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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the AES Corporation's, Second Quarter 2018 Financial Review Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead.
Thank you, Andrew. Good morning and welcome to AES' Second Quarter 2018 Financial Review Call. Our press release, presentation and related financial information are available on our website at www.aes.com.
Today we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.
Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team.
With that, I will now turn the call over to Andrés. Andrés.
Good morning everyone and thank you for joining our second quarter 2018 financial review call. Second quarter adjusted earnings per share of $0.25 puts us at $0.52 for the first half of 2018, which is 24% higher than the $0.42 we earned in the first half of 2017. We will remain on track to hit our 2018 guidance and longer term expectations. Tom will discuss our results in more detail shortly.
I’m pleased to report that the positive momentum of the last quarter continues. During the quarter we achieved a number of milestones towards improving our risk profile and shareholder returns. Specifically, our credit ratings were recently upgraded by Fitch and Moody's and we are now rated just one notch below investment grade by all three agencies. We expect to achieve investment grade metrics by 2019 and ratings by 2020.
We brought online the 671 megawatt Eagle Valley Combined Cycle Gas Plant in Indiana in April and we will be inaugurating the 380 megawatt CCGT and LNG regasification terminal Colon in Panama later this month. Of the remaining 3.9 gigawatts currently under construction, we expect 2 gigawatts to be commission between now and year end.
We made significant progress in advancing our growth pipeline. Year-to-date we have signed nearly 1.5 gigawatts of renewable PPAs, which brings our backlog of capacity addition, including projects under construction to 5.7 gigawatts.
At our utilities in the U.S., IPL and DPL we settled two rate cases. Once approved, these widely supported settlements will position both utilities for future investments. We're on track to deliver $100 million in sustainable cost savings in 2018 as a result of our restructuring and transformation program. We received $310 million in net proceeds from the sale of our interest in Eletropaulo in Brazil, reducing our regulatory risk and simplifying our financial statements.
Lastly, we continue to be a leader in applying new technologies including energy storage. Our JV with Siemens, Fluence tied 80 megawatts of new projects in three countries bringing its total to 16 and IPL’s rate case settlement included one of the first rate based battery storage projects in the world.
I will now provide more details on some of these achievements beginning on slide four. Of our 4.3 gigawatts currently under construction, nearly half are expected to come online in 2018. Since our last call we have made significant progress on these projects, which I will highlight on the following few slides starting with a 380 megawatt Combined Cycle Plant in Panama on slide five.
I'm pleased to report that the regasification terminal is complete and that it has accepted the first shipment of LNG in Central American history. We expect that the entry of low cost U.S. LNG will transform the Central American energy sector, much as it has in the Dominican Republic.
Construction of the combined cycle power plant is nearly complete and we expect to achieve COD in September, on-time and on-budget. The project will provide long term and predictable U.S. dollar denominated returns. The storage tank is expected to be completed in 2019. Approximately 48 of the 70 tera Btus of storage capacity is uncontracted and represents potential upside as natural gas use increases over time in the region.
Now turning to our 1.3 gigawatt, Southland Combined Cycle Plant, which is a redevelopment of our existing gas facilities in Southern California. Construction is proceeding as planned, with the project now 40% complete and on track to be operational by the first half of 2020.
Next in Hawaii, we're delivering two solar-plus storage facilities for a total of 47 megawatts of solar and 34 megawatts of five hour duration energy storage on the Island of Kaua'i. The first of these pioneering projects is under construction and will satisfy energy demand during peak hours, as well as the rest of the day.
The second for the U.S. Navy is expected to begin construction later this year. Once both of these projects are completed, they will represent the largest solar-plus storage installation in the world.
Finally, we're making good progress at our 1.3 gigawatt Thermal Plant OPGC 2 in India. Construction is advancing as planned. The project is now 96% complete and we expect the plant to come online by the end of this year on budget.
As you may recall, AES Gener successfully restructured the Alto Maipo hydroelectric project in Chile in May. Since closing the restructuring, the main contractor Strabag is performing in line with the revised EPC contract and has been meeting the agreed upon construction milestones. Alto Maipo is now 68% complete, including 56% of the tunneling work and the rate of progress on tunneling has significantly improved as of late. We expect Alto Maipo to achieve commercial operations in 2020. Our remaining construction projects are renewable energy. These projects are proceeding as planned and will be key contributors to our earnings and cash flow growth for 2020.
Now turning to slide 10. We have been reshaping our portfolio to deliver attractive returns to our shareholders, while lowering risks, including reducing our carbon footprint. Our focus is on increasing the share of natural gas and renewable projects with long term U.S. dollar denominated contracts. We're earning attractive returns on our equity investments by utilizing our existing platforms, global scale, lower cost capital partners and non-recourse financing.
On a portfolio basis, our investments are projected to produce low to mid-teens IRRs on average assuming conservative terminal values. We expect our projects in Latin America to earn returns better than the portfolio average.
As you can see on slide 11, so far this year we signed 1.5 gigawatts of long term PPA's for renewable projects and now expect to exceed our internal projection of 2 gigawatts for the full year 2018. Year-to-date, sPower has signed long term PPAs for 1.2 gigawatts with large credit worthy C&I customers such as Microsoft and Apple as well as utilities. This is more than double the 500 megawatts annually assigned PPAs that we expected to achieve when we acquired sPower last year.
In light of our progress this year, we are on pace to assign 2 gigawatts to 3 gigawatts of new PPAs annually for 2019 and 2020. This would result in 7.5 gigawatts of new renewable PPAs being signed through 2020, all of which would be online by 2022.
To summarize, as shown on slide 12, we expect to add 11.8 gigawatts of new capacity through 2022. This includes 5.7 gigawatts of projects under construction, plus 9 PPAs which we referred to as our backlog, as well as 6 gigawatts of additional PPA's we expect to sign through 2020. Most of the capital needed for these projects will be funded by non-recourse financing and partner equity. Our equity requirements for these projects will be funded from our internally generated cash. Tom will discuss our capital allocation plan through 2020 shortly.
As I had noted, our goal is to earn attractive returns while greening our portfolio. As you can see a slide 13, renewables make up 75% of the 11.8 gigawatts of new capacity additions. The remainder is conventional generation, all of which is currently under construction and expected to come online through 2020.
This growth will significantly extend our average contract life from eight years currently to 10 years by 2020 and help us achieve our goal of reducing our carbon intensity by 25%. We are also working on enhancing some of our current contracts by blending and extended existing PPAs, by adding renewable energy. We call this approach green blend and extend and we will provide more color on future calls.
I would like to emphasize that we do not plan to grow simply for the sake of adding megawatts. We will invest in new projects if and only if we can earn attractive risk adjusted returns.
Finally turning to slide 14, we continue to be a leader in applying new technologies such as battery based, energy storage, since our last call of Fluence, our joint venture with Siemens, have signed contracts when additional 80 megawatts and delivered eight projects with a total capacity of 55 megawatts. Fluence has now delivered a total capacity of 271 megawatt. Total deliveries will exceed 550 megawatt in 16 countries once their existing backlog is installed.
With that, I'll turn the call over to Tom to discuss our financial results, capital allocation and guidance in more detail.
Thank Andrés. Good morning. I'll cover our second quarter results, improving credit profile and capital allocation. We continue to make good progress towards our full year adjusted EPS guidance of $1.15 to $1.25 with $0.52 earned year-to-date.
As shown on slide 16, EPS was $0.25 in the second quarter, reflecting high contributions from South America and MCAC, as well as debt pay down at the parent. Offsetting this was the sales of our coal plants in the Philippines and Kazakhstan. Our results also reflect $0.02 from a quarterly tax rate of 36% which is a timing issue as, we continue to expect a full year tax rate in the 32% to 34% range.
Onto slide 17, adjusted PTC during the quarter was $255 million, an increase of $13 million. I’ll cover our results in more detail over the next four slides beginning on slide ‘18. In the U.S. and Utilities operations were generally in line with the prior year. PTC was down a part due to the timing of a planned outage in Hawaii which occurred in second quarter this year versus the first quarter of last year.
Regarding sPower the business has outperformed our expectations since we acquired it, both from an operational and development perspective. Since the acquisition, sPower has distributed about $100 million in cash to the parent or roughly a quarter of our original investment. The business also continues to have good access to capital markets, having just closed a $500 million portfolio refinancing with a 14 year average life and a 5% coupon.
Back to our second quarter PTC, in South America improved results reflect higher contract pricing in Columbia, as well as higher contracted sales and lower interest expense at AES Gener in Chile. In MCAC higher PTC was largely driven by the Dominican Republic due to the completion of the Combined Cycle last year, as well as improved availability. Finally in Eurasia, our results primarily reflect the sale of our business in the Philippines and Kazakhstan.
Shifting to our year-to-date results on slide 22, adjusted EPS increased $0.10 to $0.52, which represents 43% at the midpoint of our full year guidance versus 39% achieved year-to-date 2017. Our results reflect higher contributions from U.S. and Utilities, including higher regulated rates and lower maintenance expenses of DPL.
In South America contracted sales were up in Chile, Colombia and Argentina and we also benefit from lower parent debt. These impacts were partially offset by the asset sales in Eurasia.
Turning to our improving credit profile beginning on slide 23, in the third quarter of 2016 we established a goal of reaching investment grade. At that time we had $5 billion in parent debt and leverage of 4.9x. We expect to end this year with $3.8 billion in debt and leverage 4.3x. Our goal is to achieve investment grade metrics of below 4x by 2019.
As shown on slide 24, the rating agencies are recognizing our commitment and actions. As of third quarter 2016, we rated BB- and BB. Today after recent upgrades by Fitch and Moody's we are rated BB+ by all three agencies just one notch below investment grade. We continue to believe that obtaining investment grade rating will help us not only to reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation.
Now to 2018 current capital allocations on slide 25, which is in line with our prior disclosure. Beginning on the left hand side, sources reflect $1.9 billion of total available discretionary cash, including $600 million to $675 million of parent free cash flow. Sources also reflect $1.2 billion in net asset sale proceeds from Masinloc in the Philippines and Eletropaulo in Brazil.
Now to uses on the right hand side of the slide. Including the 8.3% dividend increase we announced in December, we’ll be returning $345 million to shareholders this year. We've used over $1 billion to reduce parent debt, including revolver drawings. We plan to invest $300 million in our subsidiaries, primarily for projects under construction, leaving about $40 million of unallocated cash.
Finally moving to our capital allocation from 2018 to 2020 beginning on slide 26, we continue to expect our portfolio to generate $4.2 billion in discretionary cash, which is roughly half of our current market cap. But half our discretionary cash is expected to be generated from parent free cash flow. The rest comes from our $2 billion asset sales target, $1.2 billion which we have achieved to-date.
Turning to uses for this discretionary cash on slide 27, roughly two-thirds has been allocated towards current dividend and delevering. Earlier Andrés laid out 11.8 gigawatts of additions, 60% of which is coming online in 2020. Our equity needs for this capacity are manageable as we bring in partners and use non-recourse financing.
Specifically we're planning to fund $800 million for our equity investments in our backlog and project PPAs coming online through 2020. This is only $50 million more than our expectations on our last call. This quarter we are also showing $150 million for our equity investments in projected PPAs coming on line in 2021. Once completed, all these projects will contribute to our growth through 2020 and beyond.
The remaining $600 million of unallocated cash which is largely weighted to 2019 and 2020 is available to create additional shareholder value, including investments in subsidiaries and dividend growth. As you know, our annualized dividend growth rate is 9% over the last three years and 27% over the last four. Although, we don't plan to continue growing the dividend at such an exceptional rate, we expect dividend growth to remain an important part of our value proposition. We review our dividend annually with our Board in December.
With that, I'll turn it back to Andrés.
Thanks Tom. Before we take your questions, let me summarize today's call. Our performance year-to-date puts us on track to achieve our 2018 guidance. We are well positioned to achieve investment grade credit metrics in 2019. Our 5.7 gigawatt backlog of long term contracted projects will enable us to achieve our key objectives of profitable growth and greening the portfolio.
We expect to generate substantial amounts of discretionary cash from 2018 through 2020, which we will deploy consistent with our capital allocation framework and we remain confident in our ability to deliver on our 8% to 10% average annual growth in adjusted EPS and parent free cash flow through 2020.
Operator, we are ready to take your questions.
We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Ali Agha of SunTrust. Please go ahead.
Thank you, good morning.
Good morning Ali.
Good morning. My first question, you didn't bring this up on your remarks. If you could give us an update on where things stand with Maritza and Bulgaria, and more I think to the point as you've said to us before, I think that we should be expecting something to change there on the contract eventually, either a buyout or restructuring.
And my question is, when you sort of model the different scenarios with what could play out with Maritza eventually, how that does that impact that 8% to 10% profile of earnings growth you’ve laid out ‘18 through ’20. Does it change it in any way? Is that already factored in? How should we be thinking about that, that's my first question?
Sure, well we aren't in any formal negotiations yet with the government. As I’ve said in the past, an issue was raised with the European Commission regarding illegal state aid. It hasn't been declared as such, but you know both sides are expected to begin negotiations sometime in the future.
As I’ve said, we have a very strong contract. We're being paid on time. Bulgaria is an investment grade country; it's growing and the situation of our uptick or NEK continues to improve. So really you know it's very too early to say when this will come out. And as I said you know, we have a good contract and we will defend our interests. The plant is needed in Bulgaria, so you know we will keep you informed of this in terms of sort of how this would affect our future.
You know we do have contingencies in our numbers and we have to see where this turns out. There are a range of outcomes and we don’t have a satisfactory outcome. Obviously arbitration is a possibility. So sort of stay tuned. There will be more information as it’s happening. We really don't have much more to report than we did on the prior call.
Okay. Second question, you laid out some of the new projects, PPAs backlog that will likely come online beyond 2020, 2021 and 2022, etcetera. So in that context, I wanted to get a sense of what your visibility is for your growth profile beyond 2020 as you start factoring these projects in, and is the growth rate that you laid out for us through 20 sustainable going forward. Do you have line of sight? Can you give us some sense of how the profile would look like beyond 2020?
Well Ali, we will update you on that after are – on our fourth quarter call. I think what we are showing here is that we do have a very robust pipeline of projects, and that as we continue to growth the renewable pipeline as to develop competitive advantages of scale and of combinations of technology, I expect this pipeline to continue. So I can't really give you any specific number, but I think that as time passes, I think you're seeing the robustness of the pipeline, the many opportunities that we have and that you know how fast we grow will depend on making sure that we have attractive returns on that growth.
I would add that you know besides just megawatts, we have other projects such as the LNG and it's not only the regasification terminal that we should be inaugurating within 10 days officially in Panama, but we also have the eastern gas pipeline in the Dominican Republic. So we have some businesses which are growing in addition to just the megawatts.
Last question, more near term. You alluded to the fact that the tax rate impact in the quarter has been more of a timing issue should come down in the second half. But if you looked at the overall earnings that you have reported and generated though the first half, that you said it’s up 24% year-over-year, how does that compare to your own internal budget in the context of the full year when we look at the adjusted earnings that have come through, through the first half?
Well, I think as you know Tom and I said, I mean we're on track to hit our numbers and sometimes tax rates can be a little bit lumpy for us, because it depends on where the earnings came from specifically. So we really – I wouldn't read too much into a sort of a one quarter tax rate and you know we really planned for the year.
Yeah, and Ali its Tom. We pointed out that last year our earnings will shape the same. We tend to have third quarter and fourth quarter are historically strong for us. So this is consistent with where we started the year.
Okay. Thank you.
The next question comes from Angie Storozynski of Macquarie. Please go ahead.
Thank you. So going back to the growth at sPower, I remember that when you get acquired the business, I think the assumption was that there would be about 500 megawatt of growth per year. Now it seems you are significantly exceeding that rate, yet you are keeping your earnings growth projections unchanged through 2020. Why is that? Is it just because the growth is more towards 2021 and beyond and hence there isn’t a positive earnings, you know providing upside to your growth rate till 2020.
Well, you know I think, thinking of sort of our growth rate, I would make some mentions. You know one is sPower obviously it’s a big contributor. We are also doing very well in our distributed energy business, it’s smaller, but it's also a big contributor to this.
Overall about 50% of our renewables growth is wind more less, 50% is solar, 50% is U.S., 50% is outside, so we have a very robust wide portfolio. So you know I think that you know again, we’ll talk about our longer term projections. But as you mentioned, there is – we’re a portfolio, we have a number of things going on, so you know we feel uncomfortable about hitting our numbers for this year and we feel comfortable with our guidance to 2020 of 8% to 10% growth.
Okay, now you mentioned that the incremental growth would be financed with internally generated cash flows, but the thing we all seem stories about you potentially divesting a share of some of your operating assets. I'm talking about the contracted renewables. Could you talk about that?
Yeah Angie, it’s Tom. Yeah, we have mentioned in the past that we, after closing sPower we did get some inbounds on buying some piece of operating assets. We continue to see if that's a an opportunity. That would be something that would fit into our asset sale piece, the 1.2 versus $2 billion, so the $800 million to go. We'll see and continue to think about those opportunities in conjunction with our partner income.
But those are really sell downs of partial pieces of operating assets. Obviously the front side of the business, the growth development side, we want to keep that driving forward as it is, and if we did things like that, that’s probably we’ll continue to be the operator, owner-operator-manager, which is also adding value as they are now. By year end they’ll be self-operating in the solar, about 85% of their facilities, which is adding some incremental margin on the upside.
Yeah NGOs, so to put this in context you know, we will be on looking for opportunity to leverage our equity, by bringing in lower cost capital partners. So you know whether that be a partial sell down in different assets, that allows us to use our equity towards higher returns us, for example development and then putting into operation plants and then once they are up and operating if we can get lower cost capital, then that's what we will do.
So you know over the last years we've raised quite a lot of capital by selling assets, and let's say reinvesting some of that capital in higher return projects. So this is you know right on our strategy, so expect more of that.
And lastly, I know you’ve said actually twice already that you will be providing us with updates on growth beyond 2020 only on the fourth quarter call. But during this this year's fourth quarter call you didn't roll forward your earnings to 2021 as you had historically provided. You know we have this concern us among investors about your contract and that you are rolling off and providing a potential earnings clash. So could you at least give us a sense directionally if 2021 would be an apt year versus 2020 based on what you see currently?
You know, as I see that really when we don't have any cliffs in 2021, actually we have a lot of assets coming online in 2020. So you know I would just say that the momentum, you know 2021 should be a good year, because that's when all these assets will be online and you know that includes things like the energy storage, 400 megawatt hours of energy storage coming online in Southland.
In terms of cliff, we really you know – the only – we have contracts falling off at AES Gener in 2023 and that's only half of the contracts. So Gener is you know pretty much fully contracted through 2023, so know we don't see a cliff in 2021.
Okay, thank you.
Thank you.
The next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning.
Good morning Julien.
Hey, thank you for the time. I wanted to follow up a little bit on Angie’s direction for questioning. Can you elaborate a little bit on the equity investments that you intend to make in the renewable segment just to make sure we're clear about this.
I think I heard you say for instance in ‘21 that you're going to put about $150 million in that specific project here. (NYSE:A) Is that a good cadence of the capital, and (NYSE:B) historically we think about maybe low to mid-teens returns on these kinds investment. Is that basically to say that perhaps that’s equal to $0.02 to $0.03 of earnings accretion based off of that investment or is it maybe a little bit lower than that just given the return profile of contracted sellers.
Hey Julien, it’s Tom. So on my slide 27, the $150 million, this is projected – obviously it depends upon capital structure, partnership things and also location of projects, but we had $150 million that could be invested in 2020 for projects to go COD in ’21; that's roughly half of the amount of say ‘21 COD projects.
So in terms of cadence if you just think about the layers, cadence is probably 300 in total renewables, probably about $300 million, maybe $350 million a year, something like that, which if you look back at our history, I think at least the last five years, that’s generally about our equity investment in projects. It's been about 300 to 400 per year and so this would be very consistent. Obviously less lumpy in things like Colon or other things of that nature and more going to more smaller investments in renewables in the U.S. and obviously in our key markets.
In terms of returns, I think generally in the U.S. we're seeing low double digits and internationally depending upon where we are, we see low to mid-teens. So we expect those to be accretive as we move along and we would factor that into our guidance updates for 2021 and beyond.
Let me be clear about this, just a little clear. So you know basically the thought process is 300 to 350 a year in cadence and you're saying low double digits. Is that an IRR or is that an ROE in the current year? i.e., should we take say the mid-point of that, say 300 to 400, 350; put say a low teens ROE on that to kind of get a sense for what the earnings contribution is, say about a nickel or so.
Those are fair for ROE’s and probably if I was going to use the cadence, I’d use 300 to 400 and those are reasonable for ROE’s. Some of them are a little bit – it depends on the region. Some of them are a little more near term ROE beneficial and some are a little more sloped. But as a portfolio those IR’s are pretty reflected in those ROE’s.
Got it. And this is – and to be further clear about this and distinguished, on slide 50 you talked about global renewables with a total equity investment of 136. How does that compare, just to make sure we're not double counting here and thinking about this separately?
I’m sorry, which slide again?
Slide 50 talks about global renewables. That's a separate investment bucket for equity contributions than the…
So these are the projects in construction. So I think so as Tom mentioned you known on an annual basis we are talking about $300 million to $400 million of equity investments moving forward.
This is a slightly different cut of that, right? $300 million to $400 million and then right now you've got $136 million actively invested, but this is the 136… [Cross Talk]
… Cash power they’ve signed 1.2 and all our numbers are AC year-to-date, so most of those projects have not yet started construction. They will shortly like the big Microsoft-Apple project and Virginia will start construction next quarter, so it's not right.
So 136 is a small factor of the total equity.
It’s a small piece yeah, because it just has the stuff that's already gone NPP, it’s already construction.
And sorry, just sort of another one there just to clarify. The source of the success from the solar, I mean I know you have a list of projects thus far. But if you were to define as power sort of MO in the store space, is this principally [inaudible] contacts. I mean where are we basically orienting themselves for opportunity?
I’d say sPower is right at probably 60 – on new business is shifting towards 50-50 wind and solar. They are probably right now about 60% solar, 40% wind, but they are shifting. When we closed on the acquisition, they were about 85% solar. They were making the shift, they are very client focused. So folks like Microsoft and Apple are obviously great clients, so we’d look to do additional business with those and other clients like that. We do still do some utility transactions and you know some other large utility type players such as a couple of CCA's in California.
Our smaller DE business tends to be more program focused, so they look at a state program and then build that on a state program, we are doing a lot of that right now in Massachusetts. Hawaii project, as Andrés mentioned, the two solar storage projects is opportunities for the EP business in Hawaii. So they can be more regional focused.
Yeah, and Julien don't forget that 50% of this is outside the U.S. and they were mainly C&I customers, you know investment grade, dollar contract, long term dollar contracts. So it’s a mix of things, and again to the extent that we can bring in partner equity or sell down, you know that also improves our returns.
Great, excellent! Thank you very much.
Thank you, Julien.
The next questions comes from Christopher Turnure of JP Morgan. Please go ahead.
Great, good morning. Andrés you mentioned in your prepared remarks briefly that you continue to be I guess hopeful for new LNG projects, but I was hoping you could give us more color there on either the existing Panama or Dominican Republic contracts. The types of customers you might be talking to, duration and when we might have an update their?
Okay. Well, I think that you know first of all what we're doing in Panama is replicating what we've done successfully in the Dominican Republic. So in the Dominican Republic we have the very nice business of selling to industrials and transportation LNG at our facility. So we have those capabilities built into the Panama project already.
Now it will take some time for the Panama Central American market to develop. Now we have a strategic alliance with ENGIE to market our gas from these two facilities and they can create products for clients, for example, that are offset some of the risks of having – you know competing with diesel or competing with heavy fuel oil for clients to sign up for long term gas contract.
So in Panama what we are saying is basically the 22 tera Btus will be used by the plant, our plant coming online. There are more plants in the area that could be converted and would require the construction of some gas pipelines. We are fully capable of you know again, discharging from the LNG from that plant as well. So that’s a market that’s going to take some time to develop as it has in the Dominican Republic.
Now, in the Dominican Republic we have a very significant growth with the building of the Eastern gas pipeline that's about 12 tera Btus and the offtakers Barrick. So again, investment-grade, offtakers for its mines and it's basically converting its generation at those mines to gas. There is also potential for you know transportation in that area. So once that eastern gas pipelines is built, there is a lot of other potential diesel plants and heavy fuel plants and transportation that could be converted.
So it’s taking a successful business case from the Dominican Republic replicating it in Central America. So the Panamanian market is very attractive, but you know we could also use it as a hub to deliver gas into other Central American countries, such as Honduras.
Okay, great. And then just remind me, how much if any capacity is left in the Dominican Republic right now? Is it a percentage of I guess the total capacity?
I would say in this Dominican Republic we probably have another 15 tera Btus, 20 tera Btus to go, because that’s a 80 tera But tank, so that would be the world about 60. So it gives an idea of how we can fill it up. Now again, it's very attractive to do tolling and which is what we do without taking any commodity risk on these projects. You know longer term we have mentioned in the past we have a potential very large similar project in Vietnam. So that would be more sort of a 2023 project.
Okay, and then switching gears, could you give us more color on your decision to sell the Chilean transmission assets and pay off debt down there. Kind of anything specific about those assets that made the time appropriate to sell here?
Well you know AES Gener is doing sort of a restructuring program of its asset, and so it’s sold a gas peaking plant and it solid the transmission assets we think for you know attractive prices, and it’s used those proceeds to pay down debt.
So it’s you know similar, let’s say to what AES has done and in terms of we’ve sold assets that we think are more valuable to others and non-core assets and taken those funds and used the delver the company, so it’s very similar.
Okay. Makes sense. Thanks Andrés.
The next question comes from Steve Fleishman of Wolf Research. Please go ahead.
Yeah, good morning. A couple of quick questions; first any risks you are needing to manage from the tariff trade war issues.
Okay, you’re talking about the tariffs on solar panels?
And more broadly.
More broadly. And more broadly -- no quite frankly we're not much affected if at all. I would say a first the biggest one year you could mention sort of NAFTA negotiations in Mexico. Remember that our strategy has been to contract long term dollars with private sector. So you know we're really not seeing any effect in any of our markets directly. If you're talking about solar panels in the U. S., both sPower and our distributed energy you know have sufficient panels on contract and on attractive terms for ‘18 and ’19. So we're well positioned and quite frankly some of the uncertainty favor I think the bigger players such as us.
Okay, good, and then just in terms of – so it sounds like the kind of accelerated renewables investment is already embedded in your 8% to 10% growth rate for 2020, that’s correct.
That’s correct.
Okay, and could you be to agree that it’s still the same number and that’s additive to the growth. Could you be a little bit more clear on what areas maybe are a little less than before or you kind of higher within the range?
Well, I think again we’re within our range. I would say you know this is on our strategy of greening our portfolio. Remember we’ll also be selling down some assets, you know as we’ve been doing so you have the give and take.
But basically the way I think about this, the overall arching theme here is really derisking. So in derisking we're going towards a you know more longer term contracts, more dollar contracts, less construction risks, because they are more individual small projects rather than large projects and you know we obviously have a contingency in our numbers and so you know stay updated, but basically this is very positive news.
I think that if you notice, the chart we put up for the returns on renewables in the U.S. increased and we had a 10% average IRA up to 11 you know and we think we’ll continue to make progress there. So you know overall I think the news is very good and the way to think about is it our portfolio continues to be less risky you know and then the portfolio in the past and it’s you know in line with an investment grade company.
Okay, and then just maybe lastly, since sPower is still relatively newer to the company, can you just maybe give a little more color on kind of the process from – I think you said it’s done better than you expected, operationally. I assume financially as well, so far is that true?
Yeah, I mean the answer is yes. I mean again we are quite conservative on our terminal values on our growth prospects. So when we bought it, if you recall, on our earnings call we were talking about 500 megawatts of year of signed PPAs and obviously we've done better. You know at the same time you know we were hitting our return criteria and finding ways to improve that. So I would say overall it’s a good start
Any expansion of the growth is more, because you are just seeing a lot more opportunities at your returns than you initially expected. Is that…
Well, I think a better way to phrase it Steve might be that we were conservative. You know we were hoping for this. But on the other hand we were conservative and saying you know what is a you know P95 and that’s what we were talking about, so you know we're very pleased with it.
You know we are also very pleased with our distributed energy unit. It’s doing you know probably three to four times the business we had originally anticipated when we bought that business. So you know, this in generally we've been conservative and likewise we’re also being very conservative about terminal values when we calculate our returns.
And then one last question, just in the U.S. on the solar projects I assume you booked IPCs upon startup and then when did you address PPC's for the 10 year, and just thinking about the way the earnings layout of the two segments?
Yeah Steve, generally we are not – we are using tax equity. We expect to continue to use tax equity for the next couple years, but from an earnings standpoint PPC dos come through via tax equity to our earnings and then ITC does help buy a tax equity in the initial couple of years for solar.
Thank you.
The next questions comes Lasan Johong of Auvila Research Consulting. Please go ahead.
Thank you. Great call. I love the clarity, so I appreciate it, thank you very much. But I got a few questions (A) Andrés, the pipeline business in Dominican Republic, is that going to be a – is that one a one off project or is this something that you guys want to delve into more deeply on a more broader basis.
We had one pipeline in the Dominican Republic, going from Andres to out DTP facility. So this would be you know getting us to a larger market, because it’s not only within Santo Domingo, it's going to the east where there is a....
No, I understand that, but – I apologize for interrupting. I understand that, but is pipeline going to be another investment vehicle going forward or is this going to be on a one off basis depending on the need for a particular project.
Basically you know I would say we're not getting into the pipeline business. I mean if a pipeline is needed for example in Panama to a specific demand, maybe like there's a couple plants within say a 10 mile radius, then we will we will build it, but it’s very much tied to the facility. So we're not going to build a separate pipelines that aren't sort of helping us realize the value, you know the value that our storage and reclassification has. So it will be very linked to that. We're not getting into the pipeline business otherwise.
Great! On the investment grade rating, once you change investment grade rating, it kind of frees up a lot of issues that were kind of handcuffs if you will in past transactions. So is it possible at that point to bring some businesses up to the current level. Say for example DPL and IPL could be at the parent levels to insure for example that the interest expense reductions are not limited at the parent level, something like that or are there any other structural changes you would make with the changes in the investment grade rating.
Yeah, it’s Tom I don’t think we’ll change our basic philosophy of having our subsidiaries, be it standalone, nonrecourse entity. As you know most of those entities are investment grade rated or investment grade structures in the event of not going to investment grade countries. DPL has recently become investment grade. So I don’t think we’ll change – and the changes you said would not help us from a – structural change, like that would not help us from the US tax perspective.
But in general we feel the shift to investment grade we think will help – when we primarily focused on it for our equity valuation, I don’t think it’s going to change. There are a lot of things that we cannot do today, but we will able to do. I feel quite comfortable with our financial flexibility as we stand today and the best part is [inaudible] support and demonstration of approving this profile.
Well Tom, at some point the cash flows are going to be kind of overwhelming, as you are not be able to use the money to pay down debt. So what’s the kind of the longer term plans for that massive excessive cash flow coming?
I think we’ll use our capital allocation framework and we’ll keep you updated and we’ll have to see. But I think again, what Tom was saying, we've been able I think to do a number of very good sale of assets, of non-core assets and part of that is that you know we really had the financial flexibility to wait until the timing was right and get the right deal going forward. So becoming investment grade is I think will give us even greater financial flexibility and make us more robust for any changes in capital markets.
Yeah, but what are you going to do with all this cash flow coming at you in the next – hopefully in the next three or four years? Well, you can’t use that money to pay down debt. There’s not going to be enough debt left to pay down, so what’s the plans for that excess cash?
We’ll keep you updated when that happens.
Okay, last question, AES has gone through an incredible amount of transformation since 2000. I’ve been following you since 1998. What does AES look like in five years? I have a pretty good understanding of the picture now, because of today's call, but I just want to get it straight from you guys. Are you guys shifting more and more towards renewables and kind of laying back on conventional generation. Is that kind of the idea of where you are talking about?
Well definitely as I said you know, we're reducing risk and part of that is greening the portfolio. We think that’s part of our risk reduction program. That's also quite frankly in some markets where the demand is. You know if you want to get new PPAs in the U.S. market and its heavily weighted towards renewables.
Now we do see a transition. We do think that having the existing conventional assets gives us an advantage, because you know renewables are energy, but they are really not capacity. So the two ways to get to capacity is you can either put in battery and that's great because you can sell a lot of batteries, but that you're talking about hundreds of billions of dollars globally would have to be invested.
And in the transition you can use your existing plant, be it hydro, gas or coal and actually some of the green blend of extent we're seeing has very interesting possibilities, which is a combination of you know low cost energy from renewables [inaudible] combined with the capacity of the coal plant for example in some markets or gas plants.
So, you know what do I think of the next five years? Well, we’ll be leading that transition in many markets. We’ll continue to be leading in the new technologies, whether it be combining solar storage or quite frankly combining the solar with conventional as well. We hope to be a leader in the market as well.
Thanks a lot. I'd just like to add one more question. In Vietnam you said you know it’s difficult to replicate the Colon type projects. Does that mean that you would also look into the potential of exporting gas from Vietnam to say Cambodia and Thailand?
In this case I mean mostly it’ll be total length, so it would be a very big facility and that would be – there are several trenches of combined cycle gas plants that go with that. So you know at this stage you know I think that yeah that the possibility exists. You know we have a MOU signed with Petro Vietnam and it would have to be really what their policy is at that point. So that’s ways off as I said. That would be more like a 2023 project.
Thank you. Great call!
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Ahmed Pasha for any closing remarks.
Thanks everybody for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Thank you and have a nice day!
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.