Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES
Thank you, Andres, and good morning, everyone. Today, I will discuss our third quarter results, our 2023 guidance, how we are flexing our plans to adapt to current financial market conditions, and how we minimize our exposure to interest rates.
Turning to our financial results for the quarter, beginning on Slide 10. I'm pleased to share that we had a strong third quarter and are fully on track to achieve our full year guidance. Adjusted EBITDA with tax attributes was just over $1 billion versus $991 million last year, driven primarily by higher contributions at our Renewables SBU, the recovery of prior year's purchased power costs at AES Ohio included as part of the ESP4 settlement, and improved results at Fluence. These drivers were partially offset by the absence of the significant LNG transaction margins, which we earned last year. Tax attributes earned by our U.S. renewables projects this quarter were $18 million versus $60 million a year ago, in line with our expectations of a higher share of renewable projects coming online in the fourth quarter.
Turning to Slide 11. Adjusted EPS was $0.60 versus $0.63 last year. In addition to the drivers of adjusted EBITDA, we saw higher parent interest expense this quarter, as well as a higher adjusted tax rate.
I'll cover the performance of our Strategic Business Units, or SBUs, in more detail over the next few slides, beginning on Slide 12. In the Renewables SBU, we saw higher adjusted EBITDA with tax attributes, driven primarily by higher contributions from new projects brought online in the last 12 months, as well as higher margins in Columbia. This was partially offset by lower tax credit recognition as a result of fewer new projects placed into service this quarter versus a year ago.
Our business continues to make strong progress, not just with construction, but also the financing of new projects. We continue to see a robust market for tax credits this year. We have already raised $1.8 billion in tax capital financing. The market for tax attributes is also greatly expanding as a result of the tax credit transfer option that has brought many more participants to the market. Importantly, tax credit transfers get recognized in operating and free cash flow, which further enhances our financial funding flexibility. Going forward, we will increasingly use tax credit transfers as a means to monetize tax credits, including for nearly 500 megawatts of projects in 2023.
At our Utilities SBU, higher adjusted PTC was driven by the recovery of prior year's purchased power costs at AES Ohio included as part of the ESP4 settlement, which had been recognized as an expense in the third quarter of last year.
I'd now like to take a moment to discuss the continued progress of our utility growth program on Slide 14. In August, we received Commission approval at AES Ohio for our new Electric Security Plan, or ESP4, which includes timely recovery of $500 million of grid modernization investments at a 10% return on equity, allowing us to further improve the quality of service.
As a reminder, we plan to grow the combined rate basis of our U.S. utilities at a 10% average annual rate through 2027. 80 of our planned investments through 2027 are either already approved or under FERC formula rate programs. We are executing on this plan. And with our investment programs across the two utilities, we are on track to increase our capital expenditures by over 35% year over year as we work to modernize and invest in system reliability. As we've previously discussed, our utilities in Ohio and Indiana continue to charge the lowest residential rates of all electric utilities in both states.
Turning back to our third quarter results with our Energy Infrastructure SBU on Slide 15. Lower adjusted EBITDA primarily reflects significant LNG transaction margins in the prior year, partially offset by prior year one-time expenses in Argentina and higher revenues recognized for the monetization of the PPA at our Warrior Run coal plant.
Finally, at our New Energy Technologies SBU, higher adjusted EBITDA reflects continued improved results at Fluence. Fluence has continued to demonstrate improving margins and strong pipeline growth, and they have indicated their expectation to be close to adjusted EBITDA breakeven in the fourth quarter of their 2023 fiscal year. This year-over-year improvement would be reflected in our own fourth quarter results.
Turning to Slide 17. I'm very pleased to highlight that we now expect to achieve the top half of both our 2023 adjusted EPS guidance range of $1.65 to $1.75 and our parent free cash flow range of $950 million to $1 billion. This reflects the strong performance of our renewables construction team, whose excellent execution this year means that we expect to exceed our construction target of 3.4 gigawatts by at least 100 megawatts.
Now to Slide 18. We are reaffirming our full year 2023 adjusted EBITDA guidance range of $2.6 billion to 2.9 billion. Including the $500 million to $560 million of tax attributes we expect to realize in 2023, we expect adjusted EBITDA with tax attributes of $3.1 billion to $3.5 billion. The additional U.S. projects we expect to bring online this year should allow us to exceed the midpoint of the tax attributes estimate we provided at Investor Day.
Now to our 2023 parent capital allocation plan on Slide 19. Sources reflect approximately $2.4 billion of total discretionary cash, including $1 billion of parent free cash flow, $400 million to $600 million of asset sales, and the $900 million parent debt issuance we completed in Q2. With the agreement to sell down a minority interest in our gas and LNG business in the Dominican Republic and Panama, we have secured the entirety of our external sources of parent-level capital for 2023.
Turning to Slide 20. Since our Investor Day in May, financial market conditions have changed, and AES will flex its near-term and long-term plans accordingly. Looking ahead, we will continue to prioritize our strong credit profile and investment grade ratings, hitting our financial metric growth targets, funding our growth primarily in U.S. renewables and U.S. utilities, and advancing on our decarbonization and portfolio simplification goals.
We have a number of levers to adjust that will keep us on track with these objectives. First, and to be clear, we will not issue equity at or near current share price levels and not until it is value accretive to our shareholders on a per share basis. As such, we are increasing our asset sale target to at least $3.5 billion for the 2023 to 2027 time frame and accelerating our plan to achieve $2 billion of asset sale proceeds in 2024 and 2025. With this change, we will not issue any equity until at least 2026 and the amount anticipated has been reduced to $500 million to $1 billion through our guidance period.
Second, the tax credit transferability option that we now have creates added flexibility to monetize the tax value of our U.S. renewables projects with a broader base of market participants, while also increasing free cash flow and the capacity to fund growth.
Third, while we still intend to exit all of our coal businesses, in a few of our markets, our coal assets will be temporarily needed to support the energy transition beyond 2025, as renewable deployments and transmission have not progressed as quickly as required. We still intend to exit the majority of our remaining coal businesses by the end of 2025. However, we have the flexibility to delay the exit of a few select plants through 2027 to support continued electricity reliability. This delay would yield continued financial contributions from these assets during this period.
For 2024 and 2025, we expect to fund our remaining parent capital needs entirely with asset sales and planned debt issuances. We feel confident that we can achieve the $2 billion asset sale target in these years as we have already held discussions for a large portion of the assets in this program. We anticipate competitive processes that will yield attractive valuations with minimal dilution to earnings and cash beyond what had been incorporated in our plan. Our sales program is designed to meet our strategic objectives to simplify and decarbonize our portfolio while funding our core growth investments in U.S. renewables and utilities.
Finally, turning to Slide 21. We are largely hedged against future increases in interest rates. Looking at the parent company, our long-term debt is entirely fixed, and we hedge our exposure to refinancing risk over a five-year window. Our nearest maturities in 2025 and 2026 were previously hedged at a rate of approximately 3%. Approximately 80% of our consolidated debt is at the subsidiary or project level and is non-recourse to the parent. We typically pre-hedge future project debt issuance for the full tenor when we sign a PPA, insulating our expected returns from future rate movements.
The amortizing structure of our project debt, rather than bullet maturities, allows a project to support higher leverage. As we grow, our long-term debt balances will increase proportionally to the underlying cash flow of our businesses, enabling us to maintain steady leverage ratios and investment-grade credit metrics. At the end of the third quarter, we had approximately $6 billion of interest rate hedges outstanding at an average rate of 2.9%.
Looking at the impact of a 100 basis point shift in interest rates on our future issuances, refinancings and U.S. floating rate debt, we have under $0.01 of EPS exposure from interest rates in 2024 and $0.03 to $0.04 of exposure in 2025. Unhedged floating rate debt is primarily located outside the U.S., where inflation indexation in our PPAs provides a natural hedge against rising rates.
In summary, as we approach year end, we've made excellent progress on achieving our financial and strategic objectives for 2023. Our balance sheet is strong and we are flexing to adapt to current financial market conditions. With line of sight to our future growth funding needs, we will create value from our excellent market position, while continuing to prioritize, maintaining investment-grade credit metrics and achieving our financial commitments.
With that, I'll turn the call ack over to Andres.
