The AES Corporation

Good morning, and welcome to the AES Corporation's second quarter 2019 financial review conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press a star, then two. Please note, if you are listening to the webcast, please mute your computer speakers before asking questions. Also note, this event is being recorded. I would now like to turn the conference over to Amit Pasha. Please go ahead, sir.

Thank you, Nancy. Good morning, and welcome to our second quarter 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 Andrzej Skrzewski, 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 Andres.

Thank you, Ahmed. Good morning, everyone, and thank you for joining our second quarter 2019 financial review call. I am pleased to report that based on our year-to-day results and our expected growth in the second half of the year, we are on track to achieve our 2019 adjusted EPS guidance with a midpoint of $1.34, and our parent free cash flow target with a midpoint of $725 million. We're also confident in our ability to deliver 7% to 9% average annual growth through 2022. Turning to slide four, since our last call, we have continued to make great progress on our three key strategic objectives. These are, first, becoming investment-grade and enhancing the resilience of our portfolio. Second, positioning the company for sustained growth by increasing our backlog of contracted projects. And third, improving our competitiveness by deploying innovative technologies. Now allow me to provide some color on each one, starting with our first objective of becoming investment grade and enhancing the resilience of our portfolio on slide five. We have already achieved a key investment grade metric and we are on track to attain investment grade ratings in 2020. Our improved credit metrics reflect the growth of our free cash flow, paying down 43% of our recourse debt, and an almost 70% decrease in our exposure to foreign currencies, commodities, and hydrology over the past eight years. A good example of this last point is bringing LNG to Panama with the commissioning of the AES Colón terminal and combined cycle power plant. This new facility has reduced our exposure to poor hydrology in Panama by 70% by providing far less expensive energy to supply our hydro PPAs in times of drought. Such has occurred in 2014 and is occurring again this year. It is not only good for AES, but it is expected to save Panama more than $400 million a year in imported fuel expenses. We are further enhancing the resilience of our portfolio by decreasing our carbon intensity. This year alone, we have announced the sale of 2.4 gigawatts of thermal generation in Northern Ireland, Jordan, and Oklahoma. As you can see on slide six, as a result of our actions, we expect to reduce our carbon intensity by 50% from 2016 levels by 2022. By that date, we also expect that coal will represent less than 30% of our total generation by megawatt hour. Now to our second objective, positioning the company for sustainable growth by increasing our backlog of contracted projects, beginning on slide 7. We now have a backlog of 6.8 gigawatts of mostly renewable projects. This number encompasses projects under construction or with signed PPAs. all of which are expected to be online by 2023. We are now on track to become one of the five largest renewable developers in the world outside of China. As we discussed on our last call, we expect to sign two to three gigawatts of renewables per year, split roughly 50-50 between wind and solar, and likewise between the U.S. and international. So far this year, we have signed one gigawatt of renewable PPAs. including about 500 megawatts since our last call this new capacity includes 181 megawatts of renewable energy signed in chile as part of our green blend and extend strategy through this win-win approach we preserve the value of our existing contracts while replacing a portion of thermal energy with long-term contracted renewables in exchange our customers receive carbon-free energy at less than the marginal cost of thermal power, while still benefiting from reliable capacity provided by thermal generation. We expect to see meaningful progress on the green blend and extend opportunity in the coming months. Now to our projects under construction, beginning on slide eight. Of the 4.5 gigawatts currently under construction, 43% are renewables. This percentage will continue to grow as we complete the large conventional thermal plants we started a number of years ago, while adding new wind, solar, and energy storage. We are particularly pleased with the speed at which we have been able to transition projects from development to construction. Now onto slide nine. We are reaching key milestones on our conventional projects under construction. We have completed the construction of our OPGC 2 plant in India with one unit already online and the second unit in the final commissioning phase. Our Southland repowering project in California continues to progress well and is now approximately 95% complete. We recently achieved first fire and the project is on track to come online in the first quarter of next year ahead of our original schedule. I'm also pleased to announce that just yesterday The storage tank at our AES Colón LNG regasification facility in Panama came online, replacing the temporary floating storage unit we had been using. Turning to slide 10, our Alto Maipo hydroelectric project in Chile is advancing as planned and is now approximately 80% complete. As you may remember, tunneling is the most difficult aspect of construction, and we now have completed 36 miles. with only five miles to go until initial COD. Additionally, we broke ground on a 10 megawatt energy storage project that will serve as the first virtual reservoir in the world. This innovative project is for our Alfalfal hydro plant, which is part of the Alto Maipo complex. It will store five hours of energy during periods of low demand and inject that energy into the grid during hours of peak demand, providing the run-of-the-river plant with many of the same capabilities as a reservoir. We have the potential to increase the virtual reservoir by another 240 megawatts of five-hour energy storage at the Alto Maipo complex. Turning to slide 11, another component of our contracted growth strategy is investing in LNG, which we see as complementary to our renewables business. Not only does LNG displace heavy fuel oil and diesel with less volatile, cheaper, and cleaner natural gas, but the investments are based on long-term tolling agreements with no direct commodity risk. I have previously mentioned that once our LNG import terminals and regasification facilities are built, they can be scaled up at a relatively low cost, as much of the key infrastructure is already in place. We're working on expanding our LNG storage capacity in the Dominican Republic by 50 Tera BTUs. We have already signed or are in advanced negotiations for a third Tera BTU of this additional capacity under long-term contracts. This expansion will require minimal investment from AES and is expected to be completed by 2022. Once fully contracted, this expansion will provide 2 cents of incremental EPS. This is up and above the 3 cents of potential upside at our existing LNG facilities in the region we had already discussed. In Vietnam, we're making excellent progress toward the development of a landmark project with 450 TBTUs of LNG storage and 2 GW of combined cycle power plants. We expect to achieve this critical milestone this year, and once completed, this project will be an important contributor to our earnings growth beyond 2022. Now to our third strategic objective of deploying new technologies to maintain our market-leading positions, beginning on slide 12. We are complementing and enhancing our current businesses by incorporating digital capabilities and by growing in adjacent areas. As we discussed on our last call, by applying new digital initiatives and analytics across our $33 billion asset base, this is a primary driver of our $100 million annual cost savings initiative. We are on track to fully achieve these savings by 2022. One example of our investment in new technologies is our energy storage business. We are now the undisputed global leader in the sector. as both an owner of projects and through Fluence, the energy storage provider that we jointly own with Siemens. Fluence has now surpassed one gigawatt of projects either awarded or delivered, including more than 400 megawatts of projects awarded in the first half of 2019 alone. With a current backlog of nearly $700 million and a growing pipeline of activity, Fluence's cash-positive, self-funding, and has the potential to rapidly increase in value as demand for energy storage accelerates. Now to slide 13. Another example is our investment in Simple Energy, a company that provides utility customers a marketplace for energy efficiency products. There is great demand for digital solutions that enable energy users to be more efficient, and Simple Energy has grown even faster than we anticipated. Since our last call, Simple Energy has merged with other companies to form a new company called Uplight. Uplight is now the market leader in providing cloud-based energy solutions in the United States, serving 85 electric and gas utilities with more than 100 million customers. Through this transaction, the implied value of our equity in Simple Energy nearly doubled in a little over a year since our initial investment. A digital business such as Uplight is capital light, largely self-funding, and we expect Uplight's annual revenue to grow significantly from its current base of over $100 million. Finally, turning to slide 14, AES's success as a technology leader was recently recognized when we were awarded our industry's top honor, EEI's Edison Award. We were honored for our innovation in advancing round-the-clock renewables at our Hawaii Solar Plus Storage project, which is already operational in Hawaii. We see renewables plus storage as increasingly important for our sector, and AES is well-positioned to gain significant market share in this space. Now, I'll turn the call over to Gustavo to discuss our financial results and capital allocation in more detail.

Thank you, Andres. Today, I'll cover our financial results, outlook for 2019, and capital allocation. Overall, we are very encouraged by our performance to date and remain confident in our ability to deliver on our strategic and financial objectives. As shown in slide 16, in the second quarter, adjusted EPS was $0.26, primarily reflecting higher contributions from the U.S. and a lower tax rate. This was partially offset by the impact of asset sales, as well as planet outages in Panama and Northern Ireland. In the second half, we expected to post stronger results as we benefit from the plant in Panama returning to operations, our continued cost savings initiatives, and two gigawatts of new projects reaching COD. Turning to slide 17, adjusted pre-tax contribution, or PTC, was $240 million for the quarter. a decrease of $15 million. I'll cover our results in more detail over the next four slides, beginning on slide 18. In the U.S. and utilities SBU, increased PTC reflects the resolution of regulated rate cases last year, contributions from new renewable projects, and higher energy sales at Southland. These impacts were partially offset by the exits of coal-fired generation at ZPL and Shady Point. Regarding DPL's DMR extension filing, there is not much to report, but we remain on track for an expected ruling in 2020 and continue to feel confident about the merits of our case. In Indiana, IPL recently filed a plan to transform its electric grid while continuing to meet the energy needs of its customers with improved service reliability, efficiency, and safety. The plan calls for $1.2 billion of T&D investment over seven years, with a tracker mechanism recovering 80% of this cost between rate cases. A yes equity investment would be roughly $200 million. If approved, the plan would be a key component of the mid-single-digit rate-based growth we have discussed in the past. A final ruling in the case is expected by early 2020. At our South America SBU, lower PTC was largely driven by lower generation and energy pricing in Colombia, as well as lower volumes in Chile. Lower PTC at our Mexico, Central America, and the Caribbean, or MCC, SBU, reflects an extended planet outage for maintenance and repairs at our Shanginola hydro plant in Panama. Finally, in Eurasia, lower results primarily reflect planet outages at Kirut, and the shutdown of 300 megawatts of capacity at Bally Lanford in Northern Ireland. In mid-June, we closed the sale of these businesses for total proceeds of $120 million. In Bulgaria, there have been no significant developments since our last call. Our plant continues to be dispatched, reinforcing its criticality to the Bulgarian grid, and we are being paid on time. Lastly, we recently took advantage of strong market demand for infrastructure projects in Vietnam to refinance $1.1 billion of project debt at Mong Dong. The issuance was four times oversubscribed and enabled us to lower our interest rate while improving financial flexibility. This is just another example of our continued liability management effort across our portfolio, capitalizing on a low interest rate environment. Now to slide 22. To summarize our performance in the first half of the year, we earned adjusted EPS of 53 cents versus 52 cents last year. Relative to 2018, we expected strong growth in the second half of 2019, primarily driven by contributions from new businesses, continued cost savings initiatives, and the timing of our major outages, particularly in Panama and the Dominican Republic. As you may have seen in our press release, we are reaffirming the $1.34 midpoint of our 2019 adjusted EPS guidance. We are also narrowing the range by 4 cents from $1.28 to $1.40 to $1.30 to $1.38, giving our confidence in the outlook for the second half of the year. I will also highlight that we are reaffirming our 2019 parent-free cash flow target of $700 to $750 million. Turning to 2019, parent capital allocation on slide 23. Beginning on the left-hand side, sources reflect $1.1 billion of total discretionary cash, including $725 million of parent-free cash flow. Sources also consider $369 million in asset sale proceeds, which include Northern Ireland and this S-Power sell-down. both of which have closed, as well as Jordan, which we expected to close by year end. Now to use on the right-hand side, including the 5% dividend increase we announced in December, we'll be returning $361 million to shareholders this year. We expected to allocate another $150 million to parent debt pay down, largely to strengthen our investment grid metrics. And we plan to invest $415 million in our subsidiaries, leaving about $200 million of unallocated cash. Finally, moving to our capital allocation from 2019 through 2022, beginning on slide 24. We expect our portfolio to generate $4 billion in discretionary cash, which is about 35% of our current market cap. About 80% of this cash is expected to be generated from parent-free cash flow. The remaining $800 million comes from asset sales proceeds, about half of which has been announced or closed this year. In addition to this, we are making very good progress on the third-party capital initiative we have discussed previously and expected a formal announcement later this year. As we have said before, the goal is to provide a more systematic and cost-effective source of capital that would be incremental to the $4 billion I just mentioned. Turn to the uses of the discretionary cash on slide 25. Roughly 40% of this cash will be allocated to shareholder dividends. Looking forward, subject to annual review by the Board, we expect the dividend to grow 4% to 6% per year, in line with the industry average. We plan to use $300 million for debt reduction, half of which we expected to complete in 2019. The other half will be used to maintain credit neutrality as we pursue the remaining planned asset sales. We are also expecting to use $1.5 billion for our equity investments in our backlog and projected PPAs, and an additional $200 million to fund T&D investments at IPO. Once completed, all of these projects will contribute to our growth through 2022 and beyond. The remaining $470 million of unallocated cash will be used in accordance with our capital allocation framework to achieve our financial objectives. With that, I'll turn the call back over to Andres.

Thanks, Gustavo. Before we take your questions, let me summarize today's call. In the first half of the year, we made very good progress on our strategic objectives and expect to accomplish significant milestones in the remainder of the year. We are enhancing the resilience of our portfolio and we are on track to attain investment grade ratings in 2020. We are increasing our backlog of long-term contracted projects to sustain profitable growth, including advancing renewables and LNG infrastructure. And we are deploying innovative technologies to maintain our competitive edge and market leading positions. Accordingly, We are confident in our ability to achieve our 2019 guidance. We're also confident that we will deliver seven to 9% growth in cashflow and adjusted earnings per share through 2022. Therefore, we believe AES offers a compelling investment thesis, yielding double digit total returns that will serve our investors well for years to come. Operator, We are now ready to take questions.

Thank you. We will now begin our question and answer session. To ask a question, you may press a star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press a star then two. Again, if you are listening to the webcast, please mute your computer speakers before asking a question. At this time, we will momentarily to assemble our roster. And the first question comes from Angie Storzinski from The Query. Please go ahead.

Thank you. So first, on Ohio, the DMR for the EPL is still being challenged at court. And secondly, given the successful challenge of First Energy's DMR, Just wondering if there is a way to either adjust the current rider that DPDL is collecting and also have some improvements to the one that you're requesting to have extended so that it's not susceptible to future legal challenges.

Hi, Angie. Gustavo here. So just to provide a little bit of detail here. What it's been challenged in the court is not the legality of the DMR. So we have a very specific and narrow claim there. The discussion is around if the DMR should be included or not in the C test, right? So from our perspective, and there are precedents in Ohio in which charge similar to the DMR should not be included in the C test. So we feel good about that. In any case, we don't think this is a binary outcome, right? So we'd have to run this through the CTAS at the end to see what is the final impact. And our view is that decision will probably be coming towards year end. But again, it's not a challenge in regarding the legality of the DMR, and that's a very important clarification. The extension is a separate discussion, right? So we've got the initial three years under the assumption that it would be very specific in terms of the uses of the proceeds. So we've done, we've used 100% of the proceeds for debt pay down. We brought the complex back to investment grade. And from our perspective, it is necessary to secure the extension for the complex to maintain the investment grade and position DPO for grid modernization. You may recall we filed last year an investment on smart grid. And for us to continue with those investments, it's fundamental that we secure the extension. So we feel we have a good case. But that will have to run its due process.

Okay. And moving on to see your cash available for allocation. So just wanted to make sure that the 395 million of proceeds from asset sales is independent of this pending process where you're trying to raise third-party capital. And on the latter, given the low and falling interest rate environment, if you could comment if that is actually – somewhat beneficial to the process, i.e., that you're seeing actually more demand for partial sell-down of equity of your operating assets and future assets.

Hi, Angie. This is Andres. Yes, as we said, this initiative is additional. It in no way affects the $395 million. It's progressing well, as Gustavo said, and stay tuned for developments in the latter half of the year. I would add that this is not like if we don't do this, we've already raised $3 billion of partner capital at very good rates. So what we're trying to do here is do it in a more systematic and predictable way. But in either case, we have additional upside from incorporating partners into our businesses.

Thank you.

Our next question comes from Ali Agha from Sun Trust. Please go ahead.

Thank you. Good morning.

Good morning, Ali.

Good morning, Andres. First question, I did want to come back to Ohio if I could. I hear the point you make that, hey, the Supreme Court challenge for you is specific to the seat test. Nevertheless, there is a Supreme Court decision in the state that basically went against the validity of the FE DMR. So there is a possibility that eventually something like that challenge happens to your DMR as well if it's not happening today. So can you just simply summarize for us why you think your DMR would be different and should be treated differently than the way FE's DMR is being treated?

Yeah, I think, I mean, it's very objective here. That's not the discussion in our case, right? So the discussion, again, in our case is regarding the C test and not the legality. So that is not in the scope today.

I get that. I get that fine.

So I think potential implications would be for potential discussion on the extension of the DMR, which I think it's a more fundamental discussion if the DMR should exist or not. And, again, we do believe we have a very good case. When we got the first, very clearly, if you read the outcome there, one of the discussions is if the proceeds are clearly defined in terms of the uses. In the case of DPL, this was very clearly defined. We used 100% for debt paydown. So a lot of the fundamentals that were discussed in the other case, from our perspective, are solid from a DPL standpoint. And again, we need that from our perspective to maintain the investment gradient position DPL for grid models.

Ali, I think what's very important is also for Dayton to have a grid equal to the other grids in Ohio. It needs an investment-grade company, and that is all wrapped together in this request for an extension of the DMR.

Okay. Separately, Andres, can you also give us an update on what you're seeing in Puerto Rico right now? with the political turmoil there, any impact at all on your plant or your project out there?

Yes. Look, Puerto Rico has been through removal of a governor, and they're in the process of appointing a new governor. Look, whatever occurs will continue to be very important for Puerto Rico. We have the most reliable and by far the cheapest energy on the island. To replace our coal plant in Puerto Rico, by burning heavy fuel oil, which is what the other plants mainly burn, besides some gas, would cost about an additional $300 to $400 million a year in imported fuel bills. So PREPA would have to pay an additional $300 to $400 million per year, which would be passed on to consumers. I think what's also very important is of the large plants, there are only two which are EPA compliant. Most of the plants in Puerto Rico, because they're burning heavy fuel oil, have excess emissions of SOX. So they're not EPA compliant. And for that reason, the air in San Juan and Ponce, the two main cities, is not compliant. So while there's been some noise about our coal ash on the island, really this plant is very necessary. We're working with the PREPA to see about green blend and extend. as a way of reducing total emissions on the island, and we'll continue to work with them. So stay tuned, and this plant is important. It is producing the most reliable and the cheapest energy on the island.

Okay. And last question, Andres. You know, the $395 million of remaining asset sales, is the goal there still to exit out of non-core assets as part of the process, or is that more driven by partial sell-downs of existing assets to recycle the capital. How are you thinking about the remaining asset sale process?

Well, we have a number of objectives. So clearly we have an objective of reaching less than 30% of our total generation by megawatt hour coming from coal. So, you know, that's something that we will keep in mind. We'll also keep in mind, you know, those markets which we think are growing most quickly. And, of course, we've also been, I think, very successful in improving our returns, for example, even on renewables by incorporating partners. So there's a combination of factors. But, yes, obviously reducing our carbon footprint will be one consideration in our additional sell-downs.

Got it. Thank you.

Our next question comes from Greg Gordon from Evercore. Please go ahead, sir.

Thanks, guys. Good morning.

Good morning, Greg.

Sorry to beat a dead horse on the DMR. I already understood the nuances of your legal situation, but can you just tell us, even though in all rights you need this money to fulfill the capital needs of the distribution utility in Ohio and should get the approval. Is your 7% to 9% expected earnings growth rate resilient to a negative outcome in that case?

The answer is yes.

Thank you.

Just to complement, Greg, just to complement, I think you may recall first Q, we've announced the additional $100 million of potential cost savings from digital, which was not in the 7 to 9. So you see that... Our forecast has resilience to manage some of the negative outcome. Having said that, we expect to get the DMR extension.

My second question was with regard to Vietnam. You talked about how you're pleased with the movement towards potential realization of commercial opportunity there. I think some of your investors are a bit skittish as it pertains to really large bets on highly concentrated investments out in Asia. So if this does become a really viable commercial opportunity, do you see bringing in partners? How would you like to size that investment vis-à-vis your overall capital commitments for AES?

Yes. Well, you know, of course we have a portfolio view of our capital, and we don't want excessive concentration in any one particular market outside of the U.S. So I would say that, you know, to look at what we did with our Mong Jong facility in Vietnam, where we, you know, we have been very successful. We were paid on time. It's a dollar contract. We're viewed as the premier operator and developer and builder of projects in Vietnam. So in that case, you know, we didn't have an over-concentration of capital. So in the case of Vietnam, you know, we may have Vietnamese partners from the get-go. So, you know, we'll be conscious of that. But I think it's moving very well. And as you know, Vietnam is a place where it takes time to develop projects because you require government consensus from many entities. But, you know, we're well on our way. So we feel very confident about this project. And, you know, we obviously – We'll be conscious about over-concentration in one country.

Great. My last question is with regard to fluence. I think that there was an incident where the technology had some issues in Arizona several months ago. Was that an isolated event, or have there been improvements or modifications to the design of your offering as a result of that? Sure.

Yeah, this occurred at a two megawatt facility in Arizona. You know, we've been working with the battery manufacturer and the utility in that case, really investigating all the root causes and looking at all our facilities. I would say that we've taken prudent steps based on that, realized that we're now coming out with our fifth generation of energy storage which will be a cube, and it has all the latest safety requirements, for example, the state of New York, which is it's 9540A. And in addition to that, realize that, you know, we continue to see very strong demand for Fluence, even the operator of the one unit that did have that incident. You know, we continue to go forward. So looking at that, you know, we think this is something that there was some learning. We're working again with the battery supplier to really look at what was the root cause. And we're incorporating all learnings. And, you know, we will have what we have, you know, quite frankly, you know, the safest and most up-to-date units out in operation and in construction.

Thank you, guys. Have a great morning.

Thank you.

The next question comes from Julian Simulan Smith. Please go ahead.

Hey, good morning, team.

Good morning, Julian.

Hey, so I just wanted to follow up a little bit different from others here. First, just with respect to Vietnam and then just what's the latest progress on LNG contracting there? What should we be expecting going into the fourth quarter here or anything in particular? And then separately, you mentioned IPL. There have been some issues in Indiana around these IRP processes of late. Can you comment about what kind of generation shifts are reflected in that $1.2 billion? Would that be potentially incremental? Are you thinking about anything? I know that some of the modeling scenarios that have been released by IPL have talked about this a little bit. So just if you can on those two big capital budgeting items here. And then separately as a second question, I'll just ask it now. Can you comment a little bit on the PTC contributions and the year-over-year increases from the renewable segment and how you're thinking about that scaling through the course of the year? So I'll leave it there.

Okay, let's take this multifaceted question part by part. I think regarding Vietnam, as you know, when President Trump visited Vietnam, there was a letter of intent signed for these projects, and it was, I would say, one of the marquee projects that the two countries had agreed to. So energy demand in Vietnam is growing around 10%. Quite frankly, Vietnam is one of the beneficiaries of some of the trade dispute between the U.S. and China. So expect demand to grow even faster. Vietnam does not have sufficient domestic LNG, doesn't even have sufficient coal. So Vietnam is moving towards LNG and renewables as well. So this is a very necessary project. It's going to start supplying not only the new combined cycle gas plants, which are part of this but existing ones which are running out of offshore gas as well. So, again, I think it's very necessary. It's also a project that's very important for both countries, for the U.S. and for Vietnam. So the next thing is, you know, expect, you know, further progress in terms of, you know, announcements, you say, between the two countries and us that this is going to be moving forward with – and, you know, what Vietnamese partners are involved. Vietnam is a country of consensus, as I said, so, you know, it takes time, but they move, and they move in a very steady but very certain fashion. So that's what I would say, sort of stay tuned. And it will, of course, we have to, we are part of the Vietnamese government's master electricity plan, and that will also involve, you know, how much LNG is imported and, you know, the phasing in of the combined cycle plans. On the second, I will pass this to Gustavo. What I would say is a big part of the $1.2 billion at IPL is actually T&D. And so it's smart grid infrastructure. So I'll pass it to Gustavo.

That's right. So Julian, Gustavo here. Yeah, the 1.2 is all T&D. So the team is looking for opportunities on the generation side, but it's not in this number yet. So this is still in the works. On your Third question regarding the renewable contribution, and this quarter was not that mature around the cent. And as we bring new projects online towards year end, then we'll have an additional contribution.

Just to clarify quickly, just on the PTC contribution for renewables, should we expect a material tax credit benefit in 4Q here to be kind of a big year-over-year uptick, or

No, not mature, but some contribution, but not mature.

Yeah. Julian, I'll just remind you that remember that we're split 50-50 between solar and wind, and we're split 50-50 between U.S. and international. So, you know, something like HLBV is not as important for us as it is for other people.

And just finally to read between the lines, With IPL, we shouldn't expect anything too different from that 1.2 for the IRP process for the time being.

No. We are still working on that one. So this 1.2 was exclusively on TMD, and we are looking for opportunities on the IRP, and we'll come back to you as we put this to bed.

Okay. All right. Stay tuned. Thank you. Thanks, Julian.

Our next question comes from Charles Fishman from Morningstar. Please go ahead.

Hi, good morning. On Fluence, it's certainly an emerging technology that we're still going down the cost curve. Andres, would you say that your margins are holding per megawatt or however you measure it as this technology progresses down the cost curve?

Look, I would say that the sales margin – you know, certainly are holding. There are different margins for different businesses, you know, obviously. We're in 20 countries today. We're selling, you know, for example, in the Philippines, you know, where you have many isolated positions. You have different applications such as community solar. You have, quite frankly, SunFlex, which is a slightly different product than our Advancene product. So, you know, the margins will differ depending on the market, depending on the exact product. But basically, we see the cost curve coming down because as we come up with our next generation of product here, it's going to be more productized. It's going to be more prefab, and it's going to be less customized, you know, as we've learned more about what is optimal for our customers in different situations. So more customization will be on the software and less will be on the hardware. So I would say expect margins to continue to improve, not actually go down, even though, you know, we're seeing some, you know, in some cases, you know, people bidding very low prices for integration of energy storage, basically to say that they have a product up and operating. You know, in many of those cases, we don't compete because, you know, we do require a margin from our projects.

Sure. And then one last quick question. The virtual reservoir at Alto Maipo, how is that different from pumped storage, and does it involve any of the Fluence technology? Good question.

It's absolutely Fluence technology. So basically, it changes. It differs from pumped storage. Well, pumped storage, you need a reservoir. You've got to put that water somewhere. And, you know, you have to build pipelines, and you have to use electricity to get it up there. So there's friction, just the physics changes. of storing electrons is superior to that of storing molecules. So the virtual dam is basically the idea to combine a run-of-the-river facility, such as, you know, the whole Altamipo complex is about 750 megawatts, and then you have an associated energy storage. Now, if you have a five-hour storage, what I would remind people, that means it's five hours at 100% discharge. If you discharge it at 50%, you actually have energy storage capabilities for 10 hours. So what this will allow is, you know, the run of the river is constant, and what we're doing is injecting energy into the grid when the prices are best. That's basically it, and really providing capacity. I mean, the one big issue with renewables is that they don't really provide you around-the-clock capacity. So this will provide us, you know, our run of the river does have actually run around, clock capacity, but this will allow us to inject that energy when it's most needed. So this is a very exciting technology, and it will be, I'm sure, copied. And if we end up with a 250 megawatt five-hour facility at the Alto Maipo complex, that makes the economics much more attractive.

That is fascinating. I would think that in the U.S. with the The hydro, with all the hydro we have, but the limited opportunity to expand, that might be a potential market if you can drive the affluence cost down. Is that correct?

Yes, that's absolutely correct. I mean, we actually have people looking at the virtual hydro in places like India because realize that nowadays getting the environmental permits to construct a reservoir, you know, and that often means forest clearance. That means relocating people. is very difficult. These you can install, you know, within 12 months. So, you know, really the only barrier is getting the regulations in place, you know, getting the proper capacity payments for this to work. And, of course, it works best in situations where you have a big penetration of solar, for example, so you have really that duct curve that you can take advantage of.

Okay, thanks, Andres. I can see why you're so excited about Fluence. Thank you. Thank you.

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

Thanks, everybody, for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Thanks again, and have a nice day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Enjoy the rest of your day.