AES Corp

NYSE:AES

Earnings Call Analysis

AES Reports Record Year, Ups 2024 Guidance

AES had a stellar 2023, beating adjusted EPS and free cash flow targets with $1.76 EPS and over $1 billion in free cash flow, respectively. Their adjusted EBITDA soared to $3.4 billion, spurred by new renewable projects and cost recoveries. For 2024, they're aiming higher with adjusted EBITDA guidance between $3.6 to $4 billion and EPS forecast of $1.87 to $1.97. Investments will focus on the booming US renewables, expecting returns of 12-15%. AES plans to allocate $2.6 billion in new growth and around $500 million for dividends, upholding strong growth without new equity issues until 2026. Their long-term strategy forecasts a dividend growth of 2-3% annually post-2024, balancing shareholder yields with robust earnings.

A Record Year with Robust Performance

AES experienced an extraordinary 2023, marking it as the best year in their history with achievements surpassing strategic and financial targets. Notably, they exceeded their adjusted EPS guidance and parent free cash flow projections. Adjusted EBITDA with tax attributes grew to $3.4 billion, up from $3.2 billion the previous year, chiefly propelled by contributions from new renewable projects and a recovery of past purchase power costs at AES Ohio.

2024 Guidance Signals Continued Momentum

Looking forward, AES has initiated a robust 2024 adjusted EBITDA with tax attributes guidance range of $3.6 billion to $4 billion. This optimistic outlook is fueled by over $500 million in anticipated contributions from new renewables and growth at U.S. utilities. A $200 million reduction factors in from asset sales, implying an adjusted EBITDA range of $2.6 billion to $2.9 billion when excluding tax attributes.

Earnings and Dividends on an Upward trajectory

For 2024, AES forecasts adjusted EPS in the range of $1.87 to $1.97, suggesting a potential 9% year-over-year rise. This estimated growth aligns with their long-term growth target of 7% to 9% through 2025. In regards to dividends, investors can expect a dividend growth of 2% to 3% annually beyond 2024, striking a balance between presenting an attractive yield and fostering robust earnings and cash flow expansion throughout the planning horizon.

Strategic Investments and Capital Allocation

AES plans to significantly invest in growth, earmarking approximately $2.6 billion for 2024, with a clear focus on renewable energy and utility rate base expansion. Geographically, the U.S. will receive the majority of this investment, signifying the company’s commitment to its core growth regions. To fund these endeavors, parent free cash flow for 2024 is projected to be between $1.05 billion and $1.15 billion, supplemented by asset sales projected to bring in an additional $900 million to $1.1 billion.

Long-term Growth and Shareholder Value Enhancement

AES has crafted a strategic plan through 2027 that involves more than $7 billion of investments aimed predominantly at renewable energy and utilities, demonstrating a forward-thinking commitment to sustainable growth. This plan coheres with their aspiration to optimize shareholder value, while steering away from equity issuance as a capital source until at least 2026, only contemplating it if it would clearly benefit shareholders per share.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the AES Corporation Fourth Quarter and Full Year 2023 Financial Review Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]

I would now like to hand over to Susan Harcourt, Vice President of Investor Relations. The floor is yours. Please go ahead.

[Susan Pasley Harcourt, executive]

Thank you, operator. Good morning, and welcome to our fourth quarter and full year 2023 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 Andres Gluski, our President and Chief Executive Officer; Stephen Coughlin, our Chief Financial Officer; and other senior members of our management team.

With that, I will turn the call over to Andres.

[Andres Ricardo Gluski Weilert, executive]

Good morning, everyone, and thank you for joining our fourth quarter and full year 2023 financial review call. Today, I will discuss our 2023 strategic and financial performance. Stephen Coughlin, our CFO, will discuss our financial results and outlook in more detail shortly.

Beginning on Slide 3. 2023 was our best year ever, as we met or exceeded all of our strategic and financial objectives, including signing a record of 5.6 gigawatts of new PPAs, putting us well on track to achieve 14 to 17 gigawatts of new signings through 2025. Completing 3.5 gigawatts of construction, exceeding the target we laid out and doubling our additions compared to 2022. Delivering adjusted EBITDA of $2.8 billion in the top end of our guidance range and adjusted EBITDA with tax attributes of $3.4 billion. Achieving adjusted EPS of $1.76 and parent free cash flow of just over $1 billion, both beyond the top end of our guidance ranges, and realizing asset sales proceeds of $1.1 billion, significantly above our target of $400 million to $600 million.

Turning to Slide 4. Despite the backdrop of rising interest rates and supply chain challenges across the sector, we demonstrated that our business model is strong, resilient and well positioned. Demand across the sector has never been stronger. And in this context, I'm pleased to announce that we are raising our expected annual growth rate for adjusted EBITDA and adjusted EPS. We now expect our adjusted EBITDA to grow at an annual rate of 5% to 7% and adjusted EPS to grow at 7% to 9%, both through 2027. We are also reaffirming all of our other existing guidance. I can definitely say that I have never felt better about the outlook for this business.

Turning to power purchase agreement signings on Slide 5. We signed 5.6 gigawatts of new PPAs in 2023, more than any other year in our company's 43-year history, putting us well on track to sign 14 to 17 gigawatts of new renewable contracts from 2023 through 2025.

Today, our backlog of projects with signed PPAs is 12.3 gigawatts, the vast majority of which will be commissioned over the next 3 years. It is worthwhile to note that all of the projects in our contracted backlog remain on track for timely completion, consistent with our historical performance.

Moving to Slide 6. I'd like to highlight that the largest segment of our new business is with corporate customers. In fact, in 2023, nearly 60% of the 3.5 gigawatts of projects we brought online were to serve corporate customers and large technology companies, in particular.

Bloomberg New Energy Finance has consistently named AES as 1 of the top 2 providers of renewable energy to corporations worldwide, and our business continues to expand, particularly, given our focus on serving the power needs from data centers, which are powering the rapid growth of AI.

We are well positioned to serve this customer segment for a number of reasons. First, we have been on the forefront of working directly with these technology companies to provide innovative solutions to achieve specific renewable energy profile.

Back in 2021, we were the first company to introduce hourly match renewable energy. And today, we are working with all of the hyperscale data center companies to provide solutions that are tailored for their renewable energy and sustainability goals.

Second, we have a strong track record of delivering our projects on time, on budget, while meeting the unique needs of our customers, which I will cover in more detail momentarily. Our record of reliability is something that is increasingly recognized and valued by our customers.

And third, we have the scale and the pipeline to address growing demand from data centers, which is estimated to more than double by 2030. With over 50 gigawatts of projects in our development pipeline and advanced interconnection queue positions in the most relevant markets in the U.S., we are particularly well positioned to meet the energy demand of technology customers.

Turning to Slide 7. Our success with corporate customers combined with our improved efficiency in development and construction, have increased the returns that we have seen across our renewable portfolio. As a result, we're upping our U.S. return ranges by 200 basis points to 12% to 15% on a levered after-tax cash basis.

We are seeing even higher returns internationally. With strong market demand in AES' leading position, we are able to be increasingly selective about the projects we built, with a focus on those with the best overall financial benefits.

Next, turning to construction on Slide 8. Our ability to complete projects on time and on budget has become a major differentiator for AES. Not only is this something that our customers highly value, but it is also a pillar of our business model, and ensures that our realized financial returns are on average, equal to or better than our projections.

At the time of PPA signing, we lock in contractual arrangements for all major equipment, EPC and long-term financing, which we hedge to ensure no interest rate exposure. At the same time, we systematically embed flexibility in our supply chain to safeguard against a variety of scenarios. We also have a multiyear strategic arrangement with top suppliers, including Fluence, who we see as having the most competitive product in the industry.

More than half of our solar projects in recent years have co-located storage components, and our relationship with Fluence helped us to have the best on-time project completion rate in the industry.

In 2024, we feel very confident in our ability to add 3.6 gigawatts of new projects, including 2.2 gigawatts in the U.S. We currently have 100% of the major equipment for these projects contractually secured and nearly 80% already on site.

Now turning to our utilities, beginning on Slide 9. In 2023, we achieved important milestones at our U.S. utilities that will drive future growth, continued decarbonization and improvement in customer service. At AES, Ohio, we put in place a new regulatory framework. And at AES Indiana, we reached a unanimous settlement for our first rate case since 2018. As a result, investments are on track for the rate base growth in the high teens at both utilities, and we now have close to 70% of our planned investments through 2027 already approved in regulatory orders.

Turning to Slide 10. At AES, Ohio, we are embarking on the largest investment program that this utility has ever seen, which includes the expansion and enhancement in our transmission assets. With over 25% rate base growth per year, this is one of the fastest transmission growth rates in the country. We also recently filed for regulatory approval of the second phase of our smart grid plant, which upgrades our grid to improve service quality and customer experience.

Turning to Slide 11. At AES, Indiana, we continue to invest to improve service quality and greener generation mix. I am happy to say that we now have regulatory approval for the build-out of all named renewable projects at AES Indiana, encompassing 106 megawatts of wind, 445 megawatts of solar and 245 megawatts of energy storage.

As we continue to invest in our customer experience, service quality and sustainability at both of our U.S. utilities, 2 core principles have guided our growth plans. First is customer affordability as we address much needed investments. We currently have the lowest residential rates in both states, which we expect to maintain throughout this period of growth. And second is to prioritize the timely recovery of our investments through existing mechanisms and programs. Across both utilities, we now anticipate approximately 75% of the growth capital to be deployed under such mechanisms, which substantially reduces regulatory lag.

Finally, turning to Slide 12. Last year, we set an asset sale proceeds target of $400 million to $600 million. We greatly exceeded this range, with $1.1 billion of gross proceeds. These transactions not only put a high valuation marker on our businesses, but also put us well on our way towards achieving our asset sales goal of $2 billion through 2025 and $3.5 billion through 2027.

Our success this past year provides us with a cushion, and we expect 2024 to be another strong year. With that, I would like to turn the call over to our CFO, Stephen Coughlin.

[Stephen Coughlin, executive]

Thank you, Andres, and good morning, everyone. Today, I will discuss our 2023 results and capital allocation, our 2024 guidance and our updated expectations through 2027.

As Andres mentioned, 2023 was AES' best year on record, as we met or exceeded all of our strategic and financial targets. We beat our adjusted EPS guidance range of $1.65 to $1.75 and our parent free cash flow guidance range of $950 million to $1 billion. We also recorded strong adjusted EBITDA, well above the midpoint of our inaugural guidance range of $2.6 billion to $2.9 billion.

Turning to Slide 14. Full year 2023 adjusted EBITDA with tax attributes was $3.4 billion versus $3.2 billion in 2022, driven primarily by contributions from new renewables projects as well as the recovery of prior year's purchase power costs at AES Ohio, included as part of the ESP 4 settlement. These drivers were partially offset by lower contributions from the energy infrastructure SBU.

Turning to Slide 15. Adjusted EPS was $1.76 in 2023 versus $1.67 in 2022. Drivers were similar to those for adjusted EBITDA with tax attributes. In addition, there was a $0.06 headwind from parent interest on higher debt balances, primarily used to fund new renewables projects. I'll cover our results in more detail over the next 4 slides, beginning with the renewable strategic business unit, or SBU, on Slide 16.

Higher adjusted EBITDA with tax attributes at our Renewables SBU was primarily driven by contributions from the 3.5 gigawatts of new projects that came online in 2023 as well as higher margins in Colombia, but partially offset by the sell-down of select U.S. renewable operating assets.

At our Utilities SBU, higher adjusted PTC was primarily driven by the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP 4 settlement as well as rate base growth in the U.S.

Lower adjusted EBITDA at our energy infrastructure SBU reflects significant LNG transaction margins in 2022, lower margins in Chile and the sale of a minority interest in our Southland combined-cycle assets. These drivers were partially offset by the higher revenues recognized from the accelerated monetization of the PPA at our Warrior Run coal plant.

Finally, at our New Energy Technologies SBU, higher adjusted EBITDA reflects improved results at Fluence, which achieved positive adjusted EBITDA in their fiscal fourth quarter of 2023. Fluence also guided to positive adjusted EBITDA for their full fiscal year 2024.

Now let's turn to how we allocated our capital last year on Slide 20. Beginning on the left-hand side, sources reflect $3 billion of total discretionary cash. This includes parent free cash flow of just over $1 billion, which increased nearly 11% from the prior year, to just above the top end of our guidance. We also significantly surpassed our asset sales target, with $750 million in net asset sales proceeds to the AES parent after subsidiary-level debt repayment, reinvestment and taxes. And we issued $900 million of parent debt in May of last year.

Moving to uses on the right-hand side. We invested more than $2.1 billion in growth at our subsidiaries, of which approximately 2/3 was in the U.S. We also allocated more than $500 million of discretionary cash to our dividend.

Overall, I'm extremely pleased with our financial performance throughout 2023.

Now let's turn to our guidance and expectations, beginning on Slide 21. Today, we're initiating 2024 adjusted EBITDA with tax attributes guidance of $3.6 billion to $4 billion, driven by over $500 million in contributions from new renewables projects and from rate base growth at our U.S. utilities. We have also incorporated a $200 million partially offsetting impact from asset sales we either closed in 2023 or planned to close this year.

Excluding the $1 billion in tax attributes, we expect to recognize in 2024, adjusted EBITDA is expected to be $2.6 billion to $2.9 billion. The increase in tax attributes versus the prior year is partially due to our continued use of tax credit transfers, which results in earlier recognition of tax credits than typical tax equity structures. In addition, last year's increase in new project completions will drive higher tax attribute recognition in 2024. As a reminder, we will recognize approximately 1/3 of tax attributes generated on 2023 projects in the 2024 fiscal year.

Looking beyond this year, our head start on asset sales gives us greater visibility toward our longer-term growth and puts downward pressure on our capital budget. We expect EBITDA to increase each year through the remainder of our long-term guidance period.

Turning to Slide 22. We expect 2024 adjusted EPS of $1.87 to $1.97, which represents a 9% increase year-over-year and puts us on track to achieve our 7% to 9% long-term growth target through 2025. Growth will be primarily driven by our renewables and utilities businesses and will be partially offset by higher parent interest. We also expect an $0.08 headwind from asset sales.

Our construction program this year is more evenly spread than in recent years. As a result, we expect approximately 40% of our earnings to be recognized in the first half of the year and 60% in the second half, and we will have greater visibility throughout the year into our expected construction completion.

Turning to Slide 23. As Andres mentioned, our very strong market position in providing tailored solutions to corporate clients, including large data centers, has allowed us to realize higher returns on our renewables projects. In addition, as our renewals business continues to scale, we anticipate further realization of productivity and scale benefits.

Based on these factors and our 2023 results, we now expect AES' U.S. renewables returns to be in the 12% to 15% range. These higher returns in the U.S., along with productivity benefits, are directly accretive to our earnings and cash flow. And as a result, we are increasing our expected long-term adjusted EBITDA growth rate to 5% to 7% and our long-term adjusted EPS growth rate to 7% to 9% through 2027, off a base of our 2023 guidance midpoint.

Now turning to our 2024 parent capital allocation plan on Slide 24, beginning with approximately $3.1 billion of sources on the left-hand side. Parent free cash flow for 2024 is expected to be around $1.05 billion to $1.15 billion. We expect to generate $900 million to $1.1 billion of net asset sale proceeds this year. By the end of this year, we expect to be more than halfway toward the $3.5 billion gross asset sales target we announced on our third quarter earnings call.

Although we expect an increase of approximately $1 billion of parent debt this year, our business is well insulated from changes in interest rates. Our new projects are funded primarily with fixed rate or long-term hedged, self-amortizing debt, with tenors similar to the length of our PPAs, and more than 80% of our outstanding debt is nonrecourse to AES Corp. Our exposure from floating rates and future issuances is managed with nearly $8 billion in outstanding hedges.

Looking at the impact of a 100 basis point shift in rates on our future issuances, refinancings and outstanding U.S. floating rate debt, we have only $0.01 of EPS exposure from interest rates in 2024.

Now to the uses on the right-hand side. We plan to invest approximately $2.6 billion in new growth, of which about 85% will be allocated to growing our renewables portfolio and utility rate base. More than 90% of this will be directed into the U.S., with the remainder going to growth projects in Chile and Panama. We expect to allocate approximately $500 million to our shareholder dividend, which reflects the previously announced 4% increase.

Turning to Slide 25. Our long-term sources of parent capital through 2027 reflect the accelerated asset sales target we introduced on our third quarter call. We also expect higher organic cash generation as a result of our increased long-term growth rates. As a reminder, we will not issue any new equity until 2026 at the earliest, and will only do so in a way that creates value on a per share basis.

Now to Slide 26. Uses through 2027 reflect more than $7 billion of investment in our subsidiaries, primarily to grow our renewables and utilities businesses. We also expect to allocate more than $2 billion to our dividend.

Given our surplus of attractive investment opportunities and our desire to minimize equity issuance as a source of capital, we now expect to grow our dividend at 2% to 3% annually beyond 2024. We believe this provides an optimal balance between an already attractive dividend yield and strong earnings and cash flow growth throughout our plan period.

In summary, 2023 was an extraordinary year for AES. We demonstrated our ability to adapt to the current market and execute on our growth commitments, while we further advanced our competitive position. As we continue to perfect and scale our renewables machine, we expect to have another record year in 2024 and to deliver on our now higher long-term growth target.

We have positioned AES to achieve our strategic priorities and grow our business in a way that's highly value accretive to our shareholders. With that, I'll turn the call back over to Andres.

[Andres Ricardo Gluski Weilert, executive]

Thank you, Steve. In summary, 2023 was our best year ever, as we met or exceeded all of our strategic and financial objectives across our guidance metrics, PPA signings, construction completions and asset sales.

We are seeing strong demand for renewables across the sector, particularly due to the unprecedented demand from data centers. As a result, we are not only upping our U.S. project return rates increasing our expected average annual growth rate for adjusted EBITDA and adjusted earnings per share through 2027.

Finally, our significant success with asset sales to date as well as the outlook for the near future, gives us great comfort in our long-term funding plan. With that, I would like to open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Nick Campanella with Barclays.

[Nicholas Campanella, analyst]

I appreciate all the updates. So I guess you originally had a 3% to 5% EBITDA target when you kind of put out that Analyst Day range? And then I guess the EBITDA guidance that you gave today for fiscal '24 does seem to just be a bit flat versus that growth outlook. Is that just from the timing of asset sales? Could you just help kind of clarify what's driving that?

[Stephen Coughlin, executive]

Yes. Nick, it's Steve. That's right. I mean it's primarily because we're ahead on the asset sale target significantly from 2023. You had the $1.1 billion versus the $400 million to $600 million guidance. So that's why the asset sale drag as there's a lag when we redeploy the capital and it's yielding again, is about 200 this year. So a little higher than what we would have anticipated a year ago.

So overall, good news for the -- But it is offsetting the growth that's coming from the rate base and the utilities and in the renewables projects. That's right.

[Nicholas Campanella, analyst]

That's helpful. And then just on asset sales, to the extent that you're continuing to be successful here, and doing more versus what you kind of have in this plan? Just -- is there room to kind of offset that $1 billion of parent debt issuance? Does that change at all? Where exactly is there flexibility in this plan today from your perspective? And then could you just also kind of update us on where your leverage targets are in your minimums in this new plan?

[Stephen Coughlin, executive]

Yes. Yes. No. So definitely. So we have -- the investment grade is a top priority. So we are -- we designed the plan to meet the investment-grade targets that we have. And keep in mind -- and we built cushion into the metrics themselves. But also keep in mind that the quality and the duration of the cash flows in the business is transitioning dramatically. So we're going to a much longer duration, average duration of contracts as -- there's 20-year contracts. This is clean energy, no carbon risk. These are U.S. dollar contracts with large corporates, many of which are data center customers, big tech companies, very high-quality credit.

So it's both the solid credit metrics as well as the quality and profile of the cash flows that's evolving. We don't count on that when sizing the new debt, we count just the metrics, but the quality is improving as well.

So in terms of levers, look, I mean the asset sale target is, as it's always been, has multiple ways that it can be achieved. There's some conservatism built in over the total. We have fully anticipated any temporal dilutive impacts in the numbers that we've given, as I said, but there is some flex there as needed. But on the debt side, the investment grade is a top priority.

[Nicholas Campanella, analyst]

All right. I'll leave it there. I really appreciate it.

[Operator]

We now turn to David Arcaro with Morgan Stanley.

[David Arcaro, analyst]

I wanted to dig in a little bit on the higher return levels that you're projecting. On the higher return levels that you're projecting here, was there something that sparked it? Any kind of catalyst that has pushed you up in terms of the higher return levels in the renewables business? We've been in a higher interest rate environment for -- obviously, for a while, higher PPA price environment for a while. Is it more the mix of end customers that you're selling to now?

[Andres Ricardo Gluski Weilert, executive]

Dave, I'd say it's a combination of things. So first and foremost is the returns that we are -- on prior PPAs that we signed. So that's the first. We are seeing that we're getting higher returns. Second, what's driving these higher returns?

You may recall -- for some time, maybe like 3 years ago, starting 3, 4 years ago, I started saying that in select markets, there would be really a shortage of good renewable projects. And these are markets like California, like PJM, New York. So what we started to do is position ourselves and actually enter the queue, buy land rights, et cetera, to have projects to be able to fulfill this. So I think that part of it is the select markets, you are starting to see the shortage of renewables that we had been say, see. And I think this is something that will spread sort of market to market. It's not going to be true for all markets. Out West, there's a lot of land. There's not that much demand, but in select markets, you will be seeing that.

So I think that's also part of the result is that we are positioned in the right markets. The third thing I would say is that we're becoming more efficient in our construction, in our development process and stay tuned, I think that will continue to improve. Realize that '20, '21, you had a lot of supply chain disruptions. Those are well past us, and we're really getting to optimize that.

So based on our greater efficiency, what we're seeing is that, yes, we are getting higher returns. And we've also positioned ourselves, this is about our fourth year, fifth year of really positioning ourselves with large corporate customers. And those corporate customers have very strong demand growing very quickly. So if you ask me from a sector point of view, I think the real question is, can we meet the demand that they have for lean energy in all of these markets?

And by the way, I would add Chile as a similar market to California, where there's a real shortage of projects. This is a very strong demand from our customers and that we're very well placed. So this is not like a catalyst. This is -- we had several thesis, which have played out as we expected them to play out.

[Stephen Coughlin, executive]

Yes. And the only thing I would add, David, is that looking at 2023, what we signed up was well within to that new updated range.

[David Arcaro, analyst]

Okay. That's good to hear. And then in terms of the higher growth rates that you've outlined today, wondering if we could just unpack that a little bit. Is that all coming from the renewables segment in terms of the higher returns that you're seeing? Or is some of the -- is the utilities business or energy infrastructure also experiencing higher EBITDA growth outlook here?

[Andres Ricardo Gluski Weilert, executive]

Well, what you have is both, I think, our 2 key segments, one is the utilities. We have some of the fastest growing utilities in the U.S. And second, yes, we are also seeing better returns in the renewable sector. So the combination of those 2 is resulting in a faster growth rate.

[Operator]

Our next question comes from Julien Dumoulin-Smith with Bank of America.

[Cameron Lochridge, analyst]

This is actually Cameron Lochridge on for Julien. I wanted to start just on the raised growth expectations. And kind of piggybacking on the last question, if I look at what you had planned for your EBITDA contributions across the different businesses, 45% renewables, 32% utilities, 23% energy infrastructure in 2027, how has that mix shifted as a reflection of this -- these raised expectations for growth?

[Stephen Coughlin, executive]

Yes. So I would say, I think the mix roughly be maybe a little bit more on the renewable side, we're seeing the higher returns. So maybe that's above the 45, 50-ish. So it's going to be higher on the renewables. I think the utilities, as Andres said, it will be a little bit more of a share.

On the energy infrastructure, we did communicate that, that was going to shrink as we execute on the coal exit plan. Although for just a handful of assets, we extended that to 2027. So that dilution from those coal exits, this is the smaller portion, will be spread out over more time, which overall, I think, is a good thing in terms of the -- in the financials as well.

So a little more renewables, a little more utilities and then the energy infrastructure is shrinking a little bit less, but it's still in that same range.

[Cameron Lochridge, analyst]

Got it. And then just digging in on the renewables, just the cumulative capacity additions you guys have communicated, tripling the bag to 25 to 30 gigawatts of cumulative additions, is that still the case through '27? Or is that bumped higher? Or is this purely just a function of returns improving? And then on that returns improving piece, how do we think about the bifurcation between, perhaps more ability to capitalize on IRA credits versus just true economic improvement vis-a-vis PPAs, pricing increasing? Just kind of help us unpack that a little bit.

[Andres Ricardo Gluski Weilert, executive]

Let me sort of give a big picture, and then I'll pass it off to Steve. Look, what we're going after, really, as I said in my script, is really going after those projects, which provide the best financial benefits. You've known me for a while, I've never gone for growth for growth's sake. So really, what we want to do is maximize shareholder value on a per share basis. So really, this is an upgrading of the quality of the growth, more than a greater numeric growth.

Now I do think that it's very important to understand sort of what market segments we're in. We're in the corporate segment, but we're also very heavily into the data center segment. And this is something, again, we've been working on for many years. We have really very good relationships with key clients, and that is a demand that's growing very quickly.

And certainly that we don't mention in our speech, quite frankly, because it's very early times. But we're really going to go after artificial intelligence as an efficiency improvement in the company. And we have a big kickoff meeting that we're going to have in the next couple of months. But this is something I think we've taken in a very sort of strategic line.

Inderpal Bhandari, who was the global Chief Data Officer for IBM until 2023 has just joined our Board, and he is somebody who is very knowledgeable in the area. We also have Janet Davidson, who's also a PhD in computer science. It's interesting. I mean, right now, with Inderpal, we have 5 PhDs on our Board, which has got to be one of the highest percentages in things that run from computer science to finance to economics of business.

So that's what I wanted to put it in. What we're pursuing is returns. We're pursuing value per share. And I think we've been very systematic now for many years in positioning ourselves in a given sector and learning about and preparing ourselves for the new technologies which are coming. So there's a lot of buzzwords of AI. Well, what's behind this is 5, 6 years of getting ourselves in a position to really utilize the data and have the understanding of the company.

So with that, I'll pass it off to Steve to answer the other parts of your question.

[Stephen Coughlin, executive]

Yes. No, I agree wholeheartedly that we're focused on cash returns, and that's primarily where the higher growth coming from. You'll notice that it was really the EBITDA growth rate that ticked up the most. And so not really from tax credits. So we had already talked about that about 40% of our pipeline was in energy communities that continues to be roughly the case. So it's really from the cash generation of the assets that the increase in rates is coming up.

And we're less focused on megawatts. So it's roughly a similar amount of capital, maybe even a little bit lower. But if that means less megawatts, that's okay. We're focused on what are the best returns that we can get for our capital that's deployed. And that's cash based and not based on the credit.

[Operator]

Our next question comes from Durgesh Chopra with Evercore ISI.

[Durgesh Chopra, analyst]

I just wanted to ask about the -- I want to ask you about the new projects, the 3.6 gigawatts to be added in 2024. I mean, obviously, you've done pretty well versus your own stated 5 gigawatt target, the renewable signing. You're doing 5.6, materially higher than 5 gigawatts. But why only like the level of gigawatts actually entering commercial operation is kind of flat to 2023? So just wondering if that's just related to project timing. Because I would have expected materially tick up, just the new projects going here.

[Andres Ricardo Gluski Weilert, executive]

Yes. That's a good question. Look, 2023 was a dramatic year where we increased construction, 100%. And we've been saying, look, we're not going to grow it at 100% per year. Now we've been signing over 5 gigawatts a year of new PPAs. So eventually, these 2 have to somewhat converge. I mean, at some point, we have to be cutting the ribbon on around 5 gigawatts. But that's not going to happen likely next year, just because of the timing of some of the projects.

We also have a developing transfer project as well, and that's not part of our backlog, but it's part of the signing. So that also is part of the reason for that. So this is not a signal of anything. It just has to be the particular timing of the projects that we have. And again, we feel this year, very good about commissioning them all on time and on budget. We have 100% of the major equipment, already secured and 80% of it is on site, which is we've never been that good this early in the process.

And I think another thing important that Steve said, this is going to be reflected in our earnings profile, whereas we were very back-end loaded last year because of this very rapid growth. As growth enters a more steady state, we're going to have 40% of our earnings in the first half and only 60% in the second half. So this is something we also worked very hard to achieve.

So qualitatively, we feel -- years '24, '25, you're going to have a catch up to the amount of PPAs that we're signing.

[Durgesh Chopra, analyst]

Got it. And then maybe, Steve, can I just go back to Nick's question earlier on credit metrics? Can you just help us with where you ended 2023 on CFO, FFO debt versus your downgrade thresholds and where are you expecting 2024 to be?

[Stephen Coughlin, executive]

[Audio Gap] and that ratio is actually improving over time in the planned period. So I would expect it to be at least at that level for the [Technical Difficulty]

[Operator]

Ladies and gentlemen, we have lost connection with our speaker. Thank you for your patience as we reconnect them.

[Unknown Executive]

Yes. Hello?

[Operator]

Ladies and gentlemen, we now have our speakers reconnected. Durgesh, if you could resume with your question?

[Durgesh Chopra, analyst]

I'm not sure if the issue was at mine or yours, but Steve, what I wanted to go back to was -- and Andres, we heard the response to my first question on the addition.

Steve, in terms of credit metrics, I wanted to follow up on Nick's question earlier. Can you remind us where you're ending FFO to debt in 2023? And then where are you projecting 2024 to be versus your credit downgrade thresholds?

[Stephen Coughlin, executive]

Yes, no problem, Durgesh. Sorry, everyone about the disconnection. So hopefully, everyone can hear us well now.

Yes, so we had a solid year-end on the credit metrics. So our thresholds are at 20% FFO to debt, and we were roughly at 22% approximately. We do keep at least a very strong cushion. That's very healthy. And going forward, that ratio is actually improving in our plan. So for the end of 2024, I would expect it to be at least 22%, if not a little bit higher than that.

So the leverage of the company overall -- we do get a lot of questions about it, but it is important to keep in mind we have the recourse, nonrecourse structure. And particularly in the nonrecourse debt, this is amortizing debt. I think not everyone is doing it that way. And so our project debt is really amortizing and it's served by the cash flows from the projects.

The parent debt level is actually going to be -- it will come up a little bit over the planned period, but not a lot. So it's $4.5 billion now. And as I said in my comments on the slides, maybe another 1 to 1.5 over the 4-year period, but it's going to be pretty stable.

[Operator]

Our next question comes from Agnieszka Storozynski with Seaport Research Partners.

[Agnieszka Storozynski, analyst]

So I was just wondering, are you guys seeing any degradation in either EBITDA or cash flow generation of existing assets? I mean, we're seeing examples of -- especially on the wind side -- that wind assets are having some issues with both OpEx and CapEx, hence repowering. But just wondering if there's obviously this positive momentum on the new build side, but is there any offset from existing assets?

[Andres Ricardo Gluski Weilert, executive]

No, none whatsoever. In fact, as I said, we continue to operate better. And we are seeing that our older projects are giving the returns that we are actually giving better returns than we had forecast. So we're not seeing that. I mean, we don't have perhaps that many older wins. We do have awful low gap, but we have not seen any degradation in performance.

[Agnieszka Storozynski, analyst]

Okay. And then the second question. So I remember in the past, you were mentioning that the slightly delayed coal plant retirements could be a lever for actually both earnings and cash flow. So is there an update there?

[Stephen Coughlin, executive]

Yes. So Agnie, as I was mentioning, the -- so there's just a handful of assets that we've extended through 2027, primarily due to the short remaining duration of the contracts, and it's making both operational sense as well as financial sense for us to remain the owner through the end of life.

So there is some upside to that -- 2 upsides really. It smooths out the $750 million of EBITDA reduction from the coal exit plans throughout the '25, '26, '27, '28 period, so there's no real cliff. And then it does add to the EBITDA over the time frame. But it's one of the -- it's the smaller driver. The biggest driver of the EBITDA uplift is the higher returns we're realizing on the renewable projects, given the market dynamics that Andres discussed as well as the productivity and scale benefits we've realized in the portfolio and expect to continue to realize as we scale up.

[Andres Ricardo Gluski Weilert, executive]

Yes. And I'd like to add that we still plan to be out of coal by the end of 2027, and that we -- after 2025, we'll have somewhere about 1 gigawatt plant. And part of this is driven by the fact that these plants are still needed for stability of the system, so we are not allowed to shut them down in part. I just wanted to clarify. So the strategic objective remains the same, it's just slightly delayed in time.

[Agnieszka Storozynski, analyst]

Okay. And then lastly, and again, it's a bigger picture question, right? We -- it's very topical for today, given a lot of discussion about nuclear power. So we're all getting excited about the colocation of data centers and nuclear plants, and there is argument about spatial limitations for renewable power, given how much land it actually needs to offer similar amounts of computing capacity and especially in Virginia, where those land shortages, I think are most pronounced. So do you actually see that there is some disadvantage to your pursuit of tech clients, if that's nuclear angle were to take off?

[Andres Ricardo Gluski Weilert, executive]

Well, I think, look, a rising tide lifts all boats. So I don't think this is a situation where there's just going to be like one technology that solves all the needs. So I don't see that any future where there's not, quite frankly, a shortage of renewable projects in the key markets.

You know, I know it takes a long time to permit nuclear plants. To my knowledge, excuse me, no new nuclear plants have been built, maybe even in the last decade, anywhere near budget. So on the one hand, I do think nuclear is part of the long-run solution, because I do agree. There's only so much land, so much interconnection. On the other hand, I think that the nuclear renaissance has yet to prove itself and it has yet to build out.

So the demand from these clients is so strong. I mean, they are taking second best. Sometimes they can't get -- they want to require additionality because they really want to be part of the solution to climate change. Well, there are circumstances where they will take no additionality and basically have recontract nuclear power today, at least 0 carbon. But the truth is that squeezing the balloon. That's taking 0 carbon energy off the grid.

So I don't think -- I'll put it this way, I feel it's extraordinarily unlikely that the growth in renewables will stop and be replaced with nuclear power. And it's certainly in the next 5 years, I don't see it, and I see it very difficult in the next 10 years.

[Operator]

[Operator Instructions] We now turn to Ryan Levine with Citi.

[Ryan Levine, analyst]

Given the scarcity of data center projects, how are returns for these projects compared to the projects for other customers?

[Andres Ricardo Gluski Weilert, executive]

The scarcity -- look, we don't talk about individual projects, but we do talk about our averages. And so the return on the project will depend, obviously, if you have the suitable location, if it's providing something other than a plain vanilla. So all put together, what I can say is, again, on average, we're seeing an increase in our returns, looking backwards and looking forward, and corporate customers are our most important segment. But yes, we will not comment on sort of specific client areas.

[Ryan Levine, analyst]

Okay. And then how did you arrive at the 2% to 3% long-term dividend growth is the right growth rate from a financial policy standpoint? And what are factors that could cause that policy to continue to evolve?

[Stephen Coughlin, executive]

Ryan. So look, I mean AES has established itself as a dividend payer a long time ago. We've been consistently growing the dividend at that [ 4 to 6 ] range for quite a long time. Obviously, the company's success in the renewable space and now our utilities position for significant growth, has put us in front of a huge amount of growth opportunity, and we want to manage our capital sources appropriately. And so we are committed to our dividend. We want to continue to grow, but we felt on balance given the capital opportunities in front of us and the higher returns that growing the dividend at a little bit of a lower rate made sense at this point, particularly as we've seen higher returns coming from our growth investments.

[Ryan Levine, analyst]

Okay. And why start that in '25 as opposed to another year from a timing standpoint?

[Stephen Coughlin, executive]

Well, we look at this -- so I'm not sure that you were pointing out, so we did grow at 4% this year. This is a policy that we take very seriously and thoughtfully. And so we weren't prepared -- we made that decision for this year, towards the end of last year. We weren't prepared to make this decision until we had thoroughly analyzed it and recently made that decision as we locked down our final plan here. And we think, therefore, it makes sense once we've made the decision to go ahead and implement it as soon as we're able, which will be in 2025.

[Operator]

Our final question today comes from Gregg Orrill with UBS.

[Gregg Orrill, analyst]

Congratulations. Just a detail-oriented question. The '24 tax credit guidance of $1 billion. Is there anything in there that is timing related or you might describe as more onetime in nature? Or is that -- would you grow that from that level as you add renewables projects?

[Stephen Coughlin, executive]

Yes. So it will grow. And it's not timing so much as it's just the success of the business. As Andres said, we doubled our construction last year. And keep in mind that not all of the credits are recognized in year 1, in tax equity structures. It's roughly 1/3 get recognized in the second year. So that's boosting the credit this year as well as all of the projects that will come online this year, the new projects on top of that.

The other thing that's driving it is the transfer of credit does get recognized earlier, essentially almost all in the first year. And so there's a greater mix of credits transferred in this vintage this year as we -- that grows as a component of how we monetize the credits. So that's driving it higher. But I don't expect this to have dipped, I think it will continue to rise as we head into the years ahead, as the growth program continues.

And then keep in mind that we are benefiting from the energy community adder at a significant portion, which increases the credit. And our wind projects are all qualifying for domestic content also going forward. So that all else being equal, is driving the credit value up.

And what's important for everyone to understand is the credit is cash and earnings. And the great thing about these -- particularly the investment credits, which is the lion's share of our mix of tax attributes is upfront. So you're getting a return on your capital investment of a significant portion, at least 30%, in some cases, up to 50% right away, which is a fantastic cash profile as well as an earnings profile.

[Operator]

This concludes our Q&A. I'll now hand back to Susan Harcourt, Vice President of Investor Relations, for final remarks.

[Susan Pasley Harcourt, executive]

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]

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.