愛依斯電力 (AES) 2017 Q2 法說會逐字稿

Good morning, and welcome to the AES Second Quarter 2017 Financial Review Conference Call. (Operator Instructions) Please note, 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, Brandon. Good morning, and welcome to AES' Second Quarter 2017 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 filing for discussion of these factors.

Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team.

With that, I will now turn the call over to Andrés.

Thank you, Ahmed. Good morning, everyone, and thank you for joining our second quarter 2017 financial review call. Today, I will discuss our financial results and provide updates on our projects under construction, capital allocation and cost savings. These actions are the foundation of our expected 8% to 10% average annual growth in earnings and cash flow.

Since our previous call in early May, we have made significant progress on a number of key objectives for 2017. At the same time, we experienced a setback at one of our construction projects, Alto Maipo, in Chile. I will discuss Alto Maipo in detail in a moment, but first I would like to highlight our accomplishments since the first quarter call.

In the second quarter, better availability and lower parent interest contributed to an $0.08 improvement in our adjusted EPS of $0.25. Based on our year-to-date performance and outlook, we are reaffirming our 2017 guidance and expectations through 2020. We successfully completed the expansion of our DPP gas-fired plant in the Dominican Republic. We secured $2 billion in nonrecourse financing on favorable terms and broke ground on our 1.4 gigawatt Southland repowering project in California. With the exception of the 531 megawatt Alto Maipo project, our 4.7 gigawatts under construction are progressing well and remain on track to be completed through 2020.

We closed the acquisition of sPower, the largest independent solar developer in the United States, to increase our long-term contracted U.S. dollar-denominated renewable portfolio. To take advantage of our leadership position in energy storage, we announced a 50-50 joint venture with Siemens to create a global energy storage technology and services company. We are on track to achieve our $400 million per year cost reduction and revenue enhancement program.

Now turning to Alto Maipo on Slide 4. As we have discussed in the past, the project has experienced construction difficulties resulting in projected cost overruns of up to 22%. Since our previous call in May, productivity by the construction contractors has been slower than anticipated, and Alto Maipo terminated one of the project's contractors for performance reasons. Nonetheless, construction of the project is continuing, and Alto Maipo has been engaged in discussions with potential replacement contractors and the nonrecourse lenders to address these challenges. The Alto Maipo project is looking for modified construction contracts and flexibility in financing terms, but it is uncertain whether these efforts will ultimately be successful.

Having said that, I would like to emphasize that, first, our total exposure to the project is approximately $450 million, 87% of which has already been invested. Second, as we work through the challenges at Alto Maipo, we will be disciplined when it comes to evaluating any incremental investment from AES Gener in Alto Maipo. And third, we do not expect any material impact on our 2017 guidance and expectations through 2020 as we had already substantially reduced our expectations from Alto Maipo when we provided our long-term outlook in May. The developments at Alto Maipo are obviously very disappointing, as over the past 5 years, we have completed 6 gigawatts of projects on time and on budget.

Turning now to the rest of our construction program, beginning on Slide 5. We recently completed the 122 megawatt expansion of our DPP gas-fired plant in the Dominican Republic. By closing the cycle, DPP now has 358 megawatts of capacity and will be one of the lowest cost generators in the Dominican Republic. The additional 122 megawatts are contracted under long-term U.S. dollar-denominated PPA. The project cost of $260 million was 100% funded through nonrecourse debt at AES Dominicana.

Next, turning to our 671 megawatt Eagle Valley CCGT in Indiana on Slide 6. We remain confident that the project will achieve commercial operations in line with our prior expectation of the first half of 2018. The EPC contractor, CBI, has created positive momentum by subcontracting some of the critical work. And right now, there are approximately 1,000 workers on site. CBI is working to achieve substantial completion by year-end 2017.

Now turning to our 1.4-gigawatt Southland repowering project in California on Slide 7. As you know, the $2.3 billion Southland repowering project is a key component of our strategic objective to increase our U.S. dollar-based long-term contracted position. In June, we issued $2 billion in nonrecourse debt with a 4.5% yield and a 14-year average life.

This financing demonstrates the strength of the project, which has 20-year PPAs with Southern California Edison. The project not only includes the 1.3 gigawatts of gas-fired capacity, but also includes 100 megawatts of 4-hour duration energy storage, 400 megawatt hours, making it the largest energy storage facility in the world as well as the largest nonrecourse financing ever that includes battery-based energy storage.

The Southland CCGT will be constructed by Kiewit under fixed price turnkey EPC contracts. Kiewit is one of North America's largest engineering and construction contractors with a successful track record of completing similar projects in California. We recently broke ground on the project and expect completion in the first half of 2020.

Turning to Slide 8. As I said earlier, aside from Alto Maipo, we are making good progress across all of our construction projects, including our thermal plant OPGC 2 in India and our CCGT and LNG regasification terminal, Colón in Panama. These projects will be a key contributor to our earnings and cash flow growth through 2020.

Beyond our current construction programs, we are primarily focusing our growth investments on natural gas and renewable projects with long-term U.S. dollar-denominated contracts. This will contribute to our growth in our cash flow and earnings while also reducing our average carbon intensity.

To that end, over the last few months, we have made significant progress towards repositioning our portfolio. Specifically, as you can see on Slide 9, we completed the acquisition of 1.7 gigawatts, which includes sPower's 1.3 gigawatts of solar and wind projects in the United States. We also recently closed on the acquisition of the 386 Alto de Sertão spinning wind farm in Brazil. This project will help diversify Tietê's fuel mix and hydrological risk. With an average contracted life of 18 years, the project will also help to reduce further exposure to short-term price movements. This BRL 600 million acquisition was funded entirely with debt capacity at Tietê. With these acquisitions, AES' operating renewable portfolio increases to 9 gigawatts or approximately 1/4 of our global portfolio.

Finally, through our efforts to capitalize on our development pipeline across our portfolio, we expect to add at least 1.5 gigawatts of solar and wind through 2020. In fact, we have already signed PPAs for 400 megawatts and we are in exclusive negotiations for another gigawatt. We have sufficient internally generated cash to fund our equity contribution for both our projects under construction and the development projects I just discussed.

Turning to our energy storage business on Slide 10. 10 years ago, we saw market need and created and deployed the first utility-scale lithium-ion battery on the grid. Since then, we have remained a market leader, having 476 megawatts of energy storage deployed or under contract in 7 countries. Today, the worldwide installed base for energy storage is around 3 gigawatts, but it is projected to grow to 28 gigawatts over the next 5 years as energy storage prices decline and the penetration of intermittent renewables increases.

To take advantage of our leadership position and this unique market opportunity, in July, we announced that we are joining forces with Siemens to create Fluence, a global energy storage technology and services company. The new 50-50 joint venture combines the scale, experience and resources of AES and Siemens and will offer both AES Advancion and Siemens Siestorage, battery-based energy storage platforms. Fluence will continue to develop new storage solutions and services while leveraging the reach of Siemens global sales force, which is active in more than 160 countries. The joint venture is expected to close in the fourth quarter of this year following regulatory approvals.

Finally, turning to Slide 11 and our cost savings and revenue enhancement initiative. As you know, since 2012, we have achieved an annual run rate savings rate of $250 million. We are on track to achieve $50 million of incremental cost savings in 2017 and our $400 million run rate target by 2020. There are a number of work streams that we have established to capture these savings, ranging from asset management to global sourcing, to heat rate improvements. We are also continuing to standardize our processes across all functional areas, allowing for organization consolidation. As a result, this year, we're combining our Europe and Asia strategic business units, which will drive significant savings.

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

Thanks, Andrés. Good morning. Today, I'll review our second quarter results, capital allocation and guidance. Overall, we had a strong quarter, benefiting from higher availability, several of our businesses and lower parent interest expense.

Turning to adjusted EPS on Slide 13. Second quarter results were $0.25, an $0.08 increase from 2016. Year-to-date, we've achieved 40% of guidance midpoint, consistent with our historical pattern. The quarter-over-quarter increase was primarily driven by higher margins as availability improved at several of our businesses, primarily in MCAC in Argentina. We also benefited from paying down approximately $500 million of parent debt since a year ago.

Now to Slide 14 and adjusted PTC and consolidated free cash flow. We earned $243 million in adjusted PTC during the quarter, an increase of $83 million, largely driven by higher margins and lower parent interest. We generated $106 million of consolidated free cash flow, a decrease of $448 million from second quarter 2016, which was driven by large collections of receivables in Europe and Brazil SBUs in 2016.

Now I'll cover SBUs in more detail over the next 6 slides, beginning on Slide 15. In the U.S., our results reflect slightly lower margins, primarily due to a true-up for deferred fuel costs following the rate case at IPL in 2016, as well as lower regulated ESP rates at DPL. Adjusted PTC increased marginally, largely due to growth in our distributed energy business. Lower consolidated free cash flow also reflects the timing of working capital requirements at DPL.

At Andes, our results reflect higher margins, primarily due to higher availability in Argentina where our CTS end plant completed a major plant outage in the second quarter of last year. Although margins increased, adjusted PTC decreased due to lower capitalized interest related to completed construction projects in Chile and lower interest income in Argentina.

In Brazil, our results reflect steady margins with lower cash flow due to recovery of high purchase power costs in 2016 from prior droughts in our distribution business, Eletropaulo. It's worth mentioning that on a full year basis, we continue to expect low hydro conditions in Brazil. But the impact will be much less than in prior years due to changes we've made to our hedging strategy. We're now about 80% contracted in 2017, which leaves us well positioned to absorb hydro shortfalls.

In Mexico, Central American and the Caribbean, our results reflect higher margins driven primarily by availability in Dominican Republic, Mexico and Puerto Rico. As you may be aware, our offtake in Puerto Rico, PREPA, recently filed for bankruptcy, which resulted in a technical default of our nonrecourse debt. AES Puerto Rico continues to provide the lowest cost generation on the island. And accordingly, is being fully dispatched and paid. We're working constructively with the lenders and continue to monitor the bankruptcy proceedings closely.

In Europe, our results reflect higher capacity margins in the United Kingdom. Consolidated free cash flow decreased due to the collection of overdue receivables in 2016 at Maritza in Bulgaria. Finally, in Asia, our results reflect steady margins and slightly higher working capital, primarily due to the timing of fuel payments at Masinloc in the Philippines.

Now to Slide 21 and an update on our filing at DP&L in Ohio. As you may know, in March, we reached a settlement agreement with commission staff and certain intervenors in our ESP case. The agreement includes a Distribution Modernization Rider totaling $105 million per year over 3 years, with a 2-year extension option. The ultimate goal is to transform DPL into a stable and growing T&D business.

To that end, DPL is selling or exiting all of its 2.1 gigawatts of coal-fired capacity by mid-2018 and is exploring strategic options for the remaining 1 gigawatt of gas-fired peaking capacity. The post-hearing briefing in the ESP case concluded on May 15, and we expect final approval by the commission this quarter. Ruling consistent with the settlement agreement will help DPL continue to reduce leverage and transition to investment grade rating.

Now to Slide 22 and our improved credit profile. This year, we have prepaid $300 million of parent debt, targeting some of our highest coupon bonds, resulting in annualized interest savings of $20 million. This brings our total parent debt to $4.4 billion, which is a $2.1 billion or about 1/3 reduction since 2011. Also in the second quarter, we refinanced an additional $500 million of parent debt, which will reduce our interest expense by $15 million per year. Through disciplined debt reduction and strong growth in parent free cash flow, we expect to obtain investment grade credit metrics by 2020. We continue to believe this will help us to not only reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation.

Now to our 2017 parent capital allocation on Slide 23, which is in line with our prior disclosure. Sources on the left-hand side reflect $1.5 billion of total available discretionary cash, which includes about $625 million of parent free cash flow. As we discussed last quarter, in addition to the $300 million we received from the sale of Sul in Brazil, we continue to target $500 million in asset sale proceeds we expect to announce by the end of the year. However, receipt of proceeds may take a bit longer, possibly into early 2018.

Moving to uses on the right-hand side of the slide. Including the dividend increase we announced in December, we'll be returning almost $320 million to shareholders this year. We allocated $340 million of prepaid parent debt, as I just discussed. We've allocated $382 million for our acquisition of sPower and plan to invest $350 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 subs, debt prepayment in our current dividend, we're left with roughly $100 million of discretionary cash in '17.

Now looking to our capital allocation over the next 4 years on Slide 24. Our portfolio would generate $3.8 billion of discretionary cash through 2020, which is largely driven by parent free cash flow. This internally generated cash is sufficient to fund our dividend and construction projects while also providing the capital to further create shareholder value through dividend growth, reducing leverage and opportunistic investments in our development pipeline, including renewable projects Andrés discussed.

Finally, on Slide 25. Based on our performance year-to-date and foreign currency and commodity forward curves as of June 30, we're reaffirming our 2017 guidance and expectation for 8% to 10% average annual growth through 2020 for all metrics. Overall, we remain confident we can deliver attractive growth to our shareholders through 2020 and beyond.

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

Thanks, Tom. Before we take your questions, I would like to summarize today's call with the following takeaways. We are encouraged with the performance of our portfolio during the first half of the year. We're exploring all options to address the construction challenges at our Alto Maipo project in Chile, and we are hopeful that we will reach a resolution before year-end. To drive our near-term growth, we are on track to complete our remaining projects under construction and our revenue enhancement and cost-reduction initiatives. We have made significant progress towards repositioning our portfolio by adding renewable to natural gas with long-term U.S. dollar-denominated contracts. We have continued to reduce our leverage to improve our credit profile and achieve investment grade metrics. Accordingly, we are reaffirming our 8% to 10% annual growth through 2020 in all key metrics, including free cash flow, earnings and dividend.

Now we'll be happy to take your questions.

(Operator Instructions) Our first question comes from Ali Agha with SunTrust.

Andrés, Tom, first question, so when we look at the first half results, how does that position you when you look at that range for the year now that half the year is over? Can you give us some more color and how you're trending within that range?

Well, most of that is 40% of our year-to-date. We tend to be somewhat seasonal towards the second half, so it puts us right within the range and we're right within our guidance.

Okay. And Andrés, on the -- on Alto Maipo, as you mentioned, expect to have a resolution before year-end. Assuming you do decide to walk away from the project and take the write-off as opposed to the risk of further construction delays, et cetera, would that in any way impair Gener's ability to dividend cash up to the parent if there is a write-off, et cetera?

No. We expect to receive the cash from Gener. I mean, there may be somewhat of a difference in terms of dividends versus return of capital. But otherwise, it will not affect our expected cash from Gener. In the short term, it actually provides more cash at Gener, and Gener is doing very well from a cash basis.

And so I know that the rating agencies had put them on some credit watch, et cetera. Any rating downward, et cetera, would not impair their ability to dividend cash up?

Well, it's important that Gener maintain its investment grade rating. And Gener -- I would expect AES Gener to take all steps to maintain its investment grade rating.

Okay. And final question. Your message is pretty clear, you're executing, you're hitting your -- what the track guidance that you laid out for us, yet your stock stays caught up in this very narrow range. Doesn't seem to be reacting to the results that you're posting. Does that cause you to step back and take a more holistic or a bigger picture view on what it will take to get the stock up? And especially when you look at that capital allocation pie chart that you showed us for the next few years, does that cause you to rethink how you'd like to reinvest some of that unspoken-for cash or some other steps that you think are required given that your stock does not seem to be reflecting the results you're posting?

That's a great question, Ali. Look, periodically, since I became CEO 5 years ago, we have used third parties to look at our strategy and look at our execution. I'm talking about banks, I'm talking about consultants to look at our strategy and look at our execution and see if there's any way that we can increase value creation for our shareholders. So we've continued to do that to have a, really, sort of given them carte blanche and say, "Okay, this is our portfolio, this is our plan, what could we do better?" Now based on that, what we are seeing, if we execute on our plan, we expect our stock to react. And so we really have to have a development of several quarters of hitting our numbers, years of hitting our numbers and execute on these projects and execute on our cost savings. And if we do that, we think that our stock will react. Now obviously, we are 70% still outside of the U.S. and 50% approximately in Latin America. And the last 5 years, you've seen a secular decline in commodity prices and in Latin America. Now we are starting to see turnaround in some of the countries. I mean, Brazil has actually stopped declining in terms of GDP. It's flat and starting to turn up. Argentina is doing much better. And certainly, Argentina is one case where we've seen the country do significantly better. So our forecasts are based on a continuation of the current situation. But I think if you start seeing turnaround in some of these countries, that would be upside.

Our next question comes from Angie Storozynski with Macquarie.

So I have a question about Alto Maipo. But first, okay, so you just acquired sPower. Can you tell us how it adds to the 8% to 10% earnings growth? And basically, just give us a sense of what are the biggest drivers behind the earnings growth through 2020.

Sure, Angie. I think, well, sPower, as you know, has a pipeline of around 10 gigawatts. But as you saw in what we were forecasting, we have about less than 2 gigawatts over the next 3 years of growth coming from renewables, and a good part of that is sPower. So sPower has a number of facilities currently under PPA to be built, and it also has an exclusive negotiations for quite a lot of gigawatts as well. So that's one way we see it. We also see that it gives us the scale to be more competitive on renewables, especially solar around the world. So giving us that scale to buy panels and balance of plant as swiftly as possible, improve our designs and the same thing with wind. So if you see what we've done lately, I mean, we have quite a lot of renewables, not only in the states, we have it on our platforms, whether it be Tietê. We have another project in Mexico, which are both over 300 megawatts. And I would say that outside of the U.S., the returns tend to be higher, especially when we use our platform, especially when we're financing it locally. So all these platform expansions, we're looking at mid- to higher-teen returns, and we're looking at sort of low double digits in the states total return. So this is how they contribute to them. I don't know if Tom you'd like to add something.

No, I think that covers it. I mean, Angie, we showed some of the growth on Page 9. I think those are relatively conservative because we're focused on signed PPA and things with exclusive negotiations. Obviously, the teams are focusing on bigger things. I think it's consistent -- from sPower perspective, it's consistent with what we said. We expect them to do about 500 megawatts a year of new projects, probably in the 3 to 4 to start, in the 6 to 7 as you look over a 4- to 5-year period. So Slide 9 would be generally fairly consistent. It'd also be generally consistent with our growth -- is driven by new projects by continued cost management and through capital allocation and investment in things like sPower.

Okay. And the -- I'm just -- sorry, so the assets that have already PPAs, have you procured or has the company procured panels so that you don't have an issue with any tariff changes for imported panels?

Yes. We have procured the panels. We have secured the panels for everything we have under PPA. Now of course, in terms of the projects in advanced negotiation, we will match up the purchase of the panels with having the contract. We don't want to be long or short panels.

Okay. And so Alto Maipo, I mean, you keep showing that you've largely paid your equity investment into the project. But is this a signal that there is basically no scenario under which you're going to increase the equity commitment to the project?

Well, this really would be a decision at AES Gener and it would be strictly, again, AES Gener not a AES contribution. But it would have to be part of a complete solution, which includes greater financial flexibility and a modification of the contracts we have where the contractors are, say, stick to the milestones and stick to the progress that we expect from them. So those are the 2 changes that would have to occur. Now having said this, if Alto Maipo is completed, it will give AES Gener 750 megawatts of hydro. Next to the country's load in Santiago, and it's an asset that will last 100 years. And so we're evaluating the possibilities and we're trying to get everybody lined up. And so as I said, we will have ourselves and AES Gener, have indicated we will have a lot of discipline when it comes to any additional money in addition to what's already been committed.

Our next question comes from Stephen Byrd with Morgan Stanley.

Just to follow up on Alto Maipo briefly. Just so I understand, if you were able to have construction contractors in place that were able to firmly commit to the existing time line, et cetera, with this higher budget, is that sufficient to make it economic to complete the project? Or would you need essentially further concessions of some sort to make the project worthwhile to complete?

If I understand your question correctly, if the contractors comply with the restructuring that we did earlier this year, we would -- that would be sufficient to meet it. We have sufficient funds to meet that, plus have some contingency. So yes, that would be adequate. What concerned us is we had to terminate one contractor. It's the smaller of the 2 contractors, but we really have to have a performance that's in line with what they had committed to.

Understood, Andrés. So essentially, either the current contractor could assume that obligation or you could bring in another party, but you would need that commitment in order to be able to move forward?

That's correct. We have to have a modification in the construction contracts to make sure that they're delivering and don't miss the milestones and the targets.

Okay. Understood. Just shifting to the U.S. in terms of the remaining generation assets to be disposed of. Is there a potential for significant tax laws that could be beneficial in the event of a disposition, whether it's sold for cash or some of the assets are simply shut down?

Stephen, it's Tom. There may be -- remember, we already have a large NOL. So anything that we had, we'd really add to the NOL. The NOL is over $3.5 billion at year-end.

It would be just added to that?

Yes. I don't know the details of the closure of the coal plants. It would be a longer-term NOL benefit.

Okay. Understood. And then just lastly on your storage joint venture, very interesting development. Assuming the business is successful on a joint venture basis, how generally would that impact your financials over time? Would there be like I'm thinking about working capital contributions, profits from project sales versus ongoing contracts, I mean, would you receive revenues? How, just on a high level, would this potentially impact your bottom line, knowing that it's early days still?

Sure. As I said, this is a market that is expected to grow almost by a factor of 10 in over 5 years. So obviously, it's going to grow very quickly and that's going to require funds at the JV. So we expect -- we don't expect significant contributions from the JV for 2 years. It might be a modest drag, very slight. And then afterwards, we would expect it to use that funds to continue to grow, most likely. So sometime before we get cash back from the JV, if it's successful and growing very quickly. But we would expect, as nonconsolidated subsidiary, to have the earnings from that 2 years of going forward. So this is, I think, very promising. It's certainly a unique JV because nobody has our experience, a platform which has been used for 10 years and Siemens has global reach. And one thing to understand is Siemens is also contributing their energy storage solution, which is called Siestorage, which is more sort of a C&I, just smaller. So the 2 are complementary, so this will allow us to have the full gamut. So basically, what we have in our guidance right now is very conservative. So if this JV does very well, there will be upside. But I would expect it to take 2 years to really start materializing, but we think this is very promising. Now to -- we will also have energy storage of our own on our platform and we would be a client of Fluence for our own projects, for example, such as Southland.

Understood. And Andrés, just in terms of the types of margin you would get from this joint venture, could it be servicing margin? Would it more likely be essentially product sales margins? What kind of margin generally should we expect there?

Well, it will be a combination of both. So obviously, Siemens has a lot of experience on this, so there would be a margin on the sale and then there will be a margin on services. And obviously, you try to have a balance. Again, there's a lot of interesting possibilities here. As you know, there's a -- Siemens has a financing arm to make this. So we'll have to see how the market develops and what are the different options. So we have a great team. I think there's tremendous synergies between the 2, and stay tuned.

Our next question comes from Lasan Johong with Auvila Research.

So going back to Alto Maipo really quickly and a couple of follow-up questions. Does the new investment increase AES ownership yet again? I mean, it was 40% now it's 62%. Will it go up, again, if you make an additional investment?

Let's see. We own 67% of AES Gener. AES Gener took over from a nominal amount of the 40% that our share -- our partner had, our local partner had in Alto Maipo. So now we have about a 93% share. So it will depend on how the negotiations go because the contractor has 7%. So as part of the solution, they could take a greater stake. So I don't see anything meaningful happening to the sort of 62%, and it can move 1 or 2 up or down. So we'll have to see, but no, it's not going to go up materially.

And if AES Gener just then decided to enter more or continue to invest, do you need to modify your long-term takeaway contract -- offtake contract?

No.

Okay. So how do you preserve your ROE or ROI if you don't?

I'm sorry. The question is how do we preserve the ROE on Alto Maipo or overall on our...

Yes. On Alto Maipo, if you're investing more money then you're not -- and Gener is not.

That's fair. I mean, obviously, Alto Maipo will not fulfill our ROE expectations. We have been reducing them over time. The decision will be made on the basis of marginal returns for marginal investments.

Okay. Also, just on Fluence, is one of the objectives to do research on -- or funding another research on energy storage or is this a purely commercial experimentation?

Well, Fluence is a commercial operation. We have always seen our energy storage as a business and a need to make profit for. Now Fluence will continue to upgrade the design, look at ways of stripping out costs, look in new applications. I mean, one of the things we've only -- I would say there's a lot more applications for energy storage than have been deployed to date. So those are all the other things that Fluence will do. So there will be some design and some creations of innovation and excellence, but it's not just a sort of R&D for its own sake. It's definitely commercial orientation.

No. I'm just wondering if there was going to be an R&D component. One last question. From a long-term perspective, 8% to 10% growth, as you said, it's on the U.S. that are doing that kind of growth rate with lower risk. What should AES do to boost that 8% to 10% growth rate going forward?

Well, I think, again, we're paying a 4% dividend and we're looking at 8% to 10% growth that pushes sort of 12% to 14% range. And we think we have upside from things like a recovery in the secular sort of cycle that we've seen in the countries -- some of the countries where we operate, and there have always been cycles. In the last 5 years, it's basically been in one direction, it's been down. Growth has been down in all these countries. We have things like Fluence, which would be an upside. And the other thing to mention, if you compare us to U.S. utilities is that, I'd say, 2 things. One, we're trading at a much lower P/E. So as we improve our credit, we would expect to have a uptick on our P/E, same thing if we deliver on our results. And the other thing is we're in markets which are growing. So if it's in the States, we're doing what everybody's doing in terms of switching to gas, doing renewables. We have the upside of seeing, with sPower, how can we incorporate more energy storage on to that base. But it's very -- it's nice to be in countries where demand is growing anywhere from 5% to 10%. So again, we tend to be conservative on our estimates. We're using forward curves. And at some point, we think the cycle is beginning to turn around.

Our next question comes from Chris Turnure with JPMorgan.

You touched on this a little bit and definitely touched on it in the press release and the announcement around Alto Maipo from a couple of weeks ago. But how can we think about the kind of exact contribution that's in your guidance right now through 2020 from that project? You have a substantial amount of growth over the next couple years. And according to my calculations, that project could have at least initially been a major contributor to that growth rate.

Look, on the numbers we're providing, it's absolutely minimal. It's not significant through 2020.

Okay. So when you say minimal, should we think about that as you pushing out an online date past 2020 or into the middle of 2020? Or just substantially lowering the returns from a fully operational project?

Yes. It's Tom. I'd say when we looked at it and put our guidance in Feb through 2020, we had dialed it back considerably. It had some modest contributions, quite modest in '19 and '20. So within our guidance range here, it was very modest. Obviously, then it goes forward. It could have more meaningful, but as Andrés said, it's certainly much lower ROEs, IRRs than we initially envisioned 3 years ago when we went forward with the project.

Okay. That's great to hear. And then also, obviously, your long-term guidance is still marked off of, I think, December 31 ForEx curves and things have gone very much in your favor since that time, and you've announced and closed the sPower acquisition. Should we think about there being kind of other tailwinds to that growth rate versus your original expectations as well, totally separate from Alto Maipo?

No. I think there's various puts and takes. Our reaffirmation of guidance today is based on forward curves as of June 30. We've done a lot of effort to reduce some of the [eval] in foreign currencies. We're now 80% U.S. dollar. So to the extent there's any uplift, that's less than it had been. We're also have hedges in place for -- on a rolling 1- to 3-year basis, depending upon where we are. So net-net, we're looking at forward curves as of June 30.

Okay. And then, lastly, you mentioned in your prepared remarks that there is still that $500 million placeholder of asset sales this year might spill in terms of closure into early next year. Can you kind of remind us of maybe strategically where you are in the process of divesting nonstrategic assets? How far along you are there? And I don't know if the decision to, I guess, merge the Asia and European business units kind of speaks to that direction a little bit as well?

Sure. This is Andrés. As we said, we'll continue to sell assets and churn that capital. As you know, this year, we're likely to leave Kazakhstan, be in one less country. We have a number of sales going on. Some are for the whole asset and some are partial sell downs. So we will let you know when these occur. We don't like to that them know ahead of time because it can have operations impacts. Thinking about our portfolio, what we've always said is that we've gone from 30 countries. We'll be down to 16 by the year-end. Anywhere between 12 and 15 is the right number. I think what's most important for us is that we really have platforms from which we can expand that they are true synergies and economies of scale. And rather than just a number of countries, so if you have 2 adjacent countries and the market is being integrated, say something like Central America, it's less worrisome the number of countries than really what does it take to manage these assets well. So we're really looking at those situations where we can't add more value, we're more likely to sell down. If we don't see expansion opportunities, we'll sell down. Where we don't see synergies, we'll sell down. So I think we said in the past, we've given numbers of $200 million to $300 million ongoing per year. We'll continue to do this and to perfect our portfolio. So as we've said, we've been moving much more into dollar-denominated contracts. We have a big expansion of gas, whether it be Southland, whether it be Eagle Valley, whether it be a Colón in Panama. And also, obviously, renewables. And our vision is how do you integrate all of these renewables, plus the thermal or conventional energy, to provide more attractive and competitive solutions for our clients.

Our next question comes from Greg Gordon with Evercore ISI.

One just quick question on the slides. So looking at the first quarter slides and the second quarter slides, your committed investments in subsidiaries has gone up from 425 to 700 and that came out of unallocated discretionary cash. I'm presuming that that's capital commitments to the renewables business?

Yes. Greg, it's Tom. We incorporate Southland, because we're fairly literal with our commitment. So it's certainly envisioned, but when we closed the financing it was a firm commitment. So that's what we got...

Okay. So it's Southland. It's not the other, okay.

Yes. And the bulk of the Southland financing is going to be pretty close to COD, late '19, '20.

Got you. Okay. Great. Another larger sort of strategic question. Do you guys see your renewables development platform and your sort of renewables footprint as sort of being strategically complete? Or if there was an opportunity to do another big step out into renewables platform in the U.S., would you participate in that sort of looking at that opportunity because it looks like there's a lot of portfolios for sale, there are -- there's at least one growth platform that another entity has said that they are looking to sell either partially or completely.

What I would say, Greg, is we've made a big step out. We have a good growth platform. Not to say that we wouldn't be opportunistic with some purchases that would add on, but it would really, I think, have to provide operating synergies and other things. So we're positioned with sufficient scale, especially when you think of us on a global basis. So we certainly don't have to make any acquisitions at this time. And of course, we'll continue to be very disciplined. So I think it was very important to establish a beachhead, which then allowed us to move to the direction that the market is growing, but we certainly don't have to make any sort of a follow-up. But if there was some assets that were adjacent to or provided synergies or gave us a bigger footprint with a particular client, we would look at those.

Okay. But it's not just assets for sale? I mean, let's be frank, I mean NRG Yield is for sale. And they're not just selling assets, they're looking to sell potentially the entire platform, including their wind development business, their backlog of undeveloped projects. So theoretically, that could really push your business mix into a whole different realm of tilting away from coal and into renewables, which is what you're trying to achieve here in the first place. So I don't know how much you can comment on whether a strategic deal like that would even be remotely in the ballpark of opportunity for you.

Well, I'd say, it certainly is not high on our list. And what I can say we are on a gradual transition. Our coal plants are under contract. Those which are merchant, which we'll be disposing of over the next couple of years. So we are making that big transition. We have between those dispositions in the U.S., what we have done in Kazakhstan and some other places. We've already reduced our coal fleet by 1/4 in just the last couple of years.

Our next question comes from Steve Fleishman with Wolfe Research.

One clarification question on the -- and I guess, this is for Tom. I thought on the long-term guidance you don't update to the current June 30 mark, it goes back to December. So just on the long-term guidance, roughly, it would seem currencies are a decent amount better, commodities maybe worse. But just generally, if you did update, would you still be in the rough ballparks of your growth rate?

Yes. I think, Steve, bottom line, we would. I mean, it's various puts and takes. Yes, currencies have been a held, some commodity offsets as you said. So I mean, we kind of bundle them all together and do a check at June 30, '17.

I see. Okay. Got it. Okay, and then on the -- in terms of the growth at sPower renewables, generally, I think you mentioned 400 megawatts of PPAs already for 2020. Is that correct?

Yes. Yes, that's correct.

Okay. And is that -- can you give us a breakout of that a little? Or at least kind of regionally, U.S. versus non-U. S?

That's basically U.S.

That's all U.S?

Yes.

Okay. And then just in terms of funding the growth of sPower, your plan is to basically be able to fund that through internal -- your equity investments through internal cash?

Yes.

Okay. Okay. You don't -- you're not looking to kind of find other funding vehicles for that?

[audio gap]

No? Okay.

Sorry. Keep in mind, about 80% of the capital is funded through nonrecourse debt and tax equity. Ourselves and AIMCo would expect to fund, but to the extent there's other sources of funding that could enhance returns, we'll certainly keep our eyes open.

Our next question is from Charles Fishman with Morningstar.

Alto Maipo is -- Andrés, that's still a tunneling issue?

Yes. Alto Maipo, yes, it's -- we've done about 40% of the tunneling project. If you take everything else, it's more like at 53%, 54% completed. So the main issue is the progress rates on the tunnels. Now since one of the contractors left, we've had the actually manufacturer working on the TBM, the Tunnel Boring Machine, making better progress than they had. So the issue is really one of tunneling rates and cost.

Okay. And then just a second question. The fact that you're combining Europe and Asia, it sort of sending a signal to me that the development pipeline is probably not as strong. Or you're making a decision to not pull as hard in the development on those countries. Is that a correct assessment on my part? Or am I reading -- or do you have anything else to add about why you're doing that?

Well, I think that it's correct in a sense that we're focusing more on certain markets, certainly, where we have the bigger footprint. So of the sort of Eurasia group, there's certainly some opportunities in Northern Ireland where we're looking at. We're looking at things in Vietnam, quite attractive, and potentially some add-ons in India. We're doing energy -- the first great scale energy storage project in India, together with Tata group. So those are the 3 where we have the sort of some development activity going on. In other countries we do not have any activity going on. But this is the result, we're leaving Kazakhstan, as we've said, and we've gotten out of a number of countries. Most of the countries that we've gotten out of, actually, where in the Eurasia region. So we will be making significant synergies. The headquarters will be in Amsterdam, which is better than -- from the States, you only have a sort of 6-, 7-hour time difference with the region and it's much closer from flights.

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

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

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