AES Corp (AES) — Q1 2016 Earnings Call Transcript

Thank you, Dan. Good morning and welcome to our first quarter financial review call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team. With that, I will now turn the call over to Andrés. Andrés?

Thank you, Ahmed. Good morning, everyone, and thank you for joining our first quarter financial review call. Today, I will discuss our first quarter results and provide updates on our progress and our strategic objectives, macro conditions in our markets, and construction and development program. Since our last call in late February, we have achieved a number of key objectives for 2016. We received payment of all outstanding receivables in Bulgaria. We are on track to achieve our three-year $150 million cost reduction and revenue enhancement goals. We saw improvements in our credit ratings and outlook from the rating agencies. Our $7.5 billion construction program is advancing on schedule and will be the major contributor to our cash and earnings growth over the next three years. We continue to leverage our existing business platforms by advancing projects with long-term contracts denominated in U.S. dollars. During the first quarter, we achieved significant milestones on three new projects, which will contribute to our growth after 2018. I’ll discuss these achievements in more detail in the movement. But I would like to summarize our financial results on slide four. In the first quarter, we generated proportional free cash flow of $253 million, in line with last year. The recent collection of $350 million in Bulgaria will be reflected in our second quarter cash flow. Our first quarter adjusted EPS was $0.13, which is considerably lower than the $0.25 we earned last year. Our first quarter operating performance was impacted by adverse movements in FX, lower power prices in the U.S., and the expiration of the power purchase agreement at Tietê in Brazil. Our earnings performance was also driven by a tax rate of 50% for the first quarter, which is really a timing issue. We continue to expect a 31% to 33% tax rate for the full year. In terms of our outlook for the full year, we’re reaffirming our guidance on all financial metrics. Nonetheless, we expect our first half adjusted EPS to be relatively weak, due to the continuing impact from the factors I just mentioned and scheduled major maintenance in the second quarter. Now, I’ll turn to our strategic accomplishments since our last call. As you can see on slide five, we have successfully resolved the outstanding receivables issue at Maritza in Bulgaria. Maritza’s sole customer, the National Electricity Company, or NEK has fallen significantly behind on its payments. In April, we received full payment of the outstanding receivables of $350 million. This is a direct result of the steps taken by the government of Bulgaria to strengthen the financial position of NEK and the long-term sustainability of the energy sector. By meeting all of its contractual obligations, Bulgaria is sending a very positive signal to all foreign investors. Currently, Maritza is providing critically needed power to the Bulgarian electric grid, and we have been collecting in a timely manner since December 2015. Turning now to slide six and our cost savings and revenue enhancement initiative. Our goal is to achieve a run rate of $150 million per year in bottom line improvement. We are on track to achieve our $50 million goal for 2016 and the additional $100 million by 2018. These bottom line benefits are largely driven by global procurement efforts, moving back office functions to lower-cost service centers in Argentina and Bulgaria, and continued improvement in our performance of our plants. Now turning to slide seven, I’ll discuss macro conditions in our markets. First, the impact from hydrology in Latin America should be negligible this year. While cumulative rainfall remains below average in Panama, it has generally improved in the rest of Latin America. Regarding Panama, spot prices have fallen significantly as a result of the barge-based power plant we commissioned there last year, which reduced the effects of low rainfall on our contracted hydro plants. Second, economic conditions in our markets are generally in line with prior expectations, except for Brazil, which is experiencing a deepening recession. At our distribution businesses in Brazil, we are announcing a second consecutive year of a 5% decline in demand. While in the U.S., demand is essentially flat, in most of our other markets, we continue to see energy demand growth in the range of 4% to 10%. Moving on to slide eight, we are focusing our investment efforts on platform expansion projects with long-term contracts and U.S. dollar-denominated revenues. We see a significant opportunity to take a leading role in the distribution and storage of LNG in Central America and the Caribbean. Turning to slide nine, let us review our major new projects. During the quarter, we started construction on the 335-megawatt Masinloc expansion to take advantage of robust growth in the Philippines and our existing infrastructure. The new unit, Masinloc 2, will be one of the most competitive thermal plants in the country employing highly efficient and flexible supercritical technology. The $740 million project will be funded by a combination of non-recourse financing, partner equity, and cash generated at the Masinloc 1 facility. Moving on to slide 10, I am pleased to report that we have achieved a number of milestones on our Colon project in Panama. This project encompasses both a 380-megawatt combined cycle plant or CCGT and an adjacent LNG regasification terminal and storage facility. The CCGT is contracted under a 10-year U.S. dollar-denominated PPA. The LNG facility will have an 180,000 cubic-meter tank, which is sufficient to handle 80 Tera Btu annually. Our CCGT will use about a quarter of the tank’s capacity, leaving substantial unused capacity to meet the needs of additional power plants for downstream customers. The Colon project seeks to replicate the success of our LNG facilities in the Dominican Republic, which provides gas to our adjacent power plant, another power plant via pipeline, and to numerous downstream customers in the transportation and industrial sectors. The Colon project is strategically located near the entrance of Panama Canal and will be able to offer bunkering to the maritime industry as it starts to use natural gas as a fuel. There are many commercial synergies between the LNG terminal in the Dominican Republic and Panama. With both facilities in service, we will become the largest provider of LNG regasification and storage services in Central America and the Caribbean. All the Colon projects' permits are in place, and we have selected the EPC contractor. Project financing for approximately 60% of the project cost is well underway. AES’s equity is expected to be around $200 million, which we will fund over the construction period. The project is expected to close in the second quarter of 2016 with the completion of the power plant in 2018 and the LNG facility in 2019. As we can see on slide 11, the repowering of Southland in California is another example of a large project that will contribute to our growth beyond 2018. As a reminder, we were awarded a 20-year PPA by Southern California Edison for 1,384 megawatts of capacity, which includes 100 megawatts of energy storage and 1,284 megawatts of combined cycle gas capacity. Since our last call, we have signed turbine supply agreements and EPC contracts to build the CCGT. We are making good progress on the remaining regulatory approval and expect to break ground in 2017 with completions in 2020. We anticipate funding the $2 billion total project cost with a combination of non-recourse debt and $500 million in equity from AES and a possible financial partner. Turning to slide 12, we remain optimistic about the future of battery-based energy storage and our leadership position in this market. We currently have 116 megawatts of energy storage projects in operations across four countries and expect to install another 50 megawatts this year. Additionally, we have another 228 megawatts in advanced stage development, including the 100 megawatts under contract in California. By 2017, we expect to be operating in seven countries, adding India, the Philippines, and the Dominican Republic to the four countries where we already operate: the U.S., the UK, the Netherlands, and Chile. We see growth in our energy storage business through two paths: AES-owned projects, such as the previously discussed 100 megawatts with a PPA with Southern California Edison; and sales of our Advancion energy storage solutions by AES and our channel partners. These sales will target utilities and other large energy storage customers. Regarding long-term contracts, we see significant potential in many of our markets including the U.S., the UK, the Philippines, and Mexico. We continue to work with local regulators to facilitate the development of market structures that enable new investments in battery-based energy storage. Over the past eight years, we have learned a tremendous amount about how to integrate the various components to create a proprietary battery-based energy storage solution which we have named Advancion. To promote Advancion sales in many more markets, we have executed channel partner agreements with Mitsubishi for sales in Asia and with Eaton for sales in Europe, the Middle East, and Africa. We are in discussions with other potential partners to sell Advancion in additional markets. Although battery-based energy storage is still early in its product cycle, we believe that Advancion presents an interesting opportunity for upside in our cash and earnings forecast. Turning now to our projects under construction on slide 13. Our ongoing construction program is a significant driver of our growth over the next few years. We expect to commission 6 gigawatts of new capacity from projects currently under construction through the first half of 2019. As a reminder, total capital expenditure for this project is $7.5 billion. However, by using financial partners, AES's equity commitment is reduced to $1.3 billion. AES's equity commitment, all but $160 million, has already been funded. As you can see on slide 13, roughly 74% of our investments are in the Americas, and of this, the majority is in the U.S. and Chile. We expect an average return on equity from these projects of approximately 15%. About 3-gigawatt representing half of the capacity currently under construction is 90% complete and on track to come online on time and on budget this year. In 2017, we plan to commission an additional 670 megawatts of capacity in the U.S. and 112 megawatts in the Dominican Republic. We have completed about 70% of the work on these two projects, and we also expect them to come online on time and on budget. The remaining three major projects now under construction, Masinloc 2, OPGC 2, and Alto Maipo are all projected to come online in late 2018 and early 2019. This construction program will drive visible and attractive growth in both free cash flow and earnings. As you can see on slide 14, we expect at least 10% annual growth in proportional free cash flow through 2018, which will support our 10% annual growth in dividend, continued deleveraging of the parent and subsidiaries, and investments in attractive platform expansions. Turning now to slide 15, we also see robust growth in earnings through 2018. From 2016 to 2018, we expect an attractive growth rate of 12% to 16% in our adjusted EPS. Approximately 5% of this annual growth rate is driven by cost reductions and revenue enhancements. Another 8% to 10% of expected growth is driven by the 2.4 gigawatts of construction projects coming online in 2017 and 2018. Based on our strong market position in attractive high-growth markets, we are optimistic about our ability to drive growth beyond 2018. The three projects I just discussed, Masinloc 2, Colon, and Southland will come fully online after 2018. With that I’ll turn the call over to Tom to discuss our first quarter results, capital allocation, and full-year guidance in more detail.

Thanks, Andrés. Good morning, everyone. Today, I'll review our first quarter results including adjusted EPS, proportional free cash flow, and adjusted pre-tax contribution or PTC by strategic business unit or SBU, and I'll cover our 2016 capital allocation, as well as our 2016 guidance. Turning to slide 17, first quarter adjusted EPS of $0.13 was $0.12 lower than 2015. Much of this decline was driven by factors incorporated into our full guidance, certain exceptions, primarily the decline in power markets in the U.S. as well as lower demand in Brazil. Specifically, our results reflect the $0.04 impact from a significantly higher quarterly tax rate of 50% in 2016 versus 33% in ‘15. This was mostly driven by the timing of certain tax expenses, the largest of which was the enactment of income tax reforms in Chile. We do expect the rate to recover during the year to a full-year tax rate of 31% to 33%. Next, the $0.04 impact from the devaluation of foreign currency is expected primarily in Latin America and Europe. Additionally, we saw $0.05 lower contributions from SBUs mainly due to anticipated drivers such as the expiration of Tietê’s PPA with Eletropaulo. In addition to the drivers included in our expectations, we also saw some softness in power markets and mild weather in the U.S. That being said, we’ve seen some recovery in prices in the last month, which will contribute to our stronger second half of the year and help give us comfort in our full-year outlook. Now on slide 18, our overall results were primarily driven by lower margins in our Brazil, Europe, and U.S. SBUs due to factors I just mentioned. We generated $253 million in proportional free cash flow, a modest decrease of $12 million from last year reflecting lower margins, mostly offset by higher collections at our Brazil utilities and lower working capital requirements in Vietnam. We also earned $172 million in adjusted PTC during the quarter, a decrease of $80 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 margins at DPL, due to lower wholesale prices and lower contributions from regulated customers; lower contributions from IPL due to mild weather and the partial sell-down and sale of our Armenia Mountain wind project. Proportional free cash flow also reflects unfavorable working capital changes at IPL. In Andes, our results reflect the 40% devaluation of the Argentine peso, 24% devaluation of the Colombian peso, and lower volumes at Chivor in Colombia. Proportional free cash flow was also impacted by higher tax payments in Chile. PTC also reflects lower equity in earnings at Guacolda in Chile. In Brazil, our results reflect lower margins due to the expiration of Tietê’s PPA with Eletropaulo in 2015; lower demand at Sul and Eletropaulo and the 26% devaluation of the Brazilian real. Proportional free cash flow also reflects higher collections at Sul and Eletropaulo, as well as a favorable timing of energy purchases at Tietê. In Mexico, Central America, and the Caribbean, our results reflect modestly lower margins. Proportional free cash flow largely reflects higher than normal collections in the Dominican Republic in 2015. In Europe, our results reflect lower margins due to the 48% devaluation of the Kazakhstan Tenge and lower dark spreads at Kilroot in the UK. Proportional free cash flow also reflects the timing of payments to the fuel supplier at Maritza in Bulgaria and the unfavorable timing of working capital and tax payments in the UK. Finally, in Asia, our results benefited from higher margins and lower build-up of working capital, as a result of start-up operations at Mong Duong in Vietnam in April of 2015. Turning to slide 25, I’ll now provide an update on a regulatory filing at DPL in Ohio. As you may recall, in February, DPL filed its electric security plan. Since that time, there have been challenges to the regulation in Ohio. We see the potential for similar arguments to impact the structure of other utilities proposals pending before the Public Utilities Commission of Ohio. Consequently, when we filed our plan, we included an alternative proposal that provided an option for the PUCO to approve a non-bypassable charge structured in the same way as the one approved in our existing ESP. We believe that this alternative falls under PUCO’s authority and also achieves the policy goals set out by the Commission. We continue to believe this alternative provides a viable path forward for DPL in Ohio, and we believe the Commission is seeking a reasonable resolution to this matter before the end of this year. Turning now to our 2016 capital allocation on slide 26. Sources on the left-hand side continue to reflect $1.1 billion of total available discretionary cash, which includes $575 million in parent free cash flow and announced asset sales. We remain confident in our 2016 parent free cash flow range of $525 million to $625 million, which is the foundation of our discretionary cash available for dividend growth and value creation. Turning to uses on the right-hand side of the slide, consistent with our capital allocation plan that we showed during our last call, the 10% growth in our dividend and share repurchases year-to-date were returning at least a third of this cash to shareholders. Going forward, we see our dividend as the primary means to distribute cash to shareholders. Stock repurchases should be less material, absent proceeds from additional asset sales and partnerships. Regarding debt reduction, we’re making good progress on our $200 million target for the year, in our longer-term goal of parent credit improvement. In fact, year-to-date, we’ve prepaid $125 million in parent debt. Taking advantage of weak market conditions early in the quarter, we were able to buy this debt at a 7% discount. We’re also seeing positive momentum on the ratings front. In March, Moody’s changed our parent credit outlook from stable to positive; and in April, S&P upgraded our ratings from BB minus to BB. These actions reflect our continued efforts to de-risk our portfolio and improve our credit metrics. We think that continuing to strengthen our credit will help us get better recognition and valuation for a growing cash flow and dividend. This positive credit trend along with an overall market improvement has allowed us to continue to be opportunistic regarding refinancing and extending maturities. To that end, last week, we extended our $800 million parent revolver maturity from 2018 to 2021. Also last week on the non-recourse side, our business in the Dominican Republic was able to replace a short-term financing with a new $370 million, 10-year bond at more favorable terms. We’ve also earmarked $330 million for investments in our subsidiaries, about a third of which is for our Colon project in Panama and Southland in California, coming online after 2018. Finally, after considering these in our subs, our current dividend and debt prepayment, we’re left with roughly $150 million in discretionary cash, which we’ll invest consistent with our capital allocation framework. As in years past, much of this cash is weighted towards the latter part of the year. Now to slide 27, we are reaffirming our guidance and 2017-18 expectations for all metrics, based on foreign currency and commodity forward curves as of April 30th. We continue to generate strong proportional free cash flow, which will be relatively evenly distributed in the first and second half of the year. And with the settlement of all outstanding receivables at Maritza, we expect our first half proportional free cash flow to be well ahead of last year’s. Regarding adjusted EPS, consistent with the first quarter, we also expect the second quarter to be lower than normal. In fact, we are forecasting that 70% to 75% of our 2016 adjusted EPS will be recorded in the second half of 2016 versus about 60% in past years. There are a few reasons that our results will be stronger in the second half than in the first half. First, we expect a lower tax rate in the next few quarters. In any given year, there are certain items that influence the quarterly rate that tend to normalize on a full year basis. As I mentioned earlier, in the first quarter, we recognized a higher than usual tax expense, which when combined with relatively low first-quarter earnings has an outsized impact on our tax rate for the quarter. This tax expense was anticipated in our guidance, and accordingly, we continue to expect a 31% to 33% tax rate in 2016. Second, the higher concentration of scheduled maintenance in the first half of the year will position us for stronger performance in the second half. For example, San Nicolas plant in Argentina will undergo major maintenance in the entire second quarter as part of its regular maintenance cycle that occurs about every eight years. A few of our other plants have similar circumstances. Third, forward curves for FX and commodities reflect some improvement over the balance of the year, which will provide a benefit in the second half. Fourth, this year’s $50 million cost reduction is more heavily weighted towards the second half. Lastly, we expect to benefit from a couple of items that we are working on to partially offset lower demand in Brazil and lower power prices in the U.S., and we will be in a better position to discuss these later in the year. With that, I'll now turn it back over to Andrés.

Thanks, Tom. To summarize our views on this call, we continue to generate strong proportional free cash flow, which will be evenly distributed between the first and second half of the year. Although we expect our first half adjusted EPS to be relatively weak, many of the negative drivers will reverse in the second half, and therefore we are reaffirming our guidance for all financial metrics. In terms of our strategic priorities, in the first few months of this year, we have made significant progress, including resolving the outstanding receivables issue in Bulgaria, receiving positive actions from the rating agencies resulting from our actions to de-risk the portfolio and de-lever the parent, reaffirming our double-digit growth through 2018 in both cash flow and earnings, driven by a largely funded construction program and $150 million in cost savings and revenue enhancements, and achieving significant milestones on three new projects in our development pipeline, to drive growth beyond 2018. I am optimistic about the future of AES. We are delivering strong and growing free cash flow, which we will continue to use to maximize risk-adjusted returns for our shareholders. The 6 gigawatts we currently have under construction is the largest driver of our expected growth of at least 10% in free cash flow through 2018. Beyond 2018, we are well-positioned to capture new opportunities due to our strong business platforms in attractive and growing markets, and our leadership position in deploying new technologies. Now, I'd like to open up the call for questions.

The first question, Tom, you alluded to the fact that while the tax rate and FX drivers in the first quarter were pretty much on plan, the U.S. and Brazil results were somewhat below plan. Could quantify how much below plan from an earnings perspective Q1 ended up?

Yes. I think if you single out those two, it’s probably $0.03 to $0.04 probably split between them, probably about $0.04 equally split.

And you alluded to some offsets in the second half; would they be cost reduction-related initiatives or what would be offsetting them in the second half?

Truly, that’s one through recently. Cost reductions, a part of the $50 million we are expecting to get as part of our savings plan is more heavily weighted, but truly all the things.

I was talking about that last bucket line, which you had mentioned in those lists of things which were not really listed in more detail, you said more to come on that.

Yes, those will likely be in the second half. There are two specific things we are working on to address these issues, and while I can't provide too many details right now, I appreciate that people want more information. We expect to share more details as these developments occur in the second half of the year.

Yes. Separately, where do we stand on the Sul transaction and what's the timing we should be expecting on that?

As we said last time, we injected $75 million into Sul, we restructured the debt, and we are looking at all options now for Sul. At this point, I really can't comment anymore about that.

Okay. And lastly, on Ohio, Andrés, as you mentioned the non-bypassable, you feel keeps you out of the FERC review, but that still would keep the volatility of that business around. The beauty of the PPA was that it would take volatility out. I am wondering, have you looked at some of the recent filings that some folks have gone back in to try to keep FERC out and yet also keep volatility out or those would be of interest to you? And separately, if non-bypassable is the only way to go here, would you come back to the notion of potentially selling those assets again to get out of the commodity-exposed business there?

We believe our proposal has addressed some of the concerns associated with the PPAs. We're confident that this is the right direction and we think it's beneficial for everyone involved. Therefore, we intend to pursue this path. You are right that there is some volatility linked to the contract nature of the generation assets at DP&L, which is a separate issue. However, particularly if we obtain the non-liability rider, we need to view it as an integrated business.

But these other filings that I think FE and others may have made in response, would any of those be of interest to you?

Yes, Ali, what we have filed is quite similar to what they have filed as a new case. If you look at our plan A, it's not much different from what FE has recently filed.

Okay, we would talk more of that offline. Thank you.

Perhaps, just starting where Ali left off, can you remind us just what the benefit embedded in Ohio is of continuation of the ESP structure et cetera, or whatever structure ultimately is approved there in guidance?

Given a wide range in our guidance, I believe we have incorporated a reasonable amount going forward. However, as we mentioned, there is still quite a bit of variability in this estimate. Tom, would you like to add anything to that?

I think, Julien we have said before, we’re obviously in the middle of our filing and working through it. So, we are careful about too much detail here. But I think we said before we have got a 110 now on in our ESP. We have incorporated something and it will be less than that amount into our ‘17 and beyond numbers. But, it's still a meaningful number, but it's certainly less than what we currently get.

And then turning to the Chilean tax rate change, obviously it's a first-quarter item, but as you think about it more structurally, what is that impact in ‘17, ‘18 et cetera, just on an ongoing basis?

It's nothing. We headed into our guidance; it was unclear when the final legislation would be final, final, so be recognized. So, it's about $0.03 to $0.04; we fully expected it in our guidance for ‘16. It's just happened to fall in the first quarter because this final, final in Chile. What is it, it’s revaluation deferred taxes, the tax rate goes up slightly; so, it's a modest revaluation of deferred taxes. It's similar to what we did two years ago, I believe, ‘14, I think it was Q3 of ‘14 as I recall. It’s a similar deal. So, this is a second phase of that same legislation that came in shortly after President Bachelet took office.

And then turning to the asset sales, obviously you were very active in the first quarter here; kind of hit your annual targets already. Can you comment more broadly, I forget talking about specifics like Sul, but ambitions to continue to pursue equity sale downs? And also if you think about the ratio of buyback versus asset sales proceeds, should we assume for the most part they’re going to be earnings neutral for the course of what you’ve announced already and then prospectively?

We previously announced that we expect to generate between $200 million and $300 million in equity proceeds from asset sales and divesting from certain businesses. We have actually exceeded those projections. While we do not provide specific updates, we will continue refining our portfolio to achieve an optimal mix of risks and positions. Regarding the proceeds, we plan to allocate them similarly to the past, focusing on either new investments or paying down debt, depending on the situation. As Tom mentioned, we will place greater emphasis on increasing dividends than we have previously.

Got it. But given that you’re at seemingly the midpoint of that 200 million, 300 million, you’re saying that you’ve outperformed, so you wouldn’t necessarily rule out further asset sales clearly?

No, absolutely not, absolutely not.

And what is the earnings contribution loss from the asset sales seen thus far?

We have in our forecast through 2018, we have a modest decrease in earnings from those sales because first you never can deploy the cash immediately, and it depends on the assets you’re selling, its risk profile, whether it’d be accretive or dilutive.

I appreciate that you don’t want to give us too much detail on the Sul transaction or the potential of Sul transaction, but would you be able to give us, maybe the trailing 12-month EBITDA contribution from that business or PTC and then tell us how much debt is associated with that asset right now?

The PTC contribution from Sul is modest; it was a modest negative in the first quarter of the year. Last year, it was probably a couple of pennies of PTC, but right now, given how Sul is running, it’s a negative PTC. In terms of debt, it’s about $275 million to $300 million. When we paid it down, we got it down to about $275 million in dollars.

The debt is in reis?

Yes, the debt in reis is obviously, I’m doing the math in dollars; but call it $275 million, $300 million; it’s all in reis, so call it then 1,100, 1,200.

And you’re done with the recapitalization of that asset as of now?

Yes, we put in 300 million reis, shortly after our last call, paid down some debt, and we get covenants in that part of a significant amount of time. Yes.

And then my second question is about kind of, I guess, 2019 and beyond. I’m wondering, one, when we would potentially get more color on earnings that year in cash flow that year, and kind of terms of your overall growth rate and what that would mean specifically? And then I also wanted to understand, within, I guess, that question, the contracting structure of some of your success here on the LNG side. You have clearly, at least in Panama, one particular power plant where you have a 10-year contract. So, I guess I understand that. But then how do you guys think about the risk and the structure of the actual importing of the LNG and the regas there and the selling of that to third parties?

We usually provide our long-term forecast in February, so that will be next year when we extend our outlook. Our goal today was to highlight that our growth will continue beyond 2018, and we have a solid pipeline extending through 2020 that we've recently enhanced. Regarding the facility in Panama, the Colon facility consists of two parts: a 380-megawatt combined cycle gas plant with a ten-year power purchase agreement with a reliable off-taker in dollars, and a tank. We're using about a quarter of the tank's capacity for this plant, leaving three-quarters available. This means we'll focus on tolling, without taking on commodity risk. Essentially, this could involve supplying fuel to other power plants. We've successfully implemented a similar model in the Dominican Republic, where we've created a pipeline to our DPP facility and switched from diesel to natural gas, catering to the transportation and industrial sectors. Our first priority in Panama will be to meet domestic demand, as nearby power plants will need natural gas, followed by transportation and industrial use similar to our approach in the Dominican Republic. An interesting third option is ship bunkering. While we won’t handle the bunkering ourselves, others will manage it using our storage and regas capacity. The concept is to receive large, efficient LNG tankers in Panama and the Dominican Republic, then distribute gas to various customers or even LNG. We do not intend to engage in commodity trading in these transactions; instead, we will provide services such as regasification, bunkering, and hub services. This strategy positions us favorably to meet the needs of customers in Panama and the Dominican Republic.

That’s very clear. It sounds like this would be within your risk tolerance or your risk profile of contracted assets, kind of at least medium term in duration and beyond with no commodity risk?

Yes, that’s exactly right. And with some of the people who would be using these tanks, we would expect to have contracts as well, basically assuring a certain amount of capacity from our tanks.

My first question is so, this Panama CCGT, you mentioned it's going to start operations in ‘18. Did you have it previously in your earnings expectations for ‘18; and if that's what's actually causing the guidance to move towards the high end, the percentage-wise? That's one. And two, could you comment if you have any earnings contributions for Sul and Eletropaulo in your guidance in ‘17 and ‘18?

I will address the first question. No, this was not part of our previous guidance. Keep in mind that the power plant will begin operations late in 2018, so it will not impact 2018. Its effect will be felt starting in 2019. Additionally, the storage tank will be fully operational in 2019. Therefore, this is beyond the timeframe we have discussed before. I believe Tom can provide insights on the contributions from Sul and Eletropaulo.

Yes, to clarify, Sul has been operating at a loss since the middle of last year, with losses around $20 million to $25 million last year, and we expect similar figures this year. We’re not including Sul in our projections for 2017, and the turning point for Sul will be their upcoming rate case and adjustment mechanism in the spring of 2018, if we decide to keep the business. As for Eletropaulo, its earnings have also been quite modest. We still include Eletropaulo in our business, but its contributions are between $0.00 and $0.02, depending on your predictions for Brazil, making it a relatively small figure.

Just a brief question on the Ohio plant. I know we had the FERC decision regarding the PPAs, but we also had a decision not too long ago on AEP's ESP by the Supreme Court that kind of might arguably be comparable to the plans you filed, so do you have any thoughts in the context of that decision?

I thoughts are quite frankly, we see that our filing, we think has been the correct path to take and we think it's within the PUCO’s purview to grant because we think it's very similar to what we currently have in the ESP. So for those reasons, we remain optimistic.

And then just on the longer-term drivers, you've given great visibility on the growth drivers and particularly new projects. Just to fill out the picture, are there any visible cliffs or roll-offs over this period that we need to match against the growth projects or are those pretty much kind of done with at this point?

I would say that the only project we have is Southland, which we are repowering. That is more set for around 2020 when we have the roll-offs. Additionally, at DPL, we have our application for 2017 that would prevent any significant drop at DPL. So, we don't have any other major issues out there.

Yes. Steven, this is Ahmed. The PPA for DPL expired in 2018, but we continued to operate the plant through 2020. Our new plant, Southland, will come online in 2021.

A question for you on the batteries segment, which is one of the more unique aspects of the Company. You mentioned that you’re seeing growth through two paths. Of the 394 megawatts in operation construction or late development, is there a way you can break out between what AES owns versus builds by AES or is that all AES owned projects you…

Those are all AES owned projects. We are working very hard on third-party sales and have significant interest in various projects, some in collaboration with channel partners and others independently. We aim to provide updates within the next six months. In many instances, we are essentially creating the market by engaging with regulators to ensure that the regulations support compensation for battery-based energy storage. So yes, all of these projects are fully ours.

And then, I know because the market structures are still under development, each project is sort of a one-off situation. But, in terms of modeling this growth area, can you give us sort of rules of thumb about how to think about any modeling data points, for example like dollars per KW or return levels, just anything that we can use to try and get a little bit more specific on that?

First, it’s the way we are looking at it. You are correct that in some cases, we are putting up relatively small projects, around 10 megawatts to 20 megawatts, to open up a market. A lot of the return we believe will come from third-party sales. We are also observing some markets that are more competitive, where there is a rapid build-out of energy-based storage, which leads to lower returns. However, we are focusing on long-term contracts. We expect to earn on average the same returns as we have in our other projects and are not subsidizing this business. What will be new for us is the third-party sales because we do not have to invest any equity; we are essentially leveraging our intellectual property rights, experience, and the Advancion brand name. We have incorporated this into our third-party sales as we want to gauge their potential impact. With our channel partners, we are casting a wide net, and I believe that in the next 6 to 12 months, we will have a clearer picture of how substantial that business could become.

Thank you. Okay. So, Andrés, I want to ask Julien's question slightly differently. How long do you think AES can sustain this 12% to 16% growth rate beyond the ‘17, ‘18 expectations?

At this stage, we're not ready to provide guidance for the next four to five years. There are many factors that would influence this, such as forward exchange rates, commodity curves, and energy prices. However, we feel very confident in saying that we will not run out of growth projects in 2018. We already have significant projects set to come online in 2019 and 2020. We are continuously exploring ways to accelerate our growth rate. Part of our strategy involves leveraging partnerships and selling down assets to transform capital into higher growth, higher return projects.

Well, is it at least fair to say that AES has now come out of the restructuring mode that’s gone on for about a decade and now we are back into the growth mode; is that at least a fair treatment?

I think in terms of cash flow and earnings, it's a fair statement. That’s how we measure success, honestly; we’re not going to measure in terms of megawatts. I think we are going to remain the very disciplined Company that we have been, certainly over the last five years. We are going to be very disciplined and make sure that again not to fall into any sort of rapid growth for growth's sake, I mean we really want to maximize. I think one of the things we have shown is that we are willing to have fewer megawatts and fewer clients under operation but have a better risk profile and a better growth profile. That’s really where we want to go.

Okay. Switching to Panama, is it fair to say you are looking at the source of LNG for the plant in Gulf of Mexico?

Yes. We have a contract for gas from Trinidad for the Dominican Republic that runs through 2023. For our 25% share, we have an agreement with one of the major suppliers who will source the gas from locations they determine are best. It's likely that some of it will come from the U.S. liquefaction facilities in the Gulf. Ultimately, it's their decision where to source it when they are filling the tanks and managing the commodity risk.

Okay. So, it's coming from a tolling model and not directly from this plant?

That’s correct, unlike the case in Trinidad that we’ve seen, but it was very directed and it was coming from Trinidad at the point, or initially. Now they have optionality.

Okay. A quick question on Brazil; there are very interesting assets, upper river of Paranapanema where AES has long said that controls that because it provides tremendous benefits, both in terms of cost as well as upgrades and development opportunities. It’s on for sale, any comments?

I think that it’s true that Paranapanema, which is owned by Duke in Tietê were once one company and was split in two. Having said that, what we’re looking at our complete portfolio, in terms of our risk profile. We have right now a lot of Brazil hydro risk. So, this really isn’t, we think in our sweet spot at this point in time. And we also understand that they are going to sell the whole package together, of all the other assets. It’s a pretty big ticket and there are other assets that we’re not interested in. So, what I would say is that really at this point, it’s not something we are actively pursuing.

Last question on Brazil, Brazil’s been long in recession/mild depression for the last couple of years. Do you think the Olympics will help bring it back out of that mode and back to a more possible economic profile or do you think it needs a political change to get that?

I think that Brazil is a much more diversified economy than perhaps it gets credit for. I mean as you look at the GDP of the state of São Paulo, it looks more like Belgium than it does some of the Northeastern states of Brazil, so to realize that point. Now, I think that Brazil got itself into a funk due to some policy issues, not just commodity price drops. So, the good thing is that they can work their way out of it. Our view is that it will probably take a couple of years at least for Brazil to get out of it. I don’t think that the Olympics will have any effect whatsoever. I think the key point.

Really?

Yes, I really think that. The key point for Brazil is to determine the political process; who is going to be the President within six months and what policies he will pursue; so having said that, Brazil has a lot of strong points in its economy. If they get their political act together and take some tough structural changes, I’m sure, it will be back within five years. I feel very confident that Brazil can be a strong economy again.

I have one final question. If that's the case, Brazil seems to be in a delicate position as either a strong candidate for divestiture or for expansion. AES has available resources, yet still retains a significant presence in most sectors except for Sul. There has been considerable discussion about privatizing BNDES' interests. Is this something you intend to pursue more actively based on the political landscape, or is it something you have planned for the long term?

We can’t speak for BNDES and what they decide to do with their assets. We did have the separation of our assets in Brazil to give us greater operating control in Tietê and greater capital structuring flexibility in general. So, we’ve done that. I would say that if you look at what we’ve done Brazil, we’ve certainly de-risked ourselves significantly because we sold half of our holdings in Eletropaulo in 2006. We spun off the telco from Eletropaulo; sold that for $1. So, we feel that we’ll continue to manage Brazil holistically and look at what are the fundamental exposures we have there.

Andrés, just to follow up that last question; you are probably the most knowledgeable person about Brazil that I ever get a chance to ask a question to. In a quarter or two quarters ago, you talked about a turnaround in Brazil, maybe 2018. And now, in response to the last question, I heard you say more like five years. Has something happened in the last three months that makes you a little more pessimistic?

No, let me clarify that. I do think the turnaround in two years is still I would say possible, maybe sort of 50-50 chance. What I think within five years, I feel very optimistic at some point. I don’t know if it’s three years, two years, they will come back. I think depending on the political resolution of that the crisis they are facing now, I wouldn’t even be surprised that you have a sort of, I don’t know, call it euphoria, but a pickup in sentiment in Brazil with the resolution. I mean we’ve seen that when you have certain political developments, they actually appreciate in the market. What I think is important to realize is that the crisis in Brazil has a lot to do with certain policies and not just the drop in commodity prices. So that makes the comeback more within their capabilities of doing.

Okay. We thank everybody for joining us on 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.