愛依斯電力 (AES) 2016 Q1 法說會逐字稿

Good morning and welcome to the AES first-quarter 2016 financial review conference call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Dan. Good morning and welcome to our first-quarter 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. These refer to our SEC filings for a discussion of these factors.

Joining me this morning are Andres 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 Andres. Andres?

Thank you, Ahmed. Good morning, everyone, and thank you for joining our first-quarter financial review call. Today I will discuss our first-quarter results and provide updates on our progress on our strategic objectives, macro conditions in our markets, and our construction and development program.

Since our last call in late February we have achieved a number of key objectives for 2016. We received payment of all outstanding receivables in Bulgaria. We are on track to achieve our three-year $150 million cost reduction and revenue enhancement goals.

We saw improvements in our credit ratings and outlook from the rating agencies. Our $7.5 billion construction program is advancing on schedule and will be the major contributor to our cash and earnings growth over the next three years. We continue to leverage our existing business platforms by advancing projects with long-term contracts denominated in US dollars. During the first quarter we achieve significant milestones on three new projects, which will contribute to our growth after 2018.

I will discuss these achievements in more detail in a moment, but first I'd like to summarize our financial results, on slide 4. In the first quarter we generated proportional free cash flow of $253 million, in line with last year. The recent collection of $350 million in Bulgaria will be reflected in our second-quarter cash flow.

Our first-quarter adjusted EPS was $0.13, which is considerably lower than the $0.25 we earned last year. Our first-quarter operating performance was impacted by adverse movements in FX, lower power prices in the US, and the expiration of the power purchase agreement at Tiete in Brazil.

Our earnings performance was also driven by a tax rate of 50% for the first quarter, which is really a timing issue. We continue to expect a 31 to 33% tax rate for the full year.

In terms of our outlook for the full year, we are reaffirming our guidance on all financial metrics. Nonetheless, we expect our first-half adjusted EPS to be relatively weak due to the continuing impact from the factors I just mentioned and scheduled major maintenance in the second quarter.

Now I'll turn to our strategic accomplishments since our last call. As you can see on slide 5, we have successfully resolved the outstanding receivables issue at Maritza in Bulgaria. Maritza sole customer, the National Electricity Company, or NEK had fallen significantly behind on its payments.

In April we received full payment of the outstanding receivables of $350 million. This is a direct result of the steps taken by the government of Bulgaria to strengthen the financial position of NEK and the long-term sustainability of the energy sector. By meeting all of its contractual obligations Bulgaria is sending a very positive signal to our foreign investors. Currently Maritza is providing critically needed power to the Bulgarian electric grid and we have been collecting in a timely manner since December 2015.

Turning now to slide 6 and our cost savings and revenue enhancement initiative, our goal is to achieve a run rate of $150 million per year and bottom-line improvement. We are on track to achieve our $50 million goal for 2016 and the additional $100 million through 2018. These bottom-line benefits are largely driven by global procurement efforts, moving back office functions to lower-cost service centers in Argentina and Bulgaria, and continued improvement in the performance of our plants.

Now turning to slide 7, I'll discuss macro conditions in our markets. First, the impact from hydrology in Latin America should be negligible this year. While cumulative rainfall remains below average in Panama it is generally improved in the rest of Latin America. Regarding Panama, spot prices have fallen significantly as a result of the barge base power plant we commissioned there last year, which reduced the effects of low rainfall on our contracted hydro plants.

Second, economic conditions in our markets are generally in line with prior expectations except for Brazil which is experiencing a deepening recession. At our distribution businesses in Brazil, we are now seeing a second consecutive year of 5% decline in demand; while in the US demand is essentially flat. In most of our other markets we continue to see energy demand growth in the range of 4% to 10%.

Moving on to slide 8, we're focusing our investment efforts on platform expansion projects with long-term contracts in US dollar-denominated revenues. We see a significant opportunity to take a leading role in the distribution and storage of LNG in Central America and the Caribbean.

Turning to slide 9, let us review our major new projects. During the quarter we started construction on the 335-megawatt Masinloc expansion to take advantage of robust growth in the Philippines and our existing infrastructure. The new unit, Masinloc 2, will be the most competitive thermal plants in the country, employing highly efficient and flexible supercritical technology. The $740 million project will be funded by a combination of nonrecourse financing, partner equity and cash generated at the Masinloc 1 facility.

Moving on to slide 10, I am pleased to report that we have achieved a number of milestones on our Colon project in Panama. This project encompasses both a 380-megawatt combined-cycle plant, or CCGT, and an adjacent LNG regasification terminal and storage facility. The CCGT is contracted under a 10-year US dollar-denominated PPA.

The LNG facility will have a 180,000 cubic meter tank, which is sufficient to handle 80 tera Btu annually. Our CCGT will use about one-quarter of the tank's capacity, leaving substantial unused capacity to meet the needs of additional power plants for downstream customers.

The Colon project seeks to replicate the success of our LNG facilities in the Dominican Republic, which provides gas to our adjacent power plant, another power plant via pipeline, and to numerous downstream customers in the transportation and industrial sectors. The Colon project is strategically located near the entrance of the Panama Canal and will be able to offer bunkering to the maritime industry as it starts to use natural gas as a fuel. There are many commercial synergies between the LNG terminals in the Dominican Republic and Panama, and with both facilities in service we will become the largest provider of LNG regasification and storage services in Central America and the Caribbean.

All of the Colon projects permits are in place and we have selected the EPC contractor. Project financing for approximately 60% of the project cost is well underway. AES's equity is expected to be around $200 million, which we will fund over the construction period. The project is expected to close in the second quarter of 2016 with completion of the power plant in 2018 and the LNG facility in 2019.

As we can see on slide 11, the repowering of Southland in California is another example of a large project that will contribute to our growth beyond 2018. As a reminder, we were awarded a 20-year PPA by Southern California Edison for 1,384 megawatts of capacity, which includes 100 megawatts of energy storage and 1,284 megawatts of combined-cycle gas capacity.

Since our last call we have signed turbine supply agreements and EPC contracts to build the CCGT. We're making good progress on the remaining regulatory approvals and expect to break ground in 2017, with completion in 2020. We anticipate funding the $2 billion total project cost with a combination of nonrecourse debt and $500 million in equity from AES and a possible financial partner.

Turning to slide 12, we remain optimistic on the future battery-based energy storage and our leadership position in this market. We currently have 116 megawatts of energy storage projects in operation across four countries, and expect to install another 50 megawatts this year. Additionally, we have another 228 megawatts in advanced stage development including the 100 megawatts under contract in California. By 2017 we expect to be operating in seven countries, adding India, the Philippines and the Dominican Republic to the four countries where we already operate, the US, the UK, he Netherlands and Chile.

We see growth in our energy storage business through two paths -- AES-owned projects, such as the previously discussed 100 megawatts with the PPA with Southern California Edison; and sales of our advanced energy storage solutions by AES and our channel partners. These sales will target utilities and other large energy storage customers.

First, regarding long-term contracts, we see significant potential in many of our markets, including the US, the UK, the Philippines and Mexico. We continue to work with local regulators to facilitate the development of market structures that enable new investments in battery-based energy storage.

Second, over the past eight years we have learned a tremendous amount about how to integrate the various components to create a proprietary battery-based energy storage solution, which we had named Advancion. To promote Advancion sales in many more markets, we have executed channel partner agreements with Mitsubishi for sales in Asia, and with Eaton for sales in Europe, the Middle East and Africa. We are in discussions with other potential partners to sell Advancion in additional markets. Although battery-based energy storage is still early on in its product cycle, we believe that Advancion presents an interesting opportunity for upside in our cash and earnings forecast.

Turning now to our projects under construction on slide 13, our ongoing construction program is the most significant driver of our growth over the next few years. We expect to commission 6 gigawatts of new capacity from projects currently under construction through the first half of 2019.

As a reminder, total capital expenditure for these projects is $7.5 billion. However, by using financial partners, AES's equity commitment is reduced to $1.3 billion. Of AES's equity commitment, all but $160 million has already been funded.

As you can see on slide 13 roughly 74% of our investments are in the Americas, and of this, a majority is in the US and Chile. We expect an average return on equity from these projects of approximately 15%.

About 3 gigawatts, representing half of the capacity currently under construction, are 90% complete and are on track to come online, on time and on budget this year. In 2017 we plan to commission an additional 670 megawatts of capacity in the US and 112 megawatts in the Dominican Republic. We have completed about 70% of the work on these two projects and we also expect them to come online, on time and on budget. The remaining three major projects now under construction -- Masinloc 2, OPGC 2, and Alto Maipo -- are all projected to come online in late 2018 and early 2019.

This construction program will drive visible and attractive growth in both free cash flow and earnings. As you can see on slide 14, we expect at least 10% annual growth in proportional free cash flow through 2018, which will support our 10% annual growth in dividends, continued deleveraging of the parent and subsidiaries, and investments in attractive platform expansions.

Turning now to slide 15, we also see robust growth in earnings through 2018. From 2016 to 2018 we expect an attractive growth rate of 12% to 16% to in our adjusted EPS. Approximately 5% of this annual growth rate is driven by cost reductions and revenue enhancements. Another 8% to 10% of expected growth is driven by the 2.4 gigawatts of construction projects coming online in 2017 and 2018.

Based on our strong market position in attractive high-growth markets we're optimistic about our ability to drive growth beyond 2018. The three projects I just discussed -- Masinloc 2, Colon and Southland -- will come fully online after 2018.

With that, I'll turn the call over to Tom to discuss our first-quarter results, capital allocation and full-year guidance in more detail.

Thanks, Andres. Good morning, everyone. Today I'll review our first-quarter results, including adjusted EPS, proportional free cash flow, and adjusted pretax contribution, or PTC, by strategic business unit, or SBU. Then I'll cover our 2016 capital allocation as well as our 2016 guidance.

Turning to slide 17, first 8quarter adjusted EPS of $0.13 was $0.12 lower than 2015. Much of this decline was driven by factors incorporated into our full-year guidance with certain exceptions, primarily the decline in power markets in the US, as well as lower demand in Brazil.

Specifically our results reflect the $0.04 impact from a significantly higher quarterly tax rate of 50% in 2016 versus 33% in 2015. This was mostly driven by the timing of certain tax expenses, the largest of which was the enactment of income tax reforms in Chile. We do expect the rate to recover during the year to a full-year tax rate of 31% to 33%.

Next, the force and impact from devaluation of foreign currencies, as expected, primarily in Latin America and Europe. And also $0.05 lower contributions from our SBUs mainly due to anticipated drivers such as the expiration of Tiete's PPA with Eletropaolo.

In addition to the drivers included in our expectations, we also saw some softness in power markets and mild weather in the US. That being said, we've seen some recovery in prices in the last month, which will contribute to our stronger second half of the year and helps give us comfort in our full-year outlook.

Now to slide 18, our overall results were primarily driven by lower margins in our Brazil, Europe and US SBUs, due to the factors I just mentioned. We generated $253 million in proportional free cash flow, a modest increase of $12 million from last year, reflecting lower margins, mostly offset by higher collections at our Brazil utilities and lower working capital requirements in Vietnam. We also earned $172 million in adjusted PTC during the quarter a decrease of $80 million.

Now I'll cover our SBUs in more detail over the next six slides, beginning on slide 19. In the US, our results reflect lower margins at DPL due to lower wholesale prices and lower contributions from regulated customers, lower contributions from IPL due to mild weather and a partial selldown, and the sale of our Armenia mountain wind project. Proportional free cash flow also reflects unfavorable working capital changes at IPL.

In Andes, our results reflect a 40% devaluation of the Argentine peso, 24% de-val of the Colombian peso, and lower volumes at Chivor in Colombia. Proportional free cash flow was also impacted by higher tax payments in Chile. PTC also reflects lower equity earnings at Guacolda in Chile.

In Brazil, our results lower margins due to the expiration of Tiete's PPA with Eletropaulo in 2015, lower demand at Sul and Eletropaulo, and a 26% devaluation of the Brazilian real. Proportional free cash flow also reflects higher collections at Sul and Eletropaulo, as well as the favorable timing of energy purchases at Tiete.

In Mexico, Central America and the Caribbean, our results reflect modestly lower margins. Proportional free cash flow largely reflects higher than normal collections in the Dominican Republic in 2015.

In Europe our results reflect lower margins due to the 48% devaluation of the Kazakhstan tenge and lower dark spreads at Kilroot in the UK. Proportional free cash flow also reflects the timing of payments to the fuel supplier at Maritza in Bulgaria and the unfavorable timing of working capital and tax payments in the UK.

Finally, in Asian, our results benefited from higher margins and lower buildup of working capital as a result of the start of operations at Mong Duong in Vietnam in April of 2015.

Turning to slide 25, I'll now provide an update on our regulatory filing at DPL in Ohio. As you may recall, in February DPL filed its electric security plan. Since that time there been challenges to regulation in Ohio.

We saw the potential for similar arguments to impact the structure of other utilities' proposals pending before the Public Utilities Commission of Ohio. Consequently, when we filed our plan we included an alternative proposal that provided an option for the PUCO to approve a non-bypassable charge structured in the same way as the one approved in our existing ESP.

We believe that this alternative falls under the PUCO's authority and also achieves the policy goals set up by the Commission. We continue to believe this alternative provides a viable path forward for DPL in Ohio, and that the Commission is seeking for a reasonable resolution of the matter before the end of this year.

Turning now to our 2016 parent capital allocation on slide 26., sources on the left-hand side continue to reflect $1.1 billion of total available discretionary cash, which includes $575 million in parent free cash flow in announced asset sales. We remain confident in our 2016 parent free cash flow range of $525 million to $625 million, which is the foundation of our discretionary cash available for dividend growth and value creation.

Turning to uses on the right-hand side of the slide, consistent with our capital allocation plan that we showed during our last call, the 10% growth in our dividend and share repurchases year to date were returning at least one-third of this cash to shareholders. Going forward we see our dividend as the primary means to distribute cash to shareholders. Stock repurchases should be less material absent proceeds from additional asset sales and partnerships.

Regarding debt reduction, we're making good progress on our $200 million target for the year and our longer-term goal of parent credit improvement. In fact, year to date we prepaid $125 million of parent debt. Taking advantage of weak market conditions early in the quarter we were able to buy this debt at a 7% discount.

We're also seeing positive momentum on the ratings front. In March Moody's changed our parent credit outlook from stable to positive. And in April S&P upgraded our rating from BB-minus to BB. These actions reflect our continued efforts to derisk our portfolio and improve our credit metrics.

We think that continuing to strengthen our credit will help us get better recognition and valuation for our growing cash flow and dividend. This positive credit trend, along with an overall market improvement, has allowed us to continue to be opportunistic regarding refinancing and extending maturities. To that end last week we extended an $800 million parent revolver maturity from 2018 to 2021. Also last week, on the nonrecourse side, our business in the Dominican Republic was able to replace a short-term financing with a new $370 million 10-year bond at more favorable terms.

We've also earmarked $330 million for investments in our subsidiaries, about one-third of which is for our Colon project in Panama and at Southland in California coming online after 2018. Finally, after considering these investments in our subs, our current dividend and debt prepayment, we are left with roughly $150 million of discretionary cash, which we will invest consistent with our capital allocation framework. As in years past, much of this cash is weighted towards the latter part of the year.

Now to slide 27, we are reaffirming our guidance in 2017-2018 expectations for all metrics based on foreign currency and commodity forward curves as of April 30. We continue to generate strong proportional keep free cash flow, which will be reluctant evenly distributed in the first and second half of the year. And with the settlement of all outstanding receivables at Maritza we expect our first-half proportional free cash flow to be well ahead of last year's.

Regarding adjusted EPS, consistent with the first quarter we also expect the second quarter to be lower than normal. In fact, we are forecasting that 70% to 75% of our 2016 adjusted EPS will be recorded in the second half of 2016 versus about 60% in past years. There are a few reasons that our results will be stronger in the second half than first half.

First, we expect a lower tax rate in the next three quarters. In any given year there are certain items that influence quarterly rate that tend to normalize on a full-year basis. As I mentioned earlier, in the first quarter we recognize a higher than usual tax expense, which, when combined with relatively low first-quarter earnings, had an outsized impact on our tax rate for the quarter. This tax expense was anticipated in our guidance and accordingly we continue to expect a 31% to 33% tax rate in 2016.

Second, the higher concentration of scheduled maintenance in the first half of the year will position us for stronger performance in the second half. For example, San Nicolas, a plant in Argentina, will undergo plant major maintenance the entire second quarter as part of its regular maintenance cycle that occurs about every eight years. A few of our other plants have similar circumstances.

Third, forward curves for FX and commodities reflect some improvement over the balance of the year, which will provide a benefit in the second half. Fourth, this year's $50 million in cost reduction is more heavily weighted towards the second half. And lastly, we expect to benefit from a couple of items that we are working on to partially offset lower demand in Brazil and lower power prices in the US. Will be in a better position to discuss these later in the year.

With that, I'll now turn it back over to Andres.

Thanks, Tom. To summarize our views on this call, we continue to generate strong proportional free cash flow, which will be evenly distributed between the first and second half of the year. Although we expect our first-half adjusted EPS to be relatively weak, many of the negative drivers will reverse in the second half, and therefore we are reaffirming our guidance for all financial metrics.

In terms of our strategic priorities, in the first few months of this year we have made significant progress, including resolving the outstanding receivables issue in Bulgaria, receiving positive actions from the rating agencies resulting from our actions to derisk the portfolio and delever the parent, reaffirming our double-digit growth through 2018 in both cash flow and earnings driven by our largely funded construction program and $150 million in cost savings and revenue enhancements, and achieving significant milestones on three new projects in our development pipeline to drive growth beyond 2018.

I am optimistic about the future of AES. We are delivering strong and growing free cash flow, which we continue to use to maximize risk-adjusted returns for our shareholders. The 6 gigawatts we currently have under construction is the largest driver of our expected growth of at least 10% in free cash flow through 2018. Beyond 2018 we are well-positioned to capture new opportunities due to our strong business platforms in attractive and growing markets and our leadership position in deploying new technologies.

Now I'd like to open up the call for questions.

(Operator Instructions)

Ali Agha of SunTrust.

Thank you, good morning. First question, Tom, you alluded to the fact that, while the tax rate and FX drivers in the first quarter were pretty much on plan, the US and Brazil results were somewhat below plan. Could you quantify how much below plan from an earnings perspective Q1 ended up?

Yes, I think if you singled out those two it's probably $0.03 to $0.04, probably split between them. Probably about $0.04 equally split.

Okay. And you alluded to some offsets in the second half. Would they be cost reduction related initiatives? Or what would be offsetting them in the second half?

It's the list I went through. Certainly cost reductions are part of it. The $50 million we are expecting to get as part of our savings plan is more heavily weighted. But it's really all the things.

No, I was talking about that last bucket line, which you had mentioned in those list of things, which were not really listed in more detail. You said more to come on that.

Those are likely to be in the second half, the two things in particular that we are working on to offset these issues. It's really not appropriate to give a lot of color on it at this point, which I appreciate people would like to get more color, but we expect to give more color as they materialize in the second half of the year.

Okay. Separately, where do we stand on the Sul transaction? And what's the timing we should be expecting on that?

As we said last time, we injected $75 million into Sul. We restructured the debt. And we're looking at all options now for Sul. At this point I really can't comment any more about that.

Okay. And, lastly, on Ohio, Andres, as you mentioned, the non-bypassable you feel keeps you out of the FERC purview. But that still would keep the volatility of that business around. The beauty of the PPA was that it would take volatility out. I'm wondering, have you looked at some of the recent filings that some folks have gone back in to try to keep FERC out and, yet, also keep volatility out? I don't know if those would be of interest to you.

And, separately, if non-bypassable is the only way to go here, would you come back to the notion of potentially selling those assets again to get out of the commodity exposed business there?

I would say that, again, we believe that our proposal avoided some of the issues raised by the PPAs. We continue to feel that's the correct path to go. And we feel optimistic. We feel it's in everybody's interest. So, at this point what we would like to do is we continue to go with that path.

And you are correct that there's a certain amount of volatility due to the on-contract nature of the generation assets at the DP&L, which is separate from that. But especially if we get the non-liability rider, we have to think of it as an integrated business at that point.

But these other filings that FE and others may have made in response, would any of those be of interest to you?

Ali, what we have filed is not much different what they have filed as their new case, if you wish, because what we filed is, if you look at our plan A, which is not much different what FE has recently filed.

Okay. We will talk more of that off-line. Thank you.

Julien Dumoulin-Smith of UBS.

Good morning. Perhaps just starting where Ali left off, can you remind us just what the benefit embedded in Ohio is of continuation of the ESP structure, et cetera, or whatever structure ultimately is approved there in guidance?

We've given a wide range in our guidance, I think. So, what we have embedded in there, I think, is a reasonable amount going forward. But as we say, we do have somewhat of a wide range to this. I don't know, Tommy, would you like to add anything to that?

I think, Julien, we've said before, we are obviously in the middle of our filing and working through it. So, we are careful about too much detail here. But I think we've said before, we've got 110 now in our ESP. We've incorporated something in that will be less than that amount into our 2017 and beyond numbers. But it's still a meaningful number, but it's certainly less than what we are currently getting.

Got it. And then turning to the Chilean tax rate change, obviously it's a first-quarter item but as you think about it more structurally what is that impact in 2017, 2018, et cetera, just on an ongoing basis?

It's nothing. When we headed into our guidance, it was unclear when the final legislation would be final-final so it would be recognized. It is about $0.03 to $0.04. We fully expected it in our guidance for 2016. It just happened to fall in the first quarter because of the final-final in Chile. What it is a revaluation deferred taxes. The tax rate goes up slightly so it's a modest revaluation of deferred taxes.

It's similar to what we did two years ago, I believe, 2014. I think it was Q3 of 2014, as I recall. It was a similar deal. So, this is the second phase of that same legislation that came in shortly after President Bachelet took office.

Got it. All right, excellent. And then turning to the asset sales, obviously you were very active in the first quarter here, hit your annual targets already. Can you comment more broadly -- I forget, talking about specifics like Sul -- but ambitions to continue to pursue equity sells downs at all. If you think about the ratio of buyback versus asset sale proceeds, should we assume, for the most part, they are going to be earnings neutral for the course of what you've announced already and then prospectively?

We've announced in the past that we'd be selling likely on average $200 million to $300 million in equity proceeds to us of selldowns, and getting out of certain businesses. And we continue. I think we've, quite frankly, outperformed the numbers that we've given in the past. Now, we don't comment on them but what we would be doing again is fine-tuning our portfolio to have really an optimal mix of risks and positions. We will continue to do that.

And in terms of what we do with the proceeds, we will continue to allocate them, as we have, in terms of a mix, whether it be new investments and debt paydowns. And we will see what the circumstances are. As Tom said, I think we'll have more of an emphasis on the growth of dividends than we have had in the past.

Got it. But given that you are seemingly at the midpoint of that $200 million to $300 million you're saying that you've outperformed, so you wouldn't necessarily rule out further asset sales, clearly?

No, absolutely not.

Perhaps asked differently, what is the earnings contribution loss from the asset sales seen thus far?

In our forecast through 2018 we have modest decrease in earnings from those sales. First, you never can deploy the cash immediately, and it depends on the asset you're selling, its risk profile, whether it be accretive or dilutive.

Got it. Okay. Thank you very much.

Chris Turnure of JPMorgan.

Good morning, guys. I appreciate that you don't want to give us too much detail on the Sul transaction or potential Sul transaction, but would you be able to give us maybe the trailing 12 months EBITDA contribution from that business or PTC, and then tell us how much debt is associated with that asset right now?

The PTC contribution from Sul is modest. To be honest, it was a modest negative in the first quarter of the year. And last year it was probably a couple pennies of PTC. Right now the way Sul is running it's a negative PTC. In terms of debt, it's about $275, $300 -- around $300. By the time you do the exchange rate, it's roughly, in my head, when we paid it down we got it down to about $275.

But the debt's in reais.

Yes, the debt's in reais, obviously. I'm doing the math in dollars. But call it $275, $300. It's all in reais, so call it 1100, 1200.

Okay. And you are done with the recapitalization of that asset as of now?

Yes. We put in BRL300 million shortly after our last call, paid down some debt and able to get within covenants in a significant amount of time.

Okay, great. And then my second question is about 2019 and beyond. I'm wondering, one, when we would potentially get more color on earnings that year, and cash flow that year in terms of your overall growth rate, and what would that would mean specifically. And then I also wanted to understand, within that question, the contracting structure of some of your success here on the LNG side. You have clearly, at least in Panama, one particular power plant where you have a 10-year contract. So, I understand that, but how do you guys think about the risk and the structure of the actual importing of the LNG and the re-gas there and the selling of that to third parties?

Okay. We tend to give our longer-term forecast in February so that would be next year when we move out an additional year. What we wanted to do was give you color that our growth will continue post 2018 -- in fact, that we have a good pipeline through 2020 that we recently added to. That was really the point of this call.

Now, talking about the facility in Panama, Colon facility, it has two parts, as you said. One's a 380-megawatt combined-cycle gas plant on a 10-year PPA with a creditworthy offtaker in dollars. And the second is a tank. And the tank, we are using about one-quarter of the capacity for this plant. This leaves about three-quarters.

So, it's really a question of tolling. We're not going to be taking commodity risk on this. This could be tolling fuel for other power plants. We did this in the Dominican Republic, we are using it. We built a pipeline to our own, actually, DPP facility, and converted it from diesel to natural gas. And we are also selling it there to the transportation and industrial sectors.

What we would have in Panama is, first, to meet domestic demand. There are power plants nearby. There are other power plants that will be built that we think will require natural gas. So, that's first use. Transportation and industrial use would be second, following the model we have in the Dominican Republic.

And third, which is very interesting, is the ship bunkering. We would not be doing the bunkering. We would actually have somebody else do that, but they would use our storage and re-gas capacity. So, the way to think about this is you basically bring in large efficient LNG tankers, you unload them in Panama and the Dominican Republic, and then you have various means of delivering gas to various kinds of customers, or actually LNG, as well.

So, we do not plan to take any commodity risk per se on these transactions. We'd be providing a service -- re-gasification service, a bunkering service, and a hub services. And between the two this gives us a very attractive position to be able to service people who want services in Panama and the Dominican Republic.

Okay, that's very clear. And it sounds like this would be within your risk tolerance or your risk profile of contracted assets, at least medium term in duration and beyond, with no commodity risk.

Yes, that's exactly right. And with some of the people who would be using these tanks, we would expect to have contracts, as well, basically assuring a certain amount of capacity from our tanks.

Okay great. Thanks, Andres.

Angie Storozynski of Macquarie.

Thank you. My first question is this Panama CCGT, you mentioned it's going to start operations in 2018. Did you have it previously in your earnings expectations for 2018? And if that's what's actually causing the guidance to move towards the high end, the percentage-wise. That's one.

And, two, could you comment if you have any earnings contributions for Sul and Eletropaulo in your guidance in 2017 and 2018? Thank you.

I'll take the first. No, this was not in our guidance previously. Now, realize that the power plant will come online late in 2018 so it really won't have any effect on 2018. It's really 2019 forward. And the storage tank will become fully operational in 2019. So, this is outside the window that we have given in the past. I think Tom can talk about the contributions of Sul and EP.

Just to put a fine point, I think Sul has been running at a loss, and it's been running at a loss really since the middle of last year. So, last year it was down about $20 million, $25 million in PTC, and this year we are forecasting similar numbers. Angie, as we look at Sul, we don't have Sul in our forecast for 2017. And the inflection point for Sul would really be their the next rate case rate adjustment mechanism, which is in spring of 2018. That's if we were to retain the business.

In terms of Eletropaulo, the earnings were also very modest. We do continue to have it in our business but its contributions are between zero and $0.02, depending upon your forecast for Brazil. So, it's a fairly modest number.

Okay, thank you.

Steven Fleishman of Wolfe Research.

Hi. Just a brief question on the Ohio plant. I know we had the FERC decision regarding the PPAs, but we also had a decision, not too long ago, on AEP's ESP by the Supreme Court that might arguably be comparable to the plans you filed. Do you have any thoughts in context of that decision?

Our thoughts are, quite frankly, we see that our filing, we think has been the correct path to take, and we think it's within the PUCO's purview to grant. We think it's very similar to what we currently have in the ESP. So, for those reasons we remain optimistic.

Okay. And then just on the longer-term drivers, you've given great visibility on the growth drivers, and particularly new projects. Just to fill out the picture, are there any visible cliffs or roll-offs over this period that we need to match against the growth projects? Or are those pretty much done with at this point?

I would say that the only one we have is really Southland. That's one we're repowering. That's more 2020 timeframe that we have the roll-offs. And I'd say that's basically it. In DPL we have our application for 2017 that would eliminate any such cliff at DPL. So, we have nothing else major out there.

Steve, this is Ahmed. On DPL, our PPA expires in 2018 but we still operate the plant through 2020. And in 2021 our new plant comes online -- Southland.

This is Southland. So that's the only one we have where the PPA expires but we're going to repower that plant.

Great. Thank you.

Brian Chin of Bank of America.

Hello, good morning. A question for you on the batteries segment, which is one of the more unique aspects of the Company. You mentioned that you are seeing growth through two paths. Of the 394 megawatts in operation construction in late development, is there a way you can break out between what's AES-owned sales versus by AES? Or is that all of AES-owned projects?

Those are all AES-owned projects. We are working very hard on these third-party sales. We have a lot of interesting projects we are working on, some with channel partners, some on our own. And we hope to be giving you news sometime within the next six months. In many cases we're, quite frankly, creating the market because we are talking with regulators to make sure that the regulations allow compensation for battery-based energy storage. So, yes, that's 100% our projects.

Got you. And I know, because the market structures are still under development, each project is a one-off situation. But in terms of modeling this growth area, can you give us any rules of thumb about how to think about any modeling data points -- for example, like dollars per KW or return levels, just anything that we can use to try and get a little bit more specific on this?

The way we are looking at it, and you are correct, in some cases we are putting up relatively small projects, 10 megawatts, 20 megawatts, to open up a market. And a lot of the return, we believe, will come from third-party sales. Now, we also are seeing some markets that are more competitive and you have basically very rapid build out of energy-based storage so returns come down. We have others where we are looking at long-term contracts.

I think that the way we would look at the returns is that we would expect to earn, on average, the same as we earn in our other projects. We are not subsidizing this business. What will be new for us, quite frankly, is the third-party sales because there we don't have to put in any equity. Essentially we are using intellectual property rights and our experience and the brand name of Advancion.

We haven't, quite frankly, incorporated the third-party sales because we really want to get a good feel for what they will be like. But with our channel partners we are really casting a wide net. We will see, I think, over the next 6 to 12 months much clearer how big that business could get.

Great thank you.

[Lisandro Hang of Avula Research].

Thank you. Andres, I'm going to ask Julien's question slightly different way. How long do you think AES can sustain this 12% to 16% growth rate beyond the 2017-2018 expectations?

At this stage, it's a little bit -- we are not ready to provide four- or five-year guidance out. Obviously there's a lot of factors there with influences -- what are forward exchange rates going to be, what are commodity curves, energy prices.

But what I think we feel very confident saying is we are not going to run out of growth projects in 2018. We already have significant projects that will come online 2019-2020. And we continue to work on ways to accelerate that rate of growth. Part of it is our use of partnerships and our selldown of assets to continue to turn capital into higher-growth, higher-return projects.

At least try to say that AES has now come out of the restructuring mode that's gone on for about a decade and now we're back into the growth mode. Is that at least a fair statement?

I think in terms of cash flow and earnings it's a fair statement. That's how we measure success, honestly. We're not going to measure it in terms of megawatts. And I think we're going to remain the very disciplined company that we have been, certainly over the last five years.

We're going to be very disciplined and make sure that, again, not fall into any rapid growth for growth sake. We really want to maximize. And I think one of the things we've shown is that we are willing to have less megawatts and less clients under operation, but have a better risk profile and a better growth profile. That's really where we want to go.

Okay. Switching to Panama, is it fair to say you're looking at a source of LNG for the plant in the Gulf of Mexico?

Yes. Here's the thing. We have a contract through 2023 for gas from Trinidad for the Dominican Republic. In terms of the source of gas for our share, the 25% that we will be using, we had a contract with one of the big suppliers. They can source it wherever they feel best. Probably some of it will come from the US liquefaction facilities in the Gulf. And then when we fill up the tank and other people are utilizing it and they are taking the commodity risk, it's up to them where they will source it.

Okay, so it's coming from a [merchanter], not directly from the supplier.

That's correct. Unlike the case in Trinidad. But it was very direct and it was coming from Trinidad at the point -- initially. Now they have optionality.

Okay. A quick question on Brazil. There are very interesting assets, Upper River, Paranapanema, where AES has long said that control of those assets would provide tremendous benefits, both in terms of cost, as well as upgrades and development opportunities. It's on for sale. Any comments?

Sure. I think that it's true that Paranapanema, which is owned by Duke and Tiete, were once one company and it was split in two. Having said that, when we are looking at our complete portfolio in terms of our risk profile, we have right now a lot of Brazil hydro risk. So, this really isn't, we think, in our sweet spot at this point in time. And we also understand that they are going to sell the whole package together, of all the other assets. It's just a pretty big ticket and there are other assets that we are not interested in. So, what I would say is that, really, at this point it's not something we are actively pursuing.

Last question on Brazil, Brazil been long in recession/mild depression for the last couple years. Do you think the Olympics will help bring it back out of that mode and back to a more palatable economic profile or do you think it needs a political change to get there?

I think that Brazil is a much more diversified economy than perhaps it gets credit for. If you look at the GDP in the state of Sao Paolo it looks more like Belgium than it does to some of the northeastern states of Brazil, to realize that. Now, I think that Brazil got itself into this funk, some policy issues, not just commodity price drops. The good thing is they can work their way out of it.

Our view as that it will probably take a couple years at least for Brazil to get out of it. I don't think that the Olympics will have any effect whatsoever.

Really?

No, I don't. I think the I key points for Brazil is determine the political process, who's going to be the President within six months, and what policies he will pursue. Having said that, Brazil has a lot of strong points in its economy. So, if they get their political act together and take some structural changes, I'm sure it will be back within five years. I feel very confident that Brazil can be a strong economy again.

I'm sorry but I have to ask one last question, which is, if that's the case, then Brazil, it sounds like it's on a very fine line between great candidate for divestiture versus great candidate for expansion. AES has had very little -- BNDES still owns a large chunk of everything AES has a footprint in except for Sul. And there's been a lot of talk about privatizing the BNDES interests. Is that something that you want to pursue more aggressively depending on the political situation, or is it something that you'll lay lie for a long time?

We can't speak for BNDES and what they decide to do with their assets. We did have the separation of our assets in Brazil to give us greater operating control in Tiete and greater capital structuring flexibility in general. So, we've done that. And I would say that if you look at what we've done in Brazil, we've certainly derisked ourselves significantly because we sold half of our holdings of Eletropaulo in 2006. We spun off the telco. Eletropaulo sold that for $1 billion. We feel that we will continue to manage Brazil holistically and look at what are the fundamental exposures we have there.

Great, thank you very much.

Charles Fishman of Morningstar.

Hello. Thank you. Andres, just to follow-up that last question, you are probably the most knowledgeable person about Brazil that I ever get a chance to ask a question to. In a quarter or two quarters ago you talked about a turnaround in Brazil maybe 2018. And now in response to the last question I heard you say more like five years. Has something happened in the last three months that makes you a little more pessimistic?

No. Let me clarify that. I do think that a turnaround in two years is still, I would say, possible, maybe 50-50 chance. What I was saying, within five years I feel very optimistic, at some point -- I don't know if it's three years, two years -- they will come back.

I think, depending on the political resolution of the crisis they are facing now, I wouldn't even be surprised that you have a, I wouldn't call it euphoria but a pickup in sentiment in Brazil with the resolution. We've seen that when you have certain political developments they actually appreciate in the market. So, what I think is important to realize is that the crisis in Brazil has a lot to do with certain policies and not just a drop in commodity prices. So, that makes a comeback more within their capabilities of doing.

Okay, thanks, Andres. That's very helpful. I appreciate it. That's it.

We thank everybody for joining us in today's call. As always, the IR team will be available to answer any questions you may have. Thank you and have a nice day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.