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spk07: Welcome to the AES Corporation Third Quarter 2022 Financial Review Call. My name is Glen, and I will be recording your call today. If you would like to ask questions during the presentation, you may do so by pressing star 1 on the telephone keypad. I will now hand you over to your host, Susan, to begin.
spk05: Susan, please go ahead.
spk01: Thank you, Operator. Good morning, and welcome to our Third Quarter 2022 Financial Review Call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements. There are many factors that may cause future results to differ materially from these statements, which are 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 presentations. 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.
spk11: Good morning, everyone, and thank you for joining our third quarter 2022 financial review call. This morning, we reported third quarter adjusted EPS of 63 cents, bringing our year-to-date adjusted EPS to $1.18. With these results, we now expect our full year adjusted EPS to come in at or near the high end of our guidance range of $1.55 to $1.65. We're also reaffirming our 7% to 9% annualized growth target for adjusted EPS and parent-free cash flow through 2025. Steve Coughlin, our CFO, We'll discuss our financial results in more detail shortly. Our business model continues to demonstrate its resilience with strong contractual protections and natural hedges that have insulated us well from foreign currency movement, higher interest rates, and volatile commodity prices. In addition, the vast majority of our business is with U.S. utilities or investment-grade off-takers. Turning to slide four. At the same time, we have built flexibility into our portfolio, which has allowed us to capture upside in the current environment. For example, in Panama, we've been able to redirect Henry Hub priced LNG to European markets to capitalize on high international gas prices. This upside is the direct result of actions we took in the past to create a diverse portfolio that would limit our downside exposure to fluctuations, both in commodity prices and hydrology. With above average rainfall in Panama this year, we have been able to buy cheap hydropower and run our gas plant less, which has made it possible to redirect a portion of our contracted LNG, creating meaningful upside in our results. Now to slide five. We spoke briefly about the US Inflation Reduction Act, or IRA, on our previous call. But since then, it has become even more apparent how it is likely to greatly accelerate the demand for renewables and standalone storage in the U.S. We are very well positioned to capitalize on this demand and growth through our market leadership in renewables, particularly in the CNI segment, due to our strong customer relationship, our ownership interest influence, and our extensive and growing pipelines. Specifically, the IRA extends the production tax credit, or PTC, and the investment tax credit, or ITC, for 10 years and provides additional tax credits for energy communities, such as low-income areas or places where coal mining or thermal generation previously took place. We anticipate that the benefits of the IRA will result in a meaningful step-up in demand across the U.S., but particularly from CNI customers looking to reach their decarbonization goals. The IRA also includes a 30% ITC for standalone energy storage. AES benefits not only from being one of the largest developers of energy storage projects, but also from our ownership stake influence, the market leader in energy storage integration. We see battery-based energy storage as an essential enabler of more renewables on the grid by reducing intermittency and providing renewables-based capacity. As you can see on slide six, to address this expected growth in demand, we have been working hard to grow our pipeline of renewables and energy storage projects. Today, our pipeline stands at 64 gigawatts, or more than twice the size of our entire current portfolio. The majority of our pipeline, 51 gigawatts, is in the U.S., and much of it is in the most attractive markets for renewables, such as California and PJM. Our pipeline consists of projects that have a combination of land, interconnection access, or advanced permitting. Approximately one-third of our pipeline is in the energy communities that I previously described and are eligible for additional tax credits. We believe our pipeline will become increasingly valuable as sites for projects become scarcer. Turning to slide 7, at the same time, since our last earnings call in August, we have signed an additional 1.6 gigawatts of new renewable PPAs, or 3.2 gigawatts, year-to-date. Furthermore, we are in very advanced late-stage discussions on several large contracts that we expect will bring us within our full-year range of 4.5 to 5.5 gigawatts. Our backlog of signed PPAs stands at 11.2 gigawatts, the majority of which is expected to come online by 2025. We remain largely on track with our construction program, which is now 5.2 gigawatts. There are some projects that have been moved from this year to next, primarily due to delays from customers. But as we've mentioned before, none of these projects are late due to a lack of solar panels. We also continue to make very good progress on our two very large green hydrogen projects in the US and Chile, which include the integration of electrolyzers and renewables. Although we don't have any specific announcements to make today, we are confident that we will have more to share with you on this important initiative before the end of the year. Turning to slide eight for an update on growth initiatives at our US utilities. This quarter, AS Ohio, filed a new electric security plan, or ESP4, which outlines a comprehensive roadmap to position AES Ohio to resolve outstanding regulatory proceedings and make significant investments to modernize its network. The filing is a substantial achievement for AES Ohio, as it will lay a strong regulatory foundation for growth by implementing a more traditional utility rate structure. We expect the Public Utilities Commission of Ohio to approve ESP4 in the next 12 months. As a reminder, AS Ohio has the lowest T&D rates in the state across all customer groups, and we see significant opportunity to invest to improve reliability and strengthen the balance sheet while remaining cost competitive. Finally, AS Indiana is in the last phases of its integrated resource plan process. and plans to file the 2022 IRP report with the state regulator by December 1st. The proposal includes another milestone in AES's decarbonization plan with the conversion of the last remaining units of coal operated by AES Indiana to natural gas in 2025 and the addition of up to 1.3 gigawatts of renewables, including wind, solar, and battery storage. With that, I now would like to turn the call over to our CFO, Steve Coughlin.
spk00: Thank you, Andres, and good morning, everyone. Today I will discuss our third quarter results, 2022 parent capital allocation and 2022 guidance. Turning to our financial results for the quarter, beginning on slide 10, I'm pleased to share that our third quarter results are very strong, and we now expect to be at or near the high end of our full year 2022 adjusted EPS guidance range of $1.55 to $1.65. Third quarter adjusted EPS was 63 cents versus 50 cents last year, driven primarily by our LNG business, as Andres discussed. In addition, we also benefited from an increased ownership in AES Andes, as well as higher margins in Brazil. These positive contributions were partially offset by one-time charges at our U.S. utilities in Argentina businesses. Relative to last year, we also had higher losses from our AS Next portfolio as financial results from Fluence were not reported in our Q3 numbers last year, higher parent interest stemming from higher debt balances as we increase investment in our subsidiaries, and a higher adjusted tax rate due to a non-recurring tax benefit in Q3 2021. I should also note that despite considerable macroeconomic volatility, we see very little impact on our financial performance. For example, the forecasted full year impact of foreign currency movements after tax is well under one cent of adjusted EPS due to our highly contracted and largely dollarized business along with our very active hedging program. In addition, nearly 80% of our debt is either fixed rate or hedged against interest rate exposure and approximately 82% of our revenue is protected by inflation indexation or hedging. Turning to slide 11, adjusted pre-tax contribution, or PTC, was $569 million for the quarter, a $141 million increase year over year due to the drivers I just discussed. I'll cover the performance of our strategic business units, or SBUs, in more detail over the next four slides, beginning on slide 12. In the U.S. and Utilities SBU, lower PTC was driven primarily by the recognition of one-time expenses at our U.S. utilities from previously deferred purchase fuel and energy costs, including those related to an outage at our Eagle Valley plant from April 2021 to March 2022. We pursued and entered into a settlement for Eagle Valley and took a provision against a deferred fuel recovery asset at AES Ohio, which we will continue to pursue. These expenses impacted adjusted PTC by approximately $48 million in the third quarter. In addition, lower PTC was driven by lower availability in Puerto Rico. Our legacy Southland units provided significant energy margin contribution again in the third quarter this year, although this was not a material year-over-year driver. We are also very pleased that in the third quarter, the California state regulatory authorities formally launched the process required to further extend our Southland legacy units beyond 2023. Higher PTC at our South America SBU was mostly driven by our increased ownership of AES Andes and higher margins at both AES Andes and Brazil, but partially offset by a provision in Argentina. Higher PTC at our Mexico, Central America, and the Caribbean, or MCAC SBU, primarily reflects our commercial team's outstanding effort to redirect our LNG supply from Panama to the international market as discussed earlier. These LNG sales were enabled by the flexibility we built into our commercial structure and gas supply agreements, along with favorable market conditions, which may be present going forward, although we expect to a more limited extent. Finally, in Eurasia, adjusted PTC was relatively flat year over year, with an overall net benefit from higher power prices at our wind plant in Bulgaria. Now to slide 16. As a result of our overall strong performance year to date, along with a significant contribution from LNG sales, we now expect to come in at or near the high end of our full year 2022 adjusted EPS guidance range of $1.55 to $1.65. Growth in the year to go will be primarily driven by contributions from new businesses, including roughly 500 megawatts of projects under construction coming online, as well as further accretion from our increased ownership of AS Andes. We expect to recognize additional LNG sales in the fourth quarter, but the contribution will be much smaller than the benefit in Q3. We are also reaffirming our expected 7% to 9% annualized growth target through 2025, based primarily on our expected growth in renewables, energy storage, and U.S. utilities. Turning to slide 17, as Andres highlighted, the Inflation Reduction Act extended and expanded the tax incentives available for U.S. renewables and energy storage. Tax credits have been an important part of the economic value creation of our U.S. renewables portfolio, and the IRA provides clarity on long-term eligibility for these credits. As U.S. renewables become a larger share of our portfolio, I want to briefly touch on the way these tax incentives contribute to our earnings and cash flow. Our U.S. wind projects are typically eligible for production tax credits over the first 10 years of operations. Our solar and solar plus storage projects typically qualify for an investment tax credit generally recognized within the first two years the project begins commercial operation. To ensure we take full advantage of the tax value of our U.S. renewables, we usually bring on partners that will invest in these projects to be allocated the majority of the associated tax attributes. These are called tax equity partnerships. It's important to recognize that as we monetize these tax credits, they create earnings and cash for AES. For full year 2022, we expect our projects to generate approximately $280 to $310 million in new tax credits. After monetizing these credits through our tax equity partnerships, the earnings recognized by AES this year from new project commissionings will be approximately $200 to $230 million, with the remaining earnings from tax credits to be largely recognized next year. Due to the late year seasonality of new project commissionings, Approximately two-thirds of these earnings will occur in the fourth quarter. This year, we expect to commission more projects in the fourth quarter than in 2021, which will benefit our earnings in the year-to-go period, improving the year-over-year comparison of adjusted PTC in our U.S. and utilities SBU by the end of the year. Now to our 2022 Parent Capital Allocation Plan on slide 18. Sources reflect approximately $1.6 billion of total discretionary cash, including $900 million of parent-free cash flow, $500 million of asset sales, and $200 million of new parent debt. On the right-hand side, you can see our planned use of capital. We will return nearly $500 million to shareholders this year. This consists of our common share dividend, including the 5% increase announced last December and the coupon on the equity units. We plan to invest approximately $1.1 billion in our subsidiaries as we capitalize on attractive opportunities for growth. About half of these investments are in renewables, which represent the largest portion of our growth. Nearly a quarter of these investments are in our U.S. utilities to fund rate-based growth with a continued focus on grid and fleet modernization. In summary, nearly three-quarters of our investments this year are going to grow AES's renewables businesses in our U.S. utilities, reflecting our commitment to continue executing on our portfolio transformation. In addition, approximately 70% of our planned future investments are targeted for our U.S. subsidiaries, which will contribute to our goal of more than 50% of our earnings coming from the U.S. in 2023. I look forward to AES continuing our strong performance this year and sharing updates with you on our fourth quarter call. With that, I'll turn the call back over to Andres.
spk11: Thank you, Steve. In summary, we now expect our 2022 adjusted EPS to come in at or near the high end of our guidance range of $1.55 to $1.65. And we are reaffirming our 7% to 9% annualized growth target for adjusted EPS and parent-free cash flow through 2025. Our strong financial results continue to demonstrate the resilience of our portfolio to macroeconomic volatility. We signed additional agreements that will redirect excess LNG from our business in Panama to international customers. We expect the Inflation Reduction Act to greatly accelerate the demand for renewables, standalone storage, and green hydrogen. To address this growth in demand, we have increased our pipeline to 64 gigawatts. including 51 gigawatts in the U.S. And year-to-date, we have signed 3.2 gigawatts of renewables and energy storage under long-term contracts. And we're in late-stage discussions on several more that we expect will bring us within our full year range of 4.5 to 5.5 gigawatts. With that, I would like to open the call for questions.
spk07: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on the iPhone keypad now. When preparing to ask your questions, please ensure your phones are muted vocally. We have our first question comes from Insun Kim from Goldman Sachs. Insun, your line is now open.
spk03: Thank you. First question on the revised outlooks that you gave on U.S. pipeline and also just the backlog that you've updated. Given the IRA has passed officially, while we await the 4Q earnings for more guidance, at this point, do you have a pretty good sense of how much upside to that backlog you see, whether it's through 2025 and 2026, and whether that still gives you a good confidence that there's potential to achieve the upper end of that 7% to 9% APS growth range?
spk11: Yeah, good morning, Insu. What I would say is that, you know, we're seeing very strong demand, especially in the U.S. market, especially among C&I customers. So really, I don't think it's an issue of demand. It's really an issue of having permitted projects that can meet our clients' demand in the different markets. So, you know, regarding our growth rates, you know, we feel very confident about achieving our seven to nine. The IRA is obviously a positive to this number. But, you know, we expect some adjustments in the markets. It's not only a question of growth. It's really a question of the profitability of those projects. So what we expect over the next, I'd say, months or year is there to be somewhat more, let's say, scarcity of projects as demand increases. So I think that's where people who have gotten ahead of this and really have a mature pipeline are going to be in a substantial benefit. Obviously, the IRA also has a $3 a kilogram incentive for green hydrogen, and this is also going to be a plus for the growth of renewables and the growth of AES. So all these things I see as positive, but right now we're saying seven to nine. But we're seeing as the market becomes more favorable, it's not just a matter of how much you can grow. It's really making sure that you grow profitably.
spk03: Got it. That makes sense, and we'll await more guidance there. Second question for me on LNG. It seems like a pretty sizable benefit at the MCAC segment. I think on an EPS basis, $0.25 or so of benefit year over year, which from our perspective was much greater than expected. Could you just give more details on, if you can, on how much volume was driving that and while acknowledging that hydro conditions will dominate, whether you could see any level of benefit going forward next year and beyond. Assuming normal hydro next year and the current prices in global gas, could that still provide some level of tailwind as we think about 2023?
spk11: Yes. I mean, as we laid out, we have structured our contract such that, for example, if it's a dry year, we have all of the LNG that we need. to be able to fulfill our thermal contracts. However, if you have a wet year, then you are able to buy cheaper hydro and redirect those shipments. And I think what's very important is not only having the LNG, but having the capacity to ship that mostly to Europe and really get into the port. Because as you know, they're really bottlenecks in the port. So I think this really talks about the flexibility that we built in. the strategic relationships we have with LNG suppliers that allow us to take advantage of their position in these markets to move those shipments. So going forward, I mean, basically, when there's a La Nina in Panama, there's more hydrology. There's more water available. So we've, so, you know, there's also a factor that where, what's the level of the reservoirs? So it's, right now, I'd say that we expect the conditions to continue. we, you know, it's really a matter of the spread between Henry Hub plus the shipping and what international prices are. So, as Steve mentioned, you know, we expect, you know, we have some additional contracts coming in in the fourth quarter. And regarding next year, it's really, you know, are the conditions there? You know, is there water in the reservoirs? Is the hydrology positive? Is there the spread between Henry Hub, again, plus shipping, and international prices. So those are the conditions given. So this is, you know, mostly an upside, let's say, going forward. We're not, you know, counting on it. And regarding the tonnage, you know, we would expect somewhat less next year than we have shipped this year in terms of the actual volume. We can get back to you on the actual volume that was shipped.
spk03: Got it. Thanks for the call, Aaron. Thank you very much.
spk11: Thank you.
spk07: Thank you. We have our next question. This comes from Richard Sunderland from JP Morgan. Richard, your line is now open.
spk12: Good morning. Thank you for the time today. Let me just take you through one of these broader plan questions. Thinking about the outlook through 2025 and the broader inflation backdrop, how do you see the cost savings opportunity through 2025 currently standing versus your annual estate plan?
spk11: Okay, if I understood the question right, you're basically saying that in the inflationary environment that we're in, how do we see cost savings developing? What I would say is that, you know, given our international exposure, we're, you know, very accustomed to dealing with inflation and having to control costs in an inflationary environment. So what we, you know, have seen so far, as we've mentioned on prior calls, is that the cost of building renewables has gone up over the past year. There's no question there were, you know, panel prices have gone up in the U.S. EPC costs have gone up. However, you know, we're seeing that in this strong market, this is basically able to pass through. We're able to maintain our margins on new projects. Going forward, I mean, we've had cost-saving programs in place for the past 12 years. On a run rate basis, we've cut about $500 million of costs. So again, we have the infrastructure in place. It's part of our culture, continual improvement. So we're not particularly concerned on that side. On the pricing side, about 80% of our contracts and businesses have some form of inflation indexation. So we're very well protected on that side as well. So we have the experience. We have the methodology. It's part of our mindset. So we don't see that as a particular concern.
spk00: This is Steve. I would just add also if you look at the escalation of fuel prices on the thermal side, they've tripled in some cases. So renewables, although the costs have increased, are relatively more competitive than they were before this current inflationary cycle. And then, you know, in addition, we have the benefit with renewables of, you know, we're largely firming up prices right around the time that we're also signing up our PPA. So, you know, you have a good sense of what your levelized cost is over the life of the project and very little variable costs, of course. So, you know, we are able to build in this into the market. And then, of course, the IRA bill in the U.S., certainly with the expansion and extension and re-upping of credits, does serve to offset some of these additional inflationary increases in the renewables capital costs. So that has an opposing effect, helping bring prices somewhat back down off of what they otherwise would have been.
spk12: No, that certainly makes sense. I appreciate the color there. And maybe, Steve, picking up that last point around the IRA issue, I'm curious how transferability could impact your tax credit outlook. Is this an opportunity to invest more on a net-to-AES basis or any other impacts you foresee?
spk00: Yeah, no, certainly transferability. I mean, what we like about the IRA is it brings a lot of optionality, a lot of flexibility. It brings the production tax credit as an option for solar, and certainly that could be an opportunity for where high insulation is needed. you know, in the southwest of the U.S., for example, may be the best option. So with transferability, it certainly adds more liquidity to, I would say, a more liquid market to monetizing the tax attributes. There are still some significant benefits to having tax equity partnerships, though, where you have the tax depreciation benefit in addition to the credit that you're monetizing. as well as just in the way these projects get structured. There's a step up in the value of the assets when they're contributed to a partnership, and there's a benefit to the value of the tax attributes when that occurs as well. So it does add some options, optionality, flexibility. And so for us, it's good to have in our toolkit. And then down the road, we'll look to see you know, as AES, you know, moves forward in time, we may be able to utilize some of these tax credits for our own account, but I wouldn't expect that until, you know, several years down the road.
spk12: Great. Thank you for the time today.
spk00: Thanks.
spk07: Thank you. With our next question, this comes from Angie Stonrowski from CPOT. Angie, your line is now open.
spk08: Thank you. So first, just one clarification. So Steven, you talked about the ITC contributions from the new build this year and the carry forward for 2023. Is there some change here versus how you have been accounting for these? I mean, I'm just trying to make sure that it's not somehow related to the IRA and some different recognition of the tax attributes.
spk00: No, no, Angie. No change. But what we wanted to do was, A, as the IRA has been put in place and now we see the tax credits having a much longer life cycle extension well into the next decade, we wanted people to understand this is part of the economics of renewables, of the whole industry, really, in the U.S. We wanted people to understand what it means for AES. and that this is a long runway and is an important component of how these assets get monetized and the return gets earned. Certainly, this will escalate over time, so we should expect that as we grow the business, as anyone would grow the business. They'll have more share of credits. The other thing we wanted to point out is just if we look at the U.S. and utilities business unit, The fourth quarter, the skew towards the fourth quarter is in large part driven by the fact that we are commissioning more projects typically in the fourth quarter, more renewables projects, and the tax credit recognition or the investment tax credit is tied to the commissioning. And so we will see a lift in the U.S. fourth quarter results as we did last year, as we will again this year. in the fourth quarter as a result. So it was really those two reasons I wanted to point out, the IRA and then the seasonality of the tax credit recognition in the U.S. and utilities SVU.
spk08: Awesome. Okay, I understand. And secondly, and probably most importantly, so I remember a couple of quarters back, you guys had these seemingly lofty growth targets, four and a half to five and a half gigs of PPAs per year. It seems like you're tracking well against that. I'm just wondering if there's any upside to that number. And even more importantly, it seems like you guys have more than five gigs of capacity under construction. And so I'm just hoping to get some reassurance how you're coping with that level of activity. And if there is a possibility to increase it and how, again, like logistically, can you handle that many projects?
spk11: Yeah. Thank you, Angie. That's a great question. Yes, you know, we have a significant step up in our construction, you know, between this year and next. And you correctly point out we have more than five gigawatts currently under construction. I think we've handled it very well. You know, we have, you know, doubled the amount of people that we have, you know, working on construction in renewables in the U.S. We have been working with strategic EPC contractors, meaning that, you know, we can give them a not sort of just project by project, but really a line of sight, you know, how much work they're going to get over the next two years. So they're able to staff up. So we've done very well there. I think we've done a very good job of managing the solar panel supply, which has been very turbulent. We've had no delays this year due to solar panels. We have already most of the solar panels that we need for 2023. So we're working very closely with that, you know, also the inverter. So I feel very good about that. You know, we have done a lot of, Outside the renewables area, a lot of big projects. So I think we have experience there. So I feel very comfortable. We will have a roughly doubling of what we commissioned this year to next year. And again, we've been worried about the supply chain. We started more than two years ago. So we, I think, are in as good shape as anybody today. in handling it, and I think the results speak for themselves. We haven't had to delay any projects because of a lack of supplies or a lack of construction workers or anything of the sort. You know, regarding sort of the upside, as I said, you know, the IRA does provide upside. It has good incentives for renewables. There will be, I think, increase in demand certainly from corporations. And I think what's very important is, you know, we're not just looking at increasing our growth rate, but making sure that we're growing profitably and growing well.
spk08: Okay. And my last question about the financing of that incremental growth, especially in this higher interest rate environment. So, I mean, are you revisiting this past idea of more of like a systematic recycling of capital from your existing assets? Is there, again, especially ahead of those likely announcements for green hydrogen projects? I mean, I'm assuming that that comes with a pretty aggressive capital outlay. So how do you finance it?
spk11: What I say, we're going to continue to churn capital, you know, as our projects mature, you know, it's a way of increasing our return on invested capital. As you know, once we finish renewable projects, we sell down to people who want a fully contracted U.S. dollar renewable. So, you know, our plan through 2025 that we've laid out is fully financed. Now, if we were going to, you know, I would say going forward, if there are additional very profitable opportunities, you know, we'll have to look at that. But we have a lot of options. We have a lot of options. We're investment grade. And as we have done in the past, you know, we can turn more quickly, you know, some of our assets in terms of our sell downs.
spk08: Very good. Congratulations. Thank you.
spk11: Thank you, Angie.
spk07: Thank you, Angie. We have our next question comes from Nick Campana from Credit Suisse. Nick, your line is now open.
spk10: Hi, good morning. This is Fei for Nick today, and thanks for taking my question. Good morning. I just want to quickly touch on Ohio rate case. We saw some peers going through through this process, having some challenges there. Could you just update us on how you're managing your regulatory strategy in Ohio and the rate outcome there, if there's any changes from the last update? But again, recognizing Ohio has a pretty minimal impact to the consolidated EPS. Just any colors would be appreciated. Thanks.
spk00: Yeah, happy to. This is Steve. We are being very strategic, and I'm sure you saw that we did file for an electric security plan for our ESP4 very recently. So we are still awaiting the decision from the Utility Commission on the rate case that's outstanding. We are expecting that decision still before the end of the year. But look, the issue at hand is whether rates need to be frozen while we currently have this rate stability charge that's been in place for about 20 years. We think there is broad support for the new rates that have been asked for in the plan, and the staff came out and supported those. So what we decided to do was go ahead and chart a path to moving on to a new ESP, regardless of what this outcome is in this case. And therefore, that clock has already started ticking. As Andre said, we'd expect that to be resolved by middle to second half of next year on the ESP4. And our focus is really on growing the utility. As Andre said, this is a utility where we have the lowest rates by far across all customer classes. We want to get to a place. There's a significant opportunity for upgrades and investments, and we want to have a healthy structure from which to continue investing and a healthy balance sheet for the for the utility. So the ESP-4 was filed to give that path there. We still believe in, you know, the case that we filed and that, you know, the stability charge can still be in place. But in the case that the commission decides they want to hold rates until that stability charge is retired, then we'll have this ESP-4 path. It's already out there. It's already being in the process, and we'll have that then by the middle of next year as opposed to waiting for this to be decided and then going ahead and creating what's the next security plan. So that was our goal and our thinking here. And as I said, we still expect a decision this year on the case.
spk10: Perfect. That really makes sense. Appreciate the colors here.
spk00: Yep, absolutely.
spk07: Thank you, Nick. We have our next question. It comes from Julian Dumoulin-Smith. Julian, your line is now open.
spk02: Hey, good morning, team. Thank you so much for the time and the opportunity. Appreciate it. And congratulations on the continued success here. If I can, just to pivot back to where we started some of this conversation, I want to try to get back at some of the tax credit dynamics and how that plays itself out over the next few years. So Clearly, you all have outperformed on continued backlog generation and ramping into construction. Can we talk about some of the cadence in service here and how that translates back to credits? I appreciate the detail on 22 about what that means on an income basis, but can you talk a little bit relative to the earlier guidance, what was embedded as far as earnings expectations, and then try to transpose that against where we are against the current cadence of When is that construction progress going to reach in service? When is that backlog effectively fully in service, right, i.e., over the next two or three years? You know, I just try to reconcile prior versus today on the updated backlog as well as considering the pivot to a solar PTC from an ITC, which also may admittedly be something of an offset to the positives described here.
spk11: Okay, Julian, good to talk to you. There are a lot of questions. Sorry, I know a lot.
spk02: Take it as you will.
spk11: So let me try to frame it. We'll answer it between Steve and myself. So I guess the first question is, you know, I think regarding, you know, the new IRA, it does give us flexibility to choose in terms of ITC, PTC on some projects. This will start in 2023, which is, you know, somewhat of a slight upside there. Regarding sort of the cadence, you know, these do tend to be somewhat backloaded in the end of the year. So that Steve had mentioned, this is just because of the, you know, financing structure. So it tends to be, you know, Q3, Q4. And I think that will continue to be so going forward. In terms of our backlog, yes, I mean, we have, as we mentioned, it's 11.2 gigawatts. And, you know, the vast majority of that's going to be commissioned before the end of 2025. So, you know, there are a few projects that go beyond that. So, you know, as projects get commissioned, new ones come into the backlog. I think what's important, again, if you think of this in terms of our installed capacity, the backlog is one-third of our current installed capacity. So, you know, we feel good about our growth rates. We feel good about who we're contracting with. So, you know, our growth in the U.S., of course, is investment-grade off-takers, you know, utilities, but mostly, you know, corporate clients, and internationally as well. You know, what we're signing overseas is, you know, mainly in Chile with people like Codelco, Big Copper Exporter, others that, you know, we feel it's just as good a risk as if they were in the U.S. So I think I'll pass it off to Steve to get a little bit more in the weeds of the tax itself, some of your other questions.
spk00: Yeah, hey, Julian.
spk02: And actually, if I can, just to clarify, if you don't mind, just to jump in, the cadence by year, rather, not by inch or quarter kind of thing, but by year, breaking down that 11 gigs if we can. Again, I'm just trying to reconcile the older...
spk11: expectations versus newer and try to understand how many gigs per year um you can kind of credibly expect yeah what i would say is look we're going from about i think uh less than two gigs this year somewhere around four gigs next year and then at some point if you are always signing five gigs of um new renewable contracts you will be commissioning or bringing online five gigs the two sort of come together so the catch-up is the biggest catch-up will be next year And then you have the two lines going in parallel. Now, again, if, you know, our signings increase, well, then there will be a lag of about, I'd say, between 18 months and 24 months between the greater number for signing PPAs and the commissionings we're bringing online.
spk00: Yeah. And, Julian, so I would say, you know, also taking the number, you know, Andre said four gigawatts next year. That will continue to grow. you know, this is our main growth business for us. You know, it's five gigawatts, six gigawatts. We'll give more color on that next year as we update our guidance. And then I would look at that and say that, you know, roughly on average, say two-thirds of that is in the U.S. And then a larger share of that is solar and solar plus storage of that that's in the U.S. So, you know, say roughly 75% today is solar plus storage of the U.S. backlog. And so that's ITC qualified. You know, we can elect PTC now, as I said. We're looking at that where it makes sense for the returns, and that's typically where you have higher capacity factors, where the insulation is highest, say in the southwest of the U.S. The credits will continue to increase significantly. I think next year, as Andre said, it's going to be a big jump year over year because the level of commissionings is going way, way up next year. And it is heavily weighted towards the fourth quarter of the year. But as we continue to grow this business, the timing will become less of an issue as we get to more of a a consistent state of additions year over year. But the credits are an important part of how it's monetized. I wanted to show that given the IRA and also given how the U.S. utilities SBU seasonality is becoming more shaped by the renewables, the clean energy business in the U.S., that it's important for everyone to understand what that looks like for modeling purposes.
spk02: Got it. All right. Listen, I appreciate your attempt here on the call to get into it. Look forward to next quarter here with more details. Thank you, guys, and congratulations again.
spk11: Yeah.
spk02: Thanks, Julian.
spk07: Thank you, Julian. We have our next question. It comes from Ryan Levine from the city. Ryan, your line is now open.
spk04: Hi, everybody. I wanted to follow up on some of the ITC clarifications. So as you're looking for the U.S. portion, What adders are you assuming that you'll be able to realize as you move forward with these projects? And specifically, are you seeing any low middle income adders anticipated for your solar projects? And both in your current portfolio and then on a go forward basis, are you looking to evolve what types of projects you're pursuing in light of the details of the IRA?
spk00: Yeah, so you're talking about like the adders for the energy communities and domestic content, things like that. Is that right? Correct. So, yeah, I think roughly one-third of our U.S. pipeline today is in these energy communities that qualify for the 10% adder. I think, you know, as we move forward, then we look at domestic content. We are a leader. You know, we've launched our U.S. solar buyer program. We expect first supplies from that in 2024. So I would expect us to be having, you know, a share. I don't have a specific percentage right now, but a material share of our projects meeting the domestic content production in 2024. And then, you know, we are fully, you know, ready to be qualified for the wage and apprenticeship requirements and training already. So that's a non-issue. We're already at that 30% level with our projects. And then I would expect, you know, at least a third to be, you know, in that 40% level and some perhaps even higher, up to 50% with the domestic content as that starts to become part of, you know, our panel supply in 24 and beyond.
spk04: Great. And then in terms of the transferability comments, as you're looking to make decisions around whether or not to use tax equity partners or or utilize the transferability feature. Has that fully been determined at this point, or is there still some negotiation or analysis that needs to be done to determine how you'll structure future deals?
spk00: Okay. I mean, I would say, look, I think for us as a leader in the market, we have a lot of long-term deep relationships on the tax equity side. So And we have a lot of capabilities of very, you know, the top talent in the industry on structuring these projects on the commercial side and on the tax side so that we're optimizing returns. So for us, as I said before, transferability is an option. I'm not convinced, in fact, that it actually optimizes returns because there is the tax depreciation component, which is also an important, you know, component of value, the accelerated depreciation component. And they're structuring to step up the value of these projects as once they're built, the value of them is typically higher than what the capital cost was. So it's important that we pay attention to returns. And for us, transferability, although it brings more liquidity to the market, AAS as a leader already has that. I would say the liquidity we'd need to monetize the tax attributes. So we'll look at it, but there's nothing, you know, I wouldn't say for us it's a significant game changer given our scale and existing capabilities.
spk05: Appreciate it.
spk00: Thank you.
spk05: Thank you.
spk07: We have our last question. It comes from Greg Orell from UBS. Greg, your line is now open.
spk09: Yeah, thanks very much. Congratulations. Regarding the LNG success year to date and your thoughts on next year, just in terms of the repeatability there, what gives you the confidence there? Um, if there's anything you could share about, you know, what you might've sold forward or, or thoughts on what sort of conditions need to repeat, um, for you to deliver that again.
spk11: Yeah. Hi, Greg. Uh, I would say, look, what, what, what we said is that, you know, there are, there's a continuation of this into the fourth quarter or make smaller, you know, there's a possibility for, uh, for next year. And that will depend on the spread between, again, Henry Hub Plus prices that we get on our contracts and prices in Europe. So that's really the importance. I think in terms of the hydrology, we need continued good hydrology in Panama. Reservoirs are quite high. So we're going in in a favorable condition. So it really is what will be the spreads that justify making that shipment. And I would say also we would expect less volume in any case next year than this year. So it would be an upside. We're not counting on a very large amount of LNG. So conditions, it looks like it's a possibility, but we're not counting on it. And those are the drivers. So I think you can see how those drivers are moving and see if – there's a possibility for this.
spk00: Yeah. And I would say just add for the fourth quarter of this year, you know, we've already, we've already for whatever we would do with LNG is done for this year. So we've already, we have a much smaller upside in the fourth quarter already built into our commentary on meeting the, you know, at or near the top end of our guidance range. So that any additional volumes would be, we'd be talking about next year and what, you know, whether the market conditions as Andre said, or, are conducive to that, we think it's very possible and it would be more upside. But for this year, we've already contracted what we could contract.
spk09: Does where you end up this year, obviously you've said at or near the end, near the top of earnings guidance, does that have an impact at all on, you know, how you think about giving 23 guidance? Does it serve as a as a base or some kind of reference point, or are you still sort of pointing back to a different base?
spk11: We would be pointing back to the different base. I mean, we've said seven to nine growth and through 2025, and that's what we're committed to achieving. So, you know, it's not, you know, changing our base year for our growth rate.
spk00: Yeah. And that was 2020, if you recall, hopefully. Right. Yeah. It's a very good year. I think there's some more upside, as Andre said, but I wouldn't say it sets a new baseline because this isn't necessarily a recurring at this level thing.
spk09: Okay. Thanks a lot. Thank you, Greg.
spk07: Thank you. We have no more further questions on the line. I will now hand back to Susan for closing remarks.
spk01: We thank everybody for joining us on today's call. As always, the IR team will be available to answer any follow-up questions you may have. We will look forward to seeing many of you at the EEI Financial Conference later this month. Thank you and have a nice day.
spk05: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining.
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