Earnings Call Transcript - TE Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the T1 Energy Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeffrey Spittel, Executive Vice President, Investor Relations and Corporate Development. Please go ahead.

Jeffrey Spittel, Executive Vice President, Investor Relations and Corporate Development

Good morning, and welcome to T1 Energy's Third Quarter 2025 Earnings Conference Call. With me today on the call are Dan Barcelo, our Chief Executive Officer and Chairman of the Board; Evan Calio, our Chief Financial Officer; Jaime Gualy, our Chief Operating Officer; and Otto Erster Bergesen, our SVP of Project Development. During today's call, management may make forward-looking statements about our business. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expectations. Most of these factors are outside T1's control and are difficult to predict. Additional information about risk factors that could materially affect our business is available in our annual report on Form 10-K filed with the Securities and Exchange Commission and our other filings made with the SEC, all of which are available on the Investor Relations section of our website. With that, I'll turn the call over to Dan.

Daniel Barcelo, CEO

Thanks, Jeff, and welcome, everyone, to our third quarter earnings call. Let's turn to Slide 4, please. Many of you may be new to the T1 story this quarter, so we'll begin today with a brief look at our current position in the U.S. solar market. With 5 gigawatts of annual capacity at G1_Dallas, T1 is the largest American manufacturer of silicon-based solar modules, and we are the second largest American-owned solar module producer in the U.S., but we're just getting started. As we'll discuss on today's call, we are advancing our plan to start construction of the first 2.1-gigawatt phase of our U.S. solar cell fab, G2_Austin, before year-end. G2 is the centerpiece of our strategy to build the first end-to-end domestic polysilicon solar supply chain in the U.S. This strategy is intended to competitively differentiate T1 and to align the company with the growth dynamics in U.S. power markets. Now let's move to Slide 5 for a closer look at the big picture developments, which underpin our strategy. Today's theme is powering America. With U.S. electricity demand growing faster than it has in decades, we are positioning T1 as a homegrown enabler of three increasingly evident macro trends: accelerating U.S. AI development, onshoring of advanced American manufacturing, and strengthening American energy security. These three trends are the thematic pillars of T1's investor case. Energy is key to unlocking the future of AI. New data centers now routinely require gigawatts of electricity, and they are growing exponentially more compute and energy-intensive. Energy has emerged as the leading checkpoint for AI growth. The U.S. has the natural resources and talent to debottleneck the AI equation, and T1 plans to contribute by bringing the capability to produce leading-edge solar technology at scale domestically. T1 intends to power American AI by investing in American advanced manufacturing. The reshoring of manufacturing is another trend that is driving electricity demand growth and presenting T1 with the opportunity to strengthen critical U.S. energy supply chains. We have ramped up domestic PV module production in G1_Dallas. We are advancing towards the expected start of construction at G2_Austin, our U.S. solar cell fab, and we are expanding our U.S. supply chain through our recently announced partnerships with Hemlock/Corning, Nextpower, and Talon PV. We have entered an era when control of digital intelligence and AI infrastructure will determine the fate of nations. This underscores the strategic value of domestic energy capacity, and we believe T1's plan to build a domestic PV solar supply chain will contribute to U.S. energy security. In addition, establishing a domestic end-to-end polysilicon supply chain should strengthen our national ability to produce semiconductors, advanced materials, and grid and space technologies, all of which involve common inputs and production processes. Turning to Slide 6. Let's drill down into the AI power theme. If the U.S. is to maintain its lead in AI, we need more electrons, and we need them now. Leaders from the technology industry have suggested the U.S. must double the 2024 pace of electricity additions to 100 gigawatts per year to close the widening electron chasm between AI-driven demand and power availability. At T1, we are proponents of U.S. energy abundance, and we endorse the strategic merits of adding new natural gas and nuclear power capacity to our grid, but those technologies can only play a limited role in the near term due to swollen order backlogs, permitting red tape, and construction cycle times for new generation facilities. Solar, coupled with battery storage, is the obvious choice to bridge this gap as a rapidly deployable resource at scale. The dawn of the AI age is a company-making opportunity for T1. We have available capacity at G1_Dallas, where we recently eclipsed the daily production record equating to an annualized rate of 5.2 gigawatts. As we look to 2026 and beyond, our plans to integrate upstream of G1 will position T1 as the first company that can offer hyperscalers and their partners a high domestic content, polysilicon-based TOPCon solar module. Now let's move to Slide 7 for an update on T1's business. Shortly after we announced our preliminary third quarter results in October, we closed two successful equity capital markets transactions. T1 raised $72 million in gross proceeds from a registered direct common equity offering with high-quality new and existing institutional equity investors. And as previously disclosed, T1 entered a $100 million commitment for the issuance of preferred and common stock to certain funds and accounts managed by Encompass Capital Advisors, LLC in connection with T1's acquisition of Trina Solar's U.S. manufacturing assets. Last month, T1 elected to make the second and final draw of $50 million pursuant to this $100 million commitment. This infusion of equity capital positions T1 to begin the first phase of construction at G2_Austin during the fourth quarter of 2025. Although we initially intended to focus on raising debt prior to an equity tranche to partially fund the first phase of construction at G2_Austin, these two transactions enable us to raise capital at attractive terms while we engage with prospective debt investors and advance traditional project financing. The additional trading liquidity from a higher share count and market capitalization also provides opportunities for us to add new shareholders who were previously unable to trade in our stock. At T1, we are focused on shareholder value, and as equity owners ourselves, we are highly sensitive to dilution. So, we'll continue to use equity judiciously to fund growth CapEx while we optimize our capital stack. Our capital formation progress positions us to add G2 to our expanding domestic polysilicon solar supply chain, which now encompasses a growing network of American partners. In August, we announced an expanded polysilicon supply agreement to include the production of American-made solar wafers with Hemlock/Corning. And in October, we signed a framework agreement with Nextpower for the provision of domestic steel frames, and we made a strategic minority equity investment in Talon PV LLC, which is building a U.S. solar cell fab in Texas. These partnerships are foundational to T1's mission to build the first integrated American polysilicon solar supply chain. Our expanding partnership network and the domestication of our supply chain are also key elements of T1's policy playbook. As we highlighted on the second quarter call, our team continues to advance the de-FEOCing process to maintain T1's eligibility for Section 45X tax credits in 2026 and beyond due to requirements in the OBBB. Moreover, our commitment to invest in advanced American manufacturing and critical domestic energy supply chains are consistent with some of the administration's top priorities. Turning to operations. We continue to ramp production and sales during the third quarter at G1_Dallas, our state-of-the-art solar module facility. During the fourth quarter, we expect to generate significantly higher sales and EBITDA as we ship modules under previously booked merchant sales agreements and as we sell down inventory to customers who are clearing out 45X eligible modules before year-end. As a result, our 2025 EBITDA guidance of $25 million to $50 million is unchanged. While we build our business in the U.S., we continue to advance our goal to generate value from our legacy European assets, which are attracting interest for repurposed data center applications. We look forward to providing updates on this initiative as warranted by our progress. As we do on each quarterly earnings call, we have a rotating guest speaker from T1's management team to expand on an important topic. Since this quarter's theme is Powering America, I'd like to introduce our SVP of Project Development, Otto Erster Bergesen, to provide an update on G2_Austin, which will be the centerpiece of T1's domestic supply chain and where we are approaching the start of construction.

Otto Erster Bergesen, SVP of Project Development

Thank you, Dan. Let's turn to Slide 8. After months of work, we have a great design developed and Tier 1 partners contracted to help us move ahead with G2_Austin. We are ready to enter full execution shortly. We're pursuing a two-phased approach to reach more than 5 gigawatts of capacity for solar cell manufacturing. Phase 1 will be a 2.1-gigawatt fab, which we plan to follow with a 3.2-gigawatt Phase 2. If offtake levels permit, we can expand the second phase. The basis of design is Trina Solar's more than 100 gigawatts of solar cell fabs in general and their 5-gigawatt state-of-the-art Huai'an fab in particular. We have customized this design together with JFE Engineering in China and later with SSOE as our U.S. engineering firm. We have been working very closely with Trina, JFE, SSOE, and other companies over the past 10 months to leverage their project and operational experience while securing U.S. compliance and tailoring to U.S. conditions. Yates Construction has been selected as our general contractor. We have worked with Yates since May to provide preconstruction services, focusing on constructability and engagement of global and local subcontractors. Laplace has been selected as our EPC turnkey partner for the production line equipment. In August, we began working with Laplace on detailed design and preparations for equipment manufacturing. Laplace was a first mover on TOPCon and has extensive experience in the TOPCon space. They have been part of solar cell fabs for more than 400 gigawatts of capacity. T1 has great confidence in their ability to deliver top quality and to achieve according to their performance guarantee under the contract. The past few months, we've been working closely with Laplace and Yates to engage critical subcontractors to identify and address long lead items. We are pleased to report that the project has been very well received in the market and that we are currently contracting with subs to support the project schedule. For example, we have secured a very beneficial mill roll contract that enabled us to start erecting steel in March 2026. We have also secured favorable terms on long-lead electrical equipment like switchgears, generators, and transformers. Finally, we have built a strong team, combining Tier 1 partners with a solid in-house project management and engineering team. If you take one thing from our portion of today's presentation, I want it to be that we have a world-class team with the experience and technical expertise to execute the G2_Austin project successfully, and we look forward to breaking ground before year-end. With that, I'll turn it back over to Dan.

Daniel Barcelo, CEO

Thanks, Otto. Let's turn to Slide 9. While we move towards the expected start of construction at G2, production and sales continue to ramp at G1, our state-of-the-art U.S. module facility. We have produced more than 2.2 gigawatts of modules year-to-date, and we are on track to meet our unchanged 2025 production plan of 2.6 to 3 gigawatts. In October, we achieved a daily production record of 14.4 megawatts, which equates to an annualized run rate of 5.2 gigawatts. In less than one year, the T1 operations team has brought G1 from the start of production to a daily run rate that exceeds nameplate capacity, which speaks to the talent and dedication of our people. During the third quarter, T1 generated record net sales of about $210 million, and we expect sales to continue growing meaningfully in the fourth quarter as we start deliveries of previously booked merchant sales and we liquidate finished goods inventory that is eligible for 45X credits before year-end. This near-term sales pipeline and our continued operational progress underpin our unchanged 2025 EBITDA guidance of $25 million to $50 million. As we look forward to 2026, our supply chain team is focused on sourcing non-FEOC cells to G1 during the bridge year to the anticipated start of production at G2 in Q4 2026. We have already identified a meaningful supply of these cells for next year, which will be the primary driver of G1 production and sales before G2 is up and running. And now I'll turn the call over to Evan to walk you through the financials.

Evan Calio, CFO

Thank you, Dan. Let's move to Slide 10 for a summary of our unchanged guidance. As detailed in this morning's release, our 2025 EBITDA guidance of $25 million to $50 million based on 2025 production of 2.6 to 3 gigawatts is unchanged. In the fourth quarter, we anticipate a significant ramp in production and sales related to higher production levels, delivery of previously booked merchant sales as well as some liquidation of finished goods inventory before year-end. We expect fourth quarter production and module sales to exceed combined production and sales in the first three quarters of 2025 as we've now ramped the facility to an average 4.5-gigawatt run rate in the fourth quarter. In our October release of preliminary third quarter results, we also introduced annual run rate EBITDA guidance of $375 million to $450 million for an integrated production of G1_Dallas with the first 2.1-gigawatt phase G2_Austin. The guidance is based upon G2_Austin achieving full run rate production and sales of 2.1 gigawatts and an annualized G1_Dallas run rate production sales of 5 gigawatts, supplied by 2.1 gigawatts of G2 cell and the remainder through a combination of non-FEOC foreign cells. Any U.S. sales procured potentially through Talon represents upside. Now let's turn to Slide 11 for a summary of T1's financial condition. Bringing the first phase of G2_Austin online will deliver a step change in T1's profitability and cash flow generation. The recent capital markets transactions Dan highlighted have advanced that future. Even prior to the equity transactions, our cash position built significantly as we anticipated in the third quarter. We ended 3Q with cash, cash equivalents, and restricted cash of $87 million, $34 million of which was unrestricted. We added $118 million of cash in October. In addition, we accrued $93 million of Section 45X production tax credits through 3Q, and we expect to monetize those credits in the fourth quarter. We are currently exchanging term sheets. Aligned with our 4Q production and sales ramp, we expect to generate a similar amount of 45X credits in the fourth quarter that we expect to monetize in 1Q '26. On capital formation, we're building on the momentum of the recent equity transaction with potential G2 offtake contracts and debt investors. We also expect the recent equity raises will yield additional benefits for T1 shareholders. Our improvement in our market capitalization and daily trading volume should further expand T1's eligibility for inclusion in passively managed index funds, and we are receiving a noticeable increase in inbound inquiries from actively managed institutional funds who were previously unable to invest due to our trading and liquidity constraints.

Daniel Barcelo, CEO

Thanks, Evan. Turning to Slide 12. Let's conclude with an overview of T1's top priorities. In the near term, our focus is on preserving T1's eligibility for Section 45X credits by completing the de-FEOCing process as well as raising the capital required to complete the first phase of G2_Austin through a combination of debt and cash deposits tied to anticipated customer offtake contracts. While we advance our capital formation and count down to compliance initiatives, we're also executing our plan for 2026, which we view as the bridge year to establish an end-to-end U.S. PV solar supply chain. Our top operational priority for the next year is to source a meaningful supply of non-FEOC solar cells to feed module production at G1 prior to the expected start of operations at G2 in Q4 2026. Concurrently, as we build the G2_Austin offtake portfolio, we intend to initiate and complete the capital formation initiatives required to fund and trigger the start of construction for the planned second phase of G2 sometime in 2026. In 2027 and beyond, we will be focusing on bringing T1's integrated U.S. supply chain online and completing the second phase of G2. We plan to achieve 5 gigawatts of integrated production between G1 and G2. And by virtue of our supply agreements with Hemlock/Corning and Nextpower, we should be producing modules of domestic content that comfortably qualify our offtake customers for ITC stacking bonuses. Our ultimate objective at T1 is to generate shareholder value by establishing a differentiated competitive position as the first fully integrated U.S. polysilicon-based solar module producer. As we grow our operations and commercial enterprise, we will work to maximize returns on capital, sustainably reduce unit costs of production through software and automation upgrades, and optimize T1's balance sheet. This is an exciting time for T1, our investors, employees, customers, and partners. We are building something that doesn't exist in the U.S. today, an integrated, secure, traceable polysilicon-based supply chain based on advanced solar technology. On behalf of T1's Board of Directors, thank you for your continued support in this journey as we position T1 to power America. And with that, I'll turn it back to Jeff to coordinate Q&A.

Jeffrey Spittel, Executive Vice President, Investor Relations and Corporate Development

Thanks, Dan. Shannon, I think we're ready to open the line for questions.

Operator, Operator

Our first question comes from Philip Shen with ROTH Capital Partners.

Philip Shen, Analyst

Congrats on all the progress you're making. Yes, I wanted to check in with you guys on your de-FEOCing process to see if you guys could give us more color on the progress you've made and the main next steps that you guys have to take that we can follow to monitor that progress.

Daniel Barcelo, CEO

Thanks Philip for that. We actually have Andy Monroe, who is our Chief Legal and Policy Officer on the line. Andy, why don't you take that question?

Unknown Executive, Chief Legal and Policy Officer

Sure. Thanks, Dan and Philip. We're well positioned for compliance with our domestic and non-FEOC supply chain plans. We have a solid compliance plan developed with the assistance of world-class legal and compliance experts, and we're making real progress on executing that plan. So we're confident. We're not sharing full details on the compliance for competitive reasons at this point, but we are confident that with those factors in play, we will be compliant.

Philip Shen, Analyst

Okay. And then as it relates to the Q3 contract dispute, could you give us a little bit more context there? Could that dispute extend longer? What kind of impacts could that be? And then how big of a contract was it? It seems like with the impairment of $50 million or so, it was quite meaningful.

Daniel Barcelo, CEO

Yes. Thanks, Phil. Evan, why don't you take that? And as it relates to the size of the contract, we are limited to certain confidentiality on the contract. And as you can appreciate, if we are in negotiations, we have to be sensitive to the confidentiality required in the contract. Evan, would you like to add other parts?

Evan Calio, CFO

Yes. I mean I would say that we had already calculated that in our guidance. So there isn't necessarily a guidance change as it relates to this contract, and we are continuing to execute other contracts. So in terms of the financial effect, it's been in our guidance for two quarters now. There was goodwill because it relates to a contract that was executed when we made the acquisition. That's why there's recording a goodwill, which we made a conservative interpretation to write off that goodwill. But as Dan mentioned, we remain in discussions with the contract party. We continue to assess all options, and we'll choose a path that optimizes the value to shareholders. I hope that's helpful.

Philip Shen, Analyst

Okay. And then one more here. You guys have made some interesting and useful investments and partnerships with Nextpower and Talon here. So I was wondering if you might be able to describe more the integration of all these companies and relationships. So specifically Nextpower, what's the volume timing? When could initial modules with U.S. frames come off your line? And then as with Talon, would you expect to source cells from them to support your G1 facility? And then finally, if there's an update with Corning and Hemlock, that would be great as well.

Daniel Barcelo, CEO

Thank you, Phil. We are very dedicated to maintaining an integrated supply chain in the solar industry, and many of our projects are linked to that objective. One key aspect is domestic content, particularly with frames, which are becoming increasingly important. In the future, we anticipate stricter requirements for domestic content. Our strategy with Nextpower was focused on addressing these domestic needs. Apart from cells, we are looking at components such as glass, frames, adhesives, and junction boxes. Partnering with a reputable company like Nextpower was a significant strategic move. Additionally, Nextpower is a strong and reliable partner that excels in scaling their products, and collaborating with them on steel frames enhances our ability to improve customer experiences with our modules. Regarding the volumes and timing, we expect to ramp up usage into late 2026 or 2027, though we won’t disclose specific volumes as they are confidential under our agreement. We will provide updates on this in the future. As for Talon, we have a small undisclosed minority investment that will facilitate deeper discussions and collaboration with them. Talon is focused on developing TOPCon cells, and we anticipate the possibility of sourcing those cells in the future. There are various options available for us regarding cell supply, including selling to third parties, but our goal is to strengthen our domestic supply chain. Regarding Hemlock and Corning, we previously announced our option to convert polysilicon into wafers, which we are looking forward to sourcing from Michigan for our G2 facility. It’s important to note that our G2 facility in Austin is a separate project from Talon. We are enthusiastic about our own project as well as our minority investment in Talon.

Philip Shen, Analyst

Great, Dan. Looking forward to seeing the full results of your integrated supply chain. One more, if I may. This is from an investor. He's asking how is T1 claiming or planning to claim the 45X credits in terms of stacking when they produce cells in one site and modules at another site when the OBBA says they have to be at the same facility?

Daniel Barcelo, CEO

Andy, do you want to take that, please?

Unknown Executive, Chief Legal and Policy Officer

Sure. Without getting into all the details, there are provisions in the Act that allow for the election of unrelated party transactions, and those provisions have not been changed. That was in the original Act and were not changed by the OBBA.

Operator, Operator

Our next question comes from the line of Greg Lewis with BTIG.

Gregory Lewis, Analyst

Guys, I was hoping to get an update on kind of how we should be thinking about the event path for G2. Any kind of hurdle rates we should be thinking about in the next couple of quarters, just as we think about getting that facility up and running by the end of '26 to really set the table for '27 production.

Daniel Barcelo, CEO

Thanks, Greg. I'll have Otto layer in here, too. We've been working very hard for the last year to design the right paths here. We have over a 30% design done. We have work packages out that are live. As you know, we did raise capital earlier this month to unlock some capital in order to begin the first stages of construction. We are still on track to go and start construction in the fourth quarter of this year. The paths really go to the site, the equipment, the machines, the early earthworks, and concrete and steel packages. Those are the biggest timelines in terms of risks to the timeline. As Otto mentioned in his remarks, the steel package was particularly important and some of the switchgear was particularly important. Beyond that, if we look at the equipment, the equipment is not on a critical path, but we wanted to advance those work packages and get those equipment orders as fast as possible also. Otto, do you want to talk about the cadence and how we're tracking toward the fourth quarter '26?

Otto Erster Bergesen, SVP of Project Development

Sure, Dan. So yes, so as you mentioned, really, it's all about getting started now, getting started with earthworks, preparing to erect steel in March and also securing the long lead items. So electrical equipment, we've talked about as well. There are air units, other utility systems like water and utility plants that need to come in place. So it's all about getting started and executing those contracts that we have lined up and are negotiating now as soon as possible. So we're tracking towards our timeline.

Gregory Lewis, Analyst

Okay, great. I wanted to revisit Slide 6, where you clearly outlined the current situation in power—power is making a comeback. As we contemplate this and the acceleration and potential for solar, it seems that no one is really discussing solar in relation to data centers. Last year, we installed 50 gigawatts in the U.S., while there were only a few gigawatts of natural gas. As we analyze the increasing demand for power generation in the U.S., are we sensing that hyperscalers or other entities are pursuing behind-the-meter solutions? Or do you believe the majority of solar growth in the U.S. over the next five to ten years will primarily come from utilities?

Daniel Barcelo, CEO

Yes. We're seeing tremendous interest from developers and it’s a pass-through basically data centers, AI companies. The utility scale levels and the quantum of power that's needed, it's really only the things that solar, which we do, and storage together are only things that are going to deliver that until basically 2029, 2030 when natural gas generation hits or nuclear starts coming back. We fully believe in a combined industry that is supportive of multiple uses of energy and an all-of-the-above strategy, but solar is the only thing that's scalable right now. When we look at China, China has over a terawatt of manufacturing capacity across ingot, wafer, cells, and modules, a terawatt of manufacturing capacity. In the first half of the year, China put in 256 gigawatts. So there is tremendous human intelligence and scope to really deploy it. And we do think that the United States has those elements of capital and technology to start building that, and we'd like to see more of that develop in the U.S. But solar is the answer right now. I do think we've reached the tipping point in terms of the costs, particularly the storage costs and the adjacency to solar. And I think those two things are delivering. I do think that building these projects and designing them with either natural gas in mind or other longer-term grid access is an important dimension. And the last part I'd say is I think a lot of these other places are really going to be about distributed energy resources, energy islands. The amount of power that AI needs and the ramp that AI wants, it's just too hard to do that at current grid and current connections. So we're very confident about the future of how solar is going to contribute to that energy.

Operator, Operator

Our next question comes from the line of Sean Milligan with Needham & Company.

Sean Milligan, Analyst

Just a quick question. It looks like you mentioned that you've ramped up G1 now to over 5 gigawatts. I'm curious about how you see that sustaining into 2026, and then what you're seeing for demand in 2026 there? And then just looking forward, kind of what you're seeing for demand in 2027 as G2 comes online? And kind of the third part of that question is another publicly traded company made some comments about pricing on their call. So is there any kind of like pricing guardrails you can give us for kind of non-FEOC cells in '26, what you're looking at and then also 2027 with G2 online?

Daniel Barcelo, CEO

Thank you for the question. This year, the solar market has been quite unpredictable, especially with concerns about the OBBB's impact on the IRA, but it hasn't posed a significant threat. We have upcoming demand related to the 232 issue, but there is still a lot of uncertainty regarding inventory and sales, making for a volatile 2026. This situation has contributed to a backlog in our volume projections for 2025. Looking ahead to 2026, which serves as a transition year for us, we do not plan to produce domestic cells until the fourth quarter of that year. Therefore, for 2026, we will need to rely on sourcing non-FEOC cells. We are confident in our ability to secure quantities, but we are not ready to provide specific guidance on that front yet. The pricing situation for non-FEOC cells is also uncertain, so we plan to offer guidance on pricing and volume for 2026 in the near future. Our primary focus is on 2027, where we are actively engaging with large utility-scale investors and noticing significant interest in domestic modules. Once we finalize offtake discussions or contracts, we will share that information publicly. Our main objective now is to ensure we deliver in 2027. Evan, do you have anything to add regarding pricing or volumes?

Evan Calio, CFO

Yes, I believe you covered it, Dan. Demand for 2026 is high, and we expect early pricing to be several cents a watt higher than our current pricing in the fourth quarter. Production levels will be more affected by cell availability than by demand. As Dan mentioned, we currently have competitively priced non-FEOC cells in our inventory and are actively working to secure more for 2026, our bridge year. This will drive value, and we will provide production estimates soon. For 2027, discussions are underway with parties whose demand exceeds our 2.1-gigawatt production capacity. These talks are about multi-year offtake contracts that are promising. We anticipate that by the time we start production at the facility, most of the 2.1 gigawatts will be contracted. The challenge will be converting excess demand for G2 Phase 1 into support for G2 Phase 2, which we expect to be driven by offtake demand. We see potential for this to happen in a reasonable timeframe after financing G2 Phase 1. Our goal is to incorporate as many high-margin, in-demand cells into G1 as quickly as possible.

Sean Milligan, Analyst

That's great. That's great. And then the other question was on the COGS side. So this year, I know you've been doing a lot with your supply chain. And then next year, you bring on non-FEOC cells. I'm just curious how you see COGS moving around this year and if that starts to normalize some next year as you kind of get up to scale more?

Evan Calio, CFO

That's a great point. You can expect to see it in the fourth quarter. When operating at a scale averaging a 4.5-gigawatt run rate, our conversion costs decrease significantly over the year. We expect our facility in its second year of operation to continue reducing those controllable costs. Regarding procurement and pricing, while the cell constitutes the majority of our expenses, we are actively working to optimize those costs and anticipate improvements. We are ramping up a facility during a time of unusual tariff fluctuations, which limited our ability to optimize costs. As tariffs increased, we faced some challenges. However, we believe many of those risks will be alleviated, even with potential 232 market impacts, due to our unique and advantageous supply chain. We will offer more details on these improvements when we release our 2023 guidance shortly, as we are making progress in securing commitments.

Daniel Barcelo, CEO

Yes. I would just add to Evan that you touched on the polysilicon side. As you know, the cell is the bulk of the cost, and we work diligently to ensure very competitive cells. Our company, all of our polysilicon is from Hemlock. We take the polysilicon from Hemlock that's turned into wafers in Vietnam. We have control of the polysilicon side. And the reason I mention this is with the anticipation of what may come out of 232, we feel that we're very protected on that cost element. Again, we get the benefit of basically having a locked-in pricing on our polysilicon. So to the degree 232 does come out and add cost to other non-American polysilicon or Chinese polysilicon, we think that we're in a very advantaged state as that feeds through into the cell costs.

Sean Milligan, Analyst

Great. That's great, Dan. And then on Section, the 45X tax credits. I know this year, you've built up a good amount on the balance sheet, and you said you're looking to monetize those currently. It's not like swapping term sheets. As we look forward, should we think about credit monetization being a more regular step in the process for you all? Or is it going to be kind of larger transactions single time like once a year? Or are we thinking multiyear type transactions there to help with liquidity?

Daniel Barcelo, CEO

I believe you have a good understanding of the timing; I'll let Evan explain some details. We began fully commissioning with the certificate of occupancy in the first half. We completed all of our production volumes during that period and have actively engaged in the market despite facing uncertainties globally. Moving forward, I anticipate a more consistent approach to monetizing 45X. Additionally, we aim to optimize the pricing and costs associated with direct pay for 45X versus selling through banks to third parties. Evan, could you share when we might expect to see 45X now?

Evan Calio, CFO

Yes, look, I mean, I think as I said in my comments, we expect to execute third-party sales in this quarter for all or almost all of the 45X that we generated in 2025. I think on a go-forward basis, yes, we're looking to enter into a quarterly cash settle within some number of days after the quarter with one or several parties for our volumes. I think '26 is a year that has newer requirements that are different from the past. So it might be a slower-to-develop year. So I think they will be more midpoint of the year and on. But going forward, I think it will be more traditional of, again, quarterly cash settle on a third-party sale versus direct pay.

Sean Milligan, Analyst

All right. Congratulations on the continued move forward.

Evan Calio, CFO

Thanks, Sean.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Jeffrey Spittel for closing remarks.

Jeffrey Spittel, Executive Vice President, Investor Relations and Corporate Development

Thank you, Shannon. Thanks, everybody, for the interest. We will be back on the road at conferences in New York next week. Please feel free to reach out with additional questions, and thanks for the interest and participation today. This will conclude the call.

Operator, Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.