愛依斯電力 (AES) 2016 Q3 法說會逐字稿

Welcome to the AES Corporation third-quarter 2016 financial review conference call.

(Operator Instructions)

Also, 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.

Thanks, Nicole. Good morning. Welcome to our third-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 will now turn the call over to Andres.

Good morning, everyone. Thank you for joining our third-quarter 2016 financial review call. Today, I will provide an update on our year-to-date performance, key market trends, and our long-term strategy in the context of those trends. Tom will then review positive regulatory developments at DPL in Ohio and our financial results, as well as provide color on our current guidance.

Year-to-date, we generated proportional free cash flow of $1.1 billion, representing 91% of the midpoint 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 $0.64, representing 64% of our full-year guidance consistent with the expectations that we communicated to you previously. These results keep us on track to achieve our full-year guidance, which Tom will address in detail.

Now turning to key market trends on slide 5. At a high level, we are seeing changes in some of our markets due to the entry of natural gas and low-cost renewables. However, we are generally well positioned to take advantage of these changes because we have already begun to invest in these technologies and because most of our largely contracted portfolio has locational and cost advantages.

Accordingly despite what we have recently seen in some markets, like Chile, we remain confident in the long-term strength of our portfolio. We see a future where the operator, who has an efficient thermal and hydro fleet and can integrate them with the new technologies, will be the winner. We are also on track to meet our expectations through 2018, which are driven by our construction and cost reduction programs.

Most of our construction programs are going well, with the exception of Alto Maipo, which represents 15% of the total megawatts under construction. There's no question that the future growth across our markets will be heavily weighted towards less carbon intensive gas, wind and solar generation. Accordingly, we have been taking actions in this regard for some time now.

For example, as we've discussed on previous calls, we have been expanding our LNG infrastructure into Central America, as shown on slide 6. Our $1 billion Colon project in Panama will contribute to our growth beyond 2018 and includes a 380-megawatt combined cycle gas plant and an 180,000 cubic meter LNG regasification and storage facility. The power plant is contracted under a 10-year US dollar-denominated power purchase agreement.

This project will diversify Panama's reliance on hydro-based generation, while also meeting a growing need for natural gas across Central America. By introducing natural gas to the region, we are displacing oil-fired generation in favor of a cheaper and cleaner alternative and also serving the needs of many potential downstream customers, including commercial and industrial users and the transportation industry.

On slide 7, we see another example of how we are responding to environmental concerns about coal-fired generation. In Indiana, we just completed a multi-year $550 million rate-based investment in environmental upgrades to our coal plants and the repowering of several units from coal to gas. We will further shift IPL's fuel mix away from coal when we complete the 671-megawatt Eagle Valley CCGT Indiana in the first half of 2017. The combined impact of these investments will be to reduce the gigawatt hours IPL produces from coal by about 40%.

Turning to slide 8, the growth in renewables not only provides an opportunity for direct investments in wind and solar generation but creates a market for energy storage. We plan to invest in wind and solar generation in our markets, with a primary focus on US dollar-denominated long-term contracts. In fact, since last year, we have added more than 150-megawatts of solar with long-term contracts in the US, about half of which is operating and the rest will come online in 2017.

Regarding energy storage, we believe this technology will play a critical role in an increasingly renewables-based generation mix. AES has been designing, deploying, and operating battery-based energy storage systems for almost a decade. Today, with our proprietary Advancion platform as the world leader, with more than 400-megawatts in operation, under construction or in an advanced stage development across seven countries.

In 2016, we have already closed Advancion sales to third-parties totaling more than $70 million in gross revenue. With our proven storage platform, unequaled experience, and global reach through AES and our sales channel partnerships, we are ideally positioned to capitalize on this rapidly growing market.

Turning now to slide 9, I'd like to discuss what we consider to be key underlying strengths of our businesses: a highly contracted portfolio and the competitive nature of our assets, even in those markets where LNG based and renewable generation are making inroads. As you can see on this slide, as a result of our proactive contracting and portfolio rebalancing initiatives, today about 75% of our business is US dollar based. About 85% of our business is either contracted generation or regulated utilities. The average remaining life on our PPAs at our contracted business is seven years. When we complete our current construction program in 2020, it will be extended to 10 years.

Turning to slide 10, although that's a long average remaining contract life, there are a few markets where our contracts will roll-off sooner. Nonetheless, we believe that our position in those particular markets will allow us to continue to earn attractive returns after the current contracts expire. The majority of our businesses are low-cost flexible and reliable energy providers with strong locational advantages. Our knowledge of these markets and critical mass also puts us in a position to take advantage of growth opportunities or quickly respond to changing conditions.

Let me talk about a few of these markets in more detail. In the Dominican Republic, a portion of our contracts are rolling off in the next three years. However, our plants are mostly gas-fired. We offer the lowest-cost source of generation in the system, which is 54% oil-based. Based on today's relatively fuel prices, our variable cost is half of that of oil-fired generation, which puts us in a good position to re-contract our plans on favorable terms.

In 2017, we will complete the closing of the cycle at our DPP gas plant, which will add 122-megawatts without increasing our carbon footprint. In the Philippines, we operate a 630-megawatt coal-fired plant and are building a 335-megawatt expansion. The existing Masinloc plant is more than 90% contracted until 2019. We've already reached an agreement pending regulatory approval with the plant's off-taker for an extension to 2022. In terms of the 335-megawatt expansion project, which will come online in 2019, we have already signed 10 to 20-year contracts covering 50% of the capacity.

Our plants in the Philippines will be even more competitive once the country's gas plants, which account for 25% of the system supply move from base low to mid merit, when their current take-or-pay gas contracts roll-off from 2019 to 2023. In California, our Southland contracts are expiring in December of 2019 and 2020 but we have already re-contracted these facilities under a 20-year PPA that will require the repowering of our assets. With the new contract, we expect to see growth in earnings and cash flows from this business.

Now moving to Chile on slide 11, where we are largely contracted. Although there has been a slow down in economic growth, mainly due to the impact of falling mineral prices on the Chilean economy, we remain optimistic about the future prospects of the country. As you may know, the recent auctions for contracts beginning in 2021 and 2022 cleared significantly below market expectations.

We believe these prices reflect aggressive bidding by both new market participants and existing hydro owners. Nonetheless, we do not believe that this will have a meaningful impact on our business in Chile in the near to medium term, because AES Gener is largely hedged, with an average remaining PPA life of 11 years. Solar exposure for the next five years is quite limited, with only 8% of our contracts rolling off in 2021 and 2022.

Although over the long-term, we do forecast some softening in prices, we do not believe this auction result is necessarily indicative of the long-term price level. While Chile does have excellent solar and good wind resources, some of the assumptions underlying the reason auction outcome may have been aggressive on capital cost declines, load factors, and the all-in cost to support renewable assets with a 24/7 load-following obligation.

We see renewables, energy storage, and thermal resources as complementary in the future Chilean grid. In fact, we believe our existing portfolio will be even more important in the long-term as we see higher demand growth driven by an eventual acceleration in economic growth. Accordingly, our existing assets are well-positioned to provide reliable and competitive energy to the Chilean grid.

Now turning to slide 12, to our construction program, which is the most significant driver of cash flow and dividend growth in the coming years. Since our last call, we have completed construction of our 532-megawatt Cochrane power plant in Chile, which is 100% contracted for 18 years. This brings our year-to-date commission capacity to 3-gigawatts, all of which were completed on time and on budget. We have another 3.4-gigawatts remaining under construction where we are generally making good progress.

The main exception to our strong performance on construction is Alto Maipo, a 531-megawatt run of the river hydro plant in Chile, which is by far our most complex construction project underway. Today, the overall project is about 40% completed. As we discussed on our last call, we have encountered geological issues while excavated some underground tunnels. After consultation with the contractor and independent consultant, our expectation is still for Alto Maipo to be completed in 2019 at a cost that is about 10% to 20% over the original budget.

We expect the additional capital cost of roughly $200 million to $400 million will be funded by a combination of lenders and project sponsors. Discussions with lenders are underway. I'd note, that notwithstanding the challenges we have encountered at Alto Maipo, we have a strong track record of completing projects on time and on budget. In the last five years, AES has delivered more than 5-gigawatts of projects, which were completed on time and on budget. Accordingly, we are confident that our construction program will continue to drive attractive growth in our free cash flow and earnings.

Turning to slide 13, excluding the cost overrun at Alto Maipo, which I mentioned earlier, our 3.4-gigawatts currently under construction represent total capital expenditures of $6.4 billion; however, AES' equity commitment is limited to $1.1 billion, of this all but $250 million has already been funded. Roughly 70% of our investments are in the Americas, mainly Chile, Panama, and the US.

Before I turn the call over to Tom, I would like to emphasize our derisking of our Company over the last five years on slide 14. Today, we are in a strong position to execute on the strategic growth opportunities I just discussed in large part because of the actions we have taken. We have exited 11 markets including the riskiest countries in our portfolio. This week we also closed the sale of AES Sul, a utility in Brazil, which decreases our exposure to Brazilian regulatory and hydrology risk to more appropriate levels.

In total, our asset sales program since September of 2011 has raised $4 billion in cash to the parent. We are investing our discretionary cash towards projects that are better align with our strategy, like LNG in Central America and renewables in the US. In Panama, our hydro assets will be more valuable by 2019, when we began operating the nation's first gas-fired plant, a LNG facility which will cap energy prices in times of drought. These investments not only drive solid growth in cash flow and earnings but also offer our investors a more robust and optimal portfolio.

Last but not least, deleveraging has been and will continue to be an important part of our strategy. Over the past five years, we have reduced our parent debt by 28% and based on the growth of our cash flows, we expect to achieve investment-grade stats by 2020. We believe that, in conjunction, all of these actions will deliver attractive risk-adjusted returns to our shareholders. With that, I'll turn the call over to Tom.

Thanks, Andres. Good morning. 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. Before I get started, I'll remind you of a couple items that helped our results in the third quarter of last year. One was the restructuring of Guacolda in Chile that generated $0.06 of equity in earnings, and the other was a large receivables collection in the Dominican Republic, which led to higher than normal proportional free cash flow.

Now turning to slide 16, third-quarter adjusted EPS of $0.32 was $0.06 lower than 2015. This decline is in line with our expectations that we communicated on our last call. Specifically, our third-quarter results reflect positive contribution from our businesses particularly in the US where we benefited from rate base growth at our utility, IPL, in Indiana and improved availability at DPL in Ohio. The impact of the Guacolda restructuring in 2015 and also the $0.02 impact from the devaluation of foreign currencies as expected particularly in Andes and Europe.

Now to slide 17, our proportional free cash flow and adjusted PTC for the quarter. We generated $400 million of proportional free cash flow, a decrease of $221 million from last year. This reflects slightly lower margins and the impact of the working capital in the MCAC SBU, specifically the DR, where although collections remained strong, we had the large receivables settlement last year. We also earned $272 million in adjusted PTC during the quarter, a decrease of $43 million largely driven by the Guacolda restructuring.

Next, I'll cover our SBUs in more detail over the next six slides, beginning on slide 18. In the US, our results reflect relatively higher margins including the benefit from environmental upgrades on 1,700-megawatts of capacity that came online through this quarter and from this year's rate case at IPL, as well as higher contributions from DPL reflecting our continuing actions to improve the availability of our generation fleet.

At Andes, our results reflect higher margins primarily due to lower spot fuel and energy purchases, as well as the start of commercial operations at Cochrane Unit-1 in Chile. This was partly offset by lower spot prices and generation at Chivor in Columbia, where we replenished reservoir levels after increasing production when energy prices were at record highs in December of last year. Margins also reflect a 38% devaluation of the Argentine peso. Adjusted PTC decreased due to the Guacolda restructuring and proportional free cash flow also reflects the timing of lower VAT collections in Chile after Cochrane came online.

In Brazil, our results were largely driven by lower margins, mainly due to the expiration of Tiete's PPA at the end of 2015. As part of our rolling hedging strategy that we've had place since 2014, Tiete's about 80% hedged over the next two years. In Mexico, Central America and the Caribbean, our results reflect lower margins primarily due to lower rolling 12-month availability in Puerto Rico, which was impacted by a fourth-quarter outage in 2015.

Adjusted PTC was further impacted by lower interest income on overdue receivables in the Dominican Republic, where collections have improved. Proportional free cash flow decreased primarily due to the large settlement of receivables in the DR. In Europe, our results reflect lower margins due to the contracted capacity price reduction following the successful settlement of outstanding receivables at Maritza in Bulgaria, as well as a 36% devaluation of the Kazakhstan Tenge.

Proportional free cash flow benefited from higher collections at Maritza. It's worth mentioning that we continue to see improved collections in the roughly 6 months since that settlement and payments are current. Finally, in Asia, our results reflect steady margins and working capital requirements year-over-year.

Now to slide 24. I'll provide an update on our filing at DP&L in Ohio, where we've seen some positive momentum on the regulatory front. We remain in active discussions with the Commission staff and interveners. As you may know, last month, we amended our ESP filing to propose a distribution modernization rider of $145 million per year over seven years, with the aim of achieving and maintaining an investment-grade rating at DP&L. Hearings are now set for early December. We expect a ruling to be effective beginning in the first quarter of 2017 that will support the financial viability and credit profile of the business.

Now to slide 25 and the progress we're making to improve our credit profile. In the third quarter, we prepaid $180 million in parent debt, bringing our total debt pay-down year-to-date to $300 million. Since 2011, we've reduced parent debt by $1.8 billion or 28% and reduced interest by 125 basis points, resulting in an annualized interest savings of $180 million. As you can see on the top of the slide, we have no debt maturing at the parent until 2019, when only $240 million is due.

Turning to 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 strategy to derisk our portfolio and improve our credit metrics. We expect our credit to continue to improve largely driven by our strong growth in parent free cash flow as well as a modest amount of annual debt reduction. As a result, we expect to obtain investment-grade credit metrics by 2020. We believe this will help us reduce our cost of debt, improve financial flexibility, and also importantly enhance our equity valuation.

Turning now to our 2016 parent capital allocation on slide 26, which is material in line with our prior discussions. 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 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 proceeds from asset sales, primarily from AES Sul, where we are estimating net proceeds of $440 million including a stub dividend of around $25 million after accounting for working capital adjustments and transaction costs. Although we've successfully closed the sale in October, we anticipate receiving the majority of the proceeds at the parent in the first quarter of 2017 after meeting the required notice period for distributions.

Now to uses on the right-hand side of the slide. Consistent with our capital allocation plan, with 10% growth in our dividend and completed share repurchases, we are returning about one-third of our allocated cash to shareholders this year. Going forward, we continue to see our dividend as the primary means to distribute cash to shareholders. As I just mentioned, we've already prepaid $300 million of our near-term maturities. We've also allocated $360 million for investments in our subsidiaries, the majority of which is for new projects driving our growth through 2018 and beyond.

After considering these investments in our subsidiaries, debt prepayment and our current dividend, we are left with roughly $400 million of discretionary cash. This together with our 2017 free cash flow will provide a strong foundation to grow our dividend, continue to delever, and earn attractive risk-adjusted returns by investing in our development pipeline focused on gas and low-cost renewables.

Now turning to slide 27. As reflected in our third quarter and year-to-date, we continue to generate strong proportional free cash flow. In our third quarter, adjusted EPS was also in line with our expectations. Accordingly, we are reaffirming our 2016 guidance for all metrics. Since earlier this year, we've also experienced some headwinds including outages at two of our businesses in MCAC, as well as the slightly negative impact from reverting back to ESP-1 rates and also some dark spread compression at DPL in Ohio. However, we are expecting to offset these impacts with a couple of items, one of which would lead to a lower full-year effective tax rate.

Finally, before handing it back to Andres, I want to briefly discuss our expectations beyond 2016. On our fourth-quarter call in February, we planned to provide guidance for 2017 as well as longer-term expectations through at least 2019. At that point, we will have completed our annual budget process and will be in a better position to provide more detailed guidance.

Based on our preliminary view, we expect to be within the previously disclosed ranges for average annual growth through 2018. As Andres discussed, the majority of our new projects are coming online in 2018. So we expect growth to be stronger in 2018 and 2017. Accordingly, we are reaffirming our previously disclosed ranges for expected growth in 2017, 2018 for both proportional free cash flow and adjusted EPS. With that, I'll now turn it back to Andres.

Thanks, Tom. To summarize today's call, we have a portfolio of assets that is generating strong cash flow and a construction and development pipeline that is driving growth in cash flow and earnings. We are well-positioned to maximize shareholder value through the following. First, we are rebalancing our business mix by exiting certain businesses to reduce risk and redeploying our excess cash in growth projects with long-term US dollar-denominated contracts and focusing on less carbon intensive sources of generation.

Second, we remain committed to continuing to strengthen our credit, which is largely driven by the successful completion of our construction program, cost reductions and delevering. Accordingly, we remain confident that we can achieve investment-grade stats by 2020. Third, we are capitalizing on our advantage position in key high-growth markets. We continue to expect double-digit growth in all key metrics through 2018. Furthermore, we believe that we are well placed to deliver attractive growth in cash flow and earnings beyond 2018. With that, I would like to open the call for questions.

(Operator Instructions)

Greg Gordon, Evercore ISI.

A couple things, on slide 26, as I compare it to the second quarter, so the comparable slide, I see that the only adjustment is that you're assuming that you articulated this in your script, I just wanted to be clear, that some of the sales proceeds are slipping into 2017 from 2016, otherwise this slide is demonstrably unchanged?

That's right, Greg. This is Tom, yes.

Okay. So on the unallocated discretionary cash, you talked about -- one of the things you didn't talk about was significant further share repurchases. That was notably absent from the script, was that on purpose?

As Tom said, we see dividends as our primary way of getting cash back to our shareholders. On the other hand, we do have an approval. We have shown in the past that if we think that's the best use of our cash, we will go ahead and buy back our shares. So we are not taking it off the table, but we are saying our primary focus will be on paying and increasing and growing dividend

Okay. It just it's a very luxurious position you are in, in that you don't have any maturities for a few years. You're already growing the dividend at a pretty high articulated rate. Yet you still have all this unallocated cash. So I just -- capital allocation is going to be top of mind when we quiz you at EI.

That will be good. It's great to be in a luxurious position. (laughter) What I'm very glad is -- yes, we've been working on this for a long time, in terms of getting our debt in better shape. We are in very good shape. Not only that in terms of terms, length of the debt in terms of the majority of the debt is fixed, and also it's in the currency of the operating business. So yes, we will be talking about that but that does give us options.

Okay. Two more quick questions. One, I think you, in reiterating your guidance, you've indicated that you are using curves for commodities and currencies from the middle of the year. As I eyeball those and how much they've changed over the course of the -- since the middle of the year, I think the dollars moved in your favor but commodities have moved against you. Net net, it doesn't look like a big negative, if anything, it might be a push. Can you comment on how those changes -- how those curves have changed since June 30?

Greg, you're basically right. They're basically flat. I don't know if, Tom, you want to add something to that? But the net is flat.

Yes, that's fair

Okay, great. Then in terms of the earning's drag associated with the Chile construction project, should we think about the earning's impact as just being the incremental cost of the debt on the cost overrun?

This project would be coming in on 2019, so quite frankly, has no impact prior to that. We have to see -- again, we're negotiating now with lenders -- how much is from the sponsors, how much is from the lenders and what are the conditions. So it really doesn't have any impact through the 2018 window.

I would add that Gener has its earnings call later today, I think around 11 o'clock. But they did come out with their press release. They had one of -- I think the best quarter in the last five years. Gener's in a strong position. But we have to address the issue at Alto Maipo. As I said, we are working very constructively with our lenders and also with the construction company.

Okay. Thank you, guys. Take care.

Thanks.

Ali Agha, SunTrust.

First question, I just wanted to clarify this comment you had made. When we look at the next couple of years, you had put out -- you said you reiterated the growth numbers for 16% EPS growth. But this point about this being greater than 2018 versus 2017, I just wanted to understand that a little better. Is the implication that 2017 perhaps is lower than the 12% to 16% but then you catch up in 2018? Or that 2017 is 12% but 2018 is 16%? I just wanted to understand what you were saying on that 2017 versus 2018 growth number.

Yes, Ali, that's maybe a little more fine-tuning than we want to get to at this point. We're clearly comfortable with the 12% to 16%. We think that 2018 will be stronger than 2017. We still think the 2016 to 2017 growth rate is going to be strong and attractive. But I'd rather not get into too much fine-tuning. We'll certainly do that in February, when give formal guidance.

Understood. But, Tom, just to be clear, we should not assume that each year is 12% to 16%? We should assume that's a cumulative 2016 to 2018 number?

Yes, cumulative or average, however you want to do the math, yes. But just to explain growth between 2016 and 2017. Just we'll put a fine point on growth each year in February.

Okay. Then on Ohio, how concerned are you that there will be inevitable legal challenges to any approval you get, even for this distribution rider? What's the basis on which you guys are confident that this thing will be sustained?

Well, Ali, you always have a process and you have interveners. Having said that, we have the case of FirstEnergy, which has moved forward. So we think our case is even more robust. So we have a high degree of confidence of this moving forward.

I'd just say, as it's a distribution monetization rider, we are very focused on doing it for the health of DP&L and for T&D business. We think having a strong credit profile there is important. This will give us a trajectory to do that. Also we do think that there is investment in the DP&L T&D business that would be good for customers and would also require capital. That's one of the major components of and frankly, uses of cash as we talk with the Commission.

Okay. Just to verify the timing, you alluded to December 5, the hearings, but you also have discussions. Is this something that potentially we could hear about a settlement before year end? Or should we expect Q1 when decisions and settlements and those kinds of things happen?

Ali, I think is most likely Q1.

Okay. Last question, Andres, you talked about contracts that are rolling off post 2018. You've got stuff that's coming on at that time as well. I know you'll provide more granularity in February, but just at a high level, when you look at your business over the next, call it, four or five years or 2020, 2021, do you have much visibility and confidence in terms of, can you sustain the kind of growth rate that you've shown or promised us through 2018? Or -- just high-level or are you seeing more headwinds to slow things down?

Ali, we'll provide more color when we have our fourth-quarter call, in terms of expanding -- But we feel confident of the growth rates that we have given. We see continued growth rate past that. We will get more specific into the future. But if you look at our construction programs, you have a lot of things coming online in 2019 and 2020. Also more discrete items like some of the renewables, such as solar, which will be growing and aren't quite frankly, fully incorporated in some of the construction numbers we give because they're much shorter periods between development and construction.

Okay, thank you.

Just to clarify one thing I said on DP&L, it's a distribution modernization rider. I think I said something other than modernization. It's a big word for me (laughter).

Julien Dumoulin-Smith, UBS.

Just maybe starting out on Ohio, following for the last question. Can you elaborate a little bit, is the structure analogous to what FirstEnergy recently approved? Then separately, you talked about maintaining investment quality. What metrics are you solving for with the DMR and ultimately to get those IG metrics?

Just on DP&L, yes, it's similar. FE had some FFO ratios, I think they were using 14.5. It's similar to what we're using, so that's what gets us the $145 million of revenue requirements or DMR, I'll call it, that we requested. I guess we are focused on seven years. They were shorter with an ability to extend, but we do think it's helpful to have a defined longer period. That's certainly a matter of our discussions right now.

Got it. All right. Great. Turning to your longer-term guidance, you talked about 2018 being still intact. Can you reiterate your confidence in OPGC-2 in India just being on time. As well as also just curious -- Alto Maipo indicates half of 2018. Does that have a material contribution to 2018 in terms of your confidence to hit that number?

Okay, taking the first one, in terms of Alto Maipo, as I said, it has really no impact on 2018. So I think the key thing is -- reaching an agreement with the lenders and completing the project. Regarding OPGC-2, we will give more information into the future. I think if we look at it as a project in India, it's overall going quite well. It's a complex project. It does have rail tracks and a coal mine. We've got all the coal permits. We've got most of the land permits. So in general its proceeding well for project in India.

Got it. So you're confident the first half of 2018?

We will update that on OPGC-2, we're making overall good progress.

Okay. All right, no, fair enough. If -- coming back to Chile just real quickly, can you comment a little more about what you think -- I think your term was, an appropriate level for new entry? How you think that kind of evolves here over time? Obviously, the use of blocks rather than conventional PPAs really shifts the market dynamic there. Can you comment?

Well I think what happened Chile is two things. First, you have to realize that there were about $50 billion in mining projects in Chile, say, we were looking back three or four years ago. Of those, I think, probably about $40 billion have been suspended. So the growth in demand from the mining sector did not materialize. Those products are on hold. So that really changed the dynamics to give you a much higher reserve ratio in Chile than certainly any of the projections had been.

So that's I think the most important thing to understand. So when there was -- this auction came in. There have been some changes to the auction process, what we saw was, it was below, certainly consensus estimates. Basically came in on two sides, One, was a new entrant on the renewable side. Also we believe on the hydro side, people bid lower than expected. I would say of the thermal bids we were, probably we believe the lowest.

So we had, I think, a better view of that. What do we think is a sustainable level? Well if you go to the market research in Chile today, the sustainable level is north of $60 a megawatt hour. If you look at where this auction cleared it's more like $47. There are issues here because you have to follow the load with intermittent renewables and you have to put packages together. So we think that some of these assumptions -- obviously people are bidding for future prices of the capital investment, future prices for other things.

There's a lot of assumptions here. So we think that, more line with the consensus view overall. The one thing I would say is, if these mining projects gets reactivated, maybe even one-third of them, then the situation in Chile will change. Because you also should remember that the very high reserve margin that the market had, a lot of that is very old.

It's very old coal plants and other ones that are not efficient. So we think that's reasonable and that -- anyway the market moves though, I think that we're in a very good position having that existing thermal and hydro base to combine it with renewables, to be able to offer more secure load-following supply.

Got it. Then can you comment recently on the Philippines and Masinloc and the decision to pursue the expansion, given, call it, broader pricing pressures that we've seen in Chile, et cetera?

Different market. In the case of the Philippines, we saw that there was demand for our plant, Masinloc and that we could add another, basically another unit to Masinloc, a 335-megawatt's going to super critical and that we could contract that at attractive prices. So we started this, it's under construction today. The Philippine market will change as -- what you have today is basically a lot of gas plants that are using domestic gas, which are basically first to be dispatched.

So they're sort of base load. When these contracts burn off in the next couple years, they're going to go to mid-merit. Quite frankly, they may have to search for new sources of gas. So given that, this plant will be very well positioned. Basically I think that perhaps where you're going is that, the new contracts we're signing for 10 and 20-year PPAs are at the same -- similar prices. We basically have an extension on the existing Masinloc at the same price with the off-taker. It is pending regulatory approval, but we expect that to get approved.

How contracted is the second unit that you're building?

The second unit today's about 50%. But we expect to have it much more contracted by the time it's completed because it's not going to just one big distribution company, it's going to multiple.

Got it. Thank you

Lasan Johong, Auvila Research.

Right now, if you look at the valuation of AES, even if you ignored all the utilities, generation is trading at $1,000 a KW or that's what the market is telling us. Andres, when do you say this is enough, I'm going private, I'm going to take out AES and turn it into a private company?

I think that if you look at AES today, it's certainly been significantly derisked and certainly I think has a very attractive future growth profile. I think that we're very well-positioned. I think in terms of our valuation, we have had quite frankly a lot of headwinds over the last five years. Some external, whether it was droughts or commodity prices or FX. Now, what we have done is take out a lot of that risk as we go forward.

So I think as we deliver on the growth prospects and deliver on our construction program and certainly deliver on our cost cuts, because -- one of the things, we're today at a run rate of $250 million less of overhead and general expenses than we were five years ago. So I think all the trends are right. I certainly think that it's an issue of delivering on it. We should see valuations which are more in line with our peers.

Yes, I hope so anyway. Tom, you mentioned that by 2020 AES should be in the investment-grade metric area. Is the ambition for AES to try and become an investment-grade Company? If so, does that change the way AES looks at financing its business?

I think we'll have a better idea of what the metrics will translate to from the agencies. We want to be careful, I don't want to presume what their judgment will be. That's why we're trying to control, what we can control. What's basically move -- our ratios have gone from 6.5 to about 5. We'll have to go 4, low 4s depending upon our business mix and the stability of the business. I don't think it would materially change our business or our financing strategy.

I will say that we've done a lot, we'll continue to do a lot to look ahead and refinance, take advantage of market windows be it at the parent or really all throughout our subs, be it project finances or subsidiary finances that would be bundles. The one thing I'd say is that we'd probably look to do bundles more than one-off deals where we can and it still fits with the strategy. So we're doing that in some places.

We got an expansion right now in the Dominican Republic, about $250 million to close the cycle, make a project about one-third more efficient on its gas usage. That's being done -- it's basically being bundled with our Andres plant. That's a very efficient plant. So we're bundling those two together, so it means we don't put in equity. We basically use the equity value of Andres to bundle that and alleviate equity requirements in new and also just upgrade the credit package.

We're doing the same thing in the Philippines where new Masinloc is part of the credit package of the Philippine. So we'll look to do more of that. I think especially as we go and look at some smaller renewables. We're doing some smaller renewables in the US. This year we'll do about -- almost 100. Those are things that you really do bundle financing as opposed to project by project.

Okay. Last question, Andres, AES is going very deep and long into battery storage power. I'm just wondering because I'm assuming battery powers will be used for backup to renewables mostly and to make sure good stability remains in place. But my understanding is that backup power is typically required for six to eight-hour periods. Batteries, generally don't give out too much more output than two to four hours. Is there a disconnect between what the objective of the battery is trying to do and what actual reality is?

Yes, what we're seeing first is this market is growing very quickly. So we believe, I think, it's next year we'll have about -- installations around the world around 1-gigawatt. We're starting at maybe two years at 200. So first, it's growing very rapidly. It's a technology that has many applications. I mean it has applications for capacity release. Those were some of our first projects. Ancillary services -- you're right. Substituting peaking plants where you have a lot of renewables, that our big project in California.

But it also has applications to the T&D business, in terms of transmission There is no technical reason you couldn't make it an eight-hour if you wanted to. It's just a question that you have to put on more batteries and it becomes more expensive.

So we expect battery prices to continue to drop, because these are the same batteries you use in electric vehicles. As that becomes massified, it should drop continually. So we're projecting a continued drop in those prices. The duration is really a function of your battery price. So we are seeing that it's -- in many places the applications are more sort of in the two to four hour, today -- at today's battery prices.

But you could extend those for longer. I think that again, we're seeing a very rapid growth of demand. Again, this year alone, we've already closed $70 million in gross revenues from sales to third-parties, that is sales to other people to apply it on our grid. So, I'm certain that this will continue to grow very quickly. I'm also certain that prices will drop.

What we're really trying to see is our two-pronged approach, where we put our Advancion product on our own platforms and use them to enhance our renewables or even enhance our thermal plant and selling it to third-parties. Now that third-party sales, we're using channel partners, who have sales forces. Finally, I would say that the combination of the two, whatever we're driving at, we want to be low cost provider and also quite frankly the best provider of this service. So third-party sales helps lower the costs to us.

Thank you.

Angie Storozynski, Macquarie.

So first, going back to the Alto Maipo project, can you tell us how much of the capacity is currently contracted? If there's been any impacts on your ability to contract the remainder of the project, given the outcome of this August solar power auction?

Yes, Angie, I think about 40% of the project is contracted today, long-term contract. In terms of our ability to re-contract, I would say that obviously it will affect the price of any future contracts. When the -- it was being built, the forecast for Chile quite frankly were like $100 a megawatt hour. What we're seeing is more likely somewhere in the mid-60s, we think, is probably a long-term price. So you're right. The auction -- but I would say more than the auction, quite frankly the dynamics in the market, because quite frankly if you did have that rapid pick-up in the mining sector, I think that the prices would reverse.

Okay. Now, you are assuming that the lenders basically cover the cost overruns. I'm concerned here because it seems like you have fully committed your equity stake here. You have an increase in the cost of construction and a reduction in revenues, right? Because of the drop in power prices. So is there a scenario where you would actually consider walking away from this project?

You're right in that certainly the project looks less attractive today with the cost overruns and the lower prices than it had initially. It was a very robust project to begin with. In terms of our commitment to the project, we will look at this as in terms of what we think is the best decision for AES Gener. Obviously, we have to reach the right agreement with the lenders to make this project better than not proceeding with the project. So that always remains an option. We're looking into that, but I think that the most likely outcome is that we do complete the project.

Okay, thank you. Then my second question is on capital allocation. So you're -- you aim at investment-grade FFO to debt by 2020, so why not use the spare cash that you have or the capital that is unallocated to actually reduce that debt in order to get those investment-grade metrics earlier. This is always an issue with the strength of your dividends that is somewhat undermined by this low investment-grade rating?

Yes, I think that's a great comment, Angie, something we discussed. We've been paying down the debt consistently, trying to take advantages of windows in the market. We also have the options of transforming our portfolio for the future and taking advantage of the platform. So we have to balance those two. Obviously, that's something that we've looked at. What is the speed of the debt pay-down that we should do.

What we think is important is to have a very clear north, where were going and to deliver on that. As we do asset sales and as we see opportunities to add to our platform, we'll take that into consideration. But again, I think we have a good track record in terms of consistently improving our credit profile, derisking and cutting our costs.

Okay, thank you.

Brian Russo, Ladenburg Thalmann.

On slide 25, you guys outlined the debt to parent free cash flow plus interest ratios. I'm just curious, what's kind of your 2020 target and to get to investment-grade like ratings? Are there other ratios that we should be tracking?

This is the primary one, the target would be around 4, but it's dependent upon obviously business mix and those kind of things. But generally it's around 4, which would be a combination of parent free cash flow growth, which would be the strongest contributor, as well as some continued debt pay-down.

Okay. I think you mentioned earlier to offset some of the first-half 2016 headwinds, you're effective tax rate is a little bit lower. Is that accurate? Then, what's driving that?

Yes. That's what we're -- there are two things I mentioned that would be offsets, one is a specific tax matter that would cause our tax rate to be lower. I think we had a range of 29% to 32% in the deck. So it would be at the lower end of the range. The other would be a specific settlement of a commercial issue.

Okay, got it. Then with your portfolio management initiatives, what regions could we consider non-core? Or any countries or assets that you are currently evaluating?

Yes, Brian, that's always a very delicate question for us because we are operating in these markets. I think in the case of Brazil, when we -- I think, fore-shadowed that we had a lot of hydrology risk in Brazil. So with the sale of AES Sul, we think it better balances our portfolio. You may ask, why is the hydrology risk or regulatory risk at AES Sul? Quite frankly, when you have droughts and you have an increase in energy prices because they're running more thermal, there isn't an immediate pass-through through the distribution companies.

So quite frankly, that puts pressure on our distribution companies in terms of cash. So we think that one of the main drivers of our value creation is a strong cash flow, having less assets in distribution in Brazil would make our cash flow more stable, as we redeployed that cash. So I'd say it's clear with our core markets, which we're going after -- the markets we are most interested in and again, those markets where we can get long-term US dollar-denominated contracts will have preference. We can't get it everywhere. But we want to shift the portfolio, get more contracted, and with a lower carbon footprint. That's what you can see going forwards.

Okay, great. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to hand the conference back over to Andres Gluski for any closing remarks.

Sure. Thanks. This is Ahmed. We thank everybody for joining us on today's call. We look forward to seeing many of you next week at the EI conference. As always, the IR team will be available to answer any questions you may have. Thank you. Have a nice day.

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