AES Corp (AES) — Q4 2015 Earnings Call Transcript

Thank you, Allison. Good morning and welcome to AES' fourth quarter and full-year 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?

Thanks, Ahmed, and good morning, everyone. Today I would like to start this call with a brief review of 2015. Then I'll provide an update on the trends we're seeing across our portfolio, our action plans, and the net impact of all these factors on our 2016 guidance and long term expectations. As you are all aware, we faced significant macroeconomic headwinds in 2015, including an average devaluation of nearly 30% on our non-U.S. dollar denominated businesses. We also faced the decline of more than 5% in demand at our distribution businesses in Brazil, which is now in a deep recession. Both of these challenges are persisting in 2016, and we're taking actions to mitigate their impact on our financial results. Nonetheless, we continued to execute well on our long term strategy to create sustainable shareholder value, simplifying our geographic footprint, improving our balance sheet and debt profile, fine-tuning our financial exposure by bringing in partners at the business and project level, and profitably expanding our local platform. As a result of our consistent actions, in 2015, we were able to generate free cash flow of $1.24 billion, up 39% compared to 2014, and $66 million above the midpoint of our guidance range. This was reflected in the $531 million of parent free cash flow we generated, which is $8 million higher than 2014. And we increased our quarterly dividend for the third consecutive year to $0.11 per share, up 10% versus the previous year. Unfortunately, we were unable to overcome all of the $0.11 impact from macroeconomic headwinds we faced, and our resulting adjusted earnings per share was $1.22, down from $1.30 in 2014. This was within our revised guidance range but $0.03 below the low end of the guidance we gave at the beginning of the year. Regarding capital allocation, we continued to return most of our discretionary cash to shareholders. Last year, we directed 62% of our discretionary cash towards share repurchases and dividends, specifically $481 million to share buybacks and $276 million to dividends. We also used $345 million or 28% of our discretionary cash to strengthen our balance sheet by pre-paying and refinancing corporate debt. Our proactive steps over the past several years have put us in a strong liquidity position. Over the next three years, we only have $180 million of parent debt maturities, and we've already made 85% of our capital contributions towards our 5.6 gigawatts of projects currently under construction. To secure our earnings and cash flow growth over the next couple of years, in 2015, we brought online 1.5 gigawatts of new projects and continue to make good progress on the remaining 5.6 gigawatts of construction projects. About 90% of these projects are U.S. dollar-denominated and either regulated or have long-term PPAs. Finally, we advanced a few profitable platform expansion projects in California, Panama, and the Philippines. Now turning to slide 4 and our forecast for 2016. Over the last two years, currencies have devalued by as much as 40% to 55%, and key commodities such as oil and gas have declined by 45% to 60%. The 2016 guidance we provided on our last call incorporated the impact from the macroeconomic factors I previously mentioned as of October 15. Unfortunately, these negative trends have continued, and based on our sensitivities to commodities and foreign currencies, we've seen additional impact of $100 million on proportional free cash flow and $0.10 on adjusted earnings per share this year. Tom will provide additional color on the main drivers and their effects in a few minutes. Taking all of this into account, we expect to achieve at least 10% average annual growth in our free cash flow and 12% to 16% average annual growth in adjusted earnings per share through 2018, although all off a lower 2016 base. Our expectations for this growth is based on three factors: continued performance improvement, projects currently under construction, and capital allocation decisions. First, turning to slide 5, let us talk about continued performance improvement. As you may recall, since 2011, we have successfully implemented a cost-cutting program which resulted in a 25% decrease in global overhead, equivalent to a run rate of $200 million of savings per year. Last quarter, we launched a new efficiency and revenue enhancement program to deliver an additional $150 million in savings per year by 2018. This new initiative includes further overhead cost reductions, procurement savings, and operational efficiencies and improvements. We have already launched the programs that will allow us to realize $50 million in savings in 2016, and we're confident that we will realize $150 million in annual run rate by 2018. Turning to slide 6, second, although we have directed the majority of our discretionary cash to share buybacks, debt repayments, and dividends over the past four years, we have also been prudently investing in platform expansion projects together with financial partners. These growth projects are key to positioning AES for sustainable growth over the medium term, as well as maintaining our competitive edge. We're only investing in projects where we have an existing business, where we see attractive risk-adjusted returns, and where we can attract financial partners. Partnerships both reduce risk and enhance returns, as they provide an additional market read on our projects and often pay AES a promote or management fee. In fact, since 2011, we have raised more than $2.5 billion by incorporating financial partners on our construction projects and operating businesses. And as I said earlier and as you can see on slide 7, in 2015 alone, we brought online six projects for a total of nearly 1.5 gigawatts, and they were completed on time and on budget. Turning to slide 8, we currently have an additional 5.6 gigawatts under construction, the majority of which are expected to come online through 2018 with an average return on equity of approximately 15%. The total cost of these projects is $7 billion, and AES has already contributed 85% of its $1.2 billion in required equity contributions. A major milestone will be the completion of 1.6 gigawatts of environmental upgrades at our existing thermal generation plants at Indianapolis Power and Light. About 80% of our current construction pipeline is in the U.S. and Chile, where we're expanding our stable and U.S. dollar-denominated asset base at IPL and AES Gener. Now on to slide 9. Over the past several years, we have experienced many of the disadvantages of having an international portfolio. However, one of the advantages is that having pruned our presence from 28 to 17 countries, most of the remaining emerging markets we're in continue to experience robust growth in energy demand, supporting the need for our product. In Panama, Vietnam, and India, demand growth over the next three years is expected to be in the 6% to 10% range, while in Argentina, Chile, Colombia, Mexico, and the Philippines, growth is in the 3% to 5% range. One notable exception is Brazil, where demand for electricity dropped 5% in 2015, and we're not forecasting a recovery in levels of demand until 2018. Now let me touch on a few advanced development projects that will drive our growth beyond 2018. Turning to slide 10, in the Philippines, whereas I just mentioned, demand growth is expected to remain at around 5%, we plan to break ground in the first half of 2016 on a 300 megawatt expansion of our 630-megawatt Masinloc facility. The $750 million project will be funded with a combination of partner equity, local debt capacity, and free cash flow from the business in the Philippines. Now turning to slide 11, in Panama, along with our local partner, Grupo Motta, we won a competitive bid for a 350-megawatt gas-fired combined cycle generation plant with a 10-year U.S. dollar PPA. Using this bid as an anchor, we plan to build a 180,000 cubic meter LNG regasification and storage facility, very similar to the one we built and have successfully operated for 13 years in the Dominican Republic. The facility will be strategically located near the entrance of the Panama Canal, allowing it to serve as a ship fuel bunkering hub, as well as meeting unmet local and regional demand for natural gas. With the completion of the sister facility to our existing terminal in the Dominican Republic, we will be the largest LNG offtaker in the Caribbean and Central America. We expect to break ground this year and complete the project in 2018. As you can see on slide 12, we've also achieved important milestones on the repowering of our Southland facility, where we were awarded a 20-year PPA by Southern California Edison for nearly 1.4 gigawatts of combined cycle natural gas generation and energy storage. We're making good progress on permitting and licensing and expect to break ground in 2017, with commissioning beginning in 2020. Finally, turning to slide 13, we continue to maintain our leadership of lithium-ion-based battery energy storage. We currently have 106 megawatts in operation in four countries. We have another 60 megawatts under construction and a further 228 megawatts in an advanced stage development in the U.S., Latin America, and Asia, including 100 megawatts under contract in California. In addition to the nearly 400 megawatts that we have built or may build on our own business platform, we have reached important milestones towards third-party sales of our proprietary award-winning Advancion Energy Storage product. We recently signed an alliance agreement with the Mitsubishi Corporation to sell Advancion in Asia and Australia and a similar agreement with Eaton for select countries in Europe, the Middle East, and Africa. As part of our drive to maintain the cost competitiveness of our product, we also signed an agreement with LG to supply batteries for our pipeline of energy storage projects. In our current financial guidance, we do not include any material income from third-party sales of our Advancion project. We believe this is prudent, since our alliance-based business model is in its initial phases. Nonetheless, we believe that the global market for energy storage solutions is expanding rapidly and will be quite large within five years, as utilities respond to greater renewable penetration. AES's businesses in attractive markets around the world and our long-term relationships with local regulators and customers provide us with a unique advantage in opening the door to energy storage. We will keep you informed as our alliances progress. Turning to slide 14, the third driver of our growth in per share cash flow and earnings is our capital allocation strategy. Four years ago, we identified specific actions to improve total shareholder return, reduce risk and simplify our portfolio. Since then, we have used 81% of our discretionary cash towards share repurchases, dividends, and debt prepayments. Since 2011, we have reduced our share count by 15% and our parent debt by 23%. We have completed timely exits from 11 countries and netted $3 billion in asset sale proceeds, including more than $500 million in 2015. As you can see on slide 15, since 2012, we returned $2 billion to shareholders through share repurchases and dividends, including $757 million or 12% of our current market cap in 2015. While I have discussed our growth opportunities in some detail, we remain committed to returning cash to shareholders and reducing corporate leverage. With that, I will now turn the call over to Tom, to provide more color on our 2015 results and 2016 guidance.

Thanks, Andres, and good morning everyone. Today I'll review our full-year results including proportional free cash flow, adjusted EPS, proportional free cash flow, and adjusted pre-tax contribution or PTC by strategic business unit or SBU. Then I'll cover our 2015 capital allocation, our 2016 guidance, and longer-term expectations, as well as our 2016 capital allocation. Turning to slide 17, full-year adjusted EPS of $1.22 was $0.08 lower than 2014. At a high level, we were impacted by the $0.11 impact from the roughly 30% average devaluation in foreign currencies, primarily the Brazilian real and Colombian peso, lower operating results in Brazil due to lower demand and a general economic slowdown, as well as lower commodity prices, particularly in the Dominican Republic. These negative drivers were partially offset by a reduction in share count of 6% of 40 million shares, lower parent interest expense, and a slightly lower tax rate, as well as improved hydrology in Panama and the benefit of new businesses including Mong Duong in Vietnam. Turning to slide 18, overall, we generated $1.2 billion of proportional free cash flow, an increase of $350 million from last year, even though operating margin was down. As expected, in the Dominican Republic, we settled our outstanding receivables, and in Chile, we recovered delayed VAT payments for the construction of Cochrane and Alto Maipo. We previously expected to be in the low end of our range if the PPA amendment and collection of receivables at Maritza in Bulgaria did not close. Although it's been delayed until 2016, we came in above the midpoint of our range as a result of improved collections and working capital improvements across our portfolio, some of which came late in 2015 rather than our prior expectation to collect in 2016. We also earned $1.15 billion in adjusted PTC during the year, a decrease of $171 million. Now I'll cover our SBUs in more detail over the next six slides, beginning on slide 19. In the U.S., our results reflect lower generation across our wind portfolio, lower contributions from IPL due to wholesale margins and the partial sell-down, as well as from DPL, where a greater portion of the energy was sold into the wholesale versus the retail market. Proportional free cash flow also reflects higher collections, lower inventory, and a one-time contract termination payment at DPL in 2014. In Andes, our results reflect higher margins as a result of improved availability in Chile and higher energy prices at Chivor in Colombia, partially offset by the 27% devaluation of the Colombian peso. Proportional free cash flow also benefited from increased VAT refunds. PTC also reflects the gain on restructuring at Guacolda in Chile. In Brazil, our results reflect lower margins due to lower demand and the 29% devaluation in the Brazilian real. Proportional free cash flow also reflects higher interest expense, partially offset by the timing of energy purchases, lower tax payments, and lower CapEx at Sul. PTC also includes the net unfavorable reversal of liabilities at Eletropaulo and Sul. In Mexico, Central America, and the Caribbean, our results reflect lower margins as a result of lower LNG sales demand, ancillary service revenue, and availability in the DR, partially offset by improved hydrology in Panama. Proportional free cash flow had a very strong increase from the collection of outstanding receivables in the DR, as well as favorable timing of collections in Puerto Rico and Panama. In Europe, our results reflect lower margins due to the 16% devaluation of the euro, the 20% devaluation of the Kazakhstan tenge, and the sales of our businesses in Nigeria and our wind business in the UK. Proportional free cash flow, however, was up due to higher collections in Bulgaria and Jordan. Lower PTC also reflects the reversal of a liability in Kazakhstan that was favorable in 2014. Finally, in Asia, our results benefited from higher margins as a result of the start of operations at Mong Duong in Vietnam, as well as improved availability at Masinloc in the Philippines. Proportional free cash flow was negatively impacted by higher tax payments and the timing of collections and fuel payments at Masinloc. Now to slide 25 and our parent capital allocation for 2015. Sources on the left-hand side reflect the total available discretionary cash, roughly $1.6 billion, which is about $140 million higher than our expectation. This is largely a result of the approximate 4% sell-down of Gener in the fourth quarter. You may remember from our last call that we expected additional asset sale proceeds of approximately $150 million in our 2016 capital allocation plan. We were able to close this in 2015 and now own approximately 67% of Gener, down from 71%. This brought our total asset sale proceeds for 2015 to $537 million. Parent free cash flow came in just above the midpoint of our range of $531 million. Turning to uses on the right-hand side, we allocated 91% of our discretionary cash toward debt pay down and return to shareholders. Specifically, we used $345 million to refinance and prepay over $800 million of high coupon debt. This included reducing our overall debt by $240 million and the issuance of $575 million of 5.5% 10-year notes, which further extended our maturities and lowered interest expense. In addition to the dividend, we've invested $481 million in our shares. This brings total cash returned to shareholders through buybacks and dividends to $757 million for 2015. Since our last call when we announced our $400 million authorization, we bought back $136 million, including $79 million in 2016. Turning to slide 26 and our 2016 guidance and 2017 and 2018 expectations. As Andres mentioned, our prior guidance was based on currency and commodity forward curves as of October 15. Bringing those curves forward to January 31 resulted in an incremental impact of $0.10 on EPS or roughly $100 million. Our hedging activities have mitigated this impact by $0.03. Additionally, since then, economic conditions in Brazil have also deteriorated by about $0.02. We've incorporated these impacts into our revised guidance. Our 2016 proportional free cash flow guidance is now $125 million lower, with a revised midpoint of $1.175 billion. This reflects the $100 million in macro impacts I just discussed, as well as the fact that our 2015 proportional free cash flow benefited from the accelerated collections in the fourth quarter. Regarding parent free cash flow, we now expect 2016 to be $50 million lower, a mid-point of $575 million. Although this is below our previous expectation, it still represents roughly 10% growth relative to 2015. In 2017 and 2018, we're still projecting at least 10% annual growth in cash flow, but off a lower 2016 base. Our 2016 adjusted EPS guidance is now $0.95 to $1.05, or $0.10 below our prior guidance, with the midpoint of $1. In 2017 and 2018, we're maintaining our 12% to 16% growth rate, but off a lower 2016 base. However, we do expect to be in the higher end of that range. Before turning to capital allocation, I want to provide updates on a couple of our businesses, beginning on slide 27. Regarding Maritza in Bulgaria, recent energy sector reforms have now been enacted, resulting in improvement in the financial position of our offtaker NEK. We saw evidence of this in 2015, as collections were 24% higher than 2014. We've also seen progress recently in the financing process of NEK's parent to raise the funds necessary to settle our receivables. That said, our guidance includes only a modest portion of the outstanding receivables we expect to collect. Also, this week, DPL filed its electric security plan, which included a request for a reliability rider. Our plan tracks the criteria set out by the Public Utility Commission of Ohio, which are designed to improve rate stability for customers, ensure continued reliability, and promote fuel diversity in Ohio, while also ensuring the continued economic viability of DPL's plants based on a targeted 10.7% return on equity. We expect resolution of this filing later this year, with the outcome effective at the beginning of 2017. We remain on track to have our generation and wires businesses separated by that time. Turning now to 2016 parent capital allocation on slide 29, sources on the left-hand side reflect $1.1 billion of total available discretionary cash. This is roughly $50 million less than our prior expectation, reflecting lower parent free cash flow. Our discretionary cash could increase through additional funds from asset sales. Turning to uses on the right-hand side of the slide, with 10% growth in our dividend and share repurchases year-to-date, we're returning at least one-third of this cash to shareholders. Regarding debt reduction, improving our credit profile continues to be a priority. From a fixed income perspective, we benefit from lowering financing costs and ensuring access to capital. Equally important from an equity perspective, we think that continuing to strengthen our credit will help us get better recognition and valuation for our growing cash flows and dividend. Accordingly, we're targeting $200 million of debt reduction this year, over half of which we've already done. As an aside, we also continue to have good access to financial markets across our businesses, which is still open for attractive projects at favorable terms, as we've seen recently with our advanced development projects and refinancings. As an example, just a couple of weeks ago, we closed a 15-year nonrecourse financing for our Masinloc expansion project in the Philippines, at an all-in cost of less than 5%. We have earmarked $330 million for investments in our projects under construction, as well as our expansion projects at Southland in California and in Panama. We will also be injecting $75 million into Sul in Brazil in support of debt restructuring, which will strengthen Sul's capital structure by paying down a portion of the $330 million in debt currently outstanding. The equity injection will also facilitate agreements to extend debt maturities to 2020 and 2021. We believe those meaningful value in the business above our equity contribution. And following this restructuring, which we expect to close shortly, we will be assessing all strategic alternatives for Sul. After considering these investments in our subsidiaries, our current dividend, and debt prepayment, we're left with roughly $170 million of discretionary cash to be allocated. As in years past, much of this cash is weighted towards the latter part of the year. We'll continue to invest this cash consistent with our capital allocation framework. With that, I'll now pass it back to Andres.

Thanks, Tom. As we have discussed, the macro environment has been and continues to be challenging. However, our strategy will allow us to weather the unfavorable macroeconomic environment. And just as importantly, it will allow us to continue to reposition our portfolio in spite of near-term headwinds. Furthermore, we will be able to capture the financial upside when these trends reverse. In the meantime, our portfolio generates strong and growing free cash flow. And consistent with our track record, we will continue to cut costs, streamline our business, and allocate our discretionary cash to maximize value for our shareholders. With that, I would now like to open the call for questions. Operator?

So a quick question here, in terms of target leverage. You've talked a lot about debt repayment this morning and just broader debt paydown strategies. What's your ultimate target ratios as you guys sit here today? Has it evolved much?

Well, I would say the first point is that we paid down about $1.5 billion of debt over the past four years, demonstrating our consistency in this area. Each time we sell something, we also pay down some debt. Looking ahead, we aim to achieve investment-grade-like metrics and reach a strong BB rating by 2018.

How much additional debt reduction do you need to achieve? Are you on track with your current debt pay down efforts? What is the total amount you would need to reduce each year to reach that goal?

Yes, Julien, this is Tom. To be consistent with our previous statements, we mentioned a range of $100 million to $200 million a year. This year, we are at the upper end of that range with $200 million. If we meet our targets, then $100 million a year would make sense. However, we generally expect to maintain that range of $100 million to $200 million for at least the next couple of years, from 2017 to 2018.

Okay. But you would hit IG, if at that pace?

We would hit IG stats. The ratings are obviously a broader issue. But if you look over a three, five-year period, we would hit IG stats over that horizon.

Following a few brief points to set expectations, do you anticipate any asset sales this year? Additionally, regarding the new assets you announced, specifically the Masinloc 2 and the Panama combined cycle, what are your initial expectations for the EPS contributions from each of these plants once they become operational?

Regarding asset sales, we believe that on average, we have been selling over $200 million each year. Last year, we sold approximately $500 million. We will exit certain markets when we feel the timing is appropriate, and we will also sell down positions to secure partnership funding for reinvestment in new projects. Concerning EPS contributions, we estimate that our projects will yield a return on equity of around 15% during the first three years of full operation. This can vary significantly from project to project, but what is crucial is that we are restructuring our portfolio. Ninety percent of the new projects, which total about 7 gigawatts, are denominated in U.S. dollars, and 80% of these new projects are located in the U.S. and Chile. Thus, we are repositioning our portfolio to focus on more contracted, dollar-based projects in countries with robust markets.

And quick last question, does the EBITDA you provide for DPL reflect any above market assumptions for the ESP in future years?

What we provided in there for the reliability rider, as we said in the past, it's incorporated into our numbers and it is a modest increase versus what we had as a non-bypassable in the past.

My first question, what is your confidence level in the revised earnings outlook for 2016? Given the ongoing global turmoil, how much cushion have you given yourselves, if things get even worse than at right now?

Yes. Well, we always give guidance based on sensitivities and based on commodities and based on FX at a period in time. So we feel very confident that we can deliver this, based on those numbers. If you have a further deterioration, we have the sensitivities. Now we have also engaged in some hedging which Tom can talk about, to lessen that. I think that if you look over the years, we've always outperformed our guidance based on the numbers at the beginning of the year. What has happened is that the commodities and FX have moved in a negative direction.

Okay. I guess, a second question on Brazil. There have been some stories suggesting potential exit from maybe Eletropaulo Sul. You alluded to Sul in your comments. Can you give us a sense of what you are looking at there in Brazil? And maybe bigger picture, if you are not looking for an exit, what is the strategic rationale for staying there, given the disproportionately negative impact that Brazil has to your overall stock and valuation, given such a small contribution to earnings, given the outlook that is not looking any positive, why are you in Brazil?

Let's take a moment to reflect. Since I became involved in Brazil around 2006, we have reduced our stake in Eletropaulo by approximately 70%. Until recently, Brazil contributed positively to our earnings and cash flow. However, I acknowledge that the outlook for Brazil in 2015 was poor, and I anticipate that 2016 will also be challenging. We do not foresee a recovery in energy demand until around 2018. It's important to note that we only own 16% of Eletropaulo, which at current market valuation represents roughly $60 million in equity, a relatively small amount. As a publicly traded entity, we will refrain from commenting further. Nevertheless, we have remained consistent in our strategy to focus our investments in Brazil. For instance, during periods when asset prices were high, we faced pressure to increase our leverage at Tiete and acquire more assets, but we chose not to because we believed those were not sound investments. In the broader context for Brazil, we have 2,006 megawatts of hydro that are well-contracted for the next few years at rates significantly higher than the current spot prices. Looking ahead, it may be difficult to acquire similar hydro assets at a reasonable cost. Brazil is currently facing challenges, and recovery will take time. However, we must maintain a long-term perspective regarding AES' presence in Brazil without focusing on any specific asset.

But the comment on regarding Sul, Andres does that apply to distribution exposure in general in Brazil? Which in the past you've said has been a challenging market for you?

Again I said, I'm not going to comment on Eletropaulo; it's a publicly traded company. But regarding Sul, we're going to look at all strategic alternatives. With the refinancing, with this capital injection and refinancing, this will give us a year's grace. And we will look at alternatives of how to make Sul more efficient and what makes the most sense for our shareholders.

Okay. Last question, sort of more bigger picture, at what point would you be willing to step back and look dispassionately at the portfolio, Andres, and perhaps follow the logic that some of us espouse, that the sum of the parts may be greater than the whole and does it make sense to maybe look at unlocking equity value, by perhaps breaking up some of the pieces of this company? Would this ever occur in your mind or what's your thinking?

I believe that has definitely happened. We've approached this in a very objective manner. We've sold a third of this portfolio, and if you review the selling prices and timing, we would rate our performance quite positively. We always take a dispassionate approach because we work for our shareholders. Much of what we do involves capturing value through partnerships and using those funds to reposition our portfolio. We're open to all alternatives, as we've stated before. About a year ago, yieldcos were popular, and many suggested we consider one. However, from a fundamental perspective, we determined that partnerships were a better option. They are less expensive, do not impose new investment obligations, and we believe this strategy has been effective. We remain open-minded and periodically assess our options, but any decision must fundamentally unlock value rather than simply follow trends. We have consistently taken a rational approach to our sales decisions and evaluate everything from a fundamental standpoint. For instance, if we invest new funds into Sul, it’s because we believe there is significant equity value present. We maintain a detached viewpoint regarding specific businesses.

Going back to the balance sheet, I wanted to get an update or clarify your earlier comments regarding your intention to deleverage gradually through the end of the decade. Has there been any significant change in that regard over the past six to twelve months due to Forex, commodity prices, or other pressures you’ve faced? It seems like you're trying to convey a consistent message. Additionally, could you provide an update on the debt capacity at some of your subsidiaries, specifically regarding Tiete and the status of the $500 million in capacity? Also, is there any additional availability at Gener or in Europe?

No, I believe our overall comments about credit improvement are in line with what we've previously stated. When we refer to improvements in our credit ratio and statistics, there are two components to consider: the numerator and the denominator. We anticipate that the majority of the improvement will come from the numerator, meaning that an increase in parent free cash flow—essentially the distributions from our subsidiaries—is a key factor in assessing the health of our parent credit. We expect growth, particularly the 10% or more increase in parent free cash flow, to be driven by these subsidiary distributions. While reducing debt and interest costs is a part of the equation, it plays a smaller role. Reflecting on what I mentioned to Julien, we project that we will achieve $200 million this year, and foresee around $100 million each for the next two years. This aligns with our previous guidance over the last 6 to 12 months, which has consistently indicated around $100 million to $200 million per year. This is also in line with last year's performance. Notably, some of the debt we paid off last year was due to asset sale proceeds, but approximately $150 million to $175 million was simply related to our efforts to reduce debt and further our credit goals. We believe that over a period of about 4 to 5 years, we can achieve investment-grade metrics through a steady approach. Senior management and the Board are definitely prioritizing this, especially as we continue to offer a generous dividend and aim for 10% growth. We want our shareholders to feel assured about our stability and growth trajectory, and we see credit improvement as a significant part of this strategy. Additionally, to quickly address Tiete, it currently has about $500 million of debt capacity. Like our other Brazilian utilities, it has a strong debt to EBITDA ratio and minimal debt levels. However, I may be cautious about that figure presently due to the challenges in Brazil. Nonetheless, there is debt capacity available, which will be utilized as we aim to expand Tiete. Generally, we are focused on optimizing our subsidiary operations. Currently, Gener holds a BBB- rating, and while we don’t expect significant additional capacity from Gener given the ongoing construction program, there are opportunities following the Alto Maipo project. We're always assessing debt capacity within our business operations. A notable example is Masinloc, where we’re planning to increase the facility by 50% with a 300 megawatt addition. This will be financed by linking the credit of the existing Masinloc with the new project, significantly reducing the equity we need to inject. We approached a similar financing strategy for the Dominican Republic, where we completed a $260 million project with minimal equity investment by tying the new project to the existing one, thereby leveraging our available debt capacity effectively.

Chris, what I would add is just to remind everybody, I think our debt is in very good shape. I think Tom and his team have done a great job. At the parent side, we only have $180 million of maturities at the parent, and that's in 2018. So we have no maturities at the parent this year or next. And at the subs, 95% of the debt is in the functional currency of that business, and at the parent, 90% is fixed. So this is consistent with what we've been doing. I mean, we have been repositioning this debt to put ourselves in a strong position. When you, for example, you had a tightening of credit over the last couple of years in the global market, it's not affecting us. So this is consistent with that philosophy. It is just that, as these new projects come online, where we can give more guidance, in terms of the strengthening of our credit into the next couple of years.

And then, my follow-up is on the overall outlook for 2016 to 2018. Obviously, Forex and commodities have hit you guys pretty hard. And you also mentioned a reduced outlook for demand growth in Brazil on the utility side, as weighing on your outlook versus the last update. Are there any other drivers there that we should think about better meaningful in the aggregate?

No. I mean, those are the drivers. As we said, it's commodity prices, it's oil, it's gas, it's FX, and it's growth in Brazil. And quite frankly, other than Brazil, all of our other markets are growing. Argentina could be flat this year, but we expect a good growth in Argentina in 2017 and 2018.

I wanted to go back to Brazil. I recall during the EEI, you guys mentioned that you seem to have a pretty significant hydro exposure in the country, both on the TSS side and the utility side. Tiete does have some debt capacity. We seem to be heading to a potential asset sale by other market participants. Do you think it would make sense for you to bulk up on your generation assets on the hydro assets in Brazil or in South America in general? Or would you rather be more conservative and just continue to return cash to investors and not to double-down, especially in Brazil?

I would say that regarding others selling assets in Brazil, we are not considering a large acquisition there. We will take a more conservative approach. Additionally, a significant risk we need to measure and control is hydrology in Brazil. We have modified our contracting structure. This year, there is ample water in the south and southeast of Brazil, so the concern of rationing is no longer present, along with the decrease in demand. Fortunately, our team has effectively managed contracting at Tiete for the next couple of years, securing prices around 150 reais, 149 reais per megawatt hour while the spot market prices due to the rainfall and reduced demand are as low as 30 to 40 reais. Therefore, we are in a strong position. To answer your question, strategically, we do not plan to increase our hydro risk in Brazil significantly.

Okay. And now a different topic, Ohio. So you've just filed your ESP. Similar to all the other utilities, you're asking for a PPA for your Ohio coal plants. Now we're likely to have a FERC review of those PPAs with the other players. Now, what is your expectation about the future of these assets if FERC were to somehow challenge the PPAs of the remaining two companies? Would you expect, for instance, Ohio to potentially fully re-regulate its power market?

Yes, Angie, it's Tom. We filed a reliability rider in Ohio, which reflects a different perspective compared to some of the other local companies. At this point, we are not focused on their situations. We just submitted it, and we anticipate a resolution this year. It aligns with the criteria and objectives set forth by the PCO, aiming to provide long-term stability and benefits to rate payers over the next decade. The figures we filed are slightly more favorable than our current ESP. We plan to incorporate something into our guidance, but I prefer not to delve into specifics about what is included. However, we believe the plants hold economic value, especially over the next ten years, based solely on our coal plants, amounting to around $1 billion of rate base.

I wanted to discuss trends in terms of where AES parent is receiving distributions from its subsidiaries in 2015 and beyond? Could you talk to the trends in terms of changes over time relative to what we saw in 2015, in terms of where the cash actually came from?

I'll go ahead and pass that over to Tom. But basically, our big contributors are Andes and U.S., have been our big contributors. Asia growing somewhat, because as Mong Duong comes on. But Tom, perhaps you can give a more specific answer?

Yes, Steve, how are you? We have some details in the appendix of our deck. I think section 46 contains some information, and there are also more details by Strategic Business Unit. Generally, our distributions align with our largest regions, which are the U.S. and Andes. MCAC was a significant contributor last year, particularly due to the collection catch-up in the Dominican Republic that we mentioned. Over time, distributions typically follow the proportional free cash flow and earnings. There might be some timing discrepancies from year to year, as our companies often pay dividends based on the previous year's earnings, leading to occasional delays. However, I believe our distributions are generally very close to the proportional free cash flow and PTC.

Steve, if we had the complete collection from Bulgaria, it would represent an upside since we currently include only a modest amount of money from there. Therefore, we have adopted a conservative approach in this regard. Additionally, as Tom mentioned, recent developments in Bulgaria have been very encouraging.

So if BEH is able to affect the financing and you are paid as you should be, then there could be further upside in 2016 in terms of distributions?

That's correct. That's correct, in terms of parent free cash flow, yes.

Okay. And I presume you don't want to lay out exactly the magnitude of that at this point, in terms of the incremental?

In terms of our guidance, we expect to be at the upper end of the range for the proportional and parent free cash flow from Bulgaria. Recently, the Minister of Energy announced that Bulgarian Energy Holdings will receive a bridge loan from banks for future refinancing. She indicated that they have received significant offers from a bank consortium, with two or three additional offers expected. This is positive because it means we would get paid with the bridge loan without having to wait for the bond operation. This development is favorable. If everything else unfolds as anticipated, we would be at the upper end of the range.

Just wanted to follow up, shift over to Latin America and just get your sense at a high level of buyer appetite, ability to finance acquisitions, et cetera, for I guess, Latin America overall and Brazil in particular. Is it your sense that there is a viable buyer universe out there, or is it a little challenging, given what we're seeing in terms of deterioration in places like Brazil? What's your sense?

I would separate Brazil from the rest of Latin America at this point. Brazil is experiencing a recession, but many other countries in the region are actually growing faster than the U.S. For example, Colombia, Chile, Mexico, and Panama are seeing growth rates around 7%. The Dominican Republic is also growing, so I see Brazil as distinct from these others. In most other locations, there remains a market. Even in Argentina, we've noticed increased investor interest due to favorable government actions. My recent visit to Argentina revealed an impressive executive team. They have started to liberalize tariffs and adjust prices. However, in Brazil, while the market isn't growing, there are still sellable assets. The potential varies by asset type, but there is local interest and capacity for purchases. There are also ongoing consolidation opportunities in the sector, with foreign investors, including from Italy, Spain, and France, actively seeking assets. Despite Brazil not being a growing market, quality assets still attract buyers. While prices may not match what they were two years ago, this reflects current market valuations.

Just to follow-up on the Bulgaria discussion, what's in your 2016 earnings guidance from Bulgaria?

Yes, we expect to settle in the near term with a 14% reduction in tariff for 2016. The projected PTC for the year is around $90 million to $100 million, which is slightly lower than last year's PTC of approximately $115 million to $120 million. Although this shows a decrease, the delay in the resolution payment and the closing of our PPA adjustment may actually benefit the PTC. Our main priority is to finalize this, which will set us on the right path and improve both proportional free cash flow and parent free cash flow. Ultimately, this year's PTC is estimated to be about $90 million to $95 million.

So is the read that you feel your cash flow assumption is conservative?

I'd say in that respect, yes, our proportional free cash flow assumption would be conservative. It's a fairly modest amount that we have included, if you look at our mid-point, would be a fairly modest Bulgaria amount. So yes, if that gets done and Andres gave some color that the signs are certainly turning towards the positive here. If that gets done, then we could well be towards the higher end of our proportional free cash flow range.

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