AES
#Good morning, everyone, and thank you for joining our first quarter 2017 financial review call
Today, I will discuss our financial results and provide updates on our strategy to deliver attractive risk-adjusted returns to our shareholders
Since our most recent call in late February, we have made significant progress on a number of key objectives for 2017. We advanced our construction program, which will be the major contributor to our cash flow and earnings growth over the next four years
We capitalized on our existing platforms to further enhance future growth by targeting long-term US dollar-denominated contracts
We have taken steps to decrease our covenant intensity and merchant exposure
These steps will reduce our financial and operational risk
We continued our efforts to strengthen our credit profile by prepaying $300 million of Parent debt
This also increases Parent free cash flow by lowering interest expense
We are on track to achieve our $400 million per year cost reduction and revenue enhancement program
I will discuss these achievements in more detail in a moment, but first I would like to summarize our financial results on Slide 4. In the first quarter, we earned $0.17 of adjusted EPS versus the $0.15 we earned in the same period last year
We generated $546 million of consolidated free cash flow, $56 million higher than last year
Based on our first quarter performance and our outlook for the remainder of the year, we are reaffirming our full year guidance for all metrics
Now I would like to turn to our strategic accomplishments
As you can see on Slide 5, we have 3.4 gigawatts under construction and expect it to come online through 2019. Overall, we have achieved significant progress on all of these projects
Turning to Alto Maipo on Slide 6, as you may recall Alto Maipo is an expansion of our existing Alfalfal plant in Chile
As we discussed on our last call, the project has been experiencing tunneling challenges resulting in cost overruns estimated in the range of 10% to 20%
Over the past couple of months, we have made significant progress on this project
First, we have secured additional financing commitment for up to 22% of the project cost equivalent to $460 million including contingencies, of which $117 million will be funded by AES Gener and the remaining $343 million will be funded by the project lenders main contractor and minority partner
Second, Alto Maipo is now about 52% complete and we remain on track to reach COD in 2019. Turning to Slide 7, at our Eagle Valley, CCGT in Indiana, the EPC contractor is sub-contracting some of the work in an effort to accelerate the recovery plan
On our February call, we’ve revised the completion date for this project to the first half of 2018. However, the EPC contractor is projecting substantial completion before year end 2017. Although any delay is unfortunate, we have a fixed price contract with the EPC contractor under which they are incentivized to finish the project in a timely manner
The CCGT has achieved several important EPC milestones, and we expect first fire to occur in the third quarter
Turning to Slide 8, in our 1320 megawatt OPGC 2 project in India, we continued to make steady progress on construction and the project is expected to come online by the end of 2018. Finally, turning to Slide 9 and Colón in Panama
I am pleased to report that we have reached a number of milestones on our Colón CCGT and LNG regasification facility in Panama
The LNG facility is efficient to handle 80 Terrra BTU annually
Our CCGT will use about one quarter of the tank’s capacity leaving substantial upside potential to meet the fuel needs of additional power plants, ship bunkering services, and downstream commercial and industrial customers
We will continue to focus on providing a cleaner, more cost-effective alternatives to oil-fueled power generation while at the same time satisfying a growing need for natural gas in Central America and the Caribbean
To that end, on Friday, we announced that we have entered into a joint venture with ENGIE to market and sell LNG from our Panamanian LNG terminal to third parties in Central America
This joint venture will help us monetize the tank’s remaining capacity as additional LNG is sold using our terminal
It also further strengthens the agreement we signed last year to jointly market LNG in the Caribbean from our Andres regasification facility in the Dominican Republic
With ENGIE as our partner, and both Colon and Andres online, in 2019, we will have the leading position in Central America and in the Caribbean’s LNG regasification market
Turning to Slide 10, as you know, we are the world leader in battery-based energy storage
We currently have 394 megawatts in operation, under construction, or in late-stage development not including the 82 megawatt of our advanced energy storage platform that we have sold to third-parties
Since February, we have delivered 37.5 megawatts of four hour duration storage, the largest lithium ion energy storage installation in the world, the San Diego Gas and Electric
Following our successful commissioning of this project, San Diego Gas and Electric has awarded us another 40 megawatts four hour duration project
Although energy storage has significant potential for growth, at this point, we have not assumed any material contributions in our outlook
Turning now to Slide 11 and our cost savings and revenue enhancement initiatives
This year, we are merging our Europe and Asia strategic business units which will drive significant savings
We are also continuing the work we began last year on standardization and improved sourcing and reliability
These initiatives put us on track to achieve $50 million of incremental annual benefits in 2017 and to hit our $400 million annual savings target by 2020. Now turning to our continuing efforts to reshape our portfolio beginning on Slide 12. As we have discussed on our recent calls, we have been repositioning our portfolio towards businesses that are less carbon-intensive and have long-term US dollar-denominated contracts
This repositioning is a key element of our strategy to reduce the risk of our portfolio
This year, we have already announced our plan to sell or shutdown 3.7 gigawatts of merchant coal-fired generation in Kazakhstan and Ohio
This is 26% of our total coal-fired capacity and 70% of our merchant coal-fired capacity
Specifically, we divested 1.7 gigawatts of coal-fired generation in Kazakhstan for net proceeds of $24 million
With this sale, our only remaining assets in Kazakhstan are two plants with 1 gigawatt of hydro capacity, which are under concession that expires in the fourth quarter of this year
We expect to exit Kazakhstan following the expiration of this concession
We have already announced the shutdown of 1.3 gigawatts of merchant, coal-fired capacity at DPL
Subsequently, we’ve also agreed to sell an additional 739 megawatts of DPL owned generation for $50 million in net proceeds
Although the Kazakhstan and Ohio merchant coal sales appear to have low value on a per kilowatt basis, on a PE basis, we managed to achieve a multiple of roughly nine times
We will continue to update you as we make progress on additional asset sales to further reshape our portfolio
Turning to new businesses
Slide 13 provides an update on our Southland Repowering in California
As a reminder, we were awarded 20 year PPA by Southern California Edison for 1384 megawatts of capacity which includes 100 megawatts of energy storage and 1284 megawatts of combining cycled gas capacity
Last month, we received final environmental approval for the project
We are on track for financial close and to begin construction by mid-2017 with completion of the gas-fired capacity in 2020 and the energy storage capacity in 2021. We anticipate funding the $2.3 billion in total project cost with a combination of non-recourse debt and approximately $400 million in equity proceeds from AES
Turning to Slide 14 and our pending acquisition of sPower
We continue to see the potential for adding 500 megawatts to 1 gigawatts of renewable contracted power annually with attractive low double-digit IRR
Furthermore, we see an opportunity to capitalize on the development skills of the sPower team to tap into the growing market for renewable PPA for large corporate and incorporating energy storage on their platforms
We received the FERC approval for the transaction last month and expect to receive the remaining approvals and close no later than the third quarter
As you can see on Slide 15, we are also making progress on renewable in Mexico, and Brazil
In Mexico, we were awarded exclusivity to negotiate 25 year US dollar-denominated PPA with private offtakers to build a 306 megawatt wind project and a 60 megawatt co-generation plant
These are our first Greenfield developments in Mexico in many years and we see a number of other good growth opportunities in light of the market reforms implemented by the Mexican government
Lastly, we signed the acquisition of the 386 megawatts, Alto de Sertão wind farm in Brazil that we announced on our last call
This project will help diversify Tietê’s fuel mix and hydrological risk
With an average remaining contract life of 18 years, the project will also help to reduce future exposure to short-term price movements
This 600 million Real acquisition is being funded entirely with debt capacity at Tietê demonstrating once again our ability to utilize local debt capacity in order to grow our business and improve returns
Turning to Slide 16, this brings us to our portfolio, which we expect to generate 8% to 10% average annual growth in all of our key financial metrics through 2020. This growth is largely driven by the completion of our projects under construction, our cost savings and revenue enhancement initiatives, lower interest expense, as we continue to delever, and attractive returns from recent acquisitions and our development pipeline
We see further upside potential if we are able to capitalize on the LNG and energy storage opportunities I discussed earlier
Turning to Slide 17, our portfolio will generate $3.8 billion in discretionary cash through 2020. This is largely driven by Parent free cash flow and the proceeds from asset sales
This internally generated discretionary cash is sufficient for us to meet our dividend growth commitment to fund our growth platform and reduce our corporate debt to achieve our strategic objectives
Overall, we remain confident that we can deliver attractive growth to our shareholders through 2020 and beyond
With that, I will turn the call over to Tom to discuss our first quarter results, capital allocation and guidance in more detail
Thanks, Tom
We have made significant progress in executing on our strategy by advancing our construction programs which is the key driver of our earnings and cash flow growth capitalizing on the advantages from our existing platform in markets where we have a strong position to make investments to ensure growth beyond 2020, rebalancing our portfolio to reduce risk and complexity by exiting non-core businesses and redeploying the proceeds consistent with our capital allocation framework, prepaying parent debt to improve our credit profile and achieving investment-grade metrics and optimizing our cost structure to improve operational efficiency and achieve our $400 million in annual savings target by 2020. With these actions, we are positioned to deliver average annual growth of 8% to 10% in all key metrics including free cash flow, earnings, and our dividend
Combining this growth and our current dividend yield will result in a total return of greater than 12%
We believe our attractive total return proposition will be better reflected in our share price as we continue to make progress on our strategic objectives and guidance
Now, we will be happy to take your questions
Question-and-Answer Session
Good morning, <UNK>
Good morning, <UNK>
Okay, let me take the first one
In terms of the first, this is what we have announced before, I mean, I think we’ve delivered, actually more than delivered every year in terms of the guidance we set out
So what we are saying is we feel very comfortable with the $50 million that we announced and is in our guidance for 2017, and an additional $50 million in 2018 and last time we also announced that we – that program will continue ---+ this sort of productivity improvements will continue in 2019 and 2020 although somewhat at a decelerated pace
So, basically, this is just a reaffirmation of what we announced before
Now on the – sorry, the second question is in terms of, when you are talking about the dilution from the sale of the DP&L assets
Yes, <UNK> it’s probably couple of things when you look at DPL it’s probably about a penny and obviously it depends upon terms et cetera
But maybe it’s about a penny in terms of the – what we are looking at, but that was all contemplated when we gave our guidance in February
I would say on a cash flow basis, DPL will be pretty neutrally cash flow EBITDA minus CapEx is pretty much breakeven as we see it through our forecast period even before other indirect costs
No, <UNK>, that is part of the 50 for this year and part of the 100 for the end of next year
So we will continue to take steps, obviously as we divest those assets, that also helps us to accelerate this process
Well, I think, what Tom and I said, I mean, the main is our construction program
So we had three CCGTs that will be online in 2018 we have the cost-cutting program that we have announced and we’ve had the continued delevering
So those are the three main items that are going to contribute to the increase in our earnings and cash flow in 2018.
Yes, it does
Yes, that’s correct
And like all of our numbers, that’s based on currency and commodities, forward curves as of today
Good morning, Greg
Greg you are right
This includes the cost overruns
So there is a typo there, as you mentioned
Yes, probably, maybe just rounding
Sure, hi, Angie
In Brazil, what we are seeing is, last quarter, we saw flattening of the decline and this year we might seeing a slight pickup in demand
But, more like 1% demand has decreased like 10%
So, overall, we are modestly optimistic about Brazil
The President is taking a number – on a number of the important reforms that it flow through, going very well for the country, but we expect a gradual slow recovery in Brazil
Now this year, they are having a drought and as Tom mentioned, I think, it’s a good example of how our change in commercial strategy and the level of contracting that we have had made it, quite frankly a very small issue, where two years ago it was a very big issue for us
And so, it’s basically the same asset I should say, but it makes a very big difference
So, with the acquisition of the wins that will help provide Tietê with basically assets which are not correlated with hydrology which are contracted at 18 years at good prices
Now regarding our utility, which is Eletropaulo and remember we sold, Sul
What we are doing is moving forward on listing it on Novo Mercado and that is going well
And so basically, being on the Novo Mercado means, one share one vote and therefore we would no longer consolidate Eletropaulo in our numbers
Now the company has had a significant recovery in its share price this year and it’s continuing to make improvements operationally
We have not secured anymore contracts for Alto Maipo at this stage
It’s part of the Gener portfolio
So, they have basically the Gener, it’s highly contracted through 2021, 2023. So we don’t have any immediate issues at Gener
I mean, last year was a record year for Gener, both on earnings and cash flow
This year is also looking extremely good
So, what we are seeing, again, as re-contracting rates passes that window, what we’ve seen on the – we have signed some new contracts, especially one of our subsidies of Gener which is Guacolda and these were rates around 70. But we continue to see sort of a long run price in the sort of mid $60 per megawatt hour and that’s without assuming any sort of rebound in mining activity or more rapid growth of the economy
Chile is growing about 2%, 2.5% and traditionally it’s been growing more sort of at 4%, 5%
So we have a pickup in economic activity
We think these prices could improve further
That will depend a little bit on – to what extent we have partnerships in those deals
This year, with the acquisition of sPower and some of the new things we’ve commissioned, we’ll be close to that number in terms of new projects and acquisitions
So, but it will depend on how much of those projects we own and whether it’s 50%, whether it’s 80%
We continue to plan to basically include partners on most of our big projects
Well, when I think of the new strategy that we announced, based on the prior five year strategy, it would be an evolution of it
We think that the key elements are really having platforms, integrating renewable with existing capacity from thermal and hydro
And also being a leader in new technology
So, we are all about three months into the new strategy and we will update you next time
Thank you, <UNK>
That’s a very perceptive question
It’s 52% complete that includes all of the works and all of the equipment
On that tunneling we are more than a third complete on the tunneling
And basically what happened here is that the rock ended up being a less crusted than all of our projections and that’s what’s really slowed us down, because when you have to do more reinforcements you have to go more slowly and it was a bit surprising, because this is an expansion of an existing facility Alfalfal
So it’s in the same mountain
It reterminates some of the same water
But that is what it is and as you are right, we are not the first to have encountered a different lock and what was expected once you start tunneling
That’s exactly right
We have three of them in operation now, three TBMs and a fourth one on order that’s coming down
So we will have four TBMs operating on this site
Okay, thank you
