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Edited Transcript of AES earnings conference call or presentation 6-Aug-19 1:00pm GMT

Q2 2019 AES Corp Earnings Call

ARLINGTON Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of AES Corp earnings conference call or presentation Tuesday, August 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ahmed Pasha

The AES Corporation - VP of IR

* Andrés Ricardo Gluski Weilert

The AES Corporation - President, CEO & Director

* Gustavo Duarte Pimenta

The AES Corporation - Executive VP & CFO

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Conference Call Participants

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* Agnieszka Anna Storozynski

Macquarie Research - Head of US Utilities and Alternative Energy

* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Charles J. Fishman

Morningstar Inc., Research Division - Equity Analyst

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

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Presentation

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Operator [1]

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Good morning and welcome to The AES Corporation's Second Quarter 2019 Financial Release Conference Call. (Operator Instructions) Also note this event is being recorded.

I would now like to turn the conference over to Ahmed Pasha. Please go ahead, sir.

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Ahmed Pasha, The AES Corporation - VP of IR [2]

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Thank you, Nancy. Good morning and welcome to our second quarter 2019 financial review call. Our press release, presentation and related financial information are available on our website at aes.com.

Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Gustavo Pimenta, our Chief Financial Officer; and other senior members of our management team.

With that, I will turn the call over to Andrés.

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [3]

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Thank you, Ahmed. Good morning, everyone, and thank you for joining our second quarter 2019 financial review call. I am pleased to report that based on our year-to-date results and our expected growth in the second half of the year, we are on track to achieve our 2019 adjusted EPS guidance with the midpoint of $1.34, and our parent free cash flow target with the midpoint of $725 million. We are also confident in our ability to deliver 7% to 9% average annual growth through 2022.

Turning to Slide 4. Since our last call, we have continued to make great progress on our 3-key strategic objectives. These are: first, becoming investment-grade and enhancing the resilience of our portfolio; second, positioning the company for sustained growth by increasing our backlog of contracted projects; and third, improving our competitiveness by deploying innovative technologies.

Now allow me to provide some color on each one starting with our first objective of becoming investment-grade and enhancing the resilience of our portfolio on Slide 5. We have already achieved a key investment-grade metric, and we are on track to attain investment-grade ratings in 2020. Our improved credit metrics reflect the growth of our free cash flow, paying down 43% of our recourse debt and an almost 70% decrease in our exposure to foreign currencies, commodities and hydrology over the past 8 years.

A good example of this last point is bringing LNG to Panama with the commissioning of the AES Colón terminal, a combined cycle power plant. This new facility has reduced our exposure to pour hydrology in Panama by 70%, by providing far less expensive energy to supply our hydro PPAs in times of drought. Such has occurred in 2014 and is occurring again this year. It is not only good for AES, but it is expected to save Panama more than $400 million a year in imported fuel expenses. We are further enhancing the resilience of our portfolio by decreasing our carbon intensity. This year alone, we have announced the sale of 2.4 gigawatts of thermal generation in Northern Ireland, Jordan and Oklahoma.

As you can see on Slide 6 as a result of our actions, we expect to reduce our carbon intensity by 50% from 2016 levels by 2022. By that date, we also expect that coal will represent less than 30% of our total generation by megawatt hour.

Now to our second objectives, positioning the company for sustainable growth by increasing our backlog of contracted projects beginning on Slide 7. We now have a backlog of 6.8 gigawatts of mostly renewable projects. This number encompasses projects under construction or with signed PPAs, all of which are expected to be online by 2023. We are now on track to become one of the 5 largest renewable developers in the world outside of China. As we discussed on our last call, we expect to sign 2 to 3 gigawatts of renewables per year, split roughly 50-50 between wind and solar and likewise, between the U.S. and international.

So far this year, we have signed 1 gigawatt of renewable PPAs, including about 500 megawatts since our last call. This new capacity includes 181 megawatts of renewable energy signed in Chile as part of our Green Blend and Extend strategy. Through this win-win approach, we preserve the value of our existing contracts, while replacing a portion of thermal energy with long-term contracted renewables. In exchange, our customers receive carbon-free energy at less than the marginal cost of thermal power, while still benefiting from reliable capacity provided by thermal generation. We expect to see meaningful progress on the Green Blend and Extend opportunity in the coming months.

Now to our projects under construction beginning on Slide 8. Of the 4.5 gigawatts currently under construction, 43% are renewables. This percentage will continue to grow as we complete the large conventional thermal plants we started a number of years ago, while adding new wind, solar and energy storage. We are particularly pleased with the speed at which we have been able to transition projects from development to construction.

Now on to Slide 9. We are reaching key milestones on our conventional projects under construction. We have completed the construction of our OPGC 2 plant in India with 1 unit already online and the second unit in the final commissioning phase. Our Southland repowering project in California continues to progress well and is now approximately 95% complete. We recently achieved first fire and the project is on track to come online in the first quarter of next year, ahead of our original schedule. I'm also pleased to announce that just yesterday, the storage tank at our AES Colón LNG regasification facility in Panama came online, replacing the temporary floating storage unit we have been using.

Turning to Slide 10. Our Alto Maipo hydroelectric project in Chile is advancing as planned, and is now approximately 80% complete. As you may remember, tunneling is the most difficult aspect of construction, and we now have completed 36 miles with only 5 miles to go until initial COD. Additionally, we broke ground on a 10-megawatt energy storage project that will serve as the first virtual reservoir in the world. This innovative project is for our Alfalfal hydro plant, which is part of the Alto Maipo complex. It will store 5 hours of energy during periods of low demand and inject that energy into the grid during hours of peak demand, providing the run-of-the-river plant with many of the same capabilities as the reservoir. We have the potential to increase the virtual reservoir by another 240 megawatts of 5-hour energy storage at the Alto Maipo complex.

Turning to Slide 11. Another component of our contracted growth strategy is investing in LNG, which we see as complementary to our renewables business. Not only does LNG displace heavy fuel oil and diesel with less volatile, cheaper and cleaner natural gas, but the investments are based on long-term tolling agreements with no direct commodity risk.

I have previously mentioned that once our LNG import terminals and regasification facilities are built, they can be scaled up at a relatively low cost as much of the key infrastructure is already in place. We are working on expanding our LNG storage capacity in the Dominican Republic by 50 tera BTUs. We have already signed or are in advanced negotiations for 30 tera BTU of this additional capacity under long-term contracts. This expansion will require minimal investment from AES and is expected to be completed by 2022. Once fully contracted, this expansion will provide $0.02 of incremental EPS. This is up and above the $0.03 of potential upside at our existing LNG facilities in the region we had already discussed.

In Vietnam, we're making excellent progress toward the development of a landmark project with 450 tera BTUs of LNG storage and 2 gigawatts of combined cycle power plants. We expect to achieve this critical milestone this year. And once completed, this project will be an important contributor to our earnings growth beyond 2022.

Now to our third strategic objective of deploying new technologies to maintain our market-leading positions beginning on Slide 12. We are complementing and enhancing our current businesses by incorporating digital capabilities and by growing in adjacent areas. As we discussed on our last call, by applying new digital initiatives and analytics across our $33 billion asset base, this is a primary driver of our $100 million annual cost savings initiative. We are on track to fully achieve these savings by 2022.

One example of our investment in new technologies is our energy storage business. We are now the undisputed global leader in the sector, as both an owner of projects and through Fluence, the energy storage provider that we jointly own with Siemens. Fluence has now surpassed 1 gigawatt of projects either awarded or delivered, including more than 400 megawatts of projects awarded in the first half of 2019 alone. With the current backlog of nearly $700 million and a growing pipeline of activity, Fluence is cash-positive, self-funding and has the potential to a rapidly increase in value as demand for energy storage accelerates.

Now to Slide 13. Another example is our investment in Simple Energy, a company that provides utility customers a marketplace for energy efficiency products. There is great demand for digital solutions that enable energy users to be more efficient and Simple Energy has grown even faster than we anticipated. Since our last call, Simple Energy has merged with other companies to form a new company called Uplight. Uplight is now the market leader in providing cloud-based energy solutions in the United States, serving 85 electric and gas utilities with more than 100 million customers. Through this transaction, the implied value of our equity in Simple Energy nearly doubled in a little over a year since our initial investment. In digital business such as Uplight, it's capital-light, largely self-funding and we expect Uplight's annual revenue to grow significantly from its current base of over $100 million.

Finally, turning to Slide 14. AES' success as a technology leader was recently recognized when we were awarded our industry's top honor, EEI's Edison award. We were honored for our innovation in advancing round-the-clock renewables at our Lawa’i solar + storage project, which is already operational in Hawaii. We see renewables plus storage as an increasingly important part of our sector, and AES is well positioned to gain significant market share in this space.

Now I'll turn the call over to Gustavo to discuss our financial results and capital allocation in more detail.

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [4]

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Thank you, Andrés. Today, I'll cover our financial results, outlook for 2019 and capital allocation. Overall, we are very encouraged by our performance to date and remain confident in our ability to deliver on our strategic and financial objectives.

As shown on Slide 16, in the second quarter, adjusted EPS was $0.26, primarily reflecting higher contributions from the U.S. and the lower tax rate. This was partially offset by the impact of asset sales as well as planned outages in Panama and Northern Ireland. In the second half, we expect to post stronger results as a benefit from the plant in Panama returning to operations, our continued cost-saving initiatives and 2 gigawatts of new projects reaching COD.

Turning to Slide 17. Adjusted pretax contribution or PTC was $240 million for the quarter, a decrease of $15 million.

I'll cover our results in more detail over the next 4 slides beginning on Slide 18. In the U.S. & Utilities SBU increased PTC reflects the resolution of regulated rate cases last year, contributions from new renewable projects and higher energy sales at Southland. These impacts were partially offset by the access of coal-fired generation at DPL and Shady Point.

Regarding DPL's DMR extension filing, there is not much to report but we remain on track for an expected ruling in 2020 and continue to feel confident about the merits of our case. In Indiana, IPL recently filed a plan to transform its electric grid while continue to meet the energy needs of its customers with improved service reliability, efficiency and safety. The plan calls for $1.2 billion of T&D investment over 7 years with a TRECA mechanism recovering 80% of these costs between rate case.

AES equity investment would be roughly $200 million. If approved, the plan would be a key component of the mid-single-digit rate base growth we have discussed in the past. A final ruling in the case is expected by early 2020.

At our South America SBU, lower PTC was largely driven by lower generation and energy price in Colombia as well as lower volumes in Chile. Lower PTC at our Mexico, Central America, the Caribbean or MCC SBU reflects an extended planned outage for maintenance and repairs at our Changuinola hydro plant in Panama. Finally, Eurasia. Lower results primarily reflect planned outages at Kilroot and the shutdown of 300 megawatts of capacity at Ballylumford in Northern Ireland. In mid-June, we closed the sale of these businesses for total proceeds of $120 million.

In Bulgaria, there has been no significant developments since our last call. Our plant continues to be dispatched reinforcing its criticality to the Bulgarian grid and we are being paid on time. Lastly, we recently took advantage of strong market demand for infrastructure project in Vietnam to refinance $1.1 billion of project back at Mong Duong. The issuance was 4x oversubscribed and enabled us to lower our interest rate, while improving financial flexibility. This is just another example of our continued liability management effort across our portfolio, capitalizing on a low-interest rate environment.

Now to Slide 22. To summarize, our performance in the first half of the year, we earned adjusted EPS of $0.53 versus $0.52 last year. Relative to 2018, we expect the strong growth in the second half of 2019, primarily driven by contributions from new businesses, continued cost-savings initiatives and the timing of our major outages, particularly in Panama and the Dominican Republic.

As you may have seen in our press release, we are reaffirming the $1.34 midpoint of our 2019 adjusted EPS guidance. We are also narrowing the range by $0.04 to $1.28 -- $1.28 to $1.40, $1.30 to $1.38, given our confidence in the outlook for the second half of the year. I would also highlight that we are reaffirming our 2019 parent free cash flow target of $700 million to $750 million.

Turning to 2019. Parent capital allocation on Slide 23. Beginning on the left-hand side, source reflect $1.1 billion of total discretionary cash, including $725 million of parent free cash flow. Sources also consider $369 million in asset sale proceeds, which include Northern Ireland, and its sPower sell down, both of which have closed as well as Jordan, which is expected to close by year-end.

Now to use on the right-hand side. Included a 5% dividend increase we announced in December, we'll be returning $361 million to shareholders this year. We expect to allocate another $150 million to parent debt paydown, largely to strengthen our investment-grade metrics, and we plan to invest $415 million in our subsidiaries, leaving about $200 million of unallocated cash.

Finally, moving to our capital allocation from 2019 through 2022 beginning on Slide 24. We expect our portfolio to generate $4 billion in discretionary cash, which is about 35% of our current market cap. About 80% of this cash is expected to be generated from parent free cash flow. The remaining $800 million comes from asset sales proceeds, about half of which has been announced or closed this year.

In addition to this, we are making very good progress on the third-party capital initiative we have discussed previously and expect the formal announcement later this year. As we have said before, the goal is to provide a more systematic and cost-effective source of capital that will be incremental to the $4 billion I just mentioned.

Turning to the uses of the discretionary cash on Slide 25. Roughly 40% of this cash will be allocated to shareholder dividends. Looking forward, subject to annual review by the Board, we expect the dividend to grow 4% to 6% per year, in line with the industry average. We plan to use $300 million for debt reduction, half of which we expect to complete in 2019. The other half will be used to maintain credit neutrality as we pursue the remaining planned asset sales.

We are also expecting to use $1.5 billion for our equity investment in our backlog and projected PPAs. And an additional $200 million to fund T&D investments at IPL was completed, all of these projects will contribute to our growth through 2022 and beyond. The remaining $470 million of unallocated cash will be used in accordance with our capital allocation framework to achieve our financial objectives.

With that, I'll turn the call back over to Andrés.

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [5]

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Thanks, Gustavo. Before we take your questions, let me summarize today's call. In the first half of the year, we made very good progress on our strategic objectives and expect to accomplish significant milestones in the remainder of the year. We are enhancing the resilience of our portfolio, and we are on track to attain investment-grade ratings in 2020. We are increasing our backlog of long-term contracted projects to sustain profitable growth, including advancing renewables and LNG infrastructure. And we are deploying innovative technologies to maintain our competitive edge and market-leading positions. Accordingly, we are confident in our ability to achieve our 2019 guidance. We are also confident that we will deliver 7% to 9% growth in cash flow and adjusted earnings per share through 2022. Therefore, we believe AES offers a compelling investment thesis, yielding double-digit total returns that will serve our investors well for years to come.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Angie Storozynski from Macquarie.

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Agnieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [2]

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So first, on Ohio. The DMR for DPL is still being challenged at court. And secondly, given the successful challenge of FirstEnergy's DMR, just wondering if there is a way to either adjust the current rider that DPL is collecting, and also have some improvements to the one that you're requesting to have extended sort of susceptible to future legal challenges?

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [3]

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Angie, Gustavo here. So just to provide a little bit of detail here. And so what's been challenged in the court is not the legality of the DMR. So we have a very specific and narrow claim there. The discussion is around if the DMR should be included or not in the SEET test. So from our perspective, and there are precedents in Ohio in which charts similar to the DMRs should not be included in the SEET test, so we feel good about that. In any case, we don't think this is a binary outcome, right? So we'd have to run this through the SEET test at the end just to see the final impact. And our view is that decision will probably become towards year-end. But again, it's not a challenging regarding the legality of the DMR, it's just a very important clarification.

Next question is a separate discussion, right? So we've got the initial 3 years under the assumption that would be very specific in terms of the uses of the proceeds. So we've done, we've used 100% of the proceeds for debt paydown. We've got the complex back to investment-grade. And from our perspective, it is necessary to secure the extension for the complex to maintain the investment-grade and position the [IPL] for grid modernization. You may recall, we filed last year an investment on smart grid. And for us, continue with those investments. It's fundamental that we secure the extension. So we feel we have a good case but then we'll have to run its due process.

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Agnieszka Anna Storozynski, Macquarie Research - Head of US Utilities and Alternative Energy [4]

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Okay. And moving on to your cash available for allocation. So just wanted to make sure that $395 million of proceeds from asset sales is independent of this pending process that you're trying to raise, third-party capital and on the latter, given the low and falling interest rate environment, if you could comment, if that is actually somewhat beneficial to the process i.e., that you're seeing actually more demand for partials sell down on equity of your operating assets and future assets?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [5]

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Angie, this is Andrés. Yes, as we said, this initiative is additional and no way affects the $395 million. It's progressing well, as Gustavo said. And stay tuned for developments in the latter half of the year. I would add that this is not like -- if we don't do this, we've already raised $3 billion of partner capital at very good rates. So what we're trying to do here is do it in a more systematic and predictable way. But on either case, we have additional upside from incorporating partners into our businesses.

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Operator [6]

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Our next question comes from Ali Agha from SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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First question, I did want to come back to Ohio, if I could. I hear the points you made that, hey, the Supreme Court challenge for you is specific for the SEET test. Nonetheless, there is a Supreme Court decision in the state that basically, went against the validity of the FE DMR. So there's a possibility that eventually something like that, challenge, happens to your DMR as well, if it's not happening today. So can you just simply summarize for us why you think your DMR would be different and should be treated differently than the way FE's DMR is being treated?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [8]

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Yes, I think -- I mean, it's very objective here. We've -- that's not the discussion in our case, right? So the question, again in our case, is regarding the SEET test and not the legality. So that is not in the scope today.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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I get that. I get that point.

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [10]

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The potential implications would be for potential discussion on the extension of the DMR, which I think is a more fundamental discussion if the DMR should exist. And again, we do believe we have a very good case when we got it first. Very clearly, if you read the outcome there, one of the discussion is if the proceeds are clearly defined in terms of the uses. In the case of DPL, this was very clearly defined. We used the 100% for debt paydown, so a lot of the fundamentals that were discussed in the other case. From our perspective, are solid from DPL standpoint. And again, we need debt from our perspective to maintain the investment-grade and position DPL for grid mod.

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [11]

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Ali, I think what's important is also for Dayton to have a grid equal to the other grids in Ohio. It needs an investment-grade company and that is all wrapped together in this request for an extension of the DMR.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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Okay. Separately, Andrés, can you also give us an update on what you're seeing in Puerto Rico right now with the political turmoil there? Any impact at all on your plant or your project out there?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [13]

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Yes. In -- Puerto Rico has been through removal of the governor and the process of appointing a new governor. Look, whatever occurs, we'll continue to be very important for Puerto Rico. We have the most reliable and by far, the cheapest energy on the island. To replace our coal plant in Puerto Rico by burning heavy fuel oil, which is what the other plants mainly burn besides some gas, would cost about an additional $300 million to $400 million a year in imported fuel bills. So PREPA would have to pay an additional $300 million to $400 million per year, which will be passed on to consumers.

I think what's also very important is of the large plants, there are only 2 which are EPA compliant, most of the plants in Puerto Rico, because they're burning heavy fuel oil have excess emissions of SOX, so they're not EPA compliant. And for that reason, the air in San Juan and Ponce, 2 main cities is not compliant. So while there's been noise about our coal ash on the island, really, this plant is very necessary. We're working with PREPA to see about Green Blend and Extend as a way of reducing total emissions on the island, and we'll continue to work with them. So stay tuned and this plant is important, it is producing the most reliable and the cheapest energy on the island.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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The last question, Andrés. The $395 million of remaining asset sales, is the goal there is still to exit out of noncore assets as part of the process, or is that more driven by partial selldowns of existing assets to recycle the capital? Are you thinking about the remaining asset sale process?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [15]

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Well, we have a number of objectives. So clearly, we have an objective of reaching less than 30% of our total generation by megawatt hour coming from coal. So that's something that we will keep in mind. We'll also keep in mind those markets, which we think are growing most quickly and of course, we've also been I think very successful in improving our returns, for example, even on renewables by incorporating partners. So that's a combination of factors. But yes, obviously, reducing our carbon footprint will be one consideration in our additional selldowns.

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Operator [16]

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Our next question comes from Greg Gordon from Evercore.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [17]

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Sorry to beat the dead horse on the DMR. I already understood that the nuances of your legal situation, but can you just tell us even though in all rights, you need this money to fulfill the capital needs of the distribution utility in Ohio and to get the approval, is your 7% to 9% expected earnings growth rate resilient to a negative outcome in that case?

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [18]

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The answer is yes. Just to complement, I think you may recall first Q, we've announced the additional $100 million of potential cost savings from digital, which was not in the 7% to 9%. So you see that our forecast has resilience to manage some of the negative outcome. Having said that, we expect to get the DMR extension.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [19]

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Right, right. And then my second question was with regard to Vietnam. You talked about how you're pleased the movement towards potential realization of commercial opportunity there, but I think some of your investors are a bit skittish as it pertains to really large bets on highly-concentrated investments in Asia. So if this does come to a -- become a really viable commercial opportunity, do you see bringing in partners? How would you like to size that investment vis-a-vis your overall capital business for AES?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [20]

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Of course, we have a portfolio view of our capital, and we don't want excessive concentration in any one particular market outside of the U.S. So I would say that to look at what we did with our Mong Duong facility in Vietnam, where we have been very successful, we were paid on time, it's a dollar contract, we're viewed as the premier operator and developer and builder projects in Vietnam. So in that case, we didn't have an overconcentration of capital. So in the case of Vietnam, we may have Vietnamese partners from the get-go. But we'll be conscious of that, but I think it's moving very well. As you know, Vietnam is a place where it takes time to develop projects because you require government consensus from many entities, but we're well on our way, so we feel very confident about this project and we, obviously -- we'll be conscious about overconcentration in one country.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [21]

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Great. My last question is regard to Fluence, I think there was an incident where the technology has some issues in Arizona several months ago. Is that an isolated event or has there been improvements or modifications to this design of your offering as a result of that?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [22]

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Sure. Yes. This occurred at 2-megawatt facility in Arizona. We've been working with the battery manufacturer and the utility in that case. Really investigating all the root causes and looking at all our facilities. I would say that we've taken prudent steps based on that. Realized that we're now coming out with our fifth-generation of energy storage, which will be a cube and it has all the latest safety requirements, for example, the state of New York, which is it's 95, 48 and then in addition to that, realize that we continue to see very strong demand for Fluence even the operator of the 1 unit that did have that incident, we continue to go forward. So looking at that, we think this is something that was some learning, we are working again with the battery supplier to really look at what was the root cause, and we're incorporating all learnings, and we will have, well, we have, quite frankly, the safest and most up-to-date units out in operation and in construction.

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Operator [23]

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The next question comes from Julien Dumoulin-Smith.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [24]

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So I just wanted to follow up a little bit different from others here. First, just with respect to Vietnam and just what's the latest progress on LNG contract in there? What should we be expecting going to the fourth quarter here, anything in particular?

And then separately, you mentioned IPL, there's been some issues in Indiana around these IRP processes of late. Can you comment about what kind of generation shifts are reflected in that $1.2 billion? Would that be potentially incremental? Are you thinking about anything? I know that some of the modeling scenarios that have been released by IPL have talked about this a little bit. So just if you can on those 2 big capital budgeting items here?

And then separately, as a second question I just ask you now, can you comment a little bit on the PTC contributions and the year-over-year increased -- year-over-year increases from the renewables segment and how you're thinking about that scaling for the rest of the year? I'll leave it there.

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [25]

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Okay. Let's take this multi-faceted question part by part. I think regarding Vietnam, as you know, when President Trump visited Vietnam, there was a letter of intent signed for these projects, and it was, I'd say, one of the marquee projects that the 2 countries had agreed to. So energy demand in Vietnam is growing around 10%. Quite frankly, Vietnam is one of the beneficiaries of some of the trade dispute between the U.S. and China. So expect demand to go even faster. Vietnam does not have a sufficient domestic LNG, doesn't even have sufficient coal. Vietnam is moving towards LNG and renewables as well.

So this is a very necessary project, it's going to start supplying not only the new combined cycle gas plants, which are part of this initiative but existing ones, which are running out of offshore gas as well. So again, I think it's very necessary, it's also a project that's very important for both countries, for the U.S. and for Vietnam. So the next things is expect a further progress in terms of announcements between the 2 countries and us that this is going to be moving forward with what Vietnamese partners are involved. Vietnam is a country of consensus, as I said. So it takes time, but they move and they move in a very steady but very certain fashion. So that's what I would say sort of stay tuned. And it will, of course, we have to -- we are part of the Vietnamese government's master electricity plan, and that will also involve how much LNG is imported and the phasing in of the combined cycle plants.

On the second, I will pass this to Gustavo. What I would say is that a big part of the $1.2 billion at IPL is actually T&D, it's smart grid infrastructure. So I'll pass it to Gustavo.

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [26]

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That's right. So Julien, Gustavo here. Yes, the $1.2 billion is all T&D. So the team is looking for opportunities on the generation side, but it's not in this number yet. So this is still under works.

On your third question regarding the renewable contribution, it was just not that mature around the cent as we bring new projects online towards year-end, then we'll have an additional contribution.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [27]

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Just to clarify quickly, just on the PTC contribution for renewables. Should we expect a material tax credit benefit in 4Q here to be kind of a big year-over-year uptick or?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [28]

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Not material but some contribution, but not material. So Julien, just remind you, remember that we split 50-50 between solar and wind, and we split 50-50 between U.S. and international. So something like HLBV is not as important for us as it is for other people.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [29]

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And just finally read between the lines, with IPL we shouldn't expect anything too different from that $1.2 billion to the IPL process for the time being?

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Gustavo Duarte Pimenta, The AES Corporation - Executive VP & CFO [30]

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We're still working on that one. So that -- this $ 1.2 billion is exclusively on T&D, and we are looking for opportunities on the IRP, and we'll come back to you as we get this -- put this to bed.

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Operator [31]

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Our next question comes from Charles Fishman from Morningstar.

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Charles J. Fishman, Morningstar Inc., Research Division - Equity Analyst [32]

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On Fluence, it's certainly an emerging technology that we're still going down the cost curve. Andre, would you say that your margins are holding per megawatt or however you measure it as this technology progresses down the cost curve?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [33]

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The sales margin certainly are holding. There are different margins for different businesses, obviously. We are in 20 countries today. We're selling, for example, in the Philippines where you have many isolated positions. You have different applications such as community solar. You have, quite frankly, SunFlex, which is slightly different project -- product than our advancing product. So the margins will differ depending on the market, depending on the exact product. But basically, we see the cost curve coming down. Because as we come up with our next-generation of product here, it's going to be more productized, it's going to be more prefab and it's going to be less customized as we've learned more about what is optimal for our customers in different situations. So more customization will be on the software and less will be on the hardware. So I would say expect margins to continue to improve, not actually go down even though we're seeing some, in some cases, people are bidding very low prices for integration of energy storage. Basically, to say that they have enough product up and operating. Many of those cases, we don't compete because we would do -- require margin from our projects.

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Charles J. Fishman, Morningstar Inc., Research Division - Equity Analyst [34]

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Sure. Then one last quick question. The virtual reservoir at Alto Maipo, how is that different from pump storage? And does it involve any of the Fluence technology?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [35]

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Good question. It's absolutely Fluence technology. So basically, it changes -- its difference from pumped storage, well pump storage need a reservoir. You've got to put that water somewhere, and you have to build pipelines, and you have to use electricity get it up there. So there's friction, just the physics of storing electrons is superior to that of storing molecules so the virtual dam is basically the idea to combine a run of the river facility such as the whole Alto Maipo complex, it's about 750 megawatts. And then you have an associated energy storage. Now if you have a 5-hour storage, what I would remind people, that means it's 5 hours at 100% discharge. If you discharge it at 50%, you actually have energy storage capabilities for 10 hours.

So what this will allow is run-of-the-river is constant, and what we will be doing is injecting energy into the grid when the prices are best. That's basically it, and really providing capacity. I mean the one big issue with renewables is that they don't really provide you round-the-clock capacity. So this will provide us -- our run-of-the-river does have actually round-the-clock capacity but this will allow us to inject that energy when it's most needed. So this is a very exciting technology, and it will be, I'm sure, copied. And if we end up with a 250 megawatts 5-hour facility at the Alto Maipo complex, that makes the economics much more attractive.

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Charles J. Fishman, Morningstar Inc., Research Division - Equity Analyst [36]

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That is fascinating. I would think that in the U.S., with all the hydro we have, but the limited opportunity to expand, that might be a potential market as you can drive the Fluence cost down, is that correct?

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Andrés Ricardo Gluski Weilert, The AES Corporation - President, CEO & Director [37]

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Yes. That's absolutely correct. I mean we are -- actually are -- have people looking at the virtual hydro in places like India because realize that nowadays, getting the environmental permits to construct a reservoir, that often means forest clearance, that means relocating people, it's very difficult. These you can install within 12 months. So really, the only barrier is getting the regulations in place of getting the proper capacity payments for this to work and of course, it works best in situations where you have a big penetration of solar, for example. So you had that really that duck curve that you could take advantage of.

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Operator [38]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ahmed Pasha for any closing remarks.

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Ahmed Pasha, The AES Corporation - VP of IR [39]

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

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Operator [40]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, enjoy the rest of your day.