愛依斯電力 (AES) 2013 Q4 法說會逐字稿

Welcome and thank you for standing by. All participants will be in a listen-only mode for the duration of today's call. During the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

This call is being recorded. If you have any objections, you may disconnect at this time.

The host for today's call is Ahmed Pasha. Thank you, and you may now begin.

Thank you, Alicia. Good morning and welcome to our fourth quarter 2013 earnings call. Our earnings release presentation and related financial information are available at our website, at AES.com.

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

Joining me today are Andres Gluski, our Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team. With that, let me turn the call over to Andres.

Good morning, everyone, and welcome to our fourth quarter earnings call. Today I will briefly cover our results and the progress we have made on our strategic plan. Then Tom will give a detailed discussion of our results, as well as our expectations for the future. After that, I will provide additional color on our plan to drive our growth going forward.

Turning first to our results on slide 4. As I look back on 2013, I am pleased to report that we achieved strong results. We met or exceeded our guidance for every metric, and that is due to the hard work and dedication of our entire team. In the fourth quarter, we earned $0.29 of adjusted EPS, which is $0.02 less than what we earned in 2012, due to a $0.02 headwind from poor hydrology and a $0.04 expense related to potential customer refunds at Eletropaulo.

For the full year of 2013, we earned adjusted EPS of $1.29, which is a new high, and 7% above 2012. We achieved these results despite a $0.13 impact on earnings in 2013 from the unprecedented drought in Latin America.

This was offset by capital allocation, lower G&A expenses, and a lower effective tax rate. Over the past two years, our adjusted EPS has grown, on average, by more than 8% annually.

Turning to cash flow. Our fourth quarter proportional free cash flow grew by 19% over 2012, driven primarily by higher operating cash flow. Our full-year 2013 proportional free cash flow was $1.25 billion and represents a free cash flow yield of 12%.

Since 2011, our proportional free cash flow has grown, on average, 13% annually. Reflecting our strong cash flows, and in accordance with our dividend policy, we increased our dividend payment by 25%, to $0.05 per share each quarter, beginning in the first quarter of 2014.

Now turning to slide 5. I believe our results to date show our commitment to grow shareholder value through the three main strategic objectives we set forth in 2011; improving the profitability of the Company through overhead reductions and making greater use of our portfolio synergies and scale economies; narrowing our geographic focus by concentrating our growth on platform expansions in those markets where we have a sustainable competitive advantage, and exiting those markets where we do not; and optimizing our capital allocation to compete our growth projects risk-adjusted returns against the benefits of share buyback and debt pay downs.

Turning to slide 6, during the year, we were able to close or announce $497 million in asset sales, bringing our total to $1.4 billion since we started the program in September of 2011. We have simplified our portfolio and we now operate in 20 countries, down from 28 two years ago.

As you can see on slide 7, the funds from these sales contributed to our available discretionary cash, which we have used to maximize the risk-adjusted return for our shareholders. In fact, since 2011, we have paid down $1 billion in debt, we have bought back 59 million shares for $711 million, at an average price of $12.03 per share, and reduced our share count by 8%.

Lastly, turning to slide 8, we achieved an additional $53 million in sustainable overhead savings in 2013, bringing our total to $143 million, or a reduction of more than 30% over the past two years. Last quarter, we increased a targeted reduction in our overhead run rate to $200 million by 2015.

Now, before I walk you through our long-term plan, let me turn this call over to Tom, who will provide additional detail on our results and our expectations for growth in earnings and cash flow over the next five years.

Thanks, Andres. Good morning, everyone. First, I'll cover our fourth quarter and full year 2013 results. Then I'll discuss our 2014 guidance, capital allocation plans, and then our longer term outlook.

Let me first address the quarter, on slide 10. Our fourth quarter adjusted EPS was $0.29 a share, versus $0.31 a year ago. Performance was driven by three issues in our Brazil and our Mexico, Central America and Caribbean, or MCAC, strategic business units, or SBUs. We experienced a reduction at Sul related to the tariff reset in April of 2013, as expected, a one-time expense of $0.04 per share for potential customer refunds at Eletropaulo, and continued poor hydrology in Panama, which I'll discuss shortly.

Alongside these items, we had a better operating performance in our US and our Europe, Middle East and Africa, or EMEA, SBUs. This performance was offset by anticipated declines at Andes for planned maintenance at our Masinloc in Asia, where our new seven-year contract is below 2012's relatively high spot prices.

Additionally, debt repayment in early 2013 and lower parent interest expense made positive contributions. We also had a $0.05 benefit from than lower than expected effective tax rate of 18% versus 30%, largely driven by one-time items, including favorable resolution certain tax issues.

Although excluded from our adjusted EPS of $0.29, we took a goodwill impairment charge at DPL of $0.41 per share. DPL's recent rate case resolution provides clarity through 2016; however, lower expectations for [dug] spreads and capacity prices represent challenges for this business in the longer term. As a result, DPL recorded a non-cash goodwill impairment of $370 million in the quarter.

Let me provide a couple of business updates. At DPL in the US, we are seeking to have the Ohio Commission approve our plan to transfer our generation assets to an affiliated gen co by May, 2017. We'll explore all potential options to optimize a solution and have recently begun to evaluate the sale of DP&L generation assets to an unaffiliated third-party through a potential sale. Obviously, we can't comment much, as we're in the very early stages of this process.

Now turning to Maritz in Bulgaria. The plant's been running very well, with excellent availability; and we've received $150 million in payment since our last call. Currently, we have approximately $160 million of receivable, which $72 million is due in installments over the next 10 months and the majority of the remaining amount is less than 60 days outstanding.

Now turning to slide 11, before I discuss our full-year 2013 adjusted PTC and adjusted EPS results, I'll cover hydrology, which resulted in a negative adjusted PTC impact of $124 million, or $0.13 per share, in 2013. Hydrology was low across almost all of Latin America last year; three-quarters, or $0.10 of the impact, was in Panama, as you can see in the right hand side of the slide.

In Panama, roughly 60% of the generation capacity is hydro, with limited reservoir capacity, making the market more sensitive to rainfall. We've taken some steps to mitigate our exposure to these pressures, through capping some contracts at actual production levels. Although Panama is in its typical dry season now, we have seen water inflows in 2014 that have been below average so far.

In Brazil, the hydrology risk is reduced through a risk sharing mechanism with all generators. Therefore, Tiete's impact from hydrology tends to be moderate in most weather conditions, except in the case of a severe system-wide drought.

Brazil is currently in its rainy season, but 2014 has been below average so far. Current reservoir levels are roughly 39%, which is lower than the 46% level this time last year and the historical average of 68%. Having said that, reservoir levels will be dependent on the rainy season, which runs through April.

In Colombia, hydro risk is reduced by our significant reservoir capacity. Based on our current forecast, we anticipate normal hydro conditions in Colombia during 2014.

Finally, we have some hydro capacity in our diversified operations in Chile and Argentina. In Chile, Genre had a $0.01 impact in 2013 from low hydrology. In 2014, we're less exposed, as contract levels are better aligned with generation output.

Our business in Argentina has a more limited hydro exposure, due to our diversified portfolio. Overall, we expect an improvement in hydrology this year, but we're monitoring closely in our key markets.

Next, I'll walk through adjusted PTC drivers for 2013. Turning to slide 12, our SBUs generated $1.8 billion of PTC, before $600 million of corporate charges. As you can see, our earnings are well diversified across our SBUs.

Now to slide 13, which shows a comparison of our adjusted PTC performance relative to the expectation we provided in May of last year. We achieved $1.2 billion of adjusted PTC, which is the range we forecasted, but with a different mix.

The US outperformed our expectations, due to lower than expected customer switching at DPL; Andes and MCAC were below the expected ranges, mainly due to lower hydro and higher energy purchase costs. In Brazil, adjusted PTC was affected by lower demand at Sul, as well as the Eletropaulo charge I mentioned earlier. Finally, EMEA and Asia were in line with expectations.

As you can see on slide 14, this year we overcame significant impacts from poor hydrology and the provision related to potential customer refunds in Brazil, and increased our adjusted EPS to $1.29 per share. We benefited from capital allocation, lower global G&A, and a lower effective tax rate of 21% versus 32% in 2012.

Moving now to cash flow, beginning on slide 15. For 2013, proportional free cash flow of $1.16 billion surpassed our guidance range of $750 million to $1.05 billion. As you may know, we define this as net cash from operations less maintenance capital expenditures, which includes all environmental capital expenditures. We've modified this now to exclude recoverable environmental CapEx, as it makes more sense to treat these investments as growth CapEx that will increase earnings.

For 2013, this represents a MATS-related CapEx at IPL. Using this methodology, proportional free cash flow in 2013 was $1.27 billion.

Results were above the top end of our guidance range for 2013, as defined on this same basis. This improvement was largely driven by lower maintenance CapEx, some of which we have pushed into 2014.

In 2013, we used more than $560 million of our proportional free cash flow to pay down non-recourse debt at our subsidiaries. This is consistent with pay downs in recent years. This debt pay down to subsidiaries creates equity value we can capture through improved growth capacity, proceeds from refinancings or other distributions. The remaining cash is available for use at the subs and the parent.

Turning to slide 16 and our 2013 parent capital allocation activity. During 2013, we had $1.2 billion of discretionary cash available, including parent free cash flow.

As you may remember, we forecasted 2013 parent free cash flow in the range of $400 million to $500 million. We came in above this range, at $516 million.

This was largely driven by better operating performance at our Kilroot plant in Northern Ireland, as well as reductions in parent interest. We've invested roughly 82% of this cash in deleveraging and returning cash to shareholders.

Next on to slide 17. I'll discuss guidance, beginning with 2014 adjusted EPS. We expect our SBU level adjusted PTC contributions to grow by roughly 8%, to $2 billion.

We anticipate growth at our Andes, Brazil, MCAC and EMEA SBUs, which is largely driven by a combination with improvement in hydrology, higher availability, and improve efficiencies across our portfolio. As I discussed earlier, hydrology had a $0.13 negative impact in 2013, and improvement is the most significant positive swing in our guidance this year.

We expect our US and Asia SBUs to be flat or modestly down. In light of the devaluation of the Argentine peso, I'd like to point out that we expect about $60 million of PTC from Argentina, which is less than 3% of our annual PTC.

Growth from our other SBUs should be largely offset by an increased tax rate in the roughly 30% range, versus 21% in 2013. Bottom line is we expect to earn adjusted EPS of $1.30 to $1.38. Growth in 2014 will be mostly driven by improved operations, cost efficiencies, and capital allocation, partially offset by a higher tax rate.

Now to slide 18 and our longer term adjusted EPS expectations. Today we reaffirmed our target through 2015 and initiated our longer term outlook which, combined with our current dividend, offers an attractive total return, particularly given our valuation. We're driving future growth through multiple levers, including improving profitability, platform expansions, and opportunistic capital allocation.

For 2015, we see year-to-year adjusted EPS growth of 4% to 6%, consistent with our prior expectations. This is largely driven by positive contributions from completed construction projects, including Mong Duong in Vietnam and IPP IV in Jordan, as well as capital allocation.

In 2016, we expect flat to modest growth, despite the fact that we anticipate an $0.11 drop, or roughly 8% of our earnings, at Tiete and DPL. At Tiete, where our existing contract with Eletropaulo will transition to market prices at the end of 2015, we anticipate an impact of about $0.08. Further, lower capacity prices in PJM and DPL will result in a drop of about $0.03.

However, this impact is more than offset by continued contributions from completed construction projects in Chile, rate-based growth at IPL, a full year of operations at Mong Duong, and capital allocation. We appreciate that this is below our growth trend line. Having said that, 2016 is still a couple years out and we have some time to work on improving this outlook.

In 2017 and 2018, we expect 6% to 8% average annual growth. Our performance will be driven by contributions from the Alto Maipo and OPGC projects currently under construction, cost reductions, and capital allocation.

Our 2014 to 2018 outlook is based on foreign currency exchange rate and commodity curves as of year-end 2013, which did not change much in the last couple of months. In general, the forward curves imply an appreciating US dollar against most currencies over the next few years. This should have a negative impact on our earnings by couple of cents each year, shaving 1 to 2 percentage points off our growth rates.

Regarding tax rate, we're projecting an effective tax rate in the low to mid 30% range, which assumes an extension of the CFC look-through rule and the impact of roughly $600 million of additional asset sales by 2015. It's also worth mentioning, these asset sales tend to be modestly dilutive. We have key assumptions and sensitivities in the appendix.

Now to cash flow, on slide 19. In 2014, we expect our proportional free cash flow to be roughly $1.2 billion. Consistent with our expectations for adjusted PTC, we're expecting an increase in proportional free cash flow contributions from Andes, Brazil and MCAC, partially offset by a fuel contract modification. The relatively flat comparison with 2013 reflects $100 million impact of a combination of higher environmental CapEx at Gener and the sale of our businesses in Cameroon.

Beyond 2014, we're targeting growth, on average, of 10% to 15% annually. The main reasons that proportional free cash flow will grow faster than our earnings include first, the expected contributions from our ongoing construction projects as they come online, where depreciation is much greater than maintenance CapEx. This is consistent with our current operating portfolio, where our 2013 proportional depreciation was roughly $975 million and proportional maintenance CapEx was $610 million.

Second, the lease accounting treatment from Mong Duong, where cash flow is higher than earnings, due to levelization of the 25-year PPA. And third, the completion of environmental CapEx in Chile.

Turning to our 2014 parent capital allocation, on slide 20. We expect to have roughly $900 million of discretionary cash, which assumes only announced asset sales and then grow from additional monetization activities. This includes approximately $500 million of parent free cash flow, which we expect to grow in line with the 10% to 15% growth we are targeting in our proportional free cash flow.

In terms of planned uses, we anticipate paying down $140 million in corporate debt, $110 million of which has already been done. Another $145 million is earmarked for our dividend. We recognize that this is at the low end of our 30% to 40% payout ratio and see room to increase our dividend as our parent free cash flow grows.

We intend to invest roughly $100 million in the upcoming Gener capital raise. After other commitments we've already laid out, we have $200 million to $300 million of discretionary cash for capital allocation.

To add context, I'll note that our additional equity requirements beyond 2014 for our projects currently under construction is $400 million, and our current stock buyback authorization is approximately $190 million. As we've demonstrated, we are committed to investing in our shares, as evidenced by our repurchase of 20 million shares for $260 million on a single day last December.

Overall, we believe that our portfolio is well-positioned to deliver an attractive risk-adjusted return. The growth in our free cash flow will allow us to continue to create value for our shareholders.

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

Thanks, Tom. Now turning to slide 21. I'd like to give you some color on where we will focus our efforts over the next several years. As Tom just reviewed, we see strong growth in our proportional free cash flow of 10% to 15% annually. We plan to allocate this cash to create value for our shareholders and drive higher earnings growth, which we see accelerating in 2017 and beyond.

We will achieve our future growth by focusing our efforts on the following four strategic levers, performance excellence, reducing complexity, expanding access to capital, and leveraging our platforms. Let me walk you through each of these in more detail.

First, our results are based on achieving performance excellence, not only at our operating businesses, but also at our corporate headquarters. Our objective is to be the low cost manager of a portfolio of businesses from which synergies and economies of scale can be derived. As I discussed earlier, our global G&A costs are one-third lower than they were two years ago.

Through the consistent application of our rigorous asset management framework, we have established ourselves as a high-performance operator, as evidenced by our three consecutive Edison International Awards since 2011. Nonetheless, there is still room for further improvement and we will continue to use our Xix Sigma Light program, called APEX, for AES Performance Excellence, to help drive additional efficiencies.

Second, in an effort to continue to reduce our complexity, we have exited many of the markets where we do not have a competitive advantage and reorganized our businesses into six market-facing strategic business units. We have also expanded our disclosure to help investors better appreciate the underlying drivers of our business. We will continue to simplify our portfolio and to look for opportunities to harvest capital that can be redeployed to yield better returns.

To that end, we will generate another $500 million to $700 million in asset sale proceeds by 2015. We believe that in the longer term, we will be operating in no more than 15 to 16 countries. This focus enables us to spend more time engaging with stakeholders in our key markets and allows us to manage our businesses more efficiently, lowering our all-in cost per megawatt hour produced and sold.

Third, we're working to expand our access to capital markets through strategic partnerships at the project level and accessing niche financing, like pension funds in Chile. Having partners at the project level allows us to sculpt that portfolio to maximize risk-adjusted return for our shareholders. For example, last year we closed $500 million in partnerships, including Antofagasto Minerals at our Alto Maipo hydro project in Chile, and Google at our Mount Solar solar project in California.

We are currently working on several more partnership opportunities, including selling down a portion of our equity stake in some existing businesses and bringing on equity partners with low-cost financing or offering a TPA for our development projects. Our strong competitive position and operating and construction track record provides potential partners with superior investment opportunities, while increasing returns on our equity.

And fourth, we will continue to leverage our platforms by focusing our growth in our current market to take full advantage of our existing infrastructure, local knowledge, permits, and presence. A reflection of this focus on platform expansion is the number of twos and threes following the names of many of our growth projects, such as Ventana III and IV, Guacolda III and IV, and now even V. They are literally brownfield expansions from existing plants.

We have many similar platform expansion opportunities across our development pipeline of 6,000 megawatts, including the expansion of our existing facilities in the Philippines, India, the Dominican Republic, continued expansion of AES Gener in Chile, new generation opportunities in Colombia and Mexico, IPL's Eagle Valley combined cycle gas plant, and the repowering of Southland.

In addition to expanding our generation facilities, we are continuing to build out adjacent businesses, such as energy storage and water desalinization plants. We are also investing in enhancements, such as adding fogging technology on combustion turbines at our gas plants, or getting more megawatts out of our hydro plants' water intake structures. Such projects have a much shorter development and construction period than traditional greenfield projects.

As a result of these advantages, we are seeing returns well in excess of 20% from these adjacencies and enhancements. We aim to be earning at least $40 million in pretax earnings from these efforts by 2015. To that end, we will continue to develop and invest in new energy storage projects.

AES is already the world's largest grid scale energy storage operator, with more than 170 megawatts of resource currently in operation; and we have another 40 megawatt project currently under construction in Chile, adjacent to our Cochrane plant. We are actively developing other energy storage opportunities at our existing platforms in California, the Philippines, Northern Ireland and Puerto Rico.

In addition to energy storage, several other adjacent projects are well underway, including a 20-megawatt capacity expansion at our Chivor hydro facility in Colombia, an 800 cubic meter per hour desalinization facility at our Angamos plant in Chile, and more than 100 megawatts of additional capacity through fogging enhancements of some of our combustion turbines. I would add that the cost of these additional hundred megawatts was approximately $10 million, making them the lowest cost capacity additions in our history.

Turning to slide 22. I'm pleased to report that we're making tangible progress on our pipeline of platform expansions. Since our last call in November, we've made significant progress on advancing two large power projects.

First, we closed $1.2 billion in long-term non-recourse financing for the 531-megawatt Alto Maipo hydroelectric project in Chile. This project is an expansion of our existing 178-megawatt [Alfalfal] facility, which will benefit from its proximity to Santiago and will diversify AES Gener's energy mix in a growing market. Given that most of our equity in this project will be funded through operating cash flow at Gener, we will only be contributing $100 million of capital from AES Corp.

In the Indian state of Odisha, OPGC, a company in which we have held a 49% interest for more than 10 years, broke ground on the 1,320-megawatt expansion of its existing 420-megawatt power plant. We have already secured $1.2 billion in low-cost long-term non-recourse financing to fund 75% of the project, all in local currency.

We expect our total equity commitment to be around $225 million, of which $100 million will be largely met through our share of cash on hand at OPGC and the balance will be funded by contributions from AES in 2016. The project benefits from low-cost local coal, a partnership with the government of Odisha, a PPA with OPGC's current off-taker, and the rapidly growing demand for electricity in and around the state of Odisha.

Now turning to slide 23. We currently have 4,000 megawatts of new capacity under construction, including the two projects I just discussed, as well as Mong Duong in Vietnam and two other projects in Chile, Cochrane and Guacolda V. All of these projects are expected to come online over the next five years.

As I previously mentioned, in addition to our projects under construction, we have a development pipeline of more than 6,000 megawatts, including platform expansions at IPL, Masinloc in the Philippines, and Southland in California. Besides the projects currently under construction, we are making good progress on the environmental upgrade of 2,400 megawatts at Indianapolis Power and Light, with a total investment of $500 million. This investment will bring our plant into compliance with current environmental regulations and will earn a regulated return on our equity investment of $230 million.

As you can see on slide 24, the total cost of the projects I just discussed is about $8 billion. The majority of this cost is funded by already secured non-recourse financing.

More importantly, our share of the equity in these projects is approximately $1.25 billion, two-thirds of which is already funded. We will contribute the remaining $400 billion(sic-see presentation slides "$400 million") through 2016. In terms of the blended return on investment, we are expecting a 14% return on our equity and a cash-on-cash return of approximately 18%.

Now turning to slide 25. In summary, 2013 was a strong year, despite facing considerable headwinds, and we continued to deliver on our commitments. Going forward, our growth will be driven by our 4,000 megawatts of projects under construction and rate-based growth at IPL, which is already largely funded; performance excellence, including $200 million in cost reductions by 2015 and plans for additional savings beyond that date; and allocating our growing free cash flow to maximize risk-adjusted returns for our shareholders.

The bottom line is that our portfolio generates a 12% free cash flow yield, and we expect our cash to grow at 10% to 15% annually. As our parent free cash flow grows, we see room to increase our dividend, in line with our policy of paying 30% to 40% of our sustainable parent free cash flow. And finally, as we continue to execute on our strategy, we expect our total return to grow from a range of 6% to 8% to a range of 8% to 10%.

Operator, I would like to open the line for questions.

Thank you.

(Operator Instructions)

Our first question comes from John Cohen, and your line is now open.

Thanks. Good morning, guys.

Good morning.

I actually have a bunch of questions. Maybe I'll ask a couple and then get back into the queue.

First, a clarification. 2014 guidance, does that assume normal hydro conditions or what you're seeing today and your best guess of where the reservoir levels are going to be?

That takes into consideration what we discussed on the call, in terms of slightly lower hydro conditions overall, including Panama. It also includes the actions that we have taken to make ourselves, let's say, less sensitive to low hydrology than we had last year.

So if we see another year that's similar to 2013, you'd still be in the $1.30 to $1.38 range?

Given what our projections take into account, what we've seen of hydrology, we expect some recovery. And, yes, that would put us within that range.

Okay. Great.

And then, Tom, can you just give us a sense of how proportional free cash flow will translate into parent free cash flow?

Is there a leverage? Is that like a dollar-for-dollar dropdown from proportional to parent -- so parent's actually growing faster? Or should parent grow around the same as what proportional is growing at?

I think parent will grow around the same. So we see our proportional free cash flow growing 10% to 15%. There could be cases when the parent can grow more because it's a little more leveraged, let's say, as it's further on down the chain.

The one thing I did want to point out is that -- just make sure it was clear -- a lot of that proportional free cash does go to debt pay down at the subs. And we generally say it's around $500 million. Last year, it was $560 million.

So that does increase the value of the subs, which obviously increases the value to us. And we get that through growth or through other distributions.

In some cases, the parent free cash flow can grow faster than proportional free cash flow because of return of capital. And in the slide, we showed a little bit of return of capital last year.

Okay. I'll ask just one more.

In terms of how you think of about your pecking order preference for capital allocation between buybacks and dividend growth and debt pay down, how do you actually go about doing that?

It would seem that, given your current PE multiple and the fact the you have a nice pickup in EPS growth in 2017 and 2018, that it would be hard to find opportunities that are more accretive than buybacks. So you'd rather do buybacks than dividends or paying down debt.

Do you agree with that, or do you look at it some other way?

The way I'd say it is, we have a balanced approach. And I think we've shown that.

I think we have to look at the long-term growth of the Company. I think the returns that we're getting, especially on some of the adjacencies, are very attractive and compete with anything. And so we'll continue to do that, take a balanced approach. And we will compete new projects versus buying back our shares or paying down debt.

So I think we'll continue to do what we've shown we've done, and taking into balance where we see the long-term growth of the Company. And the other one, also the opportunities to buy back our shares at an attractive price.

Okay. Thanks very much. I'll get back in the queue.

Our next question comes from Brian Chin, and your line is now open.

Hello. Good morning.

Good morning, Brian.

On slide 39, the CFC extension that's incorporated into your tax rate guidance, could you give us a sense if the CFC extension does not occur, what the change to your guidance impact might be?

Sure. We are, let's say, protected through the end of this year due to the actions that we took in the past.

It would depend, of course. But I would say somewhere around $0.10 is about -- it could be a little bit more, could be a bit less. But that's more or less where that sensitivity is.

And if the CFC is not extended, that impact is something that should affect the ongoing outlook, right? That's not just a one-time event? Is that the right way to think about that?

Well, if that would be a change, quite frankly, take tax policy going forward. So I think that, yes, that's correct.

Now, what is important, I think, to keep in mind is that this would be non-cash for us. We have a stock of NOLs of around $2 billion, and we've continue to generate NOLs. And so this would not affect us from our cash generation point of view.

Got you. Very helpful.

And then one last topic for me. On slide 42, so you've given out the commodity exposures for 2016. In your old slide for this, for 2015, you used to have that coal had a directional sensitivity that was in the same direction as gas and oil.

In this slide, your coal directional sensitivity is opposite gas and oil. Can you give some color as to why that is?

Certainly, it should be the opposite, in terms of cheaper gas --

Brian, it was negative. It was just, we shorted. But it was negative to gas even at that time. So there's no change.

Brian, by the way, one thing I'd like to clarify on your question regarding the CFC look through rule. That's sort of $0.10. But again, we are going to take additional steps if we see that this is going to happen.

So just like in the past, if you recall two years ago, we said we had more or less the same sensitivity. We were able to offset that. So we're going to take steps. But before we have those steps actually in hand, that's what the sensitivity would be.

Right. Right.

But going back to this commodity exposure slide, is this a function of the fact that you're hedged in 2015 a certain way, but you're not hedged in 2016? And so that's why the directional differences have flip-flopped? Is that right?

That's correct.

Okay, very helpful. Thank you very much.

Our next question comes from Julien Dumoulin-Smith. Your line is now open.

Hello. Good morning.

Hello. Good morning, Julien.

Good. First, on the Ohio sale, could you elaborate just a little bit? Specifically, would that include the non-bypassful revenues? What exactly is contemplated for sale and what's the timeline here?

And maybe also to clarify, how would you treat the generation portion of DPL in your earnings guidance, given the fact that prior sales you've deconsolidated and treated as discontinued op?

Julien, it's Tom.

So we did file an updated application for our separation. We have filed an application that was briefer in nature shortly before New Year's, in 2013.

We filed a little more detailed application yesterday that should be available via the PUCO website. It basically gives a little more color on the methodology of separating the DP&L generation assets into a Genco affiliate.

We do in that layout that we've also begun to consider, a potential sale of the full DP&L 3,000-megawatt-plus generation fleet. We do in that layout that we believe that if we do that, the transition charges, the NBC and other related revenue stream, should be retained by DP&L TND.

And the arguments are laid out there that we think are very solid, and the process. Just with respect to the process, we are just beginning. So as I said in my comments, kind of too soon to give any commentary.

On the disc ops, I'll have to get back to you on that one, in terms of -- I don't think it's a separate business. So I think it would change kind of midstream, as opposed to get disc op'ed during the year. But still working through that.

Got you. Any sense on what EPS contribution from that business is this year and going on, if you can just extract out the DPL portion or the generation portion?

I'll just say that if we can sell the generation on reasonable terms, it could be modestly accretive.

Got you. Excellent.

And then just looking at the cash flow growth number, you've talked about the environmental CapEx offset, and the maintenance CapEx kind of shifts.

Can you talk about how much is environmental CapEx? And how much is that broken out between Chile and -- I suppose IPL's probably in there, as well?

So gross numbers. The program we have at IPL, upgrading to 2,400 megawatts, is about $500 million.

The programs we have in Chile are around $200 million. And so the difference, in a sense, is that the ones at IPL become part of our rate base; and the ones in Chile do not. And so the ones in Chile, we expect to complete by 2014.

Got you. So that's a key driver in terms of the improvement to the10%.

The biggest driver. It is the biggest driver of the improvement, in the number of components to it. But if you look at sustained cash flow improvement, proportional free cash flow, the biggest driver is out of Chile.

Got you. And then just one more, if you don't mind.

On the solar side, obviously there was some conversation last year about reevaluating the business. Where do you stand today in terms of that process, either selling down a further stake in that or monetizing it otherwise?

I think we showed in the past that we were looking at various options, and we'll continue to look at various options and see really what's the best outcome for us and our partners at Riverstone.

Would you describe that -- if I could push you a little bit further -- in terms of priority amongst exiting other countries, or relative to exiting other countries, is this a priority in 2014?

It's important to us to continue to look at this, but I'm not going to rank them.

Got you. Al right. Thank you.

Thanks, Julien.

Our next question comes from Chris Turnure. Your line is now open.

Good morning, Andres and Tom.

I had a question first on your free cash flow, or your proportional free cash flow guidance through 2018. That's a pretty nice number to see. And it's a pretty long time horizon to lay out guidance for.

First, could you give us a little bit more color on that versus what you gave in the slides? In other words, is it going to be lumpy? Is it going to be consistent?

And what was behind your decision to give that number that far out? And same thing for EPS versus your previous comments, that you would just kind of talk about everything through 2016.

Sure. So first, in terms of giving a longer-term time horizon, as we're seeing our strategy play out and we're seeing the results of that strategy, we felt more confident in terms of being able to give a longer view of where the business would be going.

To specifically answer the question of cash flow, there will be some lumpiness, obviously, because one of the key drivers is when new plants come online. So we really have two things going on.

One is to the extent that we can get some of the shorter-term adjacencies and enhancements and other profit improvements, those will contribute in the shorter term. And the other longer-term will be when the newer plants come online.

As you can see, we have a lot of plants coming online 2015 through 2018.

Great. Great. And then my follow-up question is on Eletropaulo.

I wanted to get some updated thoughts on how earnings are going to trend there. And I wanted to also understand correctly if there's any hydrological risk to that business versus the risk at Tiete.

I think that, again, regarding Eletropaulo, what I would say is the following.

One is that in Brazil, they basically have a sharing mechanism for when there's a low hydrology between all the generators. So that it's not sort of directly specific to one business in particular.

When the costs of generation go up, in the past, the Brazilian government has stepped in and helped with making credit available. Because there is a recovery mechanism, even though it is over time. But it can cause shorter-term liquidity problems. So the Brazilian government has addressed that.

What I would say, which is very important when people try to compare this, say, back to 2002, is in 2002, Brazil had 4 gigawatts of thermal. It has 22 gigawatts today. So that's a very important difference. And they have the experience.

The other that there can be some benefits of this for us, for example, at Uruguiaiana, where we see that we are likely to be running this plant in March and April. So there are some benefits from it.

I don't know, Andy. Would you like to add something?

Hello. This is Andy Vesey, Chris.

Specifically around EP, in terms of how it's exposed to hydrological risk. The way EP, actually at our Sul businesses under regulation in Brazil and under Brazil would work, would be that they would always be just almost fully contracted, if not more, in the marketplace. But with that case, the impact would almost be negligible for the distribution businesses.

But what has happened in Brazil, which is what used to be called MP-579, which was the basically concession rules for some of the hydros, is that a lot of these contracts couldn't be delivered on. So actually, Eletropaulo is about 1% undercontracted.

What that would look like would basically be a cash flow issue for them because they would be paying energy at a spot price to make up that percentage. It would be cash flow. But last year, in a similar situation, the Treasury of Brazil stepped in and subsidized that, provided that cash directly.

So as Andres said, the government has always made sure to keep the businesses solvent. And it's a relatively small exposure for EP. ¶ But to go back to Tom's opening comments, while the hydrological situation is below average now, we are expecting recovery. And we'll have a much better view on that in the April time frame.

Okay. Great. That's very helpful. Thank you.

Our next question comes from Maura Shaughnessy. Your line is now open.

Good afternoon -- sorry, good morning. Couple of questions. First, on the Maritza situation.

The concern was going into the winter, when demand was up and the like, maybe things would've potentially gotten a little more bumpy.

It doesn't seem like that bumpiness -- that technical term, bumpiness -- occurred and things seem on track. Is that a fair statement?

That's correct. Since our last call, they've paid $150 million. We have an agreement, in terms of part of those payments, like around $76 million, I believe, is to be made over time. And we have to see that they comply with that.

So we continue to monitor it. But we have gotten past, I'd say, the worst of the heating season in Bulgaria without any sort of political repercussions. And certainly, the government's focused on improving NEK and in terms of the financial situation of NEK.

I think the great advantage of Bulgaria, as I've said in the past, it has a very low foreign debt. So it's really a question of NEK.

So it's not a case where the government could, quite frankly, as they have done on several other occasions, raise money to inject it into NEK if they so decided.

Okay. I know this has been discussed already, the hydrology situation. Can you be specific to Panama?

In the last several months, you guys have talked about the different things that you've done to try to mitigate the exposure there. The Brazilians seem every other hour to discuss what the percentage reservoir fillage is, and we have an idea of that, ad nauseum.

But Panama, again, is just who knows? Can you be specific as to what the reservoir levels are right now relative to last year, relative to normal? And what specific things have you done to mitigate that exposure?

Yes. I'm going to go ahead and pass this one on to Andy. But you're correct, in the sense that the dispatch of the hydros in Panama is controlled by the government.

So we've made some changes to some of our contracts and done some other things to reduce our exposure. One of them including is that we sold down a portion of Changuinola to the government, so that with the government is a co-owner of all our plants in Panama.

Andy, would you like to add to that?

Yes. Maura, this is Andy Vesey.

Just a broad background. We have, fundamentally, three hydro complexes in Panama.

Bayano, which is one of two pondage hydros in Panama -- the other being Fortuna, which is not ours; Chiriqui, which is one of the river; and Changuinola, which is one of the river, as well.

I'll give you some statistics around that, that as of January for Bayano, which is the pondage hydro, we're about 29% below the historical average. So that's a number for you. Chiriqui, which is --

And how does that compare to last year?

It is slightly worse than last year.

There are two hydrological basins in Panama. Bayano is in one, and our (Indiscernible) rivers is the other. And last year, Bayano was actually doing quite well.

What happened with Bayano was not inflows last year. There was a significant east/west transmission constraint in Panama which didn't allow them to get the energy to Panama City from the larger hydro. So the government over dispatched Bayano. So while inflows were okay last year, they actually overdispatched it. And that's what caused stress to us last year with Bayano.

This year, they have been preserving the hydro in Bayano, but the inflows have been less. So what has happened is they're running much more inefficient thermals now because of that transmission concern, which has raised the spot market considerably.

But to Andres -- to your question, we did change the ownership structure of Changuinola last year. We also changed the contract between Changuinola and AES Panama from a financial contract to a physical one, as Tom had mentioned in his comments.

And while I can't say much more about it, we are currently in conversations with the Panamanian government on other regulatory solutions to significantly mitigate the hydro impact this year.

It is dry. This is the dry season, but it is drier than normal. And we'll have to wait again. The rainy season will start end of April, May. So we'll have to see how we cover.

However, to answer the question that has been put out, if indeed we have a year exactly like last the year, if we are successful with the engagement with the Panamanian government that we're involved in, we should significantly do better than we did last year under the same hydrological conditions.

Okay. And then getting specifically to Tiete. In your assumptions, you have an $0.08 hit from the roll-up of the Eletropaulo contract at the end of 2015. What is the assumed contracted price in that $0.08 hit?

We're assuming a 125, sort of where the market would be at. Our contracts to date are about at 115 -- pardon? Existing one. But I'm saying the ones -- the proportion that we have recontracted in the market. So that's a step down from 180 to about 125.

Okay. And so obviously we've seen spot prices 800, 1000-plus. What is that -- I saw that you contracted some up at 125. Is there the potential in this sloppy environment, or messy environment, that you could be able to lock in more now at higher prices than that?

The approach of the team has been to contract it over time. So the first ones we did, as you recall, were at a lower price and then they've been moving up. Hopefully, I think there is a possibility of doing some higher, like at 135. But I think that we're going to stagger this, not to take a one-time risk.

I do think what we're seeing in Brazil is less of -- the hydros are coming on late, the new hydros. So our belief that this would cause higher prices over time, I think, is playing out.

Andy, you want to add something?

Maura, the only thing I would we add is that we have about 1,200 megawatts of current capacity to take to market. Currently, about 700 of those megawatts have already been contracted for delivery in 2016. These are three-year term contracts, all to their free customers.

As Andres said, the average price of that 700 megawatts has been about 115 on the margin. Now we're seeing between 125 and 135. And it is our expectation that the market will tighten and strengthen, given both the current hydrological situation, the lateness of hydro, and the need to add more thermal into the system.

So we're being very cautious. We don't want to get ahead of our skis on this one, but the team is being very aware of the situation and is waiting to see the market improve.

And what about the opportunity for Tiete to build the infamous gas plant? The government's made some of the pricing. Cap has been raised pretty materially. But who knows if you can actually access the gas?

So what's the status of potentially plugging that hole with a thermal project?

You answered it -- it's really question of getting the gas. We have two projects in very advanced stages of development.

We are actually ready to go on them. Of course, in Brazil, you have to win the bid. So that's an aspect, in terms of how the bids are defined, whether you have, for example, a gas-specific one, whether you have a gas pass through, that certainly would help. But there is still the issue of physically getting the gas.

As you know, we do have Uruguiaina, which is 670 megawatts written off, fully ready to go. We're going to run it in March and in April.

And the solution there, which we've been working very hard with both governments, is to be able to get gas to Uruguiaina through Argentina. For these temporary runs, Petrobras will be supplying the LNG to Argentina. We'll use the existing pipeline. But that really would be a fantastic solution, because we have a plant for free.

Now, the question is, at what price can we get gas? And right now, delivered gas through Uruguiaina is around $25.00 per million BTUs. If we get it down to a more reasonable rate, then it will be a competitive plant.

Okay. Great. Thank you.

Thank you.

Our next call comes from Ali Agha. Your line is now open.

Thank you. Good morning.

Hello, Ali.

Hello, Andres.

Andres, a couple of questions. One, I just wanted to be clear on your earnings outlook that you laid out for us.

If I go back to your original driver, I think off the 2012 actual of $1.24 at the time, you had talked about 4% to 6% EPS growth through 2015. If I run the math right, right now the midpoint of 2015 actually would be lower than the midpoint of that 4% to 6% growth rate.

So has something changed? Can you clarify how we should think about this 2014, 2015 period?

No, Ali. The midpoint was, I think, $1.43, $1.44. And this implies about $1.41. So I think it just depends who has a calculator in his hands. So I think it's pretty much in the same neighborhood.

I see. Okay.

And then as you laid out your outlook 2015 and beyond, into 2018 as well, what have you assumed for those merchant assets at DPL? Are they still embedded in that guidance, or have you assumed they have been taken out?

They're embedded in the guidance.

They are still in there.

And I think, Tom, if I heard you right, your sense was if they do exit on reasonable terms, that will be accretive.

Yes.

Okay. And then on the 6,000 --

The only thing I'd say, Ali, is keep in mind that there are other portfolio management activities that could be dilutive. So at the end of the day, there could be offsets. But, yes, on a standalone basis, we do have the right terms to be accretive.

Right. And the 6,000 megawatts of development projects beyond what's in construction, have you assumed contribution from any of those in that five-year period?

No, because that would be outside that window.

When you say that, what do you mean -- in terms of contribution timeline?

In terms of contribution timeline -- if we start construction on them. We do have assumptions for using our free cash flow and capital allocation.

But what can be shorter-term, again, can be the adjacencies. I had mentioned them on our call previously. And now we're trying to get our hands around, and we've actually I think put a stake in the ground, $40 million of PTC by 2015.

So these are much shorter term, much higher return. But if you look at the bigger project, we've just started two now, Alto Maipo and OPGC II. And so it will be sort of at 2018. So those 6,000 megawatts have a longer-term horizon.

I see.

And I think, Andres, you alluded to the fact that you've got $200 million of cost reductions through 2015, more to come. Can you give us a sense, in that 2015 to 2018 period, what kind of incremental cost reductions are embedded, if any?

We have certain improvements embedded there.

The way to think about it, Ali, we have about $3 billion of discretionary spend or variable spend. So something like a 5% improvement is something that we think is realistic.

Andy?

Ali, Andy Vesey.

Since I put that $3 billion number on fixed cost out there in the last call, I've been spending a lot of time working on this. When we look at this $3 billion and we look at what's controllable by management and we take out any short-sighted cuts of maintenance, we have about $2.2 billion of cost that we should be targeting.

In the expectations that both Andres and Tom laid out between 2014 and 2018, by 2018 we will get to a run rate savings on those fixed cost on the order of $250 million.

But it builds over time. So in 2014, we have about $50 million of that cost. And it will build up over that period and eventually reach about 10% of our fixed costs.

What we've set as a target to help drive us there is we've set the view that we'll take that pile of manageable fixed costs and keep them fixed, meaning that each year we are going to put into place productivity improvements which will offset inflation.

And that's how you should think about it, and that's what we're going to go after. In addition to that, we'll continue to look for more opportunities in that space.

Okay. And just to be clear, that $250 million, is that over and above the $200 million? Or is that $200 million part of that $250 million?

No, no. Those are completely different animals.

In other words, when we talk about the $200 million, we're talking about G&A, global overhead. When you're talking about the $250 million, that's really at the operational level.

I see. And the timeline for that $250 million is what?

Well, as Andy said, that's the next five years.

I see. Got it.

And the $500 million or so of asset sales by 2015, Andres, are we talking by the beginning of 2015 or by the end of 2015?

We're going to set out a goal of around $400 million this year, and then we will complete the rest in 2015. As these things happen, for example, that they do take some time. ¶ As you know, we have Cameroon closed. We've done everything that we can in our share, on our side. And we expect this to close sometime, probably, in March. So they do take some time. There's some lag between the time that we reach an agreement.

But the other thing is, we are not going to do any fire sales, like we haven't done. And we'll sell in a matter where we really maximize the value of those assets. And so we don't feel necessarily rushed to do it.

We will do it as part of our strategic plan to simplify, help us cut costs, help our focus, but also taking to account the appropriate timing to maximize the value.

And my last question.

You mentioned capital allocation, obviously, as part of the growth driver. You've got about $190 million on your current authorization.

For planning purposes, should we assume that that's consumed this year, or should we assume it will take longer for this to be consumed?

I really wouldn't want to comment on that, I think, at this stage. I think we've shown our willingness to step up, as we did in December, with the CIC sell down. So you can assume that.

But I'm not going to make any commitment in terms of when we will use that authorization.

Fair enough. Thank you.

Operator, can we take one last question, please?

Okay. Our last question comes from Charles Fishman. Your line is now open.

Thank you.

The driver for your decision to sell the DPL generating asset, is it just the return you think you can get on the environmental CapEx going forward was unacceptable? Is that the primary driver?

I would say really it's a crosscut. It's more of a strategic, because we have a -- as we transition, and again, we haven't taken any -- we're in the transitioning out of the combined entity.

But it's really sort of a merchant position in PJM and really whether we thought that was the right fit for us.

Okay. And then if you did exit or sell those plants, would you exit the retail business, as well?

I think the two go hand-in-hand, and the retail was really a way to place our generation capacity. So certainly, we would look at that.

Okay. And then you mentioned the Chilean pension funds. I would think they like to stick close to home. Were they part of that $1.2 billion financing for Alto Maipo?

No. Basically -- put it this way, no, some Chilean banks are involved in the syndicate.

Basically, we mentioned them because we see them as niche financing. And if you really look at the growth of Gener over the past six-plus years, it really hasn't required any money from AES. ¶

Because what we were able to do is have strategic partnerships of the local capital, and so we've doubled the amount of capacity at that business using local financing and local equity partners. And so that has worked very well.

So what we are looking at is we will do something like that, where we can really see niche financing. Because as you know, they're not going to buy AES stock, but they have to buy local paper and they very much like Gener.

So what we want to do -- and this is a very important strategic thrust for us -- is to really make use of different levels of capital to maximize the return on our equity. And that means it allows us to what we call sculpt.

And that means the size of the project. We may not want to take 100% of a given risk in a given market. So this allows us to reach the optimal size for our portfolio, redeploy some cash, and also look at this, again, from a portfolio perspective. So that is a significant change in the way we've historically looked at capital here.

Okay. Thank you.

Thank you.

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

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