AES Corp (AES) — Q4 2017 Earnings Call Transcript

Thank you, Kate. Good morning, everyone. And welcome to our fourth quarter and full year 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.

Thank you, Ahmed. Good morning, everyone. Thank you for joining our fourth quarter and full year 2017 financial review call. During 2017, we delivered on all of our financial metrics. Adjusted EPS was $1.08, toward the upper end of our guidance range. Cash flow also came in at the upper end of our ranges. Based on our strong performance in 2017 and our confidence in our outlook, we are reaffirming our 8% to 10% average annual growth rate through 2020. Further, we continue to transform and simplify the company. To that end, we are maximizing our efficiency with a new organizational structure which will yield an additional $100 million in annual cost savings by 2019. We’re reducing our financial risk by prepaying $1 billion of impairing debt. We’re leveraging our platforms by adding 4.4 gigawatts of new capacity that is currently under construction. Through a balanced approach, we’ve been reshaping our portfolio while reducing our carbon exposure; first, by acquiring 2.3 gigawatts of renewable and launching the Fluence energy storage joint venture with Siemens; second, we announced that we are selling or retiring 4.3 gigawatts of merchant coal-fired generation. Through the successful execution of our strategy, we are lowering the risk of our portfolio, particularly the volatility of our earnings and cash flow. At the same time, we are well positioned to deliver 8% to 10% average annual growth in adjusted EPS compared to free cash flow through 2020, achieve investment-grade credit metrics in 2019, and reduce our carbon intensity by 25% from 2016 through 2020. I will now discuss these themes in more detail, beginning with maximizing our efficiency on slide four. We implemented a new $100 million cost savings plan as a result of our recently announced reorganization. This year, we are reducing our global workforce by 1,000 to 12%. These additional savings will strengthen our ability to deliver on our long-term financial commitments. Next, I’ll provide an update on some of our construction projects. In total, we have 4.4 gigawatts currently under construction, most of which are expansions of our existing plans and businesses. Beginning on Alto Maipo on slide five. As you may recall, this 521-megawatt hybrid project has been experiencing significant construction delays and cost overruns. However, since our third-quarter call in November, we have reached a significant milestone while resolving outstanding issues. Specifically, Alto Maipo negotiated a fixed-price lump-sum EPC contract with Strabag, the project’s main contractor for the entire project. The new EPC contract, which is pending approval from the project lenders, transfers all of the geological risks to the contractor and includes material capital commitments from Strabag. The restructuring will require concessions from the project lenders and meaningful equity contributions from AES Gener, which are tied to construction milestones. We expect to receive approval from the lenders in the second quarter. Although we were very disappointed with the extended delays and increased costs to build out the Maipo, the new contract provides much greater certainty on both the schedule and the total costs to complete the remaining 38% of the project. Once completed, Alto Maipo will diversify AES Gener’s generation mix and provide a zero-emission source of power and capacity in Chile’s load center for many decades. Turning now to the rest of our construction program, beginning on slide six. Our 671-megawatt Eagle Valley CCGT in Indiana achieved full load earlier this month. This plant is now in the commissioning phase and is expected to be completed in the first half of the year. Now, turning to our 1.3-gigawatt Southland CCGT project on slide seven, which is a new construction on our existing gas generation sites in Southern California. Construction is proceeding as planned, and the project is on track to be operational by the first half of 2020. Shortly, we will also begin construction on this site on our long-term contracted 100-megawatt four-hour duration lithium-ion energy storage facility. This project will be the world’s largest lithium-ion energy storage facility. Turning to slide eight, and our LNG businesses. In Panama this month, we started commissioning at our 380-megawatt Colón CCGT. We expect to achieve first fire in March and COD early in the second half of this year. As you may remember, we’re also building an LNG regasification and storage facility on the same site and expect to reach COD on time in 2019. In the Dominican Republic, we are in advanced discussions to secure a new client for the access capacity at our LNG storage facility and to build the pipeline to connect the LNG terminal to the eastern side of the Island. The pipeline will allow us to sell our access capacity as existing plants convert from heavy fuel oil and diesel to natural gas. We expect to earn attractive returns given the limited amount of investment necessary and that the project will require no cash in corporate. Our remaining construction projects are proceeding as planned, including our 1.3-gigawatt thermal plant OPGC 2 in India. These projects will be key contributors to our earnings and cash flow growth through 2020. Turning to slide nine. We have been reshaping our portfolio to deliver attractive returns to our shareholders while reducing our carbon exposure. Our focus is on renewable projects with long-term U.S. dollar-denominated contracts. On a portfolio basis, these investments are expected to produce low to mid-teen IRRs assuming a conservative terminal value. In general, we expect to receive at least 85% of the cash flow during the life of the PPA. These compelling returns are driven by several factors, including about half of our investments in markets with lower renewable penetration and faster growth on U.S.; using our business platforms and global scale to lower costs, such as PV panel and wind turbine purchases; utilizing local debt capacity in the businesses to fund the investments; and bringing in partners to reduce our equity commitments while providing management and development fees. Turning to slide 10. In the last year, we acquired 2.3 gigawatts of renewable capacity with long-term contracts in three markets. First in the U.S., we closed on the acquisition of sPower together with the Alberta pension fund, AIMCo. sPower was a key driver in our 2017 growth and is continuing to execute on its more than 10-gigawatt development pipeline in the U.S. In fact, this year sPower signed long-term PPAs for 582 megawatts of solar and wind capacity with investment-grade customers. Second in Brazil, AES Tietê acquired 686 megawatts of long-term contracted wind and solar generation. The equity required for these expansions was funded by using the debt capacity available at Tietê. And third in Mexico, where we have a 2.5-gigawatt development pipeline of renewables and natural gas infrastructure. We acquired a 306-megawatt Mesa La Paz wind development project. Mesa La Paz has a 25-year U.S. dollar-denominated PPA with an investment-grade private sector off-taker. The project site has sufficient additional land to accommodate up to 200 megawatts of solar, which could be an attractive upside in the future. We expect to reach financial close in March and begin construction shortly thereafter. During 2017, we also made good progress on our initiative to offer new innovative energy solutions. As a result, in Hawaii, we’re delivering two solar plus energy storage facilities for a total of 47 megawatts of solar and 34 megawatts of five-hour duration storage on the Island of Kauai. The first of these pioneering projects is under construction and will satisfy energy demand during peak hours in the evening, as well as the rest of the day. We also closed on Fluence, our joint venture with Siemens. Fluence will deliver energy storage solutions and services to a broad group of customers, from commercial and industrial companies to utility and power developers around the globe. In fact, the team is currently pursuing more than one-gigawatt sales opportunities in 15 countries. The goal is for Fluence to consolidate its position as market leader in this high-growth market. Lithium-ion-based energy storage is expected to grow tenfold in five years, reaching at least 28 gigawatts of global install capacity by 2022. In summary, as you can see on slide 11, we will be adding 8.3 gigawatts of new capacity by 2020. This represents 25% of our current installed capacity and includes seven gigawatts of projects either under construction or recently acquired. The remaining 1.3 gigawatts reflect projects in advanced stage development, half of which are under signed contracts. As a result of these additions, our average remaining contract term will increase from six years currently to 10 years by 2020. We have sufficient internally generated cash to fund our equity contributions for all the projects I just discussed. We're taking a balanced approach to decarbonizing our portfolio, recognizing that coal will continue to play a role. In 2017, we announced the exit of 4.3 gigawatts of merchant coal-fired generation, representing 30% of our coal-fired capacity. Through these actions, we are significantly reshaping our portfolio to achieve our financial and strategic objectives. As you can see on slide 12, by the end of 2020, we expect our coal-fired capacity to decline from 41% to 29%, while renewables and gas will increase from 55% to 68%. Further, as you may have seen in our press release this morning and on slide 13, I am pleased to announce that based on these steps we've taken to date, we are on track to reduce our carbon intensity by 25% from 2016 to 2020, and we will be aiming for a reduction of 50% by 2030. With that, I'll turn the call over to Tom to discuss our financial results, capital allocation guidance, and expectations in more detail.

Thanks, Andrés. Good morning. Today, I’ll review our 2017 results and capital allocation. We'll also discuss some recent business developments and conclude by addressing our guidance for this year and expectations through 2020. As Andrés mentioned, we finished 2017 on a strong note, achieving the upper end of our guidance range on all metrics and setting a solid foundation for growth through 2020. Adjusted EPS was $1.08. In the last two months of the year, we benefited from stronger margins at some of our businesses, a lower impact from hurricanes, and a lower overall tax rate. As shown on slide 15, most of our growth in 2017 was driven by higher margins, particularly in MCAC, contributions from new solar projects in the U.S., and the absence of a one-time reserve taken in 2016 in MCAC. Now to slide 16, our adjusted PTC and consolidated free cash flow. We earned a little over $1 billion in adjusted PTC during the year. This was an increase of $167 million, primarily due to the same drivers as adjusted EPS. We generated $1.9 billion of consolidated free cash flow, a decrease of $323 million from 2016, primarily due to large receivables collections in Eurasia and Brazil in 2016. Now I’ll cover our SPUs in more detail over the next five slides, beginning on slide 17. In the U.S., margins were flat. Adjusted PTC increased, primarily due to equity earnings for new solar projects at sPower and our distributed energy business. Lower consolidated free cash flow also reflects higher working capital requirements at DPL. Regarding sPower, we’re very pleased with the businesses’ performance since the acquisition. In November, sPower closed a $420 million 19-year financing at 4.6%, enabling us to meaningfully increase our returns on the business. We also continue to receive inbound indications of interest at attractive valuations to partner on sPower’s operating assets. Incorporating such a partner would further increase our overall return and transition a greater percentage of our capital into sPower’s robust development pipeline. This backlog continues to grow and is yielding excellent projects with double-digit returns, including the 580 megawatts of recently signed PPAs, Andrés mentioned. In Andes, our results were relatively flat. Higher pricing in Argentina and a full year of operations at Cochrane in Chile were largely offset by the impact of green taxes and planned major maintenance at AES Gener in Chile. Lower adjusted PTC also reflects higher interest expense in Argentina. Consolidated free cash increased largely due to lower working capital requirements at Gener. In Brazil, margins were flat while adjusted PTC benefited from the settlement of a legal dispute at our CCGT facility in the first quarter 2017. The decrease in consolidated free cash flow is largely due to the high recovery in 2016 at Eletropaulo to purchase power costs from prior drops. Most importantly, as part of our strategic shift away from the distribution business in Brazil, in Q4 we reclassified Eletropaulo to discontinued operations. This reduces our volatility and eliminates the disproportionate exposure to Brazil in our consolidated financial statements, given our 17% ownership interest. For example, we’ve been consolidating over $3 billion of revenue with over $1 billion of unfunded pension liability with only $3 million of income in 2017. Mexico, Central America, and the Caribbean results reflect improved margins, driven primarily by higher contracted sales in the Dominican Republic following the completion of the combined cycle last year, as well as higher availability in Mexico. Adjusted PTC in 2016 also reflects the reserve taken against certain reimbursements in MCAC in connection with a legal matter. Consolidated free cash flow also benefited from receivables collections in the fourth quarter in the Dominican Republic. I’ll also note that our plan in Puerto Rico is now being dispatched and delivering much-needed energy to the grid. Payments from the off-take of preps have also resumed, and we received $40 million since December. Finally in Eurasia, results reflect stable margins and the collection of a large overdue receivable in 2016 at Maritza in Bulgaria. Since restructuring Maritza’s PPA in 2016, the off-takers have been paying on time. On the regulatory side, Maritza expects to have discussions later this year with the Government of Bulgaria regarding the European Commission's review of the PPAs' compliance with state aid. We’ll keep you updated as discussions progress. Now to slide 22, and update on the impact of tax reform. As you know, we incurred a one-time non-cash charge of $1.08 billion in 2017 upon enactment of the new law, which was largely related to the deemed repatriation of foreign earnings. This is a complex bill and some issues still remain to be clarified. As we disclosed last month, in the near-term, we expect a $0.05 to $0.08 annual impact, largely driven by two aspects: first, we expect meaningful limitation on interest deductions, which are now capped at roughly 30% of non-regulated U.S. EBITDA; second, under the new global intangible income rules, unrepatriated foreign earnings above a certain threshold can now be subject to U.S. tax. We have taken actions to offset these impacts and we'll continue to evaluate additional tax planning opportunities. In the longer term, these aspects of the tax reform are beneficial to AES. For example, the adoption of a territorial tax regime will provide more flexibility in structuring new investments and repatriating profits. Now to slide 23 and our improving credit profile. We ended 2017 with $4.7 billion of parent debt, and almost $2 billion reduction since 2011. As we announced in December, we used all the proceeds from the billion-dollar Masinloc sale to further reduce parent debt, which will bring our debt to about $3.8 billion. As a result, we now expect to achieve investment-grade credit metrics in 2019, a year earlier than our prior expectations. We also have a high-priority goal of attaining an investment-grade rating by 2020. We believe this will help us to not only reduce our cost of debt and improve our financial flexibility but also enhance our equity valuation. Now to 2017 parent capital allocation on slide 24. Sources on the left-hand side reflect $1.5 billion of total available discretionary cash consistent with our expectations. This includes $637 million of parent free cash above the midpoint of our expected range. Uses on the right-hand side of the slide are largely in line with our expectations. Investment from subsidiaries are slightly higher than our prior disclosure, largely due to additional investments in U.S. renewables. Now turning to our guidance on slide 25. Consistent with industry practice, these numbers exclude costs directly associated with major restructuring programs and the one-time non-cash charge of $1.08 billion resulting from the enactment of tax reform in 2017. Today, we're initiating guidance for 2018 adjusted EPS of $1.15 to $1.25 and reaffirming our target of 8% to 10% average annual growth through 2020. Growth this year will be largely driven by contributions from new projects, cost savings, and lower parent interest. To break this down by SBU, we expect growth in the U.S. to be driven largely by positive regulatory actions at DPL, as well as growth in renewables. And these will benefit from continued market reforms in Argentina, higher contracting levels at Angamos in Chile, and higher generation in Colombia. Growth in MCAC is expected to be driven largely by completed construction projects, including a full year of operations at our combined cycle in the Dominican Republic, as well as the partial year impact from the commencement of operations at the Colón CCGT in Panama. Finally, we also expect to benefit from cost savings and long-term interest. This growth will be partially offset by business exits from the Philippines and Kazakhstan, and a higher tax rate driven by U.S. tax reform. Beginning this year, we’ll no longer provide guidance on consolidated free cash flow, which does not accurately account for AES’s ownership interest and our underlying businesses. We believe that parent free cash flow is the most tangible measure of our ability to achieve our financial goals, including strengthening our balance sheet and delivering value to shareholders. Turning to slide 26. Parent free cash flow is expected to be relatively flat this year from $600 million to $675 million. This reflects lower expected distributions from Gener to allow for incremental investments in Alto Maipo and ensure the maintenance of their investment-grade credit ratings. Consistent with prior expectations, we still expect 8% to 10% average annual growth through 2020 off the 2017 base. I’ll now discuss our 2018 parent capital allocation on slide 27. Beginning on the left side, sources reflect $1.9 billion of total available discretionary cash, including the $600 million to $675 million of parent free cash flow just mentioned. Sources also assumed $1.25 billion in asset sale proceeds, including a $1 billion sale of Masinloc in the Philippines and a $250 million placeholder for additional asset sale this year. Regarding Masinloc, we recently received a key regulatory approval for the sale to close as early as the end of the first quarter. Now, the uses on the right side of the slide. Including the 8.3% dividend increase we announced in December, we’ll be returning $345 million to shareholders this year as expected. We expect to use over $1 billion to reduce parent debt, including revolver drawings. Finally, we plan to invest at least $250 million in our subsidiaries, primarily from projects under construction leaving about $100 million unallocated cash. Now looking at our capital allocation from 2018 through 2020 beginning on slide 28. We expect our portfolio to generate $4.2 billion in discretionary cash, roughly 60% of our market cap. This reflects parent free cash flow for the period, as well as our $2 billion asset sale target for 2020, half of which will be realized from Masinloc. In terms of uses on slide 29, whether half has been allocated to the current shareholder dividend and debt reduction, about $750 million is allocated to identified investments in our subsidiaries, including projects under construction and late-stage development. The remaining $1.25 billion, which is largely weighted towards 2019 and 2020, is available to create shareholder value through investment in compelling growth opportunities, modest deleveraging of about $100 million to $200 million per year, and potential growth in our dividend. With that, I’ll now turn it back to Andrés.

Thanks, Tom. Before we take questions, let me summarize the concrete steps we’re taking to transform and simplify the company; reducing our headcount by 12% this year for $100 million in sustainable cost savings; lowering our parent debt by 20%; investing in profitable, renewable projects with long-term U.S. dollar denominated contracts, including the 2.3 gigawatts we acquired in 2017; and reducing our carbon exposure by exiting 4.3 gigawatts of merchant coal-fired generation. Accordingly, as a result of our successful execution, we will deliver 8% to 10% average annual growth and adjusted EPS in parent free cash flow through 2020, achieve investment grade metrics in 2019 and reduce our carbon intensity by 25% from 2016 to 2020. Our overarching goal is to deliver sustainable and attractive risk-adjusted total returns to our shareholders. Operator, we would now like to open up the lines for questions.

First question, Andrés on the Alto Maipo. In the past, when you have put that project as part of your construction pipeline, you assumed a zero return on the investments you've already made there. Can you give us a sense of what’s roughly the incremental investment you will need to make and the economic or financial case internally that you went through to decide, we should go forward with this as opposed to perhaps writing off the previous investment you've made there?

I can’t comment right now on what the amount of the additional investment AES Gener would have to make at this point. But that will happen when the financing is closed. But I would say that what is important is Gener has been strengthening its balance sheet, selling some assets. Also, as Tom mentioned, there will be somewhat less dividends this year as a result of investments to be made in Alto Maipo. Now in terms of what to do with the project going forward, of course, what matters is just the marginal costs and the marginal benefits. And that's what we have been looking at. I think that from a strategic point of view, having Alto Maipo plus Las Lajas and Alfafal, that’s all part of one big complex, you will have at the end 750 megawatts of capacity and power right in the load center of Chile. So this we think will be a very attractive asset. And as you know, this will, I’ll say balance Gener’s risk because Gener has been very heavily weighted towards the coal plant. And as again Tom mentioned in his speech, we did have the impact of green taxes in 2017. So that's what we're looking at Ali. We’ll look at the entire picture, it's like the marginal returns on the investments we're making and the positioning of Gener as a company into the future.

Second question, as you mentioned the parent free cash flow profile is relatively flat in ’18. How does that impact your dividend plans? And when you think about the 8% to 10% growth in dividends, could we expect that as an annual number or would that follow the parent free cash flow profile?

I think if you look at the growth of our dividend, I think we've had the fastest dividend growth of any company in our sector. And so I think going forward, we’ll continue to analyze what's the best use of our cash. Certainly, we don't think we're getting a lot of credit for our growth in the dividend and the fact that we're on a path to become investment-grade. So we will look at what we think is the best use of our cash going forward. I think we’ve laid out our priorities as we want to become investment-grade, and into that, we have the transformation of the company that’s underway that will decrease risk and will also ensure our growth into the future.

And Andrés just to clarify remind me again, that 8% to 10% growth in EPS and better free cash flow ’18 through 2020. Are you also committing to an 8% to 10% growth in the dividend commensurate with that?

At this stage, we haven’t made any comment on an 8% to 10% growth in the dividend. We’re committing to adjusted EPS growth and the parent free cash flow growth.

Last question, the billion dollars of asset sales that you are planning between ’18 through ’20 period. Is the impact of that already factored into that 8% to 10% EPS growth that you’ve laid out for us?

Absolutely. And so I mean, we’ve been talking about a balanced approach. I think if you look at our sales, we’ve really gotten good value for our shareholders on those sales. As I said, we also think that coal will continue to play a role. But what we’ve focused on, certainly we focused on coal merchant plans going in, we’ve also focused on simplifying our portfolio. Now, depending on the quality of the asset whether it’s accretive or dilutive that will depend, but this is baked into our vision of the future and what we will deliver. So we feel very comfortable about hitting that billion-dollar target, some could be selling out and some could be selling down.

So two questions. How does the new solar power impact your growth plans for sPower? And then secondly, if you could elaborate a little bit about those negotiations concerning Maritza and some state aids that you mentioned. Thank you.

Let’s talk a little bit about the solar panel. The impact of the tariff, the 30% tariff, is baked into our forecast. And it hasn’t had a material impact on the business. So I don’t know, Tom perhaps you’d like to comment on it.

I think as Andrés has said, the expectation of a tariff has been obviously out there for some time since early or middle of last year. Some of the being thrown around were actually higher than that so it’s certainly within the expectations of what was going to be passed. I think that was taken into account by our teams at sPower and our distributed energy business, so generally we’ve been moving forward. Sure on the margin there were a small number of opportunities that fell off or at least that were put on hold. But I think the team has been moving forward, most of it is evidenced by the large signing of contracts that we identified just most recently.

Okay, let me take the second question regarding Maritza. We just wanted to mention this at this stage; it's very early to say what the outcome of this would be. It’s basically known that DG comp of the European Commission does reviews of long-term PPAs, and then whether they contain what's called illegal state aid. We feel we have a very strong contract. There's a lot of ways that this could be resolved, and at this stage, I will keep you informed as it progresses. But again, we feel that we have a very strong contract. And as you know, a couple of years ago they ran up a very significant IOU, more than €400 million. On our calls, we said, look, we expect to be paid because of the strength of our contracts and, quite frankly, because of the investment-grade of Bulgaria and the fact the public sector had the means to pay. Those things were resolved; stay tuned, we'll see where this turns out. But again, we think we're starting from a strong position.

Just wanted to follow up on the last question a little bit. You’ve alluded to or you reaffirmed today the 8% to 10%. Can you just clarify to the extent to which that is inclusive of the asset sales, basically that sort of an implicit guide up, because I think before you talked about the 8% to 10% being exclusive of those and needing to have find, call it cost cuts and/or other sources to offset the dilution from asset sales. Am I thinking about that correctly?

I think maybe we weren’t as clear in the past. But I think the 8% to 10% is inclusive of asset sales. I think there’s a basket of some things that we may sell out or sell down, as Andrés said. And it does also assume use of capital for deleveraging and reinvestment; I would say our reinvestment is at rates less than what we’ve been investing at. So we feel quite good about those.

Said differently again, you basically found the cost savings at this point to fully offset the full slate of 2018 through 2020 asset sales. And again, just to make sure this is clear, that it’s only a billion dollars of asset sales that's reflected in that 8% to 10% or what magnitude through the full three-year period?

No, it's only an additional billion, so it's Masinloc plus a billion.

I have one, one other question. The language you used to describe the impact of tax reform, as you say in, near term impact of $0.08 to $0.10. What does that imply? Does that, all things equal—and obviously, this is before what you're doing to offset it—changes over time? And if so, can you give us some insight into whether it gets better or worse over time and a base case before offsets? And then other than the cost cutting which you’ve been announced, what are the things that you’re doing to offset that base case impact of tax reform?

So let me take it at a high level and then I’ll pass it to Tom. What we’ve talked about is $0.05 to $0.08 initially. There are two sides, so this one is the limitations on interest, expense deductibility related to EBITDA in the U.S. And the second is the global intangible low tax income. Now, there remains a lot to be clarified on this law. So we’re taking a conservative approach to it. Why does this change over time? Well, it changes because your asset base changes, and also has to do with your level of indebtedness, changes over time. So what happens over time gets better as the effects of a lower tax rate kick in. So that’s number one. Number two, as Tom said in his speech, we really clean the slate by basically using our NOLs to pay for the tax expense of deemed repatriation of foreign earnings. So really as a result of it, we’ll have a much more transparent tax position as time goes by. Now, we do need further clarity; clarifying need to make sure that any actions we take to optimize our capital efficiency are the ones in the long term. So with that, I’ll turn it over to Tom.

Greg, we believe the near-term outlook is a two to three year timeframe. Looking beyond that, we anticipate lower impacts based on our observations. While there are many factors at play, generally, as we manage our NOL situation and address the charges taken at the end of the year, including the deemed repatriation of foreign earnings, we have utilized about $1.9 billion of our NOL. As our NOL decreases and we approach a taxable position in the next two to three years, the overall effect of tax reform on earnings may actually diminish. I would estimate a near-term impact of around $0.05 to $0.08 over the two to three years. As we analyze this, we expect that number to decrease. We are focused on minimizing those figures and accelerating the ramp-down effect wherever possible. These are ongoing efforts.

And all that being said, that’s fully baked into the growth rate expectations that you’re aspiring to for earnings and cash flow?

Yes, we have the $0.05 to $0.08 impact baked into the projections through 2020.

Maybe you’ve addressed this a bit earlier. But in terms of your stance to keep AES Gener investment grade, what do you think is required there? What levers would you pull?

Well, we’ve basically been pulling the levers we talked about in the past. We said Gener have a lot of levers; realize that Gener had a very good year in 2017. So we’ve had some asset sales, sales in non-core assets. We have sold a peaking plant. And we’re also in the process of selling some other non-core assets, which we think quite frankly are at very good multiples. And these will be used to pay down debt at Gener to shore it up. So while the Gener price has suffered greatly in the last say two years, at the same time, Gener in terms of if you look at it, our earnings this year or cash flow is really at record levels due to the fact that we cut the ribbon on time and on budget on the other projects. So Gener again, we will keep it investment grade; there are a lot of levers to pull. And as we said, we weren't putting in more money from AES into Gener.

Gregg, I’ll just say, basically the dividend we got last year from Gener was around $160 million, $170 million, it was AES's share. And all the numbers we expect to have to be a lower number. I don't want to get specific because obviously Gener is a public company, but I’ll just leave it that we are being more conservative with expectations for ’18 until Alto Maipo gets tied up moving forward.

The question on the cost cuts and you said strengthening the 8% to 10%. Could you maybe just give a little more color on what you mean by strengthening? Are you seeing yourself higher in the range or do you have more cushion in the event that something doesn't go right? How should I think about that?

I believe that when we discuss strengthening, it actually means reducing the variability and increasing the certainty of meeting our targets. We have been working on several initiatives, and it's gratifying to see them come to fruition. To clarify regarding the cost savings program we just announced, it is largely implemented, and we expect to have the results in the first half of this year. Additionally, we have accounted for one-time severance costs in our figures. Overall, as we carry out these initiatives, we enhance the certainty of our projections and make them more resilient to unexpected challenges.

And as you stand today, what do you see as the biggest risk to achieving the growth target, if any?

I believe we have outlined our goals clearly. It is crucial for us to finalize the Alto Maipo project, even though it requires significant contributions from Gener. This marks a significant shift in the project’s risk profile since we are moving from a cost-plus model, with uncertainties in geological risks, to one where costs are certain. Additionally, we will work with a single contractor who has a strong incentive to complete the project efficiently and cost-effectively. Regarding Bulgaria, the resolution of our situation remains pending, but we feel confident about our position as we did when we faced the €400 million in IOUs. However, it's premature to predict the outcome. I see potential for growth across several of our markets, particularly encouraged by the performance of our renewable and gas projects, especially outside the U.S. We have a solid pipeline of projects in Mexico with dollar-denominated agreements and private sector buyers, and I am particularly enthusiastic about our solar and energy storage initiatives. Additionally, we are optimistic about the sPower pipeline. Concerning Fluence, it appears the market is beginning to shift. This is typical with new technology, which tends to follow an s-curve, and we need to monitor when that upward trend will materialize. Fluence will not contribute immediately to our earnings; rather, it is expected to generate substantial value in three to five years, similar to our experience with Brazilian Telecom.

Last question about Tom, I believe you mentioned a potential partner for sPower. Could you provide more details on that? Is it primarily focused on someone buying a stake in existing operating projects?

Steve, we’ve been approached by some parties about stakes in operating projects. And it would be something that we would do obviously with sPower and with AIMCo jointly. I mean it just reinforces that value of their operating portfolio where we’re obviously quite focused on the growth portfolio. But it reinforces the value of their operating portfolio and it’s potentially attractive to some co-investors, so we’ll see. And how it effectively part of your asset sales?

So instead of opportunities, $2 billion we got $1 billion it’s Masinloc, out of the billion-dollar set, the set of opportunities is greater than a billion.

I'm looking at slide 52 where you provide a breakdown of the adjusted PTC by SBU. Andes showed strong growth in 2018 compared to 2017. I understand that when you mention the 8% to 10% growth, you don’t specify it by SBU. However, there are significant growth opportunities you've mentioned in the U.S. and MCAC. I thought that with the challenges at Alto Maipo, the growth in Andes might be affected, yet it still had good growth in 2018. Am I being too tough on the situation, or are the other opportunities in that SBU overshadowing the issues at Alto Maipo? Or is the impact of Alto Maipo not as significant as I assumed? I realize you haven't provided specific details. Where might my perspective on Andes be off?

Let me clarify. First, remember that again Gener had a record year last year. The Alto Maipo issues are perspective. This is not current. The drop in the price of Gener stock is part of I think a decrease in prospective prices, the market is thinking about future prices. Now realize Gener is fully contracted through 2023 and 50% thereafter, realizing also that Gener is taking on a very large market share of commercial and industrial contracts. So Gener is a strong investment-grade company. Now talking about Andes itself, we had a very good year in Argentina. We have 3 gigawatts of excellent assets in our Argentina, we’ve always had. We’ve had relatively low debt in Argentina. So to the extent that the wholesale market has liberalized in Argentina and dollarized, this has been a positive for us. Also realize that AES Gener is about 30% Columbia and 30% hydro in Chivor. So Andes is an SBU; it’s much more than just Alto Maipo, and you realize that you're talking about, in total, almost 7 gigawatts of capacity that you have in Andes and Alto Maipo being 500. So the important thing I think is to resolve Alto Maipo to decrease the uncertainty, and I would expect to have a positive reaction in terms of Gener stock and hopefully AES stock as well.

So really Andes will contribute again; realizing you're not breaking the 8% to 10% down by SBU. But you foresee Andes contributing through that 8% to 10%, just along with U.S. and MCAC, correct?

I'd say certainly we don't see it as a drag. I mean, we have interesting renewable opportunities in the region and that even Gener has solar projects now under construction. So there is a lot of opportunities in the region. And what we are looking forward to is resolving the issues of Alto Maipo and having certainty, and getting past that and really focus on the other projects in the future.

Andrés, I'm a little confused. In the press release, it says that ASC is classifying Eletropaulo as a discontinued operation. And then Tom said that it is going to be deconsolidated. My understanding was it was going to be deconsolidated, not sold. So is there a change in status of Electropaulo?

It’s both deconsolidated and classified under discontinued operations. This means that our revenues, operating costs, and other factors do not impact our financials, making them easier to understand, especially considering our debt and unfunded pensions. Furthermore, since it's classified as a discontinued operation, it indicates that we will proceed with our strategic shift regarding Electropaulo and evaluate our ownership interest.

So at some point, it would be up for sale?

I don't want to get too specific; it’s a public company, but I believe that’s being discontinued operations, and you can interpret it from there.

Make our own assessment, okay. Andrés, it sounds like AES is moving much more towards a carbon de-risking portfolio in the U.S. And so it's interesting, the development of sPower going forward. Would it be advisable at some point for AES to sell IPL and DPL and use that capital to bolster sPower’s development program and maybe do further renewable acquisitions in the U.S.?

To put carbon de-risking in perspective, we are taking a balanced approach. We recognize that coal can still have a role in certain markets for the foreseeable future. For instance, in our U.S. operations, IPL will reduce its reliance on coal from 79% to about 44% once we launch Eagle Valley. This represents our long-term strategy for de-risking. Additionally, we have discovered ways to operate our coal plants more efficiently, reducing usage from 50% or 40% down to around 20%. This, combined with the availability of inexpensive renewables at certain times of the day, will help us lower our carbon footprint while still utilizing our coal plants as large batteries. We believe that IPL or DPL are integral to this strategy and complement our various financing sources and growth opportunities. Currently, we view these utilities as essential to our business model.

Last question to Tom, the interest deduction restricts on the U.S. portion. Obviously, back-of-the-envelope calculation, it looks like about $20 million to $30 million would not qualify out of about $265 million. Is that about right, are we in the same ballpark?

It’s challenging to evaluate the tax aspect of the situation independently. Our U.S. income that could help offset our interest is lower than that amount. It’s important to note that the income from our utilities and certain other investments isn’t available to reduce interest, but the explanation is more complex than that.

I think it’s in our interest…

Just an unregulated stuff...

But as always, it’s not quite that simple. I would say just coming down meaningfully, our interest last year was well over 200 million. I think as we see it after paying down a billion dollars of debt and also looking at some other opportunities, we’ll be under 200 million on a run-rate by mid-year. So next year, we expect interest to be maybe 180 million or something in that ballpark. By reducing debt, we’re meaningfully limiting the issue.

So next year how much of the interest expense would not qualify for the reduction?

I think there is a lot of moving parts that started baking all together and said $0.05 to $0.08. And once again, it’s hard to look at. Even some as before and some of the issues we talked about access taxes on foreign could be an offset in part to the interest. So it’s a lot of different equations but just to boil it down, we think $0.05 to $0.08 for the next two years or three years.