Q3 2022 AES Corp Earnings Call
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Yeah.
Ladies and gentlemen, welcome to the Aes Corporation third quarter 2022 financial review call. My name is clean and I will be quoting your call today.
If you would like to ask a question has joined two presentation. You may do so by pressing star one contact with key pad.
I will now hand, you over to your host Susan to begin Sison. Please go ahead.
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 <unk> Dot 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 reckon.
Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation.
Joining me. This morning are on basically ski our president and Chief Executive Officer, Steve Kaufmann, Our Chief Financial Officer, and other senior members of our management team with that I will turn the call over to Andreas.
Good morning, everyone.
Thank you for joining our third quarter 2022 financial review call.
This morning, we reported third quarter adjusted EPS of <unk> 63.
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 Copeland, our CFO will discuss our financial results in more detail shortly.
Our business model continues to demonstrate its resilience with strong contractual protections and natural hedges that had insulated as 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 have 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 hydro power and run our gas plant less which has made it possible to redirect a portion of our contracted LNG.
Waiting meaningful upside in our results.
Now to slide five.
We spoke briefly about the U S inflation reduction act or I or a on a 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 C&I segment due to our strong customer relationships, our ownership interest in fluids, and our extensive and growing pipeline.
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 C&I customers looking to reach their de carbonization goals.
The Iowa rate also includes a 30% ITC for Standalone energy storage.
Hey, yes 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.
Reducing intermittency and providing renewables based capacity.
As you can see on slide six.
To address this expected growth in demand, we had 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 gigawatt 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.
Two connection axis.
We're 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 scarce.
Turning to slide seven.
At the same time since our last earnings call in August we have signed an additional one six 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 four and a half to five gigawatts.
Today, our backlog of signed Ppas.
And that 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 had 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 continued to make very good progress on our two very large green hydrogen projects in the U S and Chile.
Which include the integration of electro lasers 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 U S utilities.
This quarter a S, Ohio filed a new electric security plan or ESP for which outlines a comprehensive roadmap to position a S. Ohio to resolve outstanding regulatory proceedings and make significant investments to modernize its network.
The filing is a substantial achievement for Aes, Ohio.
Is 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 ESP for in the next 12 months.
As a reminder.
So hyatt 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, a S. Indiana isn't the last phases of its integrated resource plan process.
And plans to file the 'twenty to 'twenty two ERP report with the state regulator by December one.
The proposal includes another milestone in Aes's de Carbonization plan with the conversion of the last remaining units of coal operated by a S. Indiana to natural gas in 2025, and the addition of up to one three gigawatts of renewables, including wind solar and battery storage.
With that.
I now would like to turn the call over to our CFO Steve Hoffman.
Thank you Andre and good morning, everyone.
Today, I will discuss our third quarter results 2022 parent capital allocation in 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 <unk> 63 versus 50 last year, driven primarily by our LNG business as Andres discussed.
In addition, we also benefited from an increased ownership and a S. A N DS as well as higher margins in Brazil.
These positive contributions were partially offset by one time charges at our U S utilities and Argentina businesses.
Last year, we also had higher losses from our a S snacks portfolio as financial results from fluids 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 nonrecurring 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 <unk>.
<unk> full year impact of foreign currency movements. After tax is well under one 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 pretax 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 S. P use 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 the deferred fuel recovery asset at a S, 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 South on 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 a S Andes and higher margins at both a S Andes and Brazil.
Partially offset by a provision in Argentina.
Higher PTC at our Mexico Central America, and the Caribbean or <unk> 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 have more limited extent.
Finally in Eurasia, adjusted PTC was relatively flat year over year with an overall net benefit from higher power 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 years ago 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 a S. 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.
It's Andreas highlighted the inflation reduction act extended and expanded the tax incentives available for U S renewables and energy storage.
Tax credits had been an important part of the economic value creation of our U S renewables portfolio and the I R. E 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 million to $310 million and new tax credits.
After monetizing these credits through our tax equity partnerships. The earnings recognized by Aes. This year from New project commissioning will be approximately $200 million 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 commissioning 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 ago period.
Improving the year over year comparison of adjusted PTC, and 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 Nu 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 capitalized 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 base growth with a continued focus on grid and fleet modernization.
In summary, nearly three quarters of our investments this year are going to grow a S. As renewables businesses and 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 a us 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 Andreas.
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.
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 three two gigawatts of renewables and energy storage under long term contracts and we are in late stage discussions on several more that we expect will bring us within our full year range of four and a half to five and a half giving a whole lot.
With that I would like to open the call for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on tackling keep it now.
Josh your questions and showing a 40, some muted Polk County.
We have our first question comes from me soon Kim from Goldman Sachs.
Your line is now open.
Yeah. Thank you first question on the revised outlook 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 for the for Q earnings for more guidance to you at this point do you have a pretty good sense of.
How much upside to that backlog you see whether it's through 'twenty five 'twenty six and whether that still gives you.
<unk> confidence that there is potential to achieve the upper end of that 7% to 9% EPS growth range.
Yeah. Good morning, it's Jim.
Sure.
What did I say is that you know where we're seeing very strong demand.
Especially in the U S market, especially amongst C&I customers.
So really I don't think it's a 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 regarding the our growth rates you know are we.
I feel very confident about achieving our seven to nine.
The I R. A is obviously a positive to this number.
But we expect some adjustments in the market. So 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 two.
I'd say months or a year is there to be somewhat more let's say scarcity of our projects as 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 area also has a.
$3, a kilogram incentive for green hydrogen and this is also going to be a plus for the the growth of renewables and in the growth of it yeah. So all of these things I see is positive, but you know right now, we're saying seven to nine but were 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.
Got it that makes sense of all await more guidance. There second question for me on LNG It seems like.
A pretty sizable benefit at the M. T. A C segment on an EPS basis, 25 cents 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 of that how much.
<unk> was driving that and while acknowledging the 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 'twenty three.
Yes, I mean, as we laid out.
We have structured our contracts 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 what year.
And 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 parts because as you know there 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 all.
Wow us to take advantage of their position in these markets to move those shipments.
So going forward I mean, basically when there's a law anemia in Panama, there's more hydrology theres more water available. So we've so.
There was also a factor that where what's the level of the reservoirs. So it's right.
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, 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 is positive is there the spread between Henry hub again plus shipping.
And international pricing. So those are the conditions, giving so this is you know mostly are an upside, let's say going forwards.
Counting on it.
And regarding the tonnage we would expect a 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.
Got it thanks for the color and thank you very much.
I do.
Thank you.
We have our next question comes from Richard <unk> from JP Morgan.
<unk> now.
Hi, Good morning, Thank you for the time.
Okay.
Good morning, Robert.
Actions.
What's the outlook through 2025, and the broader inflation backdrop, how do you see the cost savings opportunities through 2025 currently standing versus your analyst day plan.
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 are developing well.
What I would say is that you know given our international exposure.
You know very accustomed to dealing with inflation.
And having to control costs in an inflationary environment.
So what we have.
I've seen so far as we've mentioned on prior calls that the cost of building renewables has gone up.
Over the past year, there's no question that we're you know.
Panel prices have gone up in the U S.
EPC costs have gone up.
However, you know we're seeing that in the in this strong market, where 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 got about $500 million of cost. So again, we have the infrastructure in place, it's part of our culture of continual improvement.
So you know, 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 you know we have the experience we have the methodology, it's part of our mindset. So we don't see that as a particular concern.
This is Steve I would just add you know also if you look at the escalation of fuel prices on the thermal side, they've gone tripled and in some cases so.
Renewables, although the cost of increased a relatively more competitive than they were before this turned inflationary cycle.
And then in addition, we have the benefit with renewables were largely firming up prices right around the time that we're also signing up our PPA. So.
You have a good sense of what your level is costas over the over the life of the project and very little variable cost of course.
So we were able to build in this into the market and then of course, the IR a bill in the U S. Certainly with the expansion and extension and re upping of credits does serve to offset some of these additional and inflationary increases in the in the renewables capital cost so that that's a that's a.
And a pause in opposing effect, helping bring prices somewhat backed out off of what they otherwise would've been.
No that certainly makes sense I appreciate the color there and maybe see picking up that that last point around the IRI.
Curious, how transferability could impact your tax credit outlook.
The opportunity to invest more on a net basis or any other impacts you foresee.
Yeah, No certainly transferability I mean, what we liked about the IRA as 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 a opportunity for where high installation.
As you.
You know in the southwest of the U S. For example, maybe the best option. So with transferability. It certainly adds a more 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 partnership so where you have the tax depreciation.
Benefit in addition to the credit that you're monetizing.
Monetizing as well, it's just in the way it is.
These are projects get structured.
There's a step up in the value of the assets when they're contributing to a partnership and there's a there's a benefit to the value of the tax attributes when that occurs as well. So it does add some options its optionality flexibility.
And so for US it's good to have in our tool kit.
And then down the road you know, we'll look to see you.
As a yes.
You know moves forward in time, we may be able to utilize some of these tax credits for own account, but I wouldnt expect that until.
Several years down the road.
Great. Thank you for the time today.
Thanks.
Thank you.
With our next questions comes from Angie Stone Rawski from Seaport.
It is now open.
Thank you. So first just one clarification, so Stephen you talked about the ITC contributions.
The new Bell.
This year end and the carry forward for 2023 is this is there some change here versus how you had been accounting for these.
I mean, I'm, just trying to make sure that that it's not somehow related to the I R. A in some different recognition of the tax attributes.
No no.
No change, but what we wanted to do was a you know as as the I R. A.
<unk> has been put in place and now we see the tax credits, having a much longer.
Lifecycle 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 a yes.
And then this is a long runway and is an important component of how these assets get get to monetize and return gets earned.
The.
Certainly they will.
This 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.
This unit.
Fourth quarter, there is a bit skewed 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 for 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 its really.
Those two reasons I wanted to pointed out the higher rate and then the seasonality of the tax credit recognition in the U S and utilities SBU.
Awesome, Okay, I understand and then secondly, and probably most importantly, so I remember a couple of quarters back you guys happy seemingly lofty growth targets, you know four and a half to five and a half game because of Ppas per year. It seems like you are tracking well against that I'm, just wondering if theres any apps.
Right to that number and even more importantly, it seems like you guys have more than five game because of stock of capacity under construction and so I'm just hoping to get some reinsurance how you are coping with that level of activity and if you. If there is a possibility to increase it and how I can like logistic.
Can you handle that many projects.
Yeah. Thank you.
That's a that's a great question.
Yes, you know we had a significant step up in our construction.
This year and next and you correctly pointed 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 in the amount of people that we have you know working on construction.
And in renewables in the U S. We have been working with strategic EPC contractors, meaning that you know we can give them.
Not sort of just project by project, but really a line of sight you know how much work they are going to get over the two 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 that we've just 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 working very closely with that also the inverters. So.
I feel very good about that we have done a lot of outside the renewal date.
Renewables area a lot of our big projects. So I think we're has experience there. So I feel very comfortable we will have a roughly doubling of what we commissioned this year to next year.
And again, you know we've been worried about the supply chain you know we started to.
More than two years ago. So we I think are in as good shape as anybody and handling it and then I think the results speak for themselves, we haven't had to delay any projects.
Because of a lack of supply Israel or a lack of.
Oh.
Construction workers or anything of the sort.
You know regarding sort of the upside as I said, you know the IRS does provide upside it it.
It has.
Good incentives for renewables.
They will be.
Thank a increase in demand certainly from 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.
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 that does.
Past I D.
What was that like a systematic recycling of capital from your existing assets is there.
And again, especially ahead of the bell slightly announcements for green hydrogen projects I mean, I'm, assuming that that comes with a pretty aggressive capital outlays. So how do you finance it.
Oh, when I said, we're going to continue to churn capital.
As our projects mature.
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 a renewable.
So you know our plan through 2025 that we've laid out is fully finance now if if we were going to 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 were 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.
Very good congratulations thank you.
Thank you Andrew.
Thank you Angie.
Our next question comes from Nick <unk> from Credit Suisse. Thank you nice element.
Yeah.
Hi, Good morning. This is Fei for Nick today, and thanks for taking my question and good morning, I just wanted to quickly touch on the Ohio rate case, we saw some peers going through through this process, having some challenges there could you just update us on how you are managing your regulatory strategy in Ohio, and the right outcome. There if theres any changes from the last.
But again, recognizing Ohio has a pretty has a pretty minimal impact to the consolidated EPS just any color would be appreciated. Thanks.
Yeah, No happy to this is Steve.
We are being very strategic and.
Sure you saw that we did file for an electric.
Electric security plans force or R. E S P for.
Very recently, so we are still awaiting the decision from the utility Commission on the rate case, that's that's outstanding outstanding we are.
Expecting that decision is still before the end of the year, but look the issue at hand is weather.
Rates needs 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 are had been asked for in the plan and the stock came out and supported those so.
What we decided to do was go.
Go ahead and chart a path to moving onto a new ESP, regardless of what this outcome is in this case and therefore that that clock has already started taking as Andre said.
We'd expect that to be resolved by middle to second half of next year on the ESP for.
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 wanted to have a healthy.
Structure from which to continue investing in our healthy balance sheet for the for the utility. So the ESP for was filed to give that that path. There we still believe in the.
The case that we filed and that you know the stability charged can still be in place, but in the case that the commission decides they want to hold rates until that stability charges.
As a retired then we will have this ESP for past its already out there its already being in.
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 plans. So that that was our goal and our thinking here and as I said, we still expect a decision this year on the case.
Perfect that really makes sense appreciate the colors here.
Yes, absolutely.
Thank you Monique.
We have our next question comes from Julien Dumoulin Smith Julien.
Melted.
Hey, good morning team. Thank you so much for the time and the opportunity I appreciate it and congratulations on the continued up.
Success here.
If I can just to pivot back to where we started with some of this conversation.
I wanted 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 and ramping into construction can we talk about some of the cadence of in service here and how that translates back to credits I appreciate the detail on <unk>.
Two 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 does that construction progress going to reach and service when does that backlog effectively fully in.
Service rate I E over the next two or three years, just trying to reconcile prior versus today on the updated backlog as well as considering the pivot to a solar PTC from an ITC, which also made digitally be something of an offset to the depositors described here.
Okay, Julian but to talk to you. This there are a lot of questions I know a lot.
Well so let me let me just say, let me try to frame it all I will answer it between.
Steve and myself so.
So I guess the the <unk>.
First question is.
Think regarding you know the.
The new I R. A it does give us flexibility to.
Two to choose.
And in terms of ITC PTC on some projects this.
This will start in 'twenty, 'twenty, three which as you know somewhat of a.
No I'd say, it's slight upside there regarding sort of the cadence you know these do tend to be somewhat back loaded in the end of the year.
That Steve had mentioned this is just because of the you know.
The financing structure. So it tends to be you know Q3, Q4, and I think that will continue to be so going forwards.
In terms of our backlog, yes, I mean, we have as we mentioned it's 11.
Two gigawatt and you know the vast majority of that is going to be commissioned before the end of 2025.
So you know there are a few projects that they go beyond that so you know as projects get commission new ones come into the backlog I think what's what's important again, if you think of this in terms of our installed capacity. It's the backlog is one third of our current installed capacity.
We feel good about our growth rates, we feel good about the.
Who we're contracting with so you know our growth in the U S of course is investment grade off takers.
Utilities in but mostly corporate clients are in.
And internationally as well you know what we're signing overseas is amazing.
Mainly in Chile with people like Codelco, big copper export or others that.
It's a we feel it is just as good of 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.
Weeds of of the tax itself some of your other questions, Yeah, Hey, Joe and actually if I can just to clarify.
If if if you don't mind just to jump in the cadence by year, rather than up intra quarter kind of thing, but by by year breaking down that 11 gigs. If we can just again I'm just trying to reconcile the older older expectations versus newer and try to understand how many gigs per year.
Got incredibly expect.
Yeah, what I would say is look we're going from about <unk>.
I think a lesson two gigs this year somewhere around four gigs next year.
And then at some point of view are always signing five gigs of new renewable contracts you will be commissioning are bringing on line five gigs to sort of come together. So the catch up is the biggest catch up will be next year.
And then you have the two lines are going in parallel now again if if.
You know our signings increase well then there'll be a lag of about it.
I'd say between 18 months and 24 months between the greater number for signing Ppas and the commissioning is we're bringing online.
Yeah, and Julien So I would say also taking the number you know Andreas set four Gigawatts next year that will continue to grow.
You know this is our main growth business for us.
It's five Gigawatts six Gigawatts will 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 I'll have a lot of the larger share of that is solar and solar plus storage.
Because in the U S. So.
Say roughly 75% today is is a solar solar plus storage of the U S backlog.
So that's ITC qualified.
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 installation as high as say in the southwest.
The U S.
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 commissioning is going way way up next year.
And it is a 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.
Yeah.
Consistent state of growth.
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 and utilities SBU seasonality is becoming more.
Shaped by the renewables the clean energy business in the U S. But it's important for everyone to understand what that looks like for modeling purposes.
Got it alright listen I appreciate your attempt to hear on the call I'd like to get into it look forward cigarette next quarter here with more details. Thank you guys and congratulations again.
Yeah. Thanks Julien.
Thank you Shannon we have our next question comes from Ryan Levine from Citi.
Brian Your line is now open.
Hi, everybody.
Wanted to follow up on some of the ITC clarifications, so as Youre looking for the U S portion.
Net adders are you assuming that you'll be able to realize as you move forward with these projects and specifically are you seeing any well middle income adder is 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.
Next you're pursuing in light of the T cells to the IRA.
Yeah, So youre talking about like theaters for the energy communities and domestic content things like that is that right. So 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.
Launched our U S solar buyer consortium, we expect first supplies from that in 2024, So I would expect us to be having a you know.
Sure 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.
Ready to be qualified for the 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.
At least a third to be in that 40% level and some perhaps even higher up to 50% with the domestic content as that starts to become part of.
Our panel supply in 'twenty four and beyond.
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 or or.
Analysis of Gnathion to determine how he obstruction of future deals.
Okay, I mean, I would say look.
I think the for us as a leader in the market.
Have a lot of long term deep relationships on on the tax equity side. So.
And we have a lot of capabilities a very you know the top talent in the in the industry on structuring these projects on the commercial side on the tax side. So that we're optimizing returns so for us as I said before transfer abilities and option I'm not convinced that in fact that it actually optimizes return.
Turns because there is the tax depreciation.
Component, which is also important.
Component of value of the accelerated depreciation so you know and they're structuring to step.
Step up the value of these projects as well as once they're built.
Value of them is is typically higher than what the capital cost was so you know there there's and important.
It's important that we should pay attention to returns and for us transferability, although it brings more liquidity to the market.
As a leader already has.
I would say the liquidity, we need to 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 it's a significant.
A game changer.
Given our scale in existing capabilities.
Appreciate it thank you.
Thank you.
We have our last question comes from Greg <unk> from UBS your.
Your line is now open.
Yeah, Thanks, very much congratulations.
<unk>.
Regarding the the LNG success year to date and your thoughts on next year.
And in terms of the.
Repeat ability there.
What gives you the confidence there.
If there's anything you can share about.
You know what you might have sold forward or thoughts on what sort of conditions need to repeat.
For you to deliver that again.
Yeah, Hi, Greg I would say it looks well.
Well, what we said is that there are there's a continuation of this into the fourth quarter will be smaller.
There's a possibility for for next year in.
And that will depend on the spread between again Henry hub plus prices that we get of our R&R 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.
Panama and the reservoirs are quite high so we're going in and the favorable conditions. So it really is what will be the spreads that justify this you.
Making that shipment.
And I would say also you know we would expect less volume in any case Ah next year than this year.
So it would be you know, we're not counting on a very large.
The amount of LNG, so conditions it looks like it's it's.
It's a possibility, but we're not counting on it and those are the drivers and as I said I think you can see how those drivers are moving in and see if.
There's a possibility for this year and I would say just add for the fourth quarter of this year.
We've already we've already for whatever we would do with LNG has 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 are at or near the top end of our guidance range.
So 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 is very possible and it would be more upside but for this year.
We've already contracted what we could contract.
Yeah.
This is 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.
How you'd think about giving a 'twenty three guidance, though does it serve as a as a base or where.
Some kind of reference point or are you still sort of.
Pointing back to a different base.
We'd be pointing back to the different base I mean, we've said seven to nine.
And in through 2025, and that's what we're committed to achieving so you know it's it's not you know changing changing our base year for that.
Our growth rate.
And that was too high class problem with recall.
[laughter] 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.
Our recurring at this level thing.
Okay. Thanks, a lot.
Thank you Craig.
Okay.
Thank you we have no more further questions on the line and I will now hand back to Susan.
We marked.
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 EI Financial Conference later this month.
And have a nice day.
Thank you.
Ladies and gentlemen. This concludes today's call. Thank you for Tony you May now disconnect your lines.
Okay.