Q3 2023 The AES Corp Earnings Call
Good morning, and thank you for joining the Aes Corporation third quarter 'twenty to 'twenty three financial review call.
My name is Kate and I will be the moderator for today's call I'll.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to turn the call over to your host Susan Harcourt, Vice President of Investor Relations You May proceed.
Thank you operator.
Good morning, and welcome to our third quarter 2023 financial review call. Our press release presentation and related financial information are available on our website at E. S 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.
Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation.
Joining me. This morning are Andres Kluski, our president and Chief Executive Officer, Steve Hoffman, 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.
And thank you for joining our third quarter 2023 financial review call.
In addition to discussing our third quarter and outlook for the remainder of the year I will address some concerns that we have heard from investors since our second quarter call in August.
Specifically Mike.
Remarks today will focus on three areas.
Strategic and financial updates.
Our funding sources.
And our exposure to interest rates.
Beginning on slide three.
I'm pleased to report that our financial results continued to be strong.
And we now expect full year adjusted EPS to be in the top half of our guidance range of $1 65 to $1 75.
We are also reaffirming all of our short and long term financial metrics.
For the third quarter adjusted EBITA with tax attributes was $1 billion.
Adjusted earnings per share was 60.
I'm very pleased with these results, which Steve will address in more detail shortly.
Turning to slide four we.
We continue to see strong demand for long term contracts for renewable.
Particularly from our primary customer base of large technology companies with a rapidly expanding data center business.
Notably even with rising interest rates renewables continue to have the lowest liberalized cost of energy or L. C. O E across almost all of the markets where we operate.
So far this year, we have signed three seven gigawatts of new Ppas incur.
Including one five gigawatts since our second quarter call in August.
This number does not include the one two gigawatt of new projects. We were recently awarded in New York.
Given that we have several large contracts that could be finalized in the coming weeks, we remain confident in our ability to sign at least five gigawatts of new long term ppas this year.
Included in the new contracts that we have already signed is our first ever developed transfer agreement or DTA to.
To transfer to a utility 975 megawatts of solar plus storage at the point of commencement of construction.
This structure allows us to create value from our advanced pipeline without the investment of any a S equity beyond the development costs.
Now turning to our backlog on slide five.
Our backlog of projects with signed long term contracts is now 13.1 gigawatts.
Of this total backlog, we expect more than 70% or over nine gigawatts to come online through 2025 and.
And we have already secured all of the necessary equipment for these projects.
Furthermore, 44% or five eight gigawatt is already under construction.
Moving to slide six.
Construction program continues to make excellent progress with 93% of the megawatts expected to come online this year already having achieved mechanical completion.
As a result, we have increased our year end construction target from 3.4 gigawatt to three five gigawatt to incorporate the progress we have made this year.
This figure reflects a more than doubling of the renewable projects placed in service compared to last year.
Now turning to slide seven.
In light of current market conditions.
We'd like to directly address the sources of funding that we have in our long term plan.
We will not be issuing any equity until at least 2026 and even then we will only issue equity if it is value accretive to our shareholders instead.
We are significantly accelerating our asset sales.
And believe we now have line of sight to at least $2 billion of asset sale proceeds in 'twenty, four and 'twenty five and expect our asset sale proceeds to total at least $3 5 billion through 2027.
With the proceeds from the sell downs of our businesses in the Dominican Republic, and Panama that we announced in September we have already secured all of our external financing needs for the year at attractive terms.
The general buckets that are part of our asset sales plan are.
Collects it.
Sell downs of U S renewable projects.
So monetization of businesses, including new energy technologies.
And the exit of certain noncore businesses.
We also plan to bring in partners at some of our businesses as we have done in the past to reduce future equity needs.
While we never disclose specific transaction until we have actually signed sales agreements.
We are an active and positive discussions with many interested counterparties.
Turning to slide eight.
Last topic I want to address.
Before turning the call over to Steve is our exposure to interest rates.
As a normal course of business, we have always proactively match the profile of the debt to the profile of the cash flows that are supporting it with.
Which minimizes any impact from higher interest rates.
Approximately 80% of our debt is nonrecourse to the a S parents.
And all of that.
Vast majority is either utility that <unk>.
Included in our customer rates or project level debt that is matched to the underlying project revenues.
All of our long term debt at Corp.
Either fixed or hedged and as we've stated before we've been able to pass on higher costs and interest rates and the new Ppas we sign.
Finally, I want to highlight our commitment to maintaining our investment grade credit ratings.
Which we see as an important component of our value proposition.
To that end in every business decision, we make we take into consideration our relevant credit metrics.
We take a disciplined approach to growth and overall risk management to ensure that we consistently maintain these metrics.
With that.
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. Our 2023 guidance. How we are flexing our plans to adapt to current financial market conditions, and how we minimize our exposure to interest rates.
Turning to our financial results for the quarter beginning on slide 10, I'm pleased to share that we had a strong third quarter and are fully on track to achieve our full year guidance.
Adjusted EBITDA with tax attributes with just over 1 billion versus $991 million last year, driven primarily by higher contributions that are renewables SBU.
The recovery of prior year's purchase power costs at a S. Ohio included as part of the E. S. P for settlement.
And improved results at fluids.
These drivers were partially offset by the absence of the significant LNG transaction margins, which we earned last year.
Tax attributes earned by our U S. Renewables projects this quarter were $18 million versus $60 million a year ago in line with our expectations of a higher share of renewable projects coming online in the fourth quarter.
Turning to slide 11, adjusted EPS was <unk> 60 versus 63 last year.
In addition to the drivers of adjusted EBITA, We saw higher parent interest expense this quarter as well as a higher adjusted tax rate.
I'll cover the performance of our strategic business units or S. P use in more detail over the next few slides beginning on slide 12.
In the renewables SBU, we saw higher adjusted EBITDA with tax attributes driven primarily by higher contributions from new projects brought online in the last 12 months as well as higher margins in Colombia.
This was partially offset by lower tax credit recognition as a result of fewer new projects placed into service this quarter versus a year ago.
Our business continues to make strong progress not just with construction, but also the financing of new projects, we continue to see a robust market for tax credits.
This year, we have already raised $1 8 billion in tax capital financing.
Market for tax attributes is also greatly expanding as a result of the tax credit transfer option that has brought many more participants to the market.
Importantly tax credit transfers get recognized in operating and free cash flow, which further enhances our financial funding flexibility.
Going forward, we will increasingly use tax credit transfers as a means to monetize tax credits, including for nearly 500 megawatts of projects in 2023.
At our utilities SBU higher adjusted PTC was driven by the recovery of prior year's purchase power costs at a S. Ohio included as part of the E. S. P for settlement, which had been recognized as an expense in the third quarter of last year.
I'd now like to take a moment to discuss the continued progress of our utility growth program on slide 14.
In August we received commission approval at a S. Ohio for our new electric security plan or ESP for which includes timely recovery of $500 million of grid modernization investments at a 10% return on equity, allowing us to further improve the quality of service.
As a reminder, we plan to grow the combined rate bases of our U S utilities at a 10% average annual rate through 2027.
80% of our planned investments through 2027 are either already approved or under FERC formula rate programs were.
We are executing on this plan and with our investment programs across the two utilities.
On track to increase our capital expenditures by over 35% year over year, as we work to modernize and invest in system reliability.
As we've previously discussed our utilities in Ohio, and Indiana continue to charge the lowest residential rates of all electric utilities in both states.
Turning back to our third quarter results with our energy infrastructure SBU on slide 15.
Lower adjusted EBITDA, primarily reflects significant LNG transaction margins in the prior year, partially offset by prior year, one time expenses in Argentina and.
And higher revenues recognized from the monetization of the P. P a at or where you run coal plant.
Finally at our new energy technologies SBU.
Adjusted EBITDA reflects continued improved results at fluids.
Fluent has continued to demonstrate improving margins and strong pipeline growth and they have indicated their expectation to be close to adjusted EBITDA breakeven in the fourth quarter of their 2023 fiscal year.
This year over year improvement would be reflected in our own fourth quarter results.
Turning to slide 17, I'm very pleased to highlight that we now expect to achieve the top half of both our 2023 adjusted EPS guidance range of $1 65 to $1 75, and our parent free cash flow range of $950 million to 1 billion.
Dollars.
This reflects the strong performance of our renewables construction team, whose excellent execution. This year means that we expect to exceed our construction target of 3.4 gigawatts by at least 100 megawatts.
Now to slide 18.
We are reaffirming our full year 2023, adjusted EBITDA guidance range of $2 six to $2 9 billion.
Including the $500 million to $560 million of tax attributes, we expect to realize in 'twenty to 'twenty three we expect adjusted EBITDA with tax attributes of three one to $3 5 billion.
The additional U S projects, we expect to bring online this year should allow us to exceed the midpoint of the tax attributes estimate we provided at Investor day.
Now to our 2023 parent capital allocation plan on slide 19.
Sources reflect approximately $2 4 billion of total discretionary cash, including 1 billion of parent free cash flow.
$400 million to $600 million of asset sales and the 900 million parent debt issuance, we completed in Q2.
With the agreement to sell down a minority interest in our gas and LNG business in the Dominican Republic, and Panama, we have secured the entirety of our external sources of parent level capital for 2023.
Turning to slide 'twenty sensor.
Since our Investor day in May financial market conditions have changed and Aes will flex its near term and long term plans accordingly.
Looking ahead, we will continue to prioritize our strong credit profile and investment grade ratings hitting.
Hitting our financial metric growth targets.
Funding our growth primarily in U S renewables and U S utilities and advancing on our de carbonization and portfolio simplification goals.
We have a number of levers to adjust that will keep us on track with these objectives.
First and to be clear, we will not issue equity at or near current share price levels and not until it is value accretive to our share shareholders on a per share basis.
As such we are increasing our asset sale target to at least $3 5 billion for the 2023 to 2027 time frame.
And accelerating our plan to achieve $2 billion of asset sale proceeds in 2024 and 2025.
With this change we will not issue any equity until at least 2026 and the amount anticipated has been reduced to $500 million to $1 billion through our guidance period.
Second the tax credit transferability option that we now have creates added flexibility to monetize the tax value of our U S. Renewables projects with a broader base of market participants, while also increasing free cash flow and the capacity to fund growth.
Third while we still intend to exit all of our core businesses and a few of our markets. Our coal assets will be temporarily needed to support the energy transition beyond 2025, as renewable deployments and transmission have not progressed as quickly as required.
We still intend to exit the majority of our remaining coal businesses by the end of 2025.
However, we have the flexibility to delay the exit of a few select plants through 2027th to support continued electricity reliability.
This delay would yield continued financial contributions from these assets during this period.
For 2024, and 2025, we expect to fund our remaining parent capital needs entirely with asset sales and planned debt issuances.
We feel confident that we can achieve the 2 billion asset sale target in these years as we have already held discussions for a large portion of the assets in this program.
We anticipate competitive processes that will yield attractive valuations with minimal dilution to earnings and cash beyond what had been incorporated in our plan.
Our sales program is designed to meet our strategic objective to simplify and Decarbonize our portfolio, while funding our core growth investments in U S renewables and utilities.
Finally, turning to slide 21, we are largely hedged against future increases in interest rates.
Looking at the parent company, our long term debt is entirely fixed and we hedge our exposure to refinancing risk over a five year window.
Our nearest maturities in 2025, and 2026 were previously hedged at a rate of approximately 3%.
Approximately 80% of our consolidated debt is that the subsidiary or project level and is non recourse to the parent.
We typically pre hedged future project debt issuance for the full 10 or when we sign a PPA insulating our expected returns from future rate movements.
The amortizing structure of our project debt rather than bullet maturities allows the project to support higher leverage.
As we grow our long term debt balances will increase proportionately to the underlying cash flow of our businesses, enabling us to maintain steady leverage ratios and investment grade credit metrics.
At the end of the third quarter, we had approximately 6 billion of interest rate hedges outstanding at an average rate of two 9%.
Looking at the impact of a 100 basis points shift in interest rates on our future issuances refinancings and U S floating rate debt, we have under a penny of EPS exposure from interest rates in 2024.
And three to four cents of exposure in 2025.
Unhedged floating rate debt is primarily located outside the U S where inflation indexation and R. P. P. A is provides a natural hedge against rising rates.
In summary, as we approach year end, we've made excellent progress on achieving our financial and strategic objectives for 2023.
Our balance sheet is strong and we are flexing to adapt to current financial market conditions.
With line of sight to our future growth funding needs, we will create value from our excellent market position, while continuing to prioritize maintaining investment grade credit metrics and achieving our financial commitments.
With that I'll turn the call back over to Andres.
Thank you, Steve before moving to Q&A I would like to briefly address a few other concerns that we've heard from some of you regarding the future of the renewable sector in general.
For starters global warming is unfortunately, very real and likely accelerating.
We have seen it in all time record temperatures over the past five years.
And especially this summer in the northern Hemisphere.
This new reality was reflected in record demand for energy during Heatwaves.
Unprecedented wildfires and.
And more volatile rainfall.
All of which affect the general public.
Completely a political actors such as insurance companies are pulling out of certain markets and vulnerable areas after suffering material losses due to climate change.
It is therefore extremely unlikely that major corporations will abruptly walk away from all of their carbon reduction goals, regardless of any short term unscientific political rhetoric.
Given all that is happening in the renewable space. It is now more important than ever to differentiate among companies and developers.
In my opinion, nobody is better placed than a yes to create shareholder value from the ongoing energy transition because we had been focusing for years on the most resilient and lucrative opportunities.
We are among the largest suppliers of renewable energy in the most attractive markets in the U S, California, New York and PJM.
We're also the biggest supplier of renewable energy to corporations in the world and particularly to data centers.
Already data centers represent half of our U S backlog.
And the growth of generative AI will only accelerate their demand for more renewable energy.
An important differentiator is it a S is one of the very few major renewable developers that has not had to abandon projects in its backlog due to cost increases or supply chain disruptions.
This has cemented our reputation for reliability among premium customers.
And finally, hey, yes is the most innovative company in the sector developing and implementing new technologies.
Such as grid scale energy storage.
We're really match renewable power purchase agreements.
Prefabricated solar.
Construction robotics.
And software for energy efficiency, and AI enabled grid visualization.
I believe these efforts will have material and growing benefit to our shareholders, especially by maintaining our lead in the most lucrative market segments.
Regarding significant drivers for future growth post 2027, Hey, yes is best positioned to be the leader in green hydrogen production with the most advanced large project in the country.
Texas and our participation in two of the largest hubs chosen by the department of energy.
Our green hydrogen projects have real off takers and sites and we expect that they will meet the most exacting standards of additionality regionally and hourly matching.
Today Aes has the technology.
People cluster.
Customer and supplier relationships.
The scale and proven track record to continue to grow renewables profitably during the now unstoppable energy transition.
While the total addressable market for our products and services is truly a minutes.
I want to emphasize once more that our aim is to maximize shareholder value not the number of megawatts or market share.
Our priority will always be to ensure the best risk adjusted returns for our shareholders on a per share basis.
With that I would like to open up the call for questions.
Thank you [noise] Cleveland.
We will now begin the question and answer session.
If he would like to ask a question. Please press star followed by a one on your telephone keypad.
If for any reason you would like to remove your question. Please press star followed by a tail.
As a reminder, if you were using a speaker phone. Please remember to pick up your handset before asking your question.
To ask a question it is star followed by a one.
The first question will be from the line of David Arcaro with Morgan Stanley. Your line is now open.
Oh, Hey, good morning, Thanks, so much for taking my question.
Right.
Hey, there.
So it's strong update in terms of the.
Contract originations within the renewables.
<unk> portfolio I was wondering if you could elaborate on what youre seeing in terms of that backdrop, the trends and customer demands there have been concerns in the market around renewable slowdown given higher PPA prices.
Financing challenges et cetera, I'm wondering if you could talk about what your conversations are like with your customers are there pockets of weakness or.
Or is there still an app.
Ample opportunity set out there for contract signings.
What we're seeing is very strong demand for all of our target customers.
So we have not seen a weakening and as we said it's up I.
I think it's very important to distinguish what markets you are operating in so.
So you know markets like California, and New York PJM, there's very strong demand and there's very strong demand from corporations, especially from the tech companies in the data center business. So we have not seen a slowing down now.
If you're talking about work and <unk>.
Actions for public utilities et cetera, we're seeing.
A lot more competition for those projects, but for the our target customers in our target markets, we're seeing demand very firm.
Great that's helpful. That's encouraging.
And then.
Maybe a question on the asset sale.
Outlook here, you know youre accelerating targeting $2 billion over the next two.
Two years I guess, what gives you the line of sight there.
How is that market in terms of project sales are you seeing demand and.
Kind of off takers, there to acquire projects and what are you seeing in terms of pricing or their favorable yields versus what you're developing those projects that thanks.
Okay. So I think that's sort of two parts of the question. So a lot of the asset sales.
Selling out or selling down a specific businesses you know as we have been doing for the past decade.
Our businesses continue to perform very well so we see that there is interest in these businesses because it's not again not all businesses are created equal and we have very favorable positions in these markets. We're.
We're also seeing a great interest for people to partner with us.
And that also includes our existing partners for greater participation. So those are things which are <unk>.
Decrease the equity needs over the next four or five years. So I think that's very important to see that one.
Balancing both.
I think the question regarding the sell down of renewable projects I'll pass over to Steve. So he can give you an update on that.
That's going well.
As part of our sales Andre walked through in his comments, there's a number of ways, we achieve it with the renewable sell downs.
We typically will sell down after the projects come online and these are very low risk long duration cash flows. Our average contract duration is 19 years, obviously no variable fuel cost very little variable O&M and these types of assets, so theyre very attractive.
And so yes returns.
Expectations have come up somewhat but not in lockstep with where base rates have come because of the very low risk profile of these assets. So those sell downs continue to yield.
Lifting and Aaas's equity returns commensurate with what we talked about in the past David.
Okay excellent I appreciate the color I'll pass it on thanks, so much.
Thanks, Dave.
Thank you.
The next question will be from Dateline of their gosh Chopra with Evercore ISI. Your line is now open.
Okay.
Hey, good morning team. Thanks for giving me time, Hey, just want to start off with a quick housekeeping question here just.
10 cents EPS upside that we've talked about Steve from projects potentially being moved.
From 24 into late 'twenty three is that factored into your raised EPS guidance now or is that still an upside.
Yeah. So so a portion of it our guests. So we did guide to 100 megawatts over at least this year. So the three four to $3. Five so just a a portion of that 10 cents is is included and the good thing is we have.
Very clear line of sight at this point to that increase as mechanical completion, that's been achieved a 93% of the new capacity that means everything is all built out or just in final synchronization of equipment and systems.
And so we feel very confident in the year end number that which does not.
Come online this year of that upside will be in the first half of next year.
Got it Okay. That's fair and then maybe see if there was there was a report from credit rating agency.
Lighting sort of weakening of your credit metrics.
And then going into 2024, and then you know Andreas and you both talked about the importance of maintaining a strong balance sheet.
Could you just sort of frame for us what your expectation is.
These asset sales, because obviously, there's going to be a cash flow drop.
What the expectation is for year after photo debt metrics next year versus where youre downgrade thresholds.
Yeah. So so one thing I would point out is that our credit metrics to fluctuate some during the year as we have higher.
Construction balances are in the middle of the year, we also have a higher level on our corporate revolver.
As projects come online towards the end of the year paying down construction balances and then we have.
The corporate revolver used to manage timing in distributions from our subsidiaries.
The other thing to keep in mind is that we are in a high growth mode. So at any point in time.
You have construction debt, that's not yet yielding and thats all non recourse and it's also used to finance the tax credit value as well so theres very quick.
Paydowns on that debt once these projects come on line, but no we feel.
We're in regular contact with all the rating agencies, we feel very good about exceeding not just meeting but exceeding the thresholds.
The thing to keep in mind is that you know are.
Our leverage.
Is amortizing so most of our project level debt is amortizing over the PPA period. So this is a very low restructure its nonrecourse.
And it's not subject to significant bullets and it allows us to maintain a leverage ratio that will grow just proportionally our debt will only grow proportionately to the cash flows of the business.
Okay, so, but just to be clear, though Steve I mean next year you feel with the plan that you have in place that worsens your downgrade thresholds.
You'll exceed them right into 2024.
Yeah, absolutely this is a.
Top priority.
Metric in all of our planning so maintaining investment grade credits or is at the top and so as we look at the asset sales.
In mind, we already had a significant amount of $2 seven to 3 billion considered in our Investor day numbers.
And we are prioritizing assets that both at our strategy, but are as well are minimally.
Dilutive on an earnings cash and credit so I'm very confident that we will not.
Impact our credit metrics negatively with the plans that we have.
Got it perfect and I know just but I just wanted to ask this one last question and I'll pass it on to others, but just under as you mentioned you know active discussions with a lot of parties on assets.
Three 5 billion is already very significant and asset sales.
That number would be higher as you sort of get more interest in it.
Have those discussions.
At this point in time.
We feel that we will sell at least three and a half a billion dollars through.
End of 2027, but a lot of this will get a partial sell downs sell down of renewables our planned exit from from coal so.
In the past we've done a multiple of this number.
I will point out that I'm not aware of any time that we have set a target for asset sales or not.
Cheaped it or exceeded it so we feel very confident in achieving those asset sale numbers.
Super guys. Thanks, so much I appreciate it.
Thank you. Thank you.
Thank you.
The next question will be from deadline of Angi stores and ski with Seaport Global Your line is now open.
Thank you guys.
Okay. So firstly I wanted to you mentioned about you mentioned transferability of tax credits.
Just wanted to make sure that we're not.
In essence window dressing and trying to sell for certain credit metrics that this is actually driven by economics. So when I look back to your analyst day you.
<unk> steel renewables in the U S, 40% tax equity, 40% project level debt and then 20% equity. So I just wanted to make sure that that structure is still and we're not trying to.
Basically boost credit metrics by levering these projects more and again just just explain to me why we're moving from the traditional credits tax equity structures, which allowed you to monetize the accelerated depreciation among others to the transfer of Delhi.
Yeah, Hey, Steve Thanks for the.
No. It is important to recognize the Aaas has always been maximizing their tax credit value.
And so that continues to be the case.
The reality is the transfers.
Offer a more a broader market.
Broader set of market participants.
A more liquid market. So many more corporates coming in from different sectors, that's a faster simpler transaction to execute.
But we'll still do both because it's important that you not only.
Monetize the tax credit value, but also the benefit of the accelerated depreciation which is not something that's transferable and does require either a yes or a partner in the asset to be able to utilize that accelerated depreciation benefit. So there'll be hybrid done here, but you know my primary point is that it is a.
Broader market.
Simpler transactions more more liquidity.
And I do think it's appropriate that it shows up in operating cash and free cash because this is truly a important component of value and return.
Due to the investments that gets made in the asset.
Okay, but that's.
Thats treatments without the SSL are placed under those structures you already consider it Scott when you quantified your equity needs.
During the analyst day.
So I would say it.
At this point, we have already done 500 megawatts and transfer credits the market is moving faster. So I think and in the analyst day I would say there is upside in terms of our our cash flow metrics related to the use of more transferability.
But it's not necessarily.
Something that is.
As a changing returns or anything it's just that it's creating more visibility more market participation and it shows up in the in the operating cash flow.
Okay. Okay.
But again.
It's are you still sticking with the solar ITC.
Again, that's financing structure.
As I mentioned at the beginning doesn't change right. So you are not increasing our leverage up the project.
Okay.
No we are not yet.
So we are not we are not increasing leverage at the projects.
We are only looking to monetize the tax credits as efficiently as possible and I would expect that given our credibility and our track record.
Any discount applied to the credits will be quiet.
Quite quite small relative to perhaps other market participants and then Andy just also to reiterate because I haven't said in the past we choose the credit option based on what is the best cash financial returns.
From the credit so whether you know in most cases, that's been I T C for us.
It makes very little sense to be choosing production based credits for example, and in new England solar where the capacity the capacity factors tend to be quite small. So you know I would question anyone that's doing that and their motives, but we are very focused on what's the credit that is dealing.
Yields the best return.
Yeah.
Okay and then.
Secondly, you mentioned they are the attractiveness of renewables versus how they're supposed to just based on the the.
The liberalized cost of electricity, so I E new build.
So renewables versus new builds for thermal assets that.
And not everywhere do you have to actually add incremental generation sources state and then the pushback that that's what we are hearing is that the PPA prices have now.
Slightly exceeded forward power prices be it on peak for solar or round the clock for wind. So so again I understand that distinction with the tech clients, but how about any other locations than any other off takers.
Yeah.
Well again, we're talking about the markets, where we're located.
And the way I look at it a little bit different I mean in terms of the energy the L. C O N E.
Again as I said in most markets that were operating it is the cheapest.
Issue with renewables as really having that dispatch of all 24, seven so you need to complement it with.
You know with regular power or.
Batteries, which will require even more renewals.
But I think the states is a huge play so you can say in every single location, but.
Certainly in states that have high solar irradiation or high wind. That's that's just the fact I mean, the real issue is more.
Having the 24 seven capability.
Okay.
Okay and then the last question about the some flexibility on the retirement of the coal plants. So I understand the reliability needs of.
Local grants et cetera, but this is not your renewables coming online later than expected. It's just more of a back end market backdrop in which the coal plants off trade that is that correct exactly exactly youre, saying it right and as we've always indicated we need regulatory approval.
To retire the coal plant so.
What we're seeing is in some of the market not us, but the general build out of renewables enough transmission has been somewhat.
Slower than planned.
And that these plants are.
<unk> to be needed.
Through 2027, but I would add that this is a small minority of our total plans. Okay. So we've gone from 22 Gigawatts to seven we have line of sight to four of that is already planned and of the remaining roughly three it would be a minority of that in terms, so I'm not talking about any walking.
Away from our de Carbonization.
Plan is just a question that we're seeing there's a couple of plants.
It's going to be difficult to.
Take them offline prior to the expiry of their ppas.
Great. Thank you.
Thank you.
Thank you.
The next question will be from the line of Richard Sunderland with Jpmorgan. Your line is now open.
Hi, Good morning, Thank you for the time today.
Good morning, Richard.
Yeah.
Andrew spoke to active conversations on the asset sale front I'm curious if you can outline at a high level how advanced those discussions are and if this is an effort that could yield any announcements before year end or or I guess earlier on and that's sort of 'twenty four 'twenty five window.
Yeah.
Yes, it's a good question I would think that you know again, it's over a two year period, but I would expect you know some important announcements in the first half of next year.
And again, we tend to announce things when they are very firm so.
The negotiations et cetera are ongoing.
Several assets.
But yes, I would expect to be able to.
Be able to say something in the first half of next year.
Understood.
And then <unk>.
Back at I guess, it's slide seven where you lay out the potential asset sales.
Thinking on those buckets in terms of what's actually in those buckets.
Change since the May Investor Day, I guess in particular I'm thinking about the non core businesses and if there are any new thoughts there relative to six months ago.
I'd say, yes, I really can't comment on that.
Uh huh.
I would say stay tuned and we will make announcements in that regard but it.
It's mostly assets that we have you know a designated.
Designated as noncore overtime, so its more of a an acceleration or perhaps a deepening of some of the sell downs.
Okay.
That's helpful. Thanks, and now I'll try this from from one other side, if you'll indulge me here.
New and expanded partnerships new partnerships any flavor for what what that means just again trying to get a sense of the scope of the opportunity obviously, you've laid out the magnitude with this 2 billion figure in the over $3 5 billion in total.
Well, what I'd say is.
See what we've done in the past. So for example, if you look at our when.
Well, we made a big move into renewable energy, we are first big acquisition with <unk> and we brought in a new partner.
And that relationship has evolved over time. So we're in a number of fields, which are very attractive right. Now. So I think it's a interesting time too.
See what our partners want to do or if some additional partners want to commit but we're really sitting in a privileged position, especially for.
A lot of the new growing fields.
Got it that all that all helps I'll leave it there for now thank you very much.
Okay. Thank you Richard.
Thank you.
The next question will be from day line of Julien Dumoulin Smith with Bank of America. Your line is now open.
Hey, good morning team. Thank you guys very much nicely done today.
Hi, Julien.
Hey, good morning, everyone. Thank you Andre.
[laughter] too well.
Our first question here I'm going to I'm going to take a.
A different direction.
Okay.
Alright, Alright P L three and a half billion here you talk about coal exits.
Of selective assets in 2007 to me I hear that and I'm asking well how much does that delay some of the loss of contribution in the plan out to 28 I E. The earlier targets that you gave through twenty-seven contemplated whole divestment of these assets now I get that youre, raising the asset divestment targets.
Theory, there's going to be fewer assets at the end. So in theory, you should be sacrificing some of the net income through the plan, but obviously by selling some of the coal assets in 27, you're delaying or deferring some of the chunkier lowest multiple assets potentially and the loss of the contribution into 28 I just wanted to like.
Kind of hear how you think about that.
Seven versus 28 are you effectively pushing out a little bit of an earnings impact.
From from 27% 28, if you think about it from 25 to 28.
Yes.
What I'd say, you're basically right that.
So operating through the end of a couple of plants.
<unk>.
You know, we have that flexibility it would be beneficial.
In terms of our asset sales I mean, we have.
Our our assets have different earnings profiles.
So.
How would I say, we feel confident that we have a plan in place that we will hit our numbers now when you talk about.
Post 2027.
Getting into 'twenty eight.
There'll be a balance between you know, bringing in partners for some of those growth projects post the post 'twenty eight.
And.
There are a lot of factors I think happening in the market I would expect quite frankly in our numbers. We don't have much for efficiency improvements and we're working on a lot of technologies, which should have that so.
In the net you know again we.
Youre right about some of the big blocks.
But I really think that.
I feel very confident about our numbers, what theyre going to look like 28 forwards.
Because.
We haven't.
I haven't.
You know really a pole position in all of these new technologies.
And new sectors that are opening up.
So theres not going to be a cliff that were pushed off into 28, I want to make that clear.
As we've made clear in the past there is no cliff and 26th so.
We manage we have a lot of variables a lot of levers.
So we're making sure that we have a smooth transition.
Our real problem is not one of demand there's a tremendous amount of demand tremendous of opportunities is what we want to make sure that we're maximizing value per share and taking advantage of it and.
Being smart in the best combination of levers that we pull.
No I look I get it it makes sense and just to clarify the select assets. So those are the ones who are the ppas are aspiring weather or otherwise been regulatory issues right. I guess I think that's a nice catch all right. If if if that's the way you're framing it.
One or the other.
Well, that's correct I mean, we have some assets that are.
Maybe still under contract.
And that.
It's going to be it's looking more difficult to get regulatory approval to retire those those are assets and 25.
Okay.
Right, Yes, indeed, right that there's a couple of them that stand out if you will that would seem to fit that right.
I guess I guess I know you don't want me to use perspective, yeah, yeah. Okay.
Yes.
I'm, sorry, I'm trying to be.
Less specific here quite quickly if I could pivot here real quickly.
Yes go for it.
I was just gonna say theirs.
There's a number of ways, we're exiting both through retirements and sales.
So looking at this we have seven gigawatts of coal, we've already announced and the exits of half of that so you're talking about three and a half roughly remaining.
And we're not talking about that whole amount even a small portion of that are these assets that would be you know selectively considered.
As I said, it's a.
It's a.
Yeah.
Small part of the three that's remaining.
Yeah, Okay, sorry, I just wanted to try to put that in the box a little bit more.
And just to clarify this.
The partial monetization how do you think about fluence here just to hit that we're squarely I know it's sensitive.
Sensitive subject whatever you can offer here about how you think about that through the plan you talk about beginning next year here on sell downs writ large not specific to the new technologies bucket whatever you can offer.
Oh, we can't call for much that we Havent said already I mean, what we've said is that Ah.
We.
Our shareholders, what we are really as an accelerator of new technologies, we create a lot of applications together.
They help US you know that's why we're the leader I think in the premium markets.
Overtime, we will monetize that position, it's not just fluids, we have other investments as well.
And those new technologies have progressed very well so we have other companies besides fluent but I'm not you.
You know, we really can't provide any further color on that.
And you feel confident in the previous marks and the other technologies.
I know, it's been a little bit of time, there, but that's that's important as well.
Sure I mean, it's there are different ones of levels of maturity, but of course, you have uplight, which is oh.
I think preceding well and incorporating more product offerings and are becoming part of the Schneider electric's.
Energy efficiency offerings.
But then we have other ones that are in earlier stages.
And whether they will.
A lot of value.
Outside of what they create for us So certainly one of the more exciting ones as the building of solar farms with robotics.
He has a lot of promise you that if you look at a longer term sort of four years out there I would expect a lot from that.
There's a lot we're doing a lot with with AI operationally for us I mean today, we use AI on the operations of our wind farms of next day predictions for energy demand and weather.
We're also using in the fluids is usually go in its bidding engines, but there's much much more we have collaborated with some other technology companies.
On things like grid, visualization et cetera, which I think will become.
Part and parcel of how <unk> manage their AR build outs and dispatches in reaction to natural catastrophes.
<unk>.
We do have a.
We would receive part of the royalties from the sales of the technology companies still because we co created with them. So these are all things that are.
Not in our numbers, but I think we will.
Uh huh.
We will be able increasingly to have significant cost savings and greater efficiencies from applying them and in some cases, we will be able to monetize these overtime at the right time when market conditions are right.
Yeah.
Yeah, absolutely sorry, and just one quick clarification more setting expectations ahead, you guys have done a lot on the new origination front you flagged it at the outset. This five gigawatt number I think.
Just just to set expectations, you've also done a number of acquisitions of backlog here to how does that match with your commentary about origination.
And should we expect a steady cadence of announcements of further backlog acquisitions here as as you know some of these have been the higher price points again, I just want to tackle that directly to give you an opportunity to kind of bifurcate and clearly set expectations.
Look we I think you have to.
When you think about what we're doing is we're making.
The most value of the different assets we have.
So we did our first.
The sale of the pipeline, if you will with the DTA.
Where we actually don't build the project, but we sell a development project because we felt that that was the greatest creation of value sometimes from our pipeline we may be doing this.
Because that's the best use of that pipeline.
As I said in the past.
Probably the most attractive thing for us to do is to acquire late stage development projects.
Especially when we have a premium customer who needs that energy.
And why well because while you have a development project. It's a sunk cost. If you will you have to invest to create that development project.
And so you you don't know what is the conversion rate of your pipeline. So if you have something that's in late stage.
Conversion rate is basically one if you'll have the client. So it's a very good risk adjusted rate of return. So we're gonna be doing all those things you know in the case of one of our <unk>.
Utilities Theyre buying one of the projects that had been developed by somebody else, we're selling one from the pipeline.
Others are going to be Repowering. So we'll use all of the means at our disposal to create shareholder value. So I don't think it's the way to think about this correctly is just.
You know pipeline you know Greenfield true final delivery is the best way to create value.
It's really.
The most important really as having the right projects and the right markets and the right clients and thinking about how can you best satisfy what the clients needs are.
Mentioned that we can we can talk about it offline but.
Quite frankly, what we're seeing is that.
All things being equal acquiring late stage projects and it is a buyers market now.
Is one of the most attractive businesses for us.
Yeah, No I alright, great. Thank you very much for taking the time here I really appreciate it.
Thank you Julien Thanks Joey.
Thank you.
Final question for today's call will be from the line of Michael Sullivan with Wolfe Research. Your line is now open.
Hey, good morning.
Good morning, Michael.
Okay.
Andrew.
I wanted to start with can.
Can we just.
Confirm if theres been any change to your Levered returns targets in the current environment up or down and then maybe also just you alluded to it a little bit, but just a sense of like how much <unk> or PPA pricing on new projects have changed.
Okay I'll take the first part of that also have the second pass that to Steve.
Look we're getting from our portfolio sort of low teen returns.
And that's at the project level.
If we would include sort of corporate financing or mezzanine financing, we'd be high teen returns.
I don't think anybody is getting.
You know consistently higher returns than us because of the type of projects the type of markets that we're in and the scale, we have sufficient scale to compete with anybody and we have.
<unk> had the best record of supply chain management.
So.
What I think has changed you know we use a captain model.
But which is updated for.
Risk free U S treasuries.
And they have moved up obviously, so that's what we calculate our net present value there that really comes into effect. So we do look at it what's the net present value from these projects.
No.
What I would say is that we've been able to pass on higher interest rates pass it on.
Higher costs and caused by the way are coming down you know better prices are down 50% solar prices are proceeding and we do new projects for corporate clients outside of the U S and solar panels are near all time lows.
So all that put together, yes, we are using higher discount rates to see if the projects worthwhile pursuing and a net present value.
And we have maintained our margins and.
So you know we're seeing right now no no stress on the market from from that site now.
Now the second question you wanted to talk about was the.
Particular projects.
And the states and the returns we're seeing.
Yeah, So I would say generally in the states with our corporate clients in particular, where we're doing structured products, we are seeing the higher.
Higher end of that return range.
And also it's important while people.
Prices have been increasing over the past one to two years, they've actually leveled off and are starting to come back down and we've seen significant reductions in solar module pricing. This year, we've seen significant reductions in the commodities going into batteries and battery pricing coming down.
So so we're starting to see a lot of life cost come back down.
Which is also supporting.
The activity and the demand going forward. So I think we're in a in kind of pass the difficulties of the supply chain past the impacts of the in place rent back to a declining curve and our key technologies, where we're using yes.
Michael maybe something that hasn't been asked on this call is that first we had the first project that we know of pick out the energy community additional a 10% which was a shovel on Butte wind project largest wind project in Arizona.
But we're also.
In terms of our wind farms, we are achieving.
Achieving the domestic content requirement.
We expect that.
You know fluids will be having next.
Next year, we're starting to receive a domestic.
Sufficient domestic content from its batteries and from its.
Casings and and then we're also in discussions for soldiers.
One of the first to start discussions for solar so what we see as upside from domestic content.
Additionally, and we also see the energy communities, we have already been achieved.
Achieving that so.
Can you at least a.
40% plus of our pipeline is an energy communities as is today, so that that would all be upside. So we are seeing.
Upsides from from the <unk> in terms of the returns of some of the projects.
Especially those that are already signed.
Okay. Thanks, so much for all the color one quick last one just can you give any thoughts on just the initial intervenor testimony in the Indiana rate case, and what the path looks like.
From here, whether it be settlement or or final order. Thank you.
Yeah. So so just to kind of put things in context to you know this is our first rate case in over five years and as I mentioned in my comments you know we have the lowest residential rates in Indiana of any <unk>.
<unk>. So we're starting from a very good place we had our ERP last year, where we also have a lot of support for the growth. That's there. So of course any process like this there are multiple stakeholders involved and intervenors they need to be heard.
But we feel very good about what we asked for given our position with the lowest rates and the growth plan. That's been supported through the <unk> P and again, it's our first rate case in five years, so in terms of timing.
At this point I would say middle of next year for this to be resolved in a new rates to come into effect thereafter.
Okay.
Great. Thanks again.
Thank you.
That concludes today's Q&A session and I will turn the call back over to Susan for final remarks.
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.
Forward to seeing many of you at the EI Financial Conference later this month.
And have a nice day.
That concludes today's conference call. Thank you all for your participation and you may now disconnect your lines.