AES Corp (AES) — Q3 2018 Earnings Call Transcript

Thank you, Brendon. Good morning and welcome to our third quarter 2018 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; Gustavo Pimenta, Deputy Chief Financial Officer; and other senior members of our management team. With that, I will turn the call over to Andrés.

Good morning everyone and thank you for joining our third quarter 2018 financial review call. We had a strong quarter demonstrated by solid financial results and excellent progress towards achieving our strategic goals. We continue to improve the returns from our existing portfolio and position AES for long-term sustainable growth. Our third quarter adjusted EPS of $0.35 puts us at $0.88 for the first nine months of 2018, which is 35% higher than the $0.65 we earned in the same period last year. We remain on track to achieve our 2018 guidance and longer-term expectations. Tom will discuss our results in more detail after I provide a review of our strategic accomplishments. I will structure my remarks today around four overall themes: first, optimizing our returns; second, our growing backlog of renewable projects; third, advancing our LNG strategy; and finally, deploying new technologies. I have discussed these themes in the past, and on this call, I will provide concrete examples of how we're delivering on each in support of our overall strategy. Beginning on Slide 4 with optimizing our returns. We have been reshaping our portfolio to deliver attractive returns to our shareholders while reducing our overall risk and carbon footprint. As can be seen on the slide, our renewable investments are projected to produce low-to-high teen IRRs across all markets assuming conservative terminal values. Specifically, as you may recall, we bought sPower in 2017 at a high single-digit return; since then we have taken steps to enhance that return including refinancings and operational improvements. This morning we announced that we have agreed to sell 24% of sPower's operating portfolio to Ullico. As a result of all of these actions we have improved our expected return on sPower's operating portfolio to around 13%, and we will use the proceeds to help fund new solar and wind projects in the U.S. Now turning to our backlog of renewable projects beginning on Slide 5. Our robust pipeline continues to increase driven by our focus on select markets where we can take advantage of our global scale and synergies with our existing businesses. So far this year we have signed 1.9 gigawatts of long-term PPAs for renewable projects which is 93% of our internal projection of 2 gigawatts for the full year 2018. We are on pace to sign 2 to 3 gigawatts of new PPAs annually for 2019 and 2020. We expect this capacity to be split 50-50 between the U.S. and internationally, and similarly between solar and wind. By the end of 2020, we expect to have signed 7.5 gigawatts of new renewable PPAs, all of which will be online by 2022. To complement our strategy to invest in attractive renewable projects and expand our environmental, social, and governance-related disclosures; next week we will be releasing a climate scenario report that complies with the guidelines of the task force on climate-related financial disclosures and includes updated carbon intensity reduction targets that reflect our renewable growth. Now onto Slide 6 and how we are capitalizing on our existing footprint. As you may recall, on our last call, we introduced our green blend and extend strategy. With this win-win strategy, we leverage our existing platforms, contracts, and relationships to negotiate new long-term PPAs with higher returns than we would otherwise get through a bidding process. We see potential opportunities to execute on this strategy across many of our markets including Chile, Mexico, and the United States. In the near term, we see an addressable universe of 7 gigawatts across our portfolio which could substantially increase as other markets capitalize on the economic benefits of renewables. Turning to Slide 7; we have signed two green blend and extend contracts for a total of 576 megawatts in Chile and Mexico. The contract in Chile was the first of its kind; we signed an 18-year contract with an existing customer for 1,100 gigawatt hours of annual delivery which is equivalent to 270 megawatts of renewable capacity. This will lengthen AES Gener's average contract life to 11 years, replace 5% of AES Gener's total load, and 40% of the thermal PPAs expiring in 2022. We are also implementing a similar contract in Mexico with our off-taker Penoles. To help Penoles gradually replace pet-coke with greener, efficient renewable energy, we negotiated a 25-year PPA to build the 306 megawatt Mesa La Paz wind project leveraging our strong existing customer relationship and our global renewables capabilities. This will increase our average contract life with Penoles from 8 years to 17 years. In summary, we are very encouraged by our progress to-date on the green blend and extend concept, and we are well positioned to take advantage of this significant opportunity. Turning to Slide 8; since our last call we have made good progress on the 3.9 gigawatts of projects under construction. Currently, 80% consists of large conventional projects which are significantly more capital intensive and complex, and have longer lead times. Our conventional generation projects under construction are progressing well and the majority of the capacity will be completed by the end of next year. I will now review some of these construction projects on the following slides beginning on Slide 9. Construction on our 1.3 gigawatts Southland combined cycle plant in Southern California is proceeding as planned, on time and on budget; and we are now well over halfway complete. All six turbines and generators are in place and the focus is now on the installation of piping and electrical components. The project is expected to be operational by the first half of 2020. OPGC2 in India and Alto Maipo in Chile are both advancing as planned. OPGC 2 is 97.5% complete and is expected to come online later this year. Alto Maipo is 70% complete with the tunneling work 61% complete, and is expected to come online in the second half of 2020. The remaining 20% of our projects under construction are solar, wind, and energy storage which compared to the construction of conventional generation are generally much less complex. As I previously discussed, the vast majority of our future construction will be renewables. Currently, our 776 megawatts of renewable construction projects are expected to come online through 2020. In Hawaii, we're delivering two solar plus storage facilities for a total of 47 megawatts of solar and 170 megawatt hours of 5-hour energy storage on the island of Hawaii. These pioneering projects will serve base load energy needs including satisfying 24/7 demand with renewable power. The first of these projects is under construction and the second for the U.S. Navy is expected to begin construction later this year. Once both of these projects are complete, they will represent the largest solar plus storage installation in the world. Furthermore, we were recently awarded two additional projects with 90 megawatts of solar plus 360 megawatt hours of energy storage, also in Hawaii. We are currently finalizing the PPAs for these projects and will provide additional details once the contracts are signed. To summarize, as shown on Slide 12, we expect 11.3 gigawatts of new capacity through 2022. This includes our 5.7 gigawatt backlog, as well as 5.6 gigawatts of additional renewable PPAs we expect to sign through 2020. These projects will be key contributors to our growth through 2020 and beyond. Turning now to our LNG strategy on Slide 13. As you may know, we have 2 LNG regasification terminals in Central America and the Caribbean with a total of 150 tera Btus of LNG storage capacity. These terminals were built to supply not only the gas for our co-located combined cycle plants but also to meet the growing demand for natural gas in the region. This excess capacity provides us with significant upside potential as the fixed cost of the terminals is covered by our captive requirements. We are making good progress on the commercialization of this capacity, in fact, this year we have signed three contracts yielding $35 million in additional annual margin to AES beginning in 2021. With these sales we will monetize much of our excess capacity in the Dominican Republic. However, we have options for further expansion in the Dominican Republic as needed. In Panama, the storage tank at our recently inaugurated Colon power plant and regasification terminal will come online in mid-2019, and approximately 60% of the terminal's capacity is still available. This represents an additional potential margin of more than $60 million annually for Colon. Together with our strategic partners, we are already making progress on selling natural gas to third-parties in Panama. The expertise we have gained in the Dominican Republic and Panama has positioned us well in Vietnam where we have signed an MOU to build a similar LNG regasification and storage facility. This facility would have an annual storage capacity of 300 tera Btus and provide much-needed natural gas to serve a rapidly growing market. Although in the early stages, we will provide updates as this project progresses. Now onto new technologies on Slide 14. We are a leader in deploying new technologies such as battery-based energy storage, drone applications, and digital customer interfaces. These initiatives have already allowed us to reduce O&M costs, improve customer experiences and deliver innovative solutions to the market. As one example, we are already saving $10 million annually through drone applications alone. By expanding our use of digital technologies, we expect to further reduce O&M and back-office costs by an additional tens of millions of dollars. Year-to-date, Fluence, our energy storage joint venture with Siemens, has been awarded more than 250 megawatts of new projects. Fluence has now delivered or been awarded 75 projects in 16 countries with a total capacity of 701 megawatts. Furthermore, as you might have seen, last month we appointed Sanjeev Addala for the newly created position of Chief Information Digital Officer. Sanjeev comes from GE Renewable Energy where he served as Chief Digital Officer. We've already done a lot of work to prepare for digitalization, including the strategic investment in Simple Energy earlier this year. Simple Energy is the leading provider of utility branded online energy efficiency marketplaces and customer engagement software in the U.S. Finally, after 6 years as CFO, Tom will be stepping into a new role to help us secure greater amounts of third-party financing through innovative means. Tom has played a key role in our growth in U.S. renewables, and considering the size of our pipeline and the importance of sourcing capital effectively, I have asked him to take on this new role. We plan to address this effort in more detail when it's further along but would note that we view it as the next step in our partnership strategy which has already raised approximately $3 billion and proved returns on our invested capital. Tom will be succeeded by Gustavo Pimenta, who many of you have met over the years; for the past nine months he has served as Deputy CFO, and before that as CFO of several of our Latin American operations, including the publicly-listed companies of Eletropaulo and AES Tietê in Brazil. The financial discipline and rigor that Tom and I have embedded in our capital allocation framework will of course continue unabated with this transition. Now, I will turn the call over to Tom to discuss our financial results, capital allocation, guidance, and expectations in more detail.

Thank you, Andrés. The past 6 years as CFO have been a rewarding time and I'm truly proud of the company's transformation. The business is significantly derisked and on an attractive growth path. I'm also pleased that I've helped lead our growth in renewables and I look forward to my new challenge where I will be focused on raising third-party capital to systematically and cost-effectively help finance this growth. Now, I'd like to cover our third-quarter results, improving credit profile, and capital allocation. As shown on Slide 16, EPS was $0.35 for the quarter reflecting higher contributions from South America and U.S. in utilities, a lower quarterly tax rate and debt paid down. Offsetting these were the sales of our coal plants in the Philippines and Kazakhstan. Turning to Slide 17; adjusted PTC during the quarter was $327 million, an increase of $89 million. I'll cover our results in more detail over the next four slides beginning on Slide 18. In the U.S. utilities SBU higher PTC was primarily driven by our generation of resources which came in from a long-term agreement in May. Since then AES has benefited from the facilities location by selling energy in the constrained region of the California market. These plants are being repowered under a long-term contract starting in 2020. Regarding our regulated utilities, the Indiana commission concluded IPL's rate case last week, the ruling was consistent with the prior settlement agreement, and also our expectations. This constructive outcome together with DPL's rate case in September leaves our U.S. utilities well positioned for the future rate-based investment in T&D infrastructure. IPL has grown its rate base considerably over the last few years and looking forward, there is still potential for growth in the mid-single digits. At DPL where the focus has been on restructuring the business, we could see growth in the high single digits. The captured portion of this potential growth DPL will be filing its smart grid investment plan by year-end. In South America, PTC improved on the strength of record high quarterly results at AES Gener driven by higher contracted sales, prior year plant outage and lower interest expense. Our results also reflect higher contract prices in Colombia, as well as higher tariffs in Argentina following the 2017 reset. In MCAC, lower PTC was largely driven by an event at our Andres plant in the Dominican Republic. In early September, a lightning strike caused major damage to the plant forcing it offline for about three weeks. The local team has performed admirably and we expect to get the plant back up to roughly 75% load within the week. Further measures are underway to return the plant to full capacity by the first quarter. Including reserves for property damage taken in our captive insurance business, the total impact of the third quarter was about $0.03 which backed this to be the bulk of the overall impact and the plant is fully insured. Filing new raiser, our results primarily reflect the sale of our businesses in the Philippines and Kazakhstan. Based in part on our strong year-to-date results we are reaffirming our guidance for 2018. Relative to fourth quarter 2017, this year's fourth quarter will be impacted by a higher expected tax rate compared to only 18% last year, as well as an unplanned outage at our Warrior Run plant that have just been completed. Regardless, we feel very confident with our guidance for the year. Turning to our improving credit profile beginning on Slide 22; in the third quarter of '16 we established a goal of rich investment grade. At that time we had $5 billion parent debt and a debt-to-EBITDA coverage ratio of 4.9 times. Since then we've reduced debt by almost $1.2 billion, and we expect to end this year with a ratio of 4.3 times. Our goal is to achieve investment grade metrics of below 4 times next year which positions us well to achieve an investment grade rating by 2020. As shown on Slide 23, we're now rated BB plus by all three agencies, just one notch from investment grade. We believe these credit improvements are helping us not only to reduce our cost and debt and improve our financial flexibility but also to enhance our equity valuation. Now the 2018 parent capital allocation on Slide 24. Beginning on the left-hand side, sources reflect $2 billion of total available discretionary cash, including $600 million to $675 million of parent free cash flow. Sources also reflect $1.3 billion in net asset sale proceeds which includes closed sales in the Philippines and Brazil in the recently announced sell-down of sPower's operating portfolio. Another use is on the right-hand side; including the 8.3% dividend increase we announced in December will be returning $345 million to shareholders this year. We've used over $1 billion to reduce parent debt including revolver drawings, and we plan to invest $300 million in our subsidiaries, primarily for projects under construction leaving about $100 million of unallocated cash. Finally, moving to our capital allocation from 2018 through 2020 beginning on Slide 25. We continue to expect our portfolio to generate $4.2 billion discretionary cash which is more than 40% of our current market cap. About half of our discretionary cash is expected to be generated from parent free cash flow, the rest comes from our $2 billion asset sale target, $1.3 billion of which is completed or announced. Now to the uses of this discretionary cash on Slide 26. A quarter of this cash has been allocated to the current dividend of $0.52 per share. As you know, our annualized dividend growth rate has been 9% for the last three years. Looking forward, we expect the dividend to grow in line with the industry average and remain an important part of our value proposition. We review our dividend annually worth our Board in December. Back to the slide, $1.7 billion is allocated to debt reduction, of which 70% is completed. We're also planning to fund $950 million of our equity investments in our backlog in projected PPAs. Once completed, all these projects will contribute to our growth through 2020 and beyond. With that, I'll now turn it back to Andrés.

Thanks, Tom. Before we take your questions, let me summarize today's call. We are delivering on all of our financial and strategic objectives. We have grown our backlog of projects to 5.7 gigawatts, of which 1.9 gigawatts are long-term renewable contracts signed this year. We are successfully commercializing our excess LNG storage capacity. We are on-track to achieve investment grade metrics by 2019 and ratings by 2020. Our portfolio will be generating $4.2 billion in discretionary cash from 2018 through 2020 which we will redeploy consistent with our disciplined capital allocation framework. Finally, we remain confident in our ability to deliver on our 2018 guidance and our 8% to 10% average annual growth in adjusted EPS and parent free cash flow through 2020. Operator, we are ready to take questions.

Now that we have nine months of the year behind us, just one quarter to go, and given the kind of year-over-year growth you've already reported through the nine months; is it fair to say the higher tax rate notwithstanding that we are probably trending right now above the midpoint of the full year guidance because you should have the $0.10 band and we only have one quarter to go, just wondering if you could narrow that down a bit given that nine months is already behind us?

As usual, I think we'd prefer to stay away from range within the range. I think we're very comfortable with the range. As I pointed out, remember the businesses are performing well. We've had a couple of headwinds, the most notable of which is the DR that we've recovered well in that, and that's only $0.03. I did point out the unusually low tax rate in Q4 of last year, so on a year-over-year basis that will normalize but I think it's better just to leave it there; we're very comfortable with our range.

I have a second question regarding the 24% sell down at sPower. Can you clarify how much net income is affected by that sell down? Additionally, Tom, considering your new role, should we expect to see more activities like this in the future as you finance your renewable growth? Specifically, as projects launch, will you likely sell down minority stakes and then reinvest? Is that the approach you plan to take?

In terms of the net income that is affected, I believe it's a modest amount and we remain optimistic about our growth trajectory for 2018 and an additional 8% to 10% through 2020. Regarding my new role, we have made significant progress on partnerships, as Andrés mentioned, totaling over $3 billion. This reflects the type of investor and transaction we aim to pursue on a more systematic basis. Instead of handling it case by case, we want to explore opportunities with various investors and capital that can be available with careful planning.

Andrés, as you look at slightly longer term outlook for the company, what is the visibility that you're seeing right now to sustain your growth rate beyond 2020? As you mentioned, the larger projects are going to be less important but renewables are going to pick up; so what's your line of sight or visibility for your growth rate as we look beyond 2020?

We are optimistic about our long-term growth potential. Several of our projects are set to launch between now and 2020, with Southland being a key example. Additionally, we have numerous renewable energy projects coming online. We are confident about this trajectory, particularly with initiatives like the green blend and extend with AES Gener. We anticipate continued growth and will offer more guidance during our fourth quarter call, including a long-term outlook. As previously mentioned, we foresee solid growth extending beyond 2020.

Tom, we would like to hear more about the innovative capital raising effort that you are leading. You have previously explored various less conventional opportunities for selling down; how does this latest effort differ from the minority sales you've traditionally conducted?

I believe the approach is quite consistent overall. As Andres mentioned, this represents the next step for the company and presents another challenge for me. We have established numerous partnerships, some strategic, while others involved large financial entities. Our goal is to build on that foundation in a more systematic way, ensuring that capital is more readily available rather than being allocated on a just-in-time or individual basis. We aim to engage a diverse range of investors, many of whom manage substantial assets and have a competitive cost of capital, and are very interested in long-term contracted assets, which aligns with our focus. It's important to note that this isn't reflected in our current numbers for AES; it would all be additional potential for AES. As Ali mentioned, the Ullico transaction is quite revealing, as it indicates that they would aim to pursue this approach on a larger scale with various investors. I should emphasize that my focus will not be on public market alternatives.

Maybe to follow up on the financing front; I know you mentioned rolling things forward next year but you also mentioned growing the dividend more in line with the industry average. Why is that the case and how are you considering financing the growth in the balance between earnings growth and ongoing dividend and dividend growth at this point?

We will discuss the dividend with the board in December. Over the past five years, we have increased the dividend by approximately 27%, with nearly a 9% growth in the last four years. We anticipate that future growth will align more closely with the industry average. Regarding capital availability, this new initiative presents an opportunity for growth. We've successfully transformed the company towards renewables and advanced technologies, partly by leveraging third-party capital. Moving forward, we recognize the importance of economies of scale and aim to be a low-cost constructor and developer. We have $4.2 billion in discretionary cash available from 2018 to 2020, and this is in addition to that amount. We are optimistic about our guidance for the next couple of years, which remains resilient in light of potential challenges in Bulgaria. We also see opportunities in securing more third-party capital, as we have successfully done before. Additionally, we are looking to commercialize more of our LNG storage capacity. We have utilized much of the excess capacity in the Dominican Republic, but there remains potential for further development, including various logistics options, parking floating storage units, or even constructing a second tank if demand continues to rise.

I would like to ask if you can provide a clearer definition of the EPS upside from the LNG updates today. Additionally, could you clarify the benefit of shorting the Argentine peso in 2020 compared to your initial target range of 8 to 10 for the FX fluctuations we've experienced year-to-date?

Year-to-date, you're correct that there are several factors affecting the Argentine peso. We had to recognize a loss in the previous quarter due to some tax assets and our significant back-office operations in the region. While we are slightly short on the Argentine peso, it's not a major concern moving forward. That said, the peso has appreciated recently, and the situation has stabilized. When I speak to many of you, I emphasize that a key leading indicator to monitor is our agreement with the IMF. That agreement is currently in place and being executed effectively, so we view the regulatory developments there as a positive sign. Regarding potential upsides, I don't want to elaborate beyond what I've previously stated, but AES Panama has an upside of about $60 million on an ongoing basis, assuming we can utilize all our storage capacity like we do in the Dominican Republic. Additionally, as I mentioned earlier with Total, we are making advancements in selling gas to third parties, and we will communicate with you as any contracts are finalized.

Can you provide us with an update what is the asset sales target right now? Maybe you have a view on what's the targeted number of countries that you're going to be exposed to? And also in a pie chart with allocation of excess funds, you talk about some potential incremental debt pay down; if you can explain what that's for and then what's roughly the use of the remaining cash?

Let me address the first part, and then I'll hand it over to Tom to discuss cash allocation. We announced a program of around $2 billion. So far, we've completed $1.3 billion, and the primary items include the sale of Eletropaulo and another deal in the Philippines that have been finalized. We are also expecting some funds from the 24% sale of sPower to Ullico. This leaves us with about $700 million to complete the program. We can achieve this through various means, such as selling assets in certain countries or businesses. As is our policy, we do not disclose specifics until they are finalized because we believe that is the best approach for our team. For instance, in the Netherlands, we've divested our major asset there and are left with energy storage, which is part of our strategy to simplify our portfolio. Now, I’ll pass it to Tom to discuss the possibility of further debt repayment.

So the $450 million on Slide 26 may be about 40% of that which would be without asset sales, meaning just to continue to improve our metrics from 4.3 to under 4 and meet our investment grade target objectives. The other 60% would be related to asset sales; that amount can vary based on how much cash is generated from earnings or equity from the asset sales, but we estimate it to be around $250 million to $300 million as a placeholder for asset sales. As you know, we don’t comment on asset sale candidates until everything is finalized and we are very close to making an announcement.

And just one follow-up; you continue to expect the rich investment grade metrics by the end of 2019. Can you tell us if you have the discussions of credit agencies that give you a sense when those potential upgrades would happen, would we really have to wait until 2020?

We have been discussing this with the agencies for the last two to three years. Our parent cash flow numbers are very consistent, and during our meetings, when we review our commitments and achievements, the narrative is quite clear. Generally, the agencies have been timely; they might be able to expedite things, but they have recognized our credit improvements and our proactive approach, which comes from our finance team and the Board. Our goal is to achieve the targets next year, and while we anticipate some seasoning, we will advocate for a faster process if possible to seek sooner upgrades. From a planning perspective, we believe it is reasonable to meet next year's targets, experience some seasoning, and receive the ratings by 2020.

I would like to add that there is not only the numerical aspect but also the qualitative aspect. Now that we're over 80% contracted in dollars, as our contract length increases and we complete the construction projects and move further into renewables, we have significantly reduced our commodity exposure and our weather exposure as well. For instance, the gas coming online in Panama decreases our weather exposure by 50%. Therefore, if you look at it, it's not just quantitative but also qualitative where we're at, and we believe that's an important component in our discussions with the rating agencies. This is why we feel confident that with some appropriate seasoning, we're on track to become investment grade.

Do you have any information on the pricing of the sPower sell down you can provide us?

I think it hasn't closed Steve, so we will not be talking more and more in detail about that at this point. What I could say is that like all our sell downs, it helped us increase our return on our invested capital which is part of the purpose of what we've been doing, we sell down and obviously to people who have a lower cost of capital than we do, and we provide the development and the economies of scale.

Just maybe some color as we think about the renewable backlog growth. The 13% return that you're now earning on the operating asset you've bought; is that a rough kind of target for what you kind of see coming through the growth backlog or how should we think about that aspect?

I believe we have differentiated our approach by market and product type. From the U.S. perspective, the range you've mentioned seems appropriate. We anticipate higher returns outside the U.S., particularly from our green blend and extend product. We are actively exploring ways to enhance our returns and believe they remain competitive. We are putting considerable effort into reducing project costs through scale and synergies with our existing assets. Our strategy includes green blend and extend, our local platforms, our achievements in the U.S., and continued engagement with third-party capital. We expect all these elements to help us maintain or exceed the ranges we have stated or achieved thus far.

Do you have any sense of when we might get more clarity on the new structured third-party venture that Tom is leading?

It will probably be next year, to be honest. We are working on ramping things up, and we also need to be careful about how we communicate our progress, but it will likely be in the second quarter of next year.

And finally, you mentioned the DNM LNG project, which appears to be quite significant. Can you provide a bit more detail on that project and what steps are necessary for it to officially become part of your backlog?

Right now, it's preliminary; we have signed a Memorandum of Understanding. This was part of President Trump's visit to Vietnam and is one of the key projects that were initiated; it's a joint venture with Petro Vietnam, which gives us a solid partnership to start with. This project focuses on LNG storage and regasification and is designed to meet a significant portion of the existing demand, making it much more utilized from the outset compared to our previous projects. It will replace offshore gas, which is depleting. This LNG will serve as a substitute. If everything progresses as planned, which is still in the preliminary stages, we anticipate it will be operational around 2023. There are additional power blocks that might be associated with this, though we currently do not have any signed agreements for them. However, considering our successful track record in bringing gas to Central America and the Caribbean, it seems like a natural extension. We also have a larger platform company already operating successfully in Vietnam.

You touched on a couple of items in your prepared remarks but I was wondering if you can give us a sense as to kind of performance in 2018 so far from existing assets, and what might not repeat in 2019; that lightning strike I think was one of them. But I'm particularly interested in Southland and the ramped up performance of that?

You've touched on I'd think two items. I mean that certainly, Southland, it was a capacity constraint and we were able to dispatch profitably from that plant. I think that the case of the lightning strike was also very much unexpected and is a very odd circumstance, the way it happened. But those I'd say were the most two, I'd say in general our operational performance has been good this year. So other than some lumpiness in the tax rates, I don't expect any significant differences for next year; hopefully, no lightning strikes in this case but perhaps we had a little bit of the offset in the case of Southland. I don't know Tom, if you want to add anything.

No, I think that's fair. I think once again, relative to some prior years, we're explaining some things with hydrology and other things. I think the businesses are performing very much on target.

I may have missed this earlier, but Tom, you mentioned that you wanted the dividend growth rate to align with the industry average. Can you provide more details on that? Also, is the payout ratio a consideration, and if it is, how do you define it?

I believe you can assess the industry average by looking at companies typically within the utility sector, which we consider a reasonable benchmark. It will be below 9, but it's still a strong figure and represents a solid return when you factor in both dividend growth and earnings growth. Typically, we allocate about half of our parent free cash flow to the dividend. While we don't have a specific payout ratio, the feasibility of the dividend is generally based on long-term sustainable free cash flow from the parent, which has been around the 50% mark. I think this figure is more relevant than earnings growth.

And given the investment kind of horizon that you have right now versus kind of where you've been for the past couple of years, is it fair to say that you have competitive usage of that capital that you maybe didn't have before?

Generally, we believe that dividend growth is an important aspect of our value proposition. As we consider our backlog, the two gigawatts of renewable projects are in place, and we anticipate reaching 2.5 to 3 gigawatts over the next few years, which seems very achievable based on our current run rate. This suggests that we can expect around $300 million to $400 million of AES equity when accounting for leverage, U.S. tax equity, and various partnerships. Therefore, as our parent free cash flow approaches or exceeds $800 million by the end of 2020, we believe we can manage some modest dividend growth while also investing in our businesses.

Chris, I'd also add in sort of the longer time horizon; we'll also be doing less than pay down once we reach investment grade. So more of the credit improvements will come from the growth in our cash flow rather than that pay down. We've done the heavy lifting, I mean if you look at that chart, you now have well over $1.2 billion that we've already done in terms of debt pay down this year; so we'll have more cash available for other things.

It seems like AES is planning to exit the coal-fired generation business, at least for new construction going forward; am I making too much of a conclusion here?

What I would say is that we have been decreasing our coal-fired generation as a part of our fleet, having retired or sold over 3 gigawatts this year. We are planning to build between 2 to 3 gigawatts of renewable energy each year moving forward. Our report will be released next week, and we can discuss that in more detail then. Overall, our renewables are expanding while we are either selling or shutting down unprofitable coal operations, which represents a natural transition. We will achieve our goals by adhering to sound business principles. Additionally, we need to complete the coal plant in India, OPGC 2, which will likely be the last coal plant built by AES. The company has undergone a significant transition; a decade ago, coal was our primary strength, but now we are focused on renewables, new technologies, and integrating existing thermal or hydro capacity with renewable sources. It is important to recognize the need for capacity, not just energy, and our approach of blending and extending green initiatives helps us combine capacity with energy.

I know a couple of years ago, AES was pursuing opportunities in Vietnam; is it safe to say that this will no longer be the case going forward?

Yes.

Can you layout for us what the global opportunities sat for LNG and renewables that AES is pursuing going forward?

I find it somewhat challenging to assess the current addressable market for us. We have identified 7 gigawatts of green blend and extend opportunities in the three markets mentioned, which are somewhat exclusive to us. These involve existing contracts that allow us to incorporate renewable energy and extend the duration of those contracts. In many situations, we can offer new renewable power at a lower cost than the variable expenses associated with burning coal in those units. However, we still hold the capacity contract for the coal, allowing us to pair capacity with more affordable renewable energy. This situation could expand significantly as renewable penetration increases in other markets. It’s important to note that most of these opportunities are not heavily reliant on subsidies; they are primarily influenced by the cost of new renewable power compared to the variable costs of existing thermal power in certain markets. In terms of LNG, particularly following the shale gas revolution in the U.S., we expect long-term low prices, along with sufficient liquefaction capacity. For instance, in the Dominican Republic, importing U.S. LNG instead of burning diesel and heavy fuel oil is saving the country around $500 million annually while also cutting carbon emissions by 4 million tons per year. This model could be replicated in the Dominican Republic. Vietnam is facing a gas shortage and requires additional gas supplies, making this a crucial project with significant interest. As we progress, we possess a strong project pipeline. One of Tom's objectives will be to explore how we can use our own capital to undertake more projects and improve our return on invested capital. There are plentiful opportunities available. However, I want to emphasize that we are not pursuing growth for its own sake; if we do not perceive a positive return, we will refrain from making those investments.

Just following on that LNG issue; it seems to me that it's rational for AES to go up the food chain, meaning, do a liquefaction facility. I understand there is land near Southland that AES owns, any chance of putting a liquefaction facility there?

That is not part of our plans. We don't view that as our core strength, as there is plenty of liquefaction available. Additionally, we have a strategic partnership with Total, which can offer our end customers structured projects that we cannot provide. This partnership has been very successful so far, and we are eager to continue it, but we have no plans to expand our operations into that area.

Once you obtain your investment grade rating, it could be argued that financing projects at the corporate level will be lower in cost for AES and its shareholders compared to using the subsidiary's banking facilities. Do you agree with this perspective? Am I imagining this, or is it just a matter of time before it happens?

It's interesting. I think that train left the station a long time ago; I think we're going to stick with our process to have the businesses, the projects stand on their own, and AES will provide equity. I think that's the way the house is built and I don't see it being rebuilt.

Thank you all. Our IR team is available for any follow-up questions. In next week we look forward to seeing many of you at the EI Conference in San Francisco. Thanks again, and have a nice day.