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The AES (NYSE:AES)

Q3 2013 Earnings Call

November 07, 2013 9:00 am ET

Executives

Ahmed Pasha - Vice President of Investor Relations

Andres Ricardo Gluski Weilert - Chief Executive Officer, Director and Chairman of Strategy and Investment Committee

Thomas M. O'Flynn - Chief Financial Officer and Executive Vice President

Andrew Martin Vesley - Chief Operating Officer and Executive Vice President

Analysts

Jonathan Cohen - ISI Group Inc., Research Division

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Charles J. Fishman - Morningstar Inc., Research Division

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Brian Chin - BofA Merrill Lynch, Research Division

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Operator

Welcome, and thank you all for standing by. [Operator Instructions] Now I will turn the meeting over to your host, Mr. Ahmed Pasha. Sir, you may begin.

Ahmed Pasha

Thank you, Veronica. Good morning, and welcome to the Third Quarter 2013 Earnings Call of The AES Corporation. Our earnings release presentation and related financial information are available on our website at aes.com.

Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

Joining me this morning are Andres Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team.

With that, I will now turn the call over to Andres. Andres?

Andres Ricardo Gluski Weilert

Thanks, Ahmed, and good morning, everyone. In the third quarter, we continued to execute on our strategy. And despite facing headwinds at some of our businesses largely due to very high dry hydrology in Latin America, we're on track to deliver on our guidance. We earned $0.39 of adjusted EPS this quarter, which brings our year-to-date total to $1.01 or 79% of the midpoint of our 2013 guidance. Regarding cash flow, we expect to achieve the high end of our proportional free cash flow and more importantly, the high end of our Parent free cash flow guidance. We remain focused on the long-term objectives that we laid out 2 years ago, which will be the key to our success. To that end, to improve profitability, we are increasing our cost savings target by $55 million. To simplify our geographic footprint, we have closed or announced $475 million in asset sales proceeds or 95% of our target for 2013. And to bring our dividend in line with our policy, we're raising our quarterly dividend by 25%.

Let me now provide you with some details on each one of these initiatives. First, turning to Slide 5. I will discuss our efforts to improve our profitability. We expect to achieve 93% of our prior cost savings target of $145 million, originally set for 2014 this year. We are therefore raising the bar by $55 million and are committing to sustainable cost savings at the AES level of $200 million by 2015.

To achieve this goal, we're taking a number of additional steps, including moving our back office tasks to lower-cost locations, reducing the number and size of our corporate offices and making greater use of global sourcing and synergies. We will continue to look for additional opportunities to improve our bottom line as part of our overall leadership agenda.

Next, turning to Slide 6. I will provide you with an update on our asset sales, where I'm pleased to report that we continue to make good progress. As you may have seen, today, we announced 3 asset sales, including our Cameroon business for $220 million in proceeds to AES. We're also cleaning up our wind portfolio by sending older units or those in markets in countries where we do not have a significant platform. To this end, we recently sold 39 megawatts of a wind project in Gujarat, India, allowing us to focus our efforts on the platform expansion projects in the Indian state of Odisha, where we do have significant growth opportunities.

We also just announced the sale of our Polish Wind development projects as the necessary market reforms in Poland had been indefinitely postponed. All of these transactions are consistent with our commitment to exit those markets where we do not feel we have a sustainable competitive advantage.

Since September 2011, we have closed or announced the sale of 21 businesses for total proceeds to AES of $1.4 billion. Including today's announcements, we will have exited 8 countries and will be down to operating in 20 from 28 2 years ago. We see an overall universe of potential asset sales proceeds exceeding $2 billion by 2015, including the $1.4 billion in asset sales already announced.

Now turning to Slide 7. I will provide you with some color on our third objective, optimizing capital allocation. We believe that capital allocation is a critical tool for creating shareholder value. We expect significant improvement in our Parent free cash flow over the next few years, allowing us to grow discretionary cash available for investments or to be returned to our shareholders. This growth will be largely driven by contribution from new businesses, reduced operating costs and deleveraging at the businesses. Tom will provide details on our uses of discretionary cash. But as we've demonstrated year-to-date, we will use a balanced approach to capital allocation, making sure that we compare all possible uses, including stock buybacks, dividend increases, debt paydowns and platform expansions.

To that end, since September 2011, we have prepaid $1 billion of debt, including $820 million of recourse debt, reducing our Parent debt by nearly 15%. With this debt reduction and our growing cash flow, we have made significant progress in improving our overall credit profile.

In terms of share buybacks, which have been and will remain an integral part of our capital allocation framework, since September 2011, we've invested $453 million in repurchasing 39 million shares at an average price of $11.58 per share. We currently have remaining buyback authorization of $237 million.

Finally, our total return commitment to shareholders includes a modest dividend, which we initiated last year. We have said that we plan to grow the dividend over time. And to that end, our board has approved an increase in our annual dividend payment of 25% to $0.05 per quarter, beginning with the payment in the first quarter of 2014. This implies a total annual dividend payment of $150 million or 30% of our sustainable Parent free cash flow, up from 24% previously. This increased payout is in line with our 30% to 40% payout ratio target that we announced at our Investor Day in May of this year.

Turning to Slide 8. I will now provide you with a few updates on some of our larger businesses, beginning with Bulgaria, where we own Maritza, a fully contracted 690 megawatt lignite-fired plant. As we discussed in our last call, NEK, the offtaker, has been facing liquidity issues. Our receivables balance has grown modestly since our last call, but 90% is still less than 90 days overdue.

Over the last couple of months, the Government of Bulgaria has passed new laws, which once implemented, should help improve NEK's financial position. We are closely monitoring the situation and we will update you if there are any significant developments.

Now I will discuss DP&L where the Public Utilities Commission of Ohio, or PUCO, has ruled on the Electric Security Plan, or ESP. In this order, the Commission approved $110 million in annual Service Stability Rider through 2016 which provides certainty in the near term, while we continue to work with the Commission to address challenges in 2017 and beyond. Nonetheless, we have filed for a rehearing of certain elements of the order. In particular, we have challenged the conditions attached to the $45 million Service Stability Rider that can be recovered in 2017. We expect the Commission's response in the near future, and we anticipate that the rehearing process will take 6 to 9 months.

Finally, as you may know, the ESP order required us to separate DP&L's 3,300 megawatts of generation capacity by May of 2017. We will be filing the generation separation application by the end of this year. Subsequently, we will develop a plan that will allow for separation of the generation business by May 2017.

Beginning on Slide 9, I will provide you with an update on a few other key initiatives that will contribute to our future earnings growth. First, as you may recall, last quarter, we talked about our plans to bring on partners at our existing businesses and growth projects. Consistent with that approach, we have brought on Google as a partner in the 266-megawatt Mount Signal Solar project, which is under construction at our joint venture, the Silver Ridge Power Corporation. Under this agreement, Google will invest $103 million in Mount Signal, and we expect that about half this amount will come back to AES in 2014 as discretionary cash. Commercial operation of Mount Signal is expected by the second quarter of 2014.

Similarly, last quarter, we signed an agreement with Antofagasta Minerals, a large Chilean mining conglomerate, allowing them to participate as a 40% partner in our Alto Maipo hydro project. We continue to look for similar opportunities across our portfolio to optimize our exposure on specific projects, maximize our overall returns and augment the discretionary cash available for other capital allocation purposes. Year-to-date, we have signed agreements for $500 million in equity participation from partners at the project level.

Second, in my view, AES has an unmatched footprint in many attractive markets where demand for new generation is expected to grow for the foreseeable future. While expected demand growth is low in some of our markets, particularly the U.S., we continue to see robust growth and demand for new generation in many of our markets such as Columbia, Chile, India, Mexico, the Philippines and Vietnam, where we see demand growth in the range of 4% to 8%. We're also complementing our investments in larger scale plants with smaller scaled platform enhancements and adjacencies, such as fogging technology for gas turbines, energy storage, desalinization, to maximize returns from our existing footprint and asset base. While individually, many of these projects will be relatively small, they provide significantly higher risk-adjusted returns, and in the aggregate, may become meaningful over time, particularly, if we can achieve economies of scale given our global presence.

As a recent example of this, we brought online a 40-megawatt energy storage resource at DP&L in Ohio, to provide essential reserve capacity at PJM. This project brings our total energy storage resource to more than 200 megawatts, equivalent to 100 megawatts of interconnected capacity, making us the world leader in using lithium-ion batteries for energy storage and grid stability.

While we see this particular business line as an attractive area for investment as we can earn solid returns on projects that require significantly shorter construction time, and unlike most of our assets, can be redeployed should expected returns at original site not materialize as expected. The need for energy storage will grow as the contribution of energy from renewable sources increase. For example, California is recognizing the value of fast, flexible storage resources as an integral part of a robust power grid. The 3 large utilities in California have targets to procure at least 1,325 megawatts of capacity between 2014 and 2020. Our existing facilities in California have all of the necessary infrastructure and are ideally located to support competitive development of energy storage. We plan to selectively add energy storage solutions to our existing platforms where their services can be adequately remunerated as a way to better serve our customers while increasing our return on assets.

Another adjacency that we are pursuing is desalinization, where we see a number of potential opportunities in some of the markets we serve. This week, we signed an MOU with Abengoa to develop a $26 million, 800 cubic meter per hour water desalinization facility, adjacent to our Angamos plant in Chile. This facility will use our existing water intake, discharge infrastructure and permits. Once completed, this project will provide raw water to Angamos and third-party customers.

Turning to Slide 10 and conventional platform expansions, such as rate base growth at IPL, we have commenced construction of a $500 million project to upgrade 2,400 megawatts of coal-fired capacity to comply with environmental regulations. The equity investment in this project is expected to be slightly more than $200 million and will be invested over the next 3 years. IPL will be eligible to earn a cash return on the investment during construction.

I would also like to provide you with an update on our 531-megawatt Alto Maipo, run-of-the-river hydro project in Chile. Together with our 152-megawatt Guacolda V and 532-megawatt Cochrane coal-fired projects, Alto Maipo is one of the few development projects in the growing Chilean market under construction or in late-stage development. We now have all of the key permits in place and Anker mining offtaker is a 40% equity partner, civil work, tunneling and the electro-mechanical EPC contract signed. We're also making good progress on Alto Maipo's financing, which is the last remaining major milestone. We expect to achieve financial close and begin construction before year's end.

Last but not least, I'm pleased to report that all of our 2,231 megawatts of construction projects are progressing on time and on budget.

With that, let me turn the call over to Tom.

Thomas M. O'Flynn

Thanks, Andres, and good morning, everyone. Let me first off cover our Q3 results, including adjusted EPS, adjusted free tax contribution, or PTC, by SBU and cash flow. Then I'll touch on our 2013 guidance, drivers by SBU and our capital allocation plan. Finally, I'll cover the longer-term outlook, including our expected growth rate for the next couple of years and some drivers for 2014.

Turning to Slide 12. We had a solid third quarter, and our adjusted EPS increased by $0.04 or 11%. The impact of dry hydrology on several of our Latin American businesses was offset by higher margins in United Kingdom and Dominican Republic and lower interest expense on recourse debt. In addition, we benefited from a lower effective tax rate of 26% versus 33% a year ago, which added about $0.03.

Before I go into the results, let me summarize hydrology. As you can see on Slide 13, several of our Latin American markets, including Chile, Colombia and Panama, have experienced very dry hydrology. In fact, 2013 is the driest year in more than 4 decades in Panama, and it's very unusual to have dry conditions in all these markets at the same time. Consistent with our second quarter results, unfavorable hydrology had a negative $0.04 impact in the third quarter and $0.12 on a year-to-date basis. For the fourth quarter, we're expecting only a modest impact of $0.01, as hydrology has stabilized across our portfolio.

Spot prices in Panama, Chile and Brazil have declined by 30% to 40% from unusually high levels over the last few months, which is helpful because we've been recovering some of our shortfall in the spot markets. In Panama, water inflows at our Changuinola plant are improving after the rainy season. In recent weeks, water inflows have recovered from about 70% of historical averages to about 80%, and we expect this trend to continue in the fourth quarter. In Brazil and Colombia, reservoir levels are about normal for this time of year. Overall, we expect normal hydrology next year. We've also taken actions to minimize impacts from dry hydrology, such as modifying our contracts in Panama to reduce our overall exposure to the spot markets.

Now I'll briefly review third quarter PTC at each of our SBUs, beginning on Slide 14. In the U.S., we reported a decline of $17 million, driven primarily by customer switching at DP&L as anticipated. As of Q3, 70% of the loaded DP&L had switched compared to 57% last year.

Our outlook for DP&L since receiving the ESP order is that it should contribute roughly $85 million to $95 million of annual PTC through 2015. DP&L results should benefit from a higher Service Stability Rider, targeted cost reductions of $20 million to $30 million and lower interest expense. These will be offset by additional customer switching and a lower tariff resulting from lending under the new ESP.

Our Andes SBU was largely flat for the quarter, Chivor declined due to low hydrology in Colombia and Chile declined as a result of higher spot purchases from planned maintenance and lower contract prices. These trends were offset by higher income at AES Argentina.

Brazil was also flat for the quarter, weaker Brazilian real as compared to last year, as well as lower generation at Tietê and higher interest expense at Sul reduced results for the quarter. These are largely offset by an increase in Eletropaulo for the quarter as a result of higher volumes and lower cost.

Next on Slide 15, our Mexico, Central America and Caribbean, or MCAC, SBU was also flat. Here, dry conditions in Panama were largely offset by an $18 million improvement in the Dominican Republic due to higher volumes and prices. Our Europe, Middle East and Africa, or EMEA, SBU increased through the quarter by $15 million, driven largely by our Kilroot coal-fired plant in United Kingdom, where we benefited from higher dark spreads. As we anticipated in our guidance, Asia declined for the quarter as a result of the China asset sales completed last year and higher contracted sales at Masinloc, which reduced its merchant exposure at the end of last year by signing a 7-year contract to 2019.

Finally, our corporate charges improved $28 million for the quarter, driven by lower interest expense from the Parent refinancing we executed in the second quarter. We also had some modest reductions in development cost this quarter. Across the SBUs and Parent Company, adjusted PTC increased $7 million for the quarter.

Since the formation of the SBUs a year ago, we've been actively managing G&A expenses on a global basis. Andres mentioned the increased target of $55 million by 2015. So far, we've largely communicated our savings in the G&A expenses line on our income statement, although we've also targeted reductions in administrative costs reported in cost of sales.

Going forward, much of our administrative cost savings will be recorded in our cost of sales line, as we reduced costs related to the management of our business units. From an Investor Relations standpoint, we'll continue to share targets and related progress against global G&A expenses, independent of income statement classification. When we reach our cumulative annual savings target in 2015, we will have reduced our G&A by at least 30%.

Now to our cash flow metrics beginning on Slide 16. For the fourth quarter, proportional free cash flow was $347 million, bringing our year-to-date results to $847 million. Q3 declined from last year by approximately $150 million, driven by low proportional operating cash flow in Brazil and EMEA, as well as $40 million of higher environmental CapEx at IPL in the U.S.

On Slide 17, with our Q3 results, we're on track for the year. As you may remember, we provided adjusted PTC ranges by SBU. The mix of contributions from our SBUs have changed, but the bottom line remains the same. We had challenges in MCAC in Brazil, primarily due to poor hydrology and lower demand. We've offset these negatives with higher contributions from the U.S. and lower G&A and interest expense, as well as a lower effective tax rate.

As Andres mentioned, we reaffirmed our guidance on all metrics. As a reminder, our adjusted EPS guidance of $1.24 to $1.32 includes approximately $0.05 of dilution from the Ukraine and Cameroon asset sales announced this year.

During the third quarter, we recorded approximately $340 million in impairments in our GAAP EPS. Some were triggered by our asset sales efforts, including $130 million of impairments of our Cameroon businesses and our Polish wind pipeline. We're obviously disappointed with these impairments, but believe it's important to focus our portfolio and also to react to significant market changes as they occur.

Turning now to Slide 18. As Andres mentioned, we expect to be in the high end of our proportional free cash flow guidance range of $750 million to $1.05 billion this year. This $1 billion or so of proportional free cash flow is after $900 million of maintenance and environmental capital expenditures.

Our normalized maintenance CapEx is about $600 million to $700 million, but we have about $250 million of additional environmental CapEx at Gener and IPL. The IPL program is essentially growth CapEx as we earn a cash return during construction and into the future. We expect these environmental CapEx programs to be largely completed by 2015.

In terms of uses of this proportional free cash flow, over the last few years, we've used about $500 million per year to pay down nonrecourse debt at our subsidiaries and remaining cash is available for discretionary uses at AES. This debt paydown at subsidiaries creates equity value that we can capture through proceeds and refinancings for other distributions. As we said last quarter, we expect to be at the high end of our $400 million to $500 million range for Parent free cash flow, which is the key driver of our dividend capacity.

Let me now touch on 2013 capital allocation on Slide 19. In 2013, we expect to generate $1.1 billion to $1.2 billion of discretionary cash, including Parent free cash flow of about $500 million that I just mentioned. Factoring in the $239 million of asset sale proceeds already received this year, we've invested roughly 60% of our cash in delevering and returning cash to shareholders. After proved investments, we'll have about $120 million to $270 million in discretionary cash remaining, which will obviously increase when we receive the $236 million of proceeds from the 3 transactions we just announced today.

Regarding the uses of discretionary cash to be allocated, much of the cash is received in the fourth quarter. We'll continue to use it to achieve the highest risk adjusted returns for our shareholders, including share buybacks and investments in platform expansions. To that end, we expect to invest roughly $100 million in the potential equity issuance at Gener to fund its growth program. We'll keep you updated as Gener's financing plans are finalized.

Now I'd like to discuss guidance on Slide 20, currently in the latter stage of our annual long-term planning process. In 2014, we see EPS growth in line with our 4% to 6% EPS trajectory, which assumes a normal year for hydrology but also a higher effective tax rate. Year-over-year, in '14, we expect moderate growth from Andes, Brazil, MCAC and EMEA, and flat to modest declines in the U.S. and Asia. Through 2015, we're reaffirming our average annual total return of 6% to 8%, which includes EPS growth of 4% to 6% and a dividend yield of 1% to 2%.

Relative to our prior guidance, the increased cost savings adds about $0.05 for 2015. That said, we have net offsets of a similar amount. For example, Brazil is down from prior expectations by almost $0.05 due to slower demand growth and foreign exchange.

With respect to cash flow, we expect the proportional free cash flow and Parent free cash flow will grow faster than earnings, as we realize the contributions from our projects under construction and complete environmental capital expenditures.

In February, on our fourth quarter call, we plan to issue specific 2014 EPS and cash flow guidance. We'll also provide an update on 2015 expectations and give some color on significant drivers for periods thereafter. We're committed to delivering compelling earnings growth over time in order to ensure an attractive total return for shareholders.

Lastly, as Andres mentioned, we increased our quarterly dividend to $0.05 per share for the dividend payable in February, with an ex-dividend date of January 30. Going forward, we plan to assess potential increases in our dividend once a year. This year, we're a bit ahead of schedule. Normally, we plan to review the dividend with our board in December and communicate any changes that would be effective with our first quarter dividend.

With that, I'll turn it back over to Andres.

Andres Ricardo Gluski Weilert

Thanks, Tom. In summary, we are seeing the results of executing on our strategy and we're delivering on our commitments.

On this call, we've just announced 3 asset sales, including all 3 businesses in Cameroon; increased our sustainable cost savings targets by 38%; and announced a 25% increase in our quarterly dividend. At the same time, we're executing on important platform expansions, bringing on equity partners at the project level, developing platform enhancements in adjacent businesses, all aiming to increase our return on assets over time.

AES has a diversified portfolio of businesses in attractive markets that generate growing earnings and cash flow and provide us with multiple opportunities to create long-term value for our shareholders.

Operator, I'd now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jon Cohen.

Jonathan Cohen - ISI Group Inc., Research Division

A couple of questions. First of all on Parent free cash flow. It looks like you're going to be at the high end of the range for '13 despite some challenging conditions operationally. If I fast forward, it seems like you're going to be paying down a lot less debt in the future, environmental CapEx will be lower, you have additional cash from cost savings from the Google transaction, $700 million of asset sales. At what time are you going to be in a position to update us on longer-term capital allocation strategies?

Andres Ricardo Gluski Weilert

I think that we've laid out a sort of a very clear strategy. We are very cautious about announcing investments until we get to sort of the final stages of those investments. However, when we update you, first quarter of next year, we'll be giving short of the big pools, as Tom has done, in terms of where we will be allocating our capital. I don't know, Tom. Would you like to add something to that?

Thomas M. O'Flynn

Jon, I'd just say probably 2 things. We do think our cash flow will grow at a good rate, higher than the EPS growth rate for the next couple of years, and certainly, as we look into the future, we think cash flow will continue to grow at that level. That's both proportional free cash flow, as well as Parent free cash flow. I think you hit it, proportional free cash flow and which of the driver for Parent should really be aided by the reduction in capital expenditures. So going out, we think CapEx will be more $600 million to $700 million rather than the $850 million to $900 million starting in '16, that obviously excludes growth CapEx. So that will help drive subsidiary dividend capacity. And at the Parent, we think we're generally rightsized for our debt capacity with this asset mix at the Parent, so we got $5.5 million, $5.6 million of recourse debt at the Parent, which we think is generally right with this asset mix. So we think cash flow should continue to have a good growth trend.

Jonathan Cohen - ISI Group Inc., Research Division

Okay. And one clarification. When you say that you expect normal hydro conditions next year, given that this year was a $0.13 headwind, does that mean that, all else equal, there should be another $0.13 of earnings from normal hydro next year? And is that fully offset by the higher tax rate, or is there some upside there?

Thomas M. O'Flynn

Well, all things equal, yes, we won't have the negatives. Certainly not the $0.12 that we've had year-to-date. But having said that, yes, we will have a higher tax rate that will offset some of that. And quite frankly, the higher tax rate is one of the other reasons why our cash is going faster than our earnings over the next couple of years.

Operator

Our next question comes from the line of Julien Dumoulin-Smith.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

So firstly, on the sales, congratulations first off on getting these latest done. When you talk about $2 billion and having executed thus far on a good chunk of that, what else, broadly speaking, is in the pipeline, if you could can talk about it? And then specifically, does that incorporate an assumption around or an expectation for the Silver Ridge transaction? Is that part of that $2 billion?

Andres Ricardo Gluski Weilert

Well, I'm not going to comment on any specific transactions, but I think what we played out and is that, again, those that we really don't feel we have a sustainable competitive advantage and are not sort of where we have our growth occurring are those that are slated for sale. And we've gone from 28 to 20 countries. I could see us getting out of perhaps another 5 countries. But as we said, this is a -- in the universe of $2 billion, the universe of potential sales is bigger. Some of them might be partial sale down. And we really think that's the best way to reallocate our capital is to sell down places at a lower rate of return to invest in higher return projects.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Got you. And would Solar be included in that?

Andres Ricardo Gluski Weilert

If we sold down Solar, it would be part of that potential pool.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Got you. And then specifically on the cost cutting, you talked about, obviously, upping the expectations here. That's strictly at an SG&A at the AES corporate level. Is there another bucket here to be expected over time more at the SBU level at the businesses themselves?

Andres Ricardo Gluski Weilert

Here to clarify, I mean, what Tom talked about was sort of global G&A going from really what we have sort of, let's say, in our P&L statement, and that's where we started because we wanted to be extremely transparent and help you track it. Now we're going to go beyond that and we do have efforts -- so when we're talking about the $55 million, it's looking at, for example, our hubs, how we handle our SBUs, that overheads will be included in it. Of course, we'll have other cost-saving efforts that beyond that, beyond that $55 million. Perhaps, Andy, can give a little color on that.

Andrew Martin Vesley

Julien, it's Andy Vesley. I think it's -- the question is that part of the target that we set with the $55 million does include a significant amount of G&A that we record as cost of goods sold in the businesses. So we're already starting to get into the SBUs. I think, as you know, we've had a very significant cost reduction program in Brazil. We've had it ongoing for 3 years, and we're starting to take some of those best practices more broadly into our businesses. We also, in '13, as part of going into the ESP, are focused specifically at DP&L to get those costs in line as well. What I can say, the same amount of attention that has been brought to G&A globally, we will bring to the fixed costs in the business. It's a very big bucket, as you know. And I think as we head into next year and our plans solidify, we will update everybody on our objectives there.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Great. And then lastly, with regards to the dividend, I mean, just curious, what's the pace at which you get to this target range broadly speaking? And even within that, I mean, how do you think about this on a multi-year basis, particularly given the disproportionate growth in your cash flow? And maybe even specific to that, can you talk about what the growth CAGR and the cash flows are in these near years, given that it's potentially higher than your EPS?

Andrew Martin Vesley

First, what we've said is that, we said we have a dividend policy of paying 30% to 40% of our Parent free cash flow. So what we're doing is basically bringing our dividend payment in line with our stated policy, and that's what we will do. So what you can expect is it will between 30% and 40% of that number. And as that number grows over time, we will increase the dividend accordingly. Now of course, there's a range between 30% and 40%, but now we're within that range. I don't think we're, at this stage, ready to talk about sort of a CAGR or the growth rate on the cash.

Thomas M. O'Flynn

Julien, the only thing I'd add is that if we're looking at a 4% to 6% EPS growth through '15, we call that mid-single digits, we would be looking at something in a high-single digits for a Parent free cash flow kind of CAGR. So that's an order of magnitude.

Operator

Our next question comes from Ali Agha.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

A couple of things I wanted to clarify. First, very near term. I mean, my sense was, given the hydro condition, as you point out, was still a bit of a negative in the third quarter, won't be that big of a negative in the fourth quarter. Then when I look at the earnings mix for the company in the second half, seemed to me it was more skewed towards fourth quarter versus third quarter. You reported $0.39 in the third quarter, putting you at $1.01 for the 9 months. I'm just curious why, given that assumption, you wouldn't be at or even above, certainly above the high end of the earnings guidance range? What am I missing there?

Thomas M. O'Flynn

Tax. So that's really the equalizer.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Tax in the fourth quarter will be higher and will be an...

Thomas M. O'Flynn

Correct. Ali, our general tax rate, if you just think about over a long-term basis, is more in the 30%, 32%. So that's the kind of number that would come in the fourth quarter, so you have -- weighted average that in and that would factor in the delta.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then secondly, on the slightly longer-term earnings outlook, Tom, you mentioned, you've got the $0.05 of additional cost savings, getting offset by lower Brazil assumptions. But at the same time, you do have -- as you said, your free cash flow is growing stronger at the higher end, you've got additional asset sale proceeds coming, so I don't know if you assumed any use in terms of buybacks going forward. But I'm just curious, when we look at that 4% to 6% CAGR through 2015 and also sort of throwing in there, Andres, your aspiration of getting back to 6% to 8%, are we getting to the high end of that? I mean, what's holding us back to -- if not getting to 6% to 8%, maybe getting to 6%, given all the positives you've talked about today?

Thomas M. O'Flynn

Yes. Well, I'll hit it first and Andres may want to give some color, too. But I'll just say, we expect to give some more color on '15 in February. We're just trying to give folks updates on a quarter-to-quarter basis. So I think what we have seen is clearly the cost savings are about $0.05. There's a lot of other puts and takes, but net, net, so far, the puts are equaling about the takes. I used Brazil, not to say it's the only moving part, but it's an example of a moving part that is almost a direct offset to the cost benefits, but there's obviously things that are going positively, a number of things that we're trying to make more positive, but some things that go off in a different direction. So that's just the short-term update for '15, but we expect to give you more color in February. Andres probably has some other thoughts.

Andres Ricardo Gluski Weilert

Ali, there are some conservative assumptions in terms of allocation of capital in the numbers in terms of our growth rate of 4% to 6%. Now I did mention on this call and the prior call, we are looking at ways to increase that growth rate. We want to get back to the 6% to 8% range. And that's why I'm mentioning, for example, the enhancements and the adjacencies, because right now, these are small and we don't know how much we can -- how a big a pie it can be. But we're seeing very healthy returns from these, and we think they're much lower risk-adjusted because you have the assets, so it's adding something onto the asset. So we've done a number of them. The returns are healthy, the construction times are lower and that's one of the ways that we're trying to increase our growth rate. But right now, I mean, I think it's far too early to say that we have these in the bag. So just letting you know that we are doing everything possible to get back to that 6% to 8%, and these are some of the things that we see more attractive, also like bringing partners onto our projects, we can get a promote, we can get a management fee and these are not insubstantial. I mean, this year, we've signed deals for $500 million at the project level. So this is new approaches. We're being aggressive on this. But again, we're not willing to talk about its effect yet until we really are sure that they are sufficiently big to move the needle.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So last question, just to clarify that, Andres, I mean, the time frame we are still looking at is '12 through '15. '13 is pretty much behind us. So in effect, we're looking at '14 and '15. And if I'm hearing you right, given some of the stuff that you're working on, you still think that through '15 on a compound annual basis, you could get to 6% to 8%, even though right now, you're looking at 4% to 6%. Am I hearing that right?

Andres Ricardo Gluski Weilert

Not exactly. What I'd say, we're reaffirming our guidance of 4% to 6% and total return of 6% to 8%, and we're comfortable with that. Of course, these projects that we're looking at and, of course, we have to see how many of them are, in addition to the big platform expansions that we're doing, including to the sell downs on top of this, the company doesn't end in 2015, so we're going to be looking at an ongoing growth rate. So quite frankly, our focus is on making sure that we create as much shareholder value. We did give targets out for 2015. We are committed to hitting them. But we're also committing to having a strong ongoing company and making sure that we have good growth rates after that as well.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. So your 6% to 8% aspiration doesn't necessarily take the '15 period. It may be over a longer period.

Andres Ricardo Gluski Weilert

As I've said, we are sticking to our 4% to 6% and we're doing everything possible to increase that. And again, our objective is not only at the '15 number, but beyond as well.

Operator

Our next question comes from Charles Fishman.

Charles J. Fishman - Morningstar Inc., Research Division

This is Charles Fishman with Morningstar. Your new partner for Alto Maipo, will that mining company also take a large percentage of the output of that plant?

Andres Ricardo Gluski Weilert

Yes. Definitely, the partner, which is Antofagasta Minerals, will be a major offtaker to that contract for making the financing -- so it'll take roughly about, I'd say, 1/3 of the output. Realize that this is a run-of-the-river, so there is considerable seasonality to it. So it's a constant contract. So we're contracted at the correct level, and we expect many years to have access to sell into the market.

Charles J. Fishman - Morningstar Inc., Research Division

I didn't hear you say anything about your big coal plant under construction in Vietnam. Is that still on schedule, on budget?

Thomas M. O'Flynn

Yes, yes. I'm glad that you mentioned that. Mong Duong, that's proceeding very nicely, and that's part of the -- a big part of the 2,231-megawatts under construction that are on time and on budget.

Charles J. Fishman - Morningstar Inc., Research Division

Okay. and then when you say your expectations for China -- for Asia next year are down, I would've thought that the full impact of the Masinloc contract would've passed. I mean, because you redid that contract roughly a year ago, I think. And then also, the divestiture of the China assets, wouldn't that all be behind you by next year, that things would be flat, flattish, or am I missing...

Thomas M. O'Flynn

This is Tom. I think my comment was just talking about the difference between '13 and '12. So '12, China was the difference. But the biggest difference really was that last year in '12, we still had some of our Masinloc output sold into the spot market. The spot market was quite good last year. We signed a new 7-year contract that took effect this January. Those prices are somewhat below the higher spot prices from last year, but we saw it as a very favorable thing to do because it gave us a lot of stability through 2019. So it's modesty lower revenues, but with much greater predictability that we felt was a good trade that does explain the difference.

Charles J. Fishman - Morningstar Inc., Research Division

So I misunderstood that '14 -- you didn't say '14 would be down in Asia...

Thomas M. O'Flynn

No, my comments were '12 to '13. You're right, '13 to '14 should be pretty flat, and then Mong Duong comes in Q4 '15 and thereafter, Mong Duong will start to add. But '13 versus '14 in Asia should be pretty flat.

Operator

Our next question comes from Mr. Brian Russo.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Could you just comment on the Tietê Eletropaulo contract expiration at the end of '15, and kind of where you see pricing in '16? And then maybe considering that's likely to be a headwind, if you could maybe talk about some of the growth projects that could be positive drivers of post '15. And then the 572 megawatts that should be completed in '16, what's the equity investment in that?

Thomas M. O'Flynn

Sure. As you know, yes, we do have a cliff at Tietê with the expiration of the contract with Eletropaulo. And the drop in prices is somewhere around BRL 195, around BRL 130, in that range. We have 2 developing projects in São Paulo, which is Termo Araraquara and Termo Sào Paulo. We really haven't been able to participate in the energy auctions in Brazil because we haven't been able to secure a supply of gas. There isn't gas available, so that had been sort of slowing us down to build it using some of Tietê's capacity to build new plants. So what the team has been doing in Brazil is developing a commercial arm and selling some of this energy forward to, let's say, to be ready to place this energy when this occurs. Now I'm actually very happy that we did not go ahead, let's say, and rush into, try to fill this drop in Tietê because you've seen what happened to asset prices in Brazil. So I think we think we've taken a very prudent approach. And if we didn't see value, we did not invest. Andy, you want to...

Andrew Martin Vesley

Yes, Brian, Andy Vesley. I think the only thing I would add is just give you a status on that because this is something obviously that we're actively managing. When we think about Tietê, there's about 1,200 megawatts of firm physical capacity to bring to market in the contract. And we've -- as of this date, 400 megawatts is already secured under contracts for deliveries starting when the EP contract rolls out. What's the good news is, is that we continue to see that market strengthening and power pricing going up. As you may remember, after the MP 579 intervention by the government, there was this great view that the whole markets would collapse and the pricing was really questionable. But given what we've been seeing, the need for more thermal capacity, the slowdowns in some of the large hydro projects, we anticipate actually a strengthening of these markets. So while we don't believe we will be able to re-contract at the levels we're contracted at now with EP, we think we have been pretty strategic in bringing the rest of this capacity to market, and this is something that we're working very diligently with the corporation. So Tom, I don't know if you would want to add anything to that?

Thomas M. O'Flynn

Okay.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

And just lastly, the 572 megawatts that are going to be completed in 2016, any idea what the equity investment in that is?

Andres Ricardo Gluski Weilert

You're talking about...

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

On Slide 32, you've got 572 megawatts?

Andres Ricardo Gluski Weilert

In '15?

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

In '16.

Andres Ricardo Gluski Weilert

In '16, Cochrane is the project in 2016. I think our equity is roughly $200 million.

Operator

Our next question comes from Mr. Brian Chin.

Brian Chin - BofA Merrill Lynch, Research Division

Just a longer-term opportunity question. When you talk about Indianapolis Power & Light in the $511 million investment of IPL from MATS compliance, some other utilities talk fairly frequently about coal combustion residuals, effluent limitations, guidelines, but other requirements besides just MATS, will the $511 million investment in IPL cover most of those other environmental requirements? Or can you talk a little bit about what other opportunities for growth are there at IPL for other types of environmental spending beyond just MATS?

Andrew Martin Vesley

Yes, Brian, this is Andy Vesley. Let me sort of address that. The $511 million is really the hazardous air toxic, so it doesn't cover some of the others. Some of the others which you have the 316(b), you have water effluents, the NPDES and the coal combustion residuals. If we look at IPL roughly in terms of investments and also, if you think about the national ambient air quality standards, which are actually in the development, you could be talking about another $300 million to $400 million, in that range. I don't have -- on average. So it probably is a doubling of what we're spending on the MATS out into the future, so that's about what we're looking at, and those are the significant ones that we see on the horizon that would impact our coal plants in Indiana.

Brian Chin - BofA Merrill Lynch, Research Division

Okay, great. And then second question also on longer-term growth. A number of other U.S. utilities in the Midwest are talking a little bit more aggressively about transmission and distribution on the project. I think even Dynegy was talking a little bit of that today, this morning. Haven't really heard a whole lot of transmission and distribution growth outlooks or opportunities for either Indianapolis Power & Light of Dayton Power. Can you talk about those a little bit?

Thomas M. O'Flynn

Yes, I can at a high level. I mean let's start with Dayton. I mean, Dayton has some transmission-related investments, but they're not, what I would call, very significant. On average at DP&L and the wireless business collectively, we're probably about spending $150 million, $155 million a year. We don't have mega transmission projects. We don't have that opportunity. At DP&L, really, there is a Senate Bill 560 in Indiana, which is the sort of a way to what's really was developed for the gas industry as a way of upgrading their infrastructure. When we look at IPL, as you know, we have one of the highest reliability in the State. We've actually done a very good job at maintaining our system. So we don't see, again, these huge opportunities for massive infrastructure projects. But when we think about it, on a normalized basis, in our wires business in Indiana, we're talking about an $85 million a year ongoing investment. But again, at the moment, and this can change as we take a closer look into next year, we don't really see any of these very big opportunities to make massive upgrades in the wires businesses or new transmission investments in Ohio. So that opportunity doesn't appear to be there, but it's something we continue to look at.

Operator

Our next question comes from Mr. Raymond Leung.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Just Tom, I think you -- or Andres, you mentioned that you're happy with the leverage at the Parent level. Can you talk a little bit about, with leverage remaining fairly flat, what do you think is the optimal Parent distribution to debt number? You're roughly below 4.5x. I think in the past, you've talked about 5, 5.5x. So how should we think about that, first of all?

Andres Ricardo Gluski Weilert

Yes. I think we're in -- you're fair in terms of about 4.5x. We see our debt level as being reasonable with our existing asset portfolio. We think our coverage ratios will improve as our cash flow improves for the reasons that we talked about, both in the script as well as on a couple of the questions. So we think that we'll have an improving credit profile over the next 2 to 3 years through improving the, let's say, the numerator of our coverage ratio as opposed to the interest expense in the denominator, or the debt amount in the denominator. Obviously, that can change to the extent there are changes in the portfolio. So when we do sell assets, we generally look to be credit-neutral with the use of proceeds. Ballpark, that's using about half of the money to retire Parent debt, but it's dependent upon cash flow. Obviously, the more cash flow that would be generated by an asset, then the more you would pay down debt to be credit-neutral. And then growth would flip into the other way to the extent we're getting more growth out of business, longer cash flow in Gener and Mong Duong, which are 2 investment entities and IPL will all be significant cash flow growth entities. And that would be part of the cash flow improvement story.

Thomas M. O'Flynn

And Raymond, there's also a qualitative environment as we go forward. So if you look where we're investing in our portfolio and cash flows are growing and where we're exiting, over time, I think we also can say we're improving the average quality of our cash flow and our portfolio. So that's another important contributor.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Okay. Now I guess your midpoint for Parent distributions or sub-distributions for Parent is like $1.2 billion or so. I mean, directionally, you have new projects coming online. Should we think of that as growing -- continuing to grow or improve or remains relatively steady?

Thomas M. O'Flynn

We do expect that to grow over time, and we have big projects like Mong Duong coming online. So we expect a growth in that as well.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Okay. And just another question, more subsidiary level in U.S. ops. You talked a little bit about potential cost savings. It seemed like, that was a pretty eminent item in the DP&L, ESP order. What are you guys thinking in terms of cost reductions over at DPL? And to a lesser extent, maybe if there's any opportunities at IPALCO, what you guys are thinking there in terms of cost savings?

Andrew Martin Vesley

Again, this is Andy Vesley. When we think about the NOx [ph], that was one that was right in front of us. A number of calls ago, we had said that the 3 levers for managing Dayton Power & Light, we're getting constructive regulatory outcome, so we're past that and we believe we did to some degree. The other was our -- basically our retail arm to protect our load and also make sure we could get our generation to market. And the answer on that one is, we have about 100,000 more customers under DP&L brand and we had when we acquired the company and we have about the same load. And the last one is the cost one. We had talked about a $60 million target to date through '13. We've identified about $31 million. We've taken out half of that roughly when O&M reductions, the other half when variable margin improvements, such as heat rate improvements and improve the acquisition of coal and some others, change in coal mix. What the order had left us with was, in order to get back to where we think we need, there's another $20 million to $30 million of cost reductions, which we are identifying and plan to deliver. So I think the opportunity, at least in the near term, is to bring another $20 million to $30 million of cost savings to that business in the near term. As I said earlier, that almost simultaneously, we are looking broadly at the full fixed cost of all our operating businesses, which is about something probably $3 billion. So it provides a great opportunity, and as I said, we're going to look very hard at that and talk more about that as we get into the next year.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

Okay, great. And just lastly on DPL, on the capital structure, I think at your Analyst Day, you talked about reducing debt by about $225 million at DPL. Can you sort of give us an update where you stood on that? It looked like you had about $2.8 billion of debt there, with almost $560 million of cash. But maybe, if you walk me through where you guys are with the debt reduction program there?

Thomas M. O'Flynn

Yes, the cash may be that we refinanced over the quarter end. We raised some money and I think we had a maturity on October 1 or the first few days of October. So our cash probably really looks heavy, but that was just for a couple of days. But generally, you're right, we have paid down $250 million of debt this year, and we would expect -- I think our debt at DP&L is reasonably solid. It's above $800 million, $850 million kind of range. But up at PUCO we have about $1.4 billion, and we would expect to pay down -- as I've said, $250 million this year is largely done, but we'd expect to have the ability to pay down $50 million to $70 million or so a year, largely with our new bank agreement.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division

$50 million to $70 million per year. And that's based on the latest ESP?

Thomas M. O'Flynn

Yes.

Ahmed Pasha

Sure. Veronica, can we take last question, please?

Operator

At this time, there are no further questions, sir.

Ahmed Pasha

Okay. We thank everyone for joining us today, and we look forward to seeing many of you at the conference. With that, if you have any questions, please feel free to call our IR team, and have a nice day.

Operator

That concludes today's conference. Thank you for participating. You may now disconnect.

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