Ladies and gentlemen, welcome to the AES Corporation Third Quarter 2022 Financial Review Call. My name is Glenn, and I will be coordinating your call today. [Operator Instructions] 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 Andres Gluski, our President and Chief Executive Officer; Steve Coughlin, our Chief Financial Officer; and other senior members of our management team. With that, I will turn the call over to Andres.

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 to $1.65. We're also reaffirming our 7% to 9% annualized growth target for adjusted EPS and parent cash flow through 2025. Steve Coughlin, our CFO, will discuss our financial results in more detail shortly. Our business model continues to demonstrate its resilience with strong contractual protections and natural hedges that have insulated us well from foreign currency movements, 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 4. At the same time, we have built flexibility into our portfolio, which has allowed us to capture upside in the current environment. For example, in Panama, we've been able to redirect Henry Hub priced LNG to European markets to capitalize on high international gas prices. 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 hydro power and run our gas plant less, which has made it possible to redirect a portion of our contracted LNG creating meaningful upside in our results. Now to Slide 5. We spoke briefly about the U.S. Inflation Reduction Act, or IRA, on our previous call. But since then, it has become even more apparent how it is likely to greatly accelerate the demand for renewables and…

Thank you, Andres, 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 to $1.65. Third quarter adjusted EPS was $0.63 versus $0.50 last year, driven primarily by our LNG business, as Andres discussed. In addition, we also benefited from an increased ownership in AES Andes as well as higher margins in Brazil. These positive contributions were partially offset by onetime charges at our U.S. utilities in Argentina businesses. Relative to last year, we also had higher losses from our AES 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 nonrecurring 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 index for hedging. Turning to Slide 11. Adjusted pretax 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…

Thank you, Steve. In summary, we now expect our 2022 adjusted EPS to come in at or near the high end of our guidance range of $1.55 to $1.65, and we are reaffirming our 7% to 9% annualized growth target for adjusted EPS and parent 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 gigawatts, including 51 gigawatts in the U.S. and year-to-date, we have signed 3.2 gigawatts of renewables and energy storage under long-term contracts, and we are in late-stage discussions on several more that we expect will bring us within our full year range of 4.5 to 5.5 gigawatts. With that, I would like to open the call for questions.

[Operator Instructions] We have our first question comes from Insoo Kim from Goldman Sachs. Insoo, your line is open.

First question on the revised outlooks that you gave on U.S. pipeline and also just the backlog that you've updated. Given the IRA has passed, especially while we await the 4Q earnings for more guidance, do you -- at this point, do you have a pretty good sense of how upside to that backlog you see, whether it's through '25, '26 and whether that still gives you a good confidence that there is potential to achieve the upper end of that 7% to 9% EPS growth range?

Yes. Insoo, what I'd say is that we're seeing very strong demand, especially in the U.S. market, especially among C&I customers. So really, I don't think it's an issue of demand. It's really an issue of having permitted projects that can meet our clients' demand in the different markets. So regarding the -- our growth rates, we feel very confident about achieving our 7% to 9%. The IRA is obviously a positive to this number. But we expect some adjustments in the market. So it's not only a question of growth. It's really a question of the profitability of those projects. So 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. So I think that's where people who have gotten ahead of this and really have a mature pipeline are going to be in a substantial benefit. Obviously, the IRA also has a $3 a kilogram incentive for green hydrogen, and this is also going to be a plus for the growth of renewables and the growth of AES. So all these things I see is positive. But right now, we're saying 7% to 9%. But we're seeing -- as the market becomes more favorable, it's not just a matter of how much you can grow, it's really making sure that you grow profitably.

And we'll await more guidance there. Second question for me on LNG. It seems like a pretty sizable benefit at the MCAC segment. I think on an EPS basis, $0.25 or so of benefit year-over-year, which from our perspective, was much greater than expected. Could you just give more details on, if you can, on how much of that -- how much volume was driving that? And while acknowledging the hydro conditions will dominate whether you could see any level of benefit going forward next year and beyond. Assuming normal hydro next year and the current prices and global gas, could that still provide some level of tailwind as we think about '23?

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. And I think what's very important is not only having the LNG, but having the capacity to ship that mostly to Europe and really get into the port because as you know, there are really bottlenecks in the port. So I think this really talks about the flexibility that we built in, the strategic relationships we have with LNG suppliers that allow us to take advantage of their position in these markets to move those shipments. So going forward, I mean, basically, when there's a La Nina in Panama hydrology, there's more water available. So we've -- so -- there's also a factor that where -- what's the level of the reservoirs. So it's -- right now, I'd say that we expect the conditions to continue. We -- it's really a matter of the spread between Henry Hub plus the shipping and what international prices are. So as Steve mentioned, we expect -- we have some additional contracts coming in, in the 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? So those are the conditions given. So this is mostly an upside, let's say, going forward. We're not counting on it. And regarding the tonnage, we would expect somewhat less next year than we have shipped this year in terms of the actual volume. We can get back to you on the actual volume that was shipped.

We have our next question. This comes from Richard Sunderland from JPMorgan. Richard, your line is open.

I mean one of these broader play in inflation, 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 Analyst Day plan?

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 we -- given our international exposure, we're very accustomed to dealing with inflation and having to control costs in an inflationary environment. So what we've seen so far, as we've mentioned on prior calls is that the cost of building renewables has gone up over the past year. There's no question there were panel prices have gone up in the U.S., EPC costs have gone up. However, we're seeing in this strong market, we're -- this is basically able to pass through, we're able to maintain our margins on new projects. Going forward, I mean, we've had cost saving programs in place for the past 12 years. On a run rate basis, we've got about $500 million of cost. So again, we have the infrastructure in place. It's part of our culture, continual improvement. So we're not particularly concerned on that side. On the pricing side, about 80% of our contracts and businesses have some form of inflation indexation. So we're very well protected on that side as well. So we have the experience. We have the methodology. It's part of our mindset. So we don't see that as a particular concern.

This is Steve. I would just add also, if you look at the escalation of fuel prices on the thermal side, they've gone tripled in some cases. So renewables, although the costs have increased are relatively more competitive than they were before this current inflationary cycle. And then in addition, we have the benefit with renewables, we're largely firming up prices right around the time that we're also signing up our PPA. So you have a good sense of what your levelized cost is over the life of the project and very little variable costs, of course. So we are able to build in this into the market. And then, of course, the IRA bill in the U.S., certainly with the expansion and extension and re-upping of credits, does serve to offset some of these additional inflationary increases in the renewables capital cost. So that's as an opposing effect, helping bring prices somewhat back down off of what they otherwise would have been.

No, that certainly makes sense. And I appreciate the color there. And maybe Steve, picking up that last point around the IRA. Curious on 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?

Yes. 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 a opportunity for high installation is 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. So it does add some optionality, flexibility. And so for us, it's good to have in our toolkit. And then down the road, we'll look to see as AES moves forward in time, we may be able to utilize some of these tax credits for our own account, but I wouldn't expect that until several years down the road.

Our next question comes from Angie Storozynski from Seaport. Angie, your line is open.

So first, just one clarification. So Stephen, you talked about the ITC contributions from the new build this year and the carryforward 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. No, Angie. No change. But what we wanted to do was, a, as the IRA has been put in place and now we see the tax credits having a much longer life cycle extension well into the next decade. We wanted people to understand this is part of the economics of renewables of the whole 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. The -- certainly, they will -- this will escalate over time. So we should expect that as we grow the business as anyone would grow the business, they'll have more share of credits. The other thing we wanted to point out is just if we look at the U.S. and utilities business unit, the fourth quarter, 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. And so 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. So it was really those 2 reasons I wanted to point out the IRA and then the seasonality of the tax credit recognition in the U.S. and utilities SBU.

And secondly and probably most importantly, so I remember a couple of quarters back, you guys had the seemingly lost growth targets. 4.5 to 5.5 gigs 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. And even more importantly, it seems like you guys have more than 5 gigs of capacity under construction. And so I'm just hoping to get some reassurance how you're coping with that level of activity? And if you -- if there is a possibility to increase it and how, again, like logistically, can you handle that many projects?

Yes. Thank you, Angie. That's a great question. Yes, we have a significant step-up in our construction between this year and next. And you correctly point out, we have more than 5 gigawatts currently under construction. I think we've handled it very well. We have doubled the amount of people that we have working on construction in renewables in the U.S. We have been working with strategic EPC contractors, meaning that we can give them not sort of just project by project, but really a line of sight, how much work they're going to get over the next 2 years, so they're able to staff up. So we've done very well there. I think we've done a very good job of managing the solar panel supply, which has been very turbulent. 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 also the inverter. So I feel very good about that. We have done a lot of outside the renewables area, a lot of big projects. So I think we have experience there. So I feel very comfortable. We will have a roughly doubling of what we commissioned this year to next year. And again, we've been worried about the supply chain. We started more than 2 years ago. So we, I think, are in as good shape as anybody in handling it. And I think the results speak for themselves. We haven't had to delay any projects because of a lack of supplies or a lack of construction workers or anything of the sort. Regarding sort of the upside, as I said, the IRA does provide upside. It has good incentives for renewables. They will be, I think, increasing demand certainly from corporations. And I think what's very important is we're not just looking at increasing our growth rate but making sure that we're growing profitably and growing well.

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

What I'd say, we're going to continue to churn capital. As our projects mature, it's a way of increasing our return on invested capital. As you know, once we finish renewable projects, we sell down to people who want a fully contracted U.S. dollar renewable. So our plan through 2025 that we've laid out is fully financed. If we were going to know I would say, going forward, if there are additional very profitable opportunities, we'll have to look at that, but we have a lot of options. We have a lot of options. We're investment grade. And as we have done in the past, we can turn more quickly some of our assets in terms of our sell-downs.

Our next question comes from Nick Campanella from Credit Suisse. Nick, your line is now open.

This [Fae] is for Nick today. I just want to 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. But again, recognizing Ohio is pretty -- has a pretty minimal impact to the consolidated EPS. Just any color would be appreciated.

Yes. No, happy to. This is Steve. We are being very strategic. And I'm sure you saw that we did file for an electric security plan for, so our ESP 4 very recently. So 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. . But look, the issue at hand is whether rates need to be frozen while we currently have this rate stability charge that's been in place for about 20 years. We think there is broad support for the new rates that are -- have been asked for in the plan and the staff came out and supported those. So 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 Andres said, we'd expect that to be resolved by middle to second half of next year on the ESP 4. And our focus is really on growing the utility. As Andres said, this is a utility where we have the lowest rates by far across all customer classes. We want to get to a place. There's a significant opportunity for upgrades and investments, and we want to have a healthy structure from which to continue investing in a healthy balance sheet for the utility. So the ESP 4 was filed to give that path there. We still believe in the case that we filed and that the stability charge can still be in place. But in the case that the commission decides they want to hold rates until that stability charge is retired, then we'll have this 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. So that was our goal and our thinking here. And as I said, we still expect a decision this year on the case.

Our next question comes from Julien Dumoulin-Smith. Julien, your line is open.

Congratulations on the continued success here. If I can, just to pivot back to where we started with some of this conversation. I want to try to get back at some of the tax credit dynamics and how that plays itself out over the next few years. So clearly, you all have outperformed on continued backlog generation and bring into construction. Can we talk about some of the cadence of in-service here and how that translates back to credit? I appreciate the detail on '22 about what that means on an income basis. But can you talk a little bit relative to the earlier guidance, what was embedded as far as earnings expectations? And then try to transpose that against where we are against the current cadence of when is that construction progress going to reach in-service? When is that backlog effectively fully in service, right, i.e., over the next 2 or 3 years? I just try to reconcile prior versus today on the updated backlog as well as considering the pivot to a solar PTC from an ITC, which also may meet be something of an offset to the positives described here?

Okay. Julien, good to talk to you, there are a lot of questions.

Sorry, I know a lot take it as you will.

So let me -- let me try to frame it we'll answer between Steve and myself. So I guess the first question is, I think regarding the new IRA, it does give us flexibility to choose in terms of ITC, PTC on some projects. This will start in 2023, which is somewhat of a -- I'd say it's a slight upside there. Regarding sort of the cadence, these do tend to be somewhat backloaded in the end of the year. So that Steve had mentioned, this is just because of the financing structure. So it tends to be Q3, Q4. And I think that will continue to be so going forward. In terms of our backlog, yes, I mean we have -- as we mentioned, it's 11.2 gigawatts, and the vast majority of that is going to be commissioned before end of 2025. So there are a few projects that go beyond that. So as projects get commissioned, new ones come into the backlog. I think what's important, again, if you think of this in terms of our installed capacity, it's -- the backlog is one-thirds of our current installed capacity. So we feel good about our growth rates. We feel good about the -- who we're contracting with. So our growth in the U.S., of course, is investment-grade off-takers, utilities and -- but mostly corporate clients and internationally as well. What we're signing overseas is mainly in Chile with people like Codelco, big copper exporter, others that -- it's -- we feel it's just as good a risk as if they were in the U.S. So I think I'll pass it off to Steve to get a little bit more in the weeds of the tax itself, some of your other questions.

And 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 gig, if we can. Just -- again, I'm just trying to reconcile the older expectations versus newer and try to understand how many gigs per year you can kind of credibly expect?

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

Yes. And Julien, so I would say, also taking the number -- Andres said 4 gigawatts next year, that will continue to grow. This is our main growth business for us. It's 5 gigawatts, 6 gigawatts. We'll give more color on that next year as we update our guidance. And then I would look at that and say that roughly, on average, say, two-thirds of that is in the U.S. And then a larger share of that is solar and solar plus storage of that that's in the U.S. So say, roughly 75% today is solar, solar plus storage of the U.S. backlog. And so that's ITC qualified. We can't 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 installation is high as, say, the Southwest of the U.S. The credits will continue to increase significantly. I think next year is on is going to be a big jump year-over-year because the level of commissioning is going way up next year. And it is heavily weighted towards the fourth quarter of the year. But as we continue to grow this business, the timing will become less of an issue as we get to more of a consistent state of additions year-over-year. But the credits are an important part of how it's monetized and wanted to show that given the IRA and also given how the U.S. Utilities SBU seasonality is becoming more shaped by the renewables, the clean energy business in the U.S. but it's important for everyone to understand what that looks like for modeling purposes.

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

I wanted to follow up on some of the ITC clarifications. So as you're looking for the U.S. portion, what adders are you assuming that you'll be able to realize as you move forward with these projects? And specifically, are you seeing any low mineral income adders anticipated for your solar projects and both in your current portfolio? And then on a go-forward basis, are you looking to evolve what types of projects you're pursuing in light of the details of the IRA?

Yes. So you're talking about like the adders for the energy communities and domestic content, things like that. Is that right?

Correct.

So yes, I think roughly one-third of our U.S. pipeline today is in these energy communities that qualify for the 10% adder. I think as we move forward, then we look at domestic content, we are a leader. We've launched our U.S. solar buyer consortium. We expect first supplies from that in 2024. So I would expect us to be having a share. I don't have a specific percentage right now, but a material share of our projects meeting the domestic content production in 2024. And then we are fully ready to be qualified for the wage and apprenticeship requirements and training already. So that's a nonissue. We're already have that 30% level with our project. And then I would expect at least one-third to be in that 40% level and some perhaps even higher up to 50% with the domestic content as that starts to become part of our panel supply in '24 and beyond.

And then 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 do to determine how you'll structure for future deals?

I mean, I would say, look, I think the -- for us, as a leader in the market, we have a lot of long-term deep relationships on the tax equity side. So for us, and we have a lot of capabilities of very -- the top talent in the industry on structuring these projects on the commercial side, on the tax side so that we're optimizing returns. So for us, as I said before, transferability is an option, I'm not convinced, in fact, that it actually optimizes returns because there is the tax depreciation component, which is also an important component of value of the accelerated depreciation. So -- and 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. So there's an important -- it's important that we pay attention to returns. And for us, transferability, although it brings more liquidity to the market. AES as a leader already has I would say, the liquidity we need to monetize the tax attributes. So we'll look at it, but there's nothing -- I wouldn't say for us, it's a significant game changer, given our scale existing capabilities.

We have our last question comes from Gregg Orrill from UBS. Gregg, your line is open.

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

Yes. Gregg, I would say, look, -- what we said is that there are -- there is a continuation of this into the fourth quarter, a bit smaller. There's a possibility for next year. And that will depend on the spread between, again, Henry Hub plus prices that we get on our contracts and prices in Europe. So that's really the importance. I think in terms of the hydrology, we need continued good hydrology in Panama, and reservoirs are quite high. So we're going in, in a favorable condition. So it really is what will be the spreads that justify this making that shipment. And I would say also, we would expect less volume in any case next year than this year. So it would be an upside. We're not counting on a very large amount of LNG. So conditions, it looks like it's a possibility, but we're not counting on it. And those are the drivers. And so I think you can see how those drivers are moving and see there's a possibility for this.

Yes. And I would say just to add, for the fourth quarter of this year, we've already -- for whatever we would do with LNG has done for this year. So we've already -- we have a much smaller upside in the fourth quarter already built into our commentary on meeting the -- at or near the top end of our guidance range. So that any additional volumes would be -- we'd be talking about next year and whether the market conditions, as Andres said, are conducive to that, we think it's very possible, and it would be more upside. But 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 top of earnings guidance. Does that have an impact at all on how you think about giving '23 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'd be pointing back to the different base. I mean we've said 7 to 9 growth and through 2025, and that's what we're committed to achieving. So it's not changing our base year for our growth rate.

Yes. And that was my -- yes. It's a very good year. I think there's more upside, as Andres said. But I wouldn't say it's such a new baseline because this isn't necessarily a recurring at this level thing.

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.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.