Tag Archives: chile

Why The U.S. Stock Market Never Completely Recovered

Clearly, the global economic slowdown remains a headwind for U.S. stocks. The same canaries in the investment mines that stopped serenading last summer are straining their vocal chords once again. In sum, the S&P 500 has never fully recovered because global economic headwinds, equity overvaluation and anemic market breadth remain. Some things go unnoticed. For example, the S&P 500 rallied 13% off its closing lows (1867) set in late August. Lost in the shuffle? The popular benchmark has yet to revisit its closing highs (2130) registered back in May. In essence, the corrective activity that began in the springtime as a function of a faltering global economy, overvalued equities and weakening market internals has yet to run its course. What’s more, these factors that led to the August-September sell-off in risk assets are unlikely to dissipate quickly. Let’s start with the macro-economic backdrop. Data show that quantitative easing (QE) in Europe is not stimulating borrowing activity the way that it stimulated borrowing activity in the United States. If European consumers and European businesses are fearful to take out loans – or if creditors are unwilling to extend credit – the euro-zone economy is unlikely to show improvement. Similarly, European stocks would not experience much of a boost from share buybacks. Not surprisingly, then, the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) failed to rise above its 200-day moving average; it never came close to recapturing its 52-week high. At this moment, the euro-zone proxy is still 12% below its high-water mark. Europe is hardly the only canker sore on the world stage. Japan recently revised its economic growth projections lower. China is slowing dramatically. And nations that depend upon natural resources exports (e.g., Australia, Canada, Brazil, Chile, etc.) are witnessing yet another downturn in commodity prices. In fact, the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ) has plummeted back to levels not seen since the late August free-fall for U.S. stocks. The bullish case for U.S. stocks continues to rely on the notion that the rest of the world does not matter. Ironically, the Federal Reserve did not raise borrowing costs in September and cast doubt on any rate hike this year when it stated that “…global economic and financial developments may restrain economic activity.” The central bank subsequently backtracked at its October meeting by removing its commentary on global issues altogether. So do the economic hardships abroad matter or not? They matter with respect to corporate earnings and revenue. Consider the reality that corporate profits as well as sales were negative for the recent quarter (Q3) and that multinationals with greater overseas exposure witnessed steeper year-over-year declines. Clearly, the global economic slowdown remains a headwind for U.S. stocks. What’s more, declining earnings and declining revenue continue to pressure U.S. stock valuations . We are now looking at a price-to-sales ratio of 1.84 – one of the highest P/S ratios on record. The third component that sent stocks tumbling back in August was the softening of market internals . In particular, the discrepancy between the S&P 500’s Advance-Decline (A/D) Line and that of the New York Stock Exchange (NYSE) pointed to fewer and fewer large companies holding up the benchmark. Here in November, the disparity appears to have resurfaced. Some researchers have been particularly outspoken on the lack of market breadth. Heading into the current week of trading, Strategas Research Partners noted that ” the 10 largest stocks in the S&P 500 have contributed more than 100% of the year’s roughly 2% gain .” They added that ” the 10 biggest stocks in the index accounted for just 19% of the gains last year and 15.2% of the index’s return in 2013 .” We should let the above data sink in for a moment. In 2013 as well as 2014, the S&P 500’s appreciation was attributable to most of its components. In 2015? Only the 10 biggest large-caps account for the positive spin. It gets worse. The same canaries in the investment mines that stopped serenading last summer – high yield junk bonds, emerging market stocks, small company stocks, commodities – are straining their vocal chords once again. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) appears destined to retest its 52-week lows in the same way that commodities via DBC have. In sum, the S&P 500 has never fully recovered because global economic headwinds, equity overvaluation and anemic market breadth remain. Transporters, industrials, energy, materials, retail, leisure, household products, utilities, real estate, media, healthcare – a wide variety of sectors and sub-sectors have been buckling. It follows that it should not be all that surprising to see the S&P 500 buckle as well. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Enersis’ (ENI) Q3 2015 Results – Earnings Call Transcript

Enersis S.A. (NYSE: ENI ) Q3 2015 Earnings Conference Call November 03, 2015 10:00 AM ET Executives Javier Galan – Chief Financial Officer Analysts Cosma Panzacchi – Bernstein Research Javier Suarez – Mediobanca Antra Murra – Santander Nicolas Schild – Santander Carmen Concha – Moneda Ezequiel Fernandez – Scotiabank Operator Good day, ladies and gentlemen, and welcome to the nine month results 2015 Enersis Earnings Conference Call. My name is Sonia, and I will be your operator for today. During this conference call, we may make statements that constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995. These statements could include statements regarding the intent, belief, or current expectations of Enersis and its management with respect to, among other things, Enersis’ business plans, Enersis’ cost reduction plans, trends affecting Enersis’ financial condition, or result of operations, including market trends, electricity sector in Chile or elsewhere, supervision and regulation of the electricity sector in Chile or elsewhere, and the future effects of any changes in the laws and regulations applicable to Enersis or its affiliations. Such forward-looking statements reflect only our current expectations and not guarantees of future performance, and involve risks and uncertainties. Actual results may differ materially from those anticipated in the forward-looking statements as a result of various factors. These factors include a decline in the equity and capital markets of the United States or Chile, an increase in the market rate of interest in the United States or elsewhere, adverse decisions by government regulators in Chile or elsewhere, and other factors described in Enersis’ Annual Report on Form 20-F included under Risk Factors. You may access our 20-F on the SEC’s website, www.sec.gov. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of their date. Enersis undertakes no obligation to update these forward-looking statements or to disclose any deployment as a result of which these forward-looking statements become inaccurate. I would now like to turn our presentation over to Javier Galan, Enersis’ CFO. Please proceed. Javier Galan Good morning, and welcome to our nine months conference call results presentation. I am Javier Galan, CFO of the Company, and with me today is Pedro Canamero, our Investors Relation Director. Please, let me remind you that the presentation will follow the slides that have been already uploaded in our website. Also, as always, we will have the usual question-and-answer session at the end of this presentation. First, on slide number two, I will start by outlining the main updates of the period. During the first nine months of the year, EBITDA recorded $2.6 billion, increasing by 8% compared with the same period of last year. This was mainly due to the positive performance during the third quarter in generation business in Chile and the positive results in distribution business in Argentina due to resolution number 32. This was partially offset by a negative exchange rate effect in Brazil and Colombia. Net income attributable to Enersis shareholders increased by 49%, reaching $653 million due to an adequate operational performance and better financial results compared to the same period of last year. As a result of this, earnings per share for the first nine months of the year was CLP8.3 per share compared to CLP5.5 last year. In October 6, our Colombian generation subsidiary, Emquesa, announced the initial generation tests for the 400 megawatt new hydro plant, El Quimbo. It is expected to enter into a commercial mode for mid-November. Let me just remind you that the energy production of this investment on a yearly basis should be approximately 2.2 terawatt hours, with an implied load factor of 63%. Finally, I would like to highlight the outlook improvement in Chile due to range rated El Nino phenomenon. During September, our hydro capacity increased by 17% versus the previous month. Year-to-date, the total hydro capacity of our plant in Chile grew by 20%. Let me now focus your attention on the macro scenario for this year in slide number three. Despite the global macro trends related to commodities, US dollar interest rate expectations and currencies, GDP growth of the countries where we operate, with the exception of Brazil, continue to increase at more than 2% annually. This is reflected in our electricity demand growth evolution of the first nine months of the year compared with 2014. On this respect] let me highlight the resilience of countries like Colombia and Peru, which shows a demand growth that continued to stay at the same level, or even higher compared with last year. This compensate the lower activity in Chile and Brazil being Ampla, our distribution company in Rio de Janeiro, the most effective company due to its exposure to a lower demand growth and higher electricity losses. Regarding spot prices in Chile, we’re down 44.2% compared with the same period of last year, mainly due to a rainier season that continued to show a similar trend in October. However, in Chile, we have not achieved an average hydro year yet. Let’s now take a look to our main operational highlights under the scenario on slide number four. The installed capacity of Enersis Group increased by 3.6%, or 555 megawatt due to El Quimbo hydro plant in Colombia for 400 megawatts, the restart of the gas plant TG7 in Peru for 157 megawatts, and the last unit of the Salaco Chain hydro plant for 18 million megawatts in Colombia. Net production of the Group remained flat in the first nine months of the year. Here, the lower hydro production in Brazil was partially compensated by higher thermal generation in Chile. Finally, distributed electricity increased by 2% due to higher energy sense in all the countries where we operate. On this respect, the most important areas of growth were Peru and Argentina, which increased by 4%. The number of clients at the end of September amounted to 15.1 million clients, 449,000 clients higher compared to the same period of 2014. In slide number five, let me explain the main regulatory items for the period. In Colombia, as you know, the worst tax for the full year recorded in January impacted EBITDA by $23 million. This tax will last until 2017. And regarding the new regulatory cycle, we are expecting to have the final work definition during the fourth quarter of 2015. In Peru, since September 24 and following decree law number 1,221, the recent modification to the distribution tariff calculation for the next regulatory period 2017-2021 regarding from a sector model base to a real value-added distribution base on each company. We do not expect changes in the final tariff as the current model company is very similar to us in terms of efficiencies. In Brazil, the distribution company Ampla sent a request to ANEEL asking for an extraordinary tariff review recognition based on the CVAs already accumulated during the year, an increase of uncollectables recognized in the tariff, and an improvement of the regulatory index related with [indiscernible] losses. Now, on slide six, we will analyze the financial highlights for the period. Revenues increased by 9%, and EBITDA by 8%. This is mainly explained by the 4.1 recovery of the EBITDA in the generation business, which produced $669 million in the last quarter, together with the stable distribution business, which recorded $388 million in the same period. The overall company EBITDA during the third quarter was almost $1 billion. Net income attributable to Enersis shareholders increased by 49%, recording $653 million in the first nine months of the year due to the combination of better operational results, the positive effect of additional minorities interest acquired during 2013 in [indiscernible], and GasAtacama, and a better financial result, which improved by 54% during the period, which will be explained later on. Net debt increased by $240 million mainly due to higher investments. Let me analyze the EBITDA and the net income evolution in more detail in the following slides. On a country-by-country basis, and comparing with the same period of last year, overall EBITDA increased by $181 million, or 8% despite the negative impact of translation effect rate in Brazil and Colombia. In Chile, EBITDA increased by 36%, amounting to $678 million in the first nine months of the year. During the third quarter of 2015, Chile EBITDA reached $344 million, increasing more than 30% compared to last year. This was possible due to our lower spot market prices related to a better hydrology in the country, (inaudible) generation, and the effective thermo plant energy management, which more than compensate the perimeter effect of non-corrective we saw last year in particular in Milan and Enel. In Brazil, EBITDA decreased by 22%, or $132 million as of September this year, mainly related to the exchange rate impact of 17.5%. The remaining negative impact of 4.7% is related to higher energy purchase costs, inflation, and fixed costs in Ampla. This was partially offset by the good results in Coelce, which is on the fourth regulatory cycle with an increasing demand growing at the rate of 2.4%. In Colombia, the business was also impacted by a negative exchange rate effect of 16%. Net of this effect, results were flat compared to last year. Let me remind you that this year’s results contain a wealth tax of $23 million recorded at EBITDA level during the first quarter of 2015. In Peru, the business continues to grow at a solid rate mainly due to the good performance of the distribution business showing a 15% increase in EBITDA in the first nine months of the year, reaching $166 million. This is the result of higher accumulated electricity demand, which grew at the range of 4.7%. Finally, in Argentina, the EBITDA increased by $257 million during the period, mainly due to the distribution business as a result of the already-mentioned resolution number 23. On next slide, you will find a brief overview of the EBITDA breakdown by country and by business. Colombia remains as the main EBITDA contributor, generating one-third of the accumulated EBITDA in the first nine months of the year. Together with Peru, these two countries amount for $1.3 billion of EBITDA, or 49% of the total figure, amounting $2.6 billion. Chile also increased its EBITDA contribution since last year, moving from 21% to 26% as explained in the previous slides. In terms of business activity, generation represents 58% of the consolidated EBITDA, 2% higher than last year. Let’s now have a look at the main factors determining the Group net income on slide number nine. In addition to EBITDA and EBIT growing 8% and 10% respectively during the first nine months of the year, we have had a relevant positive impact of financial results, which decreased by 54% or $260 million compared to the same period of last year, recording $223 million. This was mainly due to the following factors. On the one hand, a higher financial income of $180 million related to 2015 IFRIC 12 remuneration and CPA indexation in our Brazilian assets. Secondly, in the other hand, lower financial expenses for $105 million in part related to the exchange rate effect on lower debt in Argentina. Finally, the effective tax rate during the period was 38.5% if compared to the 41% registered in the same period of 2014. As a result of all this, total Enersis net income increased by about 32%, reaching almost $1.1 billion and net income attributable to Enersis shareholders, which determined the earning per shares and the dividend, increased by 49% to $623 million. Let me now focus your attention on the capital expenditure structure on slide number 10. During the first nine months of the year, growth investments increased 36% compared with last year, mainly due to El Quimbo, which explains 47% of this variation. Overall, net investments amounted to $1.2 billion, increasing 5% if compared to last year. 55% of this CapEx was destinated to generation activities, and 45% to distribution activities. With all these elements, let’s analyze the cash flow on the net debt evolution during the first nine months of the year in the following slides. During the first nine months of the year, funds from operations amounted to $1.6 billion after tax payments and financial expenses. This amount covered both maintaining and growth CapEx. Re-concentration of dividends distributed during the first half of the year to Enersis shareholders, including minorities, for a total amount of $110 million was the main factor explaining the negative cash flow that equaled to $674 million. We expect an actual recovery of this trend during the final part of the year. Now taking into account this free cash flow evolution, let me explain you the net debt evolution in next slides. During the first nine months of the year, net debt increased by $240 million from $3.1 billion to $3.3 billion, mainly due to the cash flow evolution already mentioned and the positive impact of our debt mainly denominated in local currency following the natural debt allocation, which tends to be in the same currency of the flows of the Company — that the Company receives. Finally, let me give you an overview of the gross debt and maturity profiles in slide number 13. As of September 2015, gross debt amounted $5 billion, 18% lower compared to December 2014 as a result of the exchange rate effects and some loans repayments. The average cost of debt remains stable at 8.4%. Total liquidity amounted to $2.9 billion, allowing us to easily service our debt through 2017. This liquidity position includes committed and uncommitted credit lines for $1.2 billion and cash and cash equivalents of $1.6 billion, of which $1.2 billion are related to capital increase. Our short-term maturities are $180 million for 2015, and $849 million for 2016. Thank you very much, and now let me hand over to the operator for the Q&A session. Please, Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Cosma Panzacchi of Bernstein. Your line is now open. Cosma Panzacchi Hi, thank you for taking my call and my questions. I have three brief questions. The first one is industrial. So, I’ve seen that there has been a general increase in losses in your distribution business across several countries. Could you actually explain what is driving this trend, and what plan do you have in place to actually optimize the losses again? The second question regards the impact of El Nino, especially given your exposure to Colombia. I wonder if this will create a potential headwind, going forward, or not. And then, the third question regards guidance. If I remember correctly from the H1 call, you were positive about your possibility of achieving the end of year targets or guidance, if you want. Do you still maintain that optimistic approach, or that positive approach? And looking forward to 2016, if I remember correctly from also the numbers that Enel has shown in the past, Enersis is expected to grow the EBITDA by approximately 20% in the generation business. Do you still think that that’s achievable, given the evolution of the macro? Thank you for taking my questions. Javier Galan Thank you very much for your question. I’ll try to address on the same order that you did them. On the industrial side, yes, we have had a general increase in losses in different distribution companies. I would say the DB Ampla, the one that is being more affected during [indiscernible] due to a higher distribution — costs on distribution, and higher losses due to theft in specific areas in Brazil, and related also to the current scenario on the country. In the second question you made related to El Nino exposure, I may say that currently in Colombia, we are expecting this situation to remain mainly at the half of next year. And currently, we are in a very good, sound position on the reserves, or both El Guavio and Betania, with 19% and 17% approximately of capacity higher than the system capacity, and along with higher prices on the region, we think we are well set up on what position in this scenario. And the third question, as you know, we do not give guidance. We have had a very good third quarter, as you saw, with $1 billion generation of EBITDA, and we are optimistic on the fourth quarter relating to specifically Chile potential generation capacity. Operator Our next question comes from Javier Suarez of Mediobanca. Your line is open. Javier Suarez Hi, good afternoon, Javier, Javier Suarez of Mediobanca. Thank you for taking my questions. I have three of them. The first one is on the debt structure of the Company. In the slide number 12, you are reporting an increase in the net debt from $3.1 billion to $3.3 billion. In terms of financial in hard currencies there, so local currency, can you break down for us by the different countries which is the [indiscernible] of your financing that is in local currencies versus hard currencies, I guess, in US dollar terms? That is the first question. The second question is on your EBITDA. Can you give us an idea on the percentage of your EBITDA on which the revenues stream is effectively in US dollar, i.e. in hard currency? I’m trying to make up my mind in the matching between your revenues stream and then the service of the debt. And the third question that I have is can you guide us through why the Company is suffering a decrease on the financial expenses when the Company has [indiscernible] on increasing the net debt position by 8%, and also the average cost of debt is also slightly increasing? Many thanks. Javier Galan Okay. Related to the debt structure shown on slide number 12, I will say that, related to the structure of this debt, we finance basically the distribution businesses and companies with local currency due to the fact that we do not have any indexation to dollars or — to dollars. And in the generation, we are basically — in generation in Chile and generation in Peru, we are financed in dollar terms due to the correlation on the dollar, on the way the tariff is determined. And the others are mainly on local currency. In terms of EBITDA, as I said before, we have revenues mainly in generation in Chile and Peru related to US dollars, so that’s the amount you should try to make up in terms of how much are we saving or how much are we indexed to dollars in this regard. In reference to your last question about the financial expenses, I made an explanation of why we had this reduction of financial expenses. That is mainly due, as I said before, so compensation on IFRIC 12, both on distribution businesses in Ampla and Coelce, which will have this year a positive effect, and last year we had a negative effect. So, we are (inaudible) is a relevant amount. Also, we have some cancellation of financial expenses in Argentina related to CAMMESA debt. And yes, we have had a slight increase in costs in financial expenses, both in Colombia and Brazil, not relevant at this moment. And we also had less income related to — as we have had less cash due to the fact of the investments we made in the first half of the year, the cash related to the capital increase. So, that is the general effect on our financial expenses. Javier Suarez So, to be 100% clear, none of your distribution activities in Latin America are financed in hard currencies, and only the generation in Brazil and Peru are financed in US dollar terms, correct? Javier Galan Yes, distribution companies, that’s right. In generation, it’s Chile and Peru are financed in dollars. Javier Suarez Chile and Peru, okay. Many thanks. Operator Our next question comes from Antra Murra of Santander. Your line is open. Antra Murra Javier, thanks for taking my question. My question is about the tariff provision in Codensa. When it’s supposed to be — what’s your BOO this revision? Javier Galan See, we expect the revision to take place in the last part of the fourth quarter of this year. And as you know, there will be a reduction on the WAC. Today we have our WAC currently in 13.9%. We expect a reduction of 1%, 1.5% reduction, which is still — will be a very important remuneration for our asset base. Antra Murra Thanks. That’s it. Operator Our next question comes from Nicolas Schild of Santander. Your line is open. Nicolas Schild Hi, thank you for taking my question. You have said in the past that one of the reason for restructuring all the LatAm assets is the holding discount that is really high on Enersis, and is lower in the case of Endesa. So, that would imply, at least in my opinion, that one megawatt, for example, [indiscernible] of Enersis should be values, or should have a less — a lower value than one megawatts in the hands of Endesa. Do you think that the valuations are going to consider this when you do the transaction to calculate the terms of exchange? Javier Galan Thanks for your question. No, I think that it’s not now the moment about commenting on different valuations which are being done in the different companies which are looking at this potential reorganization. Nicolas Schild Okay, thank you. And my second question is regarding the future growth in Chile, because in July there was a — you sent a press release disclosing that you’re going to have three terawatts of product in the pipeline of Chile, of which more than two terawatt would be constructed in the next five years. However, today there is an interview to the industry and analysis in newspaper where he said that the growth is going to be on Chilectra, because the generation opportunities — or they would do it in the generation business [indiscernible] time. When do you plan to clarify this? It’s going to be before having the shareholders meeting, or where do you see the growth in the future for this company, in both business in Chile? Javier Galan Thank you for your question. I think we have a very flexible and different optionalities in our pipeline, and we still have a very wide optionality portfolio of doing and growing in Chile. And we will develop this potential pipeline depending on the demand and depending on the prices on the country. And now, I’m trying to achieve a reasonable return for our shareholders. Regarding what you said about distribution and generation, I think that this company is in distribution business, such as the one which is in Chile. I think it’s very evolved business with a very high standard of consumption. I think that what Mr. Daniel Fernandez was trying to say is that there’s an opportunity to grow in giving more value to clients in Chile, and he was not talking more about the investment plan. Nicolas Schild All right, thank you. And my last question is regarding Ampla. Can you remind us what would be the regulatory EBITDA of that operation, and why is there the big difference between them [indiscernible], or also you are, for example, increasing expenses to lower that safe, or if you can do — if you give us a breakdown or where you’re losing that difference? Unidentified Company Representative Nicholas, about the regulatory, let’s say, review of Ampla, it’s still to be seen, which is going to be the final quantity that the DML is going to be recognized. And as we said in slide number five on October 29, on October 29 we asked for this RTP that should come in the next month. So, we have to see which of these three points has been commented are going to be taken to [indiscernible] by the regulator in order to anticipate this kind of [indiscernible] to Ampla. Nicolas Schild Okay, thank you. Operator Our next question comes from Carmen Concha of Moneda. Your line is open. Carmen Concha Hi, good afternoon. Which are the companies paying management fees in Peru and in Brazil? Can you tell us a little about the services that are provided by Enel related to these charges? Javier Galan Could you repeat your question? Carmen Concha We saw that the companies paying management fees in Brazil and Peru, so we would like to know a little about the services that Enel is providing related to these charges. Javier Galan I would say that there are two companies in Brazil, and Peru have signed a general service contract agreement with Enel. This general service is a framework contract which provides potential technical services or procurement, or other support activities being provided on markets like this by Enel on a customary basis on a one-by-one — on a specific basis, no? I think that the idea is to generate this framework contract in order to be able to take advantage of this type of potential services. So far, services have not been yet paid, and they are [indiscernible] contracted on a standalone by each of the companies on this framework contract. Carmen Concha Well, in the case of Peru? Javier Galan Both cases, in Peru and in Brazil. Carmen Concha So, the management fee is paid only when the services are provided, not now? Javier Galan Yes. Carmen Concha Okay, thank you. Operator [Operator Instructions] Our next question comes from Ezequiel Fernandez of F-O-T-I-A. Ezequiel Fernandez Yes, hi, guys, thank you for taking my question. I have three questions. I’d like to go one-by-one, and sorry if I repeat myself, because I got disconnected from the call. First is regarding the CapEx levels at Codensa and Edelnor, which went up materially for historical standards during this year. Any particular project or reason behind this? Should we expect lower CapEx in both operations maybe in the next one or two years? Javier Galan Okay. I think no, we are not expecting a reduction on the CapEx in Codensa or Edelnor. We are basically investing in quality, and in higher quality connections. And we aren’t expecting lower CapEx. Ezequiel Fernandez Okay, great. And my second question is also related to Ampla. If DNL does not grant an anticipated tariff update like you recently requested, would you need to do a capital injection from Endesa Brazil into Ampla maybe in upcoming months, or do you think it’s not that serious yet? Javier Galan We are studying the situation of Ampla. And as you mentioned, we have asked this tariff review. We are expecting to know from the ANEEL when are we going to have some feedback. I think that the situation of the Company is we need to monitor the situation, and we are studying different opportunities together with the financial community right now. Ezequiel Fernandez Okay, great. And I want to ask you a question about — finally about Edelnor, the Lima distribution unit. The results have been previewed lately, and I’m not very knowledgeable about how exactly the tariff update mechanism takes place. But, I do remember something. It seems that Edelnor tariff might have a higher pass-through to the US dollar than the regular — I mean, the rest of the distribution units. Would you agree with that, or maybe that the results are — especially in profitability, on profit per megawatt hour are related to other stuff? Thank you. Javier Galan No. In Edelnor, there’s no indexation to US dollars, if that was your question. (Inaudible) that there is a new system, and instead of being a system related to a standard company’s going to be on a company basis. No, our comment was that the standard has been used. As of today is very similar to the one we currently have, so we do not expect changes on this regard. Ezequiel Fernandez Okay. Anyway, I was speaking about the profitability increase that we have seen in the last two years in Edelnor, but maybe I can take that question with Pedro and his team after the call. So, thanks a lot, very clear. Operator And I am showing no further questions at this time. I would like to turn the call back to Management for any further remarks. Javier Galan Thanks. Well, seeing as there are no more questions, I would like to thank you for your time and your attention. Remember that our Investor Relations team will be glad to assist you in any further questions you may have. Have a nice day. Thank you. Good bye. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

The AES’ (AES) CEO Andres Gluski on Q3 2015 Results – Earnings Call Transcript

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.