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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 Fourth Quarter and Full Year 2017 Financial Review Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference call over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead.
Thank you, Kate. Good morning, everyone. And welcome to our fourth quarter and full year financial review call. Our press release, presentation and related financial information are available on our Web site at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Tom O’Flynn, our Chief Financial Officer; and other senior members of our management team.
With that, I will now turn the call over to Andrés. Andrés?
Thank you, Ahmed. Good morning, everyone. Thank you for joining our fourth quarter and full year 2017 financial review call. During 2017, we delivered on all of our financial metrics. Adjusted EPS was $1.08 toward the upper end of our guidance range. Cash flow also came in at the upper end of our ranges. Based on our strong performance in 2017 and our confidence in our outlook, we are reaffirming our 8% to 10% average annual growth rate through 2020.
Further, we continue to transform and simplify the company. To that end, we are maximizing our efficiency with a new organizational structure which will yield an additional $100 million in annual cost savings by 2019. We’re reducing our financial risk by prepaying $1 billion impairing debt. We’re leveraging our platforms by adding 4.4 gigawatts of new capacity that its currently under construction. Through a balanced approach, we’ve been reshaping our portfolio, while reducing our carbon exposure; first, by acquiring 2.3 gigawatts of renewable and launching the Fluence energy storage joint venture with Siemens; second, we announced that we are selling or retiring 4.3 gigawatts of merchant coal-fired generation.
Through this successful execution of our strategy, we are lowering the risk of our portfolio, particularly the volatility of our earnings and cash flow. At the same time, we are well positioned to deliver 8% to 10% average annual growth and adjusted EPS comparing free cash flow through 2020, achieve investment grade credit metrics in 2019 and reduce our carbon intensity by 25% from 2016 through 2020.
I will now discuss these themes in more detail, beginning with maximizing our efficiency on slide four. We implemented a new $100 million cost savings plan as a result of our recently announced reorganization. This year, we are reducing our global workforce by 1,000 to 12%. These additional savings will strengthen our ability to deliver on our long-term financial commitments.
Next, I’ll provide an update on some of our construction projects. In total, we have 4.4 gigawatts currently under construction, most of which are expansions of our existing plans and businesses. Beginning on Alto Maipo on slide five. As you may recall, this 521 megawatt hybrid project has been experiencing significant construction delay and cost overruns. However, since our third quarter call in November, we have reached a significant milestone whilst resolving outstanding issues.
Specifically, Alto Maipo negotiated a fixed price lump sum EPC contract with Strabag, the project’s main contractor for the entire project. The new EPC contract, which is pending approval from the project lenders, transfers all of the geological risks to the contractor and includes material capital commitments from Strabag. The restructuring will require concessions from the project lenders and meaningful equity contributions from AES Gener, which are tied to construction milestones. We expect to receive approval from the lenders in the second quarter.
Although, we were very disappointed with the extended delays and increased costs to build out the Maipo, the new contract provides much greater certainty on both the schedule and the total costs to complete the remaining 38% of the project. Once completed, Alto Maipo will diversify AES Gener’s generation mix and provide a zero emission source of power and capacity in Chile’s load center for many decades.
Turning now to the rest of our construction program, beginning on slide six. Our 671 megawatt Eagle Valley CCGT in Indiana achieved full load earlier this month. This plant is now in the commissioning phase and is expected to be completed in the first half of the year.
Now, turning to our 1.3 gigawatt Southland CCGT project on slide seven, which is a new construction on our existing gas generation sites in Southern California. Construction is proceeding as planned and the project on track to be operational by the first half of 2020. Shortly, we will also begin construction on this site on our long-term contracted 100 megawatt four hour duration lithium ion energy storage facility. This project will be the world’s largest lithium ion energy storage facility.
Turning to slide eight, and our LNG businesses. In Panama this month, we started commissioning at our 380 megawatt Colón CCGT. We expect to achieve first fire in March and COD early in the second half of this year. As you may remember, we’re also building an LNG re-gasification and storage facility on the same site and expect to reach COD on time in 2019. In the Dominican Republic, we are in advanced discussions to secure new client for the access capacity at our LNG storage facility and to build the pipeline to connect the LNG terminal to the Eastern side of the Island. The pipeline will allow us to sell our access capacity as existing plant convert from heavy fuel oil and diesel to natural gas.
We expect to earn attractive returns given the limited amount of investment necessary and that the project will require no cash in corp. Our remaining construction projects are proceeding as planned, including our 1.3 gigawatt thermal plant OPGC 2 in India. These projects will be key contributors to our earnings and cash flow growth through 2020.
Turning to slide nine. We have been reshaping our portfolio to deliver attractive returns to our shareholders, while reducing our carbon exposure. Our focus in on renewable projects with long-term U.S. dollar denominated contracts. On a portfolio basis, these investments are expected to produce low to mid-teen IRs assuming a conservative terminal value. In general, we expect to receive at least 85% of the cash flow during the life of PPA. These compelling returns are driven by several factors, including; about half of our investments are in markets with lower renewable penetration and faster growth on U.S.; using our business platforms and global scale to lower cost, such as PV panel and wind turbine purchases; utilizing local debt capacity in the businesses to fund the investments; and bringing in partners to reduce our equity commitments, while providing management and development fees.
Turning to slide 10. In the last year, we acquired $2.3 gigawatts of renewable capacity with long-term contracts in three markets. First in the U.S., we closed on the acquisition of sPower together with the Alberta pension fund, AIMCo. sPower was a key driver in our 2017 growth and is continuing to execute on its more than 10 gigawatt development pipeline in the U.S. In fact, this year sPower signed long-term PPAs for 582 megawatts of solar and wind capacity with investment grade customers.
Second in Brazil, AES Tietê acquired 686 megawatts of long-term contracted wind and solar generation. The equity required for these expansions was funded by using the debt capacity available at Tietê. And third in Mexico, where we have 2.5 gigawatt development pipeline of renewables and natural gas infrastructure. We acquired a 306 megawatt Mesa La Paz wind development project. Mesa La Paz has a 25 year U.S. dollar denominated PPA with an investment grade private sector off-taker. The project site has sufficient additional land to accommodate up to 200 megawatts of solar, which could be an attractive upside in the future. We expect to reach financial close in March and begin construction shortly thereafter.
During 2017, we also made good progress on our initiative to offer new innovative energy solutions. As a result, in Hawaii we’re delivering two solar plus energy storage facilities for a total of 47 megawatts of solar and 34 megawatts of five hour duration storage on the Island of Kauai. The first of these pioneering projects is under construction, and will satisfy energy demand during peak hours in the evening, as well as the rest of the day. We also closed on Fluence, our joint venture with Siemens. Fluence will deliver energy storage solutions and services to a broad group of customers from commercial and industrial companies to utility and power developers around the globe. In fact, the team is currently pursuing more than one gigawatt sales opportunities in 15 countries. The goal is for Fluence to consolidate its position as market leader in this high growth market. Lithium-ion base energy storage is expected to grow tenfold in five years, reaching at least 28 gigawatts of global install capacity by 2022.
In summary, as you can see on slide 11, we will be adding 8.3 gigawatts of new capacity by 2020. This represents 25% of our current install capacity and includes seven gigawatts of projects either under construction or recently acquired. The remaining 1.3 gigawatts reflect projects in advanced stage development, half of which are under signed contracts. As a result of these additions, our average remaining contract term will increase from six years currently to 10 years by 2020. We have sufficient internally generated cash to fund our equity contributions for all the projects I just discussed.
We're taking a balanced approach to decarbonizing our portfolio, recognizing that coal will continue to play a role. In 2017, we announced the exit of 4.3 gigawatts of merchant coal-fired generation, representing 30% of our coal fired capacity. Through these actions, we are significantly reshaping our portfolio to achieve our financial and strategic objectives.
As you can see on slide 12, by the end of 2020, we expect our coal fired capacity to decline from 41% to 29%, while renewables and gas will increase from 55% to 68%. Further, as you may have seen in our press release this morning and on slide 13, I am pleased to announced that based on these steps we've taken to-date, we are on track to reduce our carbon intensity by 25% from 2016 to 2020, and we will be aiming for a reduction of 50% by 2030.
With that, I'll turn the call over to Tom to discuss our financial results, capital allocation guidance, and expectations in more detail.
Thanks Andrés. Good morning. Today, I’ll review our 2017 results and capital allocation. We'll also discuss some recent business developments and conclude by addressing our guidance for this year, and expectations through 2020.
As Andrés mentioned, we finished 2017 on a strong note, achieving the upper end of our guidance range on all metrics and setting a solid foundation for growth through 2020. Adjusted EPS was $1.08. In the last two months of the year, we benefited from stronger margins at some of our businesses, a lower impact from hurricanes and a lower overall tax rate.
As shown on slide 15, most of our growth in 2017 was driven by higher margins, particularly in MCAC, contributions from new solar projects in the U.S. and the absence of a one-time reserve taken in 2016 in MCAC.
Now to slide 16, our adjusted PTC and consolidated free cash flow. We earned a little over $1 billion in adjusted PTC during the year. This was an increase of $167 million, primarily due to the same drivers as adjusted EPS. We generated $1.9 billion of consolidated free cashflow, a decrease of $323 million from 2016, primarily due to large receivables collections in Eurasia and Brazil in ’16.
Now I’ll cover our SPUs in more detail over the next five slides, beginning on slide 17. In the U.S., margins were flat. Adjusted PTC increased, primarily due to equity earnings for new solar projects at sPower and our distributed energy business. Lower consolidated free cash flow also reflects higher working capital requirements at DPL. Regarding sPower, we’re very pleased with the businesses’ performing since the acquisition. In November, sPower closed a $420 million 19 year financing at 4.6%, enabling us to meaningfully increase our returns on the business.
We also continue to receive inbound indications of interest at attractive valuations to partner on sPower’s operating assets. Incorporating such a partner would further increase our overall return and transition a greater percentage of our capital into sPower’s robust development pipeline. This backlog continues to grow and is yielding excellent projects with double-digit returns, including the 580 megawatts of recently signed PPAs, Andrés mentioned.
In Andes, our results were relatively flat. Higher pricing in Argentina and a full year of operations at Cochrane in Chile were largely offset by the impact of Green Taxes and planned major maintenance at AES Gener in Chile. Lower adjusted PTC also reflects higher interest expense in Argentina. Consolidated free cash increased largely due to lower working capital requirements at Gener.
In Brazil, margins were flat while adjusted PTC benefited from the settlement of a legal dispute at our CCGT [indiscernible] in the first quarter 2017. The decrease in consolidated free cash flow is largely due to the high recovery in 2016 Eletropaulo to purchase power cost from prior drops. Most importantly, as part of our strategic shift away from the distribution business in Brazil, in Q4 we reclassified Eletropaulo to discontinued operations. This reduces our volatility and eliminates the disproportionate exposure to Brazil in our consolidated financial statements, given our 17% ownership interest. For example, we’ve been consolidating over $3 billion of revenue with over $1 billion of unfunded pension liability with only $3 million of income in 2017.
Mexico, Central American and the Caribbean results reflect improved margins, driven primarily by higher contracted sales in the Dominican Republic, following completion of the combined cycle last year, as well as higher availability in Mexico. Adjusted PTC in ’16 also reflects the reserve taken against certain of the reimbursements in MCAC in connection with a legal matter. Consolidated free cash flow also benefited from receivables collections in the fourth quarter in the Dominican Republic. I’ll also note that our plan in Puerto Rico is now being dispatched and delivering much needed energy to the grid. Payments from the off take of preps have also resumed and we received $40 million since December.
Finally Eurasia, results reflects stable margins and the collection of a large overdue receivable in 2016 at Maritza in Bulgaria. Since the structuring and Maritza’s PPA in 2016, the off-takers have been paying on-time. On the regulatory side, Maritza expects to have discussions later this year with the Government of Bulgaria regarding the European Commission's review of the PPAs compliance with [indiscernible]. We’ll keep you updated as discussions progress.
Now to slide 22, and update on the impact of tax reform. As you know, we incurred a one-time non-cash charge of $1.08 in 2017 upon enactment of the new law, which was largely related to deemed repatriation of foreign earnings. This is a complex bill and some issues still remain to be clarified.
As we disclosed last month, in the near term we expect $0.05 to $0.08 annual impact, largely driven by two aspects; first, we expect meaningful limitation on interest deductions, which are now capped at roughly 30% of non-regulated U.S. EBITDA; second, under the new global intangible income rules, un-repatriated foreign earnings above a certain threshold can now be subject to U.S. tax. We have taken actions to offset these impacts and we'll continue to evaluate additional tax planning opportunities. In the longer term, these aspects of the tax reform they are beneficial to AES. For example, the adoption of a territorial tax regime will provide more flexibility in structuring new investments and repatriating profits.
Now to slide 23 and our improving credit profile. We ended ’17 with $4.7 billion of parent debt and almost $2 billion reduction since 2011. As we announced in December, we used all the proceeds from the billion dollar Masinloc sale to further reduce parent debt, which will bring our debt to about $3.8 billion. As a result, we now expect to achieve investment grade credit metrics in 2019, a year earlier than our prior expectations. We also have a high priority goal of attaining an investment grade rating by 2020. We believe this will help us to not only reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation.
Now to 2017 parent capital allocation on slide 24. Sources on the left hand side reflect $1.5 billion of total available discretionary cash consistent with our expectations. This includes $637 million of parent free cash above the midpoint of our expected range. Uses on the right hand side of the slide are largely in line with our expectations. Investment from subsidiaries are slightly higher than our prior disclosure, largely due to additional investments in U.S. renewables.
Now turning to our guidance on slide 25. Consistent with industry practice, these numbers exclude costs directly associated with major restructuring programs and the one-time non-cash charge of $1.08 resulting from the enactment of tax reform in 2017. Today, we're initiating guidance for 2018 adjusted EPS of $1.15 to $1.25 and reaffirming our target of 8% to 10% average annual growth through 2020. Growth this year will be largely driven by contributions from new projects, cost savings and lower parent interest.
To break this down by SBU, we expect growth in U.S. to be driven largely by positive regulatory actions at DPL, as well as growth in renewables. And these will benefit from continued market reforms in Argentina, higher contracting levels at Angamos in Chile and higher generation in Columbia. Growth in MCAC is expected to be driven largely by completed construction projects, including a full year of operations at are combined cycle in the Dominican Republic, as well as the partial year impact from the commencement of operations at the Colón CCGT in Panama. Finally, we also expect to benefit from cost savings and long-term interest.
This growth will be partially offset by business exits from the Philippine and Kazakhstan, and a higher tax rate driven by U.S. tax reform. Beginning this year, we’ll no longer provide guidance on consolidated free cash flow, which does not accurately account for AES’s ownership interest and our underlying businesses. We believe that parent free cash flow is the most tangible measure of our ability to achieve our financial goals, including strengthening our balance sheet and delivering value to shareholders.
Turning to slide 26. Parent free cash flow is expected to be relatively flat this year from $600 million to $675 million. This reflects lower expected distribution from Gener to allow for incremental investments in Alto Maipo and ensure the maintenance of their investment grade credit ratings. Consistent with prior expectations, we still expect 8% to 10% average annual growth through 2020 off the 2017 base.
I’ll now discuss our 2018 parent capital allocation on slide 27. Beginning on the left side, sources reflect $1.9 billion of total available discretionary cash, including the $600 million to $675 million of parent free cash flow just mentioned. Sources also assumed $1.25 billion in asset sale proceeds, including $1 billion sale of Masinloc in the Philippines and $250 million placeholder for additional asset sale this year. Regarding Masinloc, we recently received a key regulatory approval for the sale to close as early as the end of first quarter.
Now, the uses on the right side of the slide. Including the 8.3% dividend increase we announced in December, we’ll be returning $345 million to shareholders this year as expected. We expect to use over $1 billion to reduce parent debt, including revolver drawings. Finally, we plan to invest at least $250 million in our subsidiaries, primarily from projects under construction leaving about $100 million unallocated cash.
Now looking at our capital allocation from 2018 through 2020 beginning on slide 28. We expect our portfolio to generate $4.2 billion in discretionary cash, roughly 60% of our market cap. This reflects parent free cash flow for the period, as well as our $2 billion asset sale target for 2020, half of which will be realized from Masinloc.
In terms of uses on slide 29, whether half has been allocated to the current shareholder dividend and debt reduction about 750 is allocated to identified investments in our subsidiaries, including projects under construction and late stage development. The remaining $1.25 billion, which is largely weighted towards ’19 and 2020, is available to create shareholder value through investment in compelling growth opportunities, modest deleveraging of about $100 million to $200 million per year and potential growth in our dividend.
With that, I’ll now turn it back to Andrés.
Thanks, Tom. Before we take questions, let me summarize the concrete steps we’re taking to transform and simplify the company; reducing our headcount by 12% this year for $100 million in sustainable cost savings; lowering our parent debt by 20%; investing in profitable, renewable projects with long-term U.S. dollar denominated contracts, including the 2.3 gigawatts we acquired in 2017; and reducing our carbon exposure by exiting 4.3 gigawatts of merchant coal-fired generation.
Accordingly, as a result of our successful execution, we will deliver 8% to 10% average annual growth and adjusted EPS in parent free cash flow through 2020, achieve investment grade metrics in 2019 and reduce our carbon intensity by 25% from 2016 to 2020. Our overarching goal is to deliver sustainable and attractive risk adjusted total returns to our shareholders.
Operator, we would now like to open up the lines for questions.
We will now begin the question-and-answer session [Operator instructions]. The first question is from Ali Agha of SunTrust. Please go ahead.
First question Andrés on the Alto Maipo. In the past, when you have put that project as part of your construction pipeline, you resumed a zero return on the investments you've already made there. Can you give us a sense of what’s roughly the incremental investment you will need to make and the economic or financial case internally that you went through to decide, we should go forward with this as opposed to perhaps writing-off the previous investment you've made there?
I can’t comment right now on what the amount of the additional investment AES Gener would have to make at this point. But that will happen when the financing is closed. But I would say that what is important is Gener has been strengthening its balance sheet, selling some assets. Also, as Tom mentioned, there'll be somewhat less dividends this year as a result of investments to be made in Alto Maipo.
Now in terms of what to do with the project going forward, of course what matters is just the marginal costs and the marginal benefits. And that's what we have been looking at. I think that from a strategic point of view, having Alto Maipo plus Las Lajas and Alfafal, that’s all part of one big complex, you will have at the end 750 megawatts of capacity and power right in the low center of Chile.
So this we think will be a very attractive asset. And as you know, this will, I’ll say balance Gener’s risk because Gener has been very heavily weighted towards the coal plant. And as again Tom mentioned in his speech, we did have the impact of green taxes in 2017. So that's what we're looking at Ali. We’ll look at the entire picture, it's like the marginal returns on the investments we're making and the positioning of Gener as a company into the future.
Second question, as you mentioned the parent free cash flow profile is relatively flattish in ’18. How does that impact your dividend plans? And when you think about the 8% to 10% growth in dividends, could we expect that as an annual number or would that follow the parent free cash flow profile?
I think if you look at the growth of our dividend, I think we've had the fastest dividend growth of any company in our sector. And so I think going forward, we’ll continue to analyze what's the best use of our cash. Certainly, we don't think we're getting a lot of credit for our growth in the dividend and the fact that we're on a path to become investment grade. So we will look at what we think is the best use of our cash going forward. I think we’ve laid out our priorities as want to become investment grade and into that we have the transformation of the company that’s underway that we’ll decrease risk and we’ll also ensure our growth into the future.
And Andrés just to clarify remind me again, that 8% to 10% growth in EPS and better free cash flow ’18 through 2020. Are you also committing to an 8% to 10% growth in the dividend commensurate with that?
At this stage, we haven’t made any comment on an 8% to 10% growth in the dividend. We’re committing to adjusted EPS growth and the parent free cash flow growth.
Last question, the billion dollars of asset sales that you are planning between ’18 through ’20 period. Is the impact of that already factored into that 8% to 10% EPS growth that you’ve laid out for us?
Absolutely. And so I mean, we’ve been talking about a balanced approach. I think if you look at our sales, we’ve really gotten good value for our shareholders on those sales. As I said, we also think that coal will continue to play a role. But what we’ve focused on, certainly we focused on coal merchant plans going in, we’ve also focused on simplifying our portfolio. Now, depending on the quality of the asset whether it’s a creative or dilutive that will depend, but this is baked into our vision of the future and what we will deliver.
So we feel very comfortable about hitting that billion dollar target, some are could be selling out and some could be selling down. And another factor in our strategy, which we perhaps haven’t highlighted in this speech, but we’ve attracted more than $4 billion of partnership capital. So we’re really looking at maximizing our returns and partnership capital in general has given us a lot of flexibility and the allocation of our resources, helped us manage risk and it’s also helped us into our returns.
Our next question comes from Angie Storozynski of Macquarie. Please go ahead.
So two questions. How does the new solar power impact your growth plans for sPower? And then secondly, if you could elaborate a little bit about those negotiations concerning Maritza and some state aids that you mentioned. Thank you.
Let’s talk a little bit about the solar panel. The impact of the tariff, the 30% tariff, is baked into our forecast. And it hasn’t had a material impact on the business. So I don’t know Tom perhaps you’d like to comment on it.
I think as Andrés has said, I mean the expectation of a tariff have been obviously out there for some time since early or middle of last year. Some of the being thrown around were actually higher than that so it’s certainly within expectations of what was going to be passed. I think that was taken into account by our teams at sPower and our distributed energy business, so generally we’ve moving forward. Sure on the margin there were small number of opportunities that fell off or at least that put on hold. But I think the team has been moving forward, most of it is evidenced by the large signing of contracts that we identified just most recently.
Okay, let me take the second question which is regarding Maritza. We just wanted to mention this at this stage it's very early to say what the outcome of this would be. It's basically known that DG comp of the European commission does reviews of long-term PPAs, and then whether they contain what's called illegal state aid. We feel we have a very strong contract. We will -- that there's a lot of ways that this could be resolved, and at this stage and I will keep you informed as it progresses.
But again we feel that we have a very strong contract. And as you know, a couple of years ago they ran up a very significant IOU, more than €400 million. On our calls we said, look, we expect to be paid because of the strength of our contracts and quite frankly because of the investment grade of Bulgaria and the fact the public sector had the means to which to pay. Those things were resolved, stay tuned, we'll see where this turns out. But again, we think we're starting from a strong position.
Our next question comes from Julien Dumoulin-Smith of Bank of America, Merrill Lynch.
Just wanted to follow up on the last question a little bit. You’ve alluded to or you reaffirmed today the 8% to 10%. Can you just clarify to the extent to which that that is inclusive of the asset sales basically that sort of an implicit guide up, because I think before you talk about the 8% to 10% being exclusive of those and needing to have find, call it cost cuts and/or other sources to offset the dilution from asset sales. Am I thinking about that correctly?
I think maybe we weren’t as clear in the past. But I think the 8% to 10% is inclusive of asset sales. I think there’s a basket of some things that we may sell out or sell down as Andrés said. And it does also assume use of capital for deleveraging and reinvestment, I would say our reinvestment is at rates less than what we’ve been investing at. So we feel quite good about those.
Said differently again, you basically found the cost savings this point to fully offset the full slate of 2018 through 2020 asset sales. And again, just to make sure this is clear, that it’s only billion dollars of asset sales that's reflected in that 8% to 10% or what magnitude through the full three year period?
No, it's only an additional billion, so it's Masinloc plus a billion.
Our next question comes from Greg Gordon of Evercore ISI. Please go ahead.
I have one, one other question. The language you used to describe the impact of tax reform, as you say in, near term impact of $0.08 to $0.10. What is -- does that imply that the impact, all things equal and obviously this is before what you're doing to offset it, changes over time? And if so, can you give us some insight into whether it gets better or worse over time and a base case before offsets? And then other than the cost cutting which you’ve been announced. What are the things that you’re doing to offset that base case impact of tax reform?
So let me take at a high level and then I’ll pass it to Tom. What we’ve talked about is $0.05 to $0.08 initially. There are two sides, so this one is the limitations on interest, expense, deductibility related to EBITDA in the U.S. And the second is the global intangible low tax income. Now, there remains a lot to be clarified on this law. So this is -- we’re taking conservative approach to it. Why does this change overtime, well it changes because your asset base changes and also has to do with your level of indebtedness, changes overtime. So what happens overtime it gets better as the effects of a lower tax rate kick in. So that’s number one.
Number two, as Tom said in his speech, we really clean the slate by basically using our NOLs to pay for the tax expense of deemed repatriation of foreign earnings. So really as a result of it, we’ll have a much more transparent tax position as time goes by. Now, we do need a further clarity, clarifying need to make sure that any actions we take to optimize our capital efficiency are the ones in the long term. So with that I’ll turn it over to Tom.
Greg, I think we say near-term it’s a two to three year period. We look beyond that we’re seeing lower impacts based on we see in that -- as we see it. There is lot of moving parts but in general as we work through our NOL position and as part of the charging took at the end of the year and the deemed repatriation of foreign earnings, we used about $1.9 billion of our NOL. So as our NOL decrease and we move towards a taxable position over the next two to three years, the overall impact of tax reform from an earnings standpoint can actually be less. But I would probably say near-term $0.05 to $0.08 call it two to three years. And then as we look at it, we would see that number of potentials right down. Obviously, we’re trying to make numbers lower and having the ramp down effect accelerated possible. So those are the things that are still work in progress.
And all that being said, that’s fully baked into the growth rate expectations that you’re aspiring to earnings and cash flow?
Yes, we have the $0.05 to $0.08 impact baked into 2020.
The next question is from [Gregg Orrill] of UBS. Please go ahead.
Maybe you’ve address this a bit earlier. But in terms of your stance to keep AES Gener investment grade. What do you think is required there? What levers would you pull?
Well, we’ve basically been pulling the levers we talked about in the past. We said Gener have a lot of levers, realized that Gener had a very good year in 2017. So we’ve had some asset sales, sales in non-core assets. We have sold a peaking plant. And we’re also in the process of selling some other non-core assets, which we think quite frankly were at very good multiples. And these will be used to pay down debt at Gener to shore it up. So while the Gener price has suffered greatly in the last say two years, at the same time, Gener in terms of if you look at it, our earnings this year or cash flow is really at record levels due to the fact that we cut the ribbon on time and on budget on the other projects. So Gener again, we will keep it the investment grade, there are a lot of levers to pull. And as we said, we weren't putting in more money from AES into Gener.
Gregg, I’ll just say, basically the dividend we got last year from Gener was around $160 million, $170 million, it was AES share. And all the numbers we expect to have to be a lower number. I don't want to get specific because obviously Gener is a public company, but I’ll just leave it that we are being more conservative with expectations for ’18 until Alto Maipo gets tied up moving forward.
The next question is from Steve Fleishman of Wolfe Research. Please go ahead.
The question on the cost cuts and you said strengthening the 8% to 10%. Could you maybe just give a little more color on what you mean by strengthening? Are you seeing yourself higher in the range or you have more cushion in the event that something doesn't go right. How should I think about that?
Well, I think when we talk about strengthening, it’s quite frankly. I’ll say decreasing the band, increasing the certainty that you're going to hit your numbers. We had a lot of these things, I would say, in the works but it certainly feels good to have executed on them. So just to be clear on the cost savings program that we just announced, I mean, that's mostly executed. And we will have those numbers in hand in the first half of this year. And of course, we have the one time severance costs as well included in our number. So most of this is that we feel that as we execute, we reduce the -- or increase the certainty around our numbers and makes them more robust to any unforeseen possibility.
And as you stand today, what do you see as the biggest risk to achieving the growth target, if any?
Well, I would say, look. We have I think listed them. I think it's very important to close an Alto Maipo that we have, even though it does mean Gener has to make material contributions, this is very dramatic shift and the risk of this project, because we're going from one where essentially when it came to geological risk, it was cost plus to a one where we have certainty on the cost. And second, where we really have one contractor rather than two and that contractor will have significant skin in the game and every incentive to finish at the lowest cost and as early as possible. So I think that is very important.
I think, you know, as I mentioned regarding Bulgaria, this is something that we have to see the resolution of it. We think we're in a very strong position, like we thought we were -- when we ran at the €400 million of IOUs. But stay tuned, because it's too early to say where that would turnout. I think that we have opportunities for the upside in a number of our markets. I am very encouraged by the returns we're getting on our renewables and gas projects, especially outside the U.S., we have an excellent pipeline of projects in Mexico, dollar denominated with private sector off takers.
I'm very excited about the solar plus energy storage possibilities. We're excited about the sPower pipeline. And regarding Fluence, I think we're seeing that that market is starting to turn. This is a classic new technology, which will go through s-curve and we have to see when that turns up. Now speaking about Fluence, I think that’s more of a play where it’s not incremental earnings per year it’s just really creating a lot of value, three years to five years from now probably, like we did with the Brazilian Telecom.
And then last question just on the -- Tom, I think you mentioned something about a potential partner for sPower. Could you give a little more color on that and just -- or is it just mainly for somebody who would buy a stake in current operating projects?
Steve, we’ve been approached by some parties about stakes in operating projects. And it would be something that we would do obviously with [s] and with AIMCo jointly. I mean it’s just reinforces that value of their operating portfolio where we’re obviously quite focused in the growth portfolio. But it reinforces the value of their operating portfolio and it’s potentially attractive to some co-investors, so we’ll see.
And how it effectively part of your asset sales?
Yes, it’s part of a bucket of opportunities, basket of opportunities, yes.
So instead of opportunities, $2 billion we got $1 billion is Masinloc of the billion dollar set, the set of opportunities is greater than billion.
The next question is from Charles Fishman of Morningstar Research. Please go ahead.
Just specific I guess I’m looking at slide 52 where you break down the adjusted PTC breaking by SBU. And Andes certainly had some strong growth, ’18 versus ’17. And I realized you don’t -- you’re not giving, when you talk about 8% to 10%, you’re not breaking it down by SBU. But certainly, there is some very significant growth opportunities that you’ve outlined in the U.S. as well as MCAC. I thought that maybe with the problems at Alto Maipo it would maybe take the wind out of the sales of the growth in Andes, and yet you hadn’t good growth in ‘18. Am I being too hard on -- or the other opportunities in that SBU just greatly outlaying the problems at Alto Maipo or is Alto Maipo not as bigger hit as maybe I thought and I realized you haven’t disclose that. Where am I going wrong maybe on my outlook for Andes?
Let me clarify. First, remember that again Gener had a record year last year. The Alto Maipo issues are perspective. This is not current. The drop in the price of Gener stock is part of I think a decrease in prospective prices, the market is thinking what are the future prices. Now realize Gener is fully contracted through 2023 and 50% thereafter, realize also that Gener is taking a very large market share of commercial and industrial contracts. So Gener is a strong company an investment grade company.
Now talking about Andes itself, we had a very good year in Argentina. We have 3 gigawatts of excellent assets in our Argentina, we’ve always had. We’ve had relatively low debt in Argentina. So to the extent that the wholesale market has liberalized in Argentina and dollarized, this has been a positive for us. Also realize that AES Gener is about 30% Columbia, 30% hydro in Chivor. So Andes is a SBU, it’s much more than just Alto Maipo, and you realize that you're talking about, in total, almost 7gigawatts of capacity that you have in Andes and Alto Maipo being 500. So the important thing I think is to resolve Alto Maipo to decrease the uncertainty and I would expect to have a positive reaction in terms of Gener stock and hopefully AES stock as well.
So really Andes will contribute again realizing you're not breaking the 8% to 10% down by SBU. But you foresee Andes contributing through that 8% to 10%, just along with U.S. and MCAC, correct?
I'd say certainly we don't see it as a drag. I mean, we have interesting renewable opportunities in the region and that even Gener has solar projects now under construction. So there is a lot of opportunities in the region. And what we are looking forward to is resolving the issues of Alto Maipo and have certainty, and getting pass that and really focus on the other projects in the future.
Well, it sounds like your team has done excellent job of being close to resolving a difficult situation in Alto Maipo, so that's certainly a positive. Thank you.
The next question is from Lasan Johong of Auvila. Please go ahead.
Andrés, I'm a little confused. In the press release, it says that ASC classifying and Eletropaulo as a discontinued operation. And then Tom said that is going to be deconsolidated. My understanding was there going to deconsolidated not sold. So is there a change in status of Electropaulo?
It’s both deconsolidated and classified under discontinued operations. So that would be, as I said, will be part of -- so it’s true on both counts. In other words, our revenues and operating costs and everything don't flow through our financials, which makes our financials much easier to understand, especially given the debt and unfunded pension and those kinds of things. But also as classified as discontinued operations that would say that we're going to continue on our strategic shift with respect to Electropaulo and assess our ownership interest.
So at some point, it would be up for sale?
I don't want to get too specific, it’s a public company, but that’s being -- I think discontinued operations, you can bring it from there.
Make our own assessment, okay. Andrés, it sounds like AES is moving much more towards a carbon de-risking portfolio in the U.S. And so it's interesting, the development of sPower going forward. Would it be advisable at some point for AES to sell IPL and DPL and use that capital to bolster both sPower’s development program and maybe do further renewable acquisitions in the U.S.?
To me put a little bit carbon de-risking in perspective. So we're taking a balanced approach. We can see that coal could have a role to play in some markets well into the future. If you take our U.S. operations, for example, IPL, IPL will go from 79% coal to about 44% coal when we cut ribbon on Eagle Valley. So what we’re really talking about is we see this as a long-term sort of de-risking. And we also will be doing things like we have found ways to run our coal plans at lower means, we’re talking about taking down from 50%, 40% down to around 20%.
So this combined with at certain hours of the day very cheap renewables will allow us to run our coal -- decrease our carbon footprint, but at the same time take advantage of our coal plants using basically like large batteries. So when you talk about something like, IPL we think it’s -- or DPL, these are part of that strategy and that they really complement what we are in terms of the various sources of financing we have and the various growth opportunities. So right now we would consider those utilities as core to our business proposition.
Last question to Tom, the interest deduction restricts on the U.S. portion. Obviously, back on the envelop calculation, it looks like about $20 million to $30 million would not qualify out of about $265 million. Is that about right, are we in the same for the ballpark?
Just on a standalone basis, it’s hard to look at the tax -- any tax piece of puzzle in isolation. But our U.S. income that would be available to shelter our interest would be less than that. Keep in mind that the U.S. income that’s in the utilities and some of the other investments is not income that’s available to offset interest, but it’s a longer story than that.
I think it’s in our interest…
Just an unregulated stuff…
But as always, it’s not quite that simple. I would say just coming down meaningfully our interest last year was about -- was well over 200, I think as we see it after paying down the billion dollars of debt and also looking at some other opportunities, we’ll be under $200 million on a run-rate by mid-year. So next year we expect interest to be maybe $180 million or something in that ballpark. So by reducing debt, we’re meaningfully limiting the issue.
So next year how much of the interest expense would not qualify for the reduction?
I think there is a lot of moving parts that started baking all together and said $0.05 to $0.08. And once again, it’s hard to look at. Even some as before and some of the issue we talked about access taxes on foreign that could be an offset in part to the interest. So it’s a lot of different equations but just to boil it down, we think $0.05 to $0.08 for the next two years or three years.
This concludes our question-and-answer session. I would like to turn the conference back over to Ahmed Pasha for any closing remarks. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.