The AES Corporation (NYSE: AES ) Q2 2015 Earnings Conference Call August 10, 2015 9:00 am ET Executives Ahmed Pasha – Vice President of Investor Relations Andres Gluski – President and Chief Executive Officer Tom O’Flynn – Chief Financial Officer Bernerd da Santos – SVP and Chief Operating Officer Analysts Greg Gordon – Evercore ISI Ali Agha – SunTrust Chris Turnure – JPMorgan Stephen Byrd – Morgan Stanley Angie Storozynski – Macquarie Gregg Orrill – Barclays Charles Fishman – Morningstar Equity Julien Dumoulin-Smith – UBS Operator Good morning. My name is Alica, and I will be your conference operator for today. At this time, I would like to welcome everyone to the AES Corporation Q2 2015 Financial Review. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ahmed Pasha, you may begin. Ahmed Pasha Thanks, Alice. Good morning, and welcome to our second quarter 2015 earnings call. Our earnings release presentation and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andres 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, Andres. Andres? Andres Gluski Good morning, everyone, and thank you for joining our second quarter 2015 earnings call. Today, we reported second quarter EPS of $0.25 and proportional free cash flow of $62 million and we are reaffirming our 2015 guidance ranges for all metrics despite facing increased headwinds from foreign currencies. Before Tom and I provide more color on our results for the second quarter and first half of the year, allow me to review our progress on the priorities for 2015 that I provided on our earnings call in February. First, we are making good progress to reach closure on key pending issues that could impact some of our businesses. At Eletropaulo in Brazil, we have had a reasonable outcome in our four year rate case. At Maritza in Bulgaria, important milestones have been reached towards the resolution of our outstanding accounts receivable. Second, we are executing on our construction program and leveraging our platforms. In April, we commissioned our 1.2 gigawatt Mong Duong plant in Vietnam six-month early and under budget. Our remaining $7 billion construction program is advancing on schedule and we expect to bring 6 gigawatts online by the end of 2018. In July, we also broke ground on three new energy storage projects, including our first two in Europe. Third, we are expanding our access to capital through partnerships at the project and business level. Today, I’m very pleased to announce that we are forming a new 50/50 joint venture with Grupo BAL to invest in power and related infrastructure projects in Mexico. And finally, regarding capital allocation, we have delivered on our commitment to invest at least $325 million in share repurchases. Today, we are announcing that we intend to utilize the approximately $100 million left on our buyback authorization during the remainder of this year. In 2015, between buybacks and dividends, we will return $700 million to shareholders or approximately 8% of our current market cap. I will provide more detail on these achievements in a movement, but now I’d like to briefly discuss our financial results and our expectations for the remainder of the year on slide four. Our year-to-date 2015 adjusted EPS of $0.50 is in line with our results of last year and our proportional free cash flow of $327 million is well ahead of first half 2014 results. Our earnings and cash flow are typically weighted towards the second half of the year. We expect our second half results to benefit from improved availability due to less plant maintenance, better hydrology in Latin America and higher collections in Bulgaria and the Dominican Republic. Although, there is still a lot of work to be done to deliver on stronger cash flow in the second half of the year, we remain confident that we will achieve our financial guidance for 2015. Now, let’s discuss some key issues at our businesses in Brazil on slide five. As we discussed on prior calls, we have seen a decline in electricity consumption in Brazil, which is the result of the economic recession and higher energy prices. Today, economists are projecting a 2% contraction of GDP for 2015. In addition, dry hydrology is leading to high electricity prices by requiring the dispatch of more expensive thermal energy. As a result, we are forecasting a 4% year-over-year decrease in volume at our Brazilian utilities in 2015. Nonetheless, we have already factored in the softness in our prior forecast. As a reminder, every 1% change in volume in our Brazilian utilities has a $7 million pretax impact on our bottom line. Turning now to hydrology on slide six. In Brazil, we have seen rainfall improve more than expected since our last call. In July, rainfall was 156% of the long-term average and reservoir levels are projected to be 37% by the end of August materially higher than the 20% levels at the beginning of the year. Improvement in hydrology in Brazil is reflected in spot prices, which are now around 120 reis per megawatt hour significantly lower than last year. We now see the risk of rationing electricity in Brazil in 2015 as remote, but we continue to expect a negative earnings impact of $0.07 per share from poor hydrology this year. In Panama, we are observing a return to normal hydrology and spot prices are about $100 per megawatt hour, one-third of the prices we saw last year. In Colombia, our 1 gigawatt hydro plant Chivor is experiencing stronger inflows close to the historical average. While in the rest of the country, inflows are 90% of the long-term average. Turning to slide seven, we have received approval for Eletropaulo’s four-year tariff reset. This outcome sets a strong foundation for predictable cash flow and earnings from this business through 2019. Lastly, we have successfully negotiated the restructuring of Brasiliana, where we own various businesses in partnership with BNDES, the state-owned development bank. Through this restructuring, we are separating our generation business, Tietê, from other businesses under the Brasiliana umbrella. This separation will give us more control of operations and capital allocation decisions at Tietê. Once this transaction is completed, we will be in a more favourable position to grow Tietê by tapping into approximately $500 million of debt capacity at this business. Turning to slide eight, as you may recall, in April, Maritza signed an MoU with its offtaker, NEK, whereby Maritza would receive a full payment of all arrears, which as of June 30 were $281 million in exchange for a reduction in the capacity price of the long-term PPA. Since our last call, we have secured the required approvals from the project lenders and from the Bulgarian regulator. At the same time, the government of Bulgaria has taken concrete steps to improve NEK’s financial position. Parliament has approved the energy sector reforms to support NEK through a new 5% tax on generators income as well as allocating all proceeds from the sale of the state’s CO2 allowances to NEK. Finally, the regulator announced an increase in the tariff of up to 20% for certain classes of industrial users and reduce NEK’s commitment to procure more expensive renewable energy. These steps will strengthen NEK’s financial position and allow the Bulgarian public sector to raise the necessary financing to pay their outstanding receivables. We expect to sign a binding agreement and collect on all arrears in the second half of the year. Collecting from NEK will be an important contributor to the improvement in our free cash flow in the second half of the year. Now let’s turn to our progress towards our strategic objectives beginning with construction on slide nine. Our construction program is the most important driver of our 10% to 15% average annual growth in free cash flow over the next few years. This strong growth in cash flow is the foundation for our commitment to a 10% annual dividend increase as well as all other capital allocation decisions. From 2015 through 2018, we expect to commission 7 gigawatts of new capacity in comparison with roughly 600 megawatts we brought online in the three years from 2012 through 2014. Through June, we’ve already brought online 1.3 gigawatts, which is nearly 90% of the capacity we plan to commission in 2015. Moving onto slide 10, our remaining 5.8 gigawatts under construction are progressing well and remain on time and on budget. As you can see on the slide, roughly 80% of this new capacity is in the Americas. As a reminder, total CapEx for our projects currently under construction is $7 billion, but the AES’ equity commitment is only $1.3 billion and all but $400 million has already been funded. We expect an average return on equity from these projects of more than 15%. Turning now to slide 11, as we discussed on our last call, we achieved commercial operation on our 1.2 gigawatt Mong Duong project in Vietnam six months early and under budget. The plant is operating at full load and will help meet Vietnam’s rapidly growing demand for electricity and provides us with a solid platform in the country. Moving on to slide 12. We are the world leader in battery-based energy storage with 86 megawatts of installed capacity. We are seeing growing regulatory support and greater acceptance by utilities in our markets. As a result, we recently broke ground on three new energy storage projects totaling 40 megawatts in three countries. We are consolidating our global leadership and now have a total of 70 megawatts of energy storage under construction that we expect to come online through 2016 and 200 more megawatts in late stage development. We are very well-positioned to continue to take advantage of this emerging business opportunity given AES’ portfolio and eight years of successful and profitable experience operating battery-based energy storage. Turning to the new joint venture we are forming in Mexico on slide 13. Today, we announced that we signed an MoU with Grupo BAL, a Mexican business conglomerate with a market cap of $11 billion to pursue new power desalinization and natural gas projects. Grupo Bal is one of the largest and most respected business groups in Mexico and one of Grupo Bal subsidiaries, Grupo Penoles is the off-taker of our TEP plant in Mexico. As you may know, Mexico is in the process of implementing new energy sector reforms, which will allow for greater private sector participation. Over the next 10 years, it is estimated that Mexico will need 25 gigawatts of new or replacement generation. We have owned and operated a successful generation business in Mexico for more than 15 years and now with Grupo Bal we’re poised to take advantage of the opening of the energy sector. Turning to slide 14, looking at growth opportunities beyond our projects currently under construction, all of which we expect to complete by 2018, our future project mix is likely to be heavily weighted towards natural gas and renewable, while using our platforms to provide energy storage, desalinization and LNG related services. In particular, in arid and semi-arid regions such as Chile, where our plants on the coast are already providing desalinization for their own needs, long-term desalinated water contracts can be an attractive business. Using existing infrastructure and permits significantly reduces the cost of providing desalinated water to third-parties such as municipal water authorities, mining and industrial customers. Based on all of the opportunities we see across our portfolio, we believe we can invest $300 million to $400 million of AES equity in attractive growth projects each year, which is consistent with the amount of equity we are currently contributing to our growth projects. This amount of equity investment is quite moderate considering the strong growth in our free cash flow. In addition, we can use the debt capacity at our existing businesses such as Brazil, Chile, the Philippines and the Dominican Republic to fund growth projects. Recycling capital has been and will remain an integral part of our strategy. Over the past four years, we have raised $3.1 billion in asset sale proceeds and another $2.5 billion in partner equity at the business and project level. These actions have permitted us to reposition our portfolio, pay down our debt, improve risk adjusted returns, and accelerate our growth profile. Before turning the call over to Tom, I would like to emphasize that as we have demonstrated to date, we will continue to compete all new investments against share repurchases in order to ensure that we are maximizing risk-adjusted returns for our shareholders. To that end, as you can see on slide 15, we are returning $700 million to our shareholders in 2015, which is 8% of our current market cap. We have returned a total of $2 billion to shareholders since September 2011 and reduced parent debt by $1.5 billion or 25% while significantly lessening it’s average tenure. With that I will turn the call over to Tom to discuss our second quarter and year-to-date results and full-year guidance in more detail. Tom O’Flynn Thanks Andres and good morning everyone. Our first-half results and the reaffirmation of our guidance demonstrate the benefits of our proactive actions to mitigate the impact from currency devaluation in other macro factors we’ve experienced over the last several months. Today, I’ll review our second quarter results, including adjusted EPS, adjusted pretax contribution or PTC by strategic business unit or SBU, proportional free cash flow by SBU, then I’ll cover our 2015 guidance and our 2015 capital allocation plan. Turning to slide 17, second quarter adjusted EPS of $0.25 was $0.03 lower than second quarter 2014. At a high level, we were negatively impacted by the following, $0.04 operating impacts, including timing of plant maintenance of certain businesses, as well as lower demand in contracting strategy in Brazil. These were offset by favorable hydrology in Panama, in Colombia and new businesses coming online. We had a $0.02 impact from a stronger U.S. dollar, which appreciated roughly 20% against the Brazilian Real, Colombian Peso, and the Euro. Finally a $0.02 net impact from other adjustments, primarily the favorable reversal of liabilities in Brazil and Kazakhstan in 2014 offset by the favorable reversal of a liability at Eletropaulo in 2015. On the positive side, we benefited $0.04 from a lower tax rate of 30% this year versus 40% in the second quarter last year and a $0.01 from capital allocation net of asset sales, which resulted in 13% lower Parent debt, and a 4% lower share count relative to last year. Now, I’ll cover our SBU’s financial performance in more detail on the next six slides beginning on slide 18. In the U.S., adjusted PTC decreased by $24 million, due to planned maintenance in Hawaii and an IPL, as well as lower wind generation at Buffalo Gap in Texas. Proportional free cash flow was roughly flat, reflecting working capital recovery and lower interest at DPL. In Andes, PTC decreased $23 million, primarily due to the timing of planned maintenance in Chile and Argentina, as well as a weaker Columbian peso. Proportional free cash flow declined by $37 million, due to lower earnings and higher tax payment at Chivor in Colombia versus last year. In Brazil, PTC decreased $74 million. In addition to the $17 million impact from the depreciation of the Brazilian real, the decline was driven by approximately $13 million net impact from liability reversals in each period at our distribution businesses Sul and Eletropaulo. You may also recall that last year our generation business Tietê benefitted from spot sales at favorable prices, due to lower contract levels during the first half of the year. This benefit was more of a timing issue as Tietê had to purchase in this spot market in the second half. This year, Tietê’s contract levels are flat in the first and second half, so we expect contributions to be evenly distributed. Last but not least, Sul has been affected by lower demand and higher costs. Proportional free cash flow decreased $18 million, primarily driven by lower operating income at Tietê as I just discussed. In MCAC, PTC increased a $11 million, largely driven by improved hydro conditions in Panama, where we generated more this year versus buying in the spot market last year. Panama also benefited from the commencement of operations of our 72 megawatt thermal power barge. Proportional free cash flow improved by $12 million, primarily driven by improved operating performance. In Europe, adjusted PTC decreased by $32 million mainly due to lower energy prices and the timing of planned maintenance at Chilvers [ph] [0:18:16] in U.K. Despite the decline in earnings, proportional free cash flow was up $3 million, largely by improved working capital at Maritza. Finally in Asia, PTC increased $7 million, resulting from the early commencement of operations at Mong Duong in Vietnam, partially offset by the sale of minority interest in Masinloc in the Philippines in 2014. Proportional free cash flow was roughly flat. Turning to slide 24, overall, we earned $251 million in adjusted PTC during the quarter, a decrease of $89 million from last year and we generated $62 million of proportional free cash flow, an increase of $15 million. As you can see on slide 25, year-to-date adjusted PTC declined $80 million, largely driven by lower demand and contracting strategy in Brazil, a stronger U.S. dollar, as well as the net impact from reversal of liabilities in Brazil and Europe. These negative impacts were largely offset by the contributions from new businesses that came online earlier this year in our capital allocation decisions. Our proportional free cash flow increased $151 million to $327 million, primarily due to higher contributions from the U.S. and MCAC, including higher collections at DPL and improved working capital in Puerto Rico. Year-to-date adjusted PTC and proportional free cash flow by SBU are in the appendix of today’s presentation. Now to slide 26, comparing our first half results to our full-year guidance, our earnings and cash flow tend to be more heavily weighted towards the second half of the year. Consistent with our prior expectations in the second half of 2015, we expect EPS to benefit from improved availability as a result of planned maintenance that was completed earlier in the year in Chile, the Dominican Republic, and the U.S. Improved hydro conditions in Panama and Colombia, seasonality related to contract generation businesses in the U.S. and Chile as well as IPL, the previously expected benefit from tax opportunities at certain businesses and finally contributions from Mong Duong in Vietnam which came online in first half of the year. Regarding proportional free cash flow, improved results in the second half of the year versus the first half are driven in part by higher operating performance in the second half consistent with our earnings profile. The remaining increase is largely attributable to lower pension and fuel payments and IPL in the U.S., timing of income tax payments and VAT collections at [indiscernible], higher collection of receivables in the Dominican Republic and collection of receivables in Bulgaria, a portion of which will be used at the business for deleveraging and fuel payments. Bottom line is that, we have to execute on our plan, we feel confident in our ability to meet our objectives for the year and we are reaffirming our guidance on all metrics. Our reaffirmed guidance is based on forward curves as of June 30 reflecting a benefit of couple of entities relative to our prior guidance which is based on March 31. Client curves as of July 31 were effectively back to where we were as of March 31. Our gains also assumes the current outlook for hydro in Latin America, which is in line with our expectations and an unchanged full year tax rate of 31% to 33% versus year-to-date 2015 rate of 31%. Assumptions in sensitivities for our guidance are in the appendix of today’s deck. On to slide 27 in our parent capital allocation plan for the year, sources in the left hand side reflect total available discretionary cash for 2015 of roughly $1.65 billion which is $70 million higher than our last call. As a reminder, we previously announced asset sale proceeds in the sale of a portion of our interest in IPALCO and Jordan as well as the sale of the Armenia Mountain Wind farm. Today, we are also announcing the sale of our solar assets in Spain bringing our total asset sale proceeds this year to $573 million. We are also expecting an additional $45 million in return of capital from operating businesses which along with our parent free cash flow provides us with nearly $600 million available for dividend payments and growth, incremental share repurchases and other potential investments. In terms of incremental sources of discretionary cash, as Andres mentioned, we’ll continue to evaluate additional asset sale opportunities which could be $200 million to $300 million annually on average, but maybe lumpy year-to-year. Now to uses on the right hand side of the slide, we plan to invest about $350 million in our subsidiaries, 60% of which is at IPL and is already been funded. We’ve invested $345 million in prepayment and refinancing of parent debt leaving us with only $180 million in parent debt maturities through 2018. Finally, in addition to dividend, we are investing $420 million in our shares, which is $100 million more than we committed to on our last call. This brings total cash returned to shareholders through buybacks and dividends to $700 million for the year. We will continue to beat various investment opportunities to maximize per share value for shareholders. With that, I’ll now turn it back to Andres. Andres Gluski Thanks, Tom. To summarize, we continue to make steady progress on our objectives specifically we are pulling all levers to achieve our financial objectives despite the headwinds from poor hydrology in Brazil, lower foreign exchange and commodity prices. As I noted, overall hydrology in Latin America is improving as a result of the El Niño phenomena. We have achieved a number of milestones towards resolving Maritza’s outstanding receivables after signing an MOU with NEK in April. We expect to collect outstanding receivables in the second half of the year. We have completed the 1.2 gigawatt Mong Duong project in Vietnam six months ahead of schedule and we are making good progress on the remaining 5.8 gigawatts under construction. We are bringing in financial partners to leverage our platform and maximize overall returns by forming a joint venture with Grupo BAL, a strong partner with significant presence in Mexico. And in 2015, we are investing than a $1 billion in returning cash to our shareholders and debt pay downs, in addition to the $350 million we are investing in profitable growth projects. In conclusion, in line with the plans we laid out on previous calls, we continue to leverage our platforms and allocate our discretionary cash to maximize risk adjusted returns for our shareholders. Now, I’d like to open up the call for questions. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of Greg Gordon with Evercore ISI. Your line is open. Greg Gordon Thanks. Good morning guys. Andres Gluski Good morning, Greg. Greg Gordon Great quarter. Your commitment to capital allocation should be – is best-in-class. So thank you very much and I know your shareholders are certainly very happy. The question – sort of an open ended question firstly, there are so many moving parts to the guidance. I know you are on track to hit earnings guidance for the year and doing a little bit better on proportional free cash but if you look at and for the balance of the year versus the plan you laid out in March, is there any specific areas where you’re a little bit ahead or little bit behind of where you would expected? I know overall you are still within the channel. Andres Gluski I would say that one of the key drivers we have as I mentioned on cash is Maritza and we had said that we would get this in the second half of the year. So we’ve really achieved the important milestones. We are quite impressed with the commitment of the Bulgarian government to fix the electricity sector and parliament approving some – important reforms. So I think that’s the key component, so we are on track there. I would say hydrology in July was quite frankly a little bit ahead of what we expected. And FX is more or less in line with what we expect. I think if anything, the demand in Brazil is softer – perhaps a little bit softer than we had expected even though we had those numbers in. So overall, we are kind of on track. I think the main points are that we have some seasonality and some of it in terms of collections, we tend to collect more in the Dominican Republic, we have Bulgaria, those are two discrete factors in the second half. And then we had a number of planned maintenance in the first half which won’t happen in the second half. So that’s sort of overall, it’s not too far from our expectations I would say on a case-by-case basis. Greg Gordon That’s good because one of your competitors in Brazil had a big disappointment in the second quarter as it pertains to their business. So I think there were some trepidation coming into your call that you might see a downward revision. Thank you. The second question is just to be clear, when you gave the first quarter guidance, you based your projections on March 31 index, so Tom, you’re basically saying that if we roll forward to the end of July, we look a little more or less like we looked like at the end of March, so obviously still inside the guidance range. Tom O’Flynn Yes, that’s correct. If you have asked us five weeks ago, we would have said we might be $0.01 or $0.02 up but I think we lost that in the last five weeks. So basically back to where we were end of March. Greg Gordon And then final question from me, the 104 to 204 of discretionary cash to be [implicated][ ph], if the stock price doesn’t respond you guys continuing to execute at what point would you go to the Board and potentially allocate that to further share repurchases? Andres Gluski Greg, as we’ve said in the past, our Board has been very supportive of our share buybacks and we’ve always been able to go back and get a share repurchase authorization when we felt we needed it. So I think that there is – our sector has that have been hit in the last month by negativism and certainly that’s been reflected in the stock price and certainly that affects our capital allocation decisions as we are comparing the value of buying back shares with our new projects. Greg Gordon Okay. Thank you, guys. Thanks again for a great quarter. Tom O’Flynn Thank you. Operator [Operator Instructions] Your next question comes from the line of Ali Agha with SunTrust. Your line is open. Ali Agha Thank you. Good morning. Andres Gluski Good morning, Ali. Ali Agha Good morning. Andres, first question to you on Brazil, so as you said the hydro situation appears to be improving but you still have the FX headwinds, the economic and political outlook there continues to be very challenging from what we can tell. I just wanted to get a sense what is your tolerance level to absorb all of this. I mean are you there indefinitely for the long haul regardless of how old this place or how are you thinking about that relative to all the other jurisdictions where you have better opportunities perhaps? Andres Gluski Sure. I think a lot of our countries have cyclical patterns. Right now Brazil in on the – certainly not at the peak of one of these patterns. I will remind people I think of two, three years ago. Lot of questions I would get on these calls is why wasn’t I investing more in Brazil and that we were slow. What we did at the time and continue to do today is we only invest when we see long term value. And we really see the value not quite frankly get caught in the trends. I think, you know Brazil is having a recession this year. It will probably have a flat 2017 and is expected, 2016, sorry and expected to pick up in 2017. Brazil is a big market, it is a country which has great potential and I think that us as a company of the Americas we should have a presence in Brazil. Now of course all of our assets we look at, what we consider their long term value. What we could sell them for and how they contribute to a balanced portfolio. So, overall what I would say is that I agree that the economic situations look challenging in Brazil, but realize this is a country with tremendous potential that could come back and we can’t come in and out on a short-term basis. And the final thing is look we have been very prudent about again investments in Brazil, we still have $500 million of debt capacity at Tiete. So, growth in Brazil will come from leveraging the Brazilian businesses. So, I hope that answers your question, but I think that the point is that they are cyclical patterns; Brazil has a lot of capacity to rebound and as always when times were very good in Brazil we were always looking at what is the value and I would remind people that we sold a lot of Brazil at the peak. We sold our telecom business there for billion dollars. We also sold 50% of our holdings in Eletropaulo back in 2005. So, we will continue to make those adjustments as we see fit. Ali Agha Okay. The second question, I wanted to just clarify the capital usage plan going forward. If I heard you right, Andres, you were saying you may be investing $300 million to $400 million a year in new opportunities on an annual basis. Your dividend is consuming about $300 million of your cash and that’s going to grow at 10% every year. So, where is the cash coming from? Because I’m looking at Parent cash and I think these investments and the dividend, I don’t think there’s any cash left. So am I missing something here or how is that being funded? Andres Gluski Well, yes, what you are missing from the equation is what Tom mentioned that we will be selling about $200 million to $300 million in our existing asset platform. So, if you include that the equation does close and realize that as our new plants come online they will be generating more cash as well. Ali Agha Okay. Got it. And then, lastly, to clarify your point, you benchmark everything obviously against share buybacks. So, are you seeing those opportunities out there that can still give you greater returns on a risk-adjusted basis than buying back your own share, that you’re confident you can spend $300 million to $400 million a year on new projects? Andres Gluski Yes, we do. It really gets back to utilizing our platforms. So, I did mention the example, for example of de-sal. If you – basically we are upgrading our plants to use reverse osmosis technology and once you have the permit for intake of salt water and discharge of saline and you can basically put these in a modular fashion. These are very attractive opportunities. We are also seeing it in other places where we can add-on energy storage and the new projects we are engaged in. So, what I can tell you is that we are seeing above 15% returns on equity from our projects on average. So, yes, we are seeing a lot of attractive opportunities. Of course we are being very selective with our stock at these prices. Ali Agha Thank you. Operator Your next question comes from the line of Chris Turnure with JPMorgan, your line is open. Chris Turnure Good morning, guys. I wanted to get a sense of the potential for GSF reform in Brazil and to get your opinion on the potential for that in general and then the potential structure if it does materialize. And then also, on the flip side, have you sought an injunction for Tiete there? And how would that work if others are successful with injunctions in penalizing of you and the remainder of guys out there that don’t get injunctions? Andres Gluski Okay. Let me take the first one. This year, GSF will be between 17% and 19% and it’s a considerable cost to the generators. I believe the total is somewhere above BRL 20 billion that people are paying. There has been discussions between the government, the Ministry of Energy and mines and the association such as [indiscernible] as well as you have a [indiscernible] and there has been talk about capping the GSF. The exact amount is being negotiated. Let’s just give a hypothetical so it’s capped 10%. The generators will be compensated for that difference between 7% or 8% additional to the cap for example this year by an extension of their contract so you’d receive a regulatory asset, especially of their concession, you’d receive a regulatory asset equivalent to that amount. So, there is nothing set as of yet. There’s certainly interest from the government interest from the regulators and we’ll keep you informed. In terms of the probability, I think on the previous call I was quite let’s say prudent about this thing, we will see, I think the chances of something like this happening have improved. Regarding the injunction, Tom. Tom O’Flynn I just see the – I haven’t got all the details here, but there was initially compensation to one or small group of generators that was actually detrimental to the rest of the generators and we did participate with the larger generator community and saying that any – any decisions, any compensation should be consistent across the sector. That was some time ago and I believe the discussions are now focused on sector reform as Andre said it goes into compensation that really gets into concession renewal, or mind you our concession is well after [indiscernible] it is 2028. In the GSF of 17 and 19 that’s the number that we’ve had now for a number of months. There is some possibility we’ve seen thermal dispatch come down recently from about 19, I think 15.5 gigawatts which may indicate there could be some greater thermal generation i.e. a little bit of improvement on the GSF, but it’s still far too soon to tell that just news over the last couple of weeks. Chris Turnure Okay. And then, switching gears, I just wanted to get an update on your Argentinian businesses or business down there. It’s a little bit tough to break out in and of itself, how have earnings maybe trended the past couple of years there? And are those trends a function of regulatory changes to power prices? And how do you think about that business going forward, with the potential maybe for other regulatory changes to those power prices? And how do you think about things post the election? Tom O’Flynn I think that’s a great question. I’d say of course if you take a longer-term view in terms of the past coming to the present you know pricing has deteriorated in Argentina, no question about that. On the other hand, I think we have fared very well from a regulatory position because as you know until last year we are exporting energy from Argentina to Chile, through our TermoAndes plant. We also have the only coal plant in the country. So, we have been selling energy under, in TermoAndes under the [indiscernible] which in the past was more favorable than it is today, but I’d say in general you know we have always been making positive earnings in Argentina. So, even though they’re less to say than they were four, five years ago, they continue to be positive. We have been receiving 96% payment on our accounts receivable, some of these are Fannie Mae bank bonds, these bonds are dollarized, they pay interest and for example like Guillermo brown plant where we have a considerable number of these bonds are basically being used to fund that plant. We’re going to receive that plant, our proportion of it, very soon, it’s being commissioned. So, I think overall in Argentina despite the challenging economic circumstances we’ve done well that the one thing is we haven’t been able to pay dividends out of Argentina for the last two years. Now, looking forward what do we see? I think the elections in October, the two leading candidates either one would be favorable. I think you’ll have a gradual return to market-based pricing and a listing of the exchange controls. So, we have a tremendous asset base in Argentina. Of course, we’re not putting any new money in at this stage, but I think we’ve handled it well and I firmly believe that within a year or two we’ll be paying dividends out of Argentina. It is basically considerably developed country and quite wealthy. So, it’s again, I think it’s probably on the rebound at this stage. Chris Turnure Okay. Would you characterize what you’ve embedded in your long-term EPS and cash flow guidance as incorporating a lot of upside there or you remain conservative there? Tom O’Flynn We’re always conservative. So we never embed big upside. So, what I can say is we do expect sort of a continuation of what we’ve been doing there, which I think is managing the situation quite favorably. Chris Turnure Great. Thank guys. Operator [Operator Instructions] Thank you. Your next question comes from the line of Stephen Byrd with Morgan Stanley, your line is open. Stephen Byrd Good morning. Tom O’Flynn Good morning Steve. Stephen Byrd Wanted to echo Greg’s comments on capital allocations, very clear and I did want to take a little further into that following up on all these questions on the $300 million to $400 million in growth, in addition to asset sales and when you think about all of the other levers at your disposal in terms of just retain cash flow at the country level, the project level or other leveraged capacity etcetera, should we be thinking that those levers are quite significant and therefore could further reduce the amount of true equity at the parent or those more discretionary and not something that we should be thinking of as quite significant offsets in terms of the amount of equity needed at the parent. Tom O’Flynn Yes, Steven, certainly as we look for growth, we do look to drive as much as we can out of the businesses as possible, I think there are big growth drivers, certainly Hahn Air has been a big driver. They’ve brought in partners, they’ve done project finance and the only equity that’s been done in the last few years is a 150 million totally at the Hahn Air level. We did our 70% contribution. So that’s a great example of a multi-billion dollar construction program and instruction in the Hahn Air balance sheet, and Hahn Air cash flow growth as much as possible. I think Andres has mentioned a couple other examples, Dominican Republic, we have some unused debt capacity that’s currently being used to fund a facility upgrade and we look around the business to do that as much as we can. IPO has been growing quite a bit also that really grows in more of a classic utilities down that we maintain a capital structure 55, debt 45, equity 30, more came to the normal utility, but we do that and we’ll continue to look for leveraged capacity at the business, look to see whether a partner for a project or a business can come into help increase the value of the business and or bring in more effectively priced capital and then lastly if you will we’ll look at up to the parent. And the $300 million to $400 million is just a general range. I think that’s the number we’ve been at the last couple of years, you go back I think three years it was more in the mid-twos, so it’s just a general indication. Stephen Byrd Understood great. And then just shifting over to your announced joint venture, can you just discuss at a high level the nature of the arrangement, is this effectively exclusive on both sides, are there other elements of the joint venture in terms of more specific targets or anything else that you can just a little bit further color on the JV would be appreciated. Andres Gluski Sure, Grupo BAL is one of the most reputable business groups in Mexico and it has a long tradition having been established around 1901 I believe. They’ve been our off-taker at the TEP plant in – for the last 10 years and we’ve been very pleased with us. They have another small joint venture with EDP for some wind projects and we have our existing plants of TEG, TEP and [indiscernible] which will be outside this joint venture. However, going forward, it’s exclusive on both side that we’ll exclusively look at new deals. There’s no sort of target that we will invest X amount, it’s really that we will look at these projects together, we both bring strengths, we bring the global size, our successful E&C experience, our ability to manage these plants and they bring the local component and knowledge of the sector. So, Mexico is opening up the energy sector, there are I think going to be a considerable number of bids for power plants not only of CFE, but also of private sector clients and also with our strategy of using our platforms for adjacencies such as desalinization or energy storage or for example LNG services, we can add those on. So, this is a – going forward it will be exclusive 50-50, we both have to agree to make an investment. If one partner does not agree with the investment the other one can make it on its own. So, this is I think very favorable for both sides. It gives us a lot of flexibility and it’s really aiming to leverage off our strengths and the good thing is that we know each other, we’ve been working together for more than a decade. Stephen Byrd That’s great. Thank you very much. Tom O’Flynn Thank you. Operator Your next question comes from the line of Angie Storozynski with Macquarie, your line is open. Angie Storozynski Thank you. I wanted to talk about Eletropaulo. So, you have just concluded a rate case there. What kind of load assumptions do you have embedded in that rate case and secondly is the restructuring of Brazilian having any impact on Eletropaulo? Andres Gluski Okay. I would say in terms of growth and as we said we’re looking at a decline in growth and this – the numbers we gave are weighted average for Sul and Eletropaulo. The decline in demand is stronger in Sul than it has been in Eletropaulo. I think we’re looking at pretty much flat demand for next year and then growing moderately after that. I mean the long-term growth in Brazil is what you normally expect is about 3% to 4% has been the historical average over the last 10 years. The second is how Brazilian affecting Eletropaulo. As you know in 2005 we sold down 50% of our holdings both us and B&DS of Eletropaulo and we basically took that money and de-levered the company. Then in 2011, we spun off the telecom Achimos [ph] and sold that. So, right now, between the two of us, we have about 32% that is Braziliana has it, we have 16%, roughly a little bit more than 16%. I don’t really think that the Braziliana structure has been affecting Eletropaulo directly. I think that the distributors have been I think more fairly treated over the past six months than they had before and that’s why you’ve seen a recovery in the place. I mean Eletropaulo’s stock should be up I believe about 70% in dollars this year and in fact the sector it’s been the best performing within the sector by a considerable margin. I think part of that is perhaps it was dropped also more strongly because some of the let’s say decisions against us, but we got a good decision on a regulatory asset base, the WAC has been raised over 8%. So these are all favorable things. Now unquestionably other than the regulated part, which as I said the market is recognizing, it’s making certain investments to continue to improve quality of service and it will depend on the recovery of the Brazilian economy. I believe that the Brazilian government is doing the right things at this time and taking some very brave decisions, including cutting spending, raising interest rates and that these will have good long-term effects, but certainly they’re very tough in the short-run, but I really commend their bravery. So, I don’t know if that answers your question. I mean what we see in Eletropaulo is a tough 2016, I’m sorry a tough 2015, a more moderate 2016 and a recovery more in 2017, 2018. Angie Storozynski Okay. Thank you, just one more, on Mong Duong, so the plant came online six months ahead of time, the hydro conditions across the board seem to be in line with expectations, everything else is in line with expectations. So, should we just see this plant that’s potentially moving you beyond the midpoint of your guidance or what’s the potential offset if it’s not the case? Tom O’Flynn What I would say is that at this stage we are reaffirming the guidance ranges. I think there are – that’s not only earnings, but cash flow. Certainly, on cash flow depending on where we’d be in the range, the payment at Maritza is obviously a big mover because you talk about the range of a billion, 1.4 billion, 1.350 billion and 280 million will make a difference. On the other hand, right now I would say that we remain within that guidance range. Certainly, we don’t see in the five months that are left something that would likely move us outside of those ranges to the upside. Angie Storozynski Fantastic, thank you very much. Tom O’Flynn Thank you. Operator Your next question comes from the line of Gregg Orrill with Barclays, your line is open. Gregg Orrill Yes, thank you. Was wondering if you could talk a little bit more about the potential of caps on rationing exposure in Brazil and how that might affect that regulatory asset, might affect you either in magnitude going from the 10% to the 17% to 19% maybe how those things might be recorded financially? Would that help you from an earnings perspective as well as cash flow? Andres Gluski Let me answer the first part and then Tom can answer the second part how we’re looking. We see – the probability rationing this year is very low. And there are two drivers; one, the government has done a very good job of basically running thermals and saving water, and the rains did come in considerably stronger. Quite frankly as of mid July, the reservoir levels were at 41% which is very high. You should be quite frankly declining at this time of the year. So the likelihood of rationing this year not to say it’s impossible, it’s very remote and if rains continue as expected, it’s not very likely in 2016 again assuming the government continues this policy. In addition to that, you’ve had a decline in demand. So you put those two together, again it’s a much stronger position vis-à-vis having rationing this year and next than it was before and this year is substantially less. In terms of the regulatory asset, I mean that’s a considerable number but I will leave it to Tom in terms of how much we would actually book. Tom O’Flynn Yes, Greg. I think you’re ahead of us. If there is something that allowed for Tietê concession which is now ends in 2029, allows it to get extended, going to valued the economic value, does it turn into a regulatory asset that we would record, we are still early on to understand the detail. Certainly we’ll look at that from a GAAP standpoint, but I think it’s early to think – too hard about that. Gregg Orrill Okay. Thanks. Operator Your next question comes from the line of Charles Fishman with Morningstar Equity. Your line is open. Charles Fishman Good morning. In 2016, I see in slide 53 that you’re still seeing flat to modest growth. With what’s going on in Brazil with maybe your tax rate returning to a more normalized level, you won’t get as much incremental benefit from Mong Duong because it fortunately came on early. What gets you to the modest growth for next year, realizing its flat to modest growth, the guidance doesn’t change. Andres Gluski I think that the positives, we have the Cochrane coming on. This is a 552 megawatt construction project in Chile and that’s proceeding very well, and we also have rate based growth at IPL. We completed the 2,400 megawatts of upgrades and then of course you mentioned Mong Duong, but we have a full year. And the other thing is of course capital allocation and it will also depend on hydrology. If we have continued good hydrology and specifically for example in the case of Chivor, Chivor typically has a very – it’s a very good base that is in. So it tends to have less volatile hydrology than the rest of Columbia. So when you have right now, El Nino, it’s getting – the rest of Columbia is dry and actually Chivor is at average. And so then actually you get better prices for the energy you sell that you haven’t had contracted. And finally, we expect some normalization of the currencies as well. So all sorts of things that can cause this now. I agree 2016, if we look out the next three years, 2016 is on top this year because 2017 and 2018 we have a lot more projects coming online. The other thing is we realize that on some of these adjacencies such as energy storage or desal, these can be operational in a very short period of time. And desally will depend quite frankly, we have to build a pipeline to a client but some of those cases we don’t. So those are additional things that could help. Charles Fishman Okay. And then second question Andre, I realize you got a lot more going on in the U.S. but the clean power plant seems to have more benefit towards renewable. I would think that would be good for your storage business. Is that correct? Andres Gluski Yes, absolutely. I think that the clean power plant let’s say increase because it’s basically what they had laid out before, but accelerates it – increases the market for energy storage and California has really led the way requiring 1,325 megawatts of utilities to have by 2020. So this I think accelerates the adoption of energy storage. Charles Fishman And so you’ve got Ohio is going for storage and then California and Europe under construction, is that correct? Andres Gluski We are not under construction yet in California. That will be in 2019 when we start, but we have 100 megawatts with Southern California. Charles Fishman Okay. Thanks. Andres Gluski Thank you. Operator Your next question comes from the line of Mitchell [indiscernible]. Your line is open. Unidentified Analyst Hi guys. Could you discuss a little bit on some of the core outages, [indiscernible] mentioned some of its plans that are coned by you, experienced high outage rates in the second quarter and just wanted to get some color from you if you saw that at all of your plans or if it was just like [indiscernible] and what went on and how you guys are working on hopefully fixing that. Bernerd da Santos Hello, this is Bernerd da Santos. Yes, that plan is [indiscernible] beginning of the year. With the management we have implemented 180 days plan that is ongoing. We have already 30 days. We have our next preview with the team 50 days from now. I was present with the management team two weeks ago in Stuart and we have seen improvement. So we expect that we’re going to calculate whether it was the force outage rates in Stuart by the end of the year. Unidentified Analyst So you are finding it specifically to add Stuart? Bernerd da Santos Yes, that’s correct. Unidentified Analyst And is this going to impact your ability to get into the capacity performance Stuart planned. Tom O’Flynn No, we’ll factor that in. [indiscernible] are factored in but we would expect as Bernerd said an improving Ephod [ph] overtime. Unidentified Analyst Okay. Great. Thank you so much. Tom O’Flynn Thank you. Operator Your next question comes from the line of Julien Dumoulin-Smith with UBS. Your line is open. Julien Dumoulin-Smith Hey, good morning guys. Just checking in here, in terms of the next accretion, you guys are talking about for the asset sales and talk about share buybacks in place. What’s the net benefit of the $200 million to $300 million in asset sales you’re contemplating for this year relative to the share buybacks, break even or positive accretion? Tom O’Flynn That’s probably little positive. I think the overall PE of our sales about 13, we do split that between debt pay down and share buybacks. So net-net, it’s probably about maybe a breakeven – positive of breakeven. Julien Dumoulin-Smith Got it, excellent. And then can you just update us on what are the pending finalization of the issues in Bulgaria? From what I understand, that should be happening very soon. Or just is there anything really in the way there to make that happen? Andres Gluski At this point, we really have all the approvals necessary, so now it’s a question of the Bulgarian public sector raising the funds for the payment. So there is no sort of pending important approval at this stage as basically they have to do the market operations to get the funds and to pay us. Julien Dumoulin-Smith Great. And then lastly in terms of deleveraging the business in South America, what’s the timeline there, just the FX or so I mean how quickly should we expect these asset sales to come up and ultimately what’s your interest in these assets. I presume it’s pretty real [ph]. Andres Gluski Basically we will look for real value before we leverage up today as we have in the past. When you mentioned asset sales, perhaps I think you’re talking about Petrobras and hydro who may be selling some assets. We certainly look at them. What I want to say is that, we will never grow for growth sake and these really have to makes sense, and they have to make sense which should they in terms of a portfolio, there have to be things which would decrease its hydro risk. So it will depend on their contract position and other thing, so there is nothing really short term on this. We are looking at the possibility of doing something like [indiscernible] for example in Brazil as we did in Panama. But I think the main point is [indiscernible] not AES. Julien Dumoulin-Smith And just remind us what the target leverage at [indiscernible]. Tom O’Flynn Yeah. We looked at debt-to-EBITDA but right it’s quite unlevered and its dividends are restricted by earnings. So it’s not possible to do a recap and bring money upstairs. So if you want to use the leverage capacity it will be for growth within Tietê. And as Andrew said, the growth would be within Tietê funds rather than AES. Julien Dumoulin-Smith Right. And what’s the target leverage for GFA just to get a sense of how much capacity there is today. Tom O’Flynn We will use about $400 million to $500 million U.S. dollar capacity, that’s back into that – yeah, there will be capacity so you could obviously gross that up to the extension buying an asset that comes with cash flow, you could use a larger number. And that’s exactly goes upon the coverage ratio. Julien Dumoulin-Smith Excellent. Thank you guys. Operator There are no further questions at this time. I will now turn the call back to Ahmed Pasha. Ahmed Pasha Thank you everybody for joining us in 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. Operator This concludes today’s conference call. You may now disconnect.