AES - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good morning and welcome to the AES Corporation Q3 Financial Review. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the call over to Mr. Ahmed Pasha, Treasurer and Vice President of Investor Relations. Please go ahead.

Ahmed Pasha (Treasurer and VP of Internal Relations)

Thank you and good morning, everyone. Welcome to our Q3 2020 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 during the call. There are many factors that may cause future results to differ materially from these statements, which are discussed 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; Gustavo Pimenta, our Chief Financial Officer; and other senior members of our management team. With that, I will turn the call over to Andrés. Andrés?

Andrés Gluski (President and CEO)

Good morning, everyone, and thank you for joining our Q3 Financial Review Call. Today, I will cover both our near-term priorities and the progress we have made on our larger strategic goals. On our last call, I outlined three top priorities. First, achieving our 2020 guidance. Second, attaining a second investment-grade rating. And third, decarbonizing our portfolio. We see all three of these goals, both individually and collectively, as catalysts for attracting a wider investor base. Perhaps more importantly, we see all three as clear demonstrations of our ability to thrive in today's evolving landscape. Today, I am pleased to report that we're making great progress on all of these objectives and have several exciting developments to discuss. First, as Gustavo will review in his remarks, our portfolio continues to prove its resiliency in the face of COVID-19, and we're on track to achieve our full-year guidance.

In fact, we expect to be at the top end of the ranges for both Adjusted EPS and Parent Free Cash Flow. Turning to our goal of attaining a second investment grade rating, I'm proud to say that we were upgraded by S&P earlier this week. This reflects the low level of risk inherent in our current business model. Two investment grade ratings will help us reduce our overall cost of capital and enable us to attract a broader investor base. Following this milestone, we remain committed to further strengthening our balance sheet and increasing the percentage of our business in the . Now to our third priority of aggressive decarbonization on slide four. As you may recall, we set a near-term target to reduce our coal generation to below 30% of total generation by the end of this year and to below 10% by 2030.

I'm happy to report that with today's announced retirement of an additional 1.2 gigawatts, we have reduced our coal generation to 29% on a pro forma basis. Three quarters of these retirements are in the US, and the remainder are in Chile. Importantly, these retirements were already anticipated in our guidance, and we will achieve our decarbonization targets while delivering on our financial commitments. We see the transformation of our portfolio as an ongoing process, and we expect to announce additional coal retirements and asset sales in the near term. However, this milestone is significant in that it puts us in compliance with the environmental criteria of several large investors, including Norges Bank. In the longer term, we expect to produce net zero carbon emissions by 2050. Moving to our long-term strategy and the progress we've made to date. As we've discussed previously, our strategy revolves around three core themes.

One, investing in sustainable growth. Two, offering innovative solutions. And three, delivering superior results. Turning to slide five, we are well positioned to meet our strategic and financial objectives. So far this year, we have signed PPAs for 2.1 gigawatts of wind, solar, and energy storage projects, which is the most we have signed in the first three quarters of any given year. Onto slide six. We now have a backlog of 6.8 gigawatts, which is also the largest in our history. Approximately one-third is under construction, with the majority expected to come online through 2022. Almost half of this backlog is in the US, which we expect to grow as a proportion of our business going forward. Our backlog includes a mix of solar, wind, energy storage, and our Hydro project in Chile. We continue to make good progress at Alto Maipo, where construction is more than 96% complete.

As you can see on slide seven, renewables are now nearly 40% of our installed capacity, and this proportion will grow materially as we complete the 6.8 gigawatts in our 100% renewable backlog and sell and retire additional coal plants. In addition to our renewables backlog, we see significant growth opportunities at our two US utilities, DP&L and IPL. We're pleased with recent developments at IPL, where we reached a constructive settlement on various pending regulatory proceedings. Gustavo will provide additional details shortly, but this settlement is truly a milestone for DP&L as it grows its rate base and its network. Turning to slide eight, I have previously discussed our Green Blend and Extend strategy, where we work with existing customers to convert the power sold from thermal to renewable generation while extending the contract life. This approach allows all parties to meet their financial and environmental objectives.

Since our last call, we signed an additional 410 USs of solar capacity under a 17-year contract in Chile, bringing our total Green Blend and Extend execution to more than two gigawatts. As a demonstration of the strength of our existing coal contracts, in August, AES Gener reached an agreement with BHP for early termination, resulting in a payment of $720 million, which we will use in part to fund our renewables growth in Chile. While we only report on our projects with signed PPAs, as you can see on slide nine, we have a robust development pipeline, which we believe is one of our key differentiators. We currently have a development pipeline of 25 gigawatts in key markets, of which 12 gigawatts are in the US Over the past couple of months, we have been solidifying our pipeline by securing land and interconnection rights.

We already have very capable solar and energy storage development teams, and we recently acquired a group of experienced wind developers. Expected renewables growth in the US is currently 20 gigawatts per year. However, this rate could accelerate. We are very well positioned to take advantage of any increase in the rate of growth in demand for renewables. Furthermore, we also could benefit from an extension of ITC and PTC incentives for renewables, as well as the potential for new incentives for standalone storage. Turning to slide 10 and our LNG strategy, we see the expansion of our LNG infrastructure business is complementary to our renewables growth by offering a clean, predictable, and low-cost fuel that provides capacity and flexibility to the system. We are focusing our LNG business in three markets: the Caribbean, Central America, and Southeast Asia.

In all of these markets, there is rapidly growing demand for natural gas to supply new generation and to displace coal and higher-cost fuel oils. As you may know, we're developing an efficient 2.2 gigawatt combined cycle gas facility and a 450 TBtu LNG terminal in Vietnam. We have hit key milestones towards closing these projects, which will help meet Vietnam's rapidly growing electricity demand. Last week, we signed a term sheet for the LNG terminal in partnership with PV Gas, the state-owned gas utility. In parallel, we have seen strong interest from potential lenders to finance the majority of the capital cost. In Central America and the Caribbean, we continue to lead the transition to cleaner natural gas. We currently have a total of 150 TBtu of LNG storage capacity, and an additional 50 TBtu is under construction in the Dominican Republic.

We now have contracted 60% of this storage capacity, and we're in advanced discussions for an additional 20%. This would bring our total contracted volume to 80% in 2023 and beyond. For context, 200 TBtu of LNG volume can serve approximately three gigawatts of natural gas generation. Moving to slide 11, the second component of our strategy is offering innovative solutions. We see the energy needs of our clients, like Google, evolving to achieve the highest standards in clean energy. We are leading this transition through our unique integration of renewables with our scalable platforms of Fluence, 5B, and Uplight. Our technological innovation gives us a key competitive advantage. An example is energy storage, where we have access to the latest technology in the sector and combine it with our unique industry insights to create transformative clean energy solutions.

As a reminder, working closely with our customer, KIUC in Hawaii, we were the first company to develop a true 24/7 solar and energy storage project, and we continue to advance new applications. In fact, we recently inaugurated the world's first virtual reservoir in Chile, which combines run-of-the-river hydro with battery-based energy storage, allowing us to sell our energy when prices are highest. Turning to slide 12, Fluence, our joint venture with Siemens that sells energy storage technology to third parties, continues to maintain its position as the market leader in the sector. This year, Fluence has been awarded 690 of contracts, increasing their awarded or delivered capacity to 2.4 gigawatts. Fluence's revenue is expected to reach $500 million this year, an increase of 400% compared to last year. While rapidly growing their backlog, Fluence continues to enhance their digital capabilities and to complement their suite of solutions.

To that end, Fluence acquired AMS, the leading provider of AI-enabled bidding software for storage and generation assets. Through the AMS acquisition, Fluence now has ongoing contracts for digital bidding services for more than 2.4 gigawatts, most of it additional to Fluence's fleet. The integration of this technology to Fluence's current offerings will help optimize the use of energy storage and to ensure the greatest value for their clients. We're also looking to additional new products and innovation that could transform the sector, as shown on slide 13. With our recent investment in 5B, a prefabricated solar solution company, solar projects can be built in a third of the time and on half as much land. We believe that being able to double solar energy output from a given area will become a great differentiator as solar penetration increases, especially near urban and congested areas.

In addition to 5B's potential pipeline of more than 10 gigawatts of third-party projects in Australia, we see an addressable market of five gigawatts across our own development pipeline. We aim to be the most competitive solar operator and developer by using 5B to reduce time to build and increase energy density in combination with our ongoing robotic and digital initiatives. One example of how we're integrating all of these technologies to improve customer outcomes is the Andes 2B project in Chile. This project consists of 180 MW of solar, incorporates 10 MW of 5B's technology, and includes 560 MW hours of energy storage, the largest in Latin America. Another example of our leading innovations is our Uplight platform, which is helping utilities improve energy efficiency and balance system demand. Both of these capabilities are increasingly relevant to Uplight's 100 million end users and 80 utility customers in the US

Finally, as I've previously discussed, we continue to be on the forefront of new technologies. To that end, we have been running tests on hydrogen at several thermal plants in Latin America. We consider ourselves to be well positioned to be a leader to incorporate green hydrogen if and when it becomes economic sometime in the future. Turning now to the third component of our strategy, which Gustavo will spend more time on, delivering superior results. By investing in our development pipeline, we are earning attractive risk-adjusted returns. As you can see on slide 14, in the US, we're earning low double-digit returns, while internationally, we're earning mid to high-teens returns. Before concluding, I would like to note that last week we launched a new brand with a new logo.

As you can see on our slides, we have transformed AES into a leader in clean energy, and our new brand symbolizes our position at the forefront of the technological and commercial changes that are redefining our industry. Now, I would like to turn the call over to Gustavo Pimenta, our CFO, so he can provide more color on our results, debt profile, and guidance.

Gustavo Pimenta (CFO)

Thank you, Andrés, and good morning, everyone. Today, I'll cover three key topics: our resilient business model, our performance during the Q3, and our capital allocation plan. Let me start with our resilient business model. Over the last decade, we have proactively transformed our portfolio, and now 85% of our earnings are from utilities and long-term contracted generation with an average contract life of 14 years, supported by creditworthy off-takers. At the same time, more than 80% of our earnings are now in dollars.

This provides significant stability to earnings and cash flow. Turning to slide 16, you can see how our portfolio has performed during these challenging times. As you know, a majority of our customers are large industrials and export-oriented mining companies that continue to operate despite COVID-19, as they are deemed essential. As a result, Q3 receivables and day sales outstanding remained stable and very much in line with historical levels. Moving on to slide 17, the impact of the global lockdown on our financial results has been mostly limited to our utilities. Our generation businesses have been largely unaffected due to the take-or-pay nature of contracts and customers being deemed essential. As you may recall, in our first quarter call, we had anticipated an extended U-shaped recovery in energy demand across our markets. Since then, demand performance has been better than our expectation.

For Q3, our initial projection was for a demand drop of about 5%-7% at our US utilities, while the actual result was significantly less severe than anticipated. On a weather-normalized basis, the net combined volume at DPL and IPL is mostly flat. Demand at DPL was up 3%, largely driven by the higher load from residential customers, while demand at IPL was down 3%, as the load from commercial and industrial customers has yet to reach pre-COVID levels. Accordingly, the total net impact of the lower demand on our utilities was only $0.01 on adjusted EPS for the quarter, better than our initial expectation of $0.02-0.03. Now, turning to our quarterly results on slide 18, adjusted EPS was $0.42 for the quarter versus $0.48 last year.

Our quarterly results reflect a $0.11 impact, most related to last year's insurance recovery and an outage that occurred this quarter at one of our facilities in the Dominican Republic, which is already back in operations. Results also reflect the regulatory changes that were implemented at DP&L and in Argentina in Q4 2019. These headwinds were partially offset by higher contributions from the Southland Repowering Project, our Eurasia SBU, our cost savings and deleveraging initiatives, as well as a lower tax rate. Turning to slide 19, adjusted pretax contribution, or PTC, was $331 million for the quarter, a decrease of $95 million versus the Q3 of 2019. I'll cover our results in more detail over the next four slides, beginning on slide 20. In the US and utilities SBU, PTC remained relatively flat.

The benefit from the commencement of PPAs at Southland Energy CCGTs was mostly offset by the reversion to ESP1 rates at DPL in 2019, as well as lower demand at our utilities due to the impact of COVID-19. Before moving on, I would like to take a moment to update you on recent regulatory developments at DP&L on slide 21. I'm very pleased to announce that we have reached a successful settlement with PUCO staff and key intervenors, resolving four open proceedings, significantly reducing regulatory uncertainty and allowing us to move forward with our smart grid investments. More specifically, as a result of this settlement, DP&L committed to file a new ESP by 1 October 2023, and will continue to recover its approximately $80 million annual rate stabilization charge until the new ESP becomes effective.

DP&L will make smart grid investments of $249 million over the next four years, which will earn a return through the investment infrastructure rider. Resolution was reached on the two pending retroactive related to 2018 and 2019, and DP&L passed the SEET and MRO regulatory tests filed earlier this year. Now, turning back to our Q3 results on slide 22. At our South American SBU, lower PTC was primarily driven by drier hydrology at the Chivor Hydro plant in Colombia, resulting in lower generation and high energy purchases. Lower PTC at our MCAC SBU primarily reflects the outage-related impacts I discussed previously, as well as the arbitration settlement at Changuinola this year. Finally, in Eurasia, higher results reflect lower maintenance and outages, as well as lower interest expense due to debt repayment in 2020.

It also includes a favorable variance in India, given the OPGC COD delay last year. Now, to slide 25. To summarize our performance in the first three quarters of the year, we earned adjusted EPS of $0.96 versus $1.02 last year. We are reaffirming our 2020 adjusted EPS guidance range of $1.32-1.42. In fact, based on our strong year-to-date performance and outlook for the remainder of the year, we are now expecting to be at the top end of this range. Now, turning to our credit profile on slide 26. As we have discussed on our prior calls, since 2011, we reduced our parent debt by approximately $3 billion, or about 50%. As Andrés mentioned, we recently received our second investment-grade rating. We are very pleased that S&P has recognized the underlying quality and strength of our portfolio.

As you can see on this slide, we have improved our ratings by two to three notches over the last four years. Strong credit metrics remain one of our top priorities, and we will continue to take steps to maintain and further improve upon current levels. Now, to 2020 parent capital allocation on slide 27. We expected $1.5 billion of discretionary cash this year, which is roughly $100 million higher than our prior disclosure. Regarding asset sales, today, we are very pleased to announce a sell down of 35% of our interest in the Southland Repowering Projects for $424 million to Ullico, expanding from our successful partnership at sPower. This transaction demonstrates the substantial intrinsic value of our portfolio and how we benefit from our platform and long-term contracted assets. As you may recall, Southland has a 20-year contract and was commissioned early this year.

This sell down implies a total equity value of more than $1.2 billion. With this transaction, combined with our previously announced asset sales, we have exceeded our proceeds target for the year by approximately $100 million, for a total of $650 million. Further, based on our year-to-date performance and our outlook for the remainder of the year, we now also expect Parent Free Cash Flow to come in at the top end of our range of $725-775 million. Moving to the right-hand side, uses are largely unchanged from the last quarter, except investments in our subsidiaries, which are roughly $200 million higher. The increase primarily reflects a temporary cash injection at Southland and higher investments in renewables. Approximately 90% of the $900 million of investments in subsidiaries are in the US, contributing to our growth of increasing the proportion of earnings from the US to about half.

Next, moving to our capital allocation from 2020 through 2022, beginning on Slide 28. We continue to expect our portfolio to generate $3.4 billion in discretionary cash. Three quarters of this is expected to be generated from cash flow, with the remaining $900 million coming from asset sale proceeds. Turning to the uses of this discretionary cash on slide 29. Roughly a third will be allocated to shareholder dividends. Subject to any review by the board, we continue to expect it to increase the dividend by 4%-6% per year, in line with the industry average. We also expect it to use $1.9 billion to invest in our backlog, new projected PPAs, T&D investments at IPL, the partial funding of our Vietnam LNG project, and the investment in AES Haina. Once completed, these projects will contribute to our growth through 2022 and beyond.

With that, I'll turn the call back over to Andrés.

Andrés Gluski (President and CEO)

Thank you, Gustavo. Before we take your questions, let me summarize today's call. We have made great progress on our key objectives. Specifically, we secured a second investment-grade rating. We reduced our generation from coal to below 30%. We signed 2.1 gigawatts of new renewable contracts, increasing our backlog to a record 6.8 gigawatts. And we are growing our development pipeline and deploying new technologies such as Fluence, 5B, and Uplight. Finally, with our year-to-date financial performance, we now expect to be at the top end of our guidance ranges for both adjusted EPS and Parent Free Cash Flow. With that, I would like to open the call to your questions.

Operator (participant)

We'll now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. First question comes from Richard Sunderland of J.P. Morgan. Please go ahead.

Richard Sunderland (Senior Analyst of Equity Research)

Hi, good morning. Thanks for taking my questions.

Andrés Gluski (President and CEO)

Good morning.

Richard Sunderland (Senior Analyst of Equity Research)

Great. Just starting off with the Fluence process, could you update us on the latest timing and expectations around the sale of a minority interest?

Andrés Gluski (President and CEO)

Sure. The capital raise at Fluence is going very well. We have strong interest, and we expect to get it done by the end of this year.

Richard Sunderland (Senior Analyst of Equity Research)

So namely, kind of no impacts from the elections or considerations around there specifically to the sale?

Andrés Gluski (President and CEO)

Not really. I mean, this capital raise, people are looking at the long term. And certainly, lithium-ion-based energy storage has a great future ahead of it, as I said in my remarks. It's growing very rapidly, and it's the leader in the sector. So it really is a unique investment opportunity. So no, we've seen no impact whatsoever.

Richard Sunderland (Senior Analyst of Equity Research)

And has there been any shift in the kind of the interest or type of party evaluating Fluence?

Andrés Gluski (President and CEO)

None whatsoever.

Richard Sunderland (Senior Analyst of Equity Research)

Got it. Great. And then just curious on the outage cited on the quarter. I know you said the facility's back in operations. Any color around the outage itself and, I guess, risk to the facility going forward?

Gustavo Pimenta (CFO)

No, this is Gustavo Pimenta. No, it was an outage that we had in DR in one of our facilities there. It's about $0.02 impact in the quarter, but the facility is back in operation already.

Richard Sunderland (Senior Analyst of Equity Research)

Great. Thank you for the time.

Operator (participant)

Thank you. Next question comes from Julien Dumoulin-Smith, Bank of America. Please go ahead.

Julien Dumoulin-Smith (Senior Research Analyst)

Hey, good morning, Steve. Congratulations on.

Operator (participant)

Hey, good morning, Julian.

Julien Dumoulin-Smith (Senior Research Analyst)

Absolutely. Litany of developments here. It's hard to know where to start. At the outset here, how about this? So you've had a lot of success across your businesses here. When you think about the earnings trajectory of the renewables business altogether, how would you characterize that? Right? Given the backlog, given the success year-to-date, given the capital available to deploy back into it, how in aggregate would you kind of describe its attribution or contribution to the EPS growth rate? And then related to Fluence as well, if you can. I know it's still small.

Andrés Gluski (President and CEO)

Okay. Let me start. So the big picture. Most of our business, most of our earnings is coming from the traditional businesses. So this is sort of an add-on, and we're retiring some of the thermal assets. So it's a transition. So it's going to be growing over time. We feel very good about the way it's sort of blending in. It's something like Green Blend and Extend. It's blending in to this growth. So we have a backlog of seven gigawatts. It's a good mix of US and outside, and it has good returns. And there's a variety of regulatory schemes under which they operate. So we feel good about it. It's going to be growing, and it's going to be replacing some of the older thermal assets that we're retiring.

Second part of your question regarding Fluence, well, realize that, as I've said in the past, the faster Fluence grows, to some extent, it pushes off a little bit positive earnings. We're creating an enormous amount of value, but all R&D, for example, or all upgrading of our teams around the world, that's expensed, so when you're growing 400% this year, we expect a 40-plus% growth rate going forward. We have a backlog of 1 gigawatt, so that's still off, so right now, Fluence is a drag of around $0.02, so everything has a positive margin. We expect this to turn around, but it's a little bit of the function of how fast we grow, so ironically, the more value we create and the faster we grow, that may take a little bit more time, and thank you for the disclosures.

Julien Dumoulin-Smith (Senior Research Analyst)

Now, if I can pivot this slightly more specifically to your guidance, when you think about this roll forward coming up with Q4, and I know I'm kind of asking for guidance without getting it explicitly, how are you thinking about some of the major puts and takes here? Because as best I see it, it seems like you've resolved a number of these issues. And so I just want to make sure we're on the same page about this, whether it's DP&L, whether it relates to Haina, or frankly, whether it relates to your execution on backlog on renewables. But can you give us at least a sense for some of the bigger puts and takes here? And other factors that you've mentioned?

Andrés Gluski (President and CEO)

Yeah. You've mentioned most of the factors. I mean, we have rapid renewable growth, Green Blend and Extend. We have DP&L, IPL, growing their rate base. I think the one that you did not mention was the growth of LNG. So realize that we are doing very well on contracting more, really tolling of gas in the Dominican Republic. Actually, we had the contracts. They were very optimistic about doing more in Panama. And as I said in my speech, those will all contribute to our 2023 earnings and beyond. So most of the investment is made. So having said that, that's how we see it. So we feel optimistic, and that's why we've included the retirement of or part of that guidance. So we can't give you guidance before the fourth call. Gustavo, do you want to add something?

Gustavo Pimenta (CFO)

Yeah. I would just add, Julien, in addition to what Andrés just said, I think California, the extension of the legacy unit is another important driver, right? And also the incremental cost cutting. Remember, we had talked about $100 million of cost cutting through 2022, half of that through 2021. Those will be helpful, and eventually, we'll be able to capture more post that period. I think to your question on renewables, probably the best way to think about it is most of our free cash is going to renewables nowadays. It's about $350-400 million of investment in new renewables going forward, and you put low double digit to mid-teen returns, and you see that this is going to be an important driver of earnings going forward.

Julien Dumoulin-Smith (Senior Research Analyst)

Andrés, sorry to clarify this. When you were speaking on LNG, can you elaborate briefly on Panama and the IMO piece of this in terms of bunkering and the upside potential?

Andrés Gluski (President and CEO)

Well, basically, our current facility, especially the storage tank in Panama, is about 30% utilized. All the capital investment has been made. So to the extent that we can contract more gas passing through it, that goes straight to our bottom line. And so we feel good about the possibility of contracting more gas in Panama and increasing that utilization. In the case of the Dominican Republic, we had talked about this for many years, and actually, we filled up the tank to the extent that we're actually having to build a somewhat smaller but second tank there to meet all the demand. So realize that this is contracted. It's tolling. We're not taking commodity risk.So our gas strategy in the Caribbean and Central America is playing out as planned.

Julien Dumoulin-Smith (Senior Research Analyst)

One more clarification. On Indiana, I didn't hear you say anything about IPALCO and renewables. I know there's an RFP out there. Apologies if I can't.

Andrés Gluski (President and CEO)

Yeah. There is an IRP as we speak. So the team is finalizing, and it's one of the opportunities that we have to sign up for more renewable growth there and rate base. So stay tuned. We'll be talking about that shortly.

Got it. All right. Not yet in there. All right. Great. Thank you.

Julien Dumoulin-Smith (Senior Research Analyst)

Not yet in there.

Andrés Gluski (President and CEO)

Thanks, Julian.

Operator (participant)

Next question comes from Steven Berg, Morgan Stanley. Please go ahead.

Steven Bergman (Risk Process Validation Lead)

Hey, good morning, and congratulations on progress on a lot of fronts. I agree with Julian. It's kind of hard to know where to start.

Andrés Gluski (President and CEO)

Thank you very much, Steve.

Steven Bergman (Risk Process Validation Lead)

So I wanted to maybe start at a high level and just talk about your renewables business globally and thinking about sort of how to realize the full value of the business. The business has become very large with one of the biggest backlogs globally. How do you think about ensuring that you realize the full value, given that it's housed within AES? And this has always been sort of a question in terms of highlighting the value of these businesses. And I think it's just really accentuated given the trading levels of pure clean energy companies. Just curious how you're thinking about the longer-term strategy there.

Andrés Gluski (President and CEO)

That's a great question. We think about that a lot. So really, what we see is that there is a true competitive advantage of combining our existing platforms with the new. And I say that because it's easy to talk about renewables, but really, that's just energy. And what the market is demanding is capacity. So you're going to get that capacity in the short term from your existing traditional facilities and then with energy storage.

So thinking about that, nobody's in a better position than us to do that because we really are the leader in not only the amount of energy storage, but more important, I think, the new applications, finding new ways to use this. So I feel very good about this sort of leading this transition in a very responsible way, retiring coal plants, selling coal plants, providing that capacity to some extent in other new markets with gas because, quite frankly, not all markets are capable with today's technology of efficiently providing capacity; even with batteries would be too expensive with renewables. So we're leading that transition to a lower carbon future. But at the same time, I think we're uniquely integrating, be it energy storage, be it innovative renewables.

I mean, I think 5B, that technology will play a greater role in the future as you get greater, really, penetration of solar in some areas, and so being able to do it in a smaller space is very valuable. Being able to do it faster is very valuable. We're really doing some very interesting things on robotics. We're doing some very interesting things in digital controls, and so Uplight is one aspect of it, but so is, for example, the purchase of AMS by Fluence. That's a little bit how I see it, so while it's true that there is a premium today for pure renewable plays, we think there'll be a premium tomorrow for those companies that truly satisfy what customers need. It's not only energy. It's energy plus capacity, and we will lead the way into providing capacity, energy, and customer-facing solutions into the future.

So it's a very interesting transition, even though it's a little bit complicated story. Those are good points about capacity and also integration. I take those points. Maybe shifting over to the corporate customer side, the Google arrangement makes a lot of sense. And I was just curious your latest thoughts in terms of additional appetite from other corporate or potential corporate customers to do something along those lines given AES's global platform. That's a great question. So we have a, you can say, arrangement with Google. We're exploring several fronts. As you know, we do have an RFP out for a gigawatt in PJM. We will, we believe, make announcements into the future in terms of how we will be working together. As I said, several fronts. But this is not something that will not exclude other clients, potential clients.

So as we find ways to provide the capacity people need and the low carbon that people need, plus a digital overlay, that is certainly something that we believe will be attractive to a lot of clients. So Green Blend and Extend, for example, was an interesting solution for a lot of the big mining companies that wanted to lower their carbon footprint and have cheaper energy. And again, that can transition over time to a net zero solution, but it's going to take some time to get there.

Steven Bergman (Risk Process Validation Lead)

Understood. So it sounds like while there's a lot of opportunities, it's going to take some time to really get traction with a lot of corporate customers to the point where this is a more meaningful part of your overall business mix. Is that fair?

Andrés Gluski (President and CEO)

No. I would say that I guess what I'm saying is that I expect to do more with corporate customers. What I'm saying is that depending on what the situation is, it may take longer or less long. It depends on the market they're in. It depends on the availability of renewables in that market, and it depends exactly what the customer wants. I mean, what we're really working with is sort of co-creating with clients, co-creating what they want, and I think, again, we're also uniquely positioned to do that, not only because of the various technologies we're involved in, but also, quite frankly, our modus operandi with the client. So if you think of something like KIUC and the first sort of 24/7 load-following renewable solution in Kauai, that was co-developed with them, so the same way we're working with Google, we are working with other people.

What we've done in Chile, we've also worked with the client. So I hope that answers your question. So no, I don't see this way off in the future. I see it as a certain relatively short term and growing over time as the clients become more clear exactly what they want and some of the technologies get cheaper.

Steven Bergman (Risk Process Validation Lead)

Oh, sorry. Misunderstood. Great. Thank you very much. That's all I had.

Andrés Gluski (President and CEO)

All right. Thanks, Steve.

Operator (participant)

Thank you. Next question is from Charles Fishman of Morningstar. Please go ahead.

Charles Fishman (Equity Analyst)

Good morning. Andrés, on how AES PPA is awarded and signed year-to-date, slide 53. Big win at Haina on solar. It looks like you picked up another project to sPower Solar. If I compare this exhibit to the two exhibits, AES Distributed Energy actually went lower on solar. So you lost the project or just moved it around to a different subsidiary? Can you help me with that?

Gustavo Pimenta (CFO)

Yeah. Sorry. Are you looking at what, the annex page 53?

Charles Fishman (Equity Analyst)

Yes. Slide 53 and the AES DE is Distributed Energy, right? I believe. Yeah. And you can see that, okay, you got solar 91 MW new signed year-to-date energy storage 97. But then if I go back to 2Q, I see AES Distributed Energy solar 242, energy storage 247. Both of those are quite a bit higher.

Gustavo Pimenta (CFO)

Yeah. Charles is on me. I think, Charles, some of these projects that we show in the backlog, they're only either in construction or we have signed. If the project is completed, then that goes back to operations. That's no longer part of our backlog.

Charles Fishman (Equity Analyst)

Okay. So there were projects that went into operation in the quarter that you moved off this list.

Andrés Gluski (President and CEO)

Yes. Once it's in operation, it's no longer backlog. Yeah. It's been fulfilled.

Gustavo Pimenta (CFO)

The way we define backlog is either it is in construction or we have signed the PPA, but it's not yet in construction. But if it is completed, it gets out.

Charles Fishman (Equity Analyst)

Even though it was signed this year, it goes into operation, you take it off this list.

Gustavo Pimenta (CFO)

Yeah.

Charles Fishman (Equity Analyst)

Okay. Got it. Now, another question. Previously, we asked on Indiana, IPL. If I could maybe push a little harder on that. We've recently seen two other utilities in Indiana really go all in on solar. And yet, quite frankly, AES has more solar experience than both those other utilities combined, plus some. Do you have the opportunity at IPL to retire some coal or old gas plants that we should expect some movement like that? It seems like the Indiana Commission is very receptive to that direction.

Andrés Gluski (President and CEO)

Yeah. Well, we have an RFP out for 1.2 gigawatts of renewables. So stay tuned for the results of that. And in those numbers that I gave in this call of 1.2 gigawatts of retirement, there's some of the older coal plants in Indiana. So as a regulator, we have to get approval for this transition. But you're right. We have a whole lot of experience on that, and that's what we're going to do.

Charles Fishman (Equity Analyst)

Okay. That's helpful. Thank you. That's all I had. All right.

Operator (participant)

Thank you, Charles. Next question is from Steve Fleishman of Wolfe Research. Please go ahead.

Steve Fleishman (Managing Director and Senior Analyst)

Yeah. Hi. Good morning. Just wanted to clarify on the coal getting below the 30% announcement. Was there something that didn't get done in terms of an asset sale or something? Because I think these shutdowns were already planned for a while, and they're not happening till 2021 or 2023. So I guess I'm just trying to figure out how that fits into meeting it by the end of 2028.

Andrés Gluski (President and CEO)

Yeah. No. Thanks for the question. Look, what we have in there in our pro forma are sales that we already have a signed contract with or plants that we've already programmed to retire. Now, that does not exclude additional sales. Now, we're not behind on any additional sales or additional shutdowns. And as we said, we expect more in the near term. So we're saying it's 29% already in the Q3.

We had said we would do it by the end of the year. So stay tuned. We think we'll be comfortably below the 30% threshold. And remember, that's MW hours. That's actual generation. So actually, capacity we're already at about 26% and will continue to decline. So no, honestly, we haven't missed any of our internal milestones.

Steve Fleishman (Managing Director and Senior Analyst)

Okay. I'm sorry, Andrés. I need to clarify this. But these plants we've known are going to be shut down for a while. This is not new, I think. And they're not actually being shut down by the end of 2020. So I'm confused.

Andrés Gluski (President and CEO)

No. I think, Steve, I'm in here. Most of these plants, I think we got approvals. Like Hawaii, they just passed the law. We've got the regulatory approval in Hawaii, then also in Ventanas as well. So I think these are all the developments that we just announced. So these are not some things that have been approved.

Steve Fleishman (Managing Director and Senior Analyst)

And Indiana too?Because I thought.

Andrés Gluski (President and CEO)

Which one? Indiana? It's about 500 MW. I think this also got approval. We just made that filing, I think it's about a month ago or so.

Steve Fleishman (Managing Director and Senior Analyst)

Okay. And in terms of meeting the target, it doesn't matter if they don't shut by the end of 2020 or you don't sell by then as long as you're shutting a few years from now?

Andrés Gluski (President and CEO)

Yeah. I mean, we've been in discussions with ESG investors like Norges Bank. And really, it was like, "Show me a path how you're going to get there in the near term." So really, this is reflecting what they've asked us to do. We're going to overperform. I assure you of that. We've been somewhat cautious in terms of our announcements because, as Ahmed said, what we've shown this time is what we've actually gotten approvals to do. These aren't just, "Gee, I wish I'm going to shut this down." Well, can you really shut it down? And you need to have the approval of the regulator or the network operator. So that's where we're at. So honestly, this is exactly what we discussed with people like Norges Bank, exactly what they asked us to do. And if anything, we're upfront about it.

Now, it is pro forma because in some cases, the retirement, they still need it for, say, another year in some cases. But stay tuned. I assure you that we will.

Steve Fleishman (Managing Director and Senior Analyst)

I saw you announce the Petersburg retirement a couple of years ago, or we've had that for a while in the past.

Andrés Gluski (President and CEO)

No. We did not.

Steve Fleishman (Managing Director and Senior Analyst)

That's helpful.

Andrés Gluski (President and CEO)

And I think the punchline is, Steve, just to be clear, we have not seen any delays in the transactions we are working on as far as the sell-downs are concerned on the coal side. So I think we still continue to see the interest. So I don't think there's any need to read anything in between the lines.

Steve Fleishman (Managing Director and Senior Analyst)

Okay. That's helpful. And then just on the DP&L settlement, the path there, it looks like it allows you now to invest the money and get the rate base growth from that. That's correct. And also keep the current, the old ESP rate. And then I guess at the end of the period, the old ESP rate goes away, but you can then keep growing the rate base from there on. Is there any way you can kind of extend this old ESP rate that's still in through 2023?

Andrés Gluski (President and CEO)

I think our expectation is that October 2023, we'll file ESP 4. It'll probably take 12-18 months to get approval, and then we're going to get into a new ESP without the RSC. But the plan is we will build up the rate base in the meantime so we can continue to post growth post that period.

Steve Fleishman (Managing Director and Senior Analyst)

Yeah. Okay. Great. I appreciate it. Thank you.

Operator (participant)

Thank you. Again, if you have a question, please press star, then one. Next question comes from Durgesh Chopra, Evercore ISI. Please go ahead.

Durgesh Chopra (Managing Director)

Hey, team. Good morning. Thank you for taking my question. I have one clarification and then just one big picture question. Just going back to maybe Gustavo, maybe this is for you, but just going back to Slide 28 here when we sort of look at the cash generation, and you have about $250 million left of the $900-$650 million announced. I just want to be clear. The Fluence transaction, any proceeds there are not on this slide, correct?

Gustavo Pimenta (CFO)

Not on this slide. It's all going to be kept at Fluence.

Okay. Okay. And it will be kept just at Fluence. I mean, there's not use of proceeds in terms of with your other businesses.

No. No, no.

Durgesh Chopra (Managing Director)

Okay. And then maybe just big picture, obviously, this year you've executed strongly, but 7% or 9%, can you just high-level talk about what gets you to 9% versus what gets you to 7%?

Andrés Gluski (President and CEO)

I would say that the difference will have to be in terms of the projects that we have, how fast, for example, we fill up the gas tanks at Panama and the DR. It will have to be a little bit in terms of demand growth at our utilities and probably execution of our renewable projects. I'd say those are the three drivers. As Gustavo said, we have cost cuts inherent. We have lower financing costs as well. So all those are pluses. So I'd say the ones that are outside of our control to some extent, a little bit, would be the demand growth in the utilities and a little bit the timing of filling up the tolling capacity in Central America and the Caribbean.

Durgesh Chopra (Managing Director)

Got it. Helpful, guys. Maybe just one quick one. Just as you think long-term, Andrés, I mean, you have a pretty good competitive advantage here with storage and with renewables. Just how do you think about balancing growing internationally versus sort of your renewable portfolio internationally versus being 50% earnings from the US? That's your long-term target.

Andrés Gluski (President and CEO)

Yeah. That's a great question. Look, our objective is to be an investment-grade company, continue to strengthen our balance sheet and the mix of our businesses. We move very strongly towards investment-grade, dollar, long-term contracted business. And that's why we've been so resilient this year in an uncertain environment. I think we've proven that. And we've improved our credit rating in the midst of COVID. I think that says a lot for the strength of our business. We think the optimal mix, also given market conditions, probably is about half US and half outside. And we think that's optimal.

We have big corporate opportunities in the US It's a strong market for us. We also think that we have good corporate demand internationally and somewhat unique to us. And we do get higher returns in general internationally. So we think a sort of 50/50 split would be ideal. It's not that we can orient it in one direction or the other. Part of it will have to do with our clients' demand and where we have competitive advantages. But we think we're developing really global competitive advantages. So it's not only international. We have them here in the US

Durgesh Chopra (Managing Director)

That's great. Thank you, guys. Great quarter.

Andrés Gluski (President and CEO)

Thank you.

Operator (participant)

This concludes our question and answer section. And now we'll turn the conference back over to Mr. Ahmed. I'm not sure if we have closing remarks. Please go ahead.

Ahmed Pasha (Treasurer and VP of Internal Relations)

Thanks, 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. Next week, we look forward to seeing many of you at the EEI conference. Thanks again, and have a great day.

Operator (participant)

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.