The AES Corporation (AES) Q3 2021 Earnings Call Transcript

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The AES Corporation (AES 0.80%)
Q3 2021 Earnings Call
Nov 4, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to The AES Corporation Third Quarter 2021 Final Review. My name is Juan, and I will be coordinating your call today. [Operator Instructions]

I will now hand over to your host, Ahmed Pasha, Global Treasurer, Vice President of Investor Relations to begin with. Ahmed, please go ahead.

Ahmed Pasha -- Treasurer and Vice President Investor Relations

Thank you, operator. Good morning, and welcome to our third quarter 2021 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 Andres Gluski, our President and Chief Executive Officer; Steve Coughlin, our Chief Financial Officer; and other senior members of our management team.

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

Andres Gluski -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining our third quarter financial review call. Before discussing our progress since our last call, I want to introduce our new Chief Financial Officer, Steve Coughlin. Steve has been with AES for 14 years and has served in a variety of roles, including as Chief Executive Officer of Fluence and most recently as Head of both Strategy and Financial Planning. I am happy to report that we are making excellent progress on our strategic and financial goals, and remain on track to deliver on our 7% to 9% annualized growth in adjusted EPS and parent free cash flow through 2025. We had a strong third quarter with adjusted EPS of $0.50, a 19% increase versus the same quarter last year. We expect to deliver on our full year guidance, even with a $0.07 noncash impact from an updated accounting interpretation related to the equity units of a convert we issued earlier this year. Steve will provide more details shortly.

Today, I will discuss both the growth in our core business as well as the strategy and evolution of our innovation business called AES Next. We see ourselves as the leading integrator of new technologies. The two parts of our portfolio are mutually beneficial to one another and enable us to deliver greater total returns to our shareholders. More specifically, and as we have proven, our core business platforms provide the optimal environment for exponentially growing technology start-ups. At the same time, our AES Next businesses provide us with unique capabilities that enable us to offer customers the differentiated product they seek to achieve their sustainability goals. Turning to Slide four. I will provide you with an update on our core business, including our growth in renewables and an update on the overall macroeconomic environment. Beginning with renewables. We continue to see great momentum in demand overall.

As we speak, we have senior members of our team, attending the COP26 Climate Conference in Glasgow, meeting with governments, organizations and potential customers. Since our last call in August, we have signed an additional 1.1 gigawatts of renewable PPAs, bringing our year-to-date total to four gigawatts. Additionally, we are in very advanced discussions for another 850 megawatts of wind, solar and energy storage. Based on our current progress, we now expect to sign at least five gigawatts this year versus our prior expectations of four gigawatts. This represents the largest addition in our history and 66% more than in 2020. With our pipeline of 38 gigawatts of potential projects, including 10 gigawatts that are ready to bid in the U.S., we are well positioned to capitalize on this substantial opportunity.

Our success is a result of our strategy of working with our clients on long-term contracts that provides customized solutions for their specific energy and sustainability goals. As such, almost 90% of our new business has been from bilateral negotiated contracts with corporate customers. This allows us to compete on what we do best: providing differentiated, innovative solutions. One example of our work with major technology companies to provide competitively priced renewable energy netted on an hour-by-hour basis. As we announced earlier this week, we signed a 15-year agreement to provide around-the-clock renewable energy to power Microsoft's data centers in Virginia. Year-to-date, we have signed almost two gigawatts of similarly structured contracts with a number of tech companies, integrating a mix of renewable sources and energy storage. Outside the U.S., we have a similar strategy of focusing on bilateral sales with corporate customers, which has enabled us to sign long-term U.S. dollar-denominated contracts with investment-grade customers. For example, in Brazil, we see demand for more than 25 gigawatts of renewables, providing a significant opportunity to earn mid- to high-teen returns in U.S. dollars, while at the same time, diversifying our Brazilian portfolio of mostly hydro generation.

To that end, for the first time ever in Brazil, we are in very advanced negotiations to design a 300-megawatt U.S. dollar-denominated contract with a large multinational corporation for 15 years. Turning to Slide five. Our backlog of 9.2 gigawatts is the largest ever with 60% in the U.S. These projects represent one of the main drivers for our growth through 2025 and beyond. With this pace of growth, we are laser-focused on ensuring that we have adequate and reliable supply chain. For several years, we have anticipated a boom in renewable development that could potentially lead to inadequate panel supply. And as such, we took pre-emptive measures to ensure supply chain flexibility. Despite current challenges in the market, we have non-Chinese panels secured for the majority of our backlog, which is expected to come online through 2024. We have benefited from a number of strategic relationships with various suppliers and a clear advantage stemming from our scale and visibility of our pipeline.

More generally, we continue to proactively manage potential macroeconomic headwinds, including inflation and commodity prices. As part of our efforts to derisk our portfolio over the past decade, we have taken a systematic approach to risk management. In fact, in places where we use fuel, it is mostly a pass-through and, therefore, we have limited exposure to changes in commodity prices. Furthermore, more than 80% of our adjusted pre-tax contribution is in U.S. dollars, insulating us from fluctuations in foreign currencies. We not only remain committed to achieving our long-term adjusted EPS and parent free cash flow targets, but we also continue to improve our credit metrics and are on track to achieve BBB ratings from all agencies by 2025. Now to Slide six. We continue to benefit from a virtuous cycle with our corporate customers, in which our ability to provide innovative solutions leads to more opportunities for collaboration and more projects. For example, this quarter, we announced a partnership with Google to provide our utility customers cost savings and energy efficiency features as well as opportunities to accelerate their own clean energy goals through Nest thermostats.

Moving to Slide seven. Through AES Next, we integrate new technologies to bring innovation to the industry and work with existing and new customers. AES Next operates as a separate unit within AES where we develop and incubate new businesses, including a combination of strategic investments and internally developed businesses, representing approximately $50 million of gross capital annually. As I mentioned, the combination of AES Next and our core business creates the optimal environment for growth, whereby we can better create solutions for customers by utilizing our industry insights and operating platforms. One example of this mutually beneficial arrangement is in the combination of renewables plus storage. We first combined solar and storage in 2018 in Hawaii. And today, nearly half of our renewable PPAs have an energy storage component.

Another example is 5B, a prefabricated solar solution company that has patented technology, allowing projects to be built in 1/3 of the time and on half as much land while being resistant to hurricane force winds. We see 5B's technology as a source of current and future competitive advantage for AES, allowing us to build more projects in places where there is a land scarcity, constraints around height or soil disruption or hurricane risk. Likewise, 5B benefits greatly from the ability to grow rapidly on our platform, and we are currently developing projects in the U.S., Puerto Rico, Chile, Panama and India. I am highlighting the AES Next portion of our business because it is increasingly clear that AES essentially has two distinct business models that add value to our shareholders in very different ways. With our core business, we continue to measure our success through growth in adjusted EPS and parent free cash flow as well as PPAs signed. With AES Next, these businesses contribute value creation through their extremely rapid growth in valuation with the potential for future monetization. Nonetheless,they are a drag on AES' earnings during their ramp-up phase.

In 2021, this drag on earnings is expected to be approximately $0.06 per share. We assume these losses from AES Next in our 2021 guidance and our 7% to 9% annualized growth rate through 2025. Turning to Slide eight. As you know, last week, Fluence, our energy storage joint venture with Siemens, which began as a small business within AES, became a publicly listed company with a current valuation of around $6 billion. Similarly, early this year, another AES Next business, Uplight, received evaluation in a private transaction of $1.5 billion. The value of our interest in these two businesses is now at least $2.5 billion or $3 per share compared to the book value of our investments of approximately $150 million. In my view, this massive shareholder value creation more than justifies the temporary negative impact to earnings. In summary, our strategy of being the leading integrator of new technologies on our platform has yielded great results, and we have several other innovations in development under AES Next. As they mature, we will continue to take actions to accelerate their growth and show their value.

With that, I will now turn the call over to our Chief Financial Officer, Steve Coughlin.

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Thank you, Andres, and good morning, everyone. It's my pleasure to participate in my first earnings call as Chief Financial Officer of AES. I have been at AES for 14 years and feel very fortunate to work at a company that is transforming the electric sector so profoundly along so many talented people in finance and throughout the company. With our strategic and financial progress to date, AES is well positioned to continue leading this transformation. In my previous role, I led corporate strategy and financial planning where we developed our plan to get to greater than 50% renewables at least 50% of our business in the U.S. and to reduce our coal share to less than 10% by 2025, all while growing the company 7% to 9%. We are committed to those goals, and I look forward to continue executing toward them. Before I dive into our financial performance, I want to discuss the adjustment to our accounting that we made this quarter relating to the treatment of the $1 billion in equity units we issued in the first quarter this year.

Our prior guidance assume that the underlying shares would not be included in our fully diluted share count until 2024 upon settlement of the equity units. This approach was in line with industry practice and supported by our interpretation of the accounting literature and our external auditors. However, we are now subject to an updated interpretation of these instruments, and we are adjusting to include these shares in our fully diluted EPS calculations. This adjustment results in an annual impact of roughly $0.07 this year and $0.09 in 2022 and 2023 using a full year of an additional 40 million shares. It's important to keep in mind that this adjustment has no cash impact and has absolutely no impact on our business or longer-term growth rates as we had included the underlying shares in our projections for 2024 and beyond. Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted EPS guidance range, but we now expect to be at the low end of the range.

Now I'd like to cover two important topics: our performance during the third quarter and our capital allocation plan. Turning to Slide 11. You can see the strong performance of our portfolio in this quarter. Adjusted EPS was $0.50 for the quarter versus $0.42 for the comparable quarter last year. This 19% increase was primarily driven by improvements in our operating businesses, new renewables and parent interest savings. These positive drivers were partially offset by lower contributions from South America, largely due to unscheduled outages in Chile. Third quarter results also reflect an approximate $0.03 quarter-to-date impact from the higher share count due to the inclusion of 40 million additional weighted average shares relating to the equity units that I just mentioned. Turning to Slide 12. Adjusted pre-tax contribution, or PTC, was $428 million for the quarter, an increase of $97 million versus third quarter of 2020. I'll cover our results by strategic business unit over the next four slides, beginning on Slide 13.

In the US and Utilities SBU, PTC increased $69 million as a result of our continued progress in growing our U.S. footprint. The improvement was largely driven by higher contributions from Southland, which benefited from higher contracted prices, new renewables coming online at AES Clean Energy and higher availability at AES Puerto Rico. In California, our 2.3 gigawatt Southland legacy portfolio demonstrated its critical importance by continuing to meet the state's pressing energy needs and its transition to a more sustainable carbon-free future. In fact, as you may have heard, last month, the State Water Resource Control Board unanimously approved an extension of our 876-megawatt Redondo Beach facility for two years through 2023 to align with our remaining legacy units. If the demand/supply situation remains tight, some of our legacy portfolio could be available to meet California's energy needs beyond 2023 if state energy officials determine a need, although we have not assumed this in our guidance.

As you can see on Slide 14, at our South America SBU, lower PTC was primarily driven by unscheduled outages in Chile due to a blade defect impacting six turbines across our fleet that has now largely been resolved. Our third quarter results were also driven by lower hydrology in Brazil. Before moving to MCAC, I would like to provide an update on 531-megawatt Alto Maipo hydro project, owned by a subsidiary of AES Andes in Chile. Construction continues to go well, and generation is expected to begin in December of this year, with full commercial operation of the plant expected in the first half of 2022, in line with our expectations. Alto Maipo is in discussions with its nonrecourse lenders to restructure its debt to achieve a more sustainable and flexible capital structure for the long term. AES Andes has honored its equity commitment to Alto Maipo and will not be assuming any additional equity obligations. We expect the restructuring to be completed in 2022. And AES Andes already assumed zero cash flow from Alto Maipo, so we don't see the restructuring impacting our guidance. Now turning back to our third quarter results on Slide 15. The higher PTC at our MCAC SBU primarily reflects higher LNG sales in Dominican Republic and demand recovery in Panama.

And finally, in Eurasia, as shown on Slide 16, higher results reflect improved operating performance in Bulgaria. Now to Slide 17. To summarize our performance in the first three quarters of the year, we earned adjusted EPS of $1.07 versus $0.96 last year. As I mentioned earlier, in terms of our full year guidance, we are incorporating the $0.07 per share noncash impact from the adjustment for the equity units issued earlier this year. Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted EPS guidance range, but we now expect to come in at the lower end of the range of $1.50 to $1.58. It's important to note that this adjustment does not affect our longer-term growth expectations and has no impact on our cash flow. With three quarters of the year behind us, our year-to-go results will benefit from contributions from new renewables, continued demand recovery across our markets, reduced interest expense and our cost savings programs. These positive drivers are offset by the impact of the higher share count and the dilution from AES Next, as Andres discussed earlier.

Now turning to our 2021 parent capital allocation on Slide 18. Beginning on the left hand of the slide and consistent with our prior disclosure, we expect approximately $2 billion of discretionary cash this year. We remain confident in our parent free cash flow target midpoint of $800 million and the $100 million from the sale of Itabo, and we received the $1 billion of proceeds from the equity units issued in March. Moving over to the right-hand side. The uses are largely unchanged from the last quarter with $450 million in returns to our shareholders this year, consisting of our common share dividend and the coupon on the equity units. We also continue to expect almost $1.5 billion of investment in our subsidiaries, with about 60% going toward renewables globally.

Our investment program continues to be heavily weighted to the U.S. with approximately 70% targeted for our U.S. businesses. The increased focus on U.S. investments will contribute to our goal of growing the proportion of earnings from the U.S. to at least half of our base. Finally, as I ramp up in my new role, I've had the chance to speak with many of our internal and external stakeholders. It's clear that AES continues to successfully execute on our strategy, and we remain resilient in the face of volatile macroeconomic conditions. Continuing to drive the successful execution and delivering on our financial goals is my top priority. I look forward to getting input from more of our investors and analysts and providing the information you need to understand the great future ahead for AES.

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

Andres Gluski -- President and Chief Executive Officer

Thank you, Steve. In summary, we have had a strong third quarter, with both our core business and AES Next doing well. We are increasing our target for science renewable PPAs from four gigawatts to five gigawatts and Fluence successfully completed its $6 billion IPO. We remain committed to delivering on our strategic and financial goals, including our 7% to 9% annualized growth rate in earnings and cash flow, and will continue to create greater shareholder value by being the leading integrator of new technologies.

With that, I would like to open up the call to questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Rich Sunderland from JPMorgan.

Rich Sunderland -- JPMorgan -- Analyst

Just want to start with the equity units change here. Will you look to offset any of the $0.09 impact to '22 or '23, just thinking about the incremental positives after the Analyst Day this year, such as the higher renewable signings and the Redondo extension, kind of how do you see all of that shaking out with the latest change here?

Andres Gluski -- President and Chief Executive Officer

Well, as you know, we have a -- we're a portfolio, and so we have pluses and minus. Overall, it's a portfolio that has shown its great resilience over the last two years. So right now, we're not ready to give guidance for next year. But we're committed to the 7% to 9% growth rates in earnings and in free cash flow. So we'll be getting back to you on that. But as you correctly point out, they are positives, and then we have the drag of the additional shares, and we will be working with that. I'd say overall, we feel we're in an excellent position. We had a very strong quarter and year-to-date. One of the things I'd like to highlight is that we had a design malfunction in our steam turbines in Chile. And this required them to undergo maintenance at 50,000 hours instead of 100,000 hours. And this happened during the worst drought in Chile's history. So we were short energy when energy prices were high. But nonetheless, if it weren't for the accounting, we would have been well within the mid or upper region of our earnings. So this is the way that our portfolio works. So I don't know, Steve, do you want to add something?

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Sure. Yes. No. Thanks, Andres, and thanks for the question. So look, as I said in my script, really, this is just a recalculation. So it's just a different denominator on the capital -- on the equity units that we raised earlier this year. So it's purely just math, frankly. And looking ahead, we do see -- we have many levers, as Andres said, so we're fully committed to the 7% to 9%. These shares were already incorporated as of 2024. So it has no impact on that longer-term growth rate. And then looking ahead, we have a number of value-accretive opportunities in the portfolio. So we're in the midst of our planning process at this point, and we'll give 2022 guidance in February. But we feel very confident in the overall growth rate. And there's definitely things that we can do to stay within that range going forward.

Rich Sunderland -- JPMorgan -- Analyst

Understood. And then maybe just switching gears to the C and I side of the progress shown with the Microsoft deal, curious if you could speak a little bit to the two gigawatts you cited and similarly structured solutions signed year-to-date, how that compares to initial expectations. And then just kind of broadly, any near-term limitations to your ability to further roll out this around-the-clock product, just how you think about scalability there overall?

Andres Gluski -- President and Chief Executive Officer

Sure. I think we're rolling it out very well. We have said from the beginning when we did the first Google one that this was a product that was -- there was a lot of interest from other large corporate customers. So we feel good that this is not the last deal we'll do. I think the key here is really the ability to provide around the clock. And so this is 100% renewable for 15 years. So the product keeps getting more sophisticated. Now to do that, you really need to be able to model all possible situations in a given area of service, integrating also batteries and different forms of renewable power. So we've been very flexible on that. We're very excited about that, and we see additional opportunities going forward. I think as we mentioned, 90% of the deals we have signed in the last year-to-date have been with corporate customers. And so we really see this type of structured project -- product really being a competitive advantage for us. So stay tuned. We think there's something that we've been talking about, and we're really seeing it come to fruition.

Operator

The next question comes from Durgesh Chopra from Evercore ISI.

Durgesh Chopra -- Evercore ISI -- Analyst

Steve, welcome and look forward to working with you. So a couple of questions from my end. First, just, Andres, you made that comment that majority of the backlog through 2024 is now secured. Can I just ask you to clarify, when you say that, that means wind, solar, storage, everything?

Andres Gluski -- President and Chief Executive Officer

No, we were basically talking about solar panels, but we also have the balance of plan. So we feel very secured about it. But the one that's been, let's say, more in the press and more top of mind for everybody has been solar panels. So we are very early on, started switching -- buying from Chinese panels to buying panels made in Malaysia, Vietnam and in the future, Cambodia. And we've also, I think, been leaders in getting our suppliers to certify that there is no -- let's say, polysilicon coming from Western China in the -- that could be questionable in terms of the labor practices. So we feel very comfortable. We have these supplies. We have, let's say, flexibility, and we're also buying a number of U.S. panels made in the U.S., so without polysilicon, by the way. So altogether, we feel very comfortable that we have enough to meet our backlog through 2024, and that includes the balance of the plant, and that includes batteries.

Durgesh Chopra -- Evercore ISI -- Analyst

Got it. I mean I guess in the last quarter, Andres, you mentioned something around maybe 90% of the equipment needed for your then stated backlog of like, I think it was 8.5 gigawatts. Are you in that similar percentage-wise for this updated 9.2 gigawatt number?

Andres Gluski -- President and Chief Executive Officer

Yes

Durgesh Chopra -- Evercore ISI -- Analyst

Okay. Perfect. And then just obviously, great execution five gigawatts year-to-date. You have a target of three to four going to five up to 2025, right, like five gigawatts a year to 2025. So as you sort of have this momentum, can you talk about sort of your margins, profitability, cash flow returns as you're seeing cost pressures?

Andres Gluski -- President and Chief Executive Officer

Sure. Great question. Look, we are achieving -- targeting and achieving low-teen returns in the U.S., and we are targeting and achieving mid- to higher teens outside of the U.S. So those are the -- those are really our hurdle rates that we are achieving. We feel very good about that. Now I realize there's a lag between signing a PPA and commissioning the project. So this year, we'll commission north of 1.5 gigawatts, maybe as high as two. Next year, we should be somewhere between 3.5 and four gigawatts. And so this momentum will continue. So we see it's not just the number of megawatts, we have to make sure that we're earning on average, the right returns.

Operator

Our next question comes from David Peters from Wolfe Research.

David Peters -- Wolfe Research -- Analyst

Back to the different accounting treatment for the equity units, you guys made the point to mention that it was consistent with other peers, and the auditors had signed off. So I guess I'm just wondering what specifically changed that you're now subject to this new interpretation.

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Yes. This is Steve. I'm kind of happy to describe in a little more detail. So we issued the one billion equity units back in March. And as I said, it was -- the treatment that we used was very well vetted by our accountants, by our internal auditors and external advisors. So at that point, we were using a treasury stock method for the treatment, so it didn't show up in the share count. So there's a number of companies that have used similar instruments. And in consultation with our auditors, SEC have done a review of the treatment of these types of instruments and has informed our auditors that they see a different interpretation. So although we haven't had direct communications with the SEC, we felt it was most prudent that we go ahead and update the interpretation. So we're really just taking a prudent course of action here. This conversion was already assumed in the 2024 share count. So it's just an interim impact to the calculation. There's no new transaction here. It's just this recalculation of the shares. So ultimately, that's the source of it, and we're just trying to be as prudent as we can in terms of the treatment.

David Peters -- Wolfe Research -- Analyst

Great. I appreciate the detail there. Another question I had, just kind of switching gears, and I appreciate the slide in the deck that you showing the value you've created for Fluence and Uplight. And I guess now that the Fluence is public, would be a little bit more curious to hear about Uplight in terms of how you think about the value of that company today versus when you got the value mark going forward, particularly because I think I just saw that Uplight completed an acquisition recently.

Andres Gluski -- President and Chief Executive Officer

Yes. Thanks for the question. Look, we see Uplight in terms of its maturity two to three years behind Fluence, but we're very happy with the progress that Uplight has made. And I'm very happy with what we've done with AES Next because if you look at our capital contribution and today's valuation, that's a 20 times. So that's -- some of this has been in -- even though we were working, for example, on batteries for a long time, but really, in terms of having a business, it's been roughly about three years, three, four years. So these have created a lot and a lot of value for our shareholders. And it's very interesting because there are two sides of the business. The AES Next is really a value play, especially during this rapid growth phase because you have to expense a lot of your investments really. But at the same time, they're helping us grow. So when you talk about the structured products that we're selling to corporations, having AES Next and the know-how from there has been extremely helpful. So as I said, stay tuned, we have others in the works. The most mature probably is 5B. We think 5B has a lot of potential because of what it offers. It offers speed of build. It offers less use of land, and hurricane resistant is very important. Hurricane wind resistant is very important. So very happy with the progress there and very happy about the relationship between the AES core business and AES Next.

David Peters -- Wolfe Research -- Analyst

Great. And then just last one quickly, just a point of clarification. You said AES Next is roughly a $0.06 drag today. But as we get out to the outer years of your plan, I guess, '24 and '25, are you expecting it to be contributing at that point? Or would it still be a drag?

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Yes. No, we are. So I mean, I think -- this is Steve. There's a near-term dilution around -- of a similar level, say, for 2022 and then that gradually reduces. And so by 2024, '25, we're expecting positive contributions and then significant acceleration in the positive contribution from that point.

Operator

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

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

Congratulations on everything. Well done. Just to come back to this AES Next, again, kudos there. As you guys think about the drag here, you talked about '21 having a $0.06 drag. Through the '25 period here, how are you thinking about the cadence of that drag to evolve here? By the time you get to '25, what is that reflected in your expectations here? And then maybe I'll throw in another sort of nuanced EPS question. When you're thinking about the converts here, obviously, you were able to offset that and be at the top end of '21. What does that say about by the time you get to '25, considering that the converts admittedly would have been sort of effectively fully diluted by them in terms of where you stand within your range as well, again, against the backdrop of all your successes, be it origination or otherwise?

Andres Gluski -- President and Chief Executive Officer

Sure. Steve and I will answer this one. Let me take the second one. So definitely, it was in our '25 numbers because it was assumed that they would convert and so that will share count. So what is different is that we have a higher share count '21 and '22 and '23. That is the only difference in these calculations. Regarding AES Next, the one that's producing the largest drag is Fluence. Quite frankly, Fluence as it matures and had -- it's made all these investments in new designs and gearing up to be able to meet that supply in terms of guaranteeing supply of batteries around the world. And if sales increase, your -- this will, I would say, gradually turn positive. So I think maybe, Steve, do you want to mention...

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Yes. No. I mean, obviously, as Andres said, I led Fluence for its first 2.5 years, so I'm very familiar with the company and its trajectory. And look, the opportunity for Fluence just gotten massive, more massive than even we predicted when I started there. So going out and raising this capital was clearly targeted to go big and go much bigger. And so this -- in some ways, what it does is it increases the near-term dilution deliberately because we're investing to accelerate the scale of the company, and we know that it can be successful if we accelerate. So -- but it's also been significantly increasing the upside when we get out into '24, '25 period. So putting this capital to work is going to be near-term dilutive, but it's tremendously value accretive. And we've already seen some recognition of that in where it is today, and we think it's only going to go significantly upward from here. So in our numbers, it turns positive and it turned significantly positive by 2025.

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

And that's significantly positive is reflected in that '25 number today? I just want to understand like how much of the earnings are coming from that?

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Yes. Yes. So it is reflected, and I would say from the level of dilution today, it's going to flip flop to being at least that level positive by that point.

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

And when you say at least that level positive, that is AES NEXT in entirety, right? Not just Fluence.

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Yes. I think Fluence will be, at that point -- Uplight will have grown too, but I would expect Fluence would likely be the -- a few ahead, be the largest driver, but I would say at least $0.06 positive from Next by 2025.

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

Right. Okay. Got it. Excellent. And then if I can, just a more strategic question here also again against your backdrop of '25 numbers. California extension, you've only reflected this new numbers through -- you haven't reflected this through '25. That seems like a further upside, whether it's Redondo or the entirety of the legacy portfolio. And then ultimately, just when you think about the portfolio altogether at this fossil transition, again, kudos on transition, how are you thinking about some of the lingering assets, especially some of the renewed interest across the marketplace to, for instance, LNG?

Steve Coughlin -- Executive Vice President and Chief Financial Officer

So I'll take the Southland question, and then we'll turn it over to Andres. But -- so that's correct, Julien, the Southland extension is -- the Redondo extension provides some upside. So we had the Alamitos Huntington based piece through 2023. We have the recent decision that's now upside for Redondo Beach. But at this point, everything is just through 2023 and not beyond that. So to the extent there's an opportunity beyond that, that would be upside to our guidance. And in addition, this year, in the third quarter, we've seen in the numbers, we had the margin favorability from the hedges there, those assets of legacy assets are quite valuable, and we see the potential for further Q3 value recognition in our assets, which would also be upside into the guidance going forward?

Andres Gluski -- President and Chief Executive Officer

Julien, regarding sort of the LNG, we have a very strong position in the Gulf of Mexico between the Dominican Republic and Panama. We have basically been contracting much more in terms of the Dominican Republic, filling up the second tank and in Panama filling up the first tank. So we see LNG as a necessary transition fuel. And I think what we're seeing a little bit in Europe and a little bit in China is that it's very important to manage this transition. So while we're coming up with new technologies, making it possible to put more renewables on the grid, make renewables cheaper, make them more efficient and satisfy more what customers want, we see that in some -- many places, LNG, natural gas is the necessary transition fuel. So it will work together. And as we said, we are on our way to filling up our full capacity of the two locations of the three tanks.

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

Got it. So it sounds like literally and perhaps figuratively, you haven't quite filled the tank on the incremental contribution from LNG or California when it comes to '25 yet? There's more to go.

Andres Gluski -- President and Chief Executive Officer

Yes. That's right. That's right. There's still more potential. And quite frankly, that's the most profitable thing we can do is to fill up an existing tank.

Operator

[Operator Instructions] The next question comes from Stephen Byrd from Morgan Stanley.

Stephen Byrd -- Morgan Stanley -- Analyst

I wanted to just explore the Google Nest agreement and just talk a little bit more about the magnitude, if you could, and sort of repeatability of that approach. It looks like a great solution where you can bring a lot of your skills to bear to provide some value, but I'm struggling sort of thinking about how to sort of try to assess the magnitude of the opportunity here.

Andres Gluski -- President and Chief Executive Officer

Well, this is through Uplight, and Uplight has been, I believe, the biggest seller of Nest in the U.S. because it reaches around 100 million final consumers in the U.S. So the idea is to continue to add on that platform more things, improve customers' experience and customers' capabilities of improving their energy efficiency use. Now of course, Uplight works through large utilities. So that's really how it goes. So I think there is a lot of opportunity there. I agree with that. And what Uplight has been doing is acquiring additional capabilities by some of these acquisitions adding on to that platform. So it's really using that platform, using that entry into final consumers to provide additional value-add services.

Stephen Byrd -- Morgan Stanley -- Analyst

Understood. And is there a way to think about that value in terms of sort of the per customer value or some other metric in terms of the benefit that utilities would receive from the kinds of services you could provide here?

Andres Gluski -- President and Chief Executive Officer

I don't have that available right now. I think the way to think about it is this is the value of the total Uplight platform. And as you know, we partnered with Schneider Electric to have more capabilities. We've made more acquisitions, and we're working very closely with our utility customers. So I think the way this value will be reflected and captured is through the value of Uplight. And as I said, I think it's two to three years behind Fluence in terms of its evolution.

Stephen Byrd -- Morgan Stanley -- Analyst

Okay. Very clear. And then just last question for me, just on LNG. You've been making great progress. You just described on Julien's question sort of you're moving toward kind of filling up a number of these resources. I was thinking once they're essentially sort of filled to the capacity that you've targeted, they're fairly mature assets at that point and there might be a more logical owner with a fairly low discount rate at that point once they're mature. Are these good monetization assets when they're mature? There are reasons you kind of see further option value essentially around these assets longer term?

Andres Gluski -- President and Chief Executive Officer

I think two things. As you know, we are growing very rapidly in renewables. We have plans to sell down coal. So we will continue to manage this portfolio to optimize its value for our shareholders. And so we'll see how that develops. Right now, our focus is really on filling up the gas tanks.

Operator

[Operator Instructions] We currently have no further questions. I would like to hand over to Ahmed Pasha for any final remarks.

Ahmed Pasha -- Treasurer and Vice President Investor Relations

Thank you. 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 nice day.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Ahmed Pasha -- Treasurer and Vice President Investor Relations

Andres Gluski -- President and Chief Executive Officer

Steve Coughlin -- Executive Vice President and Chief Financial Officer

Rich Sunderland -- JPMorgan -- Analyst

Durgesh Chopra -- Evercore ISI -- Analyst

David Peters -- Wolfe Research -- Analyst

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

Stephen Byrd -- Morgan Stanley -- Analyst

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