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The AES Corporation (NYSE:AES)
Q4 2019 Earnings Call
Feb 28, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the AES Corporation's fourth-quarter 2019 financial review conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ahmed Pasha, vice president of investor relations. Please go ahead.

Ahmed Pasha -- Vice President of Investor Relations

Thank you, Anita. Good morning, and welcome to our full-year 2019 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. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andres 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?

Andres Gluski -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining our financial review call. Today, I will discuss our 2019 performance and our strategy to continue delivering attractive returns to our shareholders. I'll begin with some of the key highlights for this call on Slide 3. In 2019, we earned $1.36 of adjusted EPS, 10% higher than in 2018 and toward the top end of our range of $1.30 to $1.38.

We are reaffirming our 7% to 9% average annual growth in adjusted EPS and parent free cash flow through 2022. In 2019, after reducing our parent debt by half, we were upgraded to an investment-grade rating for the first time in AES' history. In 2019, we completed construction of 2.2 gigawatts of new projects. We also signed 2.8 gigawatts of renewable contracts, bringing our backlog to 6.1 gigawatts.

This pace puts us on track to nearly triple our portfolio of renewables in operation to 22 gigawatts by the end of 2024 versus 2016. We achieved critical milestones in expanding our LNG infrastructure in the Dominican Republic, Panama and Vietnam. To accelerate a broader adoption of clean energy, we are delivering innovative energy solutions through our leading platforms, including Fluence, Uplight and our strategic alliance with Google. Considering our success to date in substantially lowering our carbon intensity, today, I'm announcing a target to reduce our coal-fired generation to below 30%, measured in megawatt hours by the end of this year.

Furthermore, we expect to reduce it to less than 10% by 2030. Turning now to our strategy on Slide 4. We spent the last several years positioning AES to lead the energy transition and cementing our place as a top renewables developer throughout the Western Hemisphere. Today, I will discuss the three core themes of our strategy: investing in sustainable growth, offering innovative solutions and delivering superior results.

Through our strong presence in key markets, we are well-positioned to benefit from the global transition toward more sustainable energy. In these markets, we see growth in clean energy of 30 gigawatts per year. By capitalizing on our competitive position and the dynamics favoring clean power generation, we have had great success in increasing our backlog of signed PPAs. Turning now to that backlog of projects, beginning on Slide 5.

In 2019, we signed long-term PPAs for 2.8 gigawatts, of which approximately half is wind, 40% is solar and 10% is energy storage. 40% of this capacity is in the U.S. and 60% is located internationally. Turning to Slide 6, beginning with the U.S.

Our sPower and AES Distributed Energy businesses maintained their momentum by adding more than 1 gigawatt of new long-term contracted renewable projects to our backlog. The rate of growth from our distributed energy business is particularly impressive. In 2019, it signed 365 megawatts under long-term PPAs, three times more than in 2018. One of the reasons for this business' success is its deep knowledge of customers in specific markets, including Hawaii and the Northeastern U.S.

For example, in Hawaii, we delivered the world's largest solar-plus-storage project. And during the year, we were awarded an additional 205 megawatts of similar projects. As a reminder, our renewable investments are expected to produce low- to high-teen IRRs across our markets, assuming conservative terminal values. We have some unique advantages that allow us to earn these attractive returns, such as our presence in growth markets and our 25 gigawatts of development pipeline, including land and interconnection rights; our ability to bring low-cost capital to optimize AES' return on equity; and our relationship with key customers, including those for whom we are implementing our Green Blend and Extend product.

Now to Slide 7. As of the end of last year, our backlog of projects with signed PPAs was 6.1 gigawatts, half of which was under construction. Approximately 80% of the total or 4.8 gigawatts is renewables, split among hydro, solar, wind and energy storage. In terms of the 3 gigawatts that was under construction, I am pleased to announce that the 1.3-gigawatt Southland repowering project achieved commercial operations on February 6.

This project was completed ahead of time and slightly under budget and is helping to support the reliability of the grid in Southern California. The remaining 1.7 gigawatts under construction are renewables and energy storage. The majority of these projects are expected to come online in 2020 and the remainder in 2021. In addition to our 6.1-gigawatt backlog and the 2 to 3 gigawatts of annual renewable PPAs that we expect to sign, we see opportunities for attractive investments that are not currently included in our forecast, such as further rate-based growth at DPL and IPL, as well as more renewables and energy storage.

Turning to Slide 9. Another example of how we are achieving sustainable growth is AES Gener, which is one of our most important businesses. AES Gener is transforming its portfolio by growing its wind and solar businesses and strengthening its balance sheet. Under its Green Blend and Extend strategy, AES Gener is negotiating new long-term renewable PPAs with existing customers, which preserves the value of its thermal contract and creates incremental value with long-term contracted renewables.

Customers receive carbon-free energy at less than the marginal cost of thermal power, enabling them to meet their sustainability goals and affordable energy needs. In 2018, AES Gener announced its Green Blend and Extend strategy. And today, I'm pleased to report that since then, it has executed 2.5 gigawatts of long-term renewable contracts, the majority of which were signed in the last 12 months. As a result, AES Gener has significantly diversified its generation mix and has positioned itself to deliver attractive long-term growth.

Specifically, these new contracts will more than double its renewable capacity and largely offset the roll-off of legacy contracts in Chile through 2024. In Colombia, AES Gener is successfully expanding from a single hydro asset to a broader portfolio, which will include wind and solar. AES Gener will primarily serve its Green Blend and Extend contracts through a combination of 1.6 gigawatts of new renewable capacity and its existing portfolio. We expect these new projects to deliver mid-teen returns to AES.

In addition to this new capacity, the Alto Maipo hydroelectric complex will be substantially completed by the end of this year and will help supply these new PPAs. Gustavo will discuss how AES Gener will fund the 1.6 gigawatts of new investments, including AES participation. Now to Slide 10 and the second theme of our strategy. In addition to growing our core infrastructure business, we're also developing new solutions to meet increasing customer demand for 24/7 renewable power and greater energy efficiency.

Our focus is on solutions that are scalable and relatively capital-light, which allow us to work with our customers to co-create applications that meet their most critical energy needs. A key platform for us in this area is our energy storage business, Fluence, which continues to be the global market leader. Through this partnership with Siemens, we are well-positioned to benefit from the expected 15 to 20 gigawatts of annual growth in energy storage globally. Today, we're already seeing that nearly half of our solar projects in the U.S.

include a storage component. In 2019, Fluence won contracts for 961 megawatts and has tripled its backlog since 2018 to a record of 1.2 gigawatts, which equates to roughly $1 billion in revenue. Fluence is cash- and margin-positive and is continuing to expand its capabilities, including modular, prefab and solar DC-coupled products to address new market opportunities. Across all of our platforms, we've also been incorporating innovative applications.

An example is a 10-megawatt, five-hour duration energy storage facility at AES Gener's Alfalfal hydro plant in Chile. This groundbreaking project will serve as the first virtual reservoir in the world, providing the run-of-the-river plant with capabilities similar to a traditional reservoir. AES Gener expects to inaugurate this project in March, and it has the potential to increase this virtual reservoir by another 240 megawatts. Turning to Slide 11.

Last quarter, we announced a strategic alliance with Google to collaborate on innovation across our business lines. We're actively working together to develop new solutions to accelerate a broader adoption of renewables and energy storage and to improve the experience of corporate customers. This alliance also encompasses energy management and opportunities to develop, own and operate projects in targeted markets to help Google meet its clean energy objectives. Now to Slide 12.

Our strategic investment in Uplight continues to grow rapidly. As a reminder, Uplight provides utilities with a suite of digital services, including an online marketplace. These solutions improve end customer experiences while helping utilities balance energy demand and reduce service costs. This business now works with over 80 electric and gas utilities and reaches over 100 million households and businesses in the United States.

Uplight has over $100 million in sales in 2019 with solid margin and continues to fund growth without additional equities. We see Uplight as very well-positioned to benefit enormously from continued growth in cloud-based digital solutions in all aspects of energy management. Finally, turning to Slide 13 and the third theme of our strategy, superior results. As we invest in sustainable growth and offer innovative solutions to our customers, we are transforming our portfolio while achieving superior financial results.

In late 2019, we received our first investment-grade rating and expect that we will receive another investment-grade rating this year. Additionally, through 2022, our portfolio is expected to generate $3.4 billion of discretionary cash, which we will invest to continue to deliver double-digit total returns to our shareholders. This return includes our dividend, which has grown by 30% over the last five years, and we expect it will continue to increase by 4% to 6% annually. Having the right energy mix is key to our future success.

This morning, we announced a target to reduce our generation from coal to below 30% of our total volume by the end of this year. Furthermore, we expect to reduce generation from coal to less than 10% of our total by 2030. We are also committed to providing timely and accurate ESG data. We were the first U.S.

investor-owned company in our sector to publish a climate scenario report, consistent with the recommendations of a task force on climate-related financial disclosures. Additionally, we currently provide a substantial portion of the disclosures recommended by SASB and expect to provide virtually all of the remaining data by the end of this year. We're beginning to see the benefit of attracting a wider investor base that appreciates AES' growth in clean energy and innovation while maintaining consistent financial performance. Before I turn the call over to Gustavo, let me address the issue of COVID-19 or the coronavirus.

As a long-term contracted generator, overwhelmingly in U.S. dollars and the U.S. utility business, we see limited impact from most likely scenarios from the coronavirus epidemic. Furthermore, as I have previously laid out, AES has a strong pipeline of contracted, mostly renewable projects, that ensure our growth over the coming years.

Although we may suffer some delivery delays, both our solar and energy storage businesses have largely secured their supplies of lithium-ion batteries and photovoltaic sales for this year. We will continue to closely monitor the situation and take proactive measures to ensure the resiliency of our business. With that, let me turn the call over to Gustavo to discuss our financial results and capital allocation in more detail.

Gustavo Pimenta -- Chief Financial Officer

Thank you, Andrés. Today, I'll cover our financial results, credit profile and capital allocation. I will conclude by addressing our guidance for this year and expectations through 2022. As Andrés mentioned, we finished 2019 on a strong note, achieving the upper end range of our adjusted EPS and setting a solid foundation for growth.

As shown on Slide 15, adjusted EPS was $1.36 primarily reflecting growth at our regulated utilities, contribution from new businesses, including renewables in AES Colón, and a lower tax rate. These positive drivers were partially offset by the asset dispositions, including 2.6 gigawatt of coal-fired generation. Turning to Slide 16. Adjusted pre-tax contribution, or PTC, was $1.2 billion for the year, an increase of $55 million.

I'll cover our results in more detail over the next four slides, beginning on Slide 17. In the U.S. and Utilities SBU, this PTC reflects regulated rate cases completed in 2018, as well as contributions from new renewables projects. These impacts were partially offset by the exit of coal-fired generation at Shady Point and DPL.

At our South America SBU, lower PTC was largely driven by lower generation and asset sales, partially offset by better operating results at Guacolda and lower interest expense in Chile. Higher PTC at our MCAC SBU reflects the commencement of operations at AES Colón and better contracted prices in Panama, as well as insurance recovery in the Dominican Republic and Panama net of outage costs. Importantly, these facilities in the DR and Panama have resumed operations at full capacity. I would now like to discuss briefly the resilience of our portfolio.

This was the worst hydrological year on record in Panama, but the financial impact was significantly lower than in years past due to actions we have taken to improve our portfolio. The addition of AES Colón not only diversifies our fuel mix but also lowers the hydrologic exposure and spot price volatility of the entire system. This is just one example of how our capital allocation strategy has enabled us to lower our overall EPS risk from hydrology, foreign currency and commodities by 70% since 2011. Turning back to PTC in Eurasia.

Lower results primarily reflect asset sales in the United Kingdom, Philippines and Netherlands. Now to Slide 21. Before moving on, I wanted to provide a couple of business updates, starting with DPL in Ohio. As you may know in November, the distribution modernization rider in DPL's electric security plan was removed, and we reverted back to ESP 1.

The net impact of this decision reduced PTC by about $50 million annually. Roughly $25 million of this relates to costs that would have been recovered through a distribution investment rider. We expect it to start collecting this again in 2022 after new distribution rates have been filed and approved. In addition, as part of the order to revert to ESP 1, DPL needs to pass certain regulatory tasks, including the significantly excessive earnings test seat in April.

This test of customer for regulated utilities in Ohio and use it to assess regulated returns. We feel good about our ability to pass the test and maintain ESP 1 rates. Although the overall tariff reduction last year was disappointing, AES continues to be fully committed to DPL, and we look forward to resuming our discussions around smart grid and other modernization investment opportunities. DPL has the lowest residential tariff in Ohio, and we believe there continue to be significant opportunities to improve value to our customers.

We expect that you'll have more details about DPL's investment plan in the following quarters. Regarding Argentina, yesterday, the new administration announced anticipated reforms. As part of that, all-in prices have been reduced by about 15% to 20%, and the regulated tariffs have been linked to Argentina peso with local inflation adjustments. This is in line with our expectations following last year's election, and it is fully reflected in our guidance and expectations for 2022 and beyond.

Importantly, we have also had some positive developments that work to offset the regulatory changes in Ohio and Argentina, highlighting once again the resilience of our portfolio. This includes the potential extension of our existing legacy generation at Southland, early efficiency gains from our cost savings and digital initiatives and opportunistic refinancings, leveraging a historical low interest rate environment. Regarding Southland, approval is still pending by the state water board and local permitting authorities and is expected for the second half of this year. Now turning to our credit profile on Slide 22.

Since 2011, we have reduced our current debt by $3.1 billion or 50%. At year-end, our parent leverage was 3.7 times, and our FFO-to-debt was 21%, comfortably within the investment-grade threshold of four times and 20%, respectively. After having attained our first investment-grade rating in November, we continue to expect a second upgrade this year. Turning to our 2019 parent capital allocation on Slide 23, beginning on the left-hand side.

Sources reflect $1.4 billion of total discretionary cash. This is largely consistent with our previous call, with the exception of the announced Jordan sale, which we now expected to close in the first half of this year. Now to use on the right-hand side. Roughly 60% of our discretionary cash was allocated to shareholder dividend and debt reduction and the remaining amount we invested in our subsidiaries primarily in our renewables backlog.

Turning to our guidance on Slide 24. Today, we are initiating guidance for 2020 adjusted EPS of $1.40 to $1.48. Growth this year will be driven by the completion of our 1.3-gigawatt Southland repowering, which came online earlier this month and a full year of operations at OPGC 2 in India. Continued growth in renewals, including 1.5 gigawatt scheduled to reach commercial operations this year, efficiency gains from cost cutting and our digital initiatives and a lower interest expense due to refinancing benefits and completed debt reduction.

This growth will be partially offset by the reversion to ESP 1 at DPL Ohio, reduced tariffs in Argentina and a slightly higher tax rate. I will note that much of our growth will begin contributing later in the year, and our EPS is expected to be more weighted toward the second half. For instance, although Southland came online this month, it will be operating on a merchant basis until the PPA begins in June. Turning to Slide 25.

Parent free cash flow is expected to be from $725 million to $775 million this year and is expected to grow 7% to 9% per year through 2022 off a 2018 base. Now to 2020 parent capital allocation on Slide 26, beginning on the left-hand side. Sources reflect $1.3 billion of total discretionary cash, including roughly $750 million of parent free cash flow. Sources also include $550 million in asset sale proceeds.

Moving to the uses in the right-hand side. Including the 5% dividend increase we announced in December, we'll be returning $381 million to shareholders this year. We do not plan any additional debt reduction beyond repayment of the $180 million of temporary drawing on our revolver. Our credit metrics are very strong and we'll continue to improve on the strength of our cash flow alone.

And we plan to invest $750 million in our subsidiaries, including our equity for the Southland repowering, our renewables backlog and the Green Blend and Extend strategy at AES Gener. As Andrés mentioned, AES Gener has been successfully executing its decarbonization strategy by securing 2.5 gigawatt of renewable energy contracts. This includes growth in Colombia, where AES Gener is diversifying away from a single hydro asset to include new wind and solar resources. This replicates what AES has done in other markets such as Panama, where the addition of AES Colón diversified our portfolio and materially enhanced the value of our existing assets.

As a result of its successful strategy execution, today, AES Gener announced a $500 million equity issuance to help fund it's $1.8 billion renewable growth program. And AES will be participating with our pro rata share of approximately $335 million. We believe this investment will create significant value to our shareholders and will allow AES Gener to remain an important contributor for AES' earnings and cash flow for years to come. Finally, moving to our capital allocation from 2020 through 2022, beginning on Slide 27.

We expect our portfolio to generate $3.4 billion in discretionary cash. Three quarters of this is expected to be generated from parent free cash flow, with the remaining $900 million coming from asset sale proceeds. This reflects an increase in targeted asset sales of roughly $400 million since our last call, which is fully incorporated in our guidance for the year and in the 7% to 9% growth rate. Given the range of opportunities we have, we feel confident in achieving this additional sales target in the next few years.

Turning to the use of this discretionary cash on Slide 28. Roughly a third of this cash will be allocated to shareholder dividends. Looking forward, subject to annual review by the board, we continue to expect to increase the dividend by 4% to 6% per year, in line with the industry average. We are also expecting to use $1.6 billion to invest in our backlog, new project PPAs, T&D investments at IPL and the partial funding of our Vietnam LNG project and the investments in AES Gener acquisitions.

Once completed, this project should contribute to our growth through 2022 and beyond. The remaining $400 million of unallocated cash is largely weighted toward 2022 and will be used in accordance with our capital allocation framework to achieve our financial objectives. Based on the significant transformation we have achieved at AES in the last several years, we now have a much stronger balance sheet and portfolio of assets. As such, we are well-positioned to capitalize on our leadership in the global energy transition while delivering very solid financial performance for our shareholders.

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

Andres Gluski -- President and Chief Executive Officer

Thank you, Gustavo. Before we open the call to your questions, I will summarize the key points we have made this morning. Through the actions we have taken over the last several years, we have greatly enhanced the resiliency of our portfolio. In 2019, this was reflected in our financial performance, as well as the investment-grade rating we achieved.

By adding 2.8 gigawatts of renewables to our backlog, we have cemented our position as the leader in the global transition to cleaner energy. By successfully executing on its Green Blend and Extend strategy, AES Gener signed 2.5 gigawatts of renewable contracts. These contracts will ensure strong earnings at AES Gener by largely offsetting the roll-off of legacy contracts expiring through 2024. We are also accelerating a cleaner energy future by delivering innovative solutions through Fluence, Uplight and our strategic alliance with Google.

We are targeting a reduction in coal generation to below 30% by the end of this year and to less than 10% by 2030. Finally, we are reaffirming our 7% to 9% average annual growth in adjusted EPS and parent free cash flow through 2022, which along with our growing dividend, will deliver double-digit total returns to our shareholders. Operator, we're now ready to take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] The first question today comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

Andres Gluski -- President and Chief Executive Officer

Julien, hey, howdy?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

So if I can dig in a little bit on the latest capital raises in Gener, as well as the uptick in renewable spending here and the equity involved, how do you think about the current outlook reconciling versus the long-term earnings growth rate, right? So you've seen a further uptick in the capex in renewables, does that put you in a different place relative to that range? How do you think about your disclosed capex at this $8 billion mark relative to achieving your longer-term targets? And again, this is more of, as you ramp up, how do you think about where you are within that range? And then maybe a sub-point on that is how should we think about that global renewables investment relative to the capital raise at Gener? I suspect it's a different number than the capex on that front.

Andres Gluski -- President and Chief Executive Officer

OK. Let me take sort of the big picture. Let's start with Gener. So in the case of AES Gener, the capital raise is to fund the very successful Green Blend and Extend.

We've gotten 2.5 gigawatts of Green Blend and Extend PPAS. This is good for the existing assets. This is good for us because we get these long-term contracted renewables. Average life is around 17 years.

So that is what we're raising the capital for. Because that's up and above. We did very well in doing that, and Gener needs to raise the money. And it basically will largely offset the roll-off of existing thermal contracts that Gener has through 2024.

So that's one thing. So basically, the capital raise at Gener and our participation, we think it's a good investment. These are renewable contracts in dollars, inflation-adjusted. And we want to fund that growth and really move Gener into a sustainable long-term future.

Regarding our other investments, now this basically keeps us on the targets that we have given before. So we're on target. We are successfully delivering on these renewables. And what we're seeing is our investments in some of the most -- or innovative fields, whether it be Fluence, whether it be Uplight, are going to help us achieve those renewable goals and also achieve our financial targets.

So it's all coming together very nicely. And what this really is allowing us to do is to beat our financial guidance and commitments while at the same time decarbonizing even faster. So that really is, I would say, a big story. I think Gustavo will add something.

Gustavo Pimenta -- Chief Financial Officer

I would just add, Julien, I think one of the benefits of -- especially this investment in Gener, is the post-'22 story, right? So a lot of the investments that we are doing now will help, as we said in the call, sustain the earnings and cash flow that AES Gener has been providing to AES. So it's not within the 7% to 9%. It's going to be post that period, but it allows AES to continue to sustain growth post-2022.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. So if I can clarify briefly, the $330 million is above and beyond what you have in your global renewables, capex and equity, right?

Gustavo Pimenta -- Chief Financial Officer

That's right.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

And that's for your contributions? And again, a critical point that you're making is that the investments in that $330 million are targeted beyond the growth range that you're currently talking about?

Gustavo Pimenta -- Chief Financial Officer

That is exactly right. And we increased the asset sales, which is helping funding some of the investments.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. And if I could say it even more succinctly, if I'm hearing you right, you think that based on the broad assumptions that you're looking at, you can keep AES Gener earnings and cash flow largely intact after '22 as soon as the contracts roll off?

Gustavo Pimenta -- Chief Financial Officer

That is exactly -- Gener will provide more detail on their call, but that is exactly the way we see it.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Right. And that's with the existing set? Or you still need to scale up the Gener to get that level?

Gustavo Pimenta -- Chief Financial Officer

No, with existing -- with these new contracts and assuming the roll-off of the legacy assets.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

You're already there, is what you're saying?

Gustavo Pimenta -- Chief Financial Officer

Yes.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

OK, excellent. Thanks for the clarity, guys. This call has been significant to me.

Gustavo Pimenta -- Chief Financial Officer

Oh, thanks.

Operator

[Operator instructions] The next question comes from Charles Fishman with Morningstar. Please go ahead.

Charles Fishman -- Morningstar -- Analyst

Good morning. Slide 15, I look at -- I'm sorry. I got the wrong -- wait, I'm on the wrong slide deck. I apologize here.

It's the slide that shows 2019 headwinds on an EPS basis. There it is, Slide 15 on the slide deck, a $0.12 headwind? What will be the -- and looking at Slide 45, which has the PTCs, it doesn't look like asset sales will be a big headwind in 2020. Am I correct on that?

Gustavo Pimenta -- Chief Financial Officer

Yeah. I mean, 2020, that's right. I think we continue to have some asset sales in the plan we have at this range. So I think what is important is my 7% to 9%, even with the increase in asset sales that we presented, they are incorporated in those numbers.

So the 2020 EPS already has whatever dilution we have as a result of asset sales. It's incorporated in that 7% to 9% growth, if I answered your question.

Charles Fishman -- Morningstar -- Analyst

Yeah. No, I think you did. OK, second question is, I think, Andrés, this is the first call in quite a while. I didn't hear Alto Maipo mentioned.

Is no news, good news? That still go operational this year?

Andres Gluski -- President and Chief Executive Officer

Yes. Yes. In this case, look, Alto Maipo is 90% completed. It has sort of two phases.

So the first phase is we only have, I think, less than -- a little bit more than three miles of tunneling less. So most of the tunneling on Phase 1 is done, and we expect it to be substantially completed by the end of this year. And so we're already putting in the electronics and machinery. And so it's going forward well.

So that's why we didn't talk about it because it's going forward. And again, it is part of this, let's say, transformation at Gener toward a much lower carbon intensity.

Charles Fishman -- Morningstar -- Analyst

So the tunnel-boring machines that were the cause of the problem initially, those are operating pretty well now, and we're over that.

Andres Gluski -- President and Chief Executive Officer

Yeah. A lot of them have actually finished their task and have been taken out. So I think we have two left. At one point, we had six, which was probably the most, I think, of any project in the world.

So yes, I mean, there were issues with the rock quality and more than anything else. So that's basically been overcome. What will continue in 2021 is what's called Volcan, which is basically just to bring additional water to the project. But the project will have its full capacity of 531 megawatts.

But what is very interesting also is this first virtual reservoir, which we have 10 megawatts up and running. And the regulation is in place. It's five-year batteries, and that it will allow us to dispatch this run-of-the-river plant differently, take advantage of differences in daily pricing. And if this goes well, we could expand this from 10 megawatts to 240, which would be really substantial.

So realize that the Alto Maipo together with Alfalfal, so together, this is 750 megawatts of hydro, close to the load center of Chile in Santiago. It really will be a terrific asset.

Charles Fishman -- Morningstar -- Analyst

OK, so it sounds like no news was good news. Thank you. That's all I have.

Operator

The next question comes from Steve Fleishman with Wolfe Research. Please go ahead.

Steve Fleishman -- Wolfe Research -- Analyst

Hi. Good morning. Maybe just in thinking about some of the businesses like Fluence and Uplight and the Google partnership, could you -- I'm not sure -- I don't think you kind of can disclose like financial impacts from them yet. And I don't know when can be material to the company.

Can you maybe give some color on how we could see value for them kind of show up to the AES holder?

Andres Gluski -- President and Chief Executive Officer

Sure. Yeah, yeah, that's a great question. So let's take Fluence, which is the most mature. In the case of Fluence, this is a market which is -- and a technology, which is really hitting, I would say, very rapid rates of growth.

Anybody who you will talk to will talk about, whether it's the U.S., whether it's India, tens of gigawatts of energy storage, which is needed to be able to operate the greater numbers of renewables. And the technology keeps improving. We're coming out with new products. We'll be launching them this year, which will help lower costs.

And for example, prefab, modular, etc. So that's very exciting. Now getting to valuation. As I've said in the past, we would like and to really get a marker by having our capital raise at Fluence, so that you can see what was the value created.

So as you know, we feel that there's a lot of values being created. We think it would be a unique asset in the market. There's nothing else similar to it. So we're working on that.

Regarding Uplight, we first bought Simple Energy and then we merged it with Uplight. And the valuation that we got from Simple Energy in that merger was up about 100% from what we paid in less than two years. So Uplight is, again, doing many things for a lot of people in terms of being really a cloud-based digital services provider for utilities, really the leader in the field. And it's also helping us with our cost savings and quality improvement as well.

So that one will probably be longer term. I mean, we're already seeing the benefits in terms of our own operations in terms of the things that we can offer. And you're right, especially in the case of Google, there's not that much that we can disclose other than this involves, as I said, energy management, providing them with energy. We have our first PPA in Chile to provide them with renewable power.

And what's very interesting to them is really our ability to provide 24/7 renewables. So we're working on a number of fields with them. And in all of these is how we really get a competitive edge in renewables, combining that with our existing platforms and existing client relationships.

Steve Fleishman -- Wolfe Research -- Analyst

OK, great. Thank you.

Andres Gluski -- President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Ahmed Pasha for any closing remarks.

Ahmed Pasha -- Vice President of Investor Relations

Thank you, 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. Thanks, and have a nice day.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Ahmed Pasha -- Vice President of Investor Relations

Andres Gluski -- President and Chief Executive Officer

Gustavo Pimenta -- Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Charles Fishman -- Morningstar -- Analyst

Steve Fleishman -- Wolfe Research -- Analyst

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