The AES Corporation

Good morning and welcome to the AES Corporation's fourth quarter 2018 financial review conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, if you are listening to the webcast, please mute your computer speakers before asking questions. Please note, this event is being recorded. I would now like to turn the conference over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead.

Thank you, Keri. Good morning and welcome to our fourth quarter and full year 2018 financial review call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andres Kluski, our President and Chief Executive Officer, Gustavo Pimenta, our Chief Financial Officer, and other senior management of our management team. With that, I will turn the call over to Andres.

Andres? Thank you, Ahmed. Good morning, everyone, and thank you for joining our fourth quarter and full year 2018 financial review call. 2018 was a good year for AES, demonstrated by our strong financial results and excellent progress towards achieving our strategic goals. We delivered on all of our commitments, including our financial guidance, and hit key milestones on our strategy, positioning AES for long-term sustainable growth. Some of our key accomplishments last year were, we reached the high end of our expected ranges for both earnings per share and parents fee cash flow. We achieved a key investment grade financial metric one year ahead of our plan. We met our expectation of signing long-term PPAs for two gigawatts of renewable capacity and increased our backlog to almost six gigawatts. We accomplished key milestones on our 4.4 gigawatts under construction and completed construction of an additional 1.3 gigawatts. We introduced a longer term target to reduce our carbon intensity by 70% from 2016 through 2030. We now expect to achieve a 50% reduction by 2022. And our world leading battery based energy storage joint venture with Siemens Fluence was awarded 286 megawatts of new projects, bringing its total to 766 megawatts. Reflecting on our successful execution, improved visibility, and increased confidence in our ability to deliver, we are extending our longer term outlook by two years, and now expect 7% to 9% average annual growth in earnings and cash flow through 2022. As a result of our strong performance in 2018, combined with our improved outlook, we expect to hit the high end of our prior guidance range through 2020. Gustavo will discuss our 2018 results and guidance in more detail after I provide an overview of our strategy. Turning now to slide four, our core strategy continues to revolve around the three themes of, first, enhancing the resilience of our portfolio and lowering risk to deliver attractive returns. Second, delivering on our backlog of long-term contracted projects to ensure profitable growth. And three, investing in innovative technologies to maintain our competitive edge and market-leading position. Today, I will review the progress we've made this year in support of these themes and how we have positioned ourselves well for the future. Turning to slide five, We are seeing the benefits of many initiatives that began several years ago to de-risk our portfolio. AES Today is a very different company than it was in 2011, doing business in 28 countries around the world with significant commodity exposure. Since then, we have focused our portfolio on roughly a dozen markets where we had a competitive advantage and we have reduced our overall exposure to foreign currencies, commodities, and hydrologies by 70%. In 2018 alone, we paid down a billion dollars in current debt, and we are on a path to attain investment grade ratings in 2020, supported not only by our financial metrics, but also by the lower level of risk and higher quality of our portfolio. Our efforts to enhance the resilience of the portfolio have led us to focus increasingly on clean technologies. As you can see on slide six, we are significantly decreasing the carbon intensity of our portfolio. In November, we announced a carbon intensity reduction target of 70% by 2030 versus 2016 levels. Today, I am pleased to announce an interim carbon intensity reduction target of 50% by 2022. Our shift to renewables simply makes good business sense. It increases the longevity of our cash flows and allows us to attract a broader investor base. Another way we are decreasing the risk of our portfolio is by completing most of the large conventional projects under construction and focusing our future growth on renewable projects, which are less capital intensive and considerably simpler to build. Turning now to our strong backlog of projects, beginning with our progress on those under construction on slide seven. In 2018, we completed 1.3 gigawatts of new projects. including the Eagle Valley Combined Cycle Gas Plant at IPNL in Indiana, and the AES Colon Combined Cycle Gas Plant and Regasification Terminal in Panama, and 254 megawatts of solar and energy storage, mostly in the U.S. We still have another 4.4 gigawatts currently under construction and expect it to come online through 2021. Our OPGC-2 plant in India is in the commissioning phase, and we expect it will be fully completed in April. Our Southland repowering project in Southern California is approximately 80% complete, and the project is on track to come online in the first half of next year. And our Alto Maipo hydroelectric project in Chile is advancing as planned and is now three-quarters complete, with two-thirds of the tunneling work done. The remaining projects under construction are made up of renewables across our portfolio. As you can see on slide nine, this capacity is split equally between the US and internationally. All of these projects are going well, and they're expected to come online in the next 18 months. We are particularly pleased with the speed at which we've been able to transition these projects from development to construction. Since our last call in November, we have broken ground on 731 megawatts of solar, wind, and energy storage. As can be seen on slide 10, in 2018, we signed new PPAs for approximately 2 gigawatts of renewables, and we're on track to sign between 2 and 3 gigawatts annually in the coming years. Turning to slide 11, combining our capacity under construction with our long-term PPAs that are not yet under construction, yields our total backlog of 5.8 gigawatts. As we execute on our plan to sign two to three gigawatts of new PPAs every year, we expect to bring a total of 12 gigawatts online by 2022. By then, we project that the U.S. will represent almost half of our earnings versus about one-third today. As can be seen on slide 12, our renewable investments are expected to produce go to high-teen IRRs across all our markets, assuming conservative terminal values. We have some unique advantages that allow us to earn these attractive returns, which I will discuss in the next few slides, beginning on slide 13. First, we have existing commercial relationships that we can leverage to drive new growth. For example, our green blend and extend strategy. allows us to negotiate new long-term PPAs with existing long-term thermal customers. Through this win-win strategy, we preserve the value of our existing thermal capacity contracts while replacing a portion of thermal energy with long-term contracted renewable energy. In exchange, our customers receive carbon-free energy at less than the marginal cost of thermal power. while still benefiting from reliable capacity provided by thermal generation. In 2018 alone, we negotiated green blend and extend contracts for 576 megawatts in Chile and Mexico. A second advantage that we have for renewable growth is deep market intimacy. For example, AES Distributed Energy recently inaugurated the largest solar storage facility in the world, island of Hawaii. The project was made possible by ABS's long history in Hawaii and willingness to work with local stakeholders to meet their needs and goals. The project, which includes 100 megawatt hours of five-hour duration energy storage, will essentially serve as a source of baseload power for the island and deliver roughly 11% of its power. We recently broke ground on a similar second project also on the island of Kauai, with 14 megawatts of solar and 70 megawatt hours of five-hour duration energy storage. Third, our work with partners provides us with an important competitive advantage. We bring in partners to achieve economies of scale, fine-tune our portfolio, and improve our returns on invested capital. A recent sell-down of S-Power is a good example, where we agreed to sell 48% of our stake in SPower's operating portfolio, which along with operational improvements and refinancings, have increased our returns to 13%. The sell-down also provides us with funds to invest in SPower's 10-gigawatt development pipeline to earn similar attractive returns. Turning now to slide 16. In addition to our growth in renewables, we continue to increase our LNG business, which is displacing heavy fuel oil and diesel with cheaper and cleaner natural gas. As you may know, in 2018, we inaugurated our AS Colon combined cycle gas plant and LNG regasification facility in Panama, which will play a key role in supplying natural gas for the entire Central American region. Our LNG facilities in Panama and the Dominican Republic represent a total installed capacity of 150 Tera BTUs to serve local and regional markets. The majority of this capacity is now under contract and the remaining 55 Tera BTUs are still available to drive future growth. As I mentioned on our last call, we are capitalizing on the expertise we have gained in the Dominican Republic and Panama by developing a similar LNG regasification facility and associated combined cycle power plants in Vietnam. Although this long-term U.S. dollar-denominated 450 Tera BTU facility is in its early stages, we're making very good progress and it has the potential to contribute significantly to our longer-term growth post-2023. Turning to slide 17, the third component of our core strategy is to invest in innovative technologies to maintain our competitive edge and market-leading position. As an example, in 2007, AES launched a small energy storage group that was the first of its kind. Today, energy storage is beginning to revolutionize the sector, and AES is at the forefront. Fluence, our joint venture with Siemens, was recently named the number one utility-scale energy storage integrator in the world by Navigant Research for the third time in a row. In 2018, Fluence was awarded 286 megawatts of new projects and is now the largest global energy storage provider by capacity in the world, with a total of 80 projects in 17 countries. Turning to slide 18, we're also implementing a corporate-wide digital transformation, including becoming a strategic investor in Simple Energy. Simple Energy provides a digital platform that allows our IPNL and DPNL utilities to accelerate energy efficiency and demand response programs, all the while improving customer experience. Simple Energy's digital platform serves not only AES's utilities, but 40 other utilities in the U.S. with access to over 40 million end customers. Although not in our guidance, we expect our new digital initiatives, to materially benefit both our top and bottom lines. We will provide more color as our digital strategy matures on future calls. Now, I will turn the call over to Gustavo to discuss our financial results, capital allocation, 2019 guidance, and longer-term expectations in more detail.

Thank you, Andres. Today, I will cover our 2018 results, including credit profile and capital allocation. I will conclude by addressing our guidance for this year and expectations through 2022. As Andres mentioned, we finished 2018 on a strong note, achieving the upper end of our expected ranges for all metrics and setting a solid foundation for growth through 2022. As shown on slide 20, adjusted EPS was $1.24, reflecting higher margins from our businesses, particularly in the U.S. in utilities and South America Strategic Business Units, or SBUs. as well as that pay down at the parent. These positive drivers were partially offset by asset sales in the Philippines and Kazakhstan. Turning to slide 21, adjusted pre-tax contribution, or PTC, was $1.2 billion for the year, an increase of $160 million. I will cover our results in more detail over the next four slides, beginning on slide 22. In the U.S. and Utilities SBU, higher PTC was primarily driven by DPL, which benefited from higher rates following the resolution of its rate case. Results also reflect higher contributions from our U.S. solar business and an extended summer run at our Southland plant in California. Increased PTC at our South America SBU reflects higher contracted price in Colombia, as well as higher tariff in Argentina following the 2017 reset. Results also benefited from higher contracted sales and lower interest expense at A.S. Henner in Chile. Higher PTC at our Mexico, Central America, and the Caribbean, or MCAC SBU, reflects a full year of operations at the DPP combined cycle expansion and high export energy prices in the Dominican Republic. Results also reflect the commencement of operations at the A.S. Colon CCGT and regasification facility and improved hydrology in Panama. Finally, in Eurasia, our results primarily reflect the sales of our businesses in the Philippines and Kazakhstan. Turning to our improving credit profile on slide 26. Since we first established our goal of reaching investment grade in 2016, we have reduced parent debt by $1.3 billion, or 26%. This includes an additional $150 million repayment in December 2018. which is an acceleration of the debt reduction we had anticipated through 2020. As a result, we achieved a key investment grade financial metric of 3.95 times parent leverage, one year ahead of plan, providing us additional confidence in our ability to attain investment grade ratings in 2020. We believe this improvement in our credit profile is helping us not only to reduce our cost of debt and improve our financial flexibilities, but also to enhance our equity valuation. Over the next few years, we expected our credit metrics to show further improvement through growth in our parent-free cash flow as well as modest additional delivery. Now to our 2018 parent capital allocation on slide 27. Sources on the left-hand side reflect $1.9 billion of total discretionary cash generated in 2018, consistent with our prior expectations. This includes $689 million of parent-free cash flow just above the high end of our expected range. Uses on the right-hand side of the slide are also largely in line with our prior disclosures. The one notable exception is our $1.3 billion of cash allocated to parent debt reduction, which reflects the additional $150 million space down in the fourth quarter. Now turning to our guidance on slide 28. Today, we are initiating guidance for 2019 adjusted EPS of $1.28 to $1.40. Growth this year will be largely driven by contributions from new projects and cost savings. More specifically, we expect it to benefit from the completion of most of our large thermal construction projects, with expected commencement of operations at OPGC2 in the next few weeks, and the first full year of operations at AES Cologne in Panama. Continued growth in renewables, including 1.4 gigawatt is scheduled to reach commercial operations this year. A full year of contributions from the cost savings implemented in 2018. Lower parent interest expense due to completed and continued debt reduction. And a slightly lower effective tax rate of 29 to 31%. This growth will be partially offset by announced business exits in the Philippines, the Netherlands, and Oklahoma. Today, we are also providing our outlook of 7% to 9% EPS and cash flow growth through 2022. We have extended this outlook by two years, which reflects improved confidence in our backlog and increased visibility of earnings and cash flow. One additional point regarding our longer-term outlook. The 7% to 9% growth rate, which is off a 2018 base, is in line with hitting the high end of our previous 8% to 10% growth of a 2017 base through 2020. Consistent with our prior expectations, growth in the outer years is expected to be driven by projects currently under construction, such as Southland, the allocation of parent cash to global renewables growth, and increased LNG sales in MCEC. I would also note a couple of additional business-related assumptions embedded in our longer-term outlook. First, regarding Moritsa in Bulgaria. The plant continues to be dispatched and paid in a timely manner. Discussions related to our PPA are still in early stages and we're working to reach a mutually acceptable resolution. As we discussed before, our outlook is resilient to any reasonably likely outcome. Second, we continue to see our U.S. utilities well positioned for future rate-based investment in T&D infrastructure. IPL has grown its rate base over the last few years, and going forward, there is still opportunity for growth in the mid-single digits. At DPL, where the focus has been on restructuring the business, we could see growth in the high single digits. To that end, since our last call, DPL has filed both its grid modernization plan and VMI expansion. Together, these findings aim to maintain DPL's financial integrity while bringing its customers the substantial benefits associated with a robust, modernized electric grid. Our guidance assumes that DMI is extended for two years, from late 2020 through late 2022, allowing the company to meet its financial obligations while retaining the ability to grow its asset base through smart grid investments. Turn to slide 29. Parent-free cash flow is expected to be from $700 to $750 million this year, and it is also expected to grow 7% to 9% per year through 2022. Now to 2019 parent capital allocation on slide 30. Beginning on the left-hand side, sources reflect $1.1 billion of total discretionary cash, including $725 million of parent-free cash flow. Sources also include $321 billion $320 million in asset sales proceeds, with $107 million in proceeds to the current from the announced sell-down of S-Power's operating portfolio and a placeholder for an additional $150 million this year. Now to the uses on the right-hand side. Including the 5% dividend increase we announced in December, we will be returning $361 million to shareholders this year. We expected to allocate another $150 million this year to parent debt, largely to strengthen our investment grade metrics. And we plan to invest over $400 billion in our subsidiaries, leaving about $100 million of unallocated cash. Finally, moving to our capital allocation from 2019 through 2022, beginning on slide 31. We expected our portfolio to generate $4 billion in discretionary cash. which is more than 35% of our current market cap. About 80% of this cash is expected to be generated from current free cash flow. The rest comes from our 2 billion asset sale target, 1.4 billion of which is completed or announced. Turning to the use of discretionary cash on slide 32. Roughly 40% of this cash will be allocated to shareholder dividends. Looking forward, subject to annual review by the board, we expect the dividend to grow 4% to 6% per year, in line with the industry average. We expect to use $300 million for debt reduction, including a portion to maintain credit neutrality as we pursue the planned asset sales. We are planning to use $1.5 billion for our equity investments in our backlog and projected PPAs. Once completed, all of these projects will contribute to our growth through 2022 and beyond. The remaining $670 million of unallocated cash will be used to create shareholder value. With that, I'll turn the call back over to Andres.

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

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Again, if you are listening to the webcast, please mute your computer speakers before asking questions. At this time, we will pause momentarily to assemble our roster. The first question will come from Ali Agha of SunTrust. Please go ahead.

Thank you. Good morning. Good morning, Ali. Good morning. First question, Gustavo, Andres. Just, again, coming back to the basic assumptions underlying your 18 through 22 growth. To be clear on some of the comments you made, with regards to Bulgaria, are you assuming that you continue to own that project through the four-year period and that the current economics stay where they are, or wasn't quite clear what's kind of baked into the assumption with Bulgaria? And then also related to that on the Ohio distribution rider, Can you give us some further sort of thinking and your confidence level on why you think you'll get the extension beyond 2020, just in terms of any commentary or any conversation with the Commission? That would be helpful.

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

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

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

But also at the LNG sales, which is accelerating. So that's another important element of that guidance that we are providing.

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

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

Gotcha. Thank you.

The next question will come from Julian Dumoulin-Smith of Bank of America. Please go ahead.

Hey, good morning. Congratulations. Hey, good morning, Julian. Hey, good morning. So I just wanted to follow up a little bit more on the backlog and the capital allocation commitment. Just want to be a little clearer about this, or perhaps quite clear. Both 19 and through the 22 outlook, how are you thinking about the net income contribution from the renewables growth as it stands today? You've got a billion and a half kind of broadly allocated, and again, I know that's not necessarily all to the renewables business, but how are you thinking about renewables contributions specifically year over year into 19 and through 22 from, you know, the plan and or what you have contracted today, however you want to characterize that?

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

Yeah, that's right, Andres. So if you look at our 7% to 9%, approximately 6% of that is just the materialization and reaching COD on the large, especially the large thermal projects, south end of PGC, full year of Cologne and so on. The other 40%, it's on the renewable space, out of which half is internationally, half is in the U.S. So it's not a major contributed yet for earnings. And I think one way to see that is our proportional, our parent-free cash flow is also growing at a similar rate, right, 7% to 9% for the same period.

And just to make sure I understand this, So 419, though, right, because I appreciate that HLBV nuance and just the timing of the service. Renewable contribution is fairly limited growth, right? But as you say, 40% of the overall 7% to 9%, roughly call it maybe a little bit less than $150 million of net income growth is coming from renewables by the end of the 22 period?

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

Got it. And sorry to clarify, one more nuanced detail here. That 40% for renewables, that's relative to what investment in renewables? What you've contracted thus far or what the cumulative plan entails? I just want to make sure we're specific there.

It's the cumulative, yeah, what we have expected throughout the period.

All right. Well, thank you very much. Best of luck. Thank you, Julian.

The next question will come from Angie Strozinski of Macquarie. Please go ahead.

Thank you. So, first on your credit metrics, can you give us a sense of, you know, where credit agencies are now that you have reached investment grade metrics. And also, you're just showing us this one metric. I mean, can you comment about FSO to debt or net debt to EBITDA, where those metrics are? And again, mostly because I'm trying to gauge when we should expect upgrades to investment ratings.

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

Okay. Thank you. Secondly, so in your press release, you talk about this additional sell-down of your stake in Ask Hour. Is this – I mean, I remember that you guys mentioned that Tom is working on some, you know, systemic or structured relationship with – a party that could take future ownership of operating assets. Is this what it is or are we still waiting for that announcement and it's still scheduled for roughly mid of this year?

Yeah, so, hi Angie, this is Andres. No, this is not a part of that and as I, you know, as we've said in the past that, you know, Tom will be working on a more systematic way of getting partnership money into our projects and, you know, stay tuned. At the right time, we will, you know, explain this, but this is, as I said, we've done $3 billion of partnership capital over the past five years, and so this is an extension of that.

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

I think, again, sort of stay tuned. We said that we would have competitive dividend growth. And so, you know, this is approved annually by the board. So, you know, stay tuned. But, you know, we're sort of in that 4% to 6% range.

Exactly, which is the industry average. So we should expect this to be within the 4% to 6% range. within the cycle, within the four-year period. Annually approve it as validated by the board. Four to six is what we should expect.

Great. Thank you.

Thank you, Angie.

The next question will come from Greg Gordon of Evercore.

Thanks. Good morning.

Good morning, Greg.

Just to circle back to a couple of the original questions, you said that is your plan also resilient to potentially not getting the DMR extended by two years? So as we think about that 7% to 9% growth rate, while you're assuming that you do get the extension, if you were to not get the extension, would you still be inside the growth rate?

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

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

No, there hasn't. In fact, we remain on track.

Yeah, Greg Gustavo here. So the plan has been fully executed last year. So we are getting in 2019 the run rate savings of $100 million, which was what we had disclosed before. So in line with prior disclosures.

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

I'd say by 2010, we'll complete the $2 billion. This is what we expect. That's part of this plan. You know, going forward, you know, we'll continue to fine-tune our portfolio. So this may be, you know, there may be additional sales completed, but as part of the portfolio. So they may not be sort of wholly exiting. They may be, you know, like we did at S-Power, selling down a portion and reinvesting that money at higher returns. So, you know, that remains part of our modus operandi going forward.

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

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

Great. And then you sort of, on the targets for renewables growth, they're quite robust. And, you know, it's a little bit of a blend and extend in that in your prior guidance, you had targeted 3,000 megawatts for 19. Now you're targeting 2,500, but you're targeting consistent execution over a longer period of time. And you have a higher end exit rate, you know, exit number in terms of total aspirational growth. growth in renewables, what should we look for over the course of this year to see that you're hitting your targets? Because there was a bit of a deceleration in wins when we look at what you executed in Q3 and Q4 of 2018.

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

Well, fantastic. You're a good outlook. Thank you.

Thanks, Greg.

The next question will come from Christopher Turner of J.P. Morgan.

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

Okay, let me see that. So multiple questions. Let's see. So first, you know, no, Tom is not on the call. And what is assumed in these numbers is that, you know, we tax efficiency, you know, there's no, and what is assumed is, you know, for example, like, I'd say mainly in the US, where we actually sell down a portion, once it reaches operations, and optimize it for operational and financial, you know, efficiency. So that's, I would say, basically it. I think in the rest of the world, what we're seeing, especially, for example, in South America and in Mexico, is really the Green Blend and Extend projects themselves. You know, again, you don't have HLBV, you don't have ITC, you don't have some of the other elements that you would have in the States that, make it, let's say, a little bit more complicated accounting and less transparent to see through. So I would say it's basically that. We'll continue to do what we've done. So we think this is very credible. We've done this, and we will going forward, and different markets are progressing at different speeds. We certainly see that the combination of solar energy storage is coming into being, and that's an area where we have a we think a real competitive advantage.

Okay, and then just going back to the IRR comment that you made, does that mean that the numbers on that particular slide are kind of hypothetical and your actual returns are lower than that? Or did those numbers kind of take into consideration everything?

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

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

Yeah, sure. That's I think one of the upsides and one of the positive feedbacks that we get. I think We continue to get a diversified portfolio, which is important for them, but more focused on markets with lower risk, right? So I think from that perspective, we get very good feedback from the agencies, and it's an important component of our trajectory here.

It's not only a question of the quality of our portfolio. So I did mention in my speech that, you know, measurably our risks are down 70% over the last five years. To make that sort of very tangible, take something like Panama, where we have 777 megawatts of hydro. In a dry year, you know, we would be forced to buy in the market, and therefore energy would be high, energy to supply our contracts. And now with Cologne in place and natural gas coming into Panama, we have cut that particular risk by about 80%. So, you know, the quality of the portfolio is, you know, backing up the numbers. I think that's very, very important. The fact, you know, what's underlying the subsidiaries are investment grade as well. And that, you know, we feel, you know, the hydrology commodity FX risk is very much reduced. So it's not just the metric itself. I think it's the quality of those metrics.

Gotcha. So it sounds like you're pretty much there in terms of the business mix and your improvement. You just need to maybe execute for a couple more quarters to get that recognized. That's exactly right.

Yeah, we think there's a seasoning that the agencies will require, you know, but we feel very good on the path we're on, and we feel very good about our business mix continues to improve the quality of our portfolio. Great.

Thanks, guys.

Thank you.

The next question will come from Greg Oriel of UBS.

Yeah, thank you. Good morning. Good morning, Greg. Regarding the 24% sell-down at S power, what's the impact there on returns or earnings of S power? How are you thinking about that?

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

I think what I've been saying, Greg, is when you bought at SPAO, you bought at high single digits, right? So after the acquisition with a series of refinances, operational improvements, and so on, plus those sell-downs, we brought this to 13%. That is part of that. that we're able to conduct.

Okay, thank you.

The next question will come from Steve Fleischman of Wolf Research.

Yeah, hi, good morning. Sorry if some of these were asked, but just on the Ohio DMR, could you just remind me how much earnings come from that?

Today we have 105 pre-tax, so $105 million per year.

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

That's right. I mean, the two walk together, so we believe it's important to have the DMR for us to be able to continue the the transformation of DPL, including the smart grid investments.

Okay. And just on your – you might have answered this, but just how would you kind of characterize your returns on new renewables growth projects in the U.S. relative to that 13% that you're now up to on the S-Power kind of acquisition?

That's a good question. I think, you know, we have a – different projects in the U.S. So we have projects, for example, AES distributed energy projects. Then we have sort of S-Power projects. We have CNI customers. We still have some PURPA deals in the works. We have deals where we're really, you know, combining energy storage in new ways. So, you know, there is a range, you know, depending on the particular niche, let's say, I would say that we were addressing. I would say to – and, again, I would also say that, you know, when we calculate these returns, this is just a sort of project return that we're looking at and not any sort of leveraged corp or anything above. And we're very conservative, I'd say, about terminal values. But, obviously, in the sort of plain vanilla in the U.S., you know, it does involve that we would, let's say, flip a portion of the operating assets to some long-term holder and other than ourselves. So there is that combination. But, you know, we do have this mix. So it's not like a uniform product that we're selling across the states.

Okay. And then one last question just on – I thought I saw somewhere that you might have won a storage project in Arizona with APS. And I don't know – I didn't see that in your – could you talk about that? And it seemed to be pretty clear.

Sure. It is. It's 100 megawatts of four-hour energy storage, so it's 400 megawatt hours. This is, quite frankly, exactly the size of the one that we have on Alameda that we're building today. So if you put the two together, we have, you know, two projects of 100 megawatts of four hours each. That would be, you know, 200 megawatts, 800 megawatt hours between the two projects.

But that's not in what you announced. As of your end, right, that would be additive.

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

Okay. Thank you.

Thank you. Thank you.

The next question will come from Charles Fishman of Morningstar Research. Please go ahead.

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

You know, this is a – Fluence is a JV between us and Siemens, but Fluence's own sales team is doing quite a lot. So, you know, they're in 17 countries. They're 80 projects. The projects vary from smaller projects. You know, it can be 500 kV or multiple of them, you know, smaller units – 500 kV, 1 megawatt, or it's a larger unit, as large as the 800 megawatt hours. So, honestly, I don't have off the top of my head which of those projects are, but realize we're hitting everybody from C&I customers to the very largest utilities, you know, and everything in between. So, it's a mix of product, and, you know, the large ones tend to be a bit lumpy. What we like very much are the smaller projects that, you know, come in and, you know, We increased the number of countries around the world. One thing that's public, you know, we just, AES, together with Mitsubishi, inaugurated India's first energy storage project last week in Delhi. And this, together with Tata Power, and this project is, you know, I think very important for India because it's sort of establishing, you know, how energy storage would work on that grid and getting the regulations in place. And as you know, India has... is actually building out 200 gigawatts of renewables, probably 80, I think, are in the bag. And they're going to need a whole lot of energy storage to be able to accommodate that much renewables on their grid. So there's a lot of interesting markets opening up.

And we'll see this number of award and delivered jump when you report first quarter because of APS.

Yes.

There will be lumpiness as these projects come in. Okay, one other question, Andres. Just, I want to make sure I got this right. You said that by, I believe you said that by 2022, 50% of your PTC coming from the SBUs will be U.S. generated. Was that correct?

Yes. I mean, look, there's, of course, especially when you have renewables with shorter timeframes, you know, that are rolling in terms of, you know, this will be rolling over time and, you know, we have to win some of those bids. But yes, you know, given our current expectations, is that a little less than half will be U.S., and that's up from about a third today. So the proportion of our pre-tax contributions coming from the U.S. should rise over time, given our expectations for where that growth is coming from. You know, obviously we have, like, Southland coming online. We have a number of projects in Hawaii. You mentioned the APS. So, yeah, we've signed in terms of certainly in terms of megawatts. a lot of big projects in the States, you also have the investments, future investments in DPNL as well. So, you know, we have great visibility into a strong pipeline of growth in the U.S.

That's interesting. You're right. It certainly improves the visibility. Thank you. That's the last question I have.

Okay.

Thank you very much.

And this concludes the question and answer session. I would now like to turn the conference back over to Ahmed Pasha for any closing remarks.

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

Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.