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AES Corp (NYSE:AES)
Q2 2018 Earnings Conference Call
Aug. 7, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to The AES Corporation's Second Quarter 2018 Financial Review Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ahmed Pasha, Vice President, Investor Relations. Please go ahead.

Ahmed Pasha -- Vice President, Investor Relations

Thank you, Andrew. Good morning, and welcome to AES' second quarter 2018 financial review call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

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

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

Andres Gluski -- President and Chief Executive Officer

Good morning, everyone, and thank you for joining our second quarter 2018 financial review call. Second quarter adjusted earnings per share of $0.25 puts us at $0.52 for the first half of 2018, which is 24% higher than the $0.42 we earned in the first half of 2017. We remain on track to hit our 2018 guidance and longer-term expectations. Tom will discuss our results in more detail shortly. I'm pleased to report that the positive momentum of the last quarters continues.

During the quarter, we achieved a number of milestones toward improving our risk profile and shareholder returns. Specifically, our credit ratings were recently upgraded by Fitch and Moody's, and we are now rated just one notch below investment grade by all three agencies. We expect to achieve investment-grade metrics by 2019 and ratings by 2020. We brought online the 671 megawatt Eagle Valley combined-cycle gas plant in Indiana in April and we will be inaugurating the 380 megawatt CCGT and LNG regasification terminal Colon in Panama later this month. Of the remaining 3.9 gigawatts currently under construction, we expect 2 gigawatts to be commissioned between now and year-end.

We made significant progress in advancing our growth pipeline. Year-to-date we have signed nearly 1.5 gigawatts of renewable PPAs, which brings our backlog of capacity addition, including projects under construction, to 5.7 gigawatts. At our utilities in the US, IPL and DPL, we settled two rate cases. Once approved, these widely supported settlements will position both utilities for future investments.

We are on track to deliver $100 million in sustainable cost savings in 2018 as a result of our restructuring and transformation program. We've received $310 million in net proceeds from the sale of our interests in Eletropaulo in Brazil, reducing our regulatory risks and simplifying our financial statements. Lastly, we continue to be a leader in applying new technologies, including in energy storage. Our JV with Siemens-Fluence signed 80 megawatts of new projects in three countries bringing its total to 16 and IPL's rate case settlement included one of the first rate-based battery storage projects in the world.

I will now provide more details on some of these achievements beginning on slide four. Of our 4.3 gigawatts currently under construction, nearly half are expected to come online in 2018. Since our last call we have made significant progress on these projects, which I will highlight on the following few slides, starting with our 380 megawatt combined cycle plant in Panama on slide five. I'm pleased to report that the regasification terminal is complete and that it has accepted the first shipment of LNG in Central America's history. We expect that the entry of low-cost US LNG will transform the Central American energy sector, much as it has in the Dominican Republic.

Construction of the combined-cycle power plant is nearly complete, and we expect to achieve COD in September on time and on budget. The project will provide long-term and predictable US dollar denominated returns. The storage tank is expected to be completed in 2019. Approximately 48 of the 70 Tera BTUs of storage capacity is uncontracted and represents potential upside as natural gas use increases over time in the region.

Now turning to our 1.3 gigawatt Southland combined cycle plant, which is the redevelopment of our existing gas facilities in Southern California. Construction is proceeding as planned with the project now 40% complete and on track to be operational by the first half of 2020. Next, in Hawaii, we are delivering two solar-plus storage facilities for a total of 47 megawatts of solar and 34 megawatts of five hour duration energy storage on the island of Hawaii. The first of these pioneering projects is under construction and will satisfy energy demand during peak hours, as well as the rest of the day.

The second for the US Navy is expected to begin construction later this year. Once both of these projects are completed, they will represent the largest solar-plus storage installation in the world. Finally, we're making good progress at our 1.3 gigawatt thermal plant OPGC 2 in India. Construction is advancing as planned. The project is now 96% complete and we expect the plant to come online by the end of this year on budget.

As you may recall, AES Gener successfully restructured the Alto Maipo hydroelectric project in Chile in May. Since closing the restructuring, the main contract Strabag is performing in line with the revised EPC contract and has been meeting the agreed upon construction milestones. Alto Maipo is now 68% complete, including 56% of the tunneling work and the rate of progress on tunneling has significantly improved as of late. We expect Alto Maipo to achieve commercial operations in 2020. Our remaining construction projects are renewable energy. These projects are proceeding as planned and will be key contributors to our earnings and cash flow growth through 2020.

Now turning to slide 10, we have been reshaping our portfolio to deliver attractive returns to our shareholders while lowering risks, including reducing our carbon footprint. Our focus is on increasing the share of natural gas and renewable projects with long-term US dollar denominated contracts. We are earning attractive returns on our equity investments by utilizing our existing platforms, global scale, lower-cost capital partners, and non-recourse financing. On a portfolio basis, our investments are projected to produce low to mid-teen IRRs on average assuming conservative terminal values. We expect our projects in Latin America to earn returns better than the portfolio average.

As you can see on slide 11, so far this year, we've signed 1.5 gigawatts of long-term PPAs for renewable projects and now expect to exceed our internal projection of 2 gigawatts for the full year 2018. Year-to-date, sPower has signed long-term PPAs for 1.2 gigawatts with large credit-worthy C&I customers, such as Microsoft and Apple, as well as utilities. This is more than double the 500 megawatts annually of signed PPAs that we expected to achieve when we acquired sPower last year. In light of our progress this year, we are on pace to sign 2 to 3 gigawatts of new PPAs annually for 2019 and 2020. This would result in 7.5 gigawatts of new renewable PAA's being signed through 2020, all of which would be online by 2022.

To summarize, as shown on slide 12, we expect to add 11.8 gigawatts of new capacity through 2022. This includes 5.7 gigawatts of projects under construction, plus signed PPAs, which we refer to as our backlog, as well as, 6 gigawatts of additional PPAs we expect to sign through 2020. Most of the capital needed for these projects will be funded by non-recourse financing and partner equity. Our equity requirements for these projects will be funded from our internally generated cash. Tom will discuss our capital allocation plan through 2020 shortly. As I have noted, our goal is to earn attractive returns while greening our portfolio.

As you can see on slide 13, renewables make up 75% of the 11.8 gigawatts of new capacity additions. The remainder is conventional generation, all of which is currently under construction and expected to come online through 2020. This growth will significantly extend our average contract life from eight years currently to 10 years by 2020 and help us achieve our goal of reducing our carbon intensity by 25%. We are also working on enhancing some of our current contracts by blending and extending existing PPAs by adding renewable energy. We call this approach green blend and extend, and we will provide more color on future calls. I would like to emphasize that we do not plan to grow simply for the sake of adding megawatts. We will invest in new projects if and only if we can earn attractive risk-adjusted returns.

Finally turning to slide 14, we continue to be a leader in applying new technologies such as battery-based energy storage. Since our last call, Fluence, our joint venture with Siemens has signed contracts for an additional 80 megawatts and delivered eight projects with a total capacity of 55 megawatts. Fluence has now delivered a total capacity of 271 megawatts. Total deliveries will exceed 550 megawatts in 16 countries once their existing backlog is installed.

With that, I'll turn the call over to Tom to discuss our financial results, capital allocation, and guidance in more detail.

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

Thanks, Andres. Good morning. I'll cover our second quarter results, improving credit profile and capital allocation. We continue to make good progress toward our full year adjusted EPS guidance of $1.15 to $1.25 with $0.52 earned year-to-date. As shown on slide 16, EPS was $0.25 for the second quarter, reflecting higher contributions from South America and MCAC, as well as debt paydown at the parent. Offsetting this was the sales of our coal plants in the Philippines and Kazakhstan. Our results also reflect $0.02 from a quarterly tax rate of 36%, which is a timing issue as we continue to expect a full year tax rate in the 32% to 34% range.

On to slide 17, adjusted PTC during the quarter was $255 million, an increase of $13 million. I'll cover our results in more detail over the next four slides beginning on slide 18. In the US and Utilities, operations were generally in line with prior year. PTC was down in part due to the timing of a planned outage in Hawaii, which occurred in the second quarter this year versus the first quarter of last year.

Regarding sPower, the business has outperformed our expectations since we acquired it, both from an operational and development perspective. Since the acquisition, sPower has distributed about $100 million in cash to the parent or roughly a quarter of our original investment. The business also continues to have good access to capital markets having just closed a $500 million portfolio refinancing with a 14-year average life and a 5% coupon.

Back to our second quarter PTC, in South America, improved results reflect higher contract pricing in Colombia, as well as higher contracted sales and lower interest expense at AES Gener in Chile. In MCAC, higher PTC was largely driven by the Dominican Republic due to the completion of the combined cycle last year, as well as improved availability. Finally, in Eurasia, results primarily reflect the sale of our businesses in the Philippines and Kazakhstan.

Shifting to our year-to-date results on slide 22, adjusted EPS increased $0.10 to $0.52, which represents 43% at the midpoint of our full year guidance versus 39% achieved in year-to-date 2017. Our results reflect higher contributions from US and Utilities, including higher regulated rates and lower maintenance expense at DPL. In South America, contracted sales were up in Chile, Colombia and Argentina. We also benefited from lower parent debt. These impacts were partially offset by the asset sales in Eurasia.

Turning to our improving credit profile, beginning on slide 23, in the third quarter of 2016, we established a goal of reaching investment grade. At that time, we had $5 billion in parent debt and a leverage of 4.9 times. We expect to end this year with $3.8 billion in debt and leverage of 4.3 times. Our goal is to achieve investment grade metrics of below 4 times by 2019.

As shown on slide 24, the rating agencies are recognizing our commitment and actions. As of third quarter 2016, we were rated double BB minus BB. Today, after recent upgrades by Fitch and Moody's, we are rated BB plus by all three agencies, just one notch below investment grade. We continue to believe attaining an investment grade rating will help us not only to reduce our cost of debt and improve our financial flexibility, but also enhance our equity valuation.

Now to 2018 parent capital allocation on slide 25, which is in line with our prior disclosure. Beginning on the left hand side, sources reflect $1.9 billion of total available discretionary cash including $600 million to $675 million of parent free cash flow. Sources also reflect $1.2 billion in net asset sale proceeds from Masinloc in the Philippines and Eletropaulo in Brazil.

Now to uses on the right hand side of the slide. Including the 8.3% dividend increase we announced in December, we will be returning $345 million to shareholders this year. We've used over $1 billion to reduce parent debt, including revolver drawings. We plan to invest $300 million in our subsidiaries primarily for projects under construction, leaving about $40 million of unallocated cash.

Finally, moving to our capital allocation from 2018 through 2020, beginning on slide 26, we continue to expect our portfolio to generate $4.2 billion in discretionary cash, which is roughly half of our current market cap. About half of our discretionary cash is expected to be generated from parent free cash flow. The rest comes from our $2 billion asset sale target (inaudible) $1.2 billion, which we have achieved to-date.

Turning to uses of this discretionary cash on slide 27, roughly two-thirds has been allocated toward current dividend and delevering. Earlier Andres laid out 11.8 gigawatts of additions, 60% of which is coming online through 2020. Our equity needs for this capacity are manageable as we bring in partners and use non-recourse financing. Specifically, we're planning to fund $800 million for our equity investments in our backlog and projected PPAs coming online through 2020. This is only $50 million more than our expectations on our last call.

This quarter, we are also showing $150 million for our equity investments in projected PPAs coming online in 2021. Once completed, all these projects will contribute to our growth through 2020 and beyond. The remaining $600 million of unallocated cash, which is largely weighted to 2019 and 2020 is available to create additional shareholder value, including investments in subsidiaries and dividend growth. As you know, our annualized dividend growth rate is 9% over the last three years and 27% over the last four. Although, we don't plan to continue growing the dividend at such an exceptional rate, we expect dividend growth to remain an important part of our value proposition. We review our dividend annually with our board in December.

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

Andres Gluski -- President and Chief Executive Officer

Thanks, Tom. Before we take your questions, let me summarize today's call. Our performance year-to-date puts us on track to achieve our 2018 guidance. We are well positioned to achieve investment grade credit metrics in 2019. Our 5.7 gigawatt backlog of long-term contracted projects will enable us to achieve our key objectives of profitable growth and greening the portfolio. We expect to generate substantial amounts of discretionary cash from 2018 through 2020, which we will deploy consistent with our capital allocation framework and we remain confident in our ability to deliver on our 8% to 10% average annual growth in adjusted EPS and parent free cash flow through 2020.

Operator, we're ready to take your questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Ali Agha of SunTrust. Please go ahead.

Ali Agha -- SunTrust -- Analyst

Thank you. Good morning.

Andres Gluski -- President and Chief Executive Officer

Good morning, Ali.

Ali Agha -- SunTrust -- Analyst

Good morning. My first question, Andres, you didn't bring this up on your remarks, if you could give us an update on where things stand with Maritza in Bulgaria. And more I think to the point, as you've said to us before, I think, we should be expecting something to change there on the contract eventually, either a buyout or restructuring. And my question is, when you sort of model the different scenarios with what could play out with Maritza eventually, how does that impact that 8% to 10% profile of earnings growth you've laid out '18 through '20? Does it change it in anyway? Is that already factored in? How should we be thinking about that? That's my first question.

Andres Gluski -- President and Chief Executive Officer

Sure. Well, we aren't in any formal negotiations yet with the government. As I've said in the past, an issue was raised with the European Commission regarding illegal state aid. It hasn't been declared as such, but both sides are expected to begin negotiations sometime in the future. As I've said, we have a very strong contract. We're being paid on time. Bulgaria is an investment grade country, it's growing, and the situation of our offtake or [ph] NEK continues to improve. So really it's very too early to say whether this will come out. As I said, we have a good contract and we will defend our interests. The plant is needed in Bulgaria. So, we will keep you informed of this. In terms of sort of how this would affect our future, we do have contingencies in our numbers and we have to see where this turns out. There are a range of outcomes. If we don't have a satisfactory outcome, obviously arbitration is a possibility. So sort of stay tuned. There will be more information as it is happening. We really don't have much more to report than we did on the prior call.

Ali Agha -- SunTrust -- Analyst

Okay. Second question. You laid out some of the new projects, PPAs, backlogs that will likely come online beyond 2020, '21 and '22 et cetera. So in that context, wanted to get a sense of what your visibility is for your growth profile beyond 2020 as you start factoring these projects and is the growth rate that you've laid out for us through '20 sustainable going forward? Do you have line of sight? Can you give us some sense of how the profile would look like beyond 2020?

Andres Gluski -- President and Chief Executive Officer

Well, Ali, we will update you on that after our -- on our fourth quarter call. I think, what we're showing here is that we do have a very robust pipeline of projects. And as we continue to grow the renewable pipeline and develop competitive advantages of scale and of combinations of technology, I expect this pipeline to continue. So, I can't really give you any specific number, but I think that as time passes, I think, you're seeing the robustness of the pipeline, the many opportunities that we have and that how fast we grow will depend on making sure that we have attractive returns on that growth. I would add that, besides just megawatts we have other projects such as the LNG and it's not only the regasification terminal that we should be inaugurating within 10 days officially in Panama. But we also have the Eastern gas pipeline in the Dominican Republic. So we have some businesses which are growing in addition to just the megawatts.

Ali Agha -- SunTrust -- Analyst

Okay. Last question, more near-term. You alluded to the fact that the tax rate impact in the quarter has been more of a timing issue, it should come down in the second half. But if you looked at the overall earnings that you have reported and generated through the first half, as you said it's up 24% year-over-year, how does that compare to your own internal budget in the context of the full year when we look at the adjusted earnings that have come-through through the first half?

Andres Gluski -- President and Chief Executive Officer

Well, I think, as Tom and I said, I mean, we are on track to hit our numbers. And sometimes tax rates can be a little bit lumpy for us because it depends on where the earnings came from specifically. So really I wouldn't read too much into a sort of a one quarter tax rate and as you know, we really plan for the year.

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

Yes, Ali, it's Tom. I just -- we point out that last year earnings will shape the same. We tend to have -- third quarter and fourth quarter are historically stronger for us. So this is consistent with where we started the year.

Ali Agha -- SunTrust -- Analyst

Okay, thank you.

Operator

The next question comes from Angie Storozynski of Macquarie. Please go ahead.

Angie Storozynski -- Macquarie -- Analyst

Thank you. So going back to the growth at sPower, I remember that when you guys acquired the business, I think the assumption was that there would be about 500 megawatts of growth per year, now it seems you are significantly exceeding that rate. Yet, you are keeping your earnings growth projections unchanged through 2020. Why is that? Is it just because the growth is more toward 2021 and beyond, and hence there isn't a positive earnings (inaudible) upside to your growth rate through 2020?

Andres Gluski -- President and Chief Executive Officer

Well, I think, thinking of sort of our growth rate, I would make some mentions. One is, sPower obviously is a big contributor. We're also doing very well in our Distributed Energy business. It's smaller, but it's also a big contributor to this. Overall, about 50% of our renewables growth is wind more or less, 50% is solar, 50% is US, 50% is outside. So we have a very robust wide portfolio. So I think that we'll talk about our longer-term projections, but, as you mentioned, there is -- we have a -- we are a portfolio, we have a number of things going on. So we feel again comfortable about hitting our numbers for this year and we feel comfortable with our guidance through 2020 of 8% to 10% growth.

Angie Storozynski -- Macquarie -- Analyst

Okay. Now, you mentioned that the incremental growth would be financed with internally generated cash flows, but I think we've all seen stories about you potentially divesting a share of some of the operating assets. I'm talking about the contracted renewables. Could you talk about that?

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

Yes, Angie, it's Tom. Yes, we have mentioned in the past that we -- after closing on sPower we did get some inbounds on buying some piece of operating assets. We continue to see if that's an opportunity, that would be something that would fit into our asset sale piece, the $1.2 billion versus $2 billion, so the $800 million to go. We'll see that we continue to think about those opportunities in conjunction with our partner AIMCo, but those are really sell downs of partial pieces of operating assets. Obviously, the front side of the business, the growth development side, we want to keep that driving forward as it is. And if we did things like that, sPower would continue to be the operator, owner-operator, manager which is also adding value as they are now. By year-end, they will be self-operating in the solar, about 85% of their facilities, which is adding some incremental margin on the upside.

Andres Gluski -- President and Chief Executive Officer

Yes, Angie, I would sort of put this in context that we will be looking for opportunities to leverage our equity by bringing in lower-cost capital partners. So, whether that be a partial sell down in different assets, that allows us to use our equity toward higher return, for example, development and then putting into operation plants and then once they're up and operating, if we can get lower cost capital, that's what we will do. So over the last years we've raised quite a lot of capital by selling assets and, let's say, reinvesting some of that capital in higher return projects. So this is right on our strategy, so expect more of that.

Angie Storozynski -- Macquarie -- Analyst

And lastly, I know you've said actually twice already that you will be providing us with updates on growth beyond 2020 only on the fourth quarter call, but during this year's fourth quarter call you didn't roll forward your earnings through 2021 as you have historically provided. You have this concern among investors about your contracts in Chile rolling off and providing a potential earnings cliff. So could you at least give us a sense directionally if 2021 would be an up year versus 2020 based on what you see currently?

Andres Gluski -- President and Chief Executive Officer

No, Angie, I'd say that really when we -- we don't have any cliffs in 2021. Actually we have a lot of assets coming online in 2020. So I would just say that the momentum in 2021 should be a good year because that's when all these assets will be online and that includes things like the energy storage, the 400 megawatt hours of energy storage coming online in Southland. In terms of cliffs, we really -- the only -- we have contracts falling off at AES Gener in 2023 and that's only half of the contract. So Gener is pretty much fully contracted through 2023. So we don't see a cliff in 2021.

Angie Storozynski -- Macquarie -- Analyst

Okay. Thank you.

Andres Gluski -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning.

Andres Gluski -- President and Chief Executive Officer

Good morning, Julien.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey. Thank you for the time. I wanted to follow up a little bit on the Angie's direction for questioning. Can you elaborate a little bit on the equity investments that you intend to make in the renewables segment, just to make sure we're clear about this. I think, I heard you say, for instance, in '21 that you're going to put about $150 million in that specific project here. A, is that a good cadence of capital? And, B, historically we think about maybe low to mid teens returns on these kinds of investments, is that basically to say that perhaps that's equal to $0.02 to $0.03 of earnings accretion based on that investment or is it maybe a little bit lower than that just given the return profile of contracts in Chile?

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

Hey, Julien, it's Tom. So on my slide 27, the $150 million, this is projected. Obviously it depends upon capital structure, partnerships, things, and also location of projects, but we had $150 million that could be invested in 2020 for projects to go COD in '21. That's roughly half of the amount of, say, '21 COD projects. So in terms of cadence, if you just think about the layers, cadence is probably $300 million in total renewables, probably about $300 million maybe $350 million a year, something like that, which if you look back at our history, I think these last five years that's generally about our equity investment in projects. It's been about $300 million to $400 million per year. And so this would be very consistent. It'd be obviously less lumpy in things like Colon or things of that nature and more go into more smaller investments in renewables in the US and obviously in our key markets. In terms of returns, I think that generally in the US we're seeing low double digits and in the -- internationally, depending upon where we are, we see low to mid teens. So we would expect those to be accretive as we move along and we would factor that into our guidance updates for 2021 and beyond.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Let me be clear about this, just a little clearer. So basically the thought processes is $300 million to $350 million a year in cadence and you are say low double digits. Is that an IRR or is that an ROE in the current year? i.e., should we take, say, the midpoint of that, say, $300 million to $400 million, $350 million, put say a low teens ROE on that to kind of get a sense for what the earnings contribution is, say, about a nickel or so?

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

Those are fair for ROEs and probably if I was going to use the cadence, I'd use $300 million to $400 million. And those are reasonable for ROE. Some of them are a little bit -- it depends on the region. Some of them are a little more near-term ROE beneficial, some of them are little more sloped, but as a portfolio those IRRs are pretty reflective of ROEs.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

And this is -- and to be further clear about this and distinguish, on slide 50 you talk about global renewables at total equity investment of $136 million. How does that compare? Just to make sure we are not double counting here and thinking about this separately.

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

I'm sorry, which slide again?

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Slide 50 talks about global renewables, that's a separate investment bucket for equity contributions than the US?

Ahmed Pasha -- Vice President, Investor Relations

So these are the projects in construction. So I think -- so, as Tom mentioned, on an annual basis, we are talking about $300 million to $400 million of annual equity investments going forward.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

So this is just a slightly different cut of that, right, $300 million to $400 million and then right now you've got $136 million actively invested, but this is -- the $136 million --

Andres Gluski -- President and Chief Executive Officer

Yes, exactly. So if you take sPower, they've signed 1.2 and all our numbers are AC year-to-date. So most of those projects have not yet started construction. They will shortly , like the big Microsoft, Apple project in Virginia will start construction next quarter. So it's not yet --

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Right. The $136 million is a small factor of the total equity?

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

It's a small piece. Yes, because it just has the stuff that's already gone NTP. It's already started construction.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

And, sorry for another one there, just to clarify. The source of the success on the solar, I mean, I know you have a list of projects thus far, but if you were to define sPower as sort of MO in the solar space, is this principally PREPA related contracts, is it SREC oriented contracts? I mean, where are they principally orienting themselves for opportunities?

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

Yes, I'd say sPower is right now probably 60 -- on new business it's shifting toward 50-50 wind and solar, they are probably right now about 60% solar, 40% wind, but they are shifting. When we closed on the acquisition they were about 85% solar. They are making the shift. They are very client-focused. So folks like Microsoft and Apple are obviously great clients. So we'd look to do additional business with those and the other clients like that. We do still do some utility transactions and some other large utility type players such as couple of CCAs in California. Our smaller DE business tends to be more program focused, so they will look at a state program and then build out around the state program. They're doing a lot of that right now in Massachusetts. Hawaii project that Andres mentioned, the two solar storage projects, there's opportunities for repeat business in Hawaii. So they tend to be little more regional focused.

Andres Gluski -- President and Chief Executive Officer

Yes, and, Julien, don't forget that 50% of this is outside the US and they were mainly C&I customers, investment grade, dollar contracts, long-term dollar contracts. So it's a mix of things, and again to the extent that we can bring in partner equity or sell down, that also improves our returns.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Great. Excellent. Thank you very much.

Andres Gluski -- President and Chief Executive Officer

Thank you, Julien.

Operator

The next question comes from Christopher Turnure of JPMorgan. Please go ahead.

Christopher Turnure -- JP Morgan -- Analyst

Good morning. Andres, you mentioned in your prepared remarks briefly that you continue to be, I guess, hopeful for new LNG projects. But I was hoping you could give us more color there on either the existing Panama, Dominican Republic contracts, the types of customers you might be talking to, duration, and when we might have an update there?

Andres Gluski -- President and Chief Executive Officer

Okay. Well, I think that, first, what we're doing in Panama is replicating what we've done successfully in the Dominican Republic. So, in the Dominican Republic, we have a very nice business of selling to industrials and transportation LNG at our facility. So we had those capabilities built into the Panama project already. Now, it will take some time for the Panama, Central American market to develop. Now, we have a strategic alliance with Engie to market our gas from these two facilities and they can create products for clients, for example, that are, let's say, offset some of the risks of having competing with diesel or competing with heavy fuel oil for clients that sign up for long-term gas contracts.

So, in Panama, what we're saying is, basically the 22 tera BTUs will be used by the plant, our plant coming online. There are more plants in the area that could be converted and would require the construction of some gas pipeline. We are fully capable of again discharging from the LNG from that plant as well. So that's a market that's going to take some time to develop as it has in the Dominican Republic. Now, in the Dominican Republic, we have a very significant growth with the building of the Eastern Gas Pipeline. That's about 12 tera BTUs, and the off-taker is Barrick. So it's again an investment grade offtaker for its mines and it's basically converting its generation at those mines to gas.

There is also potential for transportation in that area. So once that Eastern Gas Pipeline is built, there's a lot of other potential diesel plants and heavy fuel plants and transportation that could be converted. So it's taking a successful business case from the Dominican Republic, replicating it in Central America. So the Panamanian market is very attractive, but we could also use it as a hub to deliver gas into other Central American countries such as Honduras.

Christopher Turnure -- JP Morgan -- Analyst

Okay, great. And then just remind me how much, if any, capacity is left in the Dominican Republic right now as a percentage of, I guess, the total capacity.

Andres Gluski -- President and Chief Executive Officer

I think in the Dominican Republic we probably have another 15, 20 tera BTUs to go, because that's an 80 tera BTU tank. So that would be in the whereabouts of 60s. So it gives you an idea of how we can fill it up. Now, again, it's very attractive to do tolling, which is what we are doing without taking any commodity risk on these projects. Longer term, we have mentioned in the past, we have a potential very large similar project in Vietnam, so that would be more sort of a 2023 project.

Christopher Turnure -- JP Morgan -- Analyst

Okay. And then switching gears, could you give us more color on your decision to sell the Chilean transmission assets and pay off debt down there, kind of anything specific about those assets that made the time appropriate to sell here?

Andres Gluski -- President and Chief Executive Officer

AES Gener is doing sort of a restructuring program of its assets and so it sold a gas peaking plant and it sold the transmission assets, we think, for attractive prices and it's used those proceeds to pay down debt. So it's similar, let's say, to what AES has done in terms of we've sold assets that we think are more valuable to others, and non-core assets and then taken those funds and used them to delever the company. So it's very similar.

Christopher Turnure -- JP Morgan -- Analyst

Okay. Makes sense. Thanks, Andres.

Andres Gluski -- President and Chief Executive Officer

Sure.

Operator

The next question comes from Steve Fleishman of Wolfe Research. Please go ahead.

Steve Fleishman -- Wolfe Research -- Analyst

Yes, good morning. Couple of quick questions. First, any risk you are needing to manage from the tariff trade war issues?

Andres Gluski -- President and Chief Executive Officer

Okay. You are talking about the tariffs on solar panels?

Steve Fleishman -- Wolfe Research -- Analyst

And more broadly, we have a lot going on. Yes.

Andres Gluski -- President and Chief Executive Officer

More broadly? No, quite frankly, we're not much affected if at all. And I'd say, first, the biggest one you could mention is sort of NAFTA negotiations in Mexico. Remember that our strategy has been to contract long term dollars with private sector. So, we're really not seeing any effect in any of our markets directly. If you're talking about solar panels in the US, both sPower and our Distributed Energy have sufficient panels on contract and on attractive terms for '18 and '19. So we're well positioned and quite frankly some of the uncertainty favor I think the bigger players such as us.

Steve Fleishman -- Wolfe Research -- Analyst

Okay, good. And then just in terms of -- so it sounds like the kind of accelerated renewables investment is already embedded in your 8% to 10% growth rate through 2020, that's correct?

Andres Gluski -- President and Chief Executive Officer

That's correct.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. And could you be -- to the degree that it's still the same number and that's additive to the growth, could you be a little bit more clear on what areas maybe are little less than before, are you kind of higher within the range?

Andres Gluski -- President and Chief Executive Officer

Well, I think, again, we are within our range, I would say. This is on our strategy of greening our portfolio. Remember, we will also be selling down some assets as we've been doing. So you have the give and take. But basically the way I think about this, the overarching theme here is really derisking. So in derisking we're going toward more longer-term contracts, more dollar contracts, less construction risk, because they are more individual small projects rather than large projects. And we obviously have a contingency in our numbers. And, so stay updated, but basically this is a very positive news. I think that if you notice the chart we put up for the returns on renewables in the US increased, we had 10%. Average IRR is up to 11% and we will continue -- we think we'll continue to make progress there. So overall, I think the news is very good and the way to think about it is our portfolio continues to be less risky than the portfolio in the past and it's in line with an investment grade company.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. And then just maybe lastly, since sPower is still relatively newer to the company, can you just maybe give a little more color on kind of the process from -- I think, you said it's done better than you expected operationally, I assume financially as well. So far, is that true?

Andres Gluski -- President and Chief Executive Officer

Yes, the answer is yes. I mean, again, we tend to be quite conservative on our terminal values, on our growth prospects. So when we bought it, if you recall, on our earnings call, we are talking about 500 megawatts a year of signed PPAs and obviously we've done better. At the same time, we were hitting our return criteria and finding ways to improve that. So I'd say, overall, it's a good story.

Steve Fleishman -- Wolfe Research -- Analyst

And the expansion of the growth is more because you're just seeing a lot more opportunities at your returns than you initially expected, is that --?

Andres Gluski -- President and Chief Executive Officer

Well, I think a better way to phrase it to you might be that we were conservative. We were hoping for this, but on the other hand, we were conservative in saying what is a P95 case, and that's what we were talking about. So we're very pleased with it. We're also very pleased with our Distributed Energy unit. It's doing probably 3 to 4 times the business we had originally anticipated when we bought that business. So this in general we've been conservative and likewise, we're also being very conservative about terminal values when we calculate our returns.

Steve Fleishman -- Wolfe Research -- Analyst

And then one last question, just in the US, on the solar projects, I assume you book ITCs upon start-up and then wind is just PTCs for the 10 years and just thinking about the way the kind of earnings layout of the two segments?

Andres Gluski -- President and Chief Executive Officer

Yes, generally, we're not a -- we're using tax equity. We expect to continue to use tax equity for the next couple of years, but, yes, from an earnings standpoint, PTC does come through via tax equity to our earnings and then the ITC does help via tax equity in the initial couple of years for solar.

Steve Fleishman -- Wolfe Research -- Analyst

Thank you.

Operator

The next question comes from Lasan Johong of Auvila Research Consulting. Please go ahead.

Lasan Johong -- Auvila Research Consulting -- Analyst

Thank you. Great call. I love the clarity. So I appreciate it. Thank you very much. But I've got a few questions. A, Andres, the pipeline business in Dominican Republic, is that going to be a -- is that a one-off project or is this something that you guys want to delve into more deeply on a more broader basis?

Andres Gluski -- President and Chief Executive Officer

We have one pipeline in the Dominican Republic going from Andres to our DPP facility. So this would be getting us to a larger market because it's not only within Santo Domingo, it's going to the east, where there is a --

Lasan Johong -- Auvila Research Consulting -- Analyst

No, I understand that, but -- I apologize for interrupting. I understand that, but is pipeline going to be another investment vehicle going forward or is this going to be on a one-off basis depending on the need for a particular project?

Andres Gluski -- President and Chief Executive Officer

Basically I would say we're not getting into the pipeline business. I mean, if pipeline is needed, for example, in Panama to a specific demand, maybe like there is couple of plants within, say, a 10-mile radius, then we will build it. But it's very much tied to the facility. So we're not going to build separate pipelines and aren't sort of helping us realize the value, the value that our storage and regasification has. So it will be very linked to that. We're not getting into the pipeline business otherwise.

Lasan Johong -- Auvila Research Consulting -- Analyst

Great, perfect. On the investment grade rating, once AES obtained investment grade rating it kind of frees up a lot of issues that were kind of handcuffed, if you will, in past transactions. So is it possible at that point to bring some businesses up to the parent level, say, for example, DPL and IPL could be at the parent level to ensure, for example, that the interest expense reductions are not limited at the parent level, something like that or are there any other structural changes you would make with attaining of the investment grade rating?

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

Yes, it's Tom. I don't think we will change our basic philosophy of having our subsidiaries be stand-alone non-recourse entity. As you know, most of those entities are investment grade rated or investment grade structures in the event they are not in investment grade countries. DPL has recently become investment grade. So I don't think it will change and the changes you said would not help us from a -- structural changes like that would not help us from the US tax perspective. In general, we feel the shift to investment grade, we think, will help our -- what we are primarily focused on is, for our equity valuation, I don't think it's going to change. There aren't things that we cannot do today that we will be able to do. In other words, I feel quite comfortable with our financial flexibility as we stand today and (inaudible) further support and demonstration of our improving risk profile.

Lasan Johong -- Auvila Research Consulting -- Analyst

Perfect. Tom, at some point, the cash flows are going to be kind of overwhelming and you will not be able to use that money to pay down debt. So what's the kind of a longer-term plan for that massive excessive cash flow coming? More dividends, are there investments?

Andres Gluski -- President and Chief Executive Officer

I think we will use our capital allocation framework and we'll keep you updated and we'll have to see. But I think, again, what Tom was saying, we've been able, I think, to do a number of very good sales of assets, of non-core assets and part of that is, we really had the financial flexibility to wait until the timing was right and get the right deal going forward. So becoming investment grade is, I think, will give us even greater financial flexibility and make us more robust for any changes in capital markets.

Lasan Johong -- Auvila Research Consulting -- Analyst

Yes, but what are you going to do with all this cash flow coming at you in the next -- beyond the next three or four years? Well you can't use that money (inaudible) paydown debt, there is not any large debt left to pay down. So what's your plan for that excess cash?

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

Again, we will keep you updated when that happens.

Lasan Johong -- Auvila Research Consulting -- Analyst

Okay, last question. AES has gone through an incredible amount of transformation since 2000. I've been following it since 1998. What does AES look like in five years? I have a pretty good understanding of the picture now, because of today's call, but I just want to get it straight from you guys. Are you guys shifting more and more toward renewables and kind of laying back on conventional generation, is that kind of the idea of where AES wants to go?

Andres Gluski -- President and Chief Executive Officer

Well, definitely, as I said, we are reducing risk and part of that is greening the portfolio. We think that's part of our risk reduction program. That's also quite frankly in some markets where the demand is. If you want to get new PPAs in the US market, it's heavily weighted toward renewables. Now, we do see a transition period. We do think that having the existing conventional assets gives us an advantage because renewables are energy, but they're really not capacity. So there are two ways to get capacities. You can either put in batteries and that's great, because you can sell a lot of batteries. But that, you're talking about hundreds of billions of dollars globally that would have to be invested.

And in the transition, you can use your existing plant, be it hydro, gas or coal. And actually some of the green blend of extend, we're seeing it has very interesting possibilities, which is the combination of low cost energy from renewables certain hours of the day, combined with the capacity of the coal plants, for example, in some markets, or gas plants. So what do I think of the next five years, well, we will be leading that transition in many markets. We will continue to be leading in the new technologies, whether it'd be combining solar storage or quite frankly combining solar with conventional as well. We hope to be a leader in that market as well.

Lasan Johong -- Auvila Research Consulting -- Analyst

Excellent. I just forget [ph], one more question. In Vietnam, you said you are going to duplicate or replicate the Colon type project. Does that mean that you would also be looking to the potential of exporting gas from Vietnam to, say, Cambodia and Thailand?

Andres Gluski -- President and Chief Executive Officer

In this case, I mean, we'd be tolling, so it'd be a very big facility and that would be -- there are several tranches of combined cycle gas plants that go with that. So at this stage, I think that the possibility exists. We have a MoU signed with PetroVietnam and it would have to be really what their policy is at that point. So that's ways off, as I said, if -- that would be more like a 2023 project.

Lasan Johong -- Auvila Research Consulting -- Analyst

Thank you. Great call.

Andres Gluski -- President and Chief Executive Officer

Thank you.

Operator

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

Ahmed Pasha -- Vice President, Investor Relations

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

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 56 minutes

Call participants:

Ahmed Pasha -- Vice President, Investor Relations

Andres Gluski -- President and Chief Executive Officer

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

Ali Agha -- SunTrust -- Analyst

Angie Storozynski -- Macquarie -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Christopher Turnure -- JP Morgan -- Analyst

Steve Fleishman -- Wolfe Research -- Analyst

Lasan Johong -- Auvila Research Consulting -- Analyst

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