愛依斯電力 (AES) 2016 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter and full-year 2016 financial review conference call.

(Operator Instructions)

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

Thank you, Daniel. Good morning and welcome to AES's fourth-quarter and full-year 2016 financial review call. Our press release, presentation and related financial information are available on our website at AES.com.

Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

Joining me this morning are Andres Gluski, our President and Chief Executive Officer, Tom O'Flynn, our Chief Financial Officer, and other senior members of our management team. With that, I will now turn the call over to Andres. Andres?

Good morning, everyone, and thank you for joining our fourth-quarter and full-year 2016 financial review call. This morning we will discuss our results and our financial outlook. We will update you on key trends we are seeing across our markets and the progress we are making on our construction program and long-term strategy, including our recent announcement that we have agreed to acquire sPower, the largest independent solar developer in the US.

The key take-away for today's call include -- we delivered on our 2016 financial guidance, we are seeing positive developments across our businesses and markets, we are on track to achieve our run rate of $350 million in cost savings and revenue enhancements through 2018. Notably, we're expanding this program by targeting an additional $25 million of annual savings in 2019, ramping up to a $50 million incremental run rate in 2020.

Despite some challenges we are facing on our 3.4 gigawatt construction program, we expect to complete these projects through 2019. We exited non-core assets to bring $500 million in proceeds to AES that we will reinvest to continue to deliver sustainable long-term growth to our shareholders.

We signed an agreement to acquire sPower's renewable portfolio and growth platform. sPower has an exceptional development team and pipeline which will contribute high-quality, long-term and growing US dollar denominated cash flows. We're initiating 2017 guidance for adjusted EPS of $1 to $1.10. Finally, we're introducing our expectation of delivering 8% to 10% average annual growth in free cash flow, adjusted EPS and our dividend through 2020.

I will now discuss some of these themes in more detail, starting with key trends and developments we are seeing across our markets, on slide 4. In general, we are expecting stronger growth in GDP and electricity demand in most of our markets. In Brazil, demand expected to grows 1% in 2017 versus a decline of 3% in 2016. In Chile, demand is expected to grow 2% to 3% versus 1% in 2016.

Turning to Chile where the regulator recently introduced new rules for long-term capacity auction, under these new rules, winning bidders who do not develop the projects they bid will face significant penalties. We're encouraged by this development as the penalties should minimize speculative bidding and force market participants to bid with prices that include a fair return on capital.

Moving on to Argentina where we own and operate 3.5 gigawatts, we are encouraged by positive steps being taken by the new government. This month the government has raised electricity tariffs and linked generation tariffs to the US dollar. This effectively eliminates our exposure to the Argentine peso. As a result of improved confidence in Argentina, we recently placed a $300 million seven-year bond at 7.75%, utilizing a portion of the debt capacity we have at our Argentine businesses. In 2017, we've already received $57 million in dividends from Argentina through February, following $20 million in 2016.

Now turning to our construction program, beginning on slide 5. As you know, our construction program is the most significant driver of our cash flow and dividend growth in coming years. In 2016, we commissioned capacity of 3 gigawatts, all of which were completed on time and on budget. We have another 3.4 gigawatts currently under construction where we're generally making good progress although we're experiencing delays at some of our projects.

Our projects under construction represent total capital expenditures of $6.4 billion. However, AES's equity commitment is limited to $1.1 billion. Of this, all but $250 million has already been funded. Roughly 70% of our investments are in the Americas, mainly in the US, Chile and Panama.

Turning to slide 6, as you may recall from prior calls, an expansion of our existing Alto Maipo plant in Chile is by far our most complex construction project under way. Since our last call we have made significant progress on a number of fronts. Specifically, the project is about 49% complete versus 40% at the time of our November call. This progress is in line with our expectations and we remain on track to complete construction in 2019.

Based on further validation over the last three months by independent engineers and our discussion with EPC contractors, we continue to expect cost overruns to be in the 10% and 20% range we discussed on our last call. To fund these overruns and any additional future needs, we have signed a term sheet for additional financing commitments for up to 22% of the project cost. We also brought in the EPC contractor as a minority partner.

These overruns will be funded by a combination of project lenders, AES Gener, Minero los Pelambres and the EPC contractor. Although any cost overruns are disappointing, these are within the range we discussed on our last call. We continue to see long-term value in the project as the expansion will further diversify AES Gener's generation mix and offers locational advantages and a long expected life.

Turning to our other projects under construction, on slide 7, as you may remember, we expected three large projects to come online in 2017. Two of the projects are the closing of the cycle at DPP in the Dominican Republic and the IPL wastewater upgrade, with a combined total project cost of $500 million. Both projects are expected to be completed on time and on budget.

The third project, the 671-megawatt Eagle Valley CCGT and IPL is behind schedule due to productivity issues on the part of our contractor. We now expect the project to come online in early 2018 versus our original expectation for the first half of 2017. This delay is obviously disappointing but manageable since we do not expect a material impact on our forecast.

Having said that, our EPC contractor is taking tangible steps to mitigate this delay and finish the project late this year. We have another three projects totaling 2 gigawatts that are expected to come online in 2018 and 2019. In summary, we remain confident that our 3.4 gigawatts of projects under construction will come online consistent with our revised expectations and continue to be the key driver of our growth through 2020, which Tom will discuss shortly.

Now turning to our progress on our long-term strategy to deliver attractive free cash flow growth while at the same time strengthening our credit, beginning on slide 8. As we've discussed previously, we are primarily focusing our growth investments on natural gas and renewable projects with long-term US-dollar denominated contracts. We intend to reduce the carbon intensity of our portfolio while ensuring solid growth in cash flow and earnings. These types of projects will improve the quality of our cash flow and help us achieve our credit objectives.

Renewables represent an attractive business opportunity in light of several trends such as the dramatic drop in the cost of renewables that have made their energy production competitive. Today, renewables are the dominant type of new generation build across almost all of our markets. And long-term PPAs are available for renewables, providing predictable, stable cash flows.

The intermittent nature of renewables does pose challenges for the grid. We believe AES's ability to deliver its renewables by integrating them with conventional energy and energy storage can meet these challenges and give us a strong competitive advantage.

Turning to slide 9, to that end, late last week we announced that we have agreed to acquire sPower, the largest independent solar developer in the United States. sPower brings 1.3 gigawatts of installed capacity with an average remaining contract life of more than 20 years with very credit-worthy off-takers and a first-class management and development team with a pipeline of more than 10 gigawatts.

This acquisition is consistent with our strategy of greening our portfolio and increasing the make of our revenues towards long-term contracted US-denominated businesses. This acquisition will provide AES with the scale to secure the best prices when purchasing photovoltaic panels and inverters for our other solar projects around the world. It will also provide us with a proven, very successful and disciplined development process that can be used on our renewable projects everywhere.

Our partner on this acquisition is AIMCo, a $95 billion Canadian pension fund with experience in making direct investments in global infrastructure. This strategic partnership will help fund sPower's attractive growth platform going forward.

We intend to fund our $382 million share of the investment largely from excess discretionary cash that we receive from the sale of AES Sul in late 2016. We expect high single-digit IRRs from the existing assets, while the development pipeline has the opportunity to earn low double-digit returns that will help drive future growth in cash flow. The sPower transaction, which is likely to close by the third quarter of 2017, is expected to be accretive to earnings.

Although the EPS contribution may be lumpy from year to year due to the nature of the tax equity financing that sPower has utilized, we expect on average a high single-digit ROE, which is better than what we could earn if we used the cash to repurchase a mix of debt and equity. The stable cash contributions from this business and its long-term contract model also help make this a credit-enhancing transaction.

Now turning to slide 10, in January Tiete in Brazil agreed to acquire 386 megawatts of wind from Renova, which has an average remaining contract life of 18 years. This acquisition is an important strategic milestone for Tiete as this business will not only diversify its generation mix from 100% hydro, but also contribute stable long-term cash flows. Furthermore, this acquisition, which is 100% levered using Tiete's existing BRL1.5 billion debt capacity, this acquisition once again demonstrates our ability to utilize [lopes] debt capacity in order to grow our business and improve returns.

Moving on to the Dominican Republic on slide 11, leveraging our success with ENGIE in Panama, our LNG supplier for our Colon project, in December we signed a partnership agreement with ENGIE to market our excess LNG storage and regasification capacity at our Andres terminal in the Dominican Republic. ENGIE will be able to offer competitive and flexible natural gas products, tailored to meet the needs of downstream customers, and dual-fuel oil-fired generators in the Caribbean.

As excess LNG capacity at our terminal gets utilized to meet the needs of these new customers, we will receive enhanced revenue. We see significant potential for this partnership with LNG to maximize the value of our existing LNG infrastructure.

Now turning to slide 12 and our progress on our cost savings and revenue enhancement initiative. In 2016 we achieved our incremental $50 million reduction target. We're on track to reach $350 million in annual savings by 2018. We are now announcing that we're targeting an additional $25 billion in annual savings in 2019, stepping up to an additional $50 million in 2020 for a total annual run rate of $400 million from our base year of 2011.

Turning to slide 13, our asset sales program has raised $4 billion in cash to the parent since September 2011. We have exited 11 markets including the riskiest countries in our portfolio. We will continue to recycle capital and we expect to raise more than $500 million in additional equity proceeds this year. Although we can't be specific on the businesses that we are targeting for sale, our goal is to continue to optimize our portfolio and improve our risk-adjusted return.

Last, but not least, turning to slide 14, delevering has been and will continue to be an important part of our strategy. Since 2011, we have reduced our parent debt by 28% and we expect to achieve investment grade statistics by 2020. This will be largely driven by robust growth in our free cash flow and modest debt prepayments. With that, I'll turn the call over to Tom.

Thanks, Andres, and good morning. Today I'll review our 2016 results and capital allocation. I'll also provide an update on some key business developments and conclude by addressing our guidance for 2017 and expectations through 2020. Overall, as Andres mentioned, we finished 2016 on a strong note, meeting guidance for all metrics and setting a solid foundation for our growth through 2020.

Turning to adjusted EPS, on slide 16, full-year results were $0.98, just below the midpoint of our guidance range. Most of the $0.27 decline from 2015 was anticipated, including the impact of foreign currency devaluation, the expiration of Tiete's PPA, and the absence of some gains that have benefited prior year's results. Additionally, our tax rate was lower than normal, in part due to restructuring completed in the fourth quarter, as expected, as well as some other tax items that were not anticipated but went in our favor. This was largely offset by an unanticipated $0.06 one-time reserve taken against certain reimbursements in MCAC in connection with a legal matter.

Now to slide 17 and our proportional free cash flow and adjusted PTC for the year, we generated $1.4 billion of proportional free cash flow, which was above the top end of our guidance range, and represents an increase of $176 million through 2015. Our results reflect the receipt of overdue receivables at Maritza in Bulgaria, as well as higher collections at our distribution businesses in Brazil. This offset lower margins and the large receipt of overdue receivables in the DR in 2015. We also earned $842 million in adjusted PTC during the year, a decrease of $335 million, largely driven by lower margins.

Now I'll cover our SBUs in more detail over the next six slides, beginning on 18. In the US, our results reflect lower margins including the impact of lower wholesale prices and lower contributions from regulated customers at DPL, which were partially offset by higher contributions to IPL including the benefit from the 2016 rate case and environmental upgrades that came online through year-end. Higher proportional free cash flow also reflects lower working capital requirements, including lower fuel costs associated with the conversion from coal to gas generation at IPL.

At Andes, our results reflect lower margins primarily due to lower spot energy prices in Colombia and the devaluation of the Argentine and Colombian pesos. Adjusted PTC also decreased due to the restructuring of Guacolda in Chile that generated additional equity and earnings in 2015. Proportional free cash flow also reflects higher collections in Argentina and Colombia.

I'd also like to note that, as Andres mentioned, the new tariff in Argentina has linked prices to the US dollar, effectively eliminating our exposure to the Argentine peso. Our earnings in US dollar equivalent has now increased to 80%, up from 74% at our last call, as you can see on appendix slide 56.

In Brazil, our results reflect lower margins, mainly due to the expiration of Tiete's above-market PPA at the end of 2015. As part of our rolling hedging strategy we've had in place since 2014, Tiete is about 80% hedged for the next two years.

Proportional free cash flow increased primarily due to the recovery of high purchased power cost from prior droughts at our distribution businesses Eletropaulo and Sul. Last year we discussed a strategic shift away from the distribution businesses in Brazil, as evidenced by the sale of Sul.

As part of this shift we're applying to list on the Novo Mercado, where only common shares trade. Upon listing, our voting rights, currently above 50%, will become equal to our economic interest of 17%, and we would deconsolidate upon losing this controlling interest. For guidance purposes we've assumed deconsolidation for the full-year 2017.

In Mexico, Central America and the Caribbean, our results reflect lower margins primarily due to lower rolling 12-month availability in Mexico and Puerto Rico, which was impacted by a fourth-quarter outage in 2015. Adjusted PTC also reflects the reserve I mentioned earlier. Proportional free cash flow decreased primarily due to a large settlement of receivables in 2015 in the DR.

In Europe, our results reflect lower margins due to the contracted capacity price reduction following the collection of outstanding receivables at Maritza in Bulgaria, as well as the 35% devaluation of the Kazhakstan tenge. Proportional free cash flow benefited primarily from the collection at Maritza. In the roughly nine months since that settlement, payments have been current. Finally in Asia, our results reflect steady margins and lower working capital requirements following commencement of operations at Mong Duong in Vietnam in 2015.

Before turning to capital allocation, I want to provide updates on a couple of other developments beginning with our filing at DP&L in Ohio, on slide 24. As you may know, last month we reached a settlement agreement with certain interveners in our ESP case. The agreement includes riders totaling $125 million per year over five years earmarked for debt reduction and investment in distribution infrastructure. The goal is to achieve sustainable investment grade credit metrics at DP&L and DPL after the expiration of the ESP. As part of the agreement, we plan to either sell or shut down 2.1 gigawatts of merchant coal-fired generation.

It's worth noting that, while reaching a settlement is a positive development, not all parties signed onto the agreement, including Commission staff. Hearings are now set for March 8. We expect the ruling to be effective beginning in late second quarter or early third quarter that will help reduce leverage and support the progression toward becoming a stable and growing T&D business.

Next, on slide 25, I'd like to briefly discuss our views on potential tax reform. At this time it's early in the process and unclear which direction final legislation may take. However, I'd note that any under scenario, we do not expect any material cash taxes to be paid for the foreseeable future due to our large NOL position. We would expect to benefit, of course, from a lower corporate tax rate as well as from a potential territorial regime that will be supportive of tax-efficient repatriation of cash.

Certainly the item that could have the most negative impact would be any limitation or elimination of interest deductibility, given the capital intensive nature of our business and the important role that debt financing plays. Overall, the impact could be slightly positive under the administration's plan to slightly negative under scenarios limiting interest deductibility such as the House blueprint. If reform is enacted, there would likely be a phase-in period that would allow us to mitigate any negative impacts through changes to capital structure and other levers.

Now to slide 26 and the progress we're making to improve our credit profile, during 2016 we prepaid $300 million of parent debt and refinanced another $500 million of floating rate debt with 10-year notes at attractive fixed rates. Since 2011, we have reduced parent debt by $1.8 billion or 28% and reduced interest cost by 125 basis points, resulting in annualized interest savings of $180 million. As you can see on the top of the slide, our nearest maturity at the parent is $240 million in 2019.

Turning to the bottom of the slide, these proactive steps have helped us reduce our parent leverage ratio from almost 6.5 times to 5 times debt to parent free cash flow, plus interest. We expect our credit to continue to improve, largely driven by our strong growth in parent free cash flow as well as a modest amount of annual debt reduction. As a result, we expect to attain investment grade credit metrics by 2020. We continue to believe this will not only help to reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation.

Turning now to our 2016 parent capital allocation on slide 27, which is materially in line with prior disclosures, sources on the left hand side reflect $1.2 billion of total available discretionary cash, which includes $579 million of parent free cash flow, just above the midpoint of our expected range. Sources also include proceeds from asset sales, primarily AES Sul. As expected, this month the parent received $300 million, the remaining proceeds from the sale of Sul, after meeting the required notice period for distributions.

Now uses on the right-hand side of the slide -- consistent with our capital allocation plan we've allocated $400 million for investment in our subsidiaries, the majority of which are for new projects driving our future growth. We prepaid $300 million of our near-term maturities. And with 10% growth in our dividend and completed share repurchases, we returned about one-third of our cash to shareholders last year.

Now to guidance on slide 28, beginning in the first quarter of 2017, we will no longer be giving guidance on proportional free cash flow. Instead, we'll report consolidated free cash flow. Our use of proportional free cash flow was intended to provide investors with an understanding of the portion of free cash flow attributable to AES after the impact of noncontrolling interest. However, the use of proportional free cash flow is not consistent with recent SEC guidance in a broader related comment process, so we'll no longer be disclosing it. Having said that, as a supplemental disclosure in our investor presentations, we'll provide information about the portion of free cash flow attributable to minority interest.

Today we're initiating guidance for 2017, providing expected average annual growth rates through 2020 of 8% to 10% for all key metrics. Key underlying assumptions include FX and commodity forward curves as of year-end 2016, tax rate for 2017 in the range of 31% to 33% and the low 30%s through 2020; at least $500 million in asset sale proceeds in 2017, with $0.03 to $0.04 dilution from the timing lag before the capital is redeployed; the deconsolidation of Eletropaulo in 2017, as I mentioned earlier; and the use of our discretionary cash in line with our capital allocation framework, which I'll discuss in a moment.

Now to slide 29, for 2017, our consolidated free cash flow guidance is $1.4 billion to $2 billion, growing at 8% to 10% through 2020. We expect free cash flow attributable to noncontrolling interest to be 30% to 40% of consolidated free cash flow through 2020. Parent free cash flow, on slide 30, is expected to be $575 million to $675 million in 2017, a 9% increase over 2016, consistent with our 8% to 10% range.

On slide 31 our adjusted EPS guidance for 2017 is $1 to $1.10, growing at 8% to 10% from 2016 through 2020. For 2017, this represents 5% growth off the midpoint of our 2016 guidance range. As we said previously, we expect growth to be stronger in 2018 than in 2017. As I mentioned, 2017 includes $0.03 to $0.04 dilution from asset sales due to the timing lag until proceeds are redeployed.

The main drivers of growth were our cost savings plan, improved availability at our plants in MCAC, and contributions from new businesses, including closing the cycle at DPP and the acquisition of sPower. Our tax rate in 2016 was unusually low, and the negative impact of a more normalized rate in 2017 was largely offset by some discrete items that benefit us year over year.

In terms of our long-term growth, we're expecting 8% to 10% from 2016 to 2020. The primary drivers of this growth are contributions from projects under construction coming online through 2019, the benefit from our ongoing cost savings and revenue enhancement initiative and capital allocation, including investment in new businesses like sPower.

Regarding the profile of growth over the period, we see stronger growth in 2018 and expect to be at the low end of our prior range of 12% to 16%. In 2018 we bring online 70% of our current projects under construction. In addition, expect a benefit by allocating our discretionary cash into both debt reduction at the parent and investment in new growth projects. We also see operating improvement in some of our existing businesses.

Now I'll discuss our 2017 parent capital allocation, on slide 32. Beginning on the left, sources reflect $1.5 billion of total available discretionary cash. Parent free cash flow, the foundation for our dividend growth and value creation, is expected to be $575 million to $675 million, up 9%. Sources also reflect asset sales. And, as I mentioned, we expect to raise at least $500 million this year in addition to the almost $300 million received in 2017 from Sul.

Now to uses on the right-hand side, including the dividend increase we announced in December, we'll be returning almost $320 million to shareholders this year. We expect to pay down at least $200 million to $300 million of debt, a portion of which reflects our continuing efforts to improve our credit profile and achieve investment grade metrics by 2020. The remaining portion would be to maintain credit neutrality associated with planned asset sales.

We've allocated $382 million for our acquisition of sPower. This represents our share of the $853 million purchase price, less $90 million in acquisition debt funding provided by our partner. We also plan to invest $250 million in our subsidiaries, the majority of which is for new projects under construction and in late stage development. After considering these investments in our subsidiaries, debt prepayment, and our current dividend, we're left with almost $300 million discretionary cash.

Before turning back to Andres, I'd like to discuss how we plan to allocate the discretionary cash we're generating through 2020. On slide 33, you can see we expect to have $3.7 billion of discretionary cash primarily from growth in parent free cash flow. After current shareholder dividends, 2017 planned parent debt reduction as well as investments in projects under construction and the sPower acquisition, we will have $1.5 billion available for other discretionary uses.

Our guidance assumes targeted 8% to 10% annual dividend growth, consistent with parent free cash flow, modest parent delevering to continue our grid improvement and support our goal of reaching investment grade credit metrics by 2020, and, lastly, investments in attractive gas infrastructure projects such as southland as well as in renewable growth opportunities, including harvesting the sPower growth portfolio where we earn attractive risk-adjusted returns with high-quality, long-term US dollar-denominated contracts. With that I'll now pass it back to Andres.

Thanks, Tom. To summarize today's call, we ended 2016 on a high note by achieving or exceeding our guidance. We made further strides on our strategic goals by making progress on our construction program, which is the biggest driver of our near-term growth; extracting additional cost savings and synergies from our existing platform; rebalancing our business mix by exiting non-core businesses and redeploying the proceeds in less carbon-intensive businesses with long-term US dollar-denominated contracts such as sPower; offering 8% to 10% growth in all key metrics, including free cash flow, earnings, and dividends.

We are encouraged by our performance in 2016 and the progress we are making to continue to derisk the portfolio and deliver compelling returns to our shareholders. Now we will be happy to take your questions. Daniel?

(Operator Instructions)

And our first question comes from Ali Agha with SunTrust. Please go ahead.

Thank you. Good morning. First question, Andres or Tom, just to clarify, the dilution that you're seeing in 2017 in your guidance, that $0.03 to $0.04, if I'm hearing you right you're saying that's a timing issue in terms of when the proceeds are invested. So, when you do end up investing those proceeds, let's call it in 2018, is the ultimate impact neutral, accretive or still dilutive? How should we think about this?

You're right, it's $0.03 to $0.04 and it's really a timing impact. We think that the effect should be probably about neutral, be very minimal. Of course, it will ultimately depend exactly on the transaction that we invest in. I wouldn't expect it to be strongly certainly dilutive.

Okay. And then also clarifying, Tom, the profile that you were laying out to us, as you mentioned at the midpoint of your 2017 guidance you're up 5%. If I'm hearing you right, in 2018 should be up like 12% over 2017, if I heard that right? And then should we assume fairly even growth in 2019, 2020, as part of your profile?

Yes, that's fair.

So, those four years, I mapped them out consistent.

Yes, actually the 12%, Ali, was off of midpoint of 2016.

Is that a CAGR? I'm a little confused.

We had previously said that we thought growth from 2016 to 2018 would be 12% to 16% in EPS. So we still think that 2018 will be at the low end of that 12% and 12% range. We obviously wanted to go out past then to give investors a longer profile.

Right. But that's a CAGR we're talking, 2016 through 2018, 12% CAGR.

Yes.

Okay. And then third question, just to understand some of the assumptions that you mapped into this longer term outlook, do we assume in there that the Ohio settlement is approved as such and kicks in with that $125 million number? Is that assumed in there? And what FX moves have you assumed? Is it just looking at the forward curve in the outer years as well or some assumed dilution? What have you assumed there?

We assumed forward curves, as always. And in terms of DPL, it's in the range. We're in discussions so I'd rather not be too specific, but it's in the ballpark of what we've been discussing.

Okay. And then, lastly, the point you made about the free cash flow usage, roughly the $1.5 billion that you're left with, when you assume some investment in there are you assuming the average ROE of 14%? Or what kind of return are you assuming on that excess cash?

Some of it's for defined projects like Southland so we've got a pretty good visibility on that. But would really be looking across our portfolio, based on, as we look at our portfolio we look at risk and returns consistent with the country, the project, et cetera. So it would be a range of things from 14% down to things in the low double digits, consistent with Andres' comment on the sPower pipeline.

I see. Okay, thank you.

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

Good morning. Lots of things to talk about. Perhaps, first, just a real quick question, a couple of easy ones. sPower, what kind of EPS should we assuming once it closes, on an annualized basis? Is it simply taking a high single-digit ROE from the equity invested or because of the (inaudible) something lower than that in terms of the ongoing ROE?

Julien, it's Tom. It's generally a few cents a year. As Andres said, it's lumpy. But generally it's a few cents a year. If you look at it over a long period the ROEs would line up with the IRRs. The ROEs in the early years are a little better because of the nature of the accounting that comes with the tax equity investments. Obviously it's bigger if there's more size.

Got it. So, it's shooting above that level in the early years. So, what's embedded in 2017 guidance or as you think about 2018 with the sPower deal? And also the trajectory thereafter.

A few cents a year.

Okay. Just a couple cents, give or take?

Yes.

Okay. Got it. And then what's the impact of deconsolidating Eletropaulo on EPS? I just want to make sure.

None. Just on the consolidated free cash flow.

Right. Also, what's reflected in terms of DPL in your 2017 guide and onwards?

I think Tom answered that in terms of basically we're not going to discuss it. But it's within the range that's public.

Got it. All right. Fair enough. Following on Ali's last one, the 12% to 16% at the low end, that would be roughly $1.24, 12% compounded two years off of 2016's dollar?

Yes, that's right.

Got I. And then what do you think about a normalization of the effective tax rate, 31% to 33%, how do you think about that in 2018 and onwards, more structurally?

That's the rates we've always talked about, in the low 30%s. Obviously there's talk about tax reform in the US and we'll, of course, incorporate any changes there. There's some very positive things such as a territorial tax, lower rates. On the other hand, there's talk about limiting interest deductibility, so we'll see how that washes out. Basically we do not believe most of the proposals in the reasonable range will have a material impact on us.

Got I. And, lastly, if you can elaborate just quickly timing on OPGC-2 just some shifts, what's the latest status, if I can?

We're making very good progress on OPGC-2, We had talked about that versus the original expectations we were about six months behind. We haven't lost any more time. Physically the project is up and running and we've done the related infrastructure projects, whether it be the rail or the new housing. So, that project is coming along very nicely.

Excellent. All right. I'll leave it there. Thank you very much.

(Operator Instructions)

Our next question comes from Stephen Byrd with Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for the comprehensive guidance here looking out. I wanted to go to your slide 33 and think about the discretionary cash a bit. When you think about the targeted credit metrics that you're looking to achieve later in the decade, can you give us a bit of color on how we should be thinking about those metrics?

Yes. Hi, Stephen. Our ratio's now 5. We think we need to get down to the 4 range. Obviously it's dependent upon business mix. But we've gone from 6.5 to 5. We think something in the 4 range would represent investment grade metrics. That will come with some parent debt reduction and also continuing growth in our parent-free cash flow.

One thing I'd like to add about that, also, is also the qualitative aspect. As we have more dollar-denominated long-contracted cash flows, that qualitative aspect, I think, is very important. So, that's part of that evolution, as well.

All fair points. And it looks like you'll have a fair amount of true discretionary cash even achieving those leverage metrics. So, that's great. And just shifting over to sPower, when we think about how you're going to finance the growth, and those returns, I assume, that you laid out are levered returns, should we be assuming that you'll avail yourself of the typical project finance debt, leverage levels that you can get? And then for the equity check will it likely be 50/50 with your partner or should we be thinking about that differently?

Yes, you're right. We're thinking of 50/50 with our partner with AIMCo. I would say that in terms of how to finance them, it's a continuation of mixes, which you have now. Obviously you will have some phasing down of the ITC. We still see that there will be appetite from financials for tax equity into these projects.

One thing I'd like to stress about the acquisition of sPower is really the effect this will have on our whole portfolio. Obviously we can do solar projects all over our platform. We have some very attractive opportunities, especially where we can integrate them with our existing conventional plants. We think that is a very interesting product offering. To have load following energy that can be supplied and taking into account the intermittency of renewables, we can offer a better product.

So, really with a pipeline that should be delivering between 500 megawatts and one gigawatts of new projects per year, we'll be able to leverage this across our portfolio, whether it be purchasing -- and, also, we think this team has been extremely successful with very disciplined development projects. It really has a proven track record.

When we think about sPower, we think about the JV with AIMCo which will continue to grow on a 50/50 basis. But, in addition, there will be synergies which will be beneficial to other AES projects but also to the JV because the more we buy and have those economies of scale, the JV will benefit from it, as well.

That's great color, Andres. Just on the pipeline, while we're talking about that, it's a huge number in terms of the potential size. Is there any way for us to get a better sense for the degree of risk or flipped around the degree of certainty that you might have in terms of pursuing this pipeline? Is it some very early stage, some quite advanced, and you feel quite good about your prospects? How should we think about just given how big it is?

That's a very good question. There's over 200 megawatts which already have PPA contracts. There's another over 200 megawatts that are under PPA negotiations. There are about two gigawatts which are platform expansions. So, those, again, have lower risk because you already have operating assets in those areas. And then the rest are varying degrees of development.

I would say that a lot of this rests upon sPower's reputation with clients which range not only from utilities but corporates, as well. So, we see this as a very robust pipeline in general and we'll see how this develops over the following years. It's more or less commissioning 500 megawatts at first and should ramp up to one gigawatt.

Now, I would say also that this is something we tried when we acquired Main Street Power which is more distributed energy, smaller. But it's interesting. Main Street had done about, I believe a little bit less than 60, 70 megawatts in its entire history. Last year, under AES, they did 88 megawatts and this year it could be as high as 200 megawatts. So, I think this shows how bringing in AES' financial capabilities, also our market knowledge, can empower this. We see this as we tried on a much smaller scale and now we're going to a larger scale.

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

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

Thank you. I wanted to talk about the guidance for free cash flow growth. I understand the dilution on the divestitures and their impact on the EPS CAGR, but how about the cash flow CAGR?

That has come down a little bit, right? You had expected a 10% CAGR in proportional free cash flow. I don't think that the controlling interest has any impact here. Why the reduction here in growth expectations?

Angie, remember that 10% was through 2018. So we're doubling the period going out through 2020 and saying 8% to 10%. I think it's still consistent with our general trajectory. We did use a baseline as a midpoint of 2016 guidance. Remember that we got about $300 million from Maritza in 2016 so you're not going to get to normalize for that.

(Multiple speakers) This is Ahmed. I think the shift will be more front-end loaded because we have $1 billion of equity in our construction projects. Those projects are coming online in 2018, so we will see more contribution front-end loaded from those investments.

Okay. Secondly, on Alto Maipo, basically you have about $300 million in cost overruns and you've agreed on financings on 22% of it. Is that correct?

Put it this way, the cost overruns are expected to be in the range of 10% to 20%. We have financing that we're closing on for up to 22%. So, it would cover even the worst estimate in terms of cost overrun.

So that 22% is not of the cost overrun, it's of the entire project?

That's correct. 110% of the worst case of the cost overruns. It would be like 220% of the expected case.

Okay, fantastic. And then, lastly, on your EPS guidance, just looking at how your CAGR, that would imply about $1.40 to $1.43 in EPS by 2020, which is probably ahead of your prior expectation for 2020 earnings. I know that you are not giving explicit guidance but it almost seems like there's slower earnings growth initially and then it accelerates and basically exceeds expectations of prior earnings growth by 2020.

Yes, that's correct.

Thank you.

(Operator Instructions)

Our next question comes from Keith Stanley with Wolfe Research. Please go ahead.

Hi. Good morning. Do you think it's possible that DPL could still get PUCO staff onboard to a deal here or do you expect the case to be fully litigated at this point?

We think it's possible to get PUCO staff onboard. Very much so.

Okay. And that would be before the March date?

Yes. Obviously, Keith, time's running out but we continue to have an open dialogue and open door and expect something to be figured out sooner. We're certainly open to that.

Okay. Great. And then at Eletropaulo -- on the asset sales, besides Eletropaulo, to get the $500 million it sounds like there's some other material sales you're planning. Are several assets being marketed right now? Or, at a high level, how can we think about what you might be looking to sell?

Again, because these are ongoing businesses we never talk about them before it's closed. But what I would say is look at what we've said is our strategy in terms of derisking the portfolio, reducing our carbon intensity. Those are the type of assets that we have sold and will continue to sell.

Obviously, with a number of $500 million we have specific in mind, which is advanced, for us to feel confident in terms of giving this guidance. That's as far as I can go. But I'd say that, as we've always said, we'll continue to churn our assets and invest them in better risk-adjusted returns.

Great. Thank you.

Our next question comes from Gregg Orrill with Barclays. Please go ahead.

Good morning. Can you provide a little more detail or perspective around the $0.06 reserve from the fourth quarter, and then thoughts on returns around your investment in wind in Brazil?

Okay. Taking the first one, that was basically we had a legal case which we had, let's say, the possibility of getting it funded and we took a reserve against that. We don't want to get into more detail about that. It's certainly a closed case which there shouldn't be anything more going forward.

Regarding the wind in Brazil, this is Renova's assets. These are 18-year contracts in reals indexed to CPI. I think we're buying them at a very attractive price. We'll remind people that in the past when Brazil was really booming we never bought anything at those prices that we didn't think was attractive. Now we see this as being at attractive prices.

I also think that it's very important to get Tiete to be growing again. We're utilizing 100% of local financing for this project. So it's an attractive acquisition and it really is a milestone for Tiete.

Okay. So, around the reserve, I think you said this, it's not an impact to ongoing earnings or how you're getting paid (multiple speakers).

Absolutely not. Shut case. It's a shut case.

Okay. Good enough. Thank you.

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

Thank you. Andres, the 8% to 10% compound annual growth rate guidance I assume has some 80% level of your [best] development projects in it. Can you give me some color on how much of your development prospects outside of your best development projects are embedded in that 8% to 10% growth rate?

I think it's really anchored in the projects that we know. Southland is in these projects. The energy storage of Southland is there, as well. We have the completion of OPCG-2 and the completion of Alto Maipo in 2019. Besides that, we do have the growth of sPower that I talked about, 500 megawatts ramping up to one gigawatt towards the end of that period. We also have some growth in terms of distributed energy, as well, around 200 megawatts a year.

Other than that, it's basically redeploying that cash. There will be other acquisitions that could be smaller ones, add-ons, and there could be some additional energy storage projects, again, modest energy storage project besides that growth. So, that's what's embedded in those numbers.

So, if I may, what you're telling me is that this is about as conservative as you're going to get in terms of your guidance going forward.

I think it's reasonably conservative. I do think if some markets really pop, like energy storage and third-party sales or something, it could be superior to that. We have other things that we're looking at from de-sal to other applications. I think it's reasonably conservative, is the right approach to it. I wouldn't say it's the most conservative.

AES has been going through a lot of restructuring, selling, buying assets. Ten years, tell me where you see AES' mix of businesses. What are you trying to drive toward? It's pretty clear in the US you want to get clean. We understand that. The rest of the world, what are your objectives in terms of how you want to posture AES going forward?

That's a great question. What we see is we'll continue our strategy of simplifying the portfolio. I always said that we don't need to be in 20 countries to really have the advantages of a diversification. We do see having a strong footprint in the US because it gives us stable cash flows. It's also the most technologically advanced market in all regards, whether it be energy storage, whether it be in the commercial sense.

And then we really see ourselves being the bridge from that to faster growing markets, and with a big emphasis in Latin America and a big emphasis to the extent we can get dollar-denominated contracts. So that's where we see the AES of the future.

Now, we do see conventional energy as being an important part of this. We really see that as a great advantage to the extent you can integrate renewables into your product and service offerings to final clients. So there is a greening of the portfolio in large part because we're just seeing energy prices from renewables come down so much. Also, it's because you can get long-term contracts up for renewables. And finally it's because that's the part of the market that's growing. Last year, almost 60% of new adds in the world are renewables.

So, in virtually all of our markets that's the segment that's growing. We want to be there. On the other hand, we see the advantages of AES as being able to integrate that into existing platforms. So, platform expansion continues to be an important part of our strategy. It's one of the things we like very much about sPower, that they have a platform expansion strategy.

Is it safe to assume that Brazil's going to get absorbed into MCAC at some point, once you deconsolidate Eletropaulo it becomes a really small part of your business?

No. And I'd say the following reason. Brazil is its own market, it has its own relations, it has its own regulatory structure. So, we think it will have to continue to be managed in that way. Tiete is also a publicly listed company.

We're very happy to start Tiete growing again because I think that will have a good impact on local investors and the multiple we get for Tiete. But, remember, our SBUs are basically organized around markets. So, what we would like is the teams there face similar clients, similar regulators, similar financial institutions.

Last question, Argentina. It sounds like AES is starting to think about keeping that business unit. Is that something I'm imagining or is this something you are developing?

We've always said that Argentina had significant upside potential and we're seeing that this year -- or, actually started seeing it last year. Argentina, we sold out of the distribution businesses, which were very, I would say, difficult, but we were left with a very solid, excellent technically, generation business, which has made money pretty much every year. We had he three years where we weren't able to pay dollar dividends.

Argentina's part of the Andes SBU. There's some synergies and some interconnections with the Chilean market. We're seeing tremendous progress in Argentina, tremendous progress in our business. I think it's very much in line with what we were telling everyone before, is that Argentina had significant upside potential and some of that upside potential is being realized. I think there's even more potential going forward.

Opportunities for more investments in Argentina possible?

I think if we did anything in Argentina it would be using local leverage capacity, like we're doing in Brazil, like we're doing in the Dominican Republic. In the past we talked about proportional free cash flow and how we were paying down sub-debt and creating opportunities. I think between DPP and Tiete, are two excellent examples of how we can lever the local business, 100% levered, and come up with attractive, in both cases very carbon-friendly projects with long-term contracts.

Thank you very much.

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

Good morning. Andres, are you able to give any more color on what the Ohio staff's objection was to the settlement agreement?

No, we really aren't. We're in negotiations now and we think we'll reach a settlement but we can't give anymore color.

Okay. I thought that would be your answer. And then the second question was, just to make sure I understand this, on the way you're reporting now. If I look at slide 29, the consolidated free cash flow growth, and if I deduct my estimate, between 30% and 40% for the non-controlling interest, that would be equivalent to the way you used to report proportional free cash flow at the consolidated level; correct?

That's right, yes. You're right.

Thank you. Got it. I just wanted to make sure I had that right. That's all I had. Thank you very much.

Okay. So, I think with this we conclude today's call. And we thank everybody for joining us on this call. As always, our IR Team will be happy to answer your questions. Thank you and have a nice day.

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