AES Corp (AES) — Q4 2018 Earnings Call Transcript

Thank you, Carey. Good morning. And welcome to our fourth quarter and full-year 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; Gustavo Pimenta, our Chief Financial Officer; and other senior management of our management team. With that, I will turn the call over to Andrés. Andrés?

Thank you, Ahmed. Good morning, everyone. And thank you for joining our fourth quarter and full-year 2018 financial review call. 2018 was a good year for AES, demonstrated by our strong financial results and excellent progress towards achieving our strategic goals. We delivered on all of our commitments, including our financial guidance, and hit key milestones on our strategy positioning AES for long-term sustainable growth. Some of our key accomplishments last year were that we reached the high-end of our expected ranges for both earnings per share and free cash flow; we achieved key investment grade financial metrics one year ahead of plan; we met our expectation of signing long-term PPAs for 2 gigawatts of renewable capacity and increased our backlog to almost 6 gigawatts; we accomplished key milestones on our 4.4 gigawatts under construction and completed construction of an additional 1.3 gigawatts; we introduced a longer-term target to reduce our carbon intensity by 70% from 2016 through 2020; we now expect to achieve a 50% reduction by 2022; and our world-leading battery-based energy storage joint venture with Siemens, Fluence, was awarded 286 megawatts of new projects bringing this total to 766 megawatts. Reflecting on our successful execution, improved visibility, and increased confidence in our ability to deliver, we are extending our longer-term outlook by two years, and now expect 7% to 9% average annual growth in earnings and cash flow through 2022. As a result of our strong performance in 2018, combined with our improved outlook, we expect to hit the high-end of our prior guidance range through 2020. Gustavo will discuss our 2018 results and guidance in more detail after I provide an overview of our strategy. Turning now to Slide 4. Our core strategy continues to revolve around the three themes: first, enhancing the resilience of our portfolio and lowering risk to deliver attractive returns; second, delivering on our backlog of long-term contracted projects to ensure profitable growth; and third, investing in cumulative technologies to maintain our competitive edge and market-leading position. Today, I will review the progress we've made this year in support of these themes and how we have positioned ourselves well for the future. Turning to Slide 5, we are seeing the benefits of many initiatives that began several years ago to de-risk our portfolio. AES today is a very different company than it was in 2011, doing business in 28 countries around the world with significant commodity exposure. Since then, we have focused our portfolio on roughly a dozen markets where we have a competitive advantage and we have reduced our overall exposure to foreign currencies, commodities, and hydrology by 70%. In 2018 alone, we paid down $1 billion in current debt, and we are on a path to attain investment grade ratings in 2020, supported not only by our financial metrics but also by the lower level of risk and higher quality of our portfolio. Our efforts to enhance the resilience of the portfolio have led us to focus increasingly on clean technologies. As you can see on Slide 6, we are significantly decreasing the carbon intensity of our portfolio. In November, we announced the carbon intensity reduction target of 70% by 2030 versus 2016 levels. Today, I am pleased to announce an interim carbon intensity reduction target of 50% by 2022. Our shift to renewables simply makes good business sense. It increases the longevity of our cash flows and allows us to attract a broader investor base. Another way we're decreasing the risk of our portfolio is by completing most of the large conventional projects under construction and focusing our future growth on renewable projects, which are less capital-intensive and considerably simpler to build. Turning now to our strong backlog of projects, beginning with our progress on those under construction on Slide 7. In 2018, we completed 1.3 gigawatts of new projects, including the Eagle Valley combined cycle gas plant and IP&L in Indiana, and the AES Colón combined cycle gas plant and regasification terminal in Panama, and 254 megawatts of solar and energy storage, mostly in the U.S. We still have another 4.4 gigawatts currently under construction and expected to come online through 2021. Our OPGC2 plant in India is in the commissioning phase and we expect it will be fully completed in May. Our Southland repowering project in Southern California is approximately 80% complete, and the project is on track to come online in the first half of next year. Our Alto Maipo hydroelectric project in Chile is advancing as planned and is now three-quarters complete with two-thirds of the tunneling work done. The remaining projects under construction are made up of renewables across our portfolio. As you can see on Slide 9, this capacity is split equally between the U.S. and internationally. All of these projects are going well and they are expected to come online in the next 18 months. We are particularly pleased with the speed at which we've been able to transition these projects from development to construction. Since our last call in November, we have broken ground on 721 megawatts of solar, wind, and energy storage. As can be seen on Slide 10, in 2018, we signed new PPAs for approximately 2 gigawatts of renewables, and we're on track to sign between 2 gigawatts and 3 gigawatts annually in the coming years. Turning to Slide 11, combining our capacity under construction with our long-term PPAs that are not yet under construction, yields our total backlog to 5.8 gigawatts. As we execute on our plan to sign 2 gigawatts to 3 gigawatts of new PPAs every year, we expect to bring a total of 12 gigawatts online by 2022. By then, we project that the U.S. will represent almost half of our earnings versus about one-third today. As can be seen on Slide 12, our renewable investments are expected to produce close to high-teen IRRs across all our market assuming conservative terminal values. We have some unique advantages that allow us to earn these attractive returns, which I'll discuss in the next few slides. Beginning on Slide 13, first, we have existing commercial relationships that we can leverage to drive new growth. For example, our green blend and extend strategy allows us to negotiate new long-term PPAs with existing long-term thermal customers. Through this win-win strategy, we preserve some value of our existing thermal capacity contracts while replacing a portion of thermal energy with long-term contracted renewable energy. In exchange, our customers receive carbon-free energy at less than the marginal cost of thermal power, while still benefiting from reliable capacity provided by thermal generation. In 2018 alone, we negotiated green blend and extend contracts for 576 megawatts in Chile and Mexico. A second advantage that we have for renewable growth is deep market intimacy. For example, AES Distributed Energy recently inaugurated the largest solar storage facility in the world, on the island of Kauai. The deposit was made possible by AES's long history in Hawaii and willingness to work with local stakeholders to meet their needs and goals. The project, which includes 100 megawatt-hours of 5-hour duration energy storage, will essentially serve as a source of baseload power for the island and deliver roughly 11% of its power. We recently broke ground on a similar second project also on the island of Hawaii with 14 megawatts of solar and 70 megawatt-hours of 5-hour duration energy storage. Third, our work with partners provides us with an important competitive advantage. We bring in partners to achieve economies of scale, fine-tune our portfolio, and improve our returns on invested capital. Our recent sell down of sPower is a good example where we agreed to sell 48% of our stake in sPower's operating portfolio, which, along with operational improvements and refinancing, have increased our returns to 13%. The sell down also provides us with funds to invest in sPower's 10 gigawatt development pipeline to earn similarly attractive returns. Turning now to Slide 16. In addition to our growth in renewables, we continue to increase our LNG business, which is displacing heavy fuel oil and diesel with cheaper and cleaner natural gas. As you may know, in 2018, we inaugurated our AES Colón combined cycle gas plant and LNG regasification facility in Panama, which will play a key role in supplying natural gas for the entire Central American region. Our LNG facilities in Panama and the Dominican Republic represent a total installed capacity of 150 terabritish thermal units to serve local and regional markets. The majority of this capacity is now under contract, and the remaining 55 terabritish thermal units are still available to drive future growth. As I mentioned on our last call, we are capitalizing on the expertise we have gained in the Dominican Republic and Panama by developing a similar LNG regasification facility and associated combined cycle power plant in Vietnam. Although, this long-term U.S. dollar denominated 450 terabritish thermal unit facility is in its early stages, we are making very good progress and it has the potential to contribute significantly to our longer-term growth for 2023. Turning to Slide 17. The third component of our core strategy is to invest in innovative technologies to maintain our competitive edge and market-leading position. As an example, in 2007, AES launched a small energy storage group that was the first of its kind. Today, energy storage is beginning to revolutionize the sector, and AES is at the forefront. Fluence, our joint venture with Siemens, was recently named the number one utility-scale energy storage integrator in the world by Navigant Research for the third time in a row. In 2018, Fluence was awarded 286 megawatts of new projects and is now the largest global energy storage provider by capacity in the world with a total of 80 projects in 17 countries. Turning to Slide 18, we're also implementing a corporate-wide digital transformation, including becoming a strategic investor in Simple Energy. Simple Energy provides a digital platform that allows our IP&L and DP&L utilities to accelerate energy efficiency and demand response programs, all the while improving customer experience. Simple Energy's digital platform serves not only AES's utilities but 40 other utilities in the U.S., with access to over 40 million end customers. Although not in our guidance, we expect our new digital initiatives to materially benefit both our top and bottom lines. We will provide more color as our digital strategy matures on future calls. Now, I'll turn the call over to Gustavo to discuss our financial results, capital allocation, 2019 guidance, and longer-term expectations in more detail.

Thank you, Andrés. Today, I will go over our 2018 results, including our credit profile and capital allocation. I will conclude by addressing our guidance for this year and expectations through 2022. As Andrés mentioned, we finished 2018 on a strong note, achieving the upper end of our expected ranges for all metrics and setting a solid foundation for growth through 2022. As shown on Slide 20, adjusted EPS was $1.24, reflecting higher margins from our businesses, particularly in the U.S. and utilities and South America's strategic business units or SBUs, as well as debt pay down at the parent. These positive drivers were partially offset by asset sales in the Philippines and Kazakhstan. Turning to Slide 21, adjusted pretax contribution (PTC) was $1.2 billion for the year, an increase of $160 million. I will cover our results in more detail over the next four slides, beginning on Slide 22. In the U.S. and utilities SBUs, higher PTC was primarily driven by DPL, which benefited from higher rates following the resolution of its rate case. Results also reflect high contributions from our U.S. solar business and an extended summer run at our Southland plant in California. Increased PTC at our South America SBU reflects higher contracted pricing in Colombia, as well as higher tariffs in Argentina following the 2017 results. Results also benefited from higher contracted sales and lower interest expense at AES Gener in Chile. Higher PTC at our Mexico, Central America and the Caribbean, or MCC SBU reflects a full year of operations at the DPP combined cycle expansion and higher spot energy prices in the Dominican Republic. Results also reflect the commencement of operations at the AES Colón CCGT and regasification facility and improving hydrology in Panama. Finally, in Eurasia, our results primarily reflect the sales of our businesses in the Philippines and Kazakhstan. Turning to our improving credit profile on Slide 26. Since we first established our goal of reaching investment grade in 2016, we have reduced the parent debt by $1.3 billion or 26%. This includes an additional $150 million repayment in December 2018, which is an acceleration of the debt reduction we had anticipated through 2020. As a result, we achieved a key investment grade financial metric of 3.95 times parent leverage, one year ahead of plan, providing us additional confidence in our ability to attain investment grade ratings in 2020. We believe this improvement in our credit profile is helping us not only to reduce our cost of debt and improve our financial flexibility, but also to enhance our equity valuation. Over the next few years, we expect that our credit metrics to show further improvement through growth in our current free cash flow, as well as modest additional deleveraging. Now to our 2018 parent capital allocations on Slide 27. Sources on the left-hand side reflect $1.9 billion of total discretionary cash generated in 2018, consistent with our prior expectations. This includes $689 million of parent free cash flow, just above the high end of our expected range. Uses on the right-hand side of the slide are also largely in line with our prior disclosures. The one notable exception is our $1.3 billion of cash allocated to parent debt reduction, which reflects the additional $150 million paid down in the fourth quarter. Now turning to our guidance on Slide 28. To-date, we are initiating guidance for 2019 adjusted EPS of $1.28 to $1.40. Growth this year will be largely driven by contributions from new projects and cost savings. More specifically, we expect to benefit from the completion of most of our large thermal construction projects with the expected commencement of operations at OPGC2 in the next few weeks and the first full year of operations at AES Colón in Panama; growth in renewables, including 1.4 gigawatts scheduled to reach commercial operations this year; a full year of contributions from the cost savings implemented in 2018; lower currency and interest expense due to completed and continued debt reduction; and a slightly lower effective tax rate of 29% to 31%. This growth will be partially offset by announced business exit in the Philippines, the Netherlands, and Oklahoma. To-date, we are also providing our outlook of 7% to 9% EPS and cash flow growth through 2022. We have extended this outlook by two years, which reflects improving confidence in our backlog and increased visibility of earnings and cash flow. One additional point regarding our longer-term outlook; the 7% to 9% growth rate, which is off a 2018 base, is in line with hitting the high-end of our previous 8% to 10% growth off a 2017 base through 2020. Consistent with our prior expectations, growth in the outer years is expected to be driven by projects currently under construction, which is Southland, the allocation of parent cash to global renewables growth, and increasing LNG sales in MCEC. I would also note a couple of additional business-related assumptions embedded in our longer-term outlook. First, regarding Maritza in Bulgaria. The plant continues to be dispatched in pace in a timely manner. Discussions related to our PPA are still in early stages and we are working to reach a mutually acceptable resolution. As discussed before, our outlook is resilient to any reasonably likely outcome. Second, we continue to see our U.S. utilities as well-positioned for future rate-based investment in T&D infrastructure. IPL has grown its rate base over the last few years. And going forward, there are these two opportunities for growth in the mid-single digits. At DPL where the focus has been on restructuring the business, we pursue growth in high single digits. To that end, since our last call, DPL has filed both its grid modernization plan and BMI extension. Together these filings aim to maintain DPL's financial integrity while bringing its customers the substantial benefits associated with the robust modernizing electric grid. Our guidance assumes that BMI is extended for two years from late 2020 through late 2022, allowing the company to meet its financial obligations while enabling its ability to grow its asset base through its marketable investments. Turning to Slide 29, parent free cash flow is expected to be from $700 million to $750 million this year, and it is also expected to grow 7% to 9% per year through 2022. Now to 2019 current capital allocation on Slide 30. Beginning on the left-hand side, sources reflect $1.1 billion of total discretionary cash, including $725 million of current free cash flow. Sources also include $320 million in asset sales proceeds with 107 in proceeds to the current from announced sell-down of sPower's operating portfolio, and a placeholder for an additional $150 million this year. Now to the uses on the right-hand side, including the 5% dividend increase we announced in December; we'll be returning $361 million to shareholders this year. We expect to allocate another $150 million this year to parent debt, largely to strengthen our investment grade metrics, and we plan to invest over $400 million in our subsidiaries leaving about $100 million in unallocated cash. Finally, moving to our capital allocation from 2019 through 2022, beginning on Slide 31. We expect our portfolio to generate $4 billion in discretionary cash, which is more than 35% of our current market cap. About 80% of this cash is expected to be generated from current free cash flow. The rest comes from our $2 billion asset sales target, $1.4 billion of which is completed or announced. Turning to the use of the discretionary cash on Slide 32. Roughly 40% of this cash will be allocated to shareholder dividends. Looking forward, subject to annual review by the Board, we expect that the dividend to grow 4% to 6% per year in line with the industry average. We expect to use $300 million for this production, including a portion to maintain credit neutrality as we pursue the final asset sales. We are planning to use $1.5 billion for our equity investments in our backlog and projected PPAs. Once completed, all of these projects will contribute to our growth through 2022 and beyond. The remaining $670 million of unallocated cash will be used to create shareholder value. With that, I'll turn the call back over to Andrés.

Thank you, Gustavo. Before we take your questions, let me summarize today's call. 2018 was a very good year for AES, as demonstrated by our strong financial results and excellent progress towards achieving our strategic goals. We are on track to attain investment-grade rating in 2020. We are completing our conventional construction projects. We are signing long-term PPAs for renewables, including successfully implementing green blend and extend through our backlog. Going forward, we will invest our growing free cash flow in a robust growth pipeline while maintaining the strength of our balance sheet and our competitive dividend. Accordingly, combining our annual growth and current dividend yield, we expect to deliver double-digit total returns to our shareholders through 2022. Operator, we're ready to take questions.

First question to start with Andrés, just again coming back to the basic assumptions underlying your '18 to '22 growth. To be clear on some of the comments you've made with regards to Bulgaria. Are you assuming that you continue to own that project through the full-year period and that the current economics stay where they are? It wasn’t quite clear what's baked into the assumption with Bulgaria, and then also related to that on the Ohio distribution rider. Can you give us some further thinking and your confidence level on why you think you will get the extension beyond 2020? Just in terms of any commentary or any conversations with the commission that would be helpful.

On Bulgaria, Bulgaria is in our forecast. As we said, our guidance is robust to any reasonably likely outcome there. So we feel confident in our guidance. It does include Bulgaria. As been said, conversations are in the very early stages. We think we have a very strong case. And certainly the plant is necessary for Bulgaria. It provides a lot of jobs locally, especially if you include the mining sector. So, yes, it's included. But our guidance is robust to any reasonably likely outcome. Regarding DP&L and the rider, I mean, basically what I can tell you, is that this has to do with the company achieving investment-grade. The company has plans for grid modernization, grid resilience. And we think those elements are necessary and likely to remain. So basically the outlook for DP&L in terms of improving the quality of new services is good and the monetization rider is part of that.

And then second question, just to clarify the fact that you're running at the higher end of your near-term '17 through '20. Would you attribute that to faster than expected success in your renewable strategy? Or what's driving you to that higher end at least in the near term?

I would say all of the above. I think we've been very successful on cost cuts. I think we've been very successful on the green blend and extend strategy. And as I mentioned in my speech, we're very pleased by how we've been able to transition projects from development into construction on the renewable side. So it's all of the above.

I'll still add, Ali, the LNG sale which is accelerating, so that's another important element of that guidance that we are providing.

And last question. I just wanted to be clear on the sources and uses that you've laid out as you fund this CapEx through 2022. Just to be very clear. You're not assuming or you don't see a need for external equity to support this program. The internal cash flow and asset sales should fund all your needs to support the backlog and the growth through 2022. Am I correct in that?

You are correct. So this is an unambiguous yes. The program is such that between our internally generated cash flow, including some asset sales, we fully fund our program and pay the dividends and also some modest debt pay down as well. So this does not assume any additional equity.

So I just wanted to follow-up a little bit more on the backlog and the capital allocation commitment. Just want to be a little clear about this or perhaps quite clear, both '19 and through the '22 outlook. How are you thinking about the net income contribution from the renewables growth as it stands today? You've got $1.5 billion broadly allocated and again I know that's not necessarily all for the renewables business. But how are you thinking about renewables' contribution specifically year-over-year into '19 and through '22 from the plan and/or what you've contracted today? However you want to characterize that.

Well, let me stand in big picture. Big picture is we have considerable capital tied-up in construction projects, which we will be cutting the ribbon from now through 2021. In many cases, we have contributed all of the capital that we need to contribute. So, most of our growth is coming from organic projects and just cutting the ribbon. So I want that to be perfectly clear. Second, you have to remember in our renewables program, half of this is outside the U.S. and the half that’s in the U.S., about 40% is win. So the contribution, for example, of HLBV is so far negligible, and it's not as big for us as it is for other people going forward. So in terms of the growth, as I said, a big contributor to this is the organic growth coming from the projects we have completed. In addition to the megawatts that I've mentioned, for example, we have completed the storage tank in Panama, which is going to happen about the middle of this year. So we have additional projects coming online from there. So with that I can pass it off to Gustavo, but I want to make absolutely unambiguous that we have very strong organic growth coming on. And given the distribution of our growth, you don't have things like HLBV outside of the U.S.?

If you examine our growth range of 7% to 9%, around 60% of that comes from the completion and reaching commercial operation dates of large thermal projects like Southland and OPGC, including a full year of follow-on projects. The remaining 40% is driven by the renewable sector, with half of that being international, primarily in the U.S., which has not yet become a significant contributor to earnings. One indication of this is that our current free cash flow is also increasing at a similar rate of 7% to 9% during the same time frame.

And just to make sure I understand this. So for '19, because I appreciate that HLBV nuance and just the timing in-service, renewable contribution is fairly limited to growth. But as you say, 40% of the overall 7% to 9% roughly, call it maybe a little bit less than $150 million of net income growth, is coming from renewables by the end of the '22 period?

Yes, and that's global renewable. So as Andrés mentioned, half of that 40%, call it 20%, is internationally, which doesn’t have that effect. And the local one then you have 40%, which is wind and then the rest is solar. So it's a subset of the 40% at the end.

So first on your credit metrics. Can give us a sense where credit agencies are now that you have reached the investment grade metrics? And also you are just showing that this one metric. Can you comment about FFO to debt or net debt-to-EBITDA and what those metrics are? And again, mostly because I'm trying to gauge when we should expect upgrade to the current rating?

So our base case is to get the metric in 2020. So it continues to be the case. We just started our process with the agencies. They are supportive. They've seen all of the efforts that were done in terms of reducing the leverage. From an FFO to debt, we are closing '18 at 18.8%, 20% is above the threshold. So that is why you see in our capital allocation another $150 million. I think what is more important is that from a capital allocation standpoint, most of the heavy lifting has been done. So we've paid down close to $1 billion of debt last year. So what is remaining in the plan is a relatively small amount, but rate agencies will take their time. So we are still expecting the actual action on the rating to be taken early next year 2020.

In your press release, you mentioned the additional sell-down of your stake in sPower. Is this related to Tom's efforts to establish structured relationships with a party that might acquire future ownership of operating assets? Or are we still waiting for an announcement, which is expected around the middle of this year?

No, this is not part of that. As we’ve mentioned before, Tom will be developing a more systematic approach to securing partnership funding for our projects. We will provide more details at the appropriate time. Over the past five years, we have raised $3 billion in partnership capital, and this initiative is an extension of that effort.

And then my last question, I remember you made comments about your dividends, the competitive dividend. Once you actually pay down all the debt that is required to the people of the credit agencies. I mean should we expect that the dividend growth will be commensurate with the earnings growth?

I think again, so stay tuned. We said that we would have competitive dividend growth. And so this is approved annually by the board. So stay tuned. But we're in that 4% to 6% range, which is the industry average. So we should expect this to be within the 4% to 6% range within the site, within the four-year period, and really validated by the board. So 4% to 6% is what we should expect.

Just to revisit a couple of the initial questions. You mentioned whether your plan would remain effective even if the BMR extension is not granted for two years. Considering the 7% to 9% growth rate, if the extension does not go through, would you still anticipate staying within that growth rate?

What I'd say is, look, we think we have a very robust plan. It's taking any potential downside. We have a number of potential upside. So certainly, we could have faster growth, for example, of our LNG sales, which are very attractive because we basically made the capital investments. So there's certainly a potential market there for that. Second, as I mentioned in my speech, we really haven’t incorporated all of the potential benefits from our digital transformation. So that has been a significant amount of cost cuts. I think we have a very good track record of overdelivering on cost cuts. But it also has significant revenue potential. So as we don't like to talk about these things until we really have them in hand. So when I look at that, this is a robust plan given I think any potential downsides or offset with potential upside, and these potential upsides are quite concrete, we feel. So stay tuned.

And there was no mention of the preexisting cost-cutting initiatives in this slide deck. I shouldn't presume that there's been any change?

No, there hasn’t. And in fact, we remain on track.

So the plan has been fully executed last year. So we are getting in '19 run-rate savings of $100 million, which was what we had disclosed before, so in line with prior disclosures.

And the $2 billion asset sell target is still in place, but you extended the overall guidance framework to '22. Does that imply that the asset, the pace of the asset sales is slowed or do you still expect to have the majority of those asset sales completed by 2020?

I'd say by 2020, we'll complete the $2 billion, what we expect, that's part of this plan. Going forward, we will continue to fine-tune our portfolio. So there may be additional sales but as part of the portfolio. So they may not be wholly exiting; they may be like we did it as far selling down a portion and reinvesting that money and higher return. So that remains part of our modus operandi going forward.

No, I get that, completely understood. I just wanted to make sure the pre-existing targets were still haven’t slipped and the answer to that is no they haven't...

No, pre-existing targets, not at all. We feel very confident about them. And we expect to execute on that.

And then on the targets for the renewables growth, they are quite robust. And it's a little bit of a blend and extend in that and then in your prior guidance, you had targeted 3,000 megawatts for '19. Now you're targeting 2,500. But you're targeting consistent execution over a longer period of time. And you have a higher end exit rate, exit number in terms of total aspirational growth in renewables. What should we look for over the course of this year to see that you're hitting your targets, because there was a bit of a deceleration in wins when we look at what you've executed in Q3 and Q4 of '18?

Greg, this has to do just with the timing of the signing of the PPAs. There has been no, from our point of view, let's say, feeling that we're going slower than we were previously. It's just a little bit of timing and making sure that we have these PPAs signed before we commence construction. So the way you can make sure that we're on track is just we will have the announcements of the growth, the milestones that we hit throughout the quarter. So again, green blend and extend has shown itself to be very robust, and we're actually doing very well there. And certainly our distributed LNG as the announcements we've had in Hawaii and other places, it is very robust. So, no, we really don't feel that we're decelerating. It's just a question of the timing, which these projects are going to come in.

I want to follow-up on some of the renewable financing comments that you've made so far. Just overall could you give us thoughts on how that effort is going? I don’t know if Tom is on the call or not. But where are you seeing the lowest costs, both in the U.S. and globally? And then your slide on the IRRs for renewables. Does that assume that you are tax-efficient or does that take into consideration any tax inefficiency that you have?

Let me see, so that’s multiple questions. Let's see. So first, Tom is not on the call. And what is assumed in these numbers is that they are tax-efficient, and what is assumed is, for example, I’d say mainly in the U.S. where we actually sell down a portion once it reaches operations and optimize it for operational and financial efficiency. So that's, I'd say, basically it. I think in the rest of the world, what we're seeing, especially for example in South America and in Mexico, is really the green blend and extend project itself. Again, you don't have a HLBV, you don’t have ITC, you don’t have some of the other elements that you have in the state that make it, let's say, a little bit more complicated accounting and less transparent to see through. So I would say it's basically that. We will continue to do what we've done. So we think this is very credible. We've done this and we will going forward. And different markets are progressing at different speeds. We certainly see that the combination of solar energy storage is coming into being and that’s an area where we have we think a real competitive advantage.

And then just going back to the IRR comment that you made. Does that mean that the numbers on that particular slide are hypothetical and your actual returns are lower than that? Or do those numbers take into consideration everything?

This is actual IRR, so cash-on-cash, so this is not ROE; it's actually IRR. So that's cash-on-cash real return.

And then just to follow-up to I think one of the earlier balance sheet questions. You mentioned that a year from now roughly is when you're thinking agencies might come back to the table here and revisit your ratings. Could you give us any color on how your discussions on business risks are going within that overall discussion?

Yes, sure. That's I think one of the upside and one of the positive feedback that we get. I think we continue to be a diversified portfolio, which is important for them, but more focused on markets with lower risk. So I think from that perspective, we get very good feedback from their agencies and it's an important component of our trajectory here. It's not only a question of the quality of our portfolio. So I did mention in my speech that, measurably our risks are down 70% over the last five years, to make very big something like Panama where we have 777 megawatts of hydro. In a dry year, we would be forced to buy in the market and therefore, energy would be high, energy to supply our contracts that are contracted. And now with Colón in place and natural gas coming into Panama, we have such that particular risk by about 80%. So the quality of the portfolio is backing up the numbers. I think that’s very, very important. In fact, what's underlying the subsidiaries is our investment-grade as well, and we feel hydrology commodity FX risk is very much. So it's not just the metric itself; I think it's the quality of those metrics.

So it sounds like you're pretty much there in terms of the business mix and your improvement; you just need to maybe execute for a couple more quarters to get that recognized?

That’s exactly right. Yes, we think there's a seasoning that those agencies will require, but we feel pretty good of the path we are on. And we feel very good that our business mix continues to improve the quality of the portfolio.

Regarding the 24% sell down in sPower, what's the impact there on returns or earnings of sPower, how are you thinking about that?

I don’t think we want to specifically discuss that amount. But obviously, once you have operating assets up and running under long-term contracts, there are other people who are willing to or interested in owning those assets for the long-term at less returns than you'd get when you are the originator, developer, and constructor of those projects.

I think what I've been saying, Greg, when we bought its how we bought at high-single digits. So after the acquisition, we secure the refinancing, the operational includes maintenance, and so on. Plus those sell-downs have brought this to 13%. That is just part of that value creation that we're able to conduct.

Just on the Ohio DMR, could you just remind me how much earnings come from that?

Today we have $105 pretax, so $105 million per year...

And are you tying the two cases such that if you're not going to be getting that in the future, if they don’t extend it, you are not going to be able to commit to grow the investment in the grid?

That's correct. We believe it's essential to have the DMR to continue the transformation of DPL, including investing in these markets.

And just how would you characterize your returns on new renewable growth projects in the U.S. compared to the 13% you are currently achieving from the sPower acquisition?

I think we have a different project in the U.S. We have several AES distributed energy projects, along with sPower projects and C&I customers. We still have some deals in progress where we are really integrating energy storage in new ways. There is a range depending on the specific area. I would also like to mention that when we evaluate these returns, we are looking only at the project return, not considering any corporate leverage or other factors. We have taken a very conservative approach regarding the terminal value. However, in general, it involves flipping a portion of the operating assets to a long-term holder other than ourselves. So we do have this mix, meaning it's not a uniform product that we are offering across the states.

And then one last question about whether you won a storage project in Arizona with APS. I didn't see that in your materials; could you discuss that? It seemed to be a strong possibility.

It's a 100 megawatt four-hour energy storage, so it's 400 megawatt-hours. This is quite frankly exactly the size of the one that we have on Alamitos that we're building today. And so as you put those two together, we have two projects of 100 megawatts to four hours each that would be 200 megawatts, 800 megawatt-hours between the two projects.

But that's not in what you announced as of the year end; that would be additive?

That's correct; that's not in 2018 numbers.

If I can just follow-up on Steve's question. So with Fluence, end of the year award, and delivered 766, if my math is right versus I think at the third quarter it was 701. So 65 megawatts were added during the fourth quarter. What specifically was that?

Fluence is a joint venture between us and Siemens. But Fluence's own sales team is doing quite a lot. So they're in 17 countries with 80 projects. The projects vary from smaller projects. It can be 500 kV or a multiple of them, smaller units 500 kV one megawatt, but the larger units as large as the 800 megawatt-hours. So honestly, I don't have off the top of my head which of those projects are. But realized we're hitting everybody from C&I customers to the very largest utilities and everything in between. So it's a mix of product. And the large ones tend to be a bit lumpy, but we like very much the smaller projects that come in. And we increased the number of countries around the world. One thing that’s probably we at AES together with Mitsubishi inaugurated India's first energy storage project last week in Delhi and this together with Tata Power. And this project is, I think, very important for India, because it establishes how energy storage would work on that grid and getting the regulations in place. And as you know, India is actually building out 200 gigawatts of renewables, probably 80s I think are in the bag. And they are going to need a whole lot of energy storage to be able to accommodate that much renewables on their grid. So there's a lot of interesting markets opening-up.

And we'll see this number order and delivered jump when you report first quarter, because of APS?

As I said, there will be lumpiness as these projects come in.

And one other question, Andrés, I want to make sure I got this right. You mentioned that by 2022, 50% of your PTC generated from the SBUs will be from the U.S. Is that correct?

There is, of course, especially when you have renewables with shorter timeframes that are rolling in terms of this will be rolling over time we have to win some of those bids. But yes, given our current expectations, a little less than half will be U.S. and that's up from about a third today. So the proportion of our pretax contributions coming from the U.S. should rise over time given our expectations for where that growth is coming from. Obviously, we have Southland coming online. We have a number of projects in Hawaii. You mentioned the APS. So we've had signings certainly in terms of megawatts, a lot of big projects in the state. You also have the future investments in the DP&L as well. So we have great visibility into a strong pipeline of growth in the U.S.

Thank you everybody for joining us on today's call. As always, the IR teams will be available to answer any questions you may have. Thanks again and have a nice day. Bye-bye.