AES Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2022

There are 11 speakers on the call.

Operator

Ladies and gentlemen, welcome to the AES Corporation First Quarter 2022 Financial Review Call. My name is Glen, and I will be recording your call today. I will now hand you over to your host, Susan, to begin, Susan, please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q3 2022 financial review call. Our press release, Presentation and related financial information are available on our website at aes.com. Today, we will be making forward looking statements. There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10 ks and 10 Q filed with the SEC.

Speaker 1

Reconciliations between GAAP and non GAAP financial measures can be found on our website along with the presentation. Joining me this morning are Andres Gluski, our President and Chief Executive Officer Steve Kauflin, our Chief Financial Officer And other senior members of our management team. With that, I will turn the call over to Andres.

Speaker 2

Good morning, everyone, And thank you for joining our Q3 2022 financial review call. This morning, we reported 3rd quarter adjusted EPS of $0.63 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 Coughlin, 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 has insulated us well from foreign currency movement, higher interest rates and volatile commodity prices. In addition, The vast majority of our business is with U.

Speaker 2

S. Utilities or investment grade off takers. Turning to slide 4. At the same time, we have built flexibility into our portfolio, which has allowed us to capture upside in the current environment. For example, in Panama, we've been able to redirect Henry Hub priced LNG to European markets to capitalize on high international gas prices.

Speaker 2

This upside is the direct result of actions we took in the past to create a diverse portfolio that would limit our downside exposure to fluctuations both in commodity prices and hydrology. With above average rainfall in Panama this year, we have been able to buy cheap hydropower and run our gas plant less, Which has made it possible to redirect a portion of our contracted LNG, creating meaningful upside in our results. Now to Slide 5. We spoke briefly about the U. S.

Speaker 2

Inflation Reduction Act or IRA on our previous call. But since then, It has become even more apparent how it is likely to greatly accelerate the demand for renewables and stand alone 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 and I segment due to our strong customer relationship, our ownership interest influence 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 Our thermal generation previously took place.

Speaker 2

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 and I customers looking to reach their decarbonization goals. The IRA also includes a 30 percent ITC for stand alone energy storage. AES benefits not only from being one of the largest Developers of energy storage projects, but also from our ownership stake in Fluence, the market leader in energy storage integration. We see battery based energy storage as an essential enabler of more renewables on the grid by reducing intermittency and providing renewables based capacity.

Speaker 2

As you can see on Slide 6, to address this expected growth in demand, We have been working hard to grow our pipeline of renewables and energy storage projects. Today, our pipeline stands at 64 gigawatts Or more than twice the size of our entire current portfolio, the majority of our pipeline, 51 Gigawatts, is in the U. S. And much of it is in the most attractive markets for renewables such as California and PJM. Our pipeline consists of projects That have a combination of land, interconnection access for advanced permitting.

Speaker 2

Approximately 1 third of our pipeline It's in the energy communities that I previously described and are eligible for additional tax credits. We believe our Pipeline will become increasingly valuable as sites for projects become scarcer. Turning to Slide 7. At the same time, since our last earnings call in August, we have signed an additional 1.6 gigawatts of new renewable PPAs or 3.2 gigawatts year to date. Furthermore, we are in very advanced late stage discussions on several large contracts that we expect will bring us within our full year range of 4.5 to 5.5 gigawatts.

Speaker 2

Today, our backlog of signed PPAs stands at 11.2 gigawatts, the majority of which It's expected to come online by 2025. We remain largely on track with our construction program, which is now 5.2 gigawatts. There are some projects that have been moved from this year to next, primarily due to delays from customers. But as we've mentioned before, None of these projects are late due to a lack of solar panels. We also continue to make very good progress on our 2 very large green hydrogen projects in the U.

Speaker 2

S. And Chile, which include the integration of electrolyzers and renewables. Although we don't have any specific announcements to make today, we are confident that we will have more to share with you on this important initiative before the end of the year. Turning to Slide 8 for an update on growth initiatives at our U. S.

Speaker 2

Utilities. This quarter, AS Ohio filed a new electric security plan or ESP 4, which outlines a comprehensive roadmap to position AES Ohio to resolve outstanding regulatory proceedings and make significant investments to modernize its network. The filing is a substantial achievement for AS Ohio as it will lay a strong regulatory foundation for growth by implementing a more traditional utility rate structure. We expect the Public Utilities Commission of Ohio to approve ESP 4 in the next 12 months. As a reminder, AES Ohio has the lowest T and 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.

Speaker 2

Finally, AES Indiana is in the last phases of its integrated resource plan process and plans to file the 2022 IRP report with the state regulator by December 1. The proposal includes another milestone in AES's decarbonization plan with the conversion of the last remaining units Coal operated by AES Indiana to natural gas in 2025 and the addition of up to 1.3 gigawatts of renewables, including wind, solar and battery storage. With that, I now would like to turn the call over to our CFO, Steve Kaufmann.

Speaker 3

Thank you, Andres, and good morning, everyone. Today, I will discuss our 3rd quarter results, 2022 Parent Capital Allocation and 2022 Guidance. Turning to our financial results for the quarter, beginning on Slide 10. I'm pleased to share that our Q3 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 $0.63 Versus $0.50 last year, driven primarily by our LNG business, as Andres discussed. In addition, We also benefited from an increased ownership in AES ANDs as well as higher margins in Brazil.

Speaker 3

These positive contributions were partially offset by one time charges at our U. S. Utilities and Argentina businesses. Relative to last year, we also had higher losses from our ASNEXT portfolio as financial results from Fluence were not reported in our Q3 numbers last year, Higher parent interest stemming from higher debt balances as we increase investment in our subsidiaries and a higher adjusted tax rate due to a non recurring tax benefit in Q3 2021. I should also note that despite considerable macroeconomic volatility, We see very little impact on our financial performance.

Speaker 3

For example, the forecasted full year impact of foreign currency movements after tax It's well under $0.01 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 $569,000,000 for the quarter, a $141,000,000 increase year over year due to the drivers I just discussed. I'll cover the performance of our strategic business units, or SBUs, in more detail over the next four slides, beginning on Slide 12. In the U.

Speaker 3

S. And Utilities SBU, lower PTC was driven primarily by the recognition of one time expenses at our U. S. Utilities from previously deferred purchase fuel and energy costs, including those related to an outage at our Eagle Valley plant from April 2021 to March 2022. We pursued and entered into a settlement for Eagle Valley And took a provision against a deferred fuel recovery asset at AES Ohio, which we will continue to pursue.

Speaker 3

These expenses impacted adjusted PTC by approximately $48,000,000 in the 3rd quarter. In addition, lower PTC was driven by lower availability in Puerto Rico. Our legacy Southland units provided Significant energy margin contribution again in the Q3 this year, although this was not a material year over year driver. We are also very pleased that in the Q3, the California state regulatory authorities formally launched the process required to further extend our Southland legacy units beyond 2023. Higher PTC at our South America SBU Was mostly driven by our increased ownership of AES Andes and higher margins at both AES Andes and Brazil, but partially offset by a provision in Argentina.

Speaker 3

Higher PTC at our Mexico, Central America and the Caribbean Or MCAC SBU primarily reflects our commercial team's outstanding effort to redirect our LNG supply from Panama to the international market as discussed earlier. These LNG sales were enabled by the flexibility we built into our commercial structure and gas supply agreements, along with favorable market conditions, which may be present going forward, although we expect to a more limited extent. Finally, in Eurasia, adjusted PTC was relatively flat year over year with an overall net benefit from higher Power prices at our wind plant in Bulgaria. Now to Slide 16. As a result of our overall strong performance year to date, Along with the significant contribution from LNG sales, we now expect to come in atornearthehighendofourfullyear 2022 adjusted EPS guidance range of $1.55 to $1.65 Growth in the year to go Will be primarily driven by contributions from new businesses, including roughly 500 megawatts of projects under construction coming online As well as further accretion from our increased ownership of A.

Speaker 3

S. Handys. We expect to recognize additional LNG sales in the 4th 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.

Speaker 3

Utilities. Turning to Slide 17. As Andreas highlighted, the Inflation Reduction Act Extended and expanded the tax incentives available for U. S. Renewables and Energy Storage.

Speaker 3

Tax credits have been an important part of the economic value creation of our U. S. Renewables portfolio, and the IRA provides clarity on long term eligibility for these credits. As U. S.

Speaker 3

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 1st 10 years of operations. Our solar and solar plus storage projects typically qualify for an investment tax credit generally recognized Within the 1st 2 years, the project begins commercial operation.

Speaker 3

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.

Speaker 3

For full year 2022, we expect our projects to generate approximately $280,000,000 to $310,000,000 in new tax credits. After monetizing these credits through our tax equity partnerships, the earnings recognized by AES this year from new project commissionings Will be approximately $200,000,000 to $230,000,000 with the remaining earnings from tax credits to be largely recognized next year. Due to the late year seasonality of new project commissionings, approximately 2 thirds of these earnings will occur in the 4th quarter. This year, we expect to commission more projects in the Q4 than in 2021, which will benefit our earnings in the year to go period, Improving the year over year comparison of adjusted PTC in our U. S.

Speaker 3

And utilities SBU by the end of the year. Now to our 2022 parent capital allocation plan on Slide 18. Sources reflect approximately $1,600,000,000 of total discretionary cash, Including $900,000,000 of parent free cash flow, dollars 500,000,000 of asset sales and $200,000,000 of new parent debt. On the right hand side, you can see our planned use of capital. We will return nearly $500,000,000 to shareholders this year.

Speaker 3

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 $1,100,000,000 in our subsidiaries as we capitalize on attractive opportunities for growth. About half of these investments are in renewables, which represent the largest portion of our growth. Nearly a quarter of these investments are in our U. S.

Speaker 3

Utilities to fund rate based growth with a continued focus on grid and fleet modernization. In summary, nearly 3 quarters of our investments this year are going to grow AES' renewables businesses in our U. S. Utilities, reflecting our commitment to continue executing on our portfolio transformation. In addition, approximately 70% of our planned future investments are targeted for our U.

Speaker 3

S. Subsidiaries, which will contribute to our goal of more than 50% of our earnings coming from the U. S. In 2023. I look forward to AES continuing our strong performance this year and sharing updates with you on our Q4 call.

Speaker 3

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

Speaker 2

Thank you, Steve. In summary, We now expect our 2022 adjusted EPS to come in at or near the high end of our guidance range of $1.55 to $1.65 And we are reaffirming our 7% to 9% Annualized growth target for adjusted EPS and Parent Keep 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, stand alone storage and green hydrogen.

Speaker 2

To address this growth in demand, we have increased our pipeline to 64 gigawatts, including 51 gigawatts in the U. S. And year to date, we have signed 3.2 gigawatts of renewables and energy storage under long term contracts, And we're in late stage discussions on several more that we expect will bring us within our full year range of 4.5 to 5.5 gigawatts. With that, I would like to open the call for questions.

Operator

Thank We have our first question comes from Insoo Kim from Goldman Sachs. Insoo, your line is now open.

Speaker 4

Yes. Thank you. First question on The revised outlook that you gave on U. S. Pipeline and also just the backlog that you've updated.

Speaker 4

Given the IRA has passed officially, while we await the 4Q earnings for more guidance, do you at this point, I do have a pretty good sense of how much upside to that backlog you see, whether it's through 2025, 26 and whether that still gives you a good confidence that There is potential to achieve the upper end of that 7% to 9% EPS growth range?

Speaker 2

Yes. Good morning, Itzhoo. What I'd say is that we're seeing very strong demand, especially in the U. S. Market, especially among C and I customers.

Speaker 2

So really I don't think it's an issue of demand. It's really an issue of having permitted projects that can meet our clients' demand in the different markets. So regarding the our growth rates, we feel very confident about achieving our 7% to 9%. The IRA 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 profitability of those projects.

Speaker 2

So what we expect over the next, let's say, months or year is There to be somewhat more, let's say, scarcity of projects as demand increases. So I think that's where people who have gotten ahead of this And really have a mature pipeline are going to be in a substantial benefit. Obviously, the IRA also has a $3 a kilogram incentive for green hydrogen and this is also going to be a plus for the growth of renewables and the growth of AES. So All these things I see is positive, but right now we're saying 7% to 9%. But we're seeing as the market becomes more favorable, it's not just a matter of how much you can grow, It's really making sure that you grow profitably.

Speaker 4

Got it. That makes sense. And we'll await more guidance there. 2nd Question for me on LNG. It seems like a pretty sizable benefit at the MCAC segment.

Speaker 4

I think on an EPS basis, $0.25 or so of benefit year over year, which from our perspective was much greater than expected. Could you just give more details on, If you can on how much of that how much volume was driving that and while acknowledging the hydro conditions will Dominique, whether you could see any level of benefit going forward next year and beyond. Assuming normal hydro next year and the current prices And Global Gas, could that still provide some level of tailwind as we think about 2023?

Speaker 2

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 wet year, then you are able to buy cheaper hydro and redirect those shipments. I think what's very important is not only having the LNG, but having the capacity to ship that mostly to Europe And really get into the port because as you know there are really bottlenecks in the port. So I think this really talks about the flexibility that we built in, The strategic relationships we have with LNG suppliers that allow us to take advantage of their position in these markets to move those shipments.

Speaker 2

So going forward, I mean, basically, when there's a La Nina in Panama, there's more hydrology, there's more water available. So we've so there's also a factor that where what's the level of the reservoirs. So it's Right now, I'd say that we expect the conditions to continue. We 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 we have some Additional contracts coming in, in the Q4.

Speaker 2

And regarding next year, it's really are the conditions there? Is there water in the reservoirs? Is the hydrology positive? Is there the spread between Henry Hub, again, plus shipping, and international prices? So those are the conditions given.

Speaker 2

So This is mostly an upside, let's say, going forward. We're not counting on it. And regarding the tonnage, we would expect Somewhat less next year than we have shipped this year in terms of the actual volume. We can get back to you on the actual volume that was shipped.

Speaker 4

Got it. Thanks for the color and thank you very much.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Richard Sunderland from JPMorgan. Richard, your line is now open.

Speaker 6

Hi, good morning. Thank you for the time today. I mean, sticking with one of these broader planned questions. Thinking about the outlook to 2025 and the broader inflation backdrop, how do you see the cost savings opportunity through 2025 currently standing versus

Speaker 2

Okay. I understood the question right. You're basically saying that In the inflationary environment that we're in, how do we see cost savings developing? What I would say is that, given our international exposure, We're very accustomed to dealing with inflation and having to control costs in an inflationary environment. So what we have seen so far as we've mentioned on prior calls is that the cost of building renewables has gone up Over the past year, there's no question there were panel prices have gone up in the U.

Speaker 2

S, EPC costs have gone up. However, we're seeing that in this strong market, this is basically able to pass through, we're able to maintain our margins on new projects. Going forward, I mean, we've had cost saving programs in place for the past 12 years. On a run rate basis, we've got about $500,000,000 of costs. So again, we have the infrastructure in place.

Speaker 2

It's part of our culture, continual improvement. So we're not particularly concerned on that side. On the Pricing side, about 80% of our contracts and businesses have some form of inflation indexation. So we're very well protected on that side as well. So we have the experience, we have the methodology, it's part of our mindset.

Speaker 2

So we don't see that as a particular concern.

Speaker 3

Yes. This is Steve. I would just add also if you look at the escalation of Fuel prices on the thermal side, they've gone tripled in some cases. So renewables, although the costs have increased, Relatively more competitive than they were before this current inflationary cycle. And then in addition, we have the benefit with renewables of we're largely Firming up prices right around the time that we're also signing up our PPA.

Speaker 3

So, you have a good sense of what your levelized cost is over the life of the project and very little variable costs, of course. So we are able to build in this into the market. And then, of course, the IRA bill in the U. S, certainly with the expansion and extension and re upping of credits, Does serve to offset some of these additional inflationary increases in the renewables capital costs. So that's And it has an opposing effect helping bring prices somewhat back down off of what they otherwise would have been.

Speaker 6

No, that certainly makes sense and I appreciate the color there. And maybe Steve picking up that last point around the IRA. Curious how transferability could impact your tax credit outlook. Is this an opportunity to invest more on a net to AES basis or Any other impacts you foresee?

Speaker 3

Yes. No, certainly transferability. I mean, what we like about the IRA is it brings a lot of optionality, a lot Flexibility, it brings the production tax credit as an option for solar and certainly that could be an opportunity for where high insulation Is in the Southwest of the U. S, for example, maybe the best option? So with transferability, it certainly adds A more liquidity too, I would say, a more liquid market to monetizing the tax attributes.

Speaker 3

There are still some significant benefits to having tax equity partnerships though where you have the tax depreciation Benefit, in addition to the credit that you're monetizing as well as just in the way these projects get structured, There's a step up in the value of the assets when they're contributed to a partnership, and there's a benefit to the value of the Tax attributes when that occurs as well. So it does add some options. It's optionality, flexibility. And so for us, it's good to have in our toolkit. And then down the road, we'll look to see As AES moves forward in time, we may be able to utilize some of these tax credits for our own account, but I wouldn't expect that until several years down the road.

Speaker 6

Great. Thank you for the time today.

Speaker 3

Thanks.

Operator

Thank you. With our next questions comes from Angie Stan Rawlski from Seaport. Angie, your line is now open.

Speaker 7

Thank you. So first, just one clarification. So Steven, you talked about the ITC Contributions from the new build this year and the carry forward for 2023, is there some change here versus How you have been accounting for these, I mean, I'm just trying to make sure that it's not somehow related So the IRA and some different recognition of the tax attributes?

Speaker 3

No, no, Angie. Hey, no change. But what we wanted to do Was, as the IRA has been put in place and now we see the tax credits having A much longer life cycle extension well into the next decade. We wanted people to understand This is part of the economics of renewables of the whole industry really in the U. S.

Speaker 3

We wanted people to understand what it means for AES And that this is a long runway and is an important component of how these assets get monetized and the return gets earned. The certainly they will 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.

Speaker 3

And Utilities business unit, The Q4, the skew towards the Q4 is in large part driven by the fact that we are commissioning More projects typically in the Q4, more renewables projects and the tax credit recognition The investment tax credit is tied to the commissioning. And so we will see a lift in the U. S. 4th quarter results As we did last year, as we will again this year in Q4 as a result, it was really those two reasons I wanted to point it out, the IRA and then the Seasonality of the tax credit recognition in the U. S.

Speaker 3

And utilities SVU.

Speaker 7

Awesome. Okay. I understand. And secondly, and probably most importantly, so I remember a couple of quarters back, you guys had these Seemingly lofty growth targets 4.5 to 5.5 gigs of PPAs per year. It seems like you're tracking well against that.

Speaker 7

I'm just wondering if there's any upside to that number. And even more importantly, it seems like you guys have more than 5 gigs Of capacity under construction. And so I'm just hoping to get some reassurance how you're coping with that level of activity And if you if there is a possibility to increase it and how again like logistically can you handle that many projects? Yes.

Speaker 2

Thank you, Anjean. That's a great question. Yes, we have a significant step up in our construction Between this year and next, and you correctly point out we have more than 5 gigawatts currently under construction. I think we've handled it very well. We have Double the amount of people that we have working on construction in renewables in the U.

Speaker 2

S. We have been working with strategic EPC contractors, meaning that we can give them Not sort of just project by project, but really a line of sight, how much work they're going to get over the next 2 years. So they're able to staff up. So we've done very well there. I think we've done a very good job of managing the solar panel supply, which has been very turbulent.

Speaker 2

We've had No delays this year due to solar panels. We have already most of the solar panels that we need for 2023. So we're working very closely with Also the inverter. So I feel very good about that. We have done a lot of outside the renewables area a lot of Big projects.

Speaker 2

So I think we're have experience there. So I feel very comfortable. We will have a Roughly doubling of what we commissioned this year to next year. And again, we've been worried about the supply chain. We started more than 2 years ago.

Speaker 2

So we I think are in as good shape as anybody in handling it. And I think the results speak for themselves. We haven't had to delay any projects because of a lack of supplies or a lack of construction workers or anything of the sort. Regarding sort of the upside, as I said, the IRA does provide upside. It has Good incentives for renewables.

Speaker 2

There will be, I think, increase in demand certainly from corporations. And I think what's very important is we're not just looking at increasing our growth rate, but making sure that we're growing profitably and growing well.

Speaker 7

Okay. And my last question about the financing of that incremental growth, especially in this higher interest rate environment. So, I mean, are you revisiting this past idea of more of a like a systematic recycling of capital from your Existing assets, is there again, especially ahead of those likely announcements for green hydrogen projects. I mean, I'm assuming that It comes with a pretty aggressive capital outlay. So how do you finance it?

Speaker 2

What I'd say, we're going to continue to churn capital. As our projects mature, it's a way of increasing our return on invested capital. As you know, once we finish renewable projects, we sell down to people who want a fully contracted U. S. Dollar renewable.

Speaker 2

So our plan through 2025 that we've laid out is fully financed. Now if we were going to know, I would say going forward, if there are additional very profitable opportunities, we'll have to look at that, but we have a lot of options. We have a lot of options. We're investment grade and As we have done in the past, we can turn more quickly some of our assets in terms of our sell downs.

Speaker 7

Very good. Congratulations. Thank you.

Speaker 2

Thank you, Angie.

Operator

Thank you, Angie. With our next question comes from Nick Campella from Credit Suisse. Mike, your line is now open.

Speaker 5

Hi, good morning. This is Fei for Nick today and thanks for taking my question. Good morning. I just want to quickly touch on Ohio rate case. We saw some peers going through this process having some challenges there.

Speaker 5

Could you just update us on how you're managing your regulatory strategy in Ohio and the rate outcome there, if there's any changes from the last update. But again, recognizing Ohio has a pretty minimal impact to the consolidated EPS, just any colors would be appreciated. Thanks.

Speaker 3

Yes. Happy to. This is Deep. We are being very strategic and I'm sure you saw that we did File for an electric security plan for us or ESP4 very recently. So We are still awaiting the decision from the utility commission on the rate case that's outstanding.

Speaker 3

We are Expecting that decision still before the end of the year. But look, the issue at hand is whether rates Need to be frozen while we currently have this rate stability charge that's been in place for about 20 years. We think there is broad support for the new rates That are have been asked for in the plan, and the staff came out and supported those. So, you know, what we decided to do was, Go ahead and chart a path to moving on to a new ESP regardless of what this outcome is in this case. And therefore that clock has already started ticking.

Speaker 3

As Andres said, we'd expect that to be resolved by middle to second half of next year on the ESP 4. And our focus is really on growing the utility. As Andre said, this is a utility where we have the lowest rates by far across all customer classes. We want to get to a place there's a significant opportunity for upgrades and investments and we want to have a healthy structure Continue investing in a healthy balance sheet for the utility. So the ESP-four was filed to give that path there.

Speaker 3

We still believe in the case that we filed and that the stability charge can still be in place. But in the case that the commission decides they want to hold rates until that stability charges is retired, Then we'll have this ESP 4Path. It's already out there. It's already being in the process and we'll have that then by the middle of next year as opposed to waiting for this to be decided and then going ahead and creating what's the next security plan. So That was our goal and our thinking here.

Speaker 3

And as I said, we still expect a decision this year on the case.

Speaker 5

Perfect. That really makes sense. Appreciate the colors here.

Speaker 3

Yes, absolutely.

Operator

Thank you, Nick. With our next question, it comes from Julien Dumoulin Smith. Julien, your line is now open.

Speaker 8

Hey, good morning team. Thank you so much for the time and the opportunity. Appreciate it and congratulations on the continued success here. If I can, just to pivot back to where we started some of this conversation, I want to try to get back at some of the tax credit dynamics How that plays itself out over the next few years. So clearly, you all have outperformed on continued backlog generation and Ramping into construction.

Speaker 8

Can we talk about some of the cadence of, in service here and how that translates back credits, I appreciate the detail on 2022 about what that means on an income basis. But can you talk a little bit relative to the earlier guidance, what was embedded As far as earnings expectations and then try to transpose that against where we are against the current cadence of when is that construction progress going to reach in service, When is that backlog effectively fully in service, right, I. E. Over the next 2 or 3 years? I just try to reconcile Prior versus today on the updated backlog as well as considering the pivot to a solar PTC from an ITC, which also Maybe something of an offset to the depositors described here.

Speaker 2

Okay. Julian,

Speaker 6

Good to

Speaker 2

talk to you. There are a lot of questions there. Sorry.

Speaker 8

I know a lot.

Speaker 2

Take it as you will. So let me try to frame it. We'll answer it between Steve and myself. So I guess the first question is, I think regarding The new IRA, it does give us flexibilities to choose in terms of ITC, PTC on some projects. This will start in 2023, which is somewhat of a I'd say it's a slight upside there.

Speaker 2

Regarding sort of the cadence, these 2 tend to be somewhat backloaded in the end of the year. So that Steve had mentioned, this is just because of the financing structure. So it tends to be Q3, Q4 And I think that will continue to be so going forward. In terms of our backlog, yes, I mean, we have, as we mentioned, it's 11 0.2 gigawatts and the vast majority of that's going to be commissioned before end of 2025. So there are few projects that go beyond that.

Speaker 2

So as projects get commissioned, new ones come into the backlog. I think what's important again, if you think of this in terms of Our installed capacity, it's the backlog is 1 third of our current installed capacity. So we feel good about our growth rates. We feel good about the Who we're contracting with? So our growth in the U.

Speaker 2

S, of course, is investment grade off takers, utilities and But mostly corporate clients and internationally as well. What we're signing overseas is mainly in Chile with people like Codelco, big copper For others that, it's a we feel it's just as good a risk as if they were in the U. S. So I think I'll pass it off to Steve to get a little bit more in the weeds of the tax itself, some of your other questions.

Speaker 8

Yes. Hey, Julian. And actually if I can just to clarify, if you don't mind just to jump in, the cadence by year rather not by intra Order kind of thing? But by year, breaking down that 11 gigs, if we can. Just again, I'm just trying to reconcile the older Expectations versus newer and try to understand how many gigs per year, you can kind of credibly expect.

Speaker 2

What I would say is, look, we're going from about, I think, less than 2 gigs this year, somewhere around 4 gigs next year. And then at some point, if you are always signing 5 gigs of new renewable contracts, you will be commissioning or bringing online 5 gigs. The 2 sort of come together. So the catch up is the biggest catch up will be next year and then you have the two lines going in parallel. Now again, if Our signings increase, well then there will be a lag of about, let's say, between 18 months 24 months Between the greater number for signing PPAs and the commissionings we're bringing online.

Speaker 3

Yes. And Julian, so I would say Also taking the number, Andres said 4 gigawatts next year. That will continue to grow. This is our main growth business for us. It's 5 gigawatts, 6 gigawatts.

Speaker 3

We'll give more color on that next year as we update our guidance. And then I would look at that and say that roughly on average say 2 thirds of that is in the U. S. And then a larger share of that is solar and solar plus storage of that that's in the U. S.

Speaker 3

So Say roughly 75% today is solar plus storage of the U. S. Backlog. And so that's ITC qualified. We can elect PTC now, as I said.

Speaker 3

We're looking at that where it makes sense for the returns and that's typically where you have higher capacity factors where the insulation is highest, say, in the Southwest of the U. S. The credits will continue to increase significantly. I think next year, as Andre said, it's going to be a big jump year over year because the level of commissioning is going way up next year. And it is heavily Weighted towards the Q4 of the year.

Speaker 3

But as we continue to grow this business, the timing will become less of an issue as we get to more of A consistent state of growth of additions year over year. But the credits are an important part of how it's monetized. As 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.

Speaker 3

S. That it's important for everyone to understand what that looks like For modeling purposes.

Speaker 8

Got it. All right. Listen, I appreciate your attempt here on the call to get into Look forward to next quarter here with more details. Thank you guys and congratulations again.

Speaker 2

Yes. Thanks Julian.

Operator

Thank you, Jun. We have our next question comes from Ryan Levine from Citi. Ryan, your line is now open.

Speaker 9

Hi, everybody. I wanted to follow-up on some of the ITC clarifications. So as you're looking for the U. S. Portion, What adders are you assuming that you'll be able to realize as you move forward with these projects?

Speaker 9

And specifically, are you seeing any Well, minimum income at or 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 projects you're pursuing in light of the details of the IRA?

Speaker 3

Yes. So you're talking about like the adders for the energy communities and domestic content, things like that. Is that right? Correct. So yes, I think roughly 1 third of our U.

Speaker 3

S. Pipeline today is in these energy communities that qualify for the 10% Better. I think as we move forward then we look at domestic content, we are a leader. We've launched our U. S.

Speaker 3

Solar buyer Consortium, we expect first supplies from that in 2024. So I would expect us to be having a share. I don't have a specific percentage right now, but a Material share of our projects meeting the domestic content production in 2024. And then we are fully ready to be qualified for the wage and apprenticeship requirements and training already. So That's a non issue.

Speaker 3

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 2024 and beyond.

Speaker 9

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 We'll utilize the transferability feature. Has that fully been determined at this point? Or is there still some negotiation for analysis that needs to be done to determine how you'll structure future sales.

Speaker 3

Okay. I mean, I would say, look, I think the for us as a leader in the market, we have a lot of long term deep relationships on the tax equity side. So for us and we have a lot of capabilities of very the top talent 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, transferability is an option. I'm not convinced, in fact, that it actually optimizes returns because there is the tax Appreciation component, which is also an important component of value of the accelerated depreciation.

Speaker 3

So and they're structuring to step up the value of these projects as once they're built, the value of them It's typically higher than what the capital cost was. So there's an important It's important that we pay attention to returns. And for us, transferability, although it brings more liquidity to the market, AES as a leader already has, I would say the liquidity we need to monetize the tax attributes. So we'll look at it, but there's nothing I wouldn't say for us it's a significant game changer given our scale and existing capabilities.

Speaker 9

Appreciate it. Thank you.

Operator

Thank you. We have our last question comes from Greg Oro from UBS. Greg, your line is now open.

Speaker 10

Yes, thanks very much. Congratulations. Thanks. Regarding the LNG success year to date and your thoughts on next year, just in terms of the Repeatability there, what gives you the confidence there? If there's anything you could share about What you might have sold forward or thoughts on what sort of conditions need to repeat for you to deliver that again?

Speaker 2

Yes. Hi, Greg. I would say, look, what we said is that there are there is a continuation of this into the 4th quarter, A bit smaller. There's a possibility for next year and that will depend on the spread between again Henry Hub Plus prices that we get on our contracts and prices in Europe. So that's really the importance.

Speaker 2

I think in terms of the hydrology, we need Continued good hydrology in Panama. Reservoirs are quite high. So we're going in, in a favorable condition. So it really is what will be the spreads That justify this making that shipment. And I would say also we would expect less volume in any case next year than this year.

Speaker 2

So it would be an upside. We're not counting on a very large amount of LNG. Conditions, it looks like it's a possibility, but we're not counting on it. And those are the drivers. And so I think you can see

Operator

Yes.

Speaker 2

You know how those drivers are moving and see if there's a possibility for this.

Speaker 3

Yes. And I would say just to add for the Q4 of this year, Yes, we've already for whatever we would do with LNG is done for this year. So we've already we have a much smaller upside In the Q4, already built into our commentary on meeting the at or near the top end of our guidance range. So that any additional volumes would be we'd be talking about next year and what whether the market conditions as Andre said Are conducive to that. We think it's very possible and it would be more upside.

Speaker 3

But for this year, we've already contracted what we could contract.

Speaker 10

Does where you end up this year, obviously you've said at or near the end near the top Of earnings guidance, does that have an impact at all on how you think about Giving 2023 guidance, does it serve as a base or some kind of reference Point or are you still sort of pointing back to a different base?

Speaker 2

We'll be pointing back to the different base. I mean, we've said 7 to 9 Growth and through 2025 and that's what we're committed to achieving. So it's not changing our base Year for our growth rate.

Speaker 3

Yes. And that was 20% if you recall. My class problem. Right. Yes.

Speaker 3

It's a very good year. I think there's some more upside as Andres said, but I wouldn't say it sets a new baseline because this isn't necessarily a recurring at this level

Speaker 10

Thanks. Okay. Thanks a lot.

Speaker 2

Thank you, Craig.

Operator

Thank you. We have no more further questions on the line. I will now hand back to Susan for closing remarks.

Speaker 1

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.

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Earnings Conference Call
AES Q3 2022
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