Ladies and gentlemen, welcome to The AES Corporation third quarter 2022 financial review call. My name is Glenn and I will be recording your call today. If you would like to ask questions during the presentation, you may do so by pressing star one on your telephone keypad. I will now hand you over to your host, Susan, to begin. Susan, please go ahead.
Thank you, operator. Good morning and welcome to our third quarter 2022 financial review call. Our press release presentation and related financial information are available on our website at aes.com. Today we will be making forward-looking statements. There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10-K and 10-Q filed with the SEC. Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer, Stephen Coughlin, our Chief Financial Officer, and other senior members of our management team. With that, I will turn the call over to Andrés.
Good morning, everyone, and thank you for joining our third quarter 2022 financial review call. This morning we reported third 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-$1.65. We're also reaffirming our 7%-9% annualized growth target for adjusted EPS and parent free cash flow through 2025. Stephen 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 have insulated us well from foreign currency movement, higher interest rates, and volatile commodity prices. In addition, the vast majority of our business is with U.S. utilities or investment- grade off-takers.
Turning to Slide four. At the same time, we have built flexibility into our portfolio, which has allowed us to capture upside in the current environment. For example, in Panama, we've been able to redirect Henry Hub-priced LNG to European markets to capitalize on high international gas prices. This upside is the direct result of actions we took in the past to create a diverse portfolio that would limit our downside exposure to fluctuations, both in commodity prices and hydrology. With above average rainfall in Panama this year, we have been able to buy cheap hydropower and run our gas plant less, which has made it possible to redirect a portion of our contracted LNG, creating meaningful upside in our results. Now to Slide five. We spoke briefly about the U.S. Inflation Reduction Act or IRA on our previous call.
Since then, it has become even more apparent how it is likely to greatly accelerate the demand for renewables and standalone storage in the U.S. We are very well positioned to capitalize on this demand and growth through our market leadership in renewables, particularly in the C&I segment, due to our strong customer relationships, our ownership interest 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 or thermal generation previously took place. We anticipate that the benefits of the IRA will result in a meaningful step up in demand across the U.S., but particularly from C&I customers looking to reach their decarbonization goals.
The IRA also includes a 30% ITC for standalone energy storage. AES benefits not only from being one of the largest developers of energy storage projects, but also from our ownership stake 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. As you can see on slide six, to address this expected growth in demand, we have been working hard to grow our pipeline of renewables and energy storage projects. Today, our pipeline stands at 64 GW or more than twice the size of our entire current portfolio. The majority of our pipeline, 51 GW, is in the U.S., and much of it is in the most attractive markets for renewables, such as California and PJM.
Our pipeline consists of projects that have a combination of land, interconnection access or advanced permitting. Approximately one-third of our pipeline is in the energy communities that I previously described and are eligible for additional tax credits. We believe our pipeline will become increasingly valuable as sites for projects become scarcer. Turning to slide seven. At the same time, since our last earnings call in August, we have signed an additional 1.6 GW of new renewable PPAs or 3.2 GW 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 GW-5.5 GW. Today, our backlog of signed PPAs stands at 11.2 GW, the majority of which is expected to come online by 2025.
We remain largely on track with our construction program, which is now 5.2 GW. There are some projects that have been moved from this year to next, primarily due to delays from customers. As we've mentioned before, none of these projects are late due to a lack of solar panels. We also continue to make very good progress on our two very large green hydrogen projects in the U.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 eight for an update on growth initiatives at our U.S. utilities.
This quarter, AES 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 AES Ohio as it will lay a strong regulatory foundation for growth by implementing a more traditional utility rate structure. We expect the Public Utilities Commission of Ohio to approve ESP‑4 in the next 12 months. As a reminder, AES Ohio has the lowest T&D rates in the state across all customer groups, and we see significant opportunity to invest to improve reliability and strengthen the balance sheet while remaining cost-competitive. Finally, 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 1st.
The proposal includes another milestone in AES's decarbonization plan, with the conversion of the last remaining units of coal operated by AES Indiana to natural gas in 2025, and the addition of up to 1.3 GW of renewables, including wind, solar, and battery storage. With that, I now would like to turn the call over to our CFO, Steve Coughlin.
Thank you, Andrés, and good morning, everyone. Today, I will discuss our third quarter results, 2022 parent capital allocation, and 2022 guidance. Turning to our financial results for the quarter, beginning on slide 10. I'm pleased to share that our third quarter results are very strong, and we now expect to be at or near the high end of our full-year 2022 adjusted EPS guidance range of $1.55-$1.65. Third quarter adjusted EPS was $0.63 versus $0.50 last year, driven primarily by our LNG business, as Andrés discussed. In addition, we also benefited from an increased ownership in AES Andes, as well as higher margins in Brazil. These positive contributions were partially offset by one-time charges at our U.S. utilities and in Argentina businesses.
Relative to last year, we also had higher losses from our AES Next portfolio as financial results from Fluence were not reported in our Q3 numbers last year. Higher parent interest stemming from higher debt balances as we increase investment in our subsidiaries, and a higher adjusted tax rate due to a non-recurring tax benefit in Q3 2021. I should also note that despite considerable macroeconomic volatility, we see very little impact on our financial performance. For example, the forecasted full-year impact of foreign currency movements after tax is well under $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 pre-tax contribution or PTC was $569 million for the quarter, a $141 million increase year-over-year due to the drivers I just discussed. I'll cover the performance of our strategic business units or SBUs in more detail over the next 4 slides, beginning on slide 12. In the U.S. and Utilities SBU, lower PTC was driven primarily by the recognition of one-time expenses at our U.S. utilities from previously deferred purchased fuel and energy costs, including those related to an outage at our Eagle Valley plant from April 2021 to March 2022. We pursued and entered into a settlement for Eagle Valley and took a provision against a deferred fuel recovery asset at AES Ohio, which we will continue to pursue. These expenses impacted adjusted PTC by approximately $48 million in the third quarter.
In addition, lower PTC was driven by lower availability in Puerto Rico. Our legacy Southland units provided significant energy margin contribution again in the third quarter this year. Although this was not a material year-over-year driver. We are also very pleased that in the third quarter, the California State regulatory authorities formally launched the process required to further extend our Southland legacy units beyond 2023. Higher PTC at our South America SBU was mostly driven by our increased ownership of AES Andes and higher margins at both AES Andes and Brazil, but partially offset by a provision in Argentina. Higher PTC at our Mexico, Central America, and the Caribbean, or MCAC SBU, primarily reflects our commercial team's outstanding effort to redirect our LNG supply from Panama to the international market, as discussed earlier.
These LNG sales were enabled by the flexibility we built into our commercial structure and gas supply agreements, along with favorable market conditions which may be present going forward, although we expect a more limited extent. Finally, in Eurasia, adjusted PTC was relatively flat year-over-year, with an overall net benefit from higher power prices at our wind plant in Bulgaria. Now to slide 16. As a result of our overall strong performance year to date, along with a significant contribution from LNG sales, we now expect to come in at or near the high end of our full-year 2022 adjusted EPS guidance range of $1.55-$1.65.
Growth in the year to go will be primarily driven by contributions from new businesses, including roughly 500 MW of projects under construction coming online, as well as further accretion from our increased ownership of AES Andes. We expect to recognize additional LNG sales in the fourth quarter, but the contribution will be much smaller than the benefit in Q3. We are also reaffirming our expected 7%-9% annualized growth target through 2025, based primarily on our expected growth in renewables, energy storage and U.S. utilities. Turning to slide 17. Andrés highlighted, the Inflation Reduction Act extended and expanded the tax incentives available for U.S. renewables and energy storage. Tax credits have been an important part of the economic value creation of our U.S. renewables portfolio, and the IRA provides clarity on long-term eligibility for these credits.
As U.S. renewables become a larger share of our portfolio, I wanna briefly touch on the way these tax incentives contribute to our earnings and cash flow. Our U.S. wind projects are typically eligible for production tax credits over the first 10 years of operations. Our solar and solar plus storage projects typically qualify for an investment tax credit, generally recognized within the first two years the project begins commercial operation. To ensure we take full advantage of the tax value of our U.S. renewables, we usually bring on partners that will invest in these projects to be allocated the majority of the associated tax attributes. These are called tax equity partnerships. It's important to recognize that as we monetize these tax credits, they create earnings and cash for AES.
For full year 2022, we expect our projects to generate approximately $280 million-$310 million in new tax credits. After monetizing these credits through our tax equity partnerships, the earnings recognized by AES this year from new project commissioning will be approximately $200 million-$230 million, with the remaining earnings from tax credits to be largely recognized next year. Due to the late year seasonality of new project commissioning, approximately two-thirds of these earnings will occur in the fourth quarter. This year, we expect to commission more projects in the fourth quarter than in 2021, which will benefit our earnings in the year to go period, improving the year-over-year comparison of Adjusted PTC in our US and utilities SBU by the end of the year. Now to our 2022 parent capital allocation plan on slide 18.
Sources reflect approximately $1.6 billion of total discretionary cash, including $900 million of parent free cash flow, $500 million of asset sales, and $200 million of new parent debt. On the right-hand side, you can see our planned use of capital. We will return nearly $500 million to shareholders this year. This consists of our common share dividend, including the 5% increase announced last December and the coupon on the equity units. We plan to invest approximately $1.1 billion in our subsidiaries as we capitalize on attractive opportunities for growth. About half of these investments are in renewables, which represent the largest portion of our growth. Nearly a quarter of these investments are in our U.S. utilities to fund rate-based growth with a continued focus on grid and fleet modernization.
In summary, nearly three-quarters of our investments this year are going to grow AES's renewables businesses in our U.S. utilities, reflecting our commitment to continue executing on our portfolio transformation. In addition, approximately 70% of our planned future investments are targeted for our U.S. subsidiaries, which will contribute to our goal of more than 50% of our earnings coming from the U.S. in 2023. I look forward to AES continuing our strong performance this year and sharing updates with you on our fourth quarter call. With that, I'll turn the call back over to Andrés.
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-$1.65, and we are reaffirming our 7%-9% annualized growth target for adjusted EPS and parent free cash flow through 2025. Our strong financial results continue to demonstrate the resilience of our portfolio to macroeconomic volatility. We signed additional agreements that will redirect excess LNG from our business in Panama to international customers. We expect the Inflation Reduction Act to greatly accelerate the demand for renewables, stand-alone storage, and green hydrogen. To address this growth in demand, we have increased our pipeline to 64 GW, including 51 GW in the US.
Year to date, we have signed 3.2 GW 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 GW-5.5 GW. With that, I would like to open the call for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on the telephone keypad now. While preparing to ask your questions, please ensure your phones are muted locally. We have our first question comes from Insoo Kim from Goldman Sachs. Insoo, your line is now open.
Yeah, thank you. First question on the revised outlooks that you gave on U.S. pipeline and also just the backlog that you've updated. You know, given the IRA has passed officially, while we await the Q2 earnings for more guidance, do you at this point have a pretty good sense of how much upside to that backlog you see, whether it's through 2025, 2026, and whether that still gives you a good confidence that there's potential to achieve the upper end of that 7%-9% APS growth range?
Yeah. Good morning, Insoo. What I'd say is that, you know, we're seeing very strong demand, especially in the U.S. market, especially among C&I customers. 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. You know, regarding our growth rates, you know, we feel very confident about achieving our 7%-9%. The IRA is obviously a positive to this number. But, you know, we expect some adjustments in the market. It's not only a question of growth, it's really a question of the profitability of those projects.
What we expect over the next I'd say months or year is there to be somewhat more let's say scarcity of projects as demand increases. I think that's where people who have you know gotten ahead of this and really have a mature pipeline are gonna be in a substantial benefit. You know, 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. All these things I see as positive. You know, right now we're saying 7%-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.
Got it. That makes sense, and we'll await more guidance there. Second question from me on LNG. It seems like, you know, a pretty sizable benefit at the MCAC segment. I think on an EPS basis, you know, $0.25 or so of benefit year-over-year, which from our perspective was, you know, much greater than expected. Could you just give more details on, if you can, on how much of that, how much volume was, you know, driving that? And, you know, while acknowledging that hydro conditions will, you know, dominate whether you could see any level of benefit going forward next year and beyond. Assuming normal hydro next year and the current prices in global gas, you know, could that still provide some level of tailwind as we think about 2023?
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. Now, 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 ports, because as you know, there are really bottlenecks in the ports. 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.
Going forward, I mean, basically when there's a La Niña in Panama, there's more hydrology. There's more water available. There's also a factor. What's the level of the reservoirs? It's right now, I'd say that we expect the conditions to continue. It's really a matter of the spread between Henry Hub plus the shipping and what international prices are. As Steve mentioned, we expect we have some additional contracts coming in in the fourth quarter. 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? Those are the conditions given.
This is, you know, mostly an upside, let's say, going forward. We're not, you know, counting on it. Regarding the tonnage, you know, we would expect somewhat less next year than we have shipped this year in terms of the actual volume. We can get back to you on the actual volume that was shipped.
Got it. Thanks for the color and thank you very much.
Thank you.
Thank you. We have our next question. This comes from Richard Sunderland from JP Morgan. Richard, your line is now open.
Hi, good morning. Thank you for the time today. I mean, sticking with one of these broader plan questions, thinking about the outlook through 2025 and the broader inflation backdrop, how do you see the cost savings opportunity through 2025 currently standing versus your annual state plan?
Okay. If I understood the question right, you're basically saying that in the inflationary environment that we're in, how do we see cost savings developing? What I would say is that, you know, we given our international exposure, we're, you know, very accustomed to dealing with inflation and having to control costs in an inflationary environment. 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. Panel prices have gone up in the U.S., EPC costs have gone up. However, you know, we're seeing that in this strong market, this is basically able to pass through. We're able to maintain our margins on new projects.
Going forward, I mean, we've had cost saving programs in place for the past 12 years. On a run rate basis, you know, we've cut about $500 million of costs. Again, we have the infrastructure in place. It's part of our culture, continual improvement. You know, we're not particularly concerned on that side. On the pricing side, about 80% of our contracts and businesses have some form of inflation indexation. We're very well protected on that side as well. You know, we have the experience, we have the methodology. It's part of our mindset. We don't see that as a particular concern.
Yeah. This is Steve. I would just add, you know, also, if you look at the escalation of, you know, fuel prices on the thermal side, they've gone, you know, tripled in some cases. Renewables, although the costs have increased, are relatively more competitive than they were before this current inflationary cycle. In addition, we have the benefit with renewables of, you know, we're largely firming up prices right around the time that we're also signing up our PPAs. You have a good sense of what your levelized cost is over the life of the project and very little variable costs, of course. We are able to build in this into the market.
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. That has an opposing effect, helping bring prices somewhat back down off of what they otherwise would have been.
No, that certainly makes sense, and appreciate the color there. Maybe, Steve, picking up that last point around the IRA. I'm curious how transferability could impact your tax credit outlook. Is this an opportunity to invest more on a net to AES basis or any other impacts you foresee?
Yeah, no, certainly transferability. I mean, what we like about the IRA is it brings a lot of optionality, a lot of flexibility. It brings the production tax credit as an option for solar, and certainly that could be an opportunity for where high insulation is, you know, in the southwest of the U.S., for example, may be the best option. So with transferability, it certainly adds more liquidity to, I would say, a more liquid market to monetizing the tax attributes. There are still some significant benefits to having tax equity partnerships, though, where you have the tax depreciation benefit in addition to the credit that you're monetizing, as well as just in the way these projects get structured.
There's a step up in the value of the assets when they're contributed to a partnership, and there's a benefit to the value of the tax attributes when that occurs as well. It does add some options, optionality, flexibility, you know. For us, you know, it's good to have in our toolkit. Down the road, you know, we'll look to see, you know, as AES, you know, moves forward in time, we may be able to utilize some of these tax credits for our own account. I wouldn't expect that until, you know, several years down the road.
Great. Thank you for the time today.
Thanks.
Thank you. With our next question, this comes from Angie Storozynski from Seaport. Angie, your line is now open.
Thank you. First, just one clarification. Stephen, you talked about the ITC contributions from the new build this year and the carry forward for 2023. Is there some change here versus how you have been accounting for these? I mean, I'm just trying to make sure that it's not somehow related to the IRA and some different recognition of the tax attributes.
No, Angie. Hey, no change. What we wanted to do was, you know, as the IRA, you know, has been put in place and now we see the tax credits having a much longer, you know, life cycle extension well into the next decade. We wanted people to understand, you know, this is part of the economics of renewables, of the whole industry really in the U.S. We wanted people to understand what it means for AES, and that this is a long runway and is an important component of how these assets get monetized and the return gets earned. Certainly they will, you know, 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, you know, if we look at the U.S. and Utilities business unit, the fourth quarter there, the skew towards the fourth quarter is in large part driven by the fact that we are commissioning more projects typically in the fourth quarter, more renewables projects, and the tax credit recognition for the investment tax credit is tied to the commissioning. We will see a lift in the U.S. fourth quarter results as we did last year, as we will again this year in the fourth quarter as a result. It's really those two reasons I wanted to point out, the IRA and then the seasonality of the tax credit recognition in the U.S. and Utilities SBU.
Awesome. Okay. I understand. Secondly, and probably most importantly, I remember, you know, a couple of quarters back, you know, you guys had these seemingly lofty growth targets, you know, 4.5 GW-5.5 GW of PPAs per year. It seems like you're tracking well against that. I'm just wondering if there's any upside to that number. Even more importantly, it seems like you guys have more than 5 GW of capacity under construction, and so I'm just hoping to get some reassurance how you're coping with that level of activity and if there is a possibility to increase it and how, again, like, logistically, can you handle that many projects?
Yeah. Thank you, Angie. That's a great question. Yes, you know, we have a significant step up in our construction, you know, between this year and next. You correctly point out we have more than 5 GW currently under construction. I think we've handled it very well. You know, we have, you know, doubled the amount of people that we have, you know, working on construction in renewables in the U.S. We have been working with strategic EPC contractors, meaning that, you know, we can give them not sort of just project by project, but really a line of sight, you know, how much work they're gonna get over the next two years, so they're able to staff up. We've done very well there.
I think we've done a very good job of managing the solar panel supply, you know, which has been very turbulent. We've had no delays this year due to solar panels. We have already most of the solar panels that we need for 2023. So we're working very closely with that, you know, also the inverters. So I feel very good about that. You know, we have done a lot outside the renewables area, a lot of big projects. So yeah, I think we have experience there. So I feel very comfortable. You know, we will have a roughly doubling, you know, of what we commission this year to next year. Again, you know, we've been worried about the supply chain. You know, we started more than two years ago.
We, I think, are in as good shape as anybody in handling it. I think the results speak for themselves. We haven't had to delay any projects because of a lack of supplies or a lack of construction workers or anything of the sort. You know, regarding sort of the upside, as I said, you know, the IRA does provide upside. It has good incentives for renewables. There will be, I think, an increase in demand certainly from corporations. I think what's very important is, you know, we're not just looking at increasing our growth rate, but making sure that we're growing profitably and growing well.
Okay. My last question about the financing of that incremental growth, especially in this higher interest rate environment. 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 there.
Yeah.
That comes with a pretty aggressive capital outlay. How do you finance it?
What I'd say, we're gonna continue to churn capital, you know, as our projects mature. You know, It's a way of increasing our return on invested capital. As you know, once we finish renewable projects, we sell down to people who want a fully contracted U.S. dollar, renewable. So, you know, our plan through 2025 that we've laid out is fully financed. Now, I would say going forward, if there are additional very profitable opportunities, you know, we'll have to look at that. But we have a lot of options. We have a lot of options. We're investment grade. As we have done in the past, you know, we can turn more quickly, you know, some of our assets in terms of our sell downs.
Very good. Congratulations. Thank you.
Thank you, Angie.
Thank you, Angie. Well, our next question comes from Nicholas Campanella from Credit Suisse. Nick, your line is now open.
Hi, good morning. This is Fay for Nick today, and thanks for taking my question. Good morning. I just wanna quickly touch on Ohio rate case. We saw some peers going through this process, having some challenges there. Could you just update us on how you're managing your regulatory strategy in Ohio and the rate outcome there, if there's any changes from the last update? Again, recognizing Ohio has a pretty minimal impact to the consolidated EPS. Just, any colors would be appreciated. Thanks.
Yeah, no, happy to. This is Steve. You know, we are being very strategic, and I'm sure you saw that we did file for an Electric Security Plan Four, so our ESP‑4 very recently. We are still awaiting the decision from the utility commission on the rate case that's outstanding. We are expecting that decision still before the end of the year. Look, the issue at hand is whether rates need to be frozen while we currently have this rate stability charge that's been in place for about 20 years. We think there is broad support for the new rates that have been asked for in the plan, and the staff came out and supported those.
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. As Andrés said, you know, we'd expect that to be resolved by middle to second half of next year on the ESP‑4 . Our focus is really on growing the utility. As Andrés said, you know, 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 wanna have a healthy structure from which to continue investing and a healthy balance sheet for the utility. The ESP‑4 was filed to give that path there.
We still believe in, you know, the case that we filed and that, you know, the stability charge can still be in place. In the case that the commission decides they wanna hold rates until that stability charge is retired, then we'll have the ESP‑4 path. It's already out there. It's already being in the process, and we'll have that then by the middle of next year as opposed to waiting for this to be decided and then going ahead and creating what's the next security plan. That was our goal and our thinking here. As I said, we still expect a decision this year on the case.
Perfect. That really makes sense. Appreciate the colors here.
Yep, absolutely.
Thank you, Nick. With our next question, this comes from Julien Dumoulin-Smith. Julien, your line is now open.
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 wanna try to get back to some of the tax credit dynamics and how that plays itself out over the next few years. Clearly, you all have outperformed on continued backlog generation and ramping into construction. Can we talk about some of the cadence of in-service here and how that translates back to credits? I appreciate the detail on 2022 about what that means on an income basis.
Can you talk a little bit relative to the earlier guidance, what was embedded as far as earnings expectations, and then try to transpose that against where we are against the current cadence of when is that construction progress going to reach in service? When is that backlog effectively fully in service, right? i.e., over the next two or three years. You know, I just try to reconcile prior versus today on the updated backlog, as well as considering the pivot to a solar PTC from an ITC, which also may admittedly be something of an offset to the positives described here.
Okay, Julien. Good to talk to you. There are a lot of questions there.
Sorry. I know a lot. Take it as you will.
Let me try to frame it. We'll answer between us, Steve and myself. I guess the first question is, you know, I think regarding, you know, 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, you know, somewhat of a, you know, I'd say it's slight upside there. Regarding sort of the cadence, you know, these two tend to be somewhat backloaded in the end of the year. That Steve had mentioned, this is just because of the, you know, financing structure. It tends to be, you know, Q3, Q4, and I think that will continue to be so going forward.
In terms of our backlog, yes, I mean, we have, as we mentioned, you know, it's 11.2 gw, and, you know, the vast majority of that's going to be commissioned before end of 2025. There are a few projects that go beyond that. 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 one-third of our current installed capacity. We feel good about our growth rates. We feel good about who we're contracting with.
You know, our growth in the U.S., of course, is investment-grade offtakers, you know, utilities and but mostly, you know, corporate clients, and internationally as well. You know, what we're signing overseas is, you know, mainly in Chile with people like Codelco, big copper exporter, others that you know we feel is just as good a risk as if they were in the U.S. I think I'll pass it off to Steve to get a little bit more in the weeds of the tax equity itself, some of your other questions.
Yeah. Hey, Julien.
Actually, if I can, just to clarify, if you don't mind, just to jump in. The cadence by year rather, not by intra-quarter kind of thing, but by year, breaking down that 11 GW 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 kinda credibly expect.
Yeah. What I would say is, look, we're going from about, I think, less than 2 GW this year to somewhere around 4 GW next year. At some point, if you are always signing 5 GW of new renewable contracts, you will be commissioning or bringing online 5 GW. The two sort of come together. The catch-up is. The biggest catch-up will be next year. You have the two lines going in parallel. Now, again, if you know, our signings increase, well, then there will be a lag of about, let's say between 18 months and 24 months between the greater number for signing PPAs and the commissioning we're bringing online.
Yeah. Julien, I would say, you know, also taking the number. You know, Andrés said 4 GW next year. That will continue to grow. You know, this is our main growth business for us. You know, it's 5 GW, 6 GW. We'll give more color on that next year as we update our guidance. I would look at that and say that, you know, roughly on average, say 2/3 of that is in the U.S. A larger share of that is solar and solar-plus-storage of that's in the U.S. You know, say roughly 75% today is solar-plus-storage of the U.S. backlog. That's ITC qualified. You know, we can elect PTC now, as I said.
We're looking at that where it makes sense for the returns, and that's typically where you have higher capacity factors, where the insolation is highest, say the Southwest of the U.S. The credits will continue to increase significantly. I think next year, as Andrés said, it's gonna be a big jump year-over-year because the level of commissioning is going way up next year. It is, you know, heavily weighted towards the fourth quarter of the year. As we continue to grow this business, you know, the timing will become less of an issue as we get to more of a, you know, consistent state of additions year-over-year. You know, the credits are an important part of how it's monetized.
I wanted to show that given the IRA and also given how the U.S. and utilities SBU seasonality is becoming more shaped by the renewables, the clean energy business in the U.S., that it's important for everyone to understand what that looks like for modeling purposes.
Got it. All right. Listen, I appreciate your attempts here on the call to get into it. Look forward to next quarter here with more details. Thank you, guys, and congratulations again.
Yeah. Thanks, Julien.
Thank you, Julien. We have our next question. Comes from Ryan Levine from Citi. Ryan, your line is now open.
Hi, everybody. Wanted to follow up on some of the ITC clarifications. 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? Specifically, are you seeing any low/middle-income adders anticipated for your solar projects? 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?
Yeah. You're talking about, like, the adders for the energy communities and domestic content, things like that. Is that right?
Correct.
Yeah, I think roughly 1/3 of our U.S. pipeline today is in these energy communities that qualify for the 10% adder. I think, you know, as we move forward, we look at domestic content. We are a leader. You know, we've launched our U.S. Solar Buyer Consortium. We expect first supplies from that in 2024. I would expect us to be having a, you know, share. I don't have a specific percentage right now, but a material share of our projects meeting the domestic content production in 2024. You know, we are fully, you know, ready to be qualified for the wage and apprenticeship requirements and training already. That's a non-issue. We're already at that 30% level with our projects.
I would expect, you know, at least a third to be, you know, in that 40% level and some perhaps even higher, up to 50% with the domestic content as that starts to become part of, you know, our solar panel supply in 2024 and beyond.
Great. In terms of the transferability comments, as you're looking to make decisions around whether or not to use tax equity partners or utilize the transferability feature, has that fully been determined at this point, or is there still some negotiation or analysis that needs to be done?
Yeah
To determine how you'll structure future deals?
Okay. I mean, I would say, look, I think for us as a leader in the market, you know, we have a lot of long-term deep relationships on the tax equity side. So for us. We have a lot of capabilities of very, you know, the top talent in the industry on structuring these projects on the commercial side and on the tax side so that we're optimizing returns. So for us, as I said before, transferability is an option. I'm not convinced that in fact it actually optimizes returns because there is the tax depreciation component, which is also an important you know component of value, the accelerated depreciation.
You know, they're structuring to step up the value of these projects as once they're built, the value of them is typically higher than what the capital cost was. You know, there's an important. It's important that we pay attention to returns. For us, transferability, although it brings more liquidity to the market, AES as a leader already has, I would say the liquidity we'd need to monetize the tax attributes. 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 our existing capabilities.
Appreciate it. Thank you.
Thank you. We have our last question comes from Gregg Orrill from UBS. Greg, your line is now open.
Yeah, 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, you know, what you might have sold forward or thoughts on what sort of conditions need to repeat, for you to deliver that again.
Yeah. Hi, Gregg. I would say, look, what we said is that, you know, there's a continuation of this into the fourth quarter, albeit smaller. You know, 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. That's really the importance. I think in terms of the hydrology, we need continued good hydrology in Panama. You know, reservoirs are quite high, so we're going in a favorable condition. It really is what will be the spreads that justify this, you know, making that shipment. I would say also, you know, we would expect less volume in any case next year than this year. You know, it would be an upside.
Okay.
You know, we're not counting on a very large amount of LNG. You know, conditions, it looks like it's a possibility, but we're not counting on it, and those are the drivers. I think you can see.
Yeah
You know, how those drivers are moving and see if there's a possibility for this.
Yeah. I would say, just to add, for the fourth quarter of this year, you know, we've already for whatever we would do with LNG is done for this year. We have a much smaller upside in the fourth quarter already built into our commentary on meeting, at or near, the top end of our guidance range. So that any additional volumes we'd be talking about next year and what, you know, whether the market conditions, as Andrés said, are conducive to that. We think it's very possible, and it would be more upside. For this year, we've already contracted what we could contract.
Does where you end up this year, obviously you've said at or near the upper end of earnings guidance, have an impact at all on, you know, 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?
We'll be pointing back to the different base. I mean, we've said 7%-9% growth and through 2025 and that's what we're committed to achieving. You know, it's not, you know, changing our base year for our growth rate.
Yeah. That was 2020.
I have a problem.
If you recall. Right. Yeah.
Yeah.
It's a very good year. I think there's some more upside, as Andrés said. I wouldn't say it sets a new baseline because this isn't necessarily a recurring at this level thing.
Okay. Thanks a lot.
Thank you, Gregg.
Thank you. We have no more further questions on the line. I will now hand back to Susan for closing 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. We will look forward to seeing many of you at the EEI Financial Conference later this month. Thank you, and have a nice day.