The AES Corporation (AES) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fourth Quarter and Full-Year 2016 Financial Review Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Ahmed Pasha, Vice President, Investor Relations. Please go ahead.

Thank you, Daniel. Good morning and welcome to AES’s fourth quarter and full-year 2016 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 during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Tom O’Flynn, our Chief Financial Officer; and other senior members of our management team. With that, I will now turn the call over to Andrés. Andrés? Andrés Gluski: Good morning, everyone, and thank you for joining our fourth quarter and full-year 2016 financial review call. This morning we will discuss our results and our financial outlook. We will update you on key trends we’re seeing across our markets and the progress we’re making on our construction program and long-term strategy, including our recent announcement that we have agreed to acquire sPower, the largest independent solar developer in the United States. The key takeaway for today’s call include, we delivered on our 2016 financial guidance; we’re seeing positive developments across our businesses in markets; we are on track to achieve our run rate of $350 million in cost savings and revenue enhancements through 2018; notably, we’re expanding this program by targeting an additional $25 million of annual savings in 2019 ramping up to a $50 million incremental run rate in 2020. Despite some challenges we are facing on a 3.4 gigawatt construction program, we expect to complete these projects through 2019. We exited non-core assets to bring $500 million in proceeds to AES that we will reinvest to continue to deliver sustainable long-term growth to our shareholders. We signed an agreement to acquire Spower’s renewable portfolio and growth platform. Spower has an exceptional development team and pipeline, which will contribute high-quality, long-term, and growing U.S. dollar-denominated cash flows. We’re initiating 2017 guidance for adjusted EPS of $1 to $1.10. Finally, we’re introducing our expectation of delivering 8% to 10% average annual growth in free cash flow, adjusted EPS and our dividend through 2020. I will now discuss some of these themes in more detail. Starting with key trends and developments we are seeing across our markets on Slide 4. In general, we are expecting stronger growth in GDP and electricity demand in most of our markets. In Brazil, demand is expected to grow 1% in 2017 versus a decline of 3% in 2016. In Chile, demand is expected to grow 2% to 3% versus 1% in 2016. Turning to Chile, where the regulator recently introduced new rules for long-term capacity auction. Under these new rules, winning bidders who do not develop the projects they bid will face significant penalties. We’re encouraged by this development as the penalty should minimize speculative bidding and force market participants to bid with prices that include a fair return on capital. Moving on to Argentina, where we own and operate 3.5 gigawatts. We are encouraged by positive steps being taken by the new government. This month, the government has raised electricity tariffs and linked generation tariffs to the U.S. dollar. This effectively eliminates our exposure to the Argentine peso. And the result of improved confidence in Argentina, we recently placed a $300 million seven-year bond at 7.75 utilizing a portion of the debt capacity we have in our Argentine businesses. In 2017, we’ve already received $57 million in dividends from Argentina through February following $20 million in 2016. Now, turning to our construction program beginning on Slide 5. As you know, our construction program is the most significant driver of our cash flow and dividend growth in coming years. In 2016, we commissioned capacity of 3 gigawatts, all of which were completed on time and on budget. We have another 3.4 gigawatts currently under construction, where we’re generally making good progress, although, we are experiencing delays at some of our projects. Our projects under construction represent total capital expenditures of $6.4 billion. However, AES’s equity commitment is limited to $1.1 billion, of this all, but $250 million has already been funded. Roughly 70% of our investments are in the Americans, mainly in the U.S., Chile, and Panama. Turning to Slide 6. As you may recall from prior calls, Alto Maipo, an expansion of our existing [indiscernible] power plant in Chile is by far our most complex construction project underway. Since our last call, we have made significant progress on a number of fronts. Specifically, the project is about 49% complete versus 40% at the time of our November call. This progress is in line with our expectations and we remain on track to complete construction in 2019. Based on further validation over the last three months by independent engineers and our discussion with EPC contractors, we continue to expect cost overruns to be in the 10% to 20% range we discussed on our last call. To fund these overruns and any additional future needs, we have signed the term sheet for additional financing commitments for up to 22% of the project cost. We also brought in EPC contractor as a minority partner. These overruns would be funded by a combination of project lenders, AES Gener, Minera los Pelambres and EPC Contractor. Although any cost overruns are disappointing these are within the range we discussed on our last call. We continue to see long-term value in the project, as expansion will further diversify AES Gener’s generation mix and offers locational advantages and a long expected life. Turning to our other projects under construction on Slide 7. As you may remember, we expected three large projects to come on line in 2017. Two of the projects are the closing of the cycle at DPP in the Dominican Republic and the IPL wastewater upgrades with a combined total project cost of $500 million. Both projects are expected to be completed on time and on budget. The third project, the 671 megawatt Eagle Valley CCGT and IPL is behind schedule. Due to productivity issues on the part of our contractor. We now expect the project to come online in early 2018 versus our original expectation for the first-half of 2017. This delay is obviously disappointing, but manageable, since we do not expect a material impact on our forecasts. Having said that, our EPC contractor is taking tangible steps to mitigate this delay and finish the project late this year. We have another three projects totaling two gigawatts that are expected to come online in 2018 and 2019. In summary, we remain confident that our 3.4 gigawatts of projects under construction will come online consistent with our revised expectations and continue to be the key driver of our growth through 2020, which Tom will discuss shortly. Now, turning to our progress on our long-term strategy to deliver attractive free cash flow growth, while at the same time strengthening our credit beginning on Slide 8. As we’ve discussed previously, we are primarily focusing our growth investments on natural gas and renewable projects with long-term U.S. dollar-denominated contracts. We intend to reduce the carbon intensity of our portfolio while ensuring solid growth in cash flow and earnings. These types of projects will improve the quality of our cash flow and help us achieve our credit objectives. Renewables represent an attractive business opportunity in light of several trends such as the dramatic drop in the cost of renewables that have made their energy production competitive. Today, renewables are the dominant type of new generation build across almost all of our markets. And long-term PPAs are available for renewables, providing predictable stable cash flows. The intermittent nature of renewables does pose challenges for the grid. We believe AES’s ability to leverage renewables by integrating them with conventional energy and energy storage can meet these challenges and give us a strong competitive advantage. Turning to Slide 9, to that end, late last week we announced that we have agreed to acquire sPower, the largest independent solar developer in the United States. sPower brings 1.3 gigawatts of installed capacity with an average remaining contract life of more than 20 years with very creditworthy off-takers and a first-class management and development team with a pipeline of more than 10 gigawatts. This acquisition is consistent with our strategy of [indiscernible] our portfolio and increasing the mix of our revenues towards long-term contracted U.S. denominated businesses. This acquisition will provide AES with the scale to secure the best prices when purchasing photovoltaic panels and inverters for our other solar projects around the world. It will also provide us with a proven very successful and disciplined development process that can be used on our renewable projects everywhere. Our partner on this acquisition is AIMCo, a $95 billion Canadian pension fund with experience in making direct investments in global infrastructure. This strategic partnership will help fund sPower’s attractive growth platform going forward. We intend to fund our $382 million share of the investment largely from excess discretionary cash that we received from the sale of AES Sul in late 2016. We expect high single-digit IRRs from the existing assets, while the development pipeline has the opportunity to earn low double-digit returns that will help drive future growth in cash flow. The sPower transaction, which is likely to close by the third quarter of 2017, is expected to be accretive to earnings. Although the EPS contribution may be lumpy from year-to-year due to the nature of the tax equity financing that sPower has utilized, we expect on average a high single-digit ROE, which is better than what we could earn if we use the cash to repurchase a mix of debt and equity. The stable cash contributions from this business and its long-term contract model also help make this a credit enhancing transaction. Now turning to Slide 10, in January Tietê in Brazil agreed to acquire 386 megawatts of wind from Renova, which has an average remaining contract life of 18 years. This acquisition is an important strategic milestone for Tietê, as this business will not only diversify its generation mix from 100% hydro, but also contribute stable long-term cash flows. Furthermore, this acquisition which is a 100% levered using Tietê’s existing R$1.5 billion debt capacity. This acquisition once again demonstrates our ability to utilize local debt capacity in order to grow our business and improve returns. Moving onto the Dominican Republic on Slide 11, leveraging our success with ENGIE in Panama, our LNG supplier for our Colón project, in December we signed a partnership agreement with ENGIE to market our excess LNG storage and regasification capacity at our Andres terminal in the Dominican Republic. ENGIE will be able to offer competitive and flexible natural gas products, tailored to meet the needs of downstream customers and dual fuel oil fired generators in the Caribbean. As excess LNG capacity at our terminal gets utilized to meet the needs of these new customers, we will receive enhanced revenue. We see significant potential for this partnership with ENGIE to maximize the value of our existing LNG infrastructure. Now turning to Slide 12 and our progress on our cost savings and revenue enhancement initiative, in 2016 we achieved our incremental $50 million reduction target. We’re on track to reach $350 million in annual savings by 2018. We are now announcing that we’re targeting an additional $25 billion in annual savings in 2019, stepping up to an additional $50 million in 2020 for a total annual run rate of $400 million from our base year of 2011. Turning to Slide 13. Our asset sales sales program has raised $4 billion in cash to the parent since September 2011. We have exited 11 markets, including the riskiest countries in our portfolio. We will continue to recycle capital and we expect to raise more than $500 million in additional equity proceeds this year. Although we can’t be specific on the businesses that we are targeting for sale, our goal is to continue to optimize our portfolio and improve our risk adjusted return. Last but not least turning to Slide 14, delevering has been and will continue to be an important part of our strategy. Since 2011, we have reduced our Parent debt by 28% and we expect to achieve investment price statistics by 2020. This will be largely driven by robust growth in our free cash flow and modest debt prepayments. With that, I’ll turn the call over to Tom. Thomas O’Flynn: Thanks, Andrés, and good morning. Today, I’ll review our 2016 results and capital allocation. I’ll also provide an update on some key business developments and conclude by addressing our guidance for 2017 and expectations through 2020. Overall, as Andrés mentioned, we finished 2016 at a strong note, meaning, guidance for all metrics and setting a solid foundation for our growth to 2020. Turning to adjusted EPS on Slide 16, full-year results were $0.98, just below the midpoint of our guidance range. Most of the $0.27 decline from 2015 was anticipated, including the impact of foreign currency devaluation, the expiration of Tietê’s PPA, and the absence of some gains that have benefited prior year’s results. Additionally, our tax rate was lower than normal in part due to restructuring completed in the fourth quarter as expected as well as some other tax items that were not anticipated that went in our favor. This was largely offset by an unanticipated $0.06 one-time reserve taken against certain reimbursements in MCAC in connection with a legal matter. Now to Slide 17 in our proportional free cash flow and adjusted PTC for the year. We generated $1.4 billion of proportional free cash flow, which was above the top end of our guidance range and represents an increase of $176 million from 2015. Now results reflect a receipt of overdue receivables at Maritza in Bulgaria, as well as higher collections at our distribution businesses in Brazil. This offset lower margins and a large receipt of overdue receivables in DR in 2015. We also earned $842 million in adjusted PTC during the year, a decrease of $335 million, largely driven by lower margins. Now, I will cover our SBUs in more detail over the next six slides beginning on 18. In the U.S., our results reflect lower margins, including the impact of lower wholesale prices and lower contributions from regulated customers at DPL, which were partially offset by higher contributions at IPL, including the benefits from 2016 rate case and environmental upgrades that came online for year-end. Higher proportional free cash flow also reflects lower working capital requirements, including lower fuel costs associated with the conversion from coal to gas generation at IPL. At Andes, our results reflect lower margins primarily due to lower spot energy price in Colombia and the devaluation of the Argentine and Colombian pesos. Adjusted PTC also decreased due to the restructuring of Guacolda in Chile that generated additional equity and earnings in 2015. Proportional free cash flow also reflects higher collections in Argentina and Colombia. I’d also like to note, as Andrés mentioned, the new tariff in Argentina is linked prices to the U.S. dollar, effectively eliminating our exposure to the Argentine peso. Our earnings in U.S. dollar equivalent has now increased to 80%, up from 74% since our last call. As you can see on appendix Slide 56, in Brazil, our results reflect lower margins, namely due to the expiration of Tietê’s above market PPA at the end of 2015. As part of our rolling hedging strategy we’ve had in place since 2014, Tietê is about 80% hedged for the next two years. Proportional free cash flow increased primarily due to the recovery of high purchase power cost from prior droughts at our distribution businesses, Eletropaulo and Sul. Last year we discussed a strategic shift away from the distribution businesses in Brazil, as evidenced by the sale of Sul. As part of this shift we’re applying to list on the Novo Mercado where only common shares trade. Upon listing, our voting rights, currently above 50%, will become equal to our economic interest of 17% and we would de-consolidate upon losing this controlling interest. For guidance purposes, we’ve assumed de-consolidation for the full year 2007. In Mexico, Central America and the Caribbean, our results reflect lower margins primarily due to lower rolling 12 month availability in Mexico and Puerto Rico which was impacted by a fourth quarter outage in 2015. Adjusted PTC also reflects the reserve I mentioned earlier. Proportional free cash flow decreased primarily due to the large settlement of receivables in 2015 in the DR. In Europe our results reflect lower margins due to the contracted capacity price reduction following the collection of outstanding receivables at Maritza in Bulgaria, as well as a 35% devaluation at the Kazakhstan Tenge. Proportional free cash flow benefitted primarily from the collection at Maritza. In the roughly nine months since that settlement payments have been current. Finally in Asia, our results reflect steady margins and lower working capital requirements following commencement of operations at Mong Duong in Vietnam in 2015. Before turning to capital allocation, I want to provide updates on a couple of other developments beginning with our filing at DP&L in Ohio on Slide 24. As you may know, last month we reached a settlement agreement with certain interveners in our ESP case. The agreement includes riders totaling $125 million per year over five years, earmarked for debt reduction in investment in distribution infrastructure. The goal is to achieve sustainable investment grade credit metrics at both DP&L and DPL after the expiration of the ESP. As part of the agreement we plan to either sell or shut down 2.1 gigawatts of merchant coal fired generation. It’s worth noting that while reaching a settlement is a positive development not all parties have signed on in the agreement, including Commission staff. Hearings are now set for March 8th and we expect to rule into the effect at the beginning in late second quarter or early third quarter that will help reduce leverage and support the progression toward becoming a stable and growing T&D business. Next on Slide 25, I’d like to briefly discuss our views on potential tax reform. At this time it’s early in the process and unclear which direction final legislation may take. However, I note that under any scenario we do not expect any material cash taxes to be paid for the foreseeable future due to our large NOL position. We would expect to benefit of course from a lower corporate tax rate, as well as from a potential territorial regime that will be supportive of tax efficient repatriation of cash. Certainly the item that could have the most negative impact will be any limitation or elimination of interest deductibility, given the capital-intensive nature of our business and the important role that debt financing plays. Overall, the impact will be slightly positive under the administration’s plan to slightly negative under scenarios limiting interest deductibility such as the house blueprint. If the reform is enacted, it would likely be a phase in period that allows to mitigate any negative impacts that changes the capital structure and other levers. Now to Slide 26 and the progress we’re making to improve our credit profile. During 2016 we prepaid $300 million in parent debt and refinanced down the $500 million of floating rate debt with 10-year notes at attractive fixed rates. Since 2011 we have reduced parent debt by $1.8 billion or 28% and reduced interest cost by 125 basis points, resulting in an annualized interest savings of $180 million. As you can see on the top of the slide, our nearest maturity at the parent is $240 million in 2019. Turning to the bottom of the slide, these proactive steps have helped us reduce our parent leverage ratio from almost 6.5 times to 5 times debt to parent free cash flow plus interest. We expect our credit to continue to improve, largely driven by a strong growth in parent free cash flow, as well as a modest amount of annual debt reduction. As a result, we expect to attain investment grade credit metrics by 2020. We continue to believe this will not only help to reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation. Turning now to our 2016 parent capital allocation on Slide 27, which is materially in line with prior disclosures. Sources on the left-hand side reflect $1.2 billion of total available discretionary cash, which includes $579 million of parent free cash flow, just above the midpoint of our expected range. Sources also include proceeds from asset sales, primarily AES Sul. As expected, this month the parents received $300 million, the remaining proceeds from the sale of Sul after meeting the required notice period for distributions. Now to uses on the right-hand side of the slide, consistent with our capital allocation plan, we’ve allocated $400 million for investment in our subsidiaries, a majority of which is for new projects driving our future growth. We prepaid $300 million of our near-term maturities and with 10% growth in our dividend and completed share purchases, we returned about a third of our cash to shareholders last year. Now to guidance on Slide 28, beginning in the first quarter of 2017, we will no longer be giving guidance on proportional free cash flow and instead we’ll report consolidated free cash flow. Our use of proportional free cash flow is intended to provide investors with an understanding of the proportional free cash flow attributable to AES after the impact of non-controlling interests. However, the use of proportional free cash flow is not consistent with the recent SEC guidance in a broader related comment process, so we’ll no longer be disclosing it. Having said that, as a supplemental disclosure in our investor presentations, we provide information about the proportional free cash flow attributable to minority interest. Today we’re initiating guidance for 2017 and providing expected average annual growth rates through 2020 of 8% to 10% for all key metrics. Key underlying assumptions include FX and commodity forward curves as of year-end 2016; tax rate for 2017 in the range of 31% to 33%, in the low 30s for 2020; at least $500 million in assets sale proceeds in 2017 with $0.03 to $0.04 dilution from the timing lag for the capital that we deployed; the deconsolidation of Eletropaulo in 2017, as I mentioned earlier, and the ease for discretionary cash in line with our capital allocation framework, which I’ll discuss in a moment. Now to Slide 29, for 2017, our consolidated free cash flow guidance is $1.4 billion to $2 billion, growing at 10% through 2020. We expect free cash flow attributable to non-controlling interests to be 30% to 40% of consolidated free cash flow through 2020. Parent free cash flow on Slide 30 is expected to be $575 million to $675 million in 2017, a 9% increase over 2016, consistent with our 8% to 10% range. On Slide 31, our adjusted EPS guidance for 2017 is $1 to $1.10, growing at 8% to 10% from 2016 through 2020. For 2017 this represents 5% growth of the midpoint of our 2016 guidance range. As we said previously, we expected growth to be stronger in 2018 than in 2017. As I mentioned, 2017 includes $0.03 to $0.04 dilution from the asset sales due to the timing lag into proceeds that we deployed. The main drivers of growth for our cost savings plan, improved availability at our plants in MCAC, and contributions from new businesses, including closing the cycle at DPP and the acquisition of sPower. Our tax rate in 2016 was unusually low and the negative impacted a more normalized rate in 2017, largely offset by some discrete items that benefit us year-over-year. In terms of our long-term growth, we’re expecting 8% to 10% from 2016 to 2020, primary drivers of this growth are contributions from projects under construction coming online through 2019, the benefit from our ongoing cost savings and revenue enhancement initiative and capital allocation including investment in new businesses like sPower. Regarding the profile of growth over the period, we see stronger growth in 2018 and expect to be at the low-end of our prior range of 12% to 16%. In 2018 we’ll bring online 70% of our current projects under construction. In addition, we expect to benefit by allocating our discretionary cash into both debt reduction at the parent and investment in new growth projects. We also see operating improvement at some of our existing businesses. Now I’ll discuss our 2017 parent capital allocation on Slide 32. Beginning on the left, sources reflect $1.5 billion of total available discretionary cash. Parent free cash flow, the foundation for our dividend growth and value creation is expected to be $575 million to $675 million, up 9%. Sources also reflect asset sales. And as I mentioned, we expect to raise at least $500 million this year in addition to the almost $300 million received in 2017 through Sul. Now to uses on the right-hand side. Including the dividend increase we announced in December, we’ll be returning almost $320 million to shareholders this year. We expect to pay down at least $200 million to $300 million of debt, a portion of which reflects our continuing efforts to improve our credit profile and achieve investment grade metrics by 2020. The remaining portion will be to maintain credit neutrality associated with planned asset sales. We’ve allocated $382 million for acquisition of sPower. This represents our share of the $853 million purchase price plus $90 million in acquisition debt funding provided by our partner. We also plan to invest $250 million in our subsidiaries, the majority of which is for new projects under construction and in late-stage development. After considering these investments in our subsidiaries, debt prepayment and our current dividend, we’re left with almost $300 million of discretionary cash. Before turning back to Andrés, I’d like to discuss how we plan to allocate the discretionary cash we’re generating through 2020. On Slide 33, you can see we expect to have $3.7 billion of discretionary cash, primarily from growth in parent free cash flow. After current shareholder dividends, 2017 planned parent debt reduction, as well as the investments in projects under construction and the sPower acquisition, we will have $1.5 billion available for other discretionary uses. Our guidance assumes targeted 8% to 10% annual dividend growth consistent with parent free cash flow, modest parent de-levering to continue our credit improvement and support our goal of reaching investment grade credit metrics by 2020. And lastly, investments in attractive gas infrastructure projects such as Southland, as well as renewable growth opportunities, including harvesting the sPower growth portfolio, where we own attractive risk-adjusted returns with high quality long-term U.S. dollar- denominated contracts. With that, I’ll now pass it back to Andrés. Andrés Gluski: Thanks Tom. To summarize today’s call, we ended 2016 on a high note by achieving or exceeding our guidance. We made further strides on our strategic goals by making progress on our construction program, which is the biggest driver of our near-term growth, extracting additional cost savings and synergies from our existing platform, rebalancing our business mix by exiting non-core businesses, and redeploying the proceeds in less carbon intensive businesses with long-term U.S. dollar-denominated contracts such as sPower, offering 8% to 10% growth in all key metrics, including free cash flow, earnings and dividends. We’re encouraged by our performance in 2016 and the progress we are making to continue to de-risk the portfolio and deliver compelling returns to our shareholders. Now, we will be happy to take your questions. Daniel?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ali Agha with SunTrust. Please go ahead.

Thank you, good morning. Andrés Gluski: Good morning Ali.

First question Andrés or Tom, just to clarify the dilution that you’re seeing in 2017 in your guidance that $0.03 to $0.04. I’m hearing you right, you are saying that’s a timing issue in terms of when the proceeds are invested, so when – you do end up investing those proceeds, let’s call it in 2018, is the ultimate impact neutral, accretive or still dilutive, how should we think about this? Andrés Gluski: You’re right, it’s $0.03 to $0.04 and it’s really a timing impact. We think that the effect should be probably about neutral, be very minimal. Of course it will ultimately depend exactly on the transaction that we invest, but you know I wouldn’t expect it to be strongly you know certainly dilutive.

Okay. And then also clarifying, Tom, the profile that you were laying out to us, as you mentioned at the mid-point of your 2017 guidance, you are up 5%. If I’m hearing you right, in 2018 you should be up like 12% over 2017, if I heard that right? And then should we assume fairly even growth in 2019, 2020 as part of your profile? Thomas O’Flynn: Yes, that’s fair.

Okay, so those two years have mapped them out consistent? Thomas O’Flynn: Yes and actually the 12%, Ali, was off of midpoint of 2016.

Is that a CAGR or is that a – I’m little confused? Thomas O’Flynn: We had previously said that we thought growth in 2016 to 2018 would be 12% to 18 – 12% to 15% EPS, so we still think that 2018 will be at the low-end of that 12 and 12 range. We obviously want to go our path then to give investors a longer profile.

Right, but that’s a CAGR we are talking, 2016 through 2018 12% CAGR. Thomas O’Flynn: Yes.

Okay, and then third question, just to understand some of the assumptions that you mapped into this longer term outlook. So I’m assuming, do we assume in there that the Ohio settlement is approved as such and kicks in with that $125 million number, is that assumed in there? And what FX moves have you assumed? Is it just looking at the forward curve in the outer years as well or some assumed dilution, what have you assumed there? Thomas O’Flynn: Yes, we assume forward curves as always. And in terms of DPL, it’s in the range – we’re in discussions, so I’d rather not be too specific, but it’s in the ballpark of what we’ve been discussing.

Okay. And then lastly, the points you made about the free cash flow usage of roughly the $1.5 billion that you’re left with. When you assume some investment in there, are you assuming the average ROE of 14% or what kind of return are you assuming on that excess cash? Thomas O’Flynn: Well, some of it’s for defined projects like [indiscernible] so we got a pretty good visibility on that, but we’re really looking across our portfolio based on – as we look at our portfolio, we look at risk and returns consistent with the country, the project etcetera. So it’ll be a range of things from 14%, down to things in the low double-digit consistent with Andrés’s comment on the sPower sales pipeline.

I see, okay, thank you.

Our next question comes from Julien Dumoulin-Smith. Please go ahead.

Hey, good morning. Lots of things to talk about. Andrés Gluski: That’s right. Good morning, Julien.

Perhaps first just a real quick question, a couple easy ones. sPower, what kind of EPS should be assuming once that closes on annualized basis. Is it simply taking a high single digit ROE from the equity invested or because of the ITC [indiscernible] something lower than that in terms of the ongoing ROE? Thomas O’Flynn: Hey Julien, it’s Tom. It’s only a few cents a year, as Andrés said, it’s lumpy, so – but generally it’s a few cents a year. If you look at over longer period, the ROEs would line up with the IRRs. The ROEs in the early years are little better, because the nature of the accounting comes with the tax equity investments, obviously it’s bigger if we – if it’s more size – size of…

Got it, so it’s shooting above that level in the earlier, so is there kind of a – what’s embedded in 2017 guidance for instance, or as you think about 2018 with the sPower deal… Thomas O’Flynn: I think...

…[indiscernible] and also the trajectory thereafter? Thomas O’Flynn: Yes, few cents a year.

Okay, just a couple cents give or take. Thomas O’Flynn: Yeah.

Okay got it. And then moving – what’s the impact of deconsolidating Eletropaulo in EPS, just – I just want to make sure. Andrés Gluski: None. Just on that…

Okay, great. Andrés Gluski: …just on the consolidated free cash flow.

Right, and also what’s reflected in terms of DPL in your 2017 guide and onwards? Andrés Gluski: I think Tom answered that in terms of – you know basically we are not going to discuss it, but it’s within the range that’s public.

Got it. All right, fair enough. And then following on Ali’s last one, the 12% to 16% well in, so that would be roughly above 24, 12% compounded, two years off of 2016’s dollar? Thomas O’Flynn: Yes, that’s right.

Got it. And then what do you think about a normalization of the effective tax rate, 31% to 33%, how do you think about that in 2018 and onwards, just as you – more structurally. Thomas O’Flynn: Well, that’s the rates we’ve always talked about, it’s sort of in the low 30s. Obviously there is talk about tax reform in the U.S. and we’ll of course incorporate any changes there. I mean it’s a very positive thing such as territorial tax, lower rates. On the other hand there is talk about limiting interest deductibility, and so we’ll see how that washes out. So I mean basically we’re looking at – we do not believe most of the proposals in the reasonable range will have a material impact on us.

Got it. And lastly, if you can elaborate just quickly, timing on OPGC 2, just on shifts, what’s the latest status if I can? Andrés Gluski: I mean we are making very good progress on OPGC 2. We had talked about that versus the original expectations, we’re about six months behind, we haven’t lost any more time and basically the project is up and running and we’ve done the related infrastructure projects, whether it be the rail or the new housing. So that project is coming along very nicely.

Excellent. All right, I’ll leave it there. Thank you very much. Andrés Gluski: Thanks, Julien.

[Operator Instructions] Our next question comes from Stephen Byrd with Morgan Stanley. Please go ahead.

Hi, good morning. Andrés Gluski: Good morning Steve.

Thanks for the comprehensive guidance you’re looking out. I wanted to go to your Slide 33 and think about the discretionary cash bid. When you think about the targeted credit metrics that you’re looking to achieve later in the decade, can you give us a bit of color on how we should be thinking about those metrics? Thomas O’Flynn: Hey Stephen, so our ratio is now five, we think we need to get down the four range, obviously it’s dependent upon business mix, but we’ve gone from 6.5 to five and we think something in the four range would be would represent investment grade metrics. So, that will come with some parent debt reduction and also continuing growth in our parent free cash flow. Andrés Gluski: One thing I’d like to add about that also is the qualitative aspect. As we have more dollar-denominated long contracted cash flows, that is qualitative aspect, I think it’s very important. So that’s part of that evolution as well.

All fair points and it looks like you’ll have a fair amount of true discretionary cash even achieving those leverage metrics, so that’s great. And just shifting over to sPower, when we think about how you’re going to finance the growth and those returns, I assume that you laid out are levered returns. Should we be assuming that you’ll avail yourself with a typical project financed debt leverage levels which you can get? And then for the equity check, will it likely be 50-50 with your partners or should we be thinking about that differently? Andrés Gluski: Yes, you’re right. I mean, we’re thinking of 50-50 with our partner with AIMCo. I would say that in terms of you know how to finance them is a continuation of the mixes which you have now and obviously you’ll have some phasing down of the ITC, we still see that there will be appetite from financials for tax equity into these protects. One thing I’d like to stress about the acquisition of sPower is really the effect it will have on our whole portfolio and obviously we can do solar project all over our platform and we have some very attractive opportunity, especially where we can integrate them with our existing conventional plans. We think that is a very interesting product offering that sort of load following energy that can be supplied and taking into account the sort of intermittency of renewables we can offer a better product. So really with the pipeline that should be delivering between 500 and 1 gigawatt of new projects per year, this really is a – we’ll be bale to leverage this across our portfolio whether it be purchasing. And also we think that this team has been extremely successful with a very disciplined development projects, it really has a proven track record. So when we think about sPower, we think about the JV with AIMCo, which will continue to grow on a 50-50 basis. But in addition, there will be synergies, which will be beneficial to other AES projects, but also to the JV, because the more we buy and the – had those economies of scale, the JV will benefit from this as well.

That’s a great color, Andrés. And just on the pipeline what we’re talking about that it’s a huge number in terms of the potential size. Is there anyway for us to get a better sense for the degree of risk or flipped around the degree of certainty that you might have in terms of pursuing this pipeline, is it some very early stage or some quite advanced and you feel quite good about your prospects, how should we think about that, just given how big it is? Andrés Gluski: Well there is over 200 megawatts which already has PPI contracts. There is another over 200 which has, are under PPI negotiations. There are about 2 gigawatts which are platform expansions and those again have lower risk because you already have operating assets in those areas. And then the rest are various degrees of development. I would say that a lot of this rest upon sPower’s reputation and with clients which range not only from utilities, but corporate as well. So we see this is a very robust pipeline in general, and we will see how this develops over the following years, but it is more or less sort of commissioning 500 megawatts at first and it should ramp up to 1 gigawatt. Now I would say also that this is not, this is something we tried, when we acquired main stream power, which is more distributed energy smaller, but it is interesting. The main stream has done about – I believe a little bit less than 60, 70 megawatts in its entire history. Last year under AES, they did 88 megawatts, and this year it could be as high as 200 megawatts. So I think this shows how bringing in sort of AES’ financial capabilities, also our market knowledge can empower this. So, we see this as you know we tried on a much smaller scale and now we are going to a large scale.

Super, helpful. Thank you very much. That’s all I had.

Our next question comes from Angie Storozynski with Macquarie. Please go ahead.

Thank you. So wanted to talk about the guidance for free cash flow growth. I understand the dilution on the earnings impact, the diversities and their impact on the EPS CAGR, but about the cash flow CAGR, I mean that has come down a little bit, right? You had expected a 10% CAGR in proportional free cash flow, I don’t think that the controlling interest has had any impact here. Why the reduction here in growth expectations? Thomas O’Flynn: Angie, remember the 10% was through 2018. So we are doubling the period, going to 2020 and saying 8% to 10%, so it – I think it is still consistent with our general trajectory. We did use the base line as a mid-point of 2016 guidance. Remember that we got about 300 million from interest, so, in 2016 so you are not going to yet normalize for that.

Okay.

And this is Ahmed. I think the shape will be more front end loaded because we have about $1 billion of equity in our construction projects. So those projects are coming on line in the 2018, so we will see more contribution front end loaded from those investments.

Okay. Secondly on Alto Maipo, so basically you have about 300 million in cost overruns and do you agreed on financing only 22% of it, is that correct? Thomas O’Flynn: Put it this way. We have the cost overruns are expected to be in the range of 10% to 20%. We have financing that we are closing on for up to 22%. So, we would cover even the sort of worst estimate in terms of cost overruns.

Also that 22% is not of the cost overrun, it is of the entire project? Thomas O’Flynn: That’s correct. The 110% of the worst case of the cost overruns, it would be like 220% of the expected case.

Okay, fantastic. And then lastly on your EPS guidance, I mean just looking at how your CAGR – I mean that would imply about $1.40 to $143 in EPS by 2020, which is probably ahead of your prior expectation for 2020 earnings. I know that you were not giving explicit guidance, but it almost seems like there is a slower earnings growth initially and then it accelerates by – and basically exceeds expectations of prior earnings growth by 2020? That’s your assessment? Andrés Gluski: That’s correct. Yes, that’s correct.

Okay, thank you.

[Operator Instructions] Our next question comes from Keith Stanley from Wolfe Research. Please go ahead.

Hi, good morning. Do you think it’s possible that DPL to still get PUCO Staff on board to a deal here? Do you expect the case to be fully litigated at this point? Andrés Gluski: We think it’s possible to get PUCO Staff onboard, very much so.

Okay. And that would be before the March date [ph]? Andrés Gluski: Yeah, I mean, obviously, Keith, time is running out, but we continue to have an open dialogue and open door and expect something will be figured out, sir, that’s – we are certainly open to that.

Okay, great. And then at Eletropaulo – well, on the asset sales, besides Eletropaulo, I mean, do you get the $500 million, it sounds like there is some other material sales you are planning or several assets being marketed right now or at a high level how can we think about what you might be looking to sell? Andrés Gluski: Well, again, you know, these are ongoing businesses; we never talk about them before its close. But what I would say is that look at what we’ve said as our strategy, in terms of de-risking the portfolio of reducing our carbon intensity. Those are the types of assets we have sold and we will continue to sell. Obviously, with the number of $500 million, we have something specific in mind, which is advanced for us to feel confident in terms of getting this guidance, so that’s as far as I can go, but I would say that – as we’ve always said, we will continue to sort of churn our assets and invest them in better -adjusted returns.

Great, thank you.

Our next question comes from Gregg Orrill with Barclays. Please go ahead. Andrés Gluski: Good morning, Gregg.

Good morning. Can you provide a little more detail or perspective around the $0.06 reserve from the fourth quarter and then thoughts on returns around your investment in wind in Brazil? Andrés Gluski: Okay. Taking the first one, I mean, that was basically we had a legal case, which we had – let’s say the possibility of getting it funded and we did took a reserve against that, we don’t want to get into more detail about that. Certainly, a close case, there shouldn’t be anything more going forward.

Okay. Andrés Gluski: Regarding the wind in Brazil, this is Renova’s asset, these are contract – 18-year contract in reals indexed to CPI. I think we are buying them at a very attractive price. We will remain the people that in the past when Brazil was really booming, we never bought anything that – at those prices we didn’t think it was attractive, now we see this is being at attractive prices. I also think that it’s very important to get Tietê to be growing again and we are utilizing 100% of local financing for this project. So it’s an attractive acquisition and it really is a milestone for Tietê.

Okay. So around the reserve, I think you said this, it’s not an impact for ongoing earnings or how are you getting paid, I mean, it still be the case? Andrés Gluski: Absolutely not. It’s a short case.

Okay, good enough. Thank you.

Our next question comes from Lasan Johong with Auvila Research Consulting. Please go ahead.

Andrés, the 8% to 10% compound annual growth rate guidance, I assume has some 80% level of your vast development projects in it, can you kind of give me some color how much of your development projects outside of your vast development projects are embedded in that 8% to 10% growth rate. Andrés Gluski: Well, I think this is really anchored in the projects that we know. Southland is in these projects. The energy storage of Southland is there as well. We have the completion of OPGC 2 and the completion of Alto Maipo in 2019. Now besides that we do have some modest – we have the growth of sPower, that I’ve talked about 500 megawatts ramping up to 1 gigawatt towards the end of that period. We also have some growth in terms of distributed energy as well around 200 megawatts a year. Other than that it’s basically redeploying that cash, there will be other acquisitions that could be smaller ones add-ons, and there could be some additional energy storage project, again, modest energy storage project and – besides that growth. So, that’s what embedded in those numbers.

So, if I may, what you are telling me is that, this is about as conservative as you are going to get in terms of your guidance going forward? Andrés Gluski: I think it’s reasonably conservative. I do think if some markets really pop like energy storage and third party sales or something it could be superior to that. We have other things that we are looking at from diesel to other applications, but I think it’s reasonably conservative is the right approach to it. I wouldn’t say it’s a most conservative case.

Yes, you’ve been going through a lot of restructuring, selling, buying assets, where – can you tell me where you see AES’ mix of businesses, is that – what are you trying to drive towards? I mean it’s pretty clear in the U.S. you want to get clean, okay, so we understand that. The rest of world, what are your objectives in terms of how you want to poster AES going forward? Andrés Gluski: That’s a great question. What we see is we will continue our strategy, simplifying the portfolio. And I always said that we don’t need to be in 20 countries to really have the advantages of diversification. We do see having a strong footprint in the U.S. because it gives us stable cash flows, it’s also the most technologically advanced market in all regards, whether it would be energy storage, whether it would be – on the commercial sense and then we really see ourself being the bridge from that to faster growing markets. And with the big emphasis in Latin America and a big emphasis to the extent we can get dollar-denominated contracts. So that’s where we see AES of the future. Now we do see conventional energy as being an important part of this. We really see that as a great advantage to the extent you can integrate renewables into your product and service offerings to final clients. So there is a greening of the portfolio in large part because we are just seeing energy prices from renewables come down so much, also it’s because you can get long-term contracts for renewables. And finally because that’s a part of the market that’s growing, I mean almost 60% of new adds in the worlds are renewables. So in virtually all of our markets that’s a segment, that’s why we want to be there. On the other hand we see the advantages of AES as being able to integrate that into existing platforms. So platform expansions continues to be an important part of our strategy and it’s one of things we like very much about sPower, they have a platform expansion strategy.

Is it safe to assume that Brazil is going to get absorbed into MCAC at some point, once you deconsolidate Eletropaulo and it becomes a really small part of your business? Andrés Gluski: No, and I would say the following reason, I mean, Brazil has its own market, it has its own relations, it has its own regulatory structure, so we think they will have to continued to be managed in that way. Tietê is also a publicly listed company. Now we are very happy to start Tietê growing again, because I think that will have a good impact on local investors and the multiple we get for Tietê. Remember, our SBUs are basically organized around markets, so what we would like is that the teams there face similar clients, similar regulators, similar financial institutions.

Last question, Argentina, it sounds like AES is starting to think about keeping that business unit, is that something I’m imagining or is this something new that’s developing? Andrés Gluski: Well, we’ve always said that Argentina had significant upside potential and we are seeing that this year or actually started seeing it last year. I mean, Argentina, we sold it out of the distribution businesses, which were, I would say, difficult.

Yeah. Andrés Gluski: But we are left with a very solid, excellent technically generation business, which has made money pretty much every year. We had three years where weren’t able to pay dollar dividends, but Argentina is part of Andes SBUs, this is – synergies and some interconnections with the Chilean market.

Yes. Andrés Gluski: But we are seeing a tremendous progress in Argentina, tremendous progress in our business and I think it’s very much in line with what we were telling everyone before is that Argentina had significant upside potential and some of that upside potential is being realized. I think there is even more potential going forward.

Opportunities for more investments in Argentina possible? Andrés Gluski: Well, I think, if we did anything in Argentina, I would be using local leverage capacity, like we are doing in Brazil, like we are doing in the Dominican Republic.

I understand. Andrés Gluski: And in the past when we talked about proportional free cash flow and how we were paying down sub-debt and creating opportunities, I think, between DPP and Tietê are two excellent examples of how we can lever the local business, 100% levered and come up with attractive, in both cases very carbon friendly projects with long-term contracts.

Thank you very much.

Our next question comes from Charles Fishman with Morningstar. Please go ahead.

Good morning. Andrés, can you give – are you able to give anymore color on what the staffs objection was – Ohio staffs objection was to the settlement agreement? Andrés Gluski: No, we really aren’t. We are in negotiations now and we think we will reach the settlement, but we can’t give any more color. Sorry.

Okay. I thought that would be your answer. And then the second question was just to make sure I understand this, on the way you are reporting now, if I look at Slide 29, the consolidated free cash flow growth and if I deduct my estimate, okay, between 30% and 40% for the non-controlling interest, that would be equivalent to the way you used to report proportional free cash at the consolidated level, correct? Andrés Gluski: That’s right, yes.

Am I? Andrés Gluski: Yes, you are right.

Okay, thank you. Got it. I just want to make sure I have it right. That’s all I had. Thank you very much. Andrés Gluski: All right. Thank you, Charles.

Okay. So I think with this we conclude today’s call and we thank everybody for joining us on this call. As always IR team will be happy in answering your questions. Thank you and have a nice day.

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.