愛依斯電力 (AES) 2016 Q2 法說會逐字稿

Good morning and welcome to the AES second-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 Vice President of Investor Relations Ahmed Pasha. Please go ahead.

Thank you, William. Good morning and welcome to AES's second-quarter 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 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'll now turn the call over to Andres. Andres?

Thank you, Ahmed. Good morning, everyone, and thank you for joining our second-quarter 2016 financial review call. Today I will discuss our year-to-date performance, provide an update on market conditions and our progress on our strategic and financial objectives. Tom will then discuss our second-quarter results and capital allocations in more detail.

Before turning to results, I would like to highlight the most milestone that we have achieved so far on our key objectives for 2016. To continue derisking our portfolio, we announced or closed asset sales with proceeds of more than $500 million, well above our target range of $200 million to $300 million.

We brought online one-third of our capacity under construction, or 2.4 gigawatts, on time and on budget. We prepaid $300 million in parent debt, exceeding our full-year target of $200 million, to accelerate our credit improvement. We are on track to achieve our three-year $150 million cost reduction and revenue enhancement goals.

In Bulgaria, we received payment of all outstanding receivables and continue to collect timely payment of invoices. And we continue to make progress to resolve DP&L's pending rate case, and are encouraged with recent regulatory developments in Ohio.

I will discuss these achievements in more detail and a moment but first I'd like to summarize our financial results on slide 4. Year to date, we generated proportional free cash flow of $670 million, representing 57% of our full-year guidance, and reflecting the collection of outstanding receivables in Bulgaria during the second quarter.

Our year-to-date adjusted EPS was $0.32, representing 32% of our full-year guidance, consistent with our comments on our last call. These results keep us on track to achieve our full-year financial guidance, which Tom will cover in detail.

Now I will provide an update on macroeconomic conditions in our markets, on slide 5. First, in Brazil, although we have seen a modest improvement in energy demand since our last call, we are still projecting negative growth for the year. In the US, demand is essentially flat. But in most of our other markets we continue to see robust growth in energy demand in the range of 4% to 10%.

Second, while we have seen significant volatility in foreign-exchange and commodity prices over the last couple of years, we are generally seeing markets stabilize. As result, foreign exchange and commodity forward curves are largely in line with our expectation as of our last call. The one exception is that, as a result of Brexit, the British pound has depreciated by roughly 10%. However, we are largely hedged in the near term and, more importantly, our exposure to the pound is only about 3% of our pretax contribution.

Turning to slide 6 and our portfolio optimization activities, in Brazil, we are seeing significant consolidation of the regulated utilities sector at attractive valuations. We capitalized on this trend with the announced sale of our 100% ownership interest in Sul, our most material utility business in Brazil from an investment point of view, for approximately $470 million in equity proceeds to AES. We are currently seeking regulatory approval for the transaction, and expect to close before the end of the year.

Including the proceeds from the sale of Sul, we've announced or closed a total of $540 million in asset sales this year. Since September 2011 we have announced or closed asset sales with $3.8 billion in proceeds.

The cornerstone of our strategy in Brazil is to grow Tiete by pursuing contracted wind and solar generation, now that we are seeing the opportunity for reasonable inflation-adjusted returns. These investments will help diversify Tiete generation mix while also allowing us to take advantage of the $300 million to $500 million in untapped debt capacity at Tiete.

Turning now to our platform expansion opportunities on slide 7, our ongoing construction program is the most significant driver of our growth over the next few years. We are focusing on our investment efforts on platform expansion projects, with long-term US dollar-denominated contracts. One such opportunity is using our DR and future Panamanian assets to play a leading role in expanding the use of LNG throughout Central America and the Caribbean.

Regarding our construction projects, I'm happy to report that thus far this year we have commissioned 2.4 gigawatts, on time and on budget. The majority of this capacity is at Indianapolis Power & Light, our regulated utility in Indiana, where we will be earning predictable regulated returns on these investments.

Later this year we expect to complete our 552-megawatt Cochrane plant in Chile, also on time and on budget. We have another 3.9 gigawatts of new capacity currently under construction, and expect it to come online through 2019.

To deliver sustainable growth beyond 2019, we continue to advance our development pipeline. To that end, we recently received approval for the 1.4 gigawatts Southland repowering project from the California Utility Commission, and we are on track to receive final environmental permits early in 2017 and expect to break ground that summer.

Turning now to slide 8, our 3.9 gigawatts currently under construction represent total capital expenditures of $7.8 billion. However, through a combination of nonrecourse financing and equity partners, AES equity commitment is limited to $1.3 billion. Of this, all but $250 million has already been funded.

Roughly 74% of our investments are in the Americas and of this a majority is in the US and Chile. We expect average return on equity from these projects of approximately 15%. The majority of our construction projects are conventional power plants such as the 670-megawatt Eagle Valley combined-cycle gas-fired plant at IPL.

Additionally, as we've discussed in the past, we are also building be 530-megawatt Alto Maipo run-of-the-river hydro project in Chile. This project is our most complex, as we are excavating 67 kilometers of underground tunnels, one-third of which are already complete. The project is roughly six months behind its original schedule and we expect to complete the project in 2019.

Turning to slide 9 and our Colon project in Panama. We have made significant progress since our last call. As a reminder, the $1 billion Colon project will contribute to our growth beyond 2018, and includes a 380-megawatt combined-cycle gas plant and 180,000 cubic meter LNG regasification and storage facility.

The power plant is contracted under a 10-year US dollar-denominated power purchase agreement. And our partner is Grupo Motta, one of the largest financial and commercial groups in the country.

We recently achieved two important milestones at Colon -- closing the financing of $535 million with a consortium of banks and initiating construction. The Colon project seeks to replicate the success of our Andres LNG facility in the Dominican Republic. Andres provides gas to our adjacent power plant, to another power plant via a gas pipeline, and to numerous downstream customers in the transportation and industrial sector.

Last month Andres also delivered its first international shipment of LNG to Barbados. This is a great example of our facility's ability to serve as a regional gas hub, by breaking large bulk shipments to serve smaller markets.

There are many commercial and operational synergies between our LNG terminals in the Dominican Republic and Panama. And with both facilities in operation we will become the largest of LNG, regasification and storage services in Central America and the Caribbean.

Turning to slide 10, we remain optimistic on the future of battery-based energy storage because we believe it will play a critical role in an increasingly renewable-based generation mix. As you may know, with our proprietary Advancion system, we are the world leader in battery-based energy storage, with 136 megawatts in operation across four countries, 30 megawatts under construction, and 228 megawatts in advanced development, including 100 megawatts under a long-term contract.

We aim to create value in the energy storage space through two primary business models. First by developing and operating AES-owned projects such as the 20-megawatt Harding Street battery array we recently commissioned at IPL. As I just mentioned, we currently have 166 megawatts in operation or construction and another 228 megawatts in advanced stage development.

Second, by marketing and selling our advanced energy storage solution to other utilities, commercial and industrial customers, directly or through our sales channels partners. These sales require no investment capital and help advance and capture economies of scale. Thus far this year, we have sold 40 megawatts of advancing systems to third parties, representing approximately $70 million in gross revenue. Our second-quarter results do not include these sales but margins on our initial sales will be modest as we amortize startup costs.

Although battery-based energy storage is still in its early adoption cycle, and we have not included any material amounts in our projection, we believe that Advancion represents an interesting opportunity for off-site.

Turning to slide 11, as a result of all the actions we're taking, 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.

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

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

Thanks, Andres. Good morning, everyone. Today I'll review our 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 guidance and expectations.

Turning to slide 14, second-quarter adjusted EPS of $0.17 was $0.09 lower than 2015. This decline is in line with our expectations communicated on our last call.

Specifically, our second-quarter results reflect $0.03 lower contributions from our SBUs, including anticipated drivers such as the timing of scheduled maintenance in Andes and MCAC; a reduction of $0.03 because last year's results included the favorable impact of a reversal of a liability at Eletropaulo; and a $0.03 impact from the devaluation in foreign currencies, as expected, particularly in Andes and Europe.

Before moving on, I want to touch on a couple large impairment charges we had this quarter that are not included in adjusted EPS. First, we impaired $235 million of assets at DPL, primarily at the Killen Station. This impairment impacts our quarterly diluted EPS, and was largely driven by the results of the recent PJM capacity auction and our expectation of higher future environmental compliance costs under the EPA's effluent limitation guidelines and coal combustion residual rules.

Second, as you may have seen our 10-Q, as a result of the sale, we've included Sul in discontinued operations and an impairment was recognized during the second quarter. The remaining loss on sale will be recorded at the closing of the transaction. After taking into account previously recorded cumulative translation adjustments, the net impact on AES's equity will be a reduction of about $100 million.

Given this business is in discontinued operations, these non-cash items do not affect either diluted or adjusted EPS. As a result of placing Sul into dis ops, its earnings or losses are removed from our 2016 and 2015 results. Consequently, our first-quarter results have been restated to $0.15 after removing the $0.02 negative impact from Sul, which brings our year-to-date adjusted EPS to $0.32.

Now to slide 15 and our overall results for the quarter. We generated $417 million of proportional free cash flow, an increase of $355 million from last year, as significant working capital improvements, primarily at Maritza in Bulgaria, offset lower margins. We also earned $160 million in adjusted PTC during the quarter, a decrease of $100 million.

Now I'll cover our SBUs in more detail over the next six slides, beginning on slide 16. In the US, our results reflect relatively flat margins as lower wholesale prices and lower contributions from regulated customers at DPL were largely offset by higher contributions at IPL, including the benefit from the recent rate case and environmental upgrades that came online through this quarter.

Also, adjusted PTC was up modestly, reflecting lower interest expense at DPL and IPL. Proportional free cash flow also reflects favorable working capital changes at IPL.

At Andes, our results reflect slightly higher margins due to higher spot and contract sales, as well as lower maintenance at Gener in Chile, partially offset by planned outages in Argentina, as well as the devaluation of the Colombian and Argentine pesos. Proportional free cash flow also benefited from higher collections in Argentina and at Gener.

In Brazil our results reflect lower margins due to the benefit of a liability reversal at Eletropaulo in 2015, the expiration of Tiete's PPA at the end of 2015, and the 12% of the Brazilian real. Proportional free cash flow also reflects higher collections at Eletropaulo and Sul.

In Mexico, Central America and the Caribbean, our results reflect lower margins due to lower availability, including a planned outage in the Dominican Republic where we were performing interconnection work in the preparation for the expansion of our DPP gas-fired facility. As you may recall, we're converting the simple cycle DPP plant to combined cycle, improving its capacity by 50% to 358 megawatts. Construction on this project is progressing well. We've already completed 80% of the upgrade and it is expected to come online in the first half of 2017.

Our quarterly results were also impacted by lower third-party gas sales in the Dominican Republic.

In Europe, our results reflect lower margins due to the 45% devaluation of the Kazakhstan tenge. Proportional free cash flow also reflects the settlement of our $350 million outstanding receivable at Maritza in Bulgaria this quarter.

It's worth mentioning that we've seen greatly improved collections in the roughly three months since that settlement, and payments are current. As a direct result of recent energy sector reforms, our offtaker, NEK, is now cash flow positive versus substantially negative in 2015. This improved financial condition also drove strong interest in the recent bond issuance by NEK's parent, where they were able to raise more than EUR 0.5 billion at attractive rates.

Finally, in Asia our results reflect steady margins and lower working capital requirements at Mong Duong in Vietnam.

On slide 22, I'll provide an update on our regulatory filing at DP&L in Ohio. Under DP&L's current ESP, which covers the period from 2014 to 2016, DP&L has been collecting a service stability rider of a little over $9 million per month. As you may know, the supreme court of Ohio reversed the utility commission's approval of the current ESP in late June. The court has since remanded the case to the Commission which now has jurisdiction.

Last week DP&L filed to withdraw its current ESP and requested that the Commission revert to the rates in effect prior to 2014, which would result in an immaterial financial impact to the Company. The matter is now pending before the Commission and we expect a ruling within a matter of weeks.

At the same time, we continued to progress on our filing for a new ESP, which we expect to be effective beginning in January 2017. We expect an outcome that will support the financial viability and credit profile of the business.

Now to slide 23 and the progress we're making to improve our credit profile, we recently completed the refinancing of $500 million of our 2019 notes extending the tenor with new 10-year notes. Additionally, since our last call, we have prepaid $180 million of impaired debt, bringing our total paydown year to date to $300 million, exceeding our 2016 debt reduction target by 50%. Since 2011, we have reduced parent debt by $1.7 billion, or 27%, and reduced interest by 125 basis points, resulting in an annualized interest savings of $180 million. As you can see at the top of the slide, we now have no debt maturities maturing at the parent until 2019 when only $240 million is due.

In addition to the refinancing we executed at the parent, we have also taken advantage of favorable market conditions and refinanced $1.4 billion in nonrecourse debt, primarily in Latin America. Through these proactive actions we have been able to extend our maturities, lower interest costs, and reduce our exposure to floating rate interest.

As you can see at the bottom of the slide, these proactive steps have helped us to reduce our parent leverage ratio from almost 6.5 times to slightly over 5 times debt to parent free cash flow plus interest. These actions reflect our continued efforts to derisk our portfolio and improve our credit metrics. We believe this will help us reduce our cost of debt and enhance our equity evaluation.

Now to our parent capital allocation on slide 24, sources on the left-hand side reflect $1.5 billion of total available discretionary cash, which includes $575 million in parent free cash flow. We continue to focus on maximizing cash to corp. As a recent example, once the Macri administration lifted currency controls in Argentina, we took a modest dividend out of the country for the first time since 2011. We remain confident in our 2016 parent free cash flow range of $525 million to $625 million, which is the foundation for our discretionary cash available for dividend growth and value creation.

Sources also include $540 million of proceeds from asset sales including the approximately $470 million in sales of Sul. As we expect the sale to close late in the year we will likely not deploy much of this capital in 2016. We have, however, accelerated the use of a portion of the expected proceeds by prepaying $180 million of parent debt in July, as I just discussed.

Now, to uses on the right-hand side of the slide, consistent with our capital allocation plan that we showed during our last call, with 10% growth in our dividend and completed share repurchases we've returned about one-third of our allocated cash to shareholders this year. Going forward, we continue to see our dividend as a primary means to distribute cash to shareholders.

As I just discussed, we've already prepaid $300 million in near-term maturities. We've also allocated $360 million for investments in our subsidiaries, the majority of which is from new projects driving our growth through 2018 and beyond. After considering these investments in our subsidiaries, debt prepayment and our current dividend, we're left with roughly $450 million of discretionary cash, which we'll invest consistent with our capital allocation framework.

Finally, turning to slide 25, we are reaffirming our 2016 guidance and 2017/2018 expectations for all metrics based on foreign currency and commodity forward curves as of June 30. We continue to generate strong proportional free cash flow, with our first-half results reflecting the settlement of all outstanding receivables at Maritza.

Our first-half adjusted EPS was in line with what we communicated on our last call, as our results were impacted by a higher tax rate, planned outages, and softness in US power prices. The majority of our earnings are expected to be generated in the second half of the year, and we should benefit from a few factors including lower scheduled maintenance, a lower effective tax rate, the realization of cost savings initiatives, and a couple other items we are working on.

With that, I will now turn it back to Andres.

Thanks Tom. Before we take your questions, let me summarize today's call. First, we are executing on our priorities for 2016, exiting certain businesses at attractive valuations, completing 2.4 gigawatts of projects on time and on budget, improving our credit profile, and collecting on our outstanding receivables in Bulgaria. Second we continue to invest our growing cash flow to reduce debt and in select growth projects as well as offering our investors a significant and growing dividend.

Third, we remain confident in our ability to deliver strong free cash flow growth through 2018, which is driven by our projects under construction and our cost savings and revenue enhancement initiatives. Finally, we believe we are well-positioned to deliver sustainable growth beyond 2018 due to our strong business platforms in attractive and growing markets and our leadership position in deploying new technologies.

With that, I would like to open up the call for questions.

(Operator Instructions)

Ali Agha with SunTrust.

Good morning. The first question, can you give us a sense of what gives you the confidence that the Ohio issues, particularly as it relates to non by passable, are going to be dissolved favorably? And what are the key milestones we should be looking at to figure out how this is playing out?

Ali, it's Tom. We continue to have normal discussions consistent with the process in Ohio. We are obviously aware of developments with the other major utilities in the state, especially A&P and FE. They've got a little bit different perspectives but we think those are both constructive directions.

We do continue to think that's there is strong support in the state for in-state generation, given the polar vortex still isn't too far removed, the in-state jobs, in-state revenue from taxes and those kind of things. So, we think there is strong support for that.

I'd probably just say we are encouraged by discussions. As we said, we refiled our rates for the remainder of 2016 to go basically back to the pre-2014 structure, and we think that is constructive and consistent with the sentiments.

And, secondly, related to that, Tom, what is baked into both your 2016 and 2017 and 2018 outlook for this non-bypassable? I'm assuming you're factoring that continuing. And what if that doesn't happen? How should we think about the sensitivities to your earnings, whether it is for this year or for the growth in 2017 and 2018 if that goes away?

Yes, I think what we would say is -- I think we have been consistent here -- number one, our most recent filing would not have a material impact -- assuming we go back to the 2013 rate structure would not have a material impact -- on our financials for the remainder of 2016. Going forward, as we have discussions, there's different approaches here, but we generally baked into our guidance is something that would be less than what we are currently getting, which is about $110 million a year or $9 million a month. But it is still a material amount. We haven't put a fine point on that, but certainly it would be a meaningful impact if there were a large fall. But at this point we believe we will get something in that range.

Remember also, Ali, we have not taken a dividend out of DPL for some time. And there is no parent free cash flow from DPL, at least for 2018, in our forecast.

Yes, understood. Separately, Andres, when you look at your portfolio today, can you just highlight for us what regions or assets in general would you consider to be non-core to this portfolio as you continue going down the road of streamlining your platform?

We, I think, have done very well in terms of focusing this Company in terms of getting out of those regions where we didn't see those markets as attractive, and realizing attractive valuations from those sales. So, what we are focused on in terms of growth is going to be those places we can get long-term, ideally dollar-denominated, contracts, and where we can bring something besides just money. So, these are additions where there are synergies or economies of scale.

We don't like to talk about exactly those places we are going to get out of until we do it, and we've very much stuck to that rule over the years. But I would say those countries where we don't see those opportunities, where we see that they, quite frankly, are either too volatile or we don't see opportunities for growth.

So, what I would like to say is that we will continue to grow those businesses, especially those that are cash accretive. And our real focus is on creating a company where we have a strong sustainable growth in our dividend. And that's what we are focused on.

I'm not going to get into it specifically, but I think if you do it by the process of elimination, which is those places where we don't see growth, where we don't see long-term contracts, and we really don't have any really particular advantageous position, we will get out of. Now, we won't talk about them until it's actually done, because obviously those can affect our operations.

Yes. Last question, Tom, just remind us, you built up your unallocated discretionary cash. In terms of your priority of the use of that cash, can you just remind us what your priority would be, ranking your priorities?

Yes. I think we will look across all the arrows in our quiver, let's say. I think we will look at incremental growth. I think we have said that we would expect about $300 million to $400 million of contributions into our businesses from corp on a normal year. This year we are right in the middle of that point.

Of course, continuing to grow the dividend on a regular basis. We will continue to look to deleverage, and may take some of this opportunity to accelerate the deleveraging of our balance sheet. And, of course, stock repurchase is still something we have authority for. We have done a lot, though, as we said, I think our primary focus in terms of cash to shareholders would be via the dividend.

Thank you.

Julien Dumoulin-Smith with UBS.

Hey, good morning. Perhaps a few more specific questions on the PUCO process here, just to be very clear as to how to think about the ESP-1 rate structure for 2013. From what I understand, it's mostly a regulated structure with fuel pass-throughs. How should we think about power prices and just competitive retailers under that rate structure? I know it's a bit detailed but I would just be curious. Are you still positively exposed to power prices increasing net-net? I'm just trying to understand how that supply recovery gets done.

And then, secondly, can you talk to the ESP-3 filing that you have pending? Are you going to need to refile that, or are you going to amend it to reflect some of the changes that might be necessary out of the Ohio Supreme Court?

Yes Julien, let me try to tackle that. In terms of number 1, the market risk and reward that we have under either structure, either the one that we had or the one that we are now going to revert back to, is really the gen, is really out our generation that faces the risks and rewards of the market.

In terms of structure we are going back to, it is different financially at the end of the day. It's about the same for us. But there was a group of people that, had they not shopped, then they would go to a defined rate structure as opposed to -- and that slices it up a little bit different way. But the utility is not exposed to that. It's a little bit different way to slice up the same amounts.

In terms of going forward, we believe that what we had filed earlier in January and February, we can work under that umbrella, if you will. So, we don't need to pull that back and refile. Remember, we had a couple of different alternatives. So, we feel that umbrella gives us the flexibility to shape a solution in different ways.

Got it. And just to be clear, the ESP-1, the 2013 rate structure, would remain in effect indefinitely until you got a rate outcome under the ESP-3 structure. So, it's agnostic -- perhaps too strong a word there -- but throughout the process, whenever you eventually get an outcome of ESP-3, just to be clear.

Yes. It would remain outstanding until there is a supplement for it, and both of them are supportive of our financial structure.

Got it. Excellent. And then just a quick one following up on the last question, as well, Brazil Eletropaulo, can you comment just on what your thought process is there? Obviously there has been some media comments out there. How do you think about Brazil, both on Tiete and the Eletropaulo side prospectively, and the time lines for each. And how would you execute if you were going to?

Okay. First, given that Eletropaulo is a publicly-listed company we don't comment on it. I think what we've said is we've made a significant strategic move by exiting Sul. If you look at today's market price, the equity value we had at Sul is more than 4 our the value that we have in Eletropaulo. So, we've made a significant shift.

Second, we've been very disciplined in Brazil, especially at Tiete. For many years we've had this leverage capacity and the ability to buy new assets to grow. But we didn't really see the valuations. We really didn't see valuations that were attractive for us. With the correction in prices in Brazil we are starting to see opportunities that would make it more attractive to leverage up Tiete and buy something in Brazil.

Now, what would we buy? As we said in the past, we're really looking at risks and we wouldn't want more hydro risk in Brazil. So, ideally it would be something like solar or wind or perhaps even thermal that would not be correlated to hydrology in Brazil to make our cash flow from Tiete more steady.

So, again, Eletropaulo being a publicly-listed company, it would be a process pertinent to that market. But we are not going to comment on it.

And then as a last quick one, any updates on the assets that you impaired in DPL? Just curious if that has any reflection on the future viability of them in terms of retirement or whether they cleared the latest auction, et cetera.

No, that was just at Killen, and that was just because it had a higher carrying value. It was reflecting the results of the latest capacity auction.

They all cleared, Julien, all our coal assets cleared.

All right, great, even better.

Stephen Byrd with Morgan Stanley.

Good morning. I just wanted to check in with you on the storage business. There is increasingly talk about the business, and you obviously were very early into this business. When you think about growth potential, we are seeing reports that costs are coming down for the actual equipment, do you see that there is an inflection point at which this does become a fairly large driver of spending? Or is it a more gradual thing where there isn't really a step change but it's really just a gradual increase as you go down the curve?

In other words, do you see relatively significant changes within a year or two or three in terms of where they costs are going that is going to allow the business to scale up a lot, or do think it's probably a more gradual pace?

What we are seeing in this business is continued reduction in cost. So, we look at the cost of batteries, they have come down 80% in the last five years, and we are projecting an additional 50% in the next five. So that will drive them down significantly.

And, really, this is not technological breakthroughs as much as just really massification of the production process. The more people that bring online giga factories and drive down battery prices, the better it will be for people such as ourselves.

Now, given that, how do we see this market? This market is growing. One of the main, let's say, things that are slowing it down is regulatory, since these batteries operate differently than just regulatory peaking plants or other people providing ancillary services because, for example, it goes positive and it goes negative.

But, having said that, we are seeing this market, it was a couple hundred megawatts last year, this year it is growing. Some of the forecasts, by 2020 it could be 10 gigawatts globally. The lowest forecast you will see is probably around 6 gigawatts. That is still a tremendous rate of growth.

Now, there are many applications. This is a little bit of a hammer so you can use it for many different things from load shifting, ancillary services, capacity release, transmission constraints. So, that's how we see this market.

I see it growing quickly, some markets quicker than others. The US is clearly leading. The UK is having an important auction now. We see interesting markets in India with their expansion of renewable.

So, basically, as I said in my speech, as you have more renewables on the grid, interruptible renewals, the greater the need for these batteries in their different forms to alleviate that. We are pursuing it by two means. One is on our own platform, we are participating in some of these auctions. When they are big enough we do bring in partners, like we do on all our large projects.

But we are also pursuing, through some direct sales but also through sales channel partners, global sales. We've are ready had some success, with $70 million so far this year. We expect that to grow over the remainder of the year and into next. And, of course, over time, that will have an interesting margin, but right now one of the things it does is help drive down cost, because this is all about scale. So, if you're one of the largest suppliers to the market, I think you'll have a cost advantage.

That's very helpful color, Andres. You had mentioned in your prepared remarks about essentially amortizing some of these initial costs. Could you remind us just how rapidly you think you would be able to eat through those costs so that we can start to see significant margins on incremental sales?

It's going to depend on -- this is volume. Basically think of start up costs and things like that are fixed costs. The more you have, the more quickly.

We are not really prepared to give guidance on the third-party sale. But I really don't see this -- certainly not this year and probably next not being a meaningful contributor. And, finally, this is not in our guidance for that reason, but this could become quite interesting outside that time horizon.

That's great. Thank you very much.

Lasan Johong from Auvila Research Consulting.

Good morning, thank you. Tom, I have a quick question on the 15% rate of return. Should we respect the hurdle rate to go up as interest rates go up and your cost of capital go up with it?

Yes, I think the short answer is generally interest rates will be coming down. Our cost of capital, I think, has been coming down so I think that's a good number, certainly on the projects we are doing. I think Andres mentioned, much of our focus will be on long-dollar US dollar-contracted business. Some of that may warrant some compression of that modestly. But I don't think we see them going up.

But my point is, eventually the interest rates are going to go up at some point, whether it's a year or two years from now. When that happens, are we going to see the 15% hurdle rate go up?

The one thing I'd say is we certainly look at our cost of capital, IRRs on a real-time basis, real-time for global interest rates, local interest rates, local risk. So, certainly if there is a meaningful change in macro conditions, be it interest rate risk or other things, inflation, what have you, we would certainly factor that into our capital allocation framework.

I think one way to look at this is we want to earn a 200 basis points-plus over our rate of cost of capital on these projects. So, it's going to depend on their locations. For example, we will have a low over ROE for those projects that are rate-based on our regulated utilities than we do on some of the other projects which are on different locations.

The one thing we are moving towards, I would say, derisking the Company. So, that, I think, is an important component. It is dollar-denominated long-term contract in a good zip code, investment grade country, those will have a lower return than some of the other locations.

But I do think that when you look at our projects, what's important is that there are a lot of synergies between them. If we look at, for example, the Panama project, it has significant synergies if we increase the amount of tolling we do from that facility. Our power plant will take roughly about 30% of the capacity of the tank in the terminal. So, we are really looking for third-party sales like we are doing in the Dominican Republic.

Once you have the two hubs operating, the return from the project will not only be from the project itself, it will also be from the existing businesses. So, that's how we are looking at it, just to say. So, I don't think -- if interest rates go up, it depends how much they go up, but we are also shifting our businesses to less risky businesses. And the returns of the project is also returns to existing businesses, which perhaps we are not including in that ROE.

Let me turn the question around. How much more business would you get if you dropped the hurdle rate to 12% or 10% even?

If we drop the hurdle rate, again we don't have a universal hurdle rate, (inaudible) the lower the cost of capital that you're using for the projects in some other markets. But we don't use a universal hurdle rate.

Okay, thank you very much for your help.

Brian Russo with Ladenburg Thalmann.

Hi, good morning. Just curious, are there any issues or risks to the Sul approval process? I believe it needs the acquirer's shareholder approval. Just maybe if you can comment on the milestones there to get approved.

Yes, the milestones, they have a shareholders' approval. We believe that they are very confident of getting it. Then there would be an approval of NL, which is the regulator. And that's why we are targeting this close for the fourth quarter of this year.

But given all that is happening in Brazil, we don't expect any issues. And, furthermore, it's an acquisition that makes a lot of sense, which is consolidating the distribution companies in the state of Rio Grande to Sul. So, there is a lot of logic, a lot of cost savings from bringing these together. So, we think the fundamentals for the transaction, for the acquirer, are very strong.

Okay, thanks. And then just on the DPL Ohio process, I'm just curious what was the thought process to file to revert back to the pre-2014 rate structure? Did you have discussions with staff? What made you choose that route versus any of the other alternatives?

Yes, we did have some consultation. I'd rather not go into the specifics. But following the Supreme Court, we wanted to look for something that had the same provision of stability and supporting the overall financial viability of the Company, but staying away from, let's say, the specifics of the Supreme Court, but also appreciating that there was strong motivation, for the reasons I mentioned earlier, to keep the utility stable and keep our generation viable.

Got it. Thank you.

Brian Chin with Bank of America ML.

Hi, good morning. I've got a question on the effluent requirements and the coal combustion residual requirements. How much extra CapEx is that going to necessitate?

We haven't disclosed that specifically. I believe DPL has a three-year forward CapEx table that is in their K. We are still reviewing it. But we did have some preliminary numbers, let's say, that were baked into our impairment analysis. It was really the combination of those numbers, that really be out in, I believe, it's the 2020 to 2021 time zone. As well as, we did have to take note of the recent capacity auction that was down from 160 to about 100. Though we think 100 is low, we did have to factor that most recent data point into our long-term forecast.

Okay. Just to be clear, the CapEx spending would be done in 2021, or there is a deadline for the plants to meet the requirements by 2021?

2022, Brian. This is Ahmed. [despite] 2022. And as Tom mentioned, we did have a number in our forecast, but, based on the revised forecast, projections are slightly higher. But the real impact for this impairment is the capacity prices which came in lower than what we were expecting. So, that was the bigger driver than the CapEx.

Got you. And then just going back to your prepared comments on Sul, you mentioned that you had recast Sul into discontinued operations, and there was a $0.02 swing on year-to-date adjusted EPS. I'm just assuming you haven't changed guidance because $0.02 is relatively minor or immaterial versus the guidance range. Is that right?

That is fair. And, to be honest, when we talked last time we did say, when we had a slower first quarter, we did say there were some things we were working on, and this was at least one of the things in the bucket.

Got you, great. Thank you very much. That's all I got.

Charles Fishman with Morningstar.

Thank you. Andres -- or, I forget who discussed the slides, slide 12 -- on the third bar, the 8% to 10% new construction -- that I get. And you've have laid that out very well. The 5% from existing businesses, I wonder if, Andres, you or Tom could maybe give a little more color on that. Is that just a full year of IPL, for instance, improving Brazil, or what plays into that 5% over the two years?

That is our cost savings and revenue enhancement initiative, which is well underway. We have a three-year $150 million cost savings revenue enhancement initiative in three chunks of $50 million, $50 million and $50 million. This is an annual run rate.

Prior to this, in the previous four years, we did a $200 million cost savings and revenue enhancement initiative. So, we have a lot of experience with this. Perhaps Bernard, our Chief Operating Officer, can make a few comments on what that consists of.

Thank you, Andres. I think we are very pleased that we are on track with the $50 million that we commit for the first year in 2015. And with all the initiatives that we have underway, we are well on track to deliver the $50 million -- the $250 million for 2017 and 2018.

And just as a reminder, those are the initiatives that we were discussing, our synergies and economies of scale. That is one of the pocket that we are working and sourcing.

And the service centers that we have in lower-cost location and we're taking the arbitrage between the labor cost that we have and the efficiencies of the standardization that we have in those places, and the standardization and (inaudible) improvement that we're doing, our fleet, sharing or replication of the lead practice of our terminal plans, best-performance terminal plants across the rest of the fleet. So, with that, we actually have identified the $150 million that need to be delivered and we are very confident to deliver those.

Okay. So, since a lot of that 5% is these cost savings, we can count on that, we can bank that. That's good. Okay, that was all I had. Thank you very much.

This concludes our question-and-answer session. I would now like to turn the conference back over to Ahmed Pasha for any closing remarks.

Thank you, everybody, for joining us on 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.