愛依斯電力 (AES) 2018 Q3 法說會逐字稿

Good morning, and welcome to The AES Corporation's Third Quarter 2018 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 our third quarter 2018 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 Andrés Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; Gustavo Pimenta, our Deputy Chief Financial Officer; and other senior members of our management team.

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

Good morning, everyone, and thank you for joining our third quarter 2018 financial review call. We had a strong quarter, demonstrated by solid financial results and excellent progress towards achieving our strategic goals. We continue to improve the returns from our existing portfolio and position AES for long-term sustainable growth.

Our third quarter adjusted EPS of $0.35 puts us at $0.88 for the first 9 months of 2018, which is 35% higher than the $0.65 we earned in the same period last year. We remain on track to achieve our 2018 guidance and longer-term expectations. Tom will discuss our results in more detail after I provide a review of our strategic accomplishments.

I will structure my remarks today around 4 overall themes: first, optimizing our returns; second, our growing backlog of renewable projects; third, advancing our LNG strategy; and finally, deploying new technologies. I have discussed these themes in the past, and on this call, I will provide concrete examples of how we're delivering on each in support of our overall strategy.

Beginning on Slide 4 with optimizing our returns. We have been reshaping our portfolio to deliver attractive returns to our shareholders while reducing our overall risk and carbon footprint. As can be seen on the slide, our renewable investments are projected to produce low- to high-teen IRRs across all markets, assuming conservative terminal values. Specifically, as you may recall, we bought sPower in 2017 at a high single-digit return. Since then, we have taken steps to enhance that return, including refinancings and operational improvements.

This morning, we announced that we have agreed to sell 24% of sPower's operating portfolio to Ullico. As a result of all of these actions, we have improved our expected return on sPower's operating portfolio to around 13%, and we will use the proceeds to help fund new solar and wind projects in the U.S.

Now turning to our backlog of renewable projects, beginning on Slide 5. Our robust pipeline continues to increase, driven by our focus on select markets where we can take advantage of our global scale and synergies with our existing businesses.

So far this year, we have signed 1.9 gigawatts of long-term PPAs for renewable projects or 93% of our internal projection of 2 gigawatts for full year 2018. We are on pace to sign 2 to 3 gigawatts of new PPAs annually for 2019 and 2020. We expect this capacity to be split 50-50 between the U.S. and internationally, and similarly between solar and wind. By the end of 2020, we expect to have signed 7.5 gigawatts of new renewable PPAs, all of which will be online by 2022.

To complement our strategy to invest in attractive renewable projects and expand our environmental, social and governance-related disclosures, next week, we will be releasing a climate scenario report that complies with the guidelines of the Task Force on Climate-related Financial Disclosures and includes updated carbon intensity reduction targets that reflect our renewable growth.

Now on to Slide 6 and how we are capitalizing on our existing footprint. As you may recall, on our last call, we introduced our 'green blend and extend' strategy. With this win-win strategy, we leverage our existing platforms, contracts and relationships to negotiate new long-term PPAs with higher returns than we would otherwise get through a bidding process.

We see potential opportunities to execute on this strategy across many of our markets, including Chile, Mexico and the United States. In the near term, we see an addressable universe of 7 gigawatts across our portfolio, which could substantially increase as other markets capitalize on the economic benefits of renewables.

Turning to Slide 7. We have signed 2 'green blend and extend' contracts for a total of 576 megawatts in Chile and Mexico. The contract in Chile was a first of its kind. We signed an 18-year contract with an existing customer for 1,100 gigawatt hours of annual delivery, which is equivalent to 270 megawatts of renewable capacity. This will lengthen AES Gener's average contract life to 11 years, replace 5% from AES Gener's total load and 40% of the thermal PPAs expiring in 2022.

We are also implementing a similar contract in Mexico with our offtaker, Peñoles. To help Peñoles gradually replace pet coke with greener, efficient renewable energy, we negotiated a 25-year PPA to build a 306-megawatt Mesa La Paz wind project, leveraging our strong existing customer relationship and our global renewables capabilities. This will increase our average contract life with Peñoles from 8 years to 17 years.

In summary, we are very encouraged by our progress to date on the 'green blend and extend' concept, and we are well positioned to take advantage of this significant opportunity.

Turning to Slide 8. Since our last call, we have made good progress on the 3.9 gigawatts of projects under construction. Currently, 80% consists of large conventional projects, which are significantly more capital intensive and complex and have longer lead times. Our conventional generation projects under construction are progressing well, and the majority of the capacity will be completed by the end of next year.

I will now review some of these construction projects on the following slides, beginning on Slide 9. Construction on our 1.3 gigawatt Southland combined-cycle plant in Southern California is proceeding as planned, on time and on budget, and we are now well over halfway complete. All 6 turbines and generators are in place and the focus is now on the installation of piping and electrical components. The project is expected to be operational by the first half of 2020.

OPGC 2 in India and Alto Maipo in Chile are both advancing as planned. OPGC 2 is 97.5% complete and is expected to come online later this year. Alto Maipo is 70% complete with the tunneling work 61% complete, and is expected to come online in the second half of 2020.

The remaining 20% of our projects under construction are solar, wind and energy storage, which, compared to construction of conventional generation, are generally much less complex. As I previously discussed, the vast majority of our future construction will be renewables. Currently, our 776 megawatts of renewable construction projects are expected to come online through 2020.

In Hawaii, we're delivering 2 solar + storage facilities for a total of 47 megawatts of solar and 170-megawatt hours of 5-hour energy storage on the island of Kauai. These pioneering projects will serve baseload energy needs, including satisfying 24/7 demand with renewable power. The first of these projects is under construction and the second, for the U.S. Navy, is expected to begin construction later this year.

Once both of these projects are complete, they will represent the largest solar + storage installation in the world. Furthermore, we were recently awarded 2 additional projects with 90 megawatts of solar plus 360-megawatt hours of energy storage, also in Hawaii. We are currently finalizing the PPAs for these projects, and we'll provide additional details once the contracts are signed.

To summarize, as shown on Slide 12, we expect to add 11.3 gigawatts of new capacity through 2022. This includes our 5.7-gigawatt backlog as well as 5.6 gigawatts of additional renewable PPAs we expect to sign through 2020. These projects will be key contributors to our growth through 2020 and beyond.

Turning now to our LNG strategy on Slide 13. As you may know, we have 2 LNG regasification terminals in Central America and the Caribbean, with a total of 150 tera BTUs of LNG storage capacity. These terminals were built to supply not only the gas for our co-located combined-cycle plants, but also to meet the growing demand for natural gas in the region. This excess capacity provides us with significant upside potential as the fixed costs of the terminals are covered by our captive requirements.

We are making good progress on the commercialization of this capacity. In fact, this year, we have signed 3 contracts, yielding $35 million in additional annual margin to AES, beginning in 2021. With these sales, we will monetize much of our excess capacity in the Dominican Republic. However, we have options for further expansion in the Dominican Republic as needed.

In Panama, the storage tank at our recently inaugurated Colón power plant and regasification terminal will come online in mid-2019, and approximately 60% of the terminal's capacity is still available. This represents an additional potential margin of more than $60 million annually for Colón. Together with our strategic partner, Total, we are already making progress on selling natural gas to third parties in Panama.

The expertise we have gained in the Dominican Republic and Panama has positioned us well in Vietnam, where we have signed a MOU to build a similar LNG regasification and storage facility. This facility would have an annual storage capacity of 300 tera BTUs and provide much-needed natural gas to serve a rapidly growing market. Although in the early stages, we will provide updates as this project progresses.

Now on to new technologies on Slide 14. We are a leader in deploying new technologies, such as battery-based energy storage, drone applications and digital customer interfaces. These initiatives have already allowed us to reduce O&M costs, improve customer experiences and deliver innovative solutions to the market. As one example, we are already saving $10 million annually through drone applications alone. By expanding our use of digital technologies, we expect to further reduce O&M and back office costs by an additional tens of millions of dollars.

Year-to-date, Fluence, our energy storage joint venture with Siemens, has been awarded more than 250 megawatts of new projects. Fluence has now delivered or been awarded 75 projects in 16 countries with a total capacity of 701 megawatts.

Furthermore, as you might have seen, last month, we appointed Sanjeev Addala to the newly created position of Chief Information Digital Officer. Sanjeev comes from GE Renewable Energy, where he served as Chief Digital Officer.

We've already done a lot of work to prepare for digitalization, including the strategic investment in Simple Energy earlier this year. Simple Energy is the leading provider of utility-branded, online energy efficiency marketplaces and customer engagement software in the U.S.

Finally, after 6 years as CFO, Tom will be stepping into a new role to help us secure greater amounts of third-party financing through innovative means. Tom has played a key role in our growth in U.S. renewables. And considering the size of our pipeline and the importance of sourcing capital effectively, I have asked him to take on this new role. We plan to address this effort in more detail when it's further along but would note that we view it as the next step in our partnership strategy, which has already raised approximately $3 billion and improved returns on our invested capital.

Tom will be succeeded by Gustavo Pimenta, who many of you have met over the years. For the past 9 months, he has served as Deputy CFO, and before that, as CFO of several of our Latin American operations, including the publicly listed companies of Eletropaulo and AES Tietê in Brazil. The financial discipline and rigor that Tom and I have embedded in our capital allocation framework will, of course, continue unabated with this transition.

Now I will turn the call over to Tom to discuss our financial results, capital allocation, guidance and expectations in more detail.

Thank you, Andrés. The past 6 years as CFO have been a rewarding time, and I'm truly proud of the company's transformation. The business is significantly derisked and on an attractive growth path. I'm also pleased that I've helped lead our growth in renewables and I look forward to my new challenge, where I'll be focused on raising third-party capital to systematically and cost-effectively help finance this growth.

Now I'd like to cover our third quarter results, improving credit profile and capital allocation. As shown on Slide 16, EPS was $0.35 for the quarter, reflecting higher contributions from South America and U.S. and Utilities, a lower quarterly tax rate and debt pay-down to parent. Offsetting these were the sales of our coal plants in the Philippines and Kazakhstan.

Turning to Slide 17. Adjusted PTC during the quarter was $327 million, an increase of $89 million. I'll cover our results in more detail over the next 4 slides, beginning on Slide 18. In the U.S. and Utilities SBU, higher PTC was primarily driven by our generation at Southland, which came as a long-term agreement in May. Since then, AES has benefited from the facility's location by selling energy in a constrained region of the California market. These plants are being repowered under a long-term contract, starting in 2020.

Regarding our regulated utilities, the Indiana Commission concluded IPL's rate case last week. The ruling was consistent with the prior settlement agreement and also our expectations. This constructive outcome, together with DPL's rate case in September, leave our U.S. utilities well positioned for future rate base investment in T&D infrastructure.

IPL has grown its rate base considerably over the last few years, and looking forward, there's still potential for growth in the mid-single digits. At DPL, where the focus has been on restructuring business, we could see growth in the high single digits. To capture a portion of this potential growth, DPL will be filing its smart grid investment plan by year-end.

In South America, PTC improved on the strength of record-high quarterly results at AES Gener, driven by higher contracted sales, prior year planned outage and lower interest expense. Our results also reflect higher contract price in Colombia as well as higher tariffs in Argentina, following the 2017 reset.

In MCAC, lower PTC was largely driven by an event at our Andres plant in the Dominican Republic. In early September, a lightning strike caused major damage to the plant, forcing it off-line for about 3 weeks. The local team has performed admirably, and we expect to get the plant back up to roughly 75% load within a week. Further measures are underway to return the plant to full capacity by the first quarter. Including reserves for property damage taken in our captive insurance business, the total impact for the third quarter was about $0.03. We expect this to be the bulk of the overall impact, given the plant is fully insured.

Finally in Eurasia, our results primarily reflect the sale of our businesses in the Philippines and Kazakhstan. Based in part on our strong year-to-date results, we are reaffirming our guidance for 2018. Relative to fourth quarter 2017, this year's fourth quarter will be impacted by a higher expected tax rate compared to only 18% last year, as well as an unplanned outage at our Warrior Run plant that has just been completed. Regardless, we feel very confident with our guidance for the year.

Turning to our improving credit profile beginning on Slide 22. In the third quarter '16, we established a goal to reach investment grade. At that time, we had $5 billion in parent debt and a debt-to-EBITDA coverage ratio of 4.9x. Since then, we've reduced debt by almost $1.2 billion, and we expect to end this year with a ratio of 4.3x. Our goal is to achieve investment-grade metrics of below 4x next year, which positions us well to achieve an investment-grade rating by 2020.

As shown on Slide 23, we're now rated BB+ by all 3 agencies, just one notch below investment grade. We believe these credit improvements are helping us not only to reduce our cost of debt and improve our financial flexibility, but also to enhance our equity valuation.

Now to 2018 parent capital allocation on Slide 24. Beginning on the left-hand side, sources reflect $2 billion of total available discretionary cash, including $600 million to $675 million of parent free cash flow. Sources also reflect $1.3 billion in net asset sale proceeds, which includes closed sales in the Philippines and Brazil and the recently announced sell-down of sPower's operating portfolio.

Now to uses on the right-hand side. Including the 8.3% dividend increase we announced in December, we'll be returning $345 million to shareholders this year. We've used over $1 billion to reduce term debt, including revolver drawings. And we plan to invest $300 million in our subsidiaries, primarily from projects under construction, leaving about $100 million of unallocated cash.

Finally, moving to our capital allocation from 2018 to 2020, beginning on Slide 25. We continue to expect our portfolio to generate $4.2 billion in discretionary cash, which is more than 40% of our current market cap. About half of our discretionary cash is expected to be generated from parent free cash flow, the rest comes from our $2 billion asset sale target; $1.3 billion of which is completed or announced.

Now to the uses of this discretionary cash on Slide 26. A 1/4 of this cash has been allocated to the current dividend of $0.52 per share. As you know, our annualized dividend growth rate has been 9% for the last 3 years. Looking forward, we expect the dividend to grow in line with the industry average and remain an important part of our value proposition. We review our dividend annually with our board in December.

Back to the slide, $1.7 billion is allocated to debt reduction, 70% of which is completed. We're also planning to fund $950 million of our equity investments in our backlog in projected PPAs. Once completed, all these projects will contribute to our growth through 2020 and beyond. The remaining $600 million of unallocated cash, which is largely weighted to '19 and '20, is available to create additional shareholder value, including investments in subsidiaries and dividend growth.

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

Thanks, Tom. Before we take your questions, let me summarize today's call. We are delivering on all of our financial and strategic objectives. We have grown our backlog of projects to 5.7 gigawatts, of which 1.9 gigawatts are long-term renewable contracts signed this year. We are successfully commercializing our excess LNG storage capacity. We are on track to achieve investment-grade metrics by 2019 and ratings by 2020.

Our portfolio will be generating $4.2 billion in discretionary cash from 2018 through 2020, which we will redeploy consistent with our disciplined capital allocation framework. Finally, we remain confident in our ability to deliver on our 2018 guidance and our 8% to 10% average annual growth in adjusted EPS and parent free cash flow through 2020.

Operator, we are ready to take questions.

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

My first question, Andrés or Tom, now that we have 9 months of the year behind us and just 1 quarter to go, and given the kind of year-over-year growth you've already reported through the 9 months, is it fair to say the higher tax rate, notwithstanding, that we are probably trending right now above the midpoint of the full year guidance? Because you still have your $0.10 band and we only have 1 quarter to go. Just wondering if you could narrow that down a bit given that 9 months is already behind us.

Yes, Ali, it's Tom. I think we -- as usual, I think we'd prefer to stay away from a range within the range. I think we're very comfortable with the range. As I pointed out, a number of the businesses are performing well except we had a couple headwinds, the most notable of which is the DR, though we've recovered well in that, and that's only $0.03. I did point out the unusually low tax rate in Q4 of last year. So on a year-over-year basis, that'll normalize. But I think it's better just to leave it that we're very comfortable with our range.

Okay. And then my second question, this 24% sell-down at sPower, can you also tell us how much net income goes away with that sell-down? And related to that, Tom, as part of your new role, is that the kind of activity we should see going forward as you're funding your renewable growth, that as projects come online likely sell down a minority stake and then refund? I mean, is that the philosophy here?

Yes, I want to hit them both. In terms of the net income that goes away, I think it's a modest amount, and we're still comfortable with our trajectory obviously for '18 and then our 8% to 10% through 2020. Yes, but in terms of my new role, it's -- over the last few years, certainly have worked on partnerships, as Andrés said, of over $3 billion. That is the type of investor and the type of transaction that we'd like to do on a more systematic basis. But rather than doing it one by one, we'd like to think about doing it with a variety of investors and with capital that could be available with good foresight, let's say.

Okay. Last question. Andrés, as you look at slightly longer-term outlook for the company, what is the visibility that you're seeing right now to sustain your growth rate beyond 2020? As you mentioned, the larger projects are going to be less important, but renewables are going to pick up. So what's your line of sight or visibility for your growth rate as we look beyond 2020?

Well, we feel very good about our longer-term growth prospects. As you know, a number of our projects are coming online in 2020. Between now and 2020, for example, Southland being a notable case. We also have a lot of renewables projects that will be coming online. So we feel good about it. We feel that the 'green blend and extend', for example in the case of AES Gener, is extending those contracts. And so we see that we will continue to grow well, and we will provide more guidance in the fourth quarter. On our fourth quarter call, we will provide longer-term guidance. But as we've been saying for some time, we expect continued good growth past 2020.

Our next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Congratulations to Tom.

Thank you.

Can you hear me?

Thank you, Julien.

Well, actually, maybe let me kick it off right there. I mean, Tom, would love to hear a little bit more about the innovative capital-raising effort that you're heading off here to lead. I mean, obviously, you all have spearheaded a lot of perhaps less-than-intuitive opportunities to sell down in different ways. What is this latest effort? How different is this latest effort from the minority sales that you've done traditionally?

I think it's thematically quite consistent. As Andrés said, I think it's really the next step for the company and also obviously another step, another challenge for me. But we've done a large number of partnerships, some are with strategics, but a number of them have been with large financials. And we want to capitalize on that and, as I said, do it on a more systematic basis, and also have capital that's more available as opposed to just in time or one by one. But we look to tap into a variety of investors, many of whom manage billions, hundreds of billion dollars of investments, would have a competitive cost of capital and are very interested in long-term contracted assets, which is obviously what we're about.

I'd say this is not in any of our numbers for AES, this is -- would all the upside to AES. I think as Ali asked, the Ullico transaction is quite indicative of thematically though we'd look to do it on a larger scale and with a variety of investors. I would say we're not focused, at least I will not be focused on public market alternatives, but it's really the things I've done in terms of working in the industry, in terms of working with partners and also more recently, for last year or 2, have been very focused on our green growth. I think I'm excited about it.

I'd say -- and I think we've gotten some questions. This is not about me slowing down. I think I -- some of you know I tried that about 7 or 8 years ago and it was -- my wife told me that was a failed experiment. And even then, I had a little league baseball team to coach that was successful, but now the only baseball team I could coach would be a fraternity softball team that would be kind of awkward. So to me, it's a new challenge. It could be quite interesting, and it could be quite beneficial for AES.

Excellent. Well, I wish you well on that venture. Maybe to follow up on the financing front. I think you alluded to rolling things forward next year, but you also alluded to growing the dividend at more of a -- I think your term is an industry average. Why is that the case? How are you thinking about financing the growth and the balance between earnings growth and dividend -- ongoing dividend and dividend growth at this point?

Well, as I said, we will review the dividend with the board in December. And I think what we have -- depending on the time period you take, we've been growing the dividend. Over the last, say, 5 years, it's like 27%, almost -- more than 9% the last 4 years. So we're saying that we will -- expect it to grow it more in line with the industry average. In terms of finding the capital, as Tom mentioned, this new initiative would be upside.

And one of the things that we've been able to do is really transform this company into a company much more based, I would say, on renewables and leading technologies. And we've been able to do that in part by using third-party capital to grow. So we feel that in the space going forward, economies of scale are very important. And we really want to be a low-cost constructor or developer. And that we have $4.2 billion of discretionary cash available from '18 to '20, but this would be additional to that. I would also say that in terms of sort of our guidance for the next couple years, we feel very good about that. And we also feel that, just to give you an example, it is resilient to, for example, any likely outcome in Bulgaria.

So we feel good about our guidance. And we have upside from finding more third-party capital like we've done very successfully. We also have upside, I would say, regarding commercializing more of the LNG storage capacity. And we feel very good that -- I had been saying for a lot of the calls saying that we had this excess capacity. We plan to commercialize it. Well, in the Dominican Republic, we pretty much used that capacity. Now that doesn't mean we can't do more. I mean, we could do everything from different logistics to parking [FSU], to even building a second tank if the demand continues to grow.

Actually, since you bring it up, I'd be curious just if you can more clearly define how much -- what is the EPS upside from the LNG updates today to be very clear? And also, if you can clarify the FX. I know you're short the Argentine peso on 20. How much of a benefit is that versus what you initially targeted in your 8% to 10% to -- for the FX swing that we've seen in the year-to-date period?

Well, on the year-to-date, you're right, that we're -- there are a lot of things going on with the Argentine peso. I mean, there were some tax assets which caused -- we had to book a loss in the prior quarter. On a regular ongoing basis because we have big back-office operations there, we are slightly, I would say, short the Argentine peso. So it's not a major issue going forward. Now having said that, the Argentine peso has appreciated of recent and the situation has stabilized. And when I talked to a lot of you, I said really the key leading indicator was to look at the agreement with the IMF. So it's in place. It's being executed well. So we see the regulatory developments there as positive in addition to that.

So in terms of the upside, I don't want to go any further than what I've said in the past that we have -- approximately an upside for AES Panama would be about $60 million on an ongoing basis if we're able to utilize all of that storage capacity as we have in the case of the Dominican Republic. And as I said prior that with Total, we are already making progress on selling gas to third parties. And as any contracts are signed or made concrete, we will let you know.

Our next question comes from Angie Storozynski with Macquarie.

Congratulations, Tom. So can you provide us with an update what is the asset sales target right now? Maybe you have a view on what's the targeted number of countries that you're going to be exposed to. And also in that pie chart with allocation of excess funds, you talked about some potential incremental debt pay-down. If you can explain what that's for and what's roughly the use of the remaining cash.

Okay. Let me take the first part, then I'll pass it over to Tom to talk about the cash allocation. What we had announced was a program of around $2 billion. We've already completed $1.3 billion. We haven't -- the big chunk, which was the sale of Eletropaulo and Masinloc in the Philippines we've received. There's some money coming in from the 24% sell-down of sPower to Ullico.

And so that leaves us about $700 million left to complete the program. That can be done in several ways. I mean, that can be selling out some countries -- or businesses, or selling down. As you know, we don't talk about it until it's concrete because we feel that that is most appropriate with our people. And as you know, we've -- in some of the countries like, say, the Netherlands, we exited our big asset there. We just have energy storage left in the Netherlands. So we continue to simplify our portfolio. So I'll pass it to Tom to talk about the potential pay-down of additional debt.

Yes. So the $450 million on Slide 26, maybe about 40% of that would be without asset sales, right, you just -- to continue to get our metrics down from 4.3 to under 4 and hit our investment-grade target objectives. The other 60% would be related to asset sales. That amount varies depending upon how cash-rich the earnings are or the equity is from the asset sales. But call it, $250 million, $300 million would be there as a placeholder for asset sales. As you know, Angie, we don't really comment on asset sale candidates until it's fully cooked and we're at or -- at the point of investment, at or very close to an announcement.

Okay. And just one follow-up. So you continue to expect to reach investment-grade metrics by the end of 2019. Can you just tell us if you have had discussions with credit agencies that give you a sense when those potential upgrades would happen, would we have to wait until 2020?

Yes, we've obviously been discussing this with the agencies for the last 2 or 3 years. Our parent cash flow numbers are very consistent. When we have meetings, when we talk about what we said we were going to do and what we've done, it's a very straightforward story. I think the agencies have been on time in general, maybe they can always be a little quicker. But in general, they have appreciated our credit moves and our forward-looking commitment that comes from, obviously, the finance team, from Andrés and from the board.

So our target here is to hit the numbers next year, and we think there may be some seasoning. Obviously, if we can season faster, we will make that case and try to see whether we can't get the actual upgrades sooner. But I think from a planning standpoint, we think it's reasonable to hit the numbers next year and have a little bit of seasoning and get the letters in 2020.

I would like to add that it's not only the numerical aspect of it, but the qualitative aspect. And so now that we're over 80% contracted in dollars as our contract lengths increase, as we complete the construction projects, as we go more into renewable. And in addition, we've already significantly reduced our commodity exposure. We have reduced our weather exposure as well. For example, with the gas coming online in Panama, that decreases our weather exposure by 50%. So if you look at it, it's not only the quantitative, but it's really qualitatively where we're at. And we feel that that's an important component in our discussions with the rating agencies and why we feel confident that with some appropriate seasoning, we're on track to become investment grade.

Fantastic. And congratulations, Tom.

Thanks.

Our next question comes from Steve Fleishman with Wolfe Research.

So just on the -- do you have any information on the pricing of the sPower sell-down you can provide us?

I think it hasn't closed, Steve, so we will not be talking more and more in detail about that at this point. What I could say is that like all our sell-downs, it's helped us increase our return, our invested capital, which is part of the purpose of what we've been doing. We sell down and obviously to people who have a lower cost of capital than we do, and we provide the development and the economies of scale.

Okay. Okay, that makes sense. And then just maybe some color as we think about the renewable backlog growth, the 13% return that you're now earning on the operating asset you bought. Is that a rough kind of target for what you kind of see coming through the growth backlog? Or how should we think about that aspect?

That's a great question. I think we have to separate it by market and by product type. So yes, I think that's -- for the U.S., that's an appropriate range that you're giving. We would expect to make more outside the U.S. We expect to make more where it's part of a 'green blend and extend' product. So we're finding ways to increase our returns, and we think they're very competitive. We're working very hard to reduce the costs on these projects by scale and by synergies with existing assets. So 'green blend and extend' plus our local platforms, plus what we've already achieved in the U.S., plus continued use of third-party capital. So all these things, we expect to continue to be in the ranges we've given -- or we've achieved today.

Okay. And then maybe just any sense on the timing of more clarity on the new kind of more structured third-party venture that, Tom, you're leading, when we might have more color on that?

Yes, Steve, it will probably be into next year, to be honest, how we're doing, obviously we're trying to ramp things up. We also need to be mindful just in which forums we talk about things. But it will probably be into, let's say, Q2 of next year.

Okay. And then lastly, you threw out this Vietnam LNG project, which sounds very large. Could you just give us maybe a little more color on that project and when it -- what you need to do to make it officially kind of part of your backlog?

Sure. I mean, right now, it's preliminary. We've signed an MOU. I mean, it was part of President Trump's visit to Vietnam, it was one of the marquee projects which were signed. It's a joint venture with PetroVietnam. So right there, we have a partner to start off with. This is just the LNG storage and regasification. Actually, it would satisfy existing demand, a lot of it. So unlike our prior projects, it would be much more utilized, let's say, just off the get-go because it's replacing offshore gas, which they've used to date and it's running out. So it's bringing LNG to substitute that.

This would be a project that, if it goes along -- and again, it's preliminary, would come online probably something like 2023. And there are other power blocks associated with it. We don't have an MOU or anything signed or any associated power blocks with it. But it's obvious that we've been successful in bringing gas to Central America, bringing gas to the Caribbean. It would be a natural add-on. And as you know, we have a big platform company in Vietnam already operating very successfully.

Our next question comes from Christopher Turnure with JPMorgan.

Andrés and Tom, you touched on a couple items in your prepared remarks, but I was wondering if you can give us a sense as to performance in 2018 so far from existing assets and what might not repeat in 2019. The lightning strike I think was one of them, but particularly interested in Southland and the ramped-up performance of late.

You've touched on, I'd say, the 2 items. I mean, certainly that Southland, it was a capacity constraint and we were able to dispatch profitably from that plant. I think that the case of the lightning strike was also very much unexpected and is a very odd circumstance the way it happened. But those, I'd say, were the most 2. I'd say, in general, our operational performance has been good this year. So other than some lumpiness in the tax rates, I don't expect any significant differences for next year. Hopefully, no lightning strikes in this case, but perhaps we had a little bit of the offset in the case of Southland. I don't know, Tom, if you want to add anything.

No, I think that's fair. I think once again, relative to some prior years, we're experiencing some things with hydrology and other things. I think the business is performing very much on target.

Okay. And then I don't know if I missed this in one of the earlier responses, but Tom, you indicated that the dividend growth rate was something that you wanted to be in line with the industry average. Can you give us a bit more color on that? And if the payout ratio is something that you're considering here as well. And if so, how you define that.

Yes, I think I'll let you be the judge of industry average, which you can look at people who were -- generally from the utility industry is what we think is a reasonable group. So it will be less than 9%, but still a good number and still a good return when you combine dividend and dividend growth with earnings growth. In general, we have used about half of our parent free cash flow for the dividend. We don't have a defined payout ratio. But in general, our wallet, the affordability of the dividend, is determined by long-term sustainable parent free cash flow, and that's been generally around the 50% range. That I think is important to look at. That's a more meaningful number than earnings growth.

Okay. And given the investment kind of horizon that you have right now versus kind of where you've been for the past couple of years, is it fair to say that you have some competitive uses of that capital that you maybe didn't have before?

Generally, I think -- well, we think our -- we think dividend growth is a meaningful part of our value proposition, as I said. Yes, but certainly, as we look at our overall backlog, the 2 GW of renewable signed this year, we think 2.5 and 3 over the next couple of years is very reasonable given our run rate. So we think that is generally about $300 million to $400 million of AES equity when you back out leverage, U.S. and tax equities and partnerships generally about $300 million to $400 million. So we think as our parent free cash flow grows up to the end of this 2020 horizon, we are at $800 million or over, we think we have the ability for some modest dividend growth and to invest in our businesses.

Yes, Chris, I'd also add on sort of the longer time horizon, we'll also be doing less debt pay-down once we reach investment grade. So more of the credit improvements will come from the growth in our cash flow rather than debt pay-down. We've done the heavy lifting. I mean, if you look at that chart, you have well over $1.2 billion that we've already done in terms of debt pay-down this year. So we will have more cash available for other things.

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

I don't want to put words in your mouth, Andrés, but it sounds like AES is going to be exiting the coal-fired generation business, at least new construction going forward. Am I taking too much of a conclusion here?

What I would say is the following, that certainly, we've been reducing coal-fired generation as a proportion of our fleet. We're retiring about -- retired or sold over 3 gigawatts this year -- actually, 4 gigawatts this year. So certainly, we're building over 2 to 3 gigawatts going forward of renewables a year. So that is going to switch. We're going to release our, say, our report next week and we can be discussing that more with you.

So the way this is coming is that it's really our renewables are growing and we're selling or shutting down uneconomical coal. So this is a natural transition, and we will achieve our goals, basically, really just following good business principles. I would say furthermore that we are -- we have to complete the coal plant in India, OPGC 2, and that will very likely be the very last coal plant that AES builds.

Now the company's gone -- I think had a remarkable transition because if you go back, say, 10 years, that was really sort of our strongest core competency. So now it's renewables, new technologies and combining, quite frankly, existing thermal or hydro capacity with the renewables. I mean, one of the things I think people don't talk about enough is the need for capacity and not just energy. And so what we're doing is really -- 'green blend and extend' is a way of combining capacity with energy.

That's great. So I know at least a couple years ago, AES was pursuing Mong Duong 3 and 4 in Vietnam. Is it safe to say that that is no longer going to be the case going forward?

Yes.

Okay. Fantastic. Another big question, a kind of global question here. Can you lay out for us what the global opportunity set for LNG and renewables that AES is pursuing going forward?

Well, I think it's a little bit hard. I mean, I think the way I'd look at it is right now what's an addressable universe for us. So I think the 7 gigawatts of 'green blend and extend' in the 3 markets we mentioned, that's to some extent sort of proprietary to us. That's existing contracts, where we can add renewable energy and get a longer contract from that. I mean, in many of those cases, is we can provide new renewable power cheaper than the variable cost of, for example, burning coal on those units, but we still have the capacity contract for the coal. So we combine capacity with cheaper renewable energy. So that's -- that could quite -- that could be larger as you have more renewable penetration in other markets. I would add that most of these aren't really -- aren't dependent on subsidies. It's just really the cost of new renewable power versus the variable cost of existing thermal power in some of these markets.

Now regarding LNG, that's a fuel that's -- especially with the shale gas revolution in the U.S., you're going have long-term low prices from the U.S. and you have sufficient liquefaction capacity. So for example, if you look at the Dominican Republic, the cost for the country of importing U.S. LNG versus burning diesel and heavy fuel oil is saving the country about $500 million a year. It's also reducing carbon output by 4 million tons a year. So that could be replicated in the Dominican Republic.

Now in the case of Vietnam, they're running out of gas. They need the gas, so this is a very much a needed project. And obviously, there's great interest. So I think that, as you see, we have a robust pipeline. One of the things Tom will be pursuing is ways that we can leverage our own capital to do more of these projects and increase our return on our invested capital. So there's ample opportunities. Now I would also say that we're not pursuing growth for growth's sake. If we don't see the returns, we're not going to make the investments.

Understood. Just following on that LNG issue. It seems to me that it's rational for AES to go up the food chain, meaning do a liquefaction facility. I understand that there's land near Southland that AES owns, any chance of putting a liquefaction facility there?

That is not part of our plans. We don't see that as our core competency. There's a lot of liquefaction available. And last -- furthermore, we do have the strategic relationship with Total, and Total can provide our final customers with structured projects -- products that we cannot. So it's been very successful thus far and we look forward to doing that more. But there are no plans to go up the food chain.

Last question for Tom. Once you get your investment-grade rating, it could be argued that financing projects at the corporate level versus doing [basically] more subsidiaries is going to be lower cost to AES and its shareholders. A, do you see it that way? B, am I kind of dreaming this up? Or is this still a process that AES will eventually end up in?

Yes, it's interesting. I think that train left the station a long time ago. I think we're going to stick with our process to have the businesses, the projects stand on their own and AES will provide equity. I think that's the way the house is built, and I don't see it being rebuilt.

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

Thank you all. Our IR team is available for any follow-up questions. And next week, we look forward to seeing many of you at the EEI conference in San Francisco. Thanks again, and have a nice day.

The conference has now concluded. We thank you for attending today's presentation, you may now disconnect.