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The AES Corporation (NYSE: AES ) Q3 2015 Earnings Conference Call November 05, 2015 09:00 AM ET Executives Ahmed Pasha – Vice President-Investor Relations Andres Gluski – President and Chief Executive Officer Tom OFlynn – Executive Vice President and Chief Financial Officer Analysts Julien Dumoulin-Smith – UBS Ali Agha – SunTrust Keith Stanley – Wolfe Research Stephen Byrd – Morgan Stanley Gregg Orrill – Barclays Chris Turnure – JP Morgan Brian Chin – Merrill Lynch Operator Good morning. My name is Lori and I will be a conference operator today. At this time I would like to welcome everyone to the AES Corporation Q3 2015 Financial Review Call. [Operator instructions] Ahmed Pasha, you may begin your conference. Ahmed Pasha Thank you, Lori. Good morning and welcome to our third 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 Gluski Good morning everyone and thank you for joining our third quarter 2015 earnings call. Since our last call, the global macroeconomic environment has continued to weaken, and we have seen a further drop in foreign exchange rates, commodity prices and economic growth in some of our markets. As you may have seen in our press release, these conditions are reducing our earnings outlook. Despite these challenges, we are taking measures to reduce their impact and will continue to generate strong and growing free cash flow, which we will use to maximize risk-adjusted shareholder returns. Today I will discuss the impact of these macroeconomic factors on our outlook, our mitigation plan and our capital allocation strategy. Then Tom will provide our third quarter results, an update on our 2015 guidance and our capital allocation plans for 2015 and 2016. Beginning with macroeconomic factors I just mentioned, the majority of the decline in our earnings forecast is related to currencies and commodities moving against us as well as the deteriorating economic outlook in Brazil. As you may know, some of our businesses, particularly in Brazil, Colombia and Europe, have been impacted by devaluations of up to 35% in their local currencies. Furthermore, lower oil and electricity prices have a direct impact on our businesses in the Dominican Republic, DP&L and Kilroot. To mitigate the impact of these factors we are launching a $150 million cost reduction and a revenue enhancement initiative. This initiative will include overhead reductions, procurement efficiencies and operational improvements. We expect to achieve a least $50 million in savings in 2016, ramping up to $150 million including modest revenue enhancements in 2018. These bottom line improvements are on top of the $200 million of overhead cost reductions and the $170 million of productivity enhancements we have initiated since 2012. I will discuss these drivers in more detail in a few minutes. Turning to Slide 4. And our expectations for cash flow growth through 2018. Despite being affected by the macroeconomic pressures that I just discussed, our free cash flow remains strong. We are expecting average annual growth in proportional and parent free cash flow of at least 10%. Specifically, in 2016, we expect to generate roughly $1.3 billion of proportional free cash flow which translates to $0.90 per share. We also expect to generate about $625 million in parent free cash flow in 2016, which is 20% higher than our 2015 guidance. Our focus on approving sustainable cash to the parent through more efficient use of cash at our subsidiaries has helped us reduce the impact of macroeconomic headwinds on our parent free cash flow. As you may recall, parent free cash flow is the basis for dividend and capital allocation decisions. Turning to Slide 5, we believe proportional free cash flow is the most important valuation metric for AES as it represents the cash generated at our businesses that can be distributed to the parent or utilized locally to delever or fund growth. Proportional free cash flow is essentially operating cash flow minus maintenance CapEx adjusted for our ownership. In 2016, we expect to generate $1.3 billion in proportional free cash flow. Of this approximately 40% or $500 million is expected to be used to pay down nonrecourse debt at our subsidiaries, which generates equity volume and roughly 15% or $175 million may be retained by our subsidiaries due to timing or other reasons. That leaves us with $625 million of parent free cash flow, which is available for discretionary uses at Corp. Turning now to Slide 6, as a reminder, the projected growth in our cash flow is driven by our projects currently under construction which remain on budget and are expected to come online through 2018. All but $160 million of our $1.1 billion in equity requirements for these projects has already been funded. And we continue to expect average cash returns of around 15%. Turning now to our adjusted EPS guidance beginning on slide 7. In 2016, the impact from microeconomic factors is roughly $0.25. The most significant drivers of our revised guidance are first, the deterioration in the forward curves for commodities and currencies from December 2014 to October 2015 accounts for more than half of the impact, or $0.15, in line with the sensitivities that we provided. Second, we are seeing another $0.05 from more demand in higher interest rates in Brazil, primarily at our utility in Rio Grande do Sul, which has also experienced catastrophic flooding in October. Previously we had been expecting demand growth of 2.5% for Brazil, but we have seen a 5% drop in demand in 2015, and expect no recovery in 2016. Third, there is an additional $0.04 impact from regulatory changes at El Nino. The regulatory changes affect capacity prices in the United Kingdom and ancillary services in the Dominican Republic. Although hydrology, in Latin America has improved, we are still expecting El Nino to have a slight negative impact on our businesses in Brazil and Panama. And finally, we expect offset $0.05 of these headwinds through our new cost savings initiatives. Taking all these factors into account, our 2016 adjusted EPS guidance range is $0.05 to $0.15. Turning now to slide 8, which show our updated outlook for adjusted EPS growth through 2018. Although the net impact on our 2016 adjusted EPS guidance is approximately $0.20, our cost savings and other initiatives will reduce the net decrease to about $0.06 per share by 2018, which keeps us within the low end of our previous 2018 expectations. Now on to capital allocations beginning on Slide 9. When we laid out our strategy four years ago, we identified specific levers to improve total shareholder returns, reduce risk and simplify the portfolio. By completing timely exits from 10 countries and netting $3 billion from our asset sales, our portfolio is in a much stronger position today than it was four years ago. Over this period, we have allocated 80% of our $5 billion in discretionary cash to debt pay down and return to shareholders. This has resulted in a 23% reduction in parent debt and a 14% reduction in share count. In fact, as you can see on slide 10, since 2012, we have turned $2 billion to shareholders through share repurchases and dividends including $700 million or 9% of our current market cap in 2015. Turning to Slide 11, going forward, after debt pay down at our subsidiaries, we expect to have a total of $2.6 billion in discretionary cash available through 2018, which is roughly one-third of our current market cap. After shareholder dividends and investments in projects under construction, we will have $1.3 billion available for other discretionary uses. These include targeting 10% annual dividend growth, continuing to deliver in order to improve our credit metrics and reduce cash and earnings volatility and opportunistically utilizing our new Ford authorization for $400 million in share repurchases. And finally, while we are still seeing a number of attractive growth opportunities, mainly in brownfield projects across the portfolio, the benchmarks for new investments has been raised. We are focused on completing those projects under construction as well as the South Line repowering and LNG-related facilities in Panama. We will continue to compete any potential investments against the other capital allocation alternatives I just discussed. I would also like to point out that the $1.3 billion in discretionary cash I outlined does not include up to $1 billion in potential asset sale proceeds through 2018. As we allocate capital among these alternatives, we will look to further reduce risk and enhance returns as we continue to fine-tune our portfolio. We expect to strengthen our credit profile over time as we pay down debt, complete our construction projects and grow our cash flow. These actions will improve the stability of our cash flow and earnings. The bottom line is our portfolio generates strong and growing free cash flow, which we will use to maximize risk-adjusted returns for our shareholders. With that, I will turn the call over to Tom to discuss our third-quarter and year-to-date results and full-year 2015 guidance. Tom OFlynn Thanks Andres, good morning everyone. Today, I’ll review our third quarter results, including proportional free cash flow by Strategic Business Unit or SBU, adjusted EPS, adjusted pretax contribution or PTC by SBU. Then, I will cover our 2015 guidance as well as our 2015 and 2016 capital allocation plans. Turning to Slide 13, third quarter adjusted EPS of $0.39 is $0.02 higher than third quarter 2014. At a high level, we benefited from a reduction in share count of 6% or $43 million shares and lowered parent interest expense as well as higher equity earnings as a result of a restructuring of one of our businesses in Chile, which we discussed on our Q1 call. These positive contributions were partially offset by lower operating results at some of our businesses such as DPL and in the Dominican Republic, which were negative year-over-year but not material versus our full-year expectations. Through roughly 35% to the valuation in foreign currencies, particularly the Brazilian real and Colombian peso. Turning to Slide 14, overall, we generated $621 million proportional free cash flow, an increase of $194 million from last year and we earned $322 million in adjusted PTC during the quarter, a decrease of $32 million. Now we will cover our SBUs in more detail on the next six slides beginning on slide 15. In the U.S., our results were largely impacted by lower contributions from DTL, primarily due to the expected transition to market prices for our regulated load and lower margin volumes and prices. Proportional free cash flow was further impacted by lower collections and the timing of working capital at IPL. In Andes, our results improved primarily due to the gain on restructuring at Guacolda in Chile and higher energy prices at Chivor in Colombia, partially offset by the devaluation of the Colombian peso. Proportional free cash flow also benefited from increased VAT refunds related to the construction of Cochrane in Chile. In Brazil, we benefited from lower spot purchases due the seasonality and shaping of our contract requirement a Tiete, partially offset by a weaker Brazilian real. Proportional free cash flow was negatively impacted by increased working capital as a result of higher recoverable energy purchases at Eletropaulo. In MCAC our results were largely impacted by lower spot sales, financially service revenue in the Dominican Republic, partially offset by improved hydrology in Panama. Proportional free cash flow had very strong increase in the timing of collection of outstanding receivables in the Dominican Republic. In Europe, we were negatively impacted mainly due to a weaker euro and the timing of planned outages at Maritza in Bulgaria as well as the sale of the Abute in 2014. Proportional free cash flow improved largely driven by higher collections at Kavarna in Bulgaria. Finally, in Asia, we benefited from improved availability at Masinloc in the Philippines and the commencement of operations along at Mong Duong in Vietnam. Turning now to 2015 guidance, on Slide 21, based on year-to-date performance and outlook for the year, we are already at about 95% of the low end of our proportional free cash flow guidance and are confident that we will be in the range. One key variable that would put us toward the high end of the range is the receipt of the $330 million in outstanding receivables at Maritza in Bulgaria as part of the previously announced capacity price reduction agreement. Government-owned utility NEK and their holding company BEH are in the process of raising capital to pay these receivables. The remaining issue is the extent of government guarantee from bridge financing prior to the issuance of a long-term bond. While we expect to close later this year, payment could slip into early next year. Turning to adjusted EPS, as we have discussed in our prior calls, we have been facing significant headwinds of about $0.20 from currencies, commodities, hydrology and declining economic conditions in Brazil. We have offset the majority of these impacts with cost savings, hedging and capital allocation. Unfortunately, these same pressures have continued in the third quarter and we face an additional $0.07 impact. We have also faced a $0.02 impact from outages at DPL and AES Hawaii. We have been working to implement additional opportunities, but now believe they will be difficult to capture. We therefore are lowering our guidance range to a $0.18 to $0.25 per share, which is roughly $0.08 lower than the midpoint of our prior guidance of $0.25 to $0.35. Now to Slide 22, and our parent capital allocation plan for 2015. The sources on the left hand side reflect total available discretionary cash or roughly $0.5 billion. As a reminder, we previously announced asset sale proceeds from the sale of a portion of interest in Ipalco and Jordan as the sales of the Armenian mountain wind farm and our solar assets in Spain. Today we are also announcing the closing of the sale of our solar assets in Italy for $42 million, bringing our total asset sales proceeds this year to $401 million. We are also expecting an additional $27 million return of capital which, with our parent free cash flow, provides us with roughly $550 million available for dividend payments and growth incremental share repurchases, debt reduction and potential investments. Turning to uses on the right hand side, we plan to invest $140 million in our subsidiaries, which does not include direct investments by CDPQ into IPL. We have invested $345 million in prepayment and refinancing parent debt, leaving us with only $180 million in parent debt maturities through 2018. In addition to dividend, we have invested $423 million of our shares. This brings total cash returned to shareholders through buybacks and dividends to $700 million for the year. Finally, we expect to have unallocated discretionary cash of about $225 million for the rest of the year. Turning now to 2016, parent capital allocation on Slide 23, source on the left hand side reflect $1.2 billion of total available discretionary cash for 2016. This includes asset sale proceeds of approximately, $200 million, the majority of which is coming from one transaction that we expect to announce shortly. Discretionary cash also includes our parent free cash flow of $625 million, which is approximately 20% higher than the midpoint of this year’s expectation. Strong cash flow, the strong growth in our parent free cash flow demonstrates our increasing focus to upstream sustainable and growing cash from our businesses to further improved returns to our shareholders. In fact, parent free cash flow is the largest contributor to the expected $2.6 billion in discretionary cash available through 2018 that Andres just covered. We’re also expecting $70 million in returned capital from operating businesses. Additional potential asset sale proceeds could further increase our discretionary cash by up to $1billion through 2018. Turning to uses on the right-hand some of the slide. As Andres mentioned, we’ll be investing in our projects under construction as well as already announced expansion projects at Southland, California and in Panama. After considering these investments in our subs, our current dividend and debt prepayment, we’re left with roughly $400 million of discretionary cash to be allocated. Consistent with our capital allocation framework, we will invest this cash in dividend growth, further debt reduction, to continue to improve our debt profile and increase the stability of equity cash flows, and share repurchases. Regarding new growth investments, we will continue to compete any new projects against share repurchases. All in all, our 2016 parent free cash flow and proportional free cash flow are growing significantly over 2015. We expect this trend to continue through 2018 and beyond. With that now, I will now turn it back to Andres. Andres Gluski Thanks, Tom. In summary, we’re pulling all levers from cost reductions, to capital allocation to respond to the challenges presented by a generally weaker global economy. As a reminder, our 6 gigawatts of projects under construction are largely funded and are the driver of at least 10% average annual growth in proportional and parent free cash flow over the next three years. Looking forward, we do not believe that our strong and growing cash flow is fully reflected in our valuation. Over the next three years we will generate $2.6 billion in discretionary cash, an amount equal to one-third of our current market cap. As our track record demonstrates we will invest in dividend growth, debt paydown and share repurchases. In fact, in 2015 alone, we have returned $700 million or roughly 9% of our current market cap to our shareholders. With that I would now like to open up the call for questions. Question-and-Answer Session Operator [Operator Instructions] Your first question is from Julien Dumoulin-Smith of UBS. Your line is open. Julien Dumoulin-Smith Hi, good morning, can you hear me? Andres Gluski Yes. Good morning Julien, we can hear you fine. Julien Dumoulin-Smith Excellent. So perhaps just following up on the guidance instruction here. I just want be very clear. When you’re making the assumptions for 12% to 16% growth off this lower 2016 number, what exactly are you embedding by the time you get to 2018 in terms of FX and commodities? I just want to be abundantly clear about that. Andres Gluski Basically what we are using is those commodities and currencies that we have with a relatively liquid market, we’re using basically forward curves two years out. And then more or less a purchasing power parity thereafter. So we have considerable devaluations embedded into these forecasts. Julien Dumoulin-Smith And so then can you help articulate a little bit further the offsets? I know you just did a little bit just now, but can you elaborate a bit further exactly how you’re able to drive these potential mitigating factors? Andres Gluski So we’re talking about the $150 million initiative. We have already done a $200 million initiative which we started in 2012. Recalling a little bit, we had set out a $100 million program and we managed to get twice that number in savings. What we have in front of us for next year is $50 million and that will be 100% cost reductions. And these are things that we have identified in terms of becoming a more efficient company, streamlining our structure, streamlining processes and really making sure that every single dollar that we are spending is going towards meeting our objectives. So, for example, we have to make sure that we are not spending any money on any business development, for example, in deals that we’re not going to do over the next couple of years. I think we have this very well identified for 2016. When we think of 2017 and we start getting into some of the initiatives that we’ve had in the past the we’ve started and we’re well underway. We have churn of accounts now, we are really looking at our procurement efficiencies. We are starting to really achieve significant efficiencies on our new construction projects. So by standardization and by more global deals. We really think that we have to get this more into our global procurement as well. There will be continued streamlining of the company as well and this continues into 2018. The only thing in 2018, we see a small number, maybe 10% of this, 15% of this in terms of revenue enhancements, these are several things that we have identified. But one of them which we don’t have in our forecast is really having a channel partner to sell some of our advancing product. We think by then it’s reasonable to think that we’d have some income from this. So we feel very confident about hitting this $150 million. And, if you go back to our earnings call, we have always hit our cost savings and revenue enhancement numbers. Julien Dumoulin Got it. And then just following up on the impact from El Nino, you kind of alluded to it but can you define that a little bit more specifically across your portfolio. What exactly are you? Andres Gluski Well, not all El Ninos are the same. This is a particularly strong El Nino. So that, normally El Nino would be favorable to, us but in the very case of the very strong El Ninos, it tends to be a bit drier in Panama than a normal El Nino. And, if you look at Southern Brazil you tend to get more rains in the extreme Southeast and somewhat less rains in the Central South. So were taken those into perspective. Normally in Colombia it’s somewhat better but with a very strong El Nino it is a little bit more volatile. So that’s the net that we think it’s a little bit negative from these factors. One thing that hasn’t been perhaps highlighted is that we have had really torrential rains in Sewall, in Rio Grande do Sul. We’ve had the worst rains since 1940. We have had storms that just recently knocked out 14 transmission towers and left half of the 1 million customers without power. And so that’s one of the things, for example, that’s affecting our 2015 guidance. So it’s basically these factors. It is a little bit Brazil, a little bit Panama and we are not expecting because it’s a strong El Nino to have the full offset in the case of Chivor in Colombia. Julien Dumoulin Great. I’ll leave it there, thank you. Andres Gluski Thanks, Julien. Operator Your next question comes from the line of Ali Agha of SunTrust. And as a reminder please mute your computer speakers. Your line is open. Ali Agha Thank you, good morning. Andres Gluski Good morning. Tom OFlynn Good morning, Ali. Ali Agha Andres, first question, beyond the FX profile that you’re looking at through 2018. Can you remind us what are you assuming for Hydro levels, for example, in Brazil? Are you assuming back to normal in 2016, 2017 and 2018. Or what is your assumption on Hydro? Andres Gluski Yes, Ali. We are assuming normal hydrology in Brazil for 2017 and 2018. That is correct. We’re assuming an El Nino through the first half of 2016. Ali Agha Okay. Secondly, can you also remind us why is there this huge disconnect between your earnings profile that continues to come down and your cash flow profile that remains 10% or higher with a proportional parent level? Why is the cash flow not being more impacted by these macro impacts on your earnings? Andres Gluski Yes. One of it is arithmetic. It’s a bigger number, so if you have an x amount of decrease, say $100 million, it is going to impact the smaller number more. But I think to be frank, we had a little bit more margin in our cash flow. And realize that our cash flow, as we have always been saying, is going to be growing faster than our earnings. And the primary driver is we have $3.5 of NOLs, we have higher depreciation that we have maintenance CapEx. And we also have some of the accounting for lease accounting and HLBV et cetera tends to spread this out. So I think, those are the primary reasons. They have not changed. And we been saying for some time that the fundamental strength of this company is its cash flow. And, I think that we have seen that even with these negative external factors, we’re delivering on what we had laid out. Tom OFlynn I’ll just add on one point that Andres just mentioned on the differential between proportional depreciation and proportional maintenance on environmental CapEx. We do continue to bring our maintenance environmental CapEx down, but that differential this year is about $300 million. The differential widens as new plants come on, that differential widens by about $75 million a year, so call it $0.78, that’s keeping earnings down, but growing cash. Ali Agha Got it, got it. And then thirdly, a more bigger picture. You’re doing a great job of trying to come up with internal offsets to these macro headwinds. Have you stepped back and taken a look at this entire portfolio? I mean, is this model working? That the AES global model and does it have to make sense for you to perhaps relook at the fact that the sum of the bars may be greater than the whole in terms of maximizing shareholder value? Andres Gluski We always look at that. I mean, we have an open mind. We know that we’re working for our shareholders. We will look at anything that we think increases shareholder value. Having said that, in terms of our portfolio, we think we have the global scale that really allows us to reach economies and synergies. So, for example, if you look at recent bids recent bids, whether it be California or the gas plant in IPL, which had to basically complete with alternatives or the gas plant and regassification terminal in Panama, we’re winning bids against the best in the business. And we’re able to do that because of this global scale and reach that we have. I think we’ve also shown that the portfolio, in this case, is offsetting. It’s doing well in one place; it’s not doing well on the other. And we think we have good combination of rapidly growing markets in Asia. And Latin America is going through a downturn in the cycle but realize that, other than Brazil, these markets are growing whereas, for example, in the U.S. it is a market where energy demand is not growing. Having said that, we have further fine-tuning to do. We have to sell down those areas where we have particular risks that have been affecting us. We are growing in those areas. If you look at where our growth is, 80% is U.S., or it’s Chile or even if you include Panama, it’s dollar-denominated. So we’re decreasing our currency and hydro risk over time. So we will continue to do what we’ve done in terms of fine-tuning this portfolio, taking advantage of our synergies, making it more efficient, cutting costs, standardizing to become the good operator. We keep an open mind. I think that we have – when, for example were people discussing Yoto in the past, we said we would look at it. We didn’t see it really a fit for us and we also felt that that would commit us to growth in situations where the markets may not be good. So, having said that, we will keep an open mind, but I think we have shown a lot of prudence in terms of going forward. We continue to look hard at our portfolio, what makes sense as a whole. And, we think we are on the right track. We have been hit with some pretty hard exogenous factors. But as we fine-tune this portfolio, we’ll be less susceptible to them over time. Ali Agha Understood. And lastly, did I hear you right, you think you’ll have another $1 billion in sale proceeds potentially between now and 2018? Andres Gluski Yes, we said up to. We said up to and this involves not only selling out of some places, but it could also mean selling down on specific businesses where we think we have too much of some risk or that we can churn that cash and put it to better use somewhere else for our shareholders. Ali Agha Thank you. Operator Your next question comes from the line of Keith Stanley of Wolfe Research. As a reminder please mute your computer speakers. Your line is open. Keith Stanley Hi, good morning. Could I just go back to the previous question on the cash flow outlook versus the earnings outlook? There is such a disparity there. Earnings, I guess come down a couple times now, but you guys continue to be able to maintain the cash flow outlook. So first of all, is the Bulgaria, the receipt of the Bulgaria receivables, is that now in your 2016 proportional free cash flow number? Andres Gluski No, it is not. As Tom laid out, we still hit our range without it in 2015, but we’re not including it in 2016. Keith Stanley So it would be upside to 2016 when you receive that cash? Andres Gluski That is correct. Keith Stanley Okay. And then, can you just talk a little more about what is – I know you identified some of the things that are driving cash flow to be stronger. How much should we assume is coming from opportunities within the subsidiaries to pull cash out? For example, you had that U.S. hold sell this year; you pulled about $200 million out. Are there a lot of opportunities to work within capital structures of subs that is helping to find incoming cash flow? Andres Gluski I’m going to ask Tom to answer this. I think the one thing to realize is that we’re focusing more on cash and getting cash back to the parent and that’s really what we’re maximizing. Sometimes there will be lumpiness in this, but not always from the same place. And we are also – but this is sustainable, because they really represent earnings from those companies that have been over time. So while there may be some lumpiness and when you get a back, it is not like a one-time shot. These things are sustainable over time and they will get bigger. Realize that we have about $1.1 billion in construction projects. We have our equity in construction projects. We have to put in $160 million more. We have a lot of money that is not yet producing results. So, Tom, if you’d like to clarify his question. Tom OFlynn Keith, I just on proportional free cash flow, maintenance and environmental CapEx is coming down. Just a general sense, it was close to $600 million this year. Over the next couple years, it’s going to be closer to $500 million. Part of that is working hard with efficiencies, but also we did finish an enviro retrofit program at Chile that is basically finished at the end of 2015, so that helps us. And you then you contrast that with growing depreciation from new assets, so it’s the differential between maintenance and environmental CapEx versus earnings. It is about $300 million today, and that differential grows about $75 million a year. We’ve always said, we do have NOLs that hit EPS, don’t hit cash. And then just sometimes when you bring a new business on, especially a new project, the earnings can be leaner at the early years, but cash continues to be strong. On parent free cash flow, it is an increasing focus of the business and a has been for a couple years. But we continue to find ways to drive efficient use of cash through the business. It may come through inventories, they’ll be down about 15% year-over-year. Our unrestricted cash on the balance sheet will be down about $100 million a year and it is down about $300 million from a couple years ago So we continue to look for efficient ways to run the business. I will say that, when we talk about parent free cash flow, all that is earnings. It’s either earnings from this year or it’s retained earnings from a prior year. When we call it parent free cash flow, it has to be earnings, either this year’s or last year’s or whatever. When we do something like the Jennco financing, if it’s a reflection of prior retained earnings, then we will call it parent free cash flow. If it’s a reflection of cash beyond retained earnings, then we will call it returning capital, and that’s why we make that distinction. To the shareholder, it’s really all money. We make that distinction which is really accounting driven. But we do think there are continued opportunities. A lot of that is growing cash in the businesses. It’s a function of proportional free cash flow, but then there are also opportunities to get businesses that may have delevered over time; we can re-lever them periodically. Obviously you don’t do that every year; you do that every few years. And of the ways to look to up freeing cash, that is a big focus. I will just say on the comment of, we do pay down a fair amount of subsidiary debt. $450 million, $500 million a year of subsidiary debt, and a lot of that we give value for, but we get it, let’s say, in loss. We will get it because we’ll refi something at one point in time that allows to have a chunk of your dividend that year. We may get it from the opportunity to build something where we have created equity value in a business and you build something, basically all debt because your equity all is already embedded in the business. Were doing that right now in the DR. And then also, obviously, the extent that we delever a business, like DPL we’re delevering. So on an aggregate-value business, equity is a bigger part of ag value. Andres Gluski Just to serve some high numbers, we’re paying about a 4% dividend. We have about a 9% parent free cash flow yield and about a 17% proportional free cash flow yield. I think it is very important what Tom said about the net debt that we pay down at the subs. The vast majority of this in businesses that are ongoing businesses, whether it be, for example, DPL utility. The money we feel that we’re paying down there, we’re creating value. I do agree that if that which would be going for an out of the money older coal plant, that would not be necessarily creating future equity value. But that is very small of that total number. So most of it is going for ongoing businesses. And realize that, because we are in markets that are growing, those plants that we have that we’re paying down nonrecourse debt are likely to even be recontracted at the same or higher prices in many cases. We are in markets that are growing at 10%. This is a very dynamic than in the states where we basically have flat demand. Keith Stanley That’s all very helpful. Two quick follow-ups. Can you give an update on the Brazil GSF cap and any progress there? Tom, I think you talked about at Maritza, sort of the issue is the government guarantee of the bridge financing. Is there a material risk there in Maritza or are you still feeling very confident on getting this done? Tom OFlynn Yes, let me get those one at a time. There are discussions going on down in Brazil about compensation to the generators for the meaningful reduction in output GSF beyond listing their nameplate. This year it is going to be about 83% to 85% of GSF. Those discussions are ongoing. I think there are some offsets, some exchanges that have to be made to get some of that. And we are cautious, I would say about whether that will be really a value to us. We’re not baking any of that into our numbers is the important thing. The team is working hard. They are working with other folks down there in similar positions, but at this point we are cautious. And we are not baking any value, cash, earnings or anything else, into our outlook at this point in time. In Maritza, we continue to be positive about it. As you know, we do have a large receivable now of $330 million. Everyone is on board in terms of the banks. The issue, NEK is owned by a holding company called BEH. BEH does have public debt out there. I believe it trades around 5%, 5.5%, but they’ve gone out for proposals from some bank groups. There’s two or three large groups. The primary issue is whether the banks would do a bridge before public take-out that would basically be a parry passive with the current BEH outstanding. Whether the banks would get a sovereign guarantee for all or part of that net, that is the major discussion. Our team is obviously in the middle of this. There may be some other ways to work our way through it. We think ultimately this will be resolved. We do think given its – time is marching on here for 2015; it may be in 2016. That’s not a material issue for us at this point. As you asked Keith, we will be in the range for proportional free cash flow if Maritza’s resolution doesn’t happen this year. All be it, it will be in the lower end of the range. But we expect it to happen next year. And obviously, we would have a very large number for next year. The discount that would accrue, which is about $2 million or $3 million a month, does not kick in until we get paid. Keith Stanley Right. Andres Gluski I think one of the important things to mention is that the Bulgarian government is in the process of enacting the regulatory reforms and terra pro forms that will make NEK cash sustainable over the time. There are two parts, one we want to catch up as soon as possible. But equally important is to have the enactment of these reforms which will solve the problem on an ongoing basis. Keith Stanley Thank you. Operator Your next question comes from the line of Stephen Byrd of Morgan Stanley. [Operator Instructions] Your line is open. Stephen Byrd Hi, Good morning. Andres Gluski Good morning, Step. Stephen Byrd I wanted to follow up on the point about deleveraging down at the subsidiary level. As you look out at the different subsidiaries, is there a potential for releveraging increasing financing there such that over 2016 or beyond you could increase the cash flow to the parent beyond your expectations? Is there a meaningful potential for that as you look at over the next couple of years? Andres Gluski What I would say is we do have a number of under-levered assets in different markets. We’ve talked a lot about Chiete, over time, how to relever Chiete. I would say that it’s really going to depend on the development in those markets and what rates we can relever these businesses. One of these issues we’ve had in Brazil at Sul, is that the interest rates on that particular business, which was hit by the drought and the lag in tariff increases and therefore needed more cash as the interest rates on loans in Brazil are 18% to 19%. So we will be cautious about that. Realize that 95% plus of our subsidiary debt is in the functional currency of that business. So that means means, in places like Brazil, you have to go with floating rates to accomplish that. So we don’t have a currency mismatch. But, to answer your question, we do have those opportunities. Tom and the team have taken advantage of it. In many cases it’s to put that money to work on what we think are very attractive adjacency sort of Brownfield type projects. There are opportunities there, but we don’t feel at this time to put anything into our guidance. It’s an opportunity we have to see how some of these markets develop. Tom OFlynn Yes. Steve, I just said, I mean we do have. It’s a great point. We are continuing to work at that that. Parent free cash flow will be up next year about 20%. That is why we have lost margin in the businesses for the currencies and other things that we talk about. Part of that is a reflection of trying to do exactly as you say. Stephen Byrd Understood. I wanted to shift over to growth. You’ve been able to develop a number of hybrid term projects. When you look out at potential further growth out there in your targeted market, do you think it’s a fairly target rich environment or do you think you are more likely to move towards greater amounts of share buyback given where the stock is? Generally, how do you see the context for even further growth in the future? Andres Gluski Obviously, where our stock is trading at is a factor. That really raises the bar in terms of what the projects have to return. As you pointed out, we have had very attractive returns on our projects. A key factor of that is partners. By bringing in partners who pay us a management fee or a promote or buy into a project, that really raises return on our capital. In terms of a target-rich environment, we are going ahead with those that we see are extremely profitable short-term platform additions. Desal in Chile, as an example. We are going to complete our projects in Panama and Southland. But we are narrowing our scope because of the drop in our share price also, quite frankly, because of the decrease of cash flow of some of our subsidiaries, as a result of XF and commodities. I think we will continue to do what we’ve been doing. We will continue to strengthen our credit over time. We have allocated some paydown of debt in 2016 as we did in 2015 and as we have done before. And that will continue to make us more stable in terms of earnings and cash flow at the parent. So that’s the focus that we have. So in summary, we continue to see good opportunities, but the bar has been raised. We will continue to use partnerships extensively to take advantage of it and we will continue to try to get the optimal portfolio. Taking Ali’s question, we want to get to a portfolio which has the growth, but has less of certain risks be it hydrology are specific markets. Stephen Byrd That’s very helpful. Thank you very much. Operator Thank you. And our next question comes from the line of Gregg Orrill from Barclays. As a reminder, please mute your computer speakers. Your line is open. Gregg Orrill Yes, thank you. I had two questions. First on DPL. Can you talk a little bit more about how you expect the credit to be trending and maybe on an FFO to debt basis over the next number of years. And then on Brazil. How much of the 2016 earnings impact was related to Brazil, and how are you thinking about managing that position in general? Thank you. Andres Gluski Okay. Yes, I’ll ask Tom to talk about the credit improvement for us at DP&L and then we’ll come back to the Brazil question. Tom OFlynn We continue to pay down debt. I haven’t got the FFO projections offhand, but the next maturity which is with at the DPL parent, not DP&L, the utility is $130 million next fall and we expect to be able to pay that off with internal cash flow that was contemplated when we left some of it outstanding with the refi we did a year or so ago. So we continue to see debt paydown. We will be transitioning the DP&L integrated utility from a fully integrated. We will be creating a Jennco, basically a sister to the utility that will involve some refinancing at the DP&L level, and that we’ll be over the next couple of years, within the next couple of years. We can follow up with the FFO specifically at DPL and DP&L. Gregg Orrill Okay. Andres Gluski When you’re asking about Brazil, are you asking versus 2015 or versus our prior 2016 guidance? Gregg Orrill Prior 2016. How much of the $0.20, roughly $0.20, impact is Brazil? Andres Gluski It’s approximately $0.05 that is coming from Brazil from the different things that are happening in Brazil. Again, going back, we had a 5% decrease in demand, which is very strong, this year. It’s reflecting a weakening economy. The economy in Brazil is actually contracting between 2.5% and 3% this year. In addition, you had increase in tariffs and you’ve had these terrible weather conditions in Sul. That’s a part of the things that are affecting demand in Brazil and then you have the effect on the currencies. Gregg Orrill Thank you. Operator Your next question comes from the line of Chris Turnure of JP Morgan. And as a reminder please mute your computer speakers. Your line is open. Chris Turnure Good morning. I just wanted to touch a little bit more on growth opportunities both organically and via asset purchases outside the Company. You guys have kind of already given color on this, but mentioned that there’s a higher bar now due to your lower share price and the alternative there of repurchasing shares. Are there any particular markets via purchases or organic growth that are that much more attractive today versus a year ago that the investment opportunities with the leverage with the JV partners might make you more interested in certain areas versus others or certain risk profiles versus others? Andres Gluski I think we would have to really look at the distribution of our portfolio. And really where we have synergies. We’re not going to do any deals, we’ve always said, that would just bring money. There really has to be synergies or something special to it. Right now we’re really focused on completing our projects and those that we mentioned are Southland and Panama, a little desal in Chile. And some energy storage projects which we think have a great potential not only for the projects themselves, but also to help us with third-party channel sales of our technology. I would say Mexico is a market that looks attractive given the partner that we have, but we’re going to be very disciplined. We’re going to be disciplined going forward, because, obviously, we have to react to the change of circumstances. We think that we have a lot of embedded growth in what we have already done. We do not want to be in a situation where we are spending on things that therefore we cannot finance or we have better opportunity to use that money somewhere else. Now having said that, if we give guidance out to 2018, but obviously 2019 is going to be even stronger. And then in 2020, you have Southland coming on. So we also want to have the opportunity for of these brownfield additions in the 1920s space, but we’re not going to be spending a lot of money chasing them at this stage. But if there are opportunities that we can keep at a low cost on the back burner, we will be looking at those. Chris Turnure Okay great. And then just could you give us some high-level thoughts on Brazil right here? You touched on hydrology for next year and that you think load growth is probably going to be around flat versus it being down so much this year. Could you talk more to the medium and longer term picture there? Andres Gluski Sure, I think there are two things in Brazil. One is that they are in a recession now. It is a going to take a little time for them to work their way out of it, in my opinion. There’s obviously a lot of political confusion, which doesn’t help. But, having said that, in the case of Brazil, this is an economy which has a population in the optimal level. It is still growing. There is still a lot of opportunities in Brazil, especially they do have structural reforms. So I think everybody, if you look at a medium to longer term outlook for Brazil, in the energy sector, will be far more positive than the outlook today, because you’re really looking at it. I think what is important to realize about Brazil, it is not just commodities that’s affecting them. It has really been internal politics and internal decisions. So, their ability to recover is much greater. So that’s it. We don’t expect great recovery in Brazil in 2016, and maybe even 2017. But thereafter, the fundamentals as the market look pretty sound. Chris Turnure Great. Thanks Andres. Operator And your final question comes from the line of Brian Chin of Merrill Lynch. And please mute your computer speakers. Your line is open. Brian Chin Hi, good morning. Tom OFlynn Good morning, Brian. Brian Chin Just a clarification on the guidance. You mentioned that there had been share repurchases of 400 million that were newly authorized by the Board. Does the guidance consider those share repurchases, or no? Tom OFlynn In terms of the longer-term guidance, we have some modest share repurchases in there. I would point out that I’ve always said in the past, we do always get the authorizations that we need. But we have said that we would do this opportunistically. So we will be very, again, disciplined in our execution of this. In terms of cash, we have some debt pay down as well into these forecast to make sure that we are credit neutral or improving our credit overtime. Brian Chin So then, just to be clear, the longer-term guidance considers some portion of 400 million share repurchases? The near-term numbers we should assume do not incorporate any; is that right? Tom OFlynn Yes, Brian. We look at a balance of share repurchase and debt repayment. It takes time, there’s opportunities to complete those. We’ll look at those, but we don’t put hypotheticals into our numbers. It’s an allocation of discretionary cash beyond our CapEx as to find between share repurchase and debt payment. Brian Chin Okay, understood. I realize that I’m perhaps delving in a little too nitty-gritty on what is assumed in there or not. But one more question on this front. We’re talking about still pursuing $1 billion in asset sales proceeds. That is not considered in the guidance? Or is it? Tom OFlynn It’s really a good question. First I want to clarify. This is up to $1 billion. So we don’t have a targeted $1 billion in sales. So this is up to $1 billion. It will depend on the opportunities and the use that we have for that cash. I want to make that perfectly clear. In terms of our guidance, we do have continued fine- tuning of our portfolio. We have some consideration for some modest dilution from some of the sales. Because that may not pan out in the sense it depends what we sell, the timing of what we sell. But we are being prudent in here that if we sell so. We will update that in terms of some of these asset sell downs materialize. And of course and it will vary very much the net effect. Whether it’s exactly what we have embedded or not, will depend on the use of that cash, whether it’s debt paydown or share buybacks or it’s another project and what’s the gestation period of that project. Brian Chin Understood. And last question, the $150 million cost-cutting initiative that was launched, can you give us a sense of what is mechanically are you looking at? You’ve had a number of cost-cutting initiatives over the last few year, many of which have been successful. Just a little more color on what you’re envisioning with this one and can you give us an SBU or at least geographic breakdown of where most of the cost initiatives you think –? Tom OFlynn I’m going to pass this one to Bernard. We’re not going to give a breakdown by SBU. But Bernard can give you a little color about some of the things. He’s looking at the SBU level, but this is everyone. This is finance; this is IT; this is absolutely everything is being look at in the Company. Bernerd Da Santos When you look at what we have done since 2012, we have seen more opportunity for seeds we moved actively for the SBU. So we’re taking advantage for economies of scales, some process, some monetization. I’m trying to give you a flavor of four pockets that we’re looking more into that quarter. The first one is intensified our progress in subsidiaries and economies of scale that is very focused on sourcing, cold, scarce inventory and long-term service agreements. The second part that we have here is centralized our global G&A. We continue to focus on that. We have roughly about $480 million is the global G&A ownership-adjusted. So we have financiers, we have service centers already lower across locations where we operate. So we’re going to lever up those. We want to continue to have more G&A transactional process, or back-office activity done in those lower cost locations. The other one is done that is estimatization and relegation of what our AES programs, that is actually to improve our profitability for our 35 gigawatts fleet. That is also including cheap grade and lower our outage or efforts that we have in our fleet. And the last pocket is really streamline our organization as we rebalance the portfolio. As we sell down some of our business, as we sell some of our assets, we also were looking for what are the new operations that are coming in for our construction. We’re streamlining our organization in order to be more centralized and more focused on more efficient base on the portfolio that we have. Brian Chin Great. Thank you very much. Andres Gluski Well, we thank everybody for joining us on today’s call. We look forward to seeing you at EAI. In the meantime, if you have any questions, please feel free to call our team. Thank you and have a nice day. Operator Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.