Feb 26, 2014
Executives
Ahmed Pasha - VP, IR Andres Gluski - CEO Tom O'Flynn - CFO Andrew Vesey - COO
Analysts
Jon Cohen - ISI Group, Inc. Brian Chin - Bank of America Merrill Lynch Julien Dumoulin-Smith - UBS Securities Ali Agha - SunTrust Robinson Humphrey Charles Fishman - Morningstar
Operator
Welcome, and thank you for standing by. All participants will be in a listen-only mode for the duration of today's call.
During the presentation we will conduct a question-and-answer session. (Operator Instructions) This call is being recorded.
If you have any objections you may disconnect at this time. The host of today's call is Ahmed Pasha.
Thank you and you may now begin.
Ahmed Pasha
Thank you, Alicia. Good morning and welcome to our Fourth Quarter 2013 Earnings Call.
Our earnings release presentation and related financial information are available at our website at aes.com. Today, we will be making forward-looking statements during this 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 today are Andres Gluski, our Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team. With that, let me turn the call over to Andres.
Andres?
Andres Gluski
Good morning everyone and welcome to our fourth quarter earnings call. Today I will briefly cover our results and the progress we have made on our strategic plan.
Then Tom will give a detailed discussion of our results, as well as our expectations for the future. After that I will provide additional color on our plan to drive our growth going forward.
Turning first to our results on Slide 4. As I look back on 2013 I am pleased to report that we achieved strong results.
We met or exceeded our guidance for every metric and that is due to the hard work and dedication of our entire team. In the fourth quarter we earned $0.29 of adjusted EPS, which is $0.02 less than what we earned in 2012, due to a $0.02 headwind from poor hydrology and a $0.04 expense related to potential customer refunds at Eletropaulo.
For the full year 2013 we earned adjusted EPS of $1.29, which is a new high and 7% above 2012. We achieved these results despite a $0.13 impact on earnings in 2013 from the unprecedented drought in Latin America.
This was offset by capital allocation, lower G&A expenses, and lower effective tax rate. Over the past two years our adjusted EPS has grown on average by more than 8% annual.
Turning to cash flow. Our fourth quarter proportional free cash flow grew by 19% over 2012, driven primarily by higher operating cash flow.
Our full year 2013 proportional free cash flow was $1.25 billion and represents a free cash flow yield of 12%. Since 2011 our proportional free cash flow has grown on average 13% annually, reflecting our strong cash flows and in accordance with our dividend policy, we increased our dividend payment by 25% to $0.05 per share each quarter beginning in the first quarter of 2014.
Now, turning to Slide 5. I believe our results to-date show our commitment to grow shareholder value through the three main strategic objectives we set forth in 2011.
Improving the profitability of the company through overhead reduction and making greater use of our portfolio synergies and scale economies, narrowing our geographic focus by concentrating our growth on platform expansion in those markets where we have a sustainable competitive advantage and exiting those markets where we do not, and optimizing our capital allocation to compete our growth projects risk adjusted returns against the benefit of share buybacks and debt paydowns. Turning to Slide 6.
During the year, we were able to close or announce $497 million in asset sales, bringing our total to $1.4 billion since we started the program in September of 2011. We have simplified our portfolio and we now operate in 20 countries, down from 28, two years ago.
As you can see on Slide 7, the funds from these sales contributed to our available discretionary cash, which we have used to maximize the risk adjusted return to our shareholders. In fact, since 2011, we have paid down a $1 billion in debt; we have bought back 59 million shares for $711 million at an average price $12.03 per share and reduced our share count by 8%.
Lastly, turning to Slide 8. We achieved an additional $53 million in sustainable overhead savings in 2013, bringing our total to $143 million for a reduction of more than 30% over the past two years.
Last quarter, we increased the targeted reduction in our overhead run rate to $200 million by 2015. Now, before I walk you through our long-term plan, let me turn this call over to Tom, who will provide additional detail on our results and our expectations for growth in earnings and cash flow over the next five years.
Tom O'Flynn
Thanks, Andres, good morning everyone. First, I will cover our fourth quarter and full year 2013 results, then I will discuss our 2014 guidance, capital allocation plans, and then our longer-term outlook.
Let me first address the quarter on Slide 10. Our fourth quarter adjusted EPS was $0.29 this year versus $0.31 a year ago.
Performance was driven by three issues in our Brazil, and our Mexico, Central America and Caribbean or MCAC, Strategic Business Units or SBUs. We experienced a reduction of Sul related to the tariff reset in April of 2013, as expected, one-time expense of $0.04 per share potential customer refunds Electropaulo and continued poor hydrology in Panama, which I will discuss shortly.
Alongside these items we had a better operating performance in our U.S., in our Europe, Middle East and Africa or EMEA SBUs. This performance was offset by anticipated declines at Andes for planned maintenance and Masinloc in Asia where our new 7-year contract is below 2012 is relatively high stock prices.
Additionally debt repayment in early 2013 and lower parent interest expense made positive contributions. We also had a $0.05 benefit from a lower than expected effective tax rate of 18% versus 30% largely driven by one-time items including favorable resolution certain tax issues.
Although excluded from our adjusted EPS of $0.29, we took a goodwill impairment charge at DPL of $0.41 per share. DPL's recent rate case resolution provides clarity for 2016.
However lower expectations for dark spreads and capacity prices represent challenges for this business in longer-term. As a result, DPL recorded a non-cash goodwill impairment of $370 million in the quarter.
Let me provide a couple of business updates. At DPL in the U.S., we are seeking to have the Ohio Commission approve our plan to transfer our generation assets to an affiliated Genco by May 2017.
We'll explore all potential options to optimize the solution and we recently began to evaluate the sale of DPL generation asset to an unaffiliated third-party through a potential sale. Obviously we can't comment much as we're in the very early stage of this process.
Now turning to Maritza in Bulgaria. The plant has been running very well with excellent availability and we've received a $150 million of payment since our last call.
Currently we have approximately $160 million of receivable, with $72 million is due in installments over the next 10 months and the majority of the remaining amount is less than 60 days outstanding. Now turning to Slide 11, before I discuss our full year 2013 adjusted PTC and adjusted EPS results, I'll cover hydrology, which resulted in a negative adjusted PTC impact of $124 million or $0.13 per share in 2013.
Hydrology was low across almost all of Latin America last year. Two quarters or $0.10 of the impact was in Panama, as you see in the right hand side of the slide.
In Panama roughly 60% of the generation capacity is hydro, with limited reservoir capacity, making the market more sensitive to rainfall. We've taken some steps to mitigate our exposure to these pressures to capping some contracts at actual production levels.
Although Panama is in its typical dry season now, we're seeing water inflows in 2014 that have been below average so far. In Brazil, the hydrology risk is reduced through risk sharing mechanism at all generators.
Therefore, Tietê impact from hydrology tends to be moderate in most weather conditions except in the cases of a severe system wide drought. Brazil is currently in its rainy season, with 2014 has been below average so far.
Current reservoir levels are roughly 39%, which is lower than the 46% level this time last year, and the historical average of 68%. Having said that, reservoir levels will be dependent on the rainy season, which runs through April.
In Columbia, hydro risk is reduced by our significant reservoir capacity. Based on our current forecast, we anticipate normal hydro conditions in Columbia during 2014.
Next, I will walk through adjusted PTC drivers for 2013. Turning to Slide 12, our SBUs generated $1.8 billion of PTC before $600 million of corporate charges.
As you can see, our earnings are well diversified across our SBUs. Now to Slide 13, which shows a comparison of our adjusted PTC performance relative to the expectation we provided in May of last year.
We achieved $1.2 billion of adjusted PTC, which is in the range we forecasted but with a different mix. U.S.
outperformed our expectations due to lower than expected customer switching in DPL. Andes and MCAC were below the expected ranges mainly due to lower hydro and higher energy purchase cost.
In Brazil, adjusted PTC was affected by a lower demand at Sul as well as the Eletropaulo charge I mentioned earlier. Finally, EMEA and Asia were in line with expectations.
As you see on Slide 14, this year we overcame significant impacts from poor hydrology and the provision related to potential customer refunds in Brazil, increased our adjusted EPS to $1.29 per share. We benefited from capital allocation, lower global G&A and a lower effective tax rate of 21% versus 32% in 2012.
Moving on to cash flow, beginning on Slide 15, for 2013 proportional free cash flow of $1.16 billion surpassed our guidance range of $750 million to $1.05 billion. As you may know, we define this as net cash from operations less maintenance capital expenditures, which includes all environmental capital expenditures.
We have modified this now to exclude recoverable environmental CapEx as it makes more sense to treat these investments as growth CapEx that will increase earnings. For 2013, this represents a MATS-related CapEx at IPL.
Using this methodology, proportional free cash flow in 2013 was $1.27 billion. The results were above the top end of our guidance range for 2013 as defined on the same basis.
This improvement was largely driven by lower maintenance CapEx some of which we have pushed into 2014. In 2013, we used more than $560 million of our proportionate free cash flow to paydown non-recourse debt at our subsidiaries.
This is consistent with paydowns in recent years. This debt paydown at subsidiaries create equity value we can capture through improved growth capacity, proceeds from refinancings, or other distributions.
The remaining cash is available for use at the SUBs and the parent. Turning to Slide 16, in our 2013 parent capital allocation activity.
During 2013, we had $1.2 billion of discretionary cash available including parent free cash flow. As you may remember, we forecasted '13 parent free cash flow in the range of $400 million to $500 million.
We came in above this range at $516 million. This was largely driven by better operating performance at our Kilroot plant in Northern Ireland as well as reductions in parent interest.
We've invested roughly 82% of those cash in deleveraging and returning cash to shareholders. Next on to Slide 17, I will discuss guidance beginning with 2014 adjusted EPS.
We expect our SBU level adjusted PTC contributions to grow by roughly 8% to $2 billion. We anticipate growth at our Andes, Brazil, MCAC, and EMEA SBUs, which is largely driven by a combination with improvement in hydrology, higher availability and improved efficiencies across our portfolio.
As I discussed earlier, hydrology had a $0.13 negative impact in 2013, and improvement is the most significant positive swing in our guidance this year. We expect our U.S.
and Asia SBUs be flat or modestly down. In light of the devaluation of the Argentine Peso, I'd like to point out that we expect about $60 million of PTC from Argentina, which is less than 3% of our annual PTC.
Growth from our other SBUs be largely offset by increased tax rate in the roughly 30% range versus 21% in 2013. Bottom line is we expect to earn adjusted EPS of $1.30 to $1.38.
Growth in '14 will be mostly driven by improved operations, cost efficiencies, and capital allocation, partially offset by higher tax rate. Now to Slide 18, and our longer-term adjusted EPS expectations.
Today we reaffirmed our target through '15 and initiated our longer-term outlook, which combined with our current dividend offers an attractive total return, particularly given our valuation. We're driving future grow through multiple levers, including improving profitability, platform expansions, and opportunistic capital allocation.
For 2015 we see year-to-year adjusted EPS growth of 46%, consistent with our prior expectations. This is largely driven by positive contributions from completed construction projects including Mong Duong in Vietnam, and IPP4 in Jordan, as well as capital allocation.
For 2016, we expect flat to modest growth. Despite the fact we anticipate an $0.11 drop or roughly 8% of our earnings at Tietê and DPL.
At Tietê where our existing contract with Eletropaulo were transitioned to market prices at the end of 2015, we're anticipating impact of about $0.08. Further lower capacity prices in PJM and DPL rose out in a drop of about $0.03.
However this impact is more than offset by continued contributions from completed construction projects in Chile, rate base growth at IPL, a full year of operations at Mong Duong and capital allocation. We appreciate that this is below our growth trend line.
Having said that 2016 is still a couple of years out and we need some time to work on improving this outlook. In 2017 and 2018, we expect 6% to 8% average annual growth.
Our performance will be driven by contributions from the Alto Maipo and OPGC projects currently under construction, cost reductions, and capital allocation. Our 2014 to 2018 outlook is based on foreign currency exchange rate and commodity curves as of year-end '13 but do not change much in last couple of months.
In general the forward curves imply an appreciating U.S. Dollar against most currencies over the next few years, shows a negative impact on our earnings by a couple of cents each year saving 1 percentage points to 2 percentage points of our growth rates.
Regarding tax rate, we're projecting effective tax rate in the low to mid 30% range, which assumes an expansion of the CFC look-through rule and the impact of roughly $600 million of additional assets sales by 2015. It's also worth mentioning these asset sales tend to be modestly dilutive with key assumptions and sensitivities in the appendix.
Now to cash flow on Slide 19. In 2014 we expect our proportional free cash flow to be roughly $1.2 billion.
Consistent with our expectations for adjusted PTC we're expecting an increase proportional free cash flow contributions from Andes, Brazil, and MCAC, partially offset by fewer contract modification. A relatively flat comparison with '13 reflects $100 million impact of a combination of higher environmental CapEx at Gener and the sale of our business in Cameroon.
Beyond '14 we're targeting growth on average of 10% to 15% annually. The main reason that the proportional free cash flow will grow faster than the earnings include first the expected contributions from our ongoing construction projects as they come online will depreciate much greater than maintenance CapEx.
This is consistent with our current operating portfolio where our 2013 proportional depreciation was roughly $975 million and proportional maintenance CapEx was $610 million; second, the lease accounting treatment from Mong Duong where cash flow is higher than earnings due to levelization of a 25 year PPA; and third, the completion of environmental CapEx in Chile. Turning to our 2014 parent capital allocation on Slide 20.
We expect that roughly $900 million of discretionary cash, which assumes only announced asset sales and they grow from additional monetization activities. This includes approximately $500 million to parent free cash flow which we expect to grow in line with the 10% to 15% growth we're targeting in our proportional free cash flow.
In terms of planned uses, we anticipate paying down a $140 million of corporate debt, a $110 million of which has already been done. Another $145 million is year marked for dividend.
We recognize that this is at the low end of our 30% to 40% payout ratio and see room to increase our dividend as our parent free cash flow grows. We intend to invest roughly $100 million in the upcoming Gener capital raise.
After other commitments we've already laid out, we have $200 million to $300 million of discretionary cash for capital allocation. In that context I'll note that our additional equity requirements beyond '14 for our projects currently under construction is $400 million and our current stock buyback authorization is approximately $190 million.
As we demonstrated we're committed to investing in our shares as evidenced by our repurchase of 20 million shares for $260 million on a single day last December. Overall we believe that our portfolio is well positioned to deliver an attractive risk adjusted return.
The growth in our free cash flow will allow us to continue to create value for our shareholders. With that, I'll now turn it back to Andres.
Andres Gluski
Thanks, Tom. Now turning to Slide 21, I'd like to give you some color on where we will focus our efforts over the next several years.
As Tom just reviewed, we see strong growth in our proportional free cash flow of 10% to 15% annually. We plan to allocate this cash to create value for our shareholders and drive higher earnings growth, which we see accelerating in 2017 and beyond.
We will achieve our future growth by focusing our efforts on the following four strategic levers, performance excellence, reducing complexity, expanding access to capital, and leveraging our platforms. Let me walk you through each of these in more detail.
First, our results are based on achieving performance excellence, not only at our operating businesses but also at our corporate headquarters. Our objective is to be the low cost manager of a portfolio of businesses from which synergies and economies of scale can be derived.
As I discussed earlier, our global G&A costs are one-third lower than they were two years ago. Through the consistent application of our rigorous asset management framework we have established ourselves as a high performance operator as evidenced by our three consecutive Edison International awards since 2011.
Nonetheless, there is still room for further improvement and we will continue to use our Six Sigma life program called APEX for AES performance excellence to help drive additional efficiencies. Second, in an effort to continue to reduce our complexity, we have exited many of the markets where we do not have a competitive advantage and reorganize our businesses into six market facing strategic business units.
We have also expanded our disclosure to help investors better appreciate the underlying drivers of our business. We will continue to simply our portfolio and to look for opportunities to harvest capital that can be redeployed to yield better return.
To that end we will generate another $500 million to $700 million in asset sale proceeds by 2015. We believe that in the longer-term, we will operating in no more than 15 to 16 countries.
This focus enable us to spend more time engaging with stakeholders in our key markets and allows us to manage our businesses more efficiently, lowering our all-in costs per megawatt hour produced and sold. Third, we're working to expand our access to capital markets through strategic partnership at the project level in accessing niche financing like pension funds in Chile.
Having partnered at the project level allows us to sculpt that portfolio to maximize risk adjusted return for our shareholders. For example, last year we closed $500 million of partnerships including Antofagasta Minerals and our Alto Maipo hydro project in Chile, and Google at our Mount Signal Solar project in California.
We are currently working on several more partnership opportunities including selling down a portion of our equity stake in some existing businesses and bringing on equity partners with low cost financing or offering a TPA for our development projects. Our strong competitive position in operating a construction track record provides potential partners with superior investment opportunities, while increasing returns on our equity.
And fourth, we will continue to leverage our platforms by focusing our growth in our current markets to take full advantage of our existing infrastructure, local knowledge, permits, and presence. A reflection of this focus on platform expansion is a number of twos and threes following the names of many of our growth projects such as Ventana III and IV, Guacolda III and IV and now even V.
They are literally Brownfield expansions from existing plant. We have many similar platform expansion opportunities across our development pipeline of 6000 megawatts, including the expansion of our existing facilities in the Philippine, India, and Dominican Republic, continued expansion of AES Gener in Chile, new generation opportunities in Columbia and Mexico, IPL's Eagle Valley combined cycle gas plant and the repowering of Southland.
In addition to expanding our generation facilities we're continuing to build out adjacent businesses such as energy storage and water desalinization plants. We are also investing in enhancements such as adding fogging technology on combustion turbines at our gas plant or getting more megawatt out of our hydro plant water intake structures.
Such projects have a much shorter development and construction period than traditional Greenfield projects. As a result of these advantages, we are seeing returns well in excess of 20% from these adjacencies and enhancements.
We aim to be earning at least $40 million in pre-tax earnings from these efforts by 2015. To that end, we will continue to develop and invest in new energy storage project.
AES is already the world's largest grid scale energy storage operator. With more than 170 megawatt of resource currently in operation and we have another 40 megawatt project currently under construction in Chile adjacent to our Cochrane plant.
We are actively developing other energy storage opportunities at our existing platforms in California, the Philippines, Northern Ireland, and Puerto Rico. In addition to energy storage, several other adjacent projects are well underway including a 20 megawatt capacity expansion at our Chivor hydro facility in Columbia and 800 cubic meter per hour desalination facility at our Angamos plant in Chile and more than a 100 megawatt of additional capacity through fogging enhancements of some of our combustion turbulence.
I would add that the cost of these additional 100 megawatt was approximately $10 million, making them the lowest cost capacity additions in our history. Turning to Slide 22, I'm pleased to report that we are making tangible progress on our pipeline of platform expansions.
Since our last call in November we've made significant progress on advancing two large power projects. First, we closed $1.2 billion in long-term non-recourse financing for the 531 megawatt Alto Maipo hydro electric project in Chile.
This project is an expansion of our existing 178 megawatt Alfalfal facility, which will benefit from its proximity to Santiago and will diversify AES Gener's energy mix in a growing market. Given that most of our equity in this project will be funded through operating cash flow at Gener, we will only be contributing $100 million of capital from AES Corp.
In the Indian state of Odisha, OPGC, a company in which we have held a 49% interest for more than 10 years, broke ground on the 1320 megawatt expansion of its existing 420 megawatt power plant. We have already secured $1.2 billion in low cost, long-term, non-recourse financing to fund 75% of the project all in local currency.
We expect our total equity commitment to be around $225 million, of which $100 million will be largely met through our share of cash-on-hand at OPGC and the balance will be funded by contributions from AES in 2016. The project benefits from low cost local coal, a partnership with the Government of Odisha, a PPA with OPGC's current offtaker and the rapidly growing demand for liquidity in and around the state of Odisha.
Now turning to Slide 23, we currently have 4,000 megawatts of new capacity under construction, including the two projects I just discussed as well as Mong Duong in Vietnam and two other projects in Chile, Cochrane and Guacolda V. All of these projects are expected to come online over the next five years.
As I previously mentioned, in addition to our projects under construction, we have a development pipeline of more than 6000 megawatts, including platform expansion to IPL, Masinloc in the Philippines, and Southland in California. The fact the project is currently under construction, we're making good progress on the environmental upgrade of 2400 megawatts at Indianapolis Power and Light with a total investment of $500 million.
This investment will bring our plants into compliance with current environmental regulation and will earn a regulator return on our equity investments of $230 million. As you can see on Slide 24, the total cost of the project I just discussed is about $8 billion.
The majority of this cost is funded by already secured non-recourse financing. More importantly our share of the equity in these projects is approximately $1.25 billion, two-thirds of which is already funded.
We will contribute the remaining $400 billion through 2016. In terms of the blended return on investment, we're expecting a 14% return on our equity and a cash-on-cash return of approximately 18%.
Now turning to Slide 25. In summary 2013 was a strong year despite facing considerable headwinds and we continue to deliver on our commitment.
Going forward, our growth will be driven by our 4,000 megawatt of project under construction and rate based growth at IPL, which is already largely funded. Performance excellence, including $200 million in cost reductions by 2015, and plan for additional savings beyond that date, and allocating our growing free cash flow to maximize risk adjusted returns for our shareholders.
The bottom line is that our portfolio generates a 12% free cash flow yield and we expect our cash to grow at 10% to 15% annually. As our parent free cash flow grows, we see room to increase our dividends in line with our policy of paying 30% to 40% of our sustainable parent free cash flow.
And finally as we continue to execute on our strategy, we expect our total return to grow from the range of 6% to 8% to a range of 8% to 10%. Operator, I'd now like to open up the lines for questions.
Operator
Thank you. (Operator Instructions) Our first question comes from Jon Cohen, and your line is now open.
Jon Cohen - ISI Group, Inc.
Actually I have a bunch of questions, maybe I'll ask a couple and then I'll get back into the queue. First a clarification, 2014 guidance, does that assume normal hydro conditions or kind of what you're seeing today and your best guess is where the reservoir levels are going to be?
Andres Gluski
Excuse me. That takes into consideration what we discussed on the call.
In terms of a slightly lower hydro conditions overall and including Panama, it also includes the actions that we have taken to make ourselves say less sensitive to low hydrology than we had last year.
Jon Cohen - ISI Group, Inc.
So if we see another year that similar to 2013, would you still be in 130 to 138 range?
Andres Gluski
Given what our projections take into account what we've seen at hydrology, we expect some recovery and yes, that would put us within that range.
Jon Cohen - ISI Group, Inc.
And then Tom, can you just give us a sense of how proportional free cash flow will translate into parent free cash flow. So there -- is there a leverage, is there like a dollar for dollar dropdown from proportional to parent.
So parent actually growing faster or should parent grow around the same as what proportional is growing at?
Tom O'Flynn
Yes, I think parent will grow around the same. So we see a proportional free cash flow growing 10% to 15%.
There could be cases when the parent can grow more because it’s a little more leveraged let's say -- is -- is that the further on down the chain. The one thing I do want to point out is that, I just made sure it was clear, lot of proportional free cash flow debt go to debt paydown at the subs.
And we generally say it's around 500 last year, its 560. So that doesn't increase the value of the subs, the subs increases the value to us and that we get that through growth or through other distributions.
In some cases the parent cash flow can grow faster than proportional free cash flow because of return of capital. And in the slide well we showed a little bit of return of capital last year.
Jon Cohen - ISI Group, Inc.
And I'll ask just one more, in terms of how you think about your packing order preference for capital allocation between buybacks and dividend growth and debt paydown, how do you actually go about doing that. I mean it would seem that given your current PE multiple and the fact that you have a nice pickup in EPS growth in '17 and '18 that it would be hard to find opportunities that are more accretive than buybacks, so you would rather do buybacks than dividends or paying down debt.
I mean do you agree with that or do you look at it some other way?
Tom O'Flynn
The way I think is we have a balanced approach and I think we've shown that. I think we have to look at the long-term growth of the company.
I think the returns that we're getting especially on some of the adjacencies are very attractive and compete with anything. And so we'll continue to do that, take a balanced approach and we will complete new projects versus buying back our shares or paying down debt.
So I think we'll continue to do what we've shown we've done and taking into balance what we see as sort of the long-term growth of the company and the other one offer opportunities to buy back our shares at an attractive price.
Operator
Our next question comes from the line of Brian Chin and your line is now open.
Brian Chin - Bank of America Merrill Lynch
On Slide 39 the CFC extension that’s incorporated into your tax rate guidance, could you give us a sense of just CFC extension does not occur, what the change to your guidance impact might be?
Andres Gluski
Sure, I mean what it does, I mean -- this -- we are let's say protected through the end of this year due to the actions that we took in the past. It would depend of course but I would say somewhere around $0.10 is about -- could be a little bit more, could be a bit less but that's, that's more or less where that sensitivity is.
Brian Chin - Bank of America Merrill Lynch
And if the CFC is not extended that impact is something that should affect the ongoing outlook, right, that's not just a one-time event. Is that the right way to think about that?
Andres Gluski
Well it's -- that would be a change and I quite frankly say tax policy but going forward. So I think that yes, that's correct.
Now what is important I think to keep in mind this will be non-cash for us. We have a stock of NOLs around $2 billion and we continue to generate NOLs and so this would not affect us from our cash generation point of view.
Brian Chin - Bank of America Merrill Lynch
And then one last topic for me. On Slide 42, so you've given out the commodity exposures for 2016.
In your old slide for this, for 2015 you used to have that coal had a directional sensitivity that was in the same direction as gas and oil. In this slide your coal directional sensitivity is opposite gas and oil, can you just give some color as to why that is?
Andres Gluski
Well, certainly we have it should be the opposite it should be cheaper gas.
Andrew Vesey
So Brian it was negative, it was just reassured but it was negative to gas, even at that time so there's no change of the sensitivity.
Andres Gluski
Brian, by the way, one thing I'd like to clarify on your question regarding CFC look-through rule that's sort of $0.10 but again we're going to take additional steps if we see that this is going to happen. So just like in the past if you recall two years ago, we said we had more of the same sensitivity.
We were all able to offset that. So we're going to take steps but before we had those steps actually in hand that's what the sensitivity would be.
Brian Chin - Bank of America Merrill Lynch
But on this -- going back to this commodity exposure slide is just a function of fact that you're hedged in '15 a certain way but you're not hedged in '16 and so that's why the directional differences have flip-flopped is that right?
Andres Gluski
That's correct.
Operator
Our next question comes from the line of Julien Dumoulin-Smith. Your line is now open.
Julien Dumoulin-Smith - UBS Securities
So first on the Ohio sale, could you elaborate just a little bit specifically would that include the non-bypass revenues, what exactly is contemplated for sale and what's the timeline here? And may be also to clarify how would you treat the generation portion of DPL in your earnings guidance given the fact that prior sales would be consolidated and treated as discontinued ops?
Tom O'Flynn
Julien, its Tom. So we did file an application for our separation.
We filed an application that was referring nature shortly before New Year's in '13. We filed a little more detailed application.
Yesterday that should be available via PUCO website. Basically gives a little more color on the methodology of separating the DP&L generation assets into a gentle affiliate.
We're doing that layout that we've also begin to consider potential sale of the full DP&L's 3,000 megawatts plus generation fleet. We're doing that layout that we believe that if we do that the transition charges at the NBC and other related revenue stream should be retained by DP&L TND and the arguments that are laid out there that we think are very solid in the process.
Just with respect to the process, we are just beginning. So as I said in my comments are kind of too soon to give any commentary.
On the disc ops I'll have to get back to on that one in terms of I don't think it's a separate business, so I think it would change kind of midstream as opposed to get disc ops during the year but we're still working through that.
Julien Dumoulin-Smith - UBS Securities
Any terms on what the EPS contributions from that business is this year and going on if you can just extract out the DPL portion and two generation portion?
Andres Gluski
Well I just say that if we can sell the generation on reasonable terms it could be modestly accretive.
Julien Dumoulin-Smith - UBS Securities
And then just looking at the cash flow growth number you talked about the environmental CapEx offset and the maintenance CapEx kind of shifts. Can you talk about how much is environmental CapEx and how much is that broken out between Chile and as well as IPL is probably in there as well?
Andres Gluski
Okay. So gross numbers.
The program we have at IPL we're operating at 2400 megawatts is about $500 million. The programs we have in Chile are around $200 million.
And so the Chile -- that the difference in the sense that the ones at IPL become partner rate-based and the ones in Chile do not. And so the ones in Chile again we expect to complete by '14.
Julien Dumoulin-Smith - UBS Securities
So that's a key driver in terms of the improvement in 10%?
Andres Gluski
It really is the biggest driver. It's the biggest driver of the improvement and with number of components to it but if you look at sustained cash flow improvement proportional free cash flow the biggest driver is out at Chile.
Julien Dumoulin-Smith - UBS Securities
And then just one more if you don't mind. On the solar side, obviously there were some conversation last year about reevaluating the business where do you stand today in terms of that process, either selling down a further stake in that or monetizing it otherwise?
Andres Gluski
Well, I think we showed on the past that we are looking at various options and we will continue to look at various options and see really what's the best outcome for us and our partners at Riverstone.
Julien Dumoulin-Smith - UBS Securities
Would you describe that if I push you a little bit further in terms of priorities amongst exiting other countries or relative to existing other countries is this a priority in '14?
Andres Gluski
I would like so it's important to us to continue to look at this, but I'm not going to sort of rank them.
Operator
Our next question comes from Chris (inaudible).
Unidentified Analyst
I had a question first on your free cash flow, your proportional free cash flow guidance through 2018. It's a pretty nice number to see and it's a pretty long time horizon to layout guidance for.
First, could you give us a little bit more color on that versus what you gave in the slides? In other words, those are going to be lumpy, those are going to be consistent and what was behind your decision to kind of give that number that far out and same thing for EPS versus your previous comments that you would just kind of talk about everything through 2015?
Andres Gluski
First in terms of giving a sort of a longer-term planned horizon, as we're seeing our strategies play out and we're seeing the results of that strategy, we felt more confident in terms of being able to give a longer view of where the business would be going. To specifically answer the question of cash flow, there will be some lumpiness obviously because one of the key driver is when new plants come online.
So we really have two things going on. One is to the extent that we can get some of the shorter term sort of adjacencies and enhancements and other profit improvements also will contribute in the shorter term and the other longer term will be when the newer plants come online.
And as you can see we have a lot of plants coming on line '15 through '18.
Unidentified Analyst
And then my follow-up question is just on Eletropaulo I wanted some updated thought on how earnings are going to trend there and I wanted to also understand correctly if there is any hydrological risk to that business versus the risk at Tietê?
Andres Gluski
I think that again regarding sort of Eletropaulo I would say the following one is that in Brazil, they basically have sort of a sharing mechanism for when there is a low hydrology between all the generators. So that it's not sort of directly specific to one business in particular when the cost of generation go up in the past the Brazilian Government has stepped in and helped with make credit available.
Because there is a recovery mechanism even though it is overtime but it can cost shorter term liquidity problems so that the Brazilian Government has addressed that. What I would say, which is very important when people try to compare this say back to 2002, because in 2002, Brazil had 4 gigawatts of thermal, it has 22 today.
So that's a very important difference and have the experience. The other that there can be some benefit of therefore for example at Uduvayana (ph) where we see that we are likely to be running this plant in March and April.
So there are some benefits from that. I don't know Andy would you like to add something.
Andrew Vesey
Yes, this is Andy Vesey, Chris. Just specifically around EP in terms of how it's exposed to -- what it's exposure to hydrological risk.
When the EP actually had our Sul businesses under regulation in Brazil and under Brazil would work with they would always be just almost fully contracted with not more in the marketplace. Well at that case the impact would almost be negligible for the distribution businesses, but what has happened in Brazil is what used to be called MP579, which was the basically concession rules for some of the hydro is that a lot of these contracts couldn't be delivered on.
So actually Eletropaulo falls about 1% under contracted. Well that would look like basically be a cash flow issue for the Brazil would be paying energy at a spot price to make up that percentage it would be cash flow.
But last year in a similar situation the treasury of Brazil stepped in and subsidized that provided that cash directly. So as Andres said the government has always made sure that keep the business with Sul and its relatively small exposure for EP.
Let's go back to Tom's opening comments while the hydrological situation is below average now we're expecting we probably will have a much better view on that in the April timeframe.
Operator
Our next question comes from Mara Shaughnessy. Your line is now open.
Unidentified Analyst
A couple of questions. First on the Maritza situation, the concern was going into the winter when demand was up and the like may be things would have potentially gotten a little more bumpy it doesn't seem like that bumpiness that technical term bumpiness occurred and things seem on track is that a fair statement?
Andres Gluski
That's correct. I mean since our last call they state $150 million.
We have an agreement in terms of part of those statements like around $76 million I believe is to be made over time and we have to see that they comply with that. So we continue to monitor it but we have gotten past I would say the worse of the heating season in Bulgaria without any sort of political repercussions.
And certainly the governments focused on improving NEK and in terms of the financial situation of NEK. I think the great advantage of Bulgaria as I've said in the past it has a very little foreign debt so it's truly a question of NEK that's not a case where the government on some other occasions raise money and to inject it into NEK back that they so decided.
Unidentified Analyst
And this, I know this has been discussed already the hydrology situation. Can you be specific to Panama in last several months you guys have talked about the different things that you've done to try to mitigate the exposure there.
The Brazilian seem every other hour discuss what the percentage reservoir pillages and we have an idea of that ad nauseam but Panama again is just who knows. Can you be specific as to what reservoir levels are right now relative to last year, relative to normal and what specific things have you done to mitigate that exposure?
Andres Gluski
Yes, I'll go ahead and pass this one on to Andy, but you're correct in the sense that the dispatch of the hydro in Panama is controlled by the government. But we've made some changes to some of our contracts and done some other things to reduce our exposure.
One of them is including is that we sold down a portion (inaudible) to the government so that with the government is a co-owner of all of our plants in Panama. Andy would you like to add to that.
Andrew Vesey
Yes, Mara its Andy Vesey. Just a broad background, we have fundamentally three hydro complexes in Panama.
Bayano, which is one of two pondage hydro's in Panama, the other being Fortuna which is not ours, Chiriqui which is one of the river and Changuinola which is one of the river as well. The hydro I will give you some statistics around that as of January for Bayano which is the pondage hydro we're about 29% percent below the historical average.
So that's a number for you. Chiriqui which is --
Unidentified Analyst
And how does that compare to last year?
Andrew Vesey
It is slightly worse than last year. You got two hydrological basins in Panama, Bayano is in one and Allegheny River is the other.
And last year Bayano was actually doing quite well. What happened with Bayano was not in flows last year, it was a significant east-west transmission constraint in Panama which didn't allow them to get the energy to Panama City from the water hydro.
So the government over dispatched Bayano. So while inflows were okay last year, they actually over dispatched it and that's what caused stress to us last year with Bayano.
This year they had been preserving the hydro in Bayano, but the inflows had been less and what has happened is there was much more inefficient thermals because of that transmission constraint, which lays the spot market considerably. But to Andre to your question we did change the ownership structure at Changuinola last year.
We also changed the contract between Changuinola and AS Panama from a financial contract to a physical one as Tom had mentioned in this comments. And while I can't say much more about it we're currently in conversations with the Panama government on other regulatory solution, to significantly mitigate the hydro impact this year.
It is dry, this is the dry season, but it is dry than normal and we'll have to wait again the rainy season will start in April/May. So we have to see how we cover.
However to answer your question that has been put out, if indeed we have a year exactly like last year, if we are successful with the engagement with the Panama government that we're involved in, we should significantly be better than we did last year under the same hydrological conditions.
Unidentified Analyst
And then getting specifically to TSA in your assumptions you've an $0.08 hit from the roll up of the Eletropaulo contract at the end of '15. What is the assumed contracted price in that $0.08 hit?
Andres Gluski
We're assuming a 125, sort of where the market will be at. Our contracts today are about 116, no the existing ones.
But I'm saying the ones -- that the portion that we have recontracted in the market so that's a step down from 180 to about 125.
Unidentified Analyst
And so what, I mean obviously we've seen spot prices 800 to 1000 plus, what is that -- I saw that you contracted some out at 125. Is there the potential in this sloppy environment or messy environment that you could be able to lock-in more now at higher prices that that?
Andres Gluski
Well the approach of the team has been to sort of contact it over time. So the first ones, as you recall we're at a lower price and then moving up.
Hopefully I think there is a possibility of doing some higher like a 135. But I think that we're going to sort of stagger this not to take a one-time risk.
I do think what we're seeing in Brazil is less of the -- the hydro's are coming on late, the new hydro. So our sort of belief that this would cause higher prices over time I think it's playing out.
Andy do you want add something?
Andrew Vesey
The only thing I'd add to -- we have about 1200 megawatts of current capacity take to market. Currently about 700 of those megawatts have already been contracted delivering 16 is it three year term contractors all to the free customers.
As Andres said the average price of that 700 megawatt has been about 115 on the margin now we assume between 125 and 135 and these are our expectations that the market will tighten and strengthen given both the current hydrological situation, lateness of hydro, and the need to add more thermal into the system. So we're being very cautious, we don't want to get ahead of our skews on this one.
But the team has been very aware of the situation and is waiting to see the market to improve.
Unidentified Analyst
And what about the opportunities for TSA to build the isthmus gas plant. The government's made some of the pricing, the cap has been raised pretty materially and but who knows if you can actually access the gap.
So what's the status of potentially plugging that hole with a thermal project?
Andres Gluski
You asked that I mean it's really a question of getting the gaps. We have two projects in very advanced stages of development.
We are actually ready to go on them, of course in Brazil you have to win the bid. So that's an aspect in terms of how the bids are defined.
Whether you have for example a gas specific one, whether you have like a gas factor that certainly would help. But there is still the issue of physical getting the gas.
As you know we do have Uduvayana, which is 670 megawatts written off, only ready to go we're going to run it in March and in April. And the solution there you know what we have been working very hard with both governments is to be able to get gas to Uduvayana through Argentina.
For these sort of temporary runs Petrobas will be supplying the LNG to Argentina, will use existing pipelines. But that really would be a fantastic solution because we have a plant for free.
Now the question is at what price can we get gas and right now deliver gas to Uduvayana is around $25 to million BT use. If we get it down to a more reasonable rate then it will be a competitive plan.
Operator
Our next call comes from Ali Agha. Your line is now open.
Ali Agha - SunTrust Robinson Humphrey
I just have a couple of questions. One I just wanted to be clear on your earnings outlook that you laid out for us.
If I go back to your original driver I think off the 12 actual of a $1.24 at that time, you talked about 4% to 6% EPS growth through '15. If I run the math right, right now the midpoint of 15 actually would be lower than the midpoint of that 4% to 6% growth rate.
So has something changed? Can you just clarify how we should think about this '14-'15 period?
Tom O'Flynn
No, Ali, I think the midpoint was I think was 1.43, 1.44 and this implies about 1.41. So I think it's just Ben who has a calculator in his hand.
So I think it's pretty much in the same neighborhood, so.
Ali Agha - SunTrust Robinson Humphrey
And then as you laid out your outlook '15 and beyond into '18 as well, what have you assumed for those merchant assets at DPL. Are they still embedded in that guidance whatever you assume that they have been taken out?
Andres Gluski
There embedded in the guidance.
Ali Agha - SunTrust Robinson Humphrey
Yes still in there and I think Tom if I heard you right, your sense was if they do exit on reasonable terms that should be accretive?
Tom O'Flynn
Yes.
Ali Agha - SunTrust Robinson Humphrey
Okay. And then the 6000--
Tom O'Flynn
I think I'd say Ali keep in mind that we got a portfolio management activity that could be dilutive. So at the end of the day there could be offsets.
But yes, on a standalone basis we're doing on the right terms to be accretive.
Ali Agha - SunTrust Robinson Humphrey
And the 6000 megawatts of development projects beyond what's in construction. Have you resumed contribution from any of those in that five year period?
Andres Gluski
No, we because that would outside of that window.
Ali Agha - SunTrust Robinson Humphrey
When you say that what do you mean in terms of contribution timeline.
Andres Gluski
In terms of contribution timeline. I mean if we start construction on them, we do have assumptions for using our pre-cash flow and capital allocation.
But what can be shorter term again can be the adjacency. I had mentioned them on our call previously and that we're trying to get our hands around and put a stake in the round $40 million of PTC by 2015.
So these are much shorter terms, much higher returns, but if you look at the bigger projects, we just started to now after (inaudible) and OPGC-2 and there'll also be sort of a 2018 stuff. So that will 6000 megawatts have a longer term horizon.
Ali Agha - SunTrust Robinson Humphrey
I see, and I think Andres you eluded to the fact that you got 4200 million of cost reductions through '15, more to come. Can you just give us a sense you know in that '15 to '18 period what kind of incremental cost reductions are embedded if any?
Andres Gluski
We have you know certain improvements embedded debt. I say the way to think about it, Ali, is we have $3 billion of discretionary spend or a variable spend.
So something like a 5% improvement you know is something that we think is realistic.
Andrew Vesey
Andy Vesey. In spite of that $3 billion number in fixed cost, (inaudible) I've spent a long time working on this.
When we look at the $3 billion and we can look at what's controllable by management and take out any short sided cuts of maintenance. We've about $2.2 billion of cost that we should be targeting.
In the sort of the expectations that both Andres and Tom laid out between '14 and '18, by '18 we will get to a run rate savings on those fixed costs on the order of $250 million. But it builds over time.
So in '14 we have, we have about $50 million of that cost and it will build up over that period. And eventually will reach about 10% of our fixed costs.
What we set as a target that will drive us there as we set the view that we'll take that piled manageable fixed cost and keep it fixed. Each year we're going to put into place productivity improvements which will offset inflation and that's sort of how you should think about.
And that's what we're going to go after. In addition to that, we'll continue to look for more opportunities in that space.
Ali Agha - SunTrust Robinson Humphrey
Just to be clear that $250 million, is that over and above the $200 million or is that $200 million part of that $250 million.
Tom O'Flynn
No, no, that was a completely different animals. In other words, when we talk about $200 million, we're talking about G&A, sort of global overhead.
When you talk about the $250 million, that's really at the operational level.
Ali Agha - SunTrust Robinson Humphrey
I see, and the timeline to that 250 is what?
Tom O'Flynn
Well as Andy said that's the next you know five year.
Ali Agha - SunTrust Robinson Humphrey
I see, got it. And the $500 million or so of asset sales by '15, Andy, are we talking by the beginning of '15 or by the end of '15?
Andres Gluski
We really set out say a goal of around 400 this year and then we will complete the rest in '15. You think it happened for example that they do take some time as we have Cameroon close, we have done everything that we can in our share and on our side and we expect this to close sometime probably in March.
So that they do take some time, there's some lag between the time that we reach an agreement. But the other thing is we are not going to do any fire sales like we haven't done and we'll sell in a manner where we really maximize the volume of those assets.
And so we don't feel necessarily rush to do it. We will do it as part of our strategic plan to simplify help us cut cost, help our focus, but also taking to account there is appropriate timing to maximize the value.
Ali Agha - SunTrust Robinson Humphrey
And a last question, you mentioned capital location which leads part of the go driver. You got about $190 million on your current authorization.
For planning purposes should we assume that that's consumed this year or should we assume it will take longer for this to be consumed?
Andres Gluski
I really wouldn't want to comment on that I think at this stage. I think we have shown our willingness to step up as we did in December with the CIC sell down, so you can assume that but I'm not going to make any commitment in terms of whether we will use that authorization.
Ali Agha - SunTrust Robinson Humphrey
Fair enough. Thank you.
Ahmed Pasha
Operator, can we take one last question please.
Operator
Okay. Our last question comes from Charles Fishman.
Your line is now open.
Charles Fishman - Morningstar
Thank you. The driver for you decision to sell the DP&L generating asset is it to the term you think you can get on the environmental CapEx going forward was unacceptable.
Is that the primary driver?
Andres Gluski
I would say really it's a cost cut. It's more of a strategic because we have a -- as we transition and again we haven't taken any -- we're transitioning it out of the combined entity, but it's really a sort of a merchant position in PJM and really whether we thought that was the right bit for us.
Charles Fishman - Morningstar
Okay. And then if you did exit a result of those plants, would you exit the retail business as well?
Tom O'Flynn
Well, I think that they two go hand-in-hand and the retail was really way to place our generation capacity. So certainly we would look at that.
Charles Fishman - Morningstar
Okay. And then you mentioned the Chilean pension, the funds I would think they like the step close to home, were they part of that $1.2 billion financing for Alto Maipo?
Tom O'Flynn
No. I mean, basically I mean, we will put it this way.
No not, because of Chilean bank our involvement in the syndicate basically as we mentioned that because we see the business financing and if you really look at the growth of (inaudible) over the past six plus years, it really hasn't required any money from AES, because what we are able to do is have strategic partnerships of the local capital and so, we double the amount of capacity asset business using local financing and local equity partners. And so, that has worked very well.
So what we are looking is we will do something like that because (inaudible) really seeing this financing because as you know they are not going to buy AES stock but they have to buy local paper and they very much like in there. So what we want to and this is a very important strategic trust for us is to really make use of different levels of capital to maximize the return on our equity and that means if it allows us to what we call sculpt, and that means the size of the project we may not want to take 100% of a given risk in a given market.
So this allows us to reach the optimal size for our portfolio, redeploy some cash and also look at this again from a portfolio prospect. So that is the significant change in the way we've historically looked at capital here.
Ahmed Pasha
Okay. Thank you for joining us on today's call, as always the IR team will be happy to answer any additional questions you may have.
Have a nice day. Thank you.
Operator
Thank you for your participation in today's call. You may now disconnect.