愛依斯電力 (AES) 2015 Q2 法說會逐字稿

Good morning. My name is Alissa and I will be your conference operator for today. At this time I would like to welcome everyone to the AES Corporation Q2 2015 financial review.

(Operator Instructions)

Thank you. Ahmed Pasha, you may begin.

Thanks, Alissa. Good morning and welcome to our second-quarter 2015 earnings call. Our earnings release, presentation and related financial information are available on our website at AES.com.

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

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

Good morning, everyone, and thank you for joining our second-quarter 2015 earnings call. Today we reported second-quarter EPS of $0.25 and proportional free cash flow of $62 million. And we are reaffirming our 2015 guidance ranges for all metrics, despite facing increased headwinds from foreign currencies.

Before Tom and I provide more color on our results for the second quarter and first half of the year, allow me to review our progress on the priorities for 2015 that I provided on our earnings call in February. First, we're making good progress to reach closure on key pending issues that could impact some of our businesses. At Eletropaulo in Brazil, we have had a reasonable outcome in our four-year rate case. At Maritza in Bulgaria, important milestones have been reached towards the resolution of our outstanding accounts receivable.

Second, we are executing on our construction program and leveraging our platforms. In April we commissioned our 1.2 gigawatt Mong Duong plant in Vietnam six months early and under budget. Our remaining $7 billion construction program is advancing on schedule and we expect to bring 6 gigawatts online by the end of 2018. In July, we also broke ground on three new energy storage projects including our first two in Europe.

Third, we are expanding our access to capital through partnerships at the project and business level. Today, I'm very pleased to announce that we are forming a new 50/50 joint venture with Grupo BAL to invest in power and related infrastructure projects in Mexico.

And, finally, regarding capital allocation, we have delivered on our commitment to invest at least $325 million in share repurchases. Today, we are announcing that we intend to utilize the approximately $100 million left on our buyback authorization during the remainder of this year. In 2015, between buybacks and dividends, we will return $700 million to shareholders, or approximately 8% of our current market cap. I will provide more detail on these achievements in a moment. But now, I'd like to briefly discuss our financial results and our expectations for the remainder of the year on slide 4.

Our year-to-date 2015 adjusted EPS of $0.50 is in line with our results of last year, and our proportional free cash flow of $327 million is well ahead of first-half 2014 results. Our earnings and cash flow are typically weighted towards the second half of the year. We expect our second-half results to benefit from improved availability due to less plant maintenance, better hydraulic maintenance, better hydrology in Latin America and higher collections in Bulgaria and the Dominican Republic. Although there is still a lot of work to be done to deliver on stronger cash flow in the second half of the year, we remain confident that we will achieve our financial guidance for 2015.

Now, let's discuss some key issues at our businesses in Brazil on slide 5. As we discussed on prior calls, we have seen a decline in electricity consumption in Brazil, which is the result of the economic recession and higher energy prices. Today, economists are projecting a 2% contraction of GDP for 2015. In addition, dry hydrology is leading to high electricity prices by requiring the dispatch of more expensive thermal energy. As a result, we are forecasting a 4% year-over-year decrease in volume at our Brazilian utilities in 2015. Nonetheless, we had already factored in this softness in our prior forecast. As a reminder, every 1% change in volume in our Brazilian utilities has a $7 million pretax impact on our bottom line.

Turning now to hydrology on slide 6, in Brazil we have seen rainfall improve more than expected since our last call. In July, rainfall was 156% of the long-term average and reservoir levels are projected to be 37% by the end of August, materially higher than the 20% levels at the beginning of the year. The improvement in hydrology in Brazil is reflected in spot prices which are now around BRL120 per megawatt hour, significantly lower than last year. We now see the risks of rationing electricity in Brazil in 2015 as remote but we continue to expect a negative earnings impact of $0.07 per share from poor hydrology this year.

In Panama, we're observing a return to normal hydrology, and spot prices are $100 per megawatt, or one-third of the price we saw last year. In Colombia, our 1 gigawatt hydro plant Chivor is experiencing stronger inflows, close to the historical average, while in the rest of the country inflows are 90% of the long-term average

Turning to slide 7, we have received approval for Eletropaulo's four-year tariff reset. This outcome sets a strong foundation for predictable cash flow and earnings from this business through 2019. Lastly, we have successfully negotiated the restructuring of Brasiliana, where we own various businesses in partnership with BNDES, the state-owned development bank. Through this restructuring we're separating our generation business, Tiete, from other businesses under the Brasiliana umbrella. This separation will give us more control of operations and capital allocation decisions at Tiete. Once this transaction is completed, we will be in a more favorable position to grow Tiete by tapping into approximately $500 million of debt capacity at this business.

Turning to slide 8, as you may recall, in April Maritza signed an MoU with its offtaker NEK whereby Martiza would receive full payment of all arrears, which as of June 30 were $281 million, in exchange for a reduction in the capacity price of the long-term PPA. Since our last call we have secured the required approvals from the project lenders and from the Bulgarian regulator.

At the same time, the government of Bulgaria has taken concrete steps to improve NEK's financial position. Parliament has approved the energy sector reforms to support NEK through a new 5% tax on generator's income as well as allocating all proceeds from the sale of the state's CO2 allowances to NEK. Finally, the regulator announced an increase in the tariff of up to 20% for certain classes of industrial users, and reduced NEK's commitment to procure more expensive renewable energy. These steps will strengthen NEK's financial position and allow the Bulgarian public sector to raise the necessary financing to pay their outstanding receivables. We expect to sign a binding agreement and collect on all arrears in the second half of the year. Collecting from NEK will be an important contributor to the improvement in our free cash flow in the second half of the year.

Now let's turn to our progress towards our strategic objectives, beginning with construction on slide 9. Our construction program is the most important driver of our 10% to 15% average annual growth in free cash flow over the next few years. This strong growth in cash flow is the foundation for our commitment to a 10% annual dividend increase as well as all other capital allocation decisions. From 2015 through 2018, we expect to commission 7 gigawatts of new capacity in comparison with the roughly 600 megawatts we brought online in the three years from 2012 through 2014. Through June, we've already brought online 1.3 gigawatts which is nearly 90% of the capacity we plan to commission in 2015.

Moving on to slide 10, our remaining 5.8 gigawatts under construction are progressing well and remain on time and on budget. As you can see on the slide, roughly 80% of new capacity is in the Americas. As a reminder, total CapEx for our projects currently under construction is $7 billion but AES's equity commitment is only $1.3 billion, and all but $400 million has already been funded. We expect an average return on equity from these projects of more than 15%.

Turning now to slide 11, as we discussed on our last call, we achieved commercial operation on our 1.2 gigawatt Mong Duong project in Vietnam six months early and under budget. The plant is operating at full load and will help meet Vietnam's rapidly growing demand for electricity, and provides us with a solid platform in the country.

Moving on to slide 12, we are the world leader in battery-based energy storage, with 86 megawatts of installed capacity. We are seeing growing regulatory support and greater acceptance by utilities in our markets. As a result, we recently broke ground on three new energy storage projects totaling 40 megawatts in three countries. We are consolidating our global leadership and now have a total of 70 megawatts of energy storage under construction that we expect to come online through 2016, and 200 more megawatts in late stage development. We are very well positioned to continue to take advantage of this emerging business opportunity, given AES's portfolio and eight years of successful and profitable experience operating battery-based energy storage.

Turning to the new joint venture we are forming in Mexico on slide 13, today we announced that we signed an MoU with Grupo BAL, a Mexican business conglomerate with a market cap of $11 billion, to pursue new power, desalinization and natural gas projects. Grupo BAL is one of the largest and most respected business groups in Mexico. And one of Grupo BAL's subsidiaries, Grupo Penoles, is the offtaker of TEP plant in Mexico.

As you may know, Mexico is in the process of implementing new energy sector reforms which will allow for greater private sector participation. Over the next 10 years, it is estimated that Mexico will need 25 gigawatts of new or replacement generation. We have owned and operated a successful generation business in Mexico for more than 15 years, and now, with Grupo BAL, we are poised to take advantage of the opening of the energy sector.

Turning to slide 14, looking at growth opportunities beyond our projects currently under construction, all of which we expect to complete by 2018, our future project mix is likely to be heavily weighted towards natural gas and renewables, while using our platforms to provide energy storage, desalinization and LNG-related services. In particular, in arid and semi-arid regions such as Chile, where our plants on the coast are already providing desalinization for their own needs, long-term desalinated water contracts can be an attractive business. Using existing infrastructure and permits significantly reduces the cost of providing desalinated water to third parties such as municipal water authorities, mining and industrial customers.

Based on all of the opportunities we see across our portfolio, we believe we can invest $300 million to $400 million of AES equity in attractive growth projects each year, which is consistent with the amount of equity we are currently contributing to our growth projects. This amount of equity investment is quite moderate, considering the strong growth in our free cash flow. In addition, we can use the debt capacity at our existing businesses such as Brazil, Chile, the Philippines and the Dominican Republic to fund growth projects.

Recycling capital has been and will remain an integral part of our strategy. Over the past four years, we have raised $3.1 billion in asset sale proceeds and another $2.5 billion in partner equity at the business and project level. These actions have permitted us to reposition our portfolio, pay down our debt, improve risk-adjusted returns and accelerate our growth profile.

Before turning the call over to Tom, I would like to emphasize that as we have demonstrated to date, we will continue to compete all new investments against share repurchases in order to ensure that we are maximizing risk-adjusted returns for our shareholders. To that end, as you can see on slide 15, we are returning $700 million to our shareholders in 2015, which is 8% of our current market cap. We have returned a total of $2 billion to shareholders since September 2011 and reduced parent debt by $1.5 billion or 25%, while significantly lengthening its average tenure.

With that, I will turn the call over to Tom to discuss our second-quarter and year-to-date results and full-year guidance in more detail.

Thanks, Andres. And good morning, everyone. Our first-half results and the reaffirmation of our guidance demonstrate the benefits of our proactive actions to mitigate the impact from currency devaluation and other macro factors we've experienced over the last several months. Today I'll review our second-quarter results including adjusted EPS, adjusted pretax contribution or PTC by strategic business unit or SBU, proportional free cash flow by SBU, then I'll cover our 2015 guidance and our 2015 capital allocation plan.

Turning to slide 17, second-quarter adjusted EPS of $0.25 was $0.03 lower than second quarter 2014. At a high level, we were negatively impacted by the following -- $0.04 operating impacts including timing of planned maintenance at certain business as well as lower demand and contracting strategy in Brazil. These were offset by favorable hydrology in Panama and Colombia and new businesses coming online.

We had a $0.02 impact from a stronger US dollar, which appreciated roughly 20% against the Brazilian real, Colombian peso and the euro. Finally, a $0.02 net impact from other adjustments, primarily the favorable reversal of liabilities in Brazil and Kazakhstan in 2014, offset by the favorable reversal of liability at Eletropaulo in 2015.

On the positive side, we benefited $0.04 from a lower tax rate of 30% this year versus 40% in the second quarter last year and $0.01 from capital allocation net of asset sales, which resulted in 13% lower parent debt and a 4% lower share count relative to last year.

Now I'll cover our SBU's financial performance in more detail on the next six slides, beginning on slide 18. In the US, adjusted PTC decreased by 24% million due to planned maintenance in Hawaii and at IPL, as well as lower wind generation at Buffalo Gap in Texas. Proportional free cash flow was roughly flat, reflecting working capital recovery and lower interest at DPL.

In Andes, PTC decreased $23 million, primarily due to timing of planned maintenance in Chile and Argentina, as well as a weaker Colombian peso. Proportional free cash flow declined by $37 million due to lower earnings and a higher tax payment at Chivor in Colombia versus last year.

In Brazil, PTC decreased $74 million. In addition to the $17 million impact from the depreciation of the Brazilian real, the decline was driven by the approximately $13 million net impact from liability reversals in each period at our distribution businesses, Sul and Eletropaulo. You may also recall that last year our generation business, Tiete, benefited from spot sales at favorable prices due to lower contract levels during the first half of the year. This benefit was more a timing issue as Tiete had to purchase in the spot market in the second half. This year Tiete's contract levels are flat in the first and second half so we expect contributions to be evenly distributed. Last but not least, Sul has been affected by lower demand and higher costs. Proportional free cash flow decreased $18 million primarily driven by lower operating income at Tiete, as I just discussed.

In MCAC, PTC increased $11 million, largely driven by improved hydro conditions in Panama where we generated more this year versus buying in the spot market last year. Panama also benefited from the commencement of operations of our 72-megawatt thermal power barge. Proportional free cash flow improved by $12 million primarily driven by improved operating performance.

In Europe, adjusted PTC decreased by $32 million mainly due to lower energy prices and the timing of planned maintenance at Kilroot in the UK. Despite the decline in earnings, proportional free cash flow was up $3 million, largely by improved working capital at Maritza.

Finally, in Asia, PTC increased $7 million resulting from the early commencement of operations at Mong Duong in Vietnam, partially offset by the sale of minority interest in Masinloc in the Philippines in 2014. Proportional free cash flow was roughly flat.

Turning to slide 24, overall we earned $251 million in adjusted PTC during the quarter, a decrease of $89 million from last year, and we generated $62 million of proportional free cash flow, an increase of $15 million. As you can see on slide 25, year-to-date adjusted PTC declined $80 million, largely driven by lower demand and contracting strategy in Brazil, a stronger US dollar, as well as the net impact from the reversal of liabilities in Brazil and Europe. These negative impacts were largely offset by the contributions from new businesses that came online earlier this year and our capital allocation decisions.

Our proportional free cash flow increased $151 million to $327 million, primarily due to higher contributions from the US and MCAC including higher collections at DP&L and improved working capital in Puerto Rico. Year-to-date adjusted PTC and proportional free cash flow by SBU are in the appendix of today's presentation.

Now to slide 26, comparing our first-half results to our full-year guidance, our earnings and cash flow tend to be more heavily weighted toward the second half of the year. Consistent with our prior expectations, in the second half of 2015 we expect EPS to benefit from improved availability as a result of planned maintenance that was completed earlier in the year in Chile, Dominican Republic and the US; improved hydro conditions in Panama and Colombia; seasonality related to contract generation businesses in the US and Chile, as well as IPL; the previously expected benefit from tax opportunities at certain businesses; and, finally, contributions from Mong Duong in Vietnam which came online in the first half of the year.

Regarding proportional free cash flow, improved results in the second half of the year versus the first half are driven in part by higher operating performance in the second half, consistent with our earnings profile. The remaining increase is largely attributable to lower pension and fuel payments at IPL in the US, timing of income tax payments and VAT collections at Gener, higher collection of receivables in the Dominican Republic, and collection of receivables in Bulgaria, a portion of which will be used at the business for deleveraging and fuel payments.

Bottom line is that although we have to execute on our plan, we feel confident in our ability to meet our objectives for the year and we are reaffirming our guidance on all metrics. Our reaffirmed guidance is based on forward curves as of June 30, reflecting a benefit of a couple of pennies relative to our prior year guidance which was based on March 31. [Planned] curves as of July 31 were effectively back to where we were as of March 31.

Our guidance also assumes the current outlook for hydro in Latin America, which is in line with our expectations, and an unchanged full-year tax rate of 31% to 33% versus year-to-date 2015 rate of 31%. Assumptions and sensitivities for our guidance are in the appendix of today's deck.

Now to slide 27 and our Parent capital allocation plan for the year, sources on the left hand side reflect total available discretionary cash for 2015 of roughly $1.65 billion, which is $70 million higher than our last call. As a reminder, we previously announced asset sale proceeds from the sale of a portion of our interest in IPALCO and Jordan, as well as the sale of the Armenia Mountain wind farm. Today we're also announcing the sale of our solar assets in Spain, bringing our total asset sale proceeds this year to $573 million.

We're also expecting an additional $45 million in return of capital from operating businesses, which, along with our Parent free cash flow, provides us with nearly $600 million available for dividend payments and growth, incremental share repurchases and other potential investments. In terms of incremental sources of discretionary cash, as Andres mentioned, we'll continue to evaluate additional asset sale opportunities which could be $200 million to $300 million annually on average but may be lumpy year to year.

Now to uses on the right hand side of the slide, we plan to invest about $350 million in our subsidiaries, 60% of which is at IPL and has already been funded. We've invested $345 million in prepayment and refinancing of Parent debt, leaving us with only $180 million in Parent debt maturities through 2018.

Finally, in addition to the dividend, we're investing $420 million in our shares which is $100 million more than we committed to in our last call. This brings total cash returned to shareholders through buybacks and dividends to $700 million for the year. We'll continue to compete various investment opportunities to maximize per share value for shareholders.

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

Thanks, Tom. To summarize, we continue to make steady progress on our objectives. Specifically, we're pulling all levers to achieve our financial objectives despite the headwinds from poor hydrology in Brazil, lower foreign exchange and commodity prices. As I noted, overall hydrology in Latin America is improving as a result of the El Nino phenomenon. We have achieved a number of milestones towards resolving Maritza's outstanding receivables after signing an MoU with NEK in April. We expect to collect outstanding receivables in the second half of the year.

We have completed the 1.2 gigawatt Mong Duong project in Vietnam six months ahead of schedule, and we are making good progress on the remaining 5.8 gigawatts under construction. We're bringing in financial partners to leverage our platform and maximize overall returns by forming a joint venture with Grupo BAL, a strong partner with significant presence in Mexico. And in 2015, we're investing more than $1 billion in returning cash to our shareholders and debt paydowns in addition to the $350 million we're investing in profitable growth projects.

In conclusion, in line with the plans we laid out on previous calls, we continue to leverage our platforms and allocate our discretionary cash to maximize-risk adjusted returns for our shareholders.

Now, I would like to open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Greg Gordon with Evercore ISI. Your line is open.

Thanks, good morning, guys. Great quarter. Your commitment to capital allocation is best in class, so thank you very much. And I know your shareholders are probably very happy. The question, an open-ended question, first, because there's so many moving parts to the guidance, I know you're on track to hit earnings guidance for the year and doing a little bit better on proportional free cash. But if you look for the balance of the year versus the plan you laid out in March is there any specific areas where you're a little bit ahead or a little bit behind of where you had expected? I know overall you're still within the channel.

I would say that one of the key drivers we have, as I mentioned on cash, is Maritza. And we said we would get this in the second half of the year. So, we really achieved the important milestones. We're quite impressed with the commitment of the Bulgarian government to fix the electricity sector and parliament approving some important reforms. So I think that's the key component. So we're on track there.

I would say hydrology in July was, quite frankly, a little bit ahead of what we expected. FX is more or less in line with what we expect. I'd say, if anything, the demand in Brazil is softer, perhaps a little bit softer than we expected even though we had those numbers in. So overall, we're kind of on track.

I think the main points are that we have some seasonality, and some of it in terms of collections. We tend to collect more in the Dominican Republic. We have the Bulgaria. Those are two discrete factors in the second half.

And then we had a number of plant maintenance in the first half which we won't have in the second half. So that's overall. It's not too far from our expectations, I would say, on a case-by-case basis.

That's good. Because one of your competitors in Brazil had a big disappointment in the second quarter as it pertains to their business, so I think there was some trepidation coming into your call that you might see a downward revision. Thank you. The second question is just to be clear. When you gave the first-quarter guidance you based your projections on the March 30 deck. Tom, you're basically saying that if we roll forward to the end of July we look a little more or less like we looked like at the end of March, so obviously still inside the guidance range?

Yes, that's correct. If you asked us five weeks ago we would have said we might have been a penny or two off, but I think we lost that in the last five weeks. So, basically back to where we were end of March.

And then final question from me, the $104 million to $204 million of discretionary cash to be obligated, if the stock price doesn't respond to you guys continuing to execute, at what point would you go to the Board and potentially allocate that to further share repurchases?

Greg, as we've said in the past, our Board has been very supportive of our share buybacks and we've always been able to go back and get a share repurchase authorization when we felt we needed it. Our sector's been hit in the last month by certain negativism, and certainly that's been reflected in the stock price, and certainly that affects our capital allocation decisions as we're comparing the value of buying back shares with our new projects.

Okay. Thank you, guys. Thanks again for a great quarter.

(Operator Instructions)

Your next question comes from the line of Ali Agha with SunTrust. Your line is open.

Thank you. Good morning. Andres, a question for you on Brazil. As you said, the hydro situation appears to be improving but you still have the FX headwinds, the economic and political outlook there continues to be very challenging from what we can tell. I just wanted to get a sense, what is your tolerance level to absorb all of this? Are you there indefinitely for the long haul regardless of how all of this plays? Or how are you thinking about that relative to all the other jurisdictions where you have better opportunities, perhaps?

Sure. I think a lot of our countries have cyclical patterns. Right now Brazil is certainly not at the peak of one of these patterns. I will remind people, I think two, three years ago a lot of questions I would get on these calls was why wasn't I investing more in Brazil and that we were slow.

What we did at the time, and we continue to do today, is we only invest when we see long-term value, and we really see the value, not, quite frankly, get caught in the trends. Brazil's having a recession this year. It will probably have a flat 2016 and expected to pick up in 2017.

Brazil is a big market. It's a country which, again, has great potential. And I think that us as a company of the Americas we should have a presence in Brazil.

Now, of course, all of our assets, we look at what we consider their long-term value, what we could sell them for and how they contribute to a balanced portfolio. So, overall, what I would say is that I agree that the economic situations look challenging in Brazil but realize this is a country with tremendous potential that could come back and we can't come in and out on a short-term basis.

And the final thing is we have been very prudent about, again, investments in Brazil. We still have $500 million of debt capacity at Tiete. So, growth in Brazil will come from leveraging the Brazilian businesses.

I hope that answers your question. But I think the point is that there are cyclical patterns. Brazil has a lot of capacity to rebound. And, as always, when times were very good in Brazil, we were always looking at what's the value.

And I will remind people that we sold a lot in Brazil at the peak. We sold our telecom business there for $1 billion. We also sold 50% of our holdings in Eletropaul back in 2005. So we'll continue to make those adjustment as we see fit.

Okay. The second question, I wanted to just clarify the capital usage plan going forward. If I heard you right, Andres, you said you may be investing $300 million to $400 million a year in new opportunities on an annual basis. Your dividend is consuming about $300 million of your cash and that's going to grow at 10% every year. So, where is the cash coming from? Because I'm looking at Parent cash and I think these investments and the dividend, I don't think there's any cash left. So am I missing something here or how is that being funded?

I think what you're missing from the equation is what Tom mentioned, that we would be selling about $200 million to $300 million in our existing asset platform. So, if you include that, the equation does close. And realize that as our new plants come online, they will be generating more cash, as well.

Okay. Got it. And then, lastly, to clarify your point, you benchmark everything obviously against share buybacks. So, are you seeing those opportunities out there that can still give you greater returns on a risk-adjusted basis than buying back your own share, that you're confident you can spend $300 million to $400 million a year on new projects?

Yes, we do. And it really gets back to utilizing our platforms. So I did mention the example, for example, of desal. Basically, we are upgrading our plants to use reverse osmosis technology. Once you have the permit for intake of salt water and discharge the saline, and you can basically put these in a modular fashion, these are very attractive opportunities.

We're also seeing it in other places where we can add on energy storage and the new projects we're engaged in. So, what I can tell you is that we're seeing above 15% returns on equity from our projects on average. So, yes, we are seeing a lot of attractive opportunities. Of course, we're being very selective with our stock at these prices.

Thank you.

Your next question comes from the line of Chris Turner with JPMorgan. Your line is open.

Good morning, guys. I wanted to get a sense of the potential for GSF reform in Brazil and to get your opinion on the potential for that in general and then the potential structure if it does materialize. And then also, on the flip side, have you sought an injunction for Tiete there? And how would that work if others are successful with injunctions in penalizing of you and the remainder of guys out there that don't get injunctions?

Let me take the first one. This year GSF will be between 17% and 19%. And it's a considerable cost to the generators. I believe the total is somewhere about BRL20 billion that people are paying.

There's been discussions between the government, the Ministry of Energy and Mines, and the associations such as [Abragi]. As well you have [Anel] involved. And there has been talk about capping the GSF. The exact amount is being negotiated. But just give a hypothetical, say, it's capped at 10%, the generators will be compensated for that difference, say, between 7% or 8%, additional to the cap, for example, this year, by an extension of their contract. So you'd receive a regulatory asset, of the concession, you'd receive a regulatory asset equivalent to that amount.

There's nothing set as of yet. There certainly is interest from the government, interest from the regulators, and we'll keep you informed. In terms of the probability, I think on the previous call I was quite, let's say, prudent about this saying we'll see. I think the chances of something like this happening have improved. Regarding the injunction -- Tom.

I'd just say, I haven't got all the details here but there was initially compensation to one or a small group of generators that was actually detrimental to the rest of the generators and we did participate with the larger generator community in saying that any decisions, any compensation should be consistent across the sector. So that was some time ago and I believe the discussions are now focused on sector reform. As Andres said it goes into compensation that really gets into concession renewal. I'll remind you, our concession is well off of Tiete. It's 2028.

And the GSF of 17 to 19, that's the number we've had now for a number of months. There is some possibility, we've seen thermal dispatch come down recently from about 19 to, I think, 15.5 gigawatts, which may indicate there could be some greater thermal generation -- I.E, a little bit of improvement on the GFS but it's still far too soon to tell. That's just news over the last couple weeks.

Okay. And then, switching gears, I just wanted to get an update on your Argentinian businesses or business down there. It's a little bit tough to break out in and of itself. How have earnings maybe trended the past couple years there? And are those trends a function of regulatory changes to power prices? And how do you think about that business going forward, with the potential maybe for other regulatory changes to those power prices? And how do you think about things post the election?

I think that's a great question. I'd say, of course if you take a longer-term view in terms of the past coming to the present, pricing has deteriorated in Argentina, no question about that.

On the other hand, I think we've fared very well from a regulatory position, because, as you know, until last year we were exporting energy from Argentina to Chile through our TermoAndes plant. We also have the only coal plant in the country. So, we have been selling energy in TermoAndes under the Energy Plus, which in the past was more favorable than it is today.

But I'd say in general, we have always been making positive earnings in Argentina. So, even though they're less, say, than they were four, five years ago, they continue to be positive. We have been receiving 96% payment on our accounts receivable. Some of these are through Fannie Mae bank bonds. These bonds are dollarized, they pay interest.

And, for example, the [Guillermo] brown plant where we have a considerable number of these bonds are basically being used to fund that plant. We're going to receive that plant, our proportion of it, very soon. It's being commissioned.

So, I'd say overall in Argentina, despite the challenging economic circumstances, we've done well. The one thing is we haven't been able to pay dividends out of Argentina for the last two years.

Looking forward, what do we see. I think the elections in October, the two leading candidates, either one would be favorable. I think you'll have a gradual return to, say, more market based pricing and a lifting of the exchange controls.

We have a tremendous asset base in Argentina. Of course, we're not putting any new money in at this stage but I think we've handled it well. I firmly believe that within a year or two we'll be paying dividends out of Argentina. It is basically considerably developed country and quite wealthy. So again, I think it's probably on the rebound at this stage.

Okay. Would you characterize what you've embedded in your long-term EPS and cash flow guidance as incorporating a lot of upside there or are you being conservative there?

We're always conservative. We never embed big upside. What I can say is we do expect a continuation of what we've been doing there which I think is managing this situation quite favorably.

Great. Thanks, guys.

(Operator Instructions)

Your next question comes from the line of Stephen Byrd with Morgan Stanley. Your line is open.

Good morning. I wanted to echo Greg's comments on capital allocations -- very clear. I did want to dig a little further into that following up on Ali's questions on the $300 million to $400 million in growth. In addition to asset sales, when you think about all of the other levers at your disposal in terms of just retained cash flow at the country level, project level or other leverage capacity, et cetera, should we be thinking that those levers are quite significant and, therefore, could further reduce the amount of true equity at the Parent? Or are those more discretionary and not something that we should be thinking of as quite significant offsets in terms of the amount of equity needed at the Parent?

Yes, Stephen. Certainly as we look for growth we do look to drive as much as we can out of the business as possible. You think of the big growth drivers. Certainly Gener has been a big driver. They brought in partners. They've done project finance. The only equity that's been done in the last few years is $150 million totally at the Gener level and we did our 70% contribution. So, that's a great example of a multi-billion dollar construction program and stretching the Gener balance sheet and Gener cash flow as much as possible.

I think Andres mentioned a couple other examples. Dominican Republic, we have some unused debt capacity that's currently being used to fund a facility upgrade. We look around the business to do that as much as we can.

IPL has been growing quite a bit, also. That really grows more of a classic utility style that we maintain a capital structure, 55 debt/45 equity. So that's more akin to the normal utility. But we do that and we'll continue to look for leverage capacity at the business, look to see whether partner for a project or a business can't come in to help increase the value of the business and/or bring in more effectively priced capital. And then, lastly, if you will, we'll look at up to the Parent.

And the $300 million to $400 million is just a general range. I think that's a number we've been at the last couple years. If you go back I think three years it was more in the mid $200 millions. It's just a general indication.

Understood. Great. And then just shifting over to your announced joint venture, can you just discuss at a high level the nature of the arrangement? Is this effectively exclusive on both sides? Are there other elements of the joint venture in terms of more specific targets or anything else? Just a little bit further color on the JV would be appreciated.

Sure. Grupo BAL is one of the most reputable business groups in Mexico, and it has a long tradition, having been established around 1901, I believe. They have been our offtaker at the TEP plant for the last 10 years and they've we've been very pleased with us.

They have another small joint venture with EDP for some wind projects and we have our existing plants of TEG, TEP and Medida, which will be outside this joint venture. However, going forward, it's exclusive on both sides, it will exclusively look at new deals. There's no target that we will invest X amount. It's really that we will look at these projects together.

We both bring strength. We bring the global size, our successful E&T experience, our ability to manage these plants. And they bring the local component and knowledge of the sector.

Mexico is opening up the energy sector. There are, I think, going to be a considerable number of bids for power plants, not only of CFE but also of private sector clients. And also with our strategy of using our platforms for adjacencies such as desalination or energy storage, or, for example, LNG services, we can add those on.

So going forward it will be exclusive 50/50. We both have to agree to make an investment. If one partner does not agree with investment, the other one can make it on its own.

So this is I think very favorable for both sides. It gives us a lot of flexibility and it's really aiming to leverage off our strengths. And the good thing is that we know each other. We've been working together for more than a decade.

That's great. Thank you very much.

Your next question comes from the line of Angie Storozynski with Macquarie. Your line is open.

Thank you. I wanted to talk about Eletropaulo. You have just concluded a rate case there. What kind of load assumptions do you have embedded in that rate case? And, secondly, is the restructuring of Brasiliana having any impacts on Eletropaulo?

I would say in terms of growth, as we said, we're looking at a decline in growth. And the numbers we gave were weighted average for Sul and Eletropaulo. The decline in demand is stronger in Sul than it has been in Eletropaulo. I think we're looking at pretty much flat demand for next year and then growing moderately after that. Long-term growth in Brazil, what you normally expect, is about 3% to 4% has been the historical average over the last 10 years.

The second is how is Brasiliana affecting Eletropaulo. As you know, in 2005 we sold down 50% of our holdings, both us and BNDS, of Eletropaulo. And we basically took that money and delevered the Company. Then in 2011 we spun off the telecom [Achimus] and sold that.

So, right now, between the two of us we have about 32%. That is, Brasiliana has its. We have 16%, roughly -- a little bit more than 16%. I don't really think that the Brasiliana structure has been affecting Eletropaulo directly.

I think that the distributors have been, I think, more fairly treated over the past six months than they had before and that's why you've seen a recovery in the price. Eletropaulo's stock should be up, I believe, about 70% in dollars this year. It's been the best performing within the sector by a considerable margin. I think part of that is perhaps it dropped also more strongly because some of the, let's say, decisions against it.

But we got a good decision on our regulatory asset base. The [WAK] has been raised to over 8%. So these are all favorable things.

Now, unquestionably, other than the regulated part which, as I said, the market is recognizing, it's making certain investments to continue to improve quality of service and it will depend on the recovery of the Brazilian economy. I believe that the Brazilian government is doing the right things at this time and taking some very brave decisions, including cutting spending, raising interest rates, and that these will have good long-term effects. But certainly they're very tough in the short run but I really commend their bravery.

So, I don't know if that answers your question. What we see in Eletropaulo is a tough 2015, a more moderate 2016 and a recovery more in 2017, 2018.

Okay, thank you. Just one more. On Mong Duong, the plant came online six months ahead of time. The hydro conditions across the board seem to be in line with expectations. Everything else is in line with expectations. Should we just see the plan potentially moving you beyond the mid point of your guidance? Or what's the potential offset if it's not the case?

What I would say is that at this stage we are reaffirming the guidance ranges. That's not only earnings but cash flow. Certainly on cash flow, depending on where we'd be in the range, the payment at Maritza is obviously a big mover. You're talking about a range of $1 billion, $1.4 billion, $1.350 billion, and $280 million will make a difference.

On the other hand, right now I would say that we remain within that guidance range. Certainly we don't see in the five months that are left something that would likely move us outside of those ranges to the upside.

Thank you very much.

Your next question comes from the line of Gregg Orrill with Barclays. Your line is open.

Yes, thank you. I was wondering if you could talk a little bit more about the potential of caps on rationing exposure in Brazil and how that might affect that regulatory asset, might affect you either in magnitude going from the 10% to the 17% to 19%, maybe how those things might be reported financially. Would that help you from an earnings perspective as well as cash flow?

Let me answer the first part, then Tom can answer the second part, how we book it. We see the probability of rationing this year is very low. And there are two drivers. One, the government's done a very good job of basically running thermals and saving water. And the rains did come in considerably stronger. Quite frankly, as of mid July the reservoir levels were at 41%, which is very high because they should be, quite frankly, declining at this time of year.

So, the likelihood of rationing this year, not to say it's impossible, it's very remote. And if rains continue as expected, it's not very likely in 2016. Again, assuming the government continues its policy. In addition to that, you've had a decline in demand.

So, you put those two together and, again, it's a much stronger position vis-a-vis having rationing this year and next than it was before. This year, it's substantially less. In terms of the regulatory asset, that's a considerable number but I'll leave it to Tom in terms of how much we would actually book.

Gregg, I think you're ahead of us. If there is something that allows Tiete's concession, which now ends in 2029, allows it to get extended, clearly the value, the economic value, does it turn into a regulatory asset that we would record? We're still early on to understand the details. Certainly we'll look at that from a GAAP standpoint but I think it's early to think too hard about that.

Okay. Thanks.

Your next question comes from the line of Charles Fishman with Morningstar Equity. Your line is open.

Good morning. In 2016 I see, slide 53, that you're still saying flat to modest growth. With what's going on in Brazil with maybe your tax rate returning to a more normalized level, you won't get as much incremental benefit from Mong Duong because it fortunately came on early, what gets you to modest growth for next year, potentially, realizing it's flat to modest growth and guidance didn't change?

I think the positive is that we have Cochrane coming on. This is a 552-megawatt construction project in Chile and that's proceeding very well. We also have rate base across at IPL. We've completed the 2,400 megawatts of MATS upgrades.

And then, of course, you mentioned Mong Duong, but we have a full year. The other thing is, of course, capital allocation and it will also depend on hydrology. If we have continued good hydrology, and specifically, for example, in the case of Chivor, Chivor typically -- it is a very good basin that it's in so it tends to have less volatile hydrology than the rest of Colombia.

So when you have, like now, El Nino, the rest of Colombia is dry and actually Chivor is at average. So, then actually you get better prices for the energy you sell that you haven't had contracted. And, finally, we expect some normalization of the currencies, as well. So all those are things that can cause this.

Now, I agree, 2016 if we look out the next three years, 2016 is the toughest year because 2017 and 2018 we have a lot more projects coming online. The other thing is, realize that on some of these adjacencies such as energy storage or desal, these can be operational in a very short period of time. Desal, it will depend, quite frankly, we have to build a pipeline to a client. But some of those cases we don't. Those are additional things that could help.

Okay. And then second question, Andres, I realize you've got a lot more going on than the US but the clean power plant seems to have more benefit towards renewables. I would think that would be good for your storage business. Is that correct?

Yes, absolutely. Absolutely. I think that the clean power plant, let's say, increases. Because it's basically what they had laid out before but accelerates it, increases the market for energy storage. California has really led the way, requiring 1,325 megawatts utilities to have by 2020. So this, I think, accelerates the adoption of energy storage.

So you've got Ohio is going for storage and then California and Europe under construction, is that correct?

We're not under construction yet in California. That will be in 2019 when we start. We have 100 megawatts with Southern California Edison.

Okay, thanks.

Your next question comes from the line of Mitchell Moss with Lord Abbett. Your line is open.

Hi, guys. Could you just discuss a little bit on some of the coal outages. Dynegy mentioned some of its plants that are co-owned by you experienced high outage rates in the second quarter. And I just wanted to get some color from you if you saw that at all of your plants or if it was just like Stuart, [Conzone], Zimmer. And what went on and how you guys are working on hopefully fixing that.

Hello, this is Bernard de Santos. Yes, that plant is at Stuart. Stuart has been (inaudible) since the beginning of the year. With the management we have implemented 180 days plan that is ongoing. We have already 30 days. We have our next review with the team 50 days from now.

I was present with a management team two weeks ago in Stuart and we have seen improvement. So, we expect we're going to actually reduce the forced outage rates in Stuart by the end of the year.

So, you're finding it specifically at Stuart?

Yes, that's correct.

And is this going to impact your ability to fit into the capacity performance at the Stuart plant?

No. We'll factor that in. E forwards are factored in. But we would expect, as Bernard said, an improving E forward over time.

Okay. Great. Thank you so much.

Your next question comes from the line of Julien Dumoulin-Smith with UBS. Your line is open.

Hi, good morning guys. Just checking in here, in terms of the net accretion you guys are talking about for the asset sales and talk about share buybacks in place, what's the net benefit of the $200 million to $300 million in asset sales you're contemplating for this year relative to the share buyback -- breakeven or positive accretion?

It's probably a little positive. I think the overall PE of our sales is about 13. We do split that between debt paydowns and share buybacks. So net-net it's probably about maybe a tad positive or breakeven.

Got it. Excellent. And then can you just update us on what are the pending finalization of the issues in Bulgaria? From what I understand that should be happening very soon. But just is there anything really in the way there to make that happen?

At this point we really have all the approvals necessary. So now it's a question of the Bulgarian public sector raising the funds for the payment. There's no pending important approval at this stage. It's basically they have to do the market operations to get the funds and to pay us.

Great. And then, lastly, in terms of releveraging the business in South America, what's the time line there just at Tiete, et cetera? How quickly should we expect these asset sales to come up? And ultimately what's your interest in these assets? I presume it's pretty (inaudible).

Basically, again, we'll look for real value before we leverage up Tiete, as we have in the past. When you mention asset sales, perhaps I think you're talking about Petrobras, Eletrobras, who may be selling some assets. We'd certainly look at them.

What I want to say is that we'll never grow for growth's sake. These really have to make sense and they have to make sense for Tiete in terms of a portfolio. They have to be things which would decrease its hydro risk. It will depend or their contract position and other things.

There's nothing really short term on this. We are looking at the possibility of doing something like a barge, for example, in Brazil, as we did in Panama. But I think the main point is at Tiete (inaudible).

Just remind us, what's the target leverage at Tiete?

We looked at debt to EBITDA. But right now it's quite unlevered and its dividends are restricted by earnings. So it's not possible to do a recap and bring money upstairs. So, if you want to use the leverage capacity it would be for growth within Tiete. And, as Andre said, the growth would be Tiete funds rather than AES.

Right. And what's the target leverage for Tiete, just to get a sense of how much capacity there is today?

It's about $400 million to $500 million, capacity. I have to back into it.

Of debt capacity.

Yes. That would capacity. So, you could obviously grow to set up, to the extent you're buying an asset that comes with cash flow, you could use a larger number. That's on a forward coverage ratio.

Excellent. Thank you guys.

There are no further questions at this time. I will now turn the call back to Ahmed Pasha.

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

This concludes today's conference call. You may you now disconnect.