愛依斯電力 (AES) 2007 Q3 法說會逐字稿

Good day. My name is Jackie, and I will be your conference operator today. At this time I would like to welcome everyone to the AES third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Thank you. It is now my pleasure to turn the floor over to Ahmed Pasha, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you. Good morning and welcome to our 2007 third-quarter earnings conference call. Joining me today are our principal speakers Paul Hanrahan, President and Chief Executive Officer, and Victoria Harker, Executive Vice President and Chief Financial Officer. Victoria will provide an overview of our quarterly performance, followed by Paul who will provide an update on our business development activity.

Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. (inaudible) may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in our filings and in our Investor Relations website, www.AES.com/InvestorRelations.

And now I would like to turn the call over to Victoria.

Thanks, Ahmed, and good morning, everyone. As you have seen from our press release, it was a good quarter in many respects, both in terms of operational results and business development achievements.

Before I get into further detail, let me start by talking about a number of financial transactions we completed after the close of the third quarter. On October 15 we completed a $2 billion unsecured financing upsized from our original planned offering of $500 million. This was a very significant transaction for us, and we were pleased at the market's positive receptivity to the offering. This was undertaken to achieve greater flexibility in our capital structure, gaining about $1.4 billion in proceeds for refinancings.

Following the completion of the tender offer, we expect our secured debt as a percentage of total parent debt to be approximately 17% as compared to 41% prior to the refinancing. Additionally we extended our maturities and locked in favorable long-term rates, terms and conditions on our new debt. The average cost of the new notes is approximately 100 basis points lower than the debt it replaces with improved covenants as well.

Also, we continued our portfolio management initiatives with the sale of a 10% interest in Gener, our generation business in Chile on October 26. Net proceeds from this transaction were approximately $300 million. This transaction increased the liquidity of Gener's shares on the local stock market and will improve our access to local markets in the future for financing the growth initiatives we have undertaken there.

Both of these recent transactions are illustrative of the real progress we're making in improving our overall capital structure, allowing for the pursuit of the strategic initiatives highlighted in our five-year plan. Paul will give an update on business development later in this call.

Now let's turn to a more detailed review of the third-quarter and year-to-date results. One thing to keep in mind as you listen to the quarter-over-quarter comparisons is the restructuring we did in Brazil in the third quarter of last year, which reduced restrictions on dividends from our Brasiliana subsidiary.

As a result of that transaction, we have received over $75 million in dividends from Brazil year-to-date. The restructuring resulted in a non-cash after-tax charge of $500 million last year or $0.76 per diluted share in the third quarter 2006. You may also recall that due to the release of a tax valuation allowance, it also resulted in a $0.07 benefit to adjusted earnings per share in the quarter. Excluding the impacts of the Brazil restructuring by comparison, third-quarter 2007 was more significantly impacted by Argentine restrictions on exported natural gas to Chile and by lower water volumes at our hydro plants in Argentina due to the droughts there.

Operational improvements in North America generation and contributions from new businesses which came online this year helped to partially offset these negative impacts. During the third quarter, revenue grew by $524 million or 18% to $3.5 billion. Specifically $174 million or 6% of that growth was attributable to favorable foreign currency rates, primarily in Brazil. The remaining 12% increase was primarily due to higher prices and volume across all of our segments, particularly at Gener in Chile and at Eastern Energy in New York, as well as contributions from TEG and TEP, the coal-fired plants we acquired in Mexico during the first quarter of this year. Year-to-date revenues have increased $1.3 billion or 15% with approximately $381 million or 4% of that increase attributable to favorable foreign currency rates.

Excluding these FX impacts, increases in revenues year-to-date have been primarily driven by higher prices partially due to the pass-through of higher costs and higher volumes, as well as contributions from the new businesses, particularly TEG and TEP plants in Mexico. Compared to third-quarter 2006 gross margin increased by $14 million to $840 million, primarily due to favorable FX, higher prices and volume at Eastern Energy, as well as the contributions from TEG and TEP for a combined impact of approximately $99 million. These increases were offset by higher costs and lower volume at our businesses in Argentina and Chile, which impacted gross margin by approximately $102 million.

Year-to-date gross margin decreased by $14 million to $2.6 billion. This decrease was primarily driven by the impact of gas restrictions and the droughts in Argentina, Chile and Southern Brazil, negatively impacting margins by approximately $158 million.

Also, as anticipated, we have $68 million in lower excess emissions sales compared to the first nine months of 2006. These impacts were partially offset by favorable FX, higher process prices and volumes at Eastern Energy and contributions from the new businesses.

Let me spend a minute now to more specifically address the situation in Argentina and its impacts on our results. Gas supply in the Argentine market is increasingly scarce, and exports have been packed and/or curtailed. Substantially all of the gas used in the Chilean power sector is currently imported from Argentina, so these restrictions have a direct impact on our Gener operations. During 2007 Gener has experienced higher costs associated with burning more expensive alternative fuels and purchasing energy at higher spot prices to fulfill their sales contracts. The Chilean regulator has reacted to the gas shortages by raising the regulated price for energy or the node price by 60% since November of 2006, including a recent increase that became effective November 1. Because of the steadily increasing node price and because the Southern Cone is moving into its summer season, we would expect natural gas demand in Argentina to decrease. We do not believe gas curtailments as a result will have as large an impact on our financial results for the remainder of this year.

Additionally we are further encouraged that the Chilean regulator has provided incentives for new more cost-effective thermal generation to be added to the system by requiring distribution companies to enter into long-term contracts. This is a market opportunity for us that Paul will discuss further in the call. As new non-natural gas-fired plants come online in the Chilean system, we would expect any residual impacts from the natural gas restrictions to be resolved.

G&A costs for the quarter increased by $26 million when compared to last year to $93 million, primarily due to higher spending associated with the strengthening of our financial infrastructure, material weakness remediation and the acceleration of our implementation of SAP worldwide, as well as higher levels of business development activity across the globe.

Interest expense net of interest income decreased by $32 million when compared to third quarter 2006, and other expense net of the other income decreased by $22 million. Asset impairment expense increased $38 million quarter-over-quarter, primarily due to a $25 million impairment at our 120 megawatt Placerita plant in North America due to a turbine failure there. Our effective tax rate for the quarter was 37% compared to a negative 3% in 2006. This increase was primarily due to the effects of the Brazil restructuring recorded in the third quarter of 2006. Excluding the favorable tax benefit and the pretax book loss associated with the restructuring, the effective tax rate for the third quarter 2006 would have been 31%. The remaining increase was due in part to the impact of an appreciating Real in certain of our Brazilian subsidiaries.

Weighted average shares outstanding were 675 million for the quarter versus 658 million in third-quarter 2006. Our trust preferred securities were not dilutive to either quarter. The increase in shares was due primarily to the dilutive effect of stock options and restricted stock in third-quarter 2007. Due to a reported loss since the third quarter of 2006, there was no dilutive impact from options or restricted stock.

In the presentation you will find that we've summarized the drivers of earnings from a quarter-over-quarter standpoint. Excluding the impacts of the Brazil transaction, operations in Chile and Argentina negatively impacted quarterly results by approximately $0.07. This is partially offset by improvements in other operations, primarily driven by increased prices at Eastern Energy and contributions from TEG and TEP of approximately $0.03 with favorable foreign currency translation accounting for approximately a $0.01 of that impact.

Increased G&A costs impacted the quarter by approximately $0.02 per diluted share, and the impairments recorded in North America had an impact of approximately $0.03. Other improvements in nonoperating items, including the decreases in net interest expense and net other expenses, positively impacted the quarter by approximately $0.03. We reported diluted earnings from continuing operations per share of $0.14 compared to a negative $0.56 in the third quarter of 2006. Adjusted earnings per share was $0.18 for the third quarter 2007 and $0.30 for the third quarter 2006.

Here are some additional financial highlights from the third quarter. Net cash from operating activities decreased by $187 million to $741 million, primarily due to the sale of EDC, our Venezuelan subsidiary, in second-quarter 2007. Excluding the impacts from EDC, net cash from operating activities would have decreased by $19 million. Depreciation and amortization expense from continuing operations was $238 million for the quarter.

Total capital expenditures were $557 million with $389 million of this spent on gross CapEx principally at Maritza, projects in Chile and on wind development initiatives. Maintenance CapEx was $168 million for the third quarter with $56 million of that related to environmental projects primarily at IPL, New York and Kilroot.

Free cash flow decreased by $159 million to $573 million, primarily due to the sale of EDC. Excluding the impacts of EDC, free cash flow would have increased by $20 million. Year-to-date cash flow from operations decreased by $31 million to $1.8 billion. Excluding the impacts from EDC, cash flow from operations would have increased by approximately $162 million. Maintenance CapEx was $679 million with $171 million of that related to environmental projects, primarily IPL and Kilroot.

Free cash flow has decreased year-to-date by $135 million to $1.2 billion, also driven by the sale of EDC. Excluding those impacts, free cash flow would have increased by $81 million.

Subsidiary cash distributions at the parent were right on track at $361 million for the quarter and $756 million year-to-date. This includes the receipt of $97 million in dividends from EDC. Cap liquidity remains strong at $1.5 billion.

Now let's turn to some of the third-quarter operating segment highlights. In our Latin American generation businesses, the biggest contributor to the $229 million increase in revenues was higher rates and volumes in Chile and Argentina of $150 million. As I discussed previously, the increase in prices did not fully compensate for the increased costs in Chile associated with the natural gas restrictions. Gross margin decreased by $84 million in comparison to third-quarter 2006, primarily driven by increased costs and lower volumes in Chile and Argentina.

In the Latin American utilities, revenues increased by $141 million, primarily due to favorable effects of $135 million. Gross margin increased by $71 million, principally due to favorable FX rates of $55 million and lower costs in Brazil of $33 million.

In our North American segment, generation revenues increased by $76 million, primarily due to $57 million in contributions from TEG and TEP in Mexico and $25 million in higher prices and volume at Eastern Energy in New York. Gross margin increased by $47 million, mainly driven by New York's higher stock prices and the contribution of the new businesses.

At IPL, our North American utility, revenues and gross margins remained relatively flat. In Europe and Africa generation revenues increased by $20 million, primarily due to higher rates and volumes, a $15 million in Kazakhstan and $3 million in favorable FX rate. Gross margin decreased by $3 million, primarily driven by lower emissions sales of $4 million in Hungary. Europe and Africa utility revenues increased by $26 million, mainly due to increased rates of $14 million in the Ukraine. Gross margin decreased by $8 million primarily due to the reversal of a VAT tax accrual at SONEL in Cameroon in the third quarter of 2006.

In our Asia segment, which includes the Middle East, higher volumes in Pakistan and Sri Lanka drove a $44 million increase in revenues. Gross margins decreased by $6 million, primarily due to lower volume Chigen in China. While we did enjoy increased revenue in Pakistan and Sri Lanka from higher volumes, we saw a relatively neutral impact to gross margin due to the associated increase in fuel costs.

Before I turn the call over to Paul, I would like to give you an update on our outlook for the remainder of the year. Earlier in the year we had given 2000 guidance on a number of different metrics. We have included a slide on our year-to-date performance compared to those metrics. Year-to-date we have earned $0.82 adjusted earnings per share, and we expect to meet our 2000 guidance target of a $1.07, as well as our other guidance metrics.

I would now like to turn the call over to Paul who will talk about our business development initiatives.

Okay. Thanks, Victoria, and good morning, everyone. Victoria has covered an update of our review of the 2007 guidance. I would just like to say we have had a reasonable quarter despite some weakness results from our businesses in the Southern Cone. Some strong performance by other businesses, notably our North American group, helped to cover the shortfall.

What I would like to do this morning is to update you on some of the progress that we have made in developing projects which will be contributing to meeting our growth goals in the future. Let me begin with our core power initiatives.

As you know, we recently won bids for over 1700 megawatts of generating capacity this quarter in the Philippines and in South Africa. We expect to take over the operations of the Masinloc baseload facility in the Philippines and to break ground in two peaking projects in South Africa, both in the early part of 2008.

One of the other markets where we have seen some good opportunities for development is Chile. With annual demand forecasted to continue growing in excess of 6% per year and the opportunity to replace existing natural gas-fired capacity with plants that are more cost-effective and reliable given the reason shortfalls in gas from Argentina, it is expected that Chile will require over 4000 megawatts of new generation capacity by 2011. And, as Victoria mentioned, we are pleased with the regulatory actions which were needed to increase energy prices by 60% in the past year, principally as a reaction to the restrictions on natural gas sourced from Argentina.

We were also encouraged by the new regulations requiring distribution companies to secure supplies for both expiring contracts and new growth by executing long-term price index power purchase agreements. Large consumers have also shown an interest in securing new long-term contracts. The recent cash shortages in Chile and the subsequent actions by the regulator have confirmed our view that there continue to be near-term attractive opportunities to add new capacity, particularly plants that do not require natural gas as a fuel.

We currently have three coal-fired projects under construction in Chile with a total capacity of 571 megawatts. The commercial operation dates are expected in the 2009 to 2010 timeframe, and all of these will have long-term contracts.

In addition to these plants under construction, we have a pipeline for over 2000 megawatts of projects in differing stages of development in Chile. In total, these amount to 500 megawatts of hydro and 1500 megawatts of coal-fired generation.

In the Northern grid, which is not interconnected with the rest of Chile, we have a 600 megawatt coal-fired plant in development with an improved environmental impact assessment. The mining industry is the dominant consumer of energy in the Northern grid, so this plant would most likely be contracted to one or more of the mining conglomerates.

In the central region, which is called the SIC, where over 90% of the country's population lives, we have 1500 megawatts of projects with EIA pending final approvals. These include a 530 megawatt hydro plant and two coal-fired plants totaling 967 megawatts. For all these projects, we plan to negotiate with counterparties to enter into long-term supply contracts. Now let me turn to Brazil.

Brazil, of course, is one of the markets where we have a continued strategic interest. Our businesses in Brazil have strengthened over the last few years both operationally and financially. As Victoria mentioned, year-to-date we have received over $75 million in dividends.

As you know, our Brazilian partner, BNDES, has announced its intentions to sell its shares in Brasiliana, the legal entity which owns the majority of our businesses in Brazil. Given our contractual right of first refusal, we have been approached by several potential partners to team up to exercise this right, and we're seriously evaluating these options. We expect the auction and the right of first refusal period to be in the December/January timeframe, and we will be keeping you posted as this process moves forward.

I would also like to spend a moment on our projects in India, a market where I feel there is enormous opportunity. We have two projects being developed in two different states in India, and these are states where the bulk of the indigenous coal in India is located. These include one plant which would be an extension of our existing plant in the state of Orissa where we operate in partnership with the state government.

In addition, we are developing a new greenfield plant in the state of Chhattisgarh, which is just next to Orissa. Both of these plants will be located near the coal mines and would have a specific coal mine allocated to each. The size will be in the range of 1000 to 1200 megawatts. Of the second Orissa project, the joint venture has been already allocated the rights to the coal mine and just yesterday received the coal block allocation for the project in Chhattisgarh. Financial close and the start of construction in both projects is expected to occur sometime in 2009.

We're also making some good progress on our 430 megawatt combined cycle gasturbine plant being developed in Northern Ireland. The project is expected to close in the third quarter of 2008 with the target commercial operation date in 2011. The capacity from this plant will be sold into the single wholesale market that is being created between Northern Ireland and the Republic of Ireland. Under this new market generation plants, we paid a spot price, plus a capacity payment, and the capacity payment has been designed to attract new investments. The progress in this project has been good. The grid connection offer has now been received and is favorable. Planning permission has already been secured, and we are in the midst of the environmental permitting.

Now let me turn to talk about our alternative energy efforts. First, let me talk about wind. We continue to make good progress towards our target of adding 2100 megawatts of capacity over the next several years. We began construction of the 170 megawatt Buffalo Gap III wind project in Texas, continuing our expansion of the sites in Texas, including the closing of the construction loan and tax equity commitment. Texas remains the most aggressive installer of new wind capacity in the US, and we feel confident about further opportunities there.

We have also made good progress in developing our business internationally with good progress in places like China, Turkey, Bulgaria, Scotland, France and Greece. Furthermore, we have taken steps to reserve wind turbines which are in short supply and will be needed to meet our buildout goals.

We also continue to advance the development of our carbon offset business, which we call Climate Solutions, with most of our visible success in the phase of aggregating a pipeline of growth opportunities. Our current pipeline of projects in development has more than doubled from the 5 million tons where it stood at the end of the second quarter. Not all this is expected to close, but it is indicative of the number of opportunities that are out there in the market today.

The types of projects in our interactive pipeline now include landfill gas collection, and these will be in China and Central America. Lighting efficiency projects in India. Wastewater treatment projects in Vietnam, Central and South America. Animal and agricultural waste. These would be in Malaysia, Indonesia, China, Russia, Ukraine and Poland.

In addition, throughout the Company, we are developing renewable generation projects such as solar, small hydro and biomass, which will generate offsets that are important to the overall economics of these low carbon sources of energy. We expect to have about 15 projects either in operation or under construction by year-end with a significant ramp up in 2008. Projects expected to be under construction include those involving palm oil mills, farms and landfills. We continue to believe that this business is an exciting and attractive area for investment for AES going forward, and the world is clearly moving towards limiting carbon emissions to the atmosphere.

All-in-all we had a good quarter in terms of development progress. I feel that these successes are positioning us well to meet the goals for quality growth that we laid out for you earlier this year.

At this point I would like to open up the call for questions you may have. And, operator, if you could please open up the line for questions?

(OPERATOR INSTRUCTIONS). Lason Johong, RBC Capital Markets.

I wanted to flesh out this Argentina/Chile issue a little bit further. Is it my understanding that there was a combination of cascading events, the hydrology issue in Argentina compounded by natural gas curtailment. Therefore, could I assume then if one of the two did not exist that the problem would have been a lot less severe?

Yes. This is Andres Gluski. You are right. There was a series of events which came together. It was a very dry year in Argentina. It was a dry year in Chile. The gas cutoffs were particularly severe. And, in addition to that, we had a forced outage at our coal plant in Argentina, CTSN, during the most lucrative month of the year in August.

So this was a particularly difficult year in that it was extremely dry in Chile, in Argentina, and we had a forced outage at our coal plant.

It is kind of a combination of very unusual events coming together to force this to happen then?

Yes, it was the most severe gas curtailment, and it was also in the basin where our hydros are in Argentina like the driest year in 40 years.

Wow. What in your opinion is Argentina doing to rectify the gas shortfall in their country?

In the case of Argentina, there are I would say two aspects. One is the price of the gas domestically. The price has been controlled, so consumption has been very high.

The other has to do with the increase of imports from Bolivia into Northern Argentina. So these are the two events which are affecting very much the availability of gas in Argentina.

This is Paul. It is probably worth mentioning that probably the more important things are what is going on in Chile where I think they have realized that they need to get more reliable sources of supply. They really became over-reliant on Argentine gas. And that is really driving them to look for other sources of fuel for the plants they have. That is why they are looking very heavily at more coal-fired capacity, more hydro capacity and looking very seriously at adding LNG.

So I think what Chile is doing is saying that they cannot necessarily rely on as many imports as they have in the past. And I think that is what has created the opportunities for us to expand our business in Chile is they have to add more nonnatural gas-fired fuel capacity.

That is great. Also, I was somewhat surprised to hear that Chigen volumes were down. Given the way the economy in China is performing, that seems a little bit of a surprise, is it not?

I think what you have gotten -- we have different plants that are out there, and you're operating in some cases smaller markets. So we do see in some situations where the plants may not be dispatched as much. There is not an economic dispatch that goes on in China. In some cases, if there is -- if somebody has added a big coal-fired power plant to the mix and they get a short-term localized set of overcapacity, that would reduce the generation by one of our plants. But we think that is probably not something that is going to be in the long-term. (multiple speakers). Yes, Mark Woodruff, who heads up our Asian business, he could comment on that further.

One of the reasons is that a number of our plants had greater dispatch in the first two quarters of the year. Many of the plants in China have annual allocated amount of dispatch for their tariffs, and the Chinese governments will try to balance dispatch among all users. And so while we had greater generation in the first two quarters, dispatch was reduced for our plants in the third quarter, but overall in line with expectations for the business for the year. So it was a question of intrayear balancing of dispatch.

I see. I understand. One last question on China again. Three (inaudible) down appears to be in jeopardy of a lot of different things, environmental effects potentially collapsing. Does that change your view on your business plans in China and how you look at the potential over -- what we thought was going to be an oversupply in China?

Well, I think with respect to our business plans for China, we're focusing on a variety of different strategies, mostly trying to capitalize on opportunities for renewable power in concert with our climate change business. We believe that the Chinese policymakers are very supportive of environmentally friendly initiatives, particularly for Western investors, and that we can be very competitive in that segment as opposed to trying to compete with a number of the very well-established large generation companies.

Okay. Understood. Thank you.

Elizabeth Parrella, Merrill Lynch.

There have been periodic news stories in the local press about your CEMIG ownership interest that BNDES may be receptive to, some type of either debt swap or debt forgiveness or allowing you to sell your shares. And I'm wondering if you could comment on that, and if you could also remind us what your share of debt is related to the CEMIG investment and what the market value is currently, and whether as a result, there is any potential transaction you might wind up with some cash that could come back?

This is Andres. Regarding our ownership of CEMIG shares, it is through an entity called SEB. As there has been an announcement previously some months ago that we were engaged in negotiations with BNDES, I really cannot give any further details about that. This is something that in terms of the value of our holdings of the shares current market price is somewhere around I think about $1.4 billion. The total amount of debt that we had originally has a compounded interest in certain other things. It is somewhat below that amount. I really cannot go further into that. But the situation with BNDES continues, and that is one holding that is not part of the Brasiliana family.

And just be clear though, those numbers you quoted are at the sub-level not the AES share of that, correct?

That is correct. That is at the SEB level.

Okay. Another question for you. You mentioned that you're looking to close on the South Africa peaking financing and the Philippines acquisition it sounds like early '08 now rather than the fourth quarter. Could you tell us what your equity contributions for each of those projects is going to be?

Yes, the equity contribution for Masinloc is about $500 million. (multiple speakers). But we think it may come down a little bit to a lower number, say between 400 and 500 million. And for South Africa --

It is less than $100 million.

Yes, it is a smaller amount.

And you have not disclosed yet what the total capital cost on South Africa is. Can you give us at least a rough feel on that?

We have not closed that deal yet, so I think we will disclose that when we close the deal. But at this point, we have not disclosed that. So we are still going through the ABC process.

The fact that we've got -- it's going to be fairly highly levered because of the contracts, so it is going to be more like your traditional contract generation projects in good countries. So you would expect it to be pretty highly levered.

Okay. And maybe one other question. Just on the climate solutions business and some of these renewable projects that you're looking at, on these renewable projects are these kind of really small projects, or are these things you would develop only with contracts? Kind of more of a traditional power project type structure, or are they much smaller things? You mentioned some -- you got like 15 projects sort of in the biomass area I think.

Yes, why don't I let Bill answer that question because it really does cut across the globe, and we're looking at a number of these types of projects.

This is Bill. I don't think there's one answer for you. Just to clarify something, I do not think Paul said 15 projects in the biomass area. I think what he said was by year-end we expect to have completed or be in construction on 15 projects generally across the Climate Solutions business. So it also includes the Methane Capture sub.

With the renewable projects, I mean we're seeing lots of opportunities either to do the renewable generation directly ourselves or to work with local developers and provide the carbon solutions part of that equation. And so it is not -- they won't necessarily all be AES-owned generation, although I think it is leading to a lot of opportunities. And it depends again on the type of the renewable generation.

So, in the case of biomass and in some of the hydros, they tend to be smaller projects. In the case of wind, those are bigger projects comparatively to the biomass and hydro, still smaller than coal plants and others that generally have increased size.

Bill, if I could just follow-up with one additional question. Holding wind aside since we can all sort of relate to that and it's structured with contracts typically, as you think about the rest of this Climate Solutions business, how much capital have you put in, how much do you expect to put in, and when does this sort of group of businesses become profitable?

I do not know offhand the amount of capital that we have put in to date. The capital, the approach is the greenfield approach. So the capital goes in in relatively small amounts, and we can modify that to respond to the market opportunities that we're seeing either up or down.

As far as when we expect the business on an all-in basis to go positive, I don't know offhand. I think as we go through the year-end stuff and think about guidance for next year, I think we can kind of update that. I think it is either late '08 or beginning of '09.

Just on that point, the CER has become almost an integral part of our business in terms of what we need and in some cases we will need to buy and in some cases we can generate. And what we're finding is, through this effort just many of our plants doing efficiency upgrades can generate CERs to justify the investments we would make, and we would basically improve the efficiency of the plant and, therefore, reduce carbon emissions to the environment. So I think you're going to see a whole range of things.

But the other thing I would mention is that even with these small renewable plants that you see out there, typically in countries there will be some incentive mechanism that may not necessarily come with contracts, but in some cases it would look like a contract, or it would be merchant but with enough incentives in there to make it economic. But generally these are attractive. When you combine the CERs with the incentive, it seems it almost would have to encourage renewables. These are attractive investments.

But you typically need the CERs as part of that to make it an economic investment. And I think what we're finding is the skillset we're developing in producing the CERs, while understating the value of CERs getting in inventory, is really allowing us to better value those than some of our competitors could.

I think this is a business where it really would be helpful if you could try to give us more information going forward in terms of how you are generating these, whether they are being used internally or sold on the market, etc., how much capital is getting put in. It is just different in some key respects from your other dimensional businesses.

Our plan is to do that because I think it is important that you understand that as well. Right now the capital that goes in terms -- these are not very capital-intensive projects for the most part. We're spending most of our money right now in the -- I think they are probably more labor-intensive in the development phase. So we're spending a fair amount of time and development money developing these projects. A very limited amount of capital has gone into building these projects. We only have a handful that are in construction right now, but that number will pick up next year. I think we will be able to give you a better sense of that as we sort out how that development pipeline is shaking out.

John Kiani, Deutsche Bank.

Would you consider selling your interest in Kazakhstan? The economic and regulatory environment in that region seems to be a little less predictable and a little more volatile than your other more core regions. Can you talk a little bit about how core that business is to AES longer-term?

Well, I think, let me -- I think the answer is we are constantly looking at the whole range of our assets and portfolio management because we think in today's markets there are going to be good opportunities to do some portfolio management activities.

We do that for two reasons. Really one is I think just to look at the overall economic valuation, what could increase the value of the Company if we were to take some steps. The other part is maybe more related to what you are talking about, which is the risk profile we have.

Kazakhstan is a business that has been doing well. It probably has a fairly high and attractive value in the market today. We like the country, but as always, we will look at the opportunities to sell down bits and pieces of businesses.

A good example being Gener. But I think with Gener what we found is the value of the business has increased quite a bit as a result of the capacity additions we have made. We thought it was an appropriate time to do some portfolio management, really more not because we would like the business, but more so that we thought it would be a good time to take some of the risks associated with any business. When it gets to be a certain size or value of our total amount, we look at possibly reducing that. And that is what we did in Chile. We said the amount of the investment is a pretty significant part of overall AES. It is probably a good thing to do.

Kazakhstan, as well as many other businesses, could fit into the same category of once we say the valuation is good, these are a big part of AES, and it might be a good time to do something. Not that we do not like Kazakhstan. We think it is a great country and a great place to invest. But it might be an opportune thing for us to do in terms of overall risk management.

That is helpful. And then on that same subject hypothetically speaking, if you did sell Kazakhstan or monetize a piece of it through an IPO process or all of it perhaps eventually, what would the use of proceeds be? Would you ever consider buying back some of your common stock?

The answer is absolutely. We will look at -- I mean right now we have a number of growth opportunities need for investment, so we would have a use of proceeds from the potential asset sales. What we will always look at is what is the most attractive investment for us to make. And we will look at what the stock price is relative to what we believe the value of the Company is. If we think that is attractive, we would then be inclined to buy back stock. We're prohibited from doing it right now because of some restrictions we have on our second lien notes, and we have paid off much of that as part of this most recent financing. But we still have some outstanding.

So one of the things we would like to do over the next year or so is to continue to move towards giving us some flexibility to be able to buy back stock when we think it's an opportunistic thing to do relative to other opportunities we have in the marketplace. Because if there are opportunities to go out and monetize assets or parts of assets, that could be something that would be in the best interest of shareholders.

And then another question. As far as the wind generation business, I know you all have put a target out there of about 2100 megawatts by 2011. Can you remind us where you stand today and how you are positioned to get to that target? Could it perhaps grow beyond 2100 megawatts? I have also read in places where you have said that your pipeline is actually closer to 4000 megawatts or maybe more.

Yes, where we stand right now is that the 2100 megawatts would be Buffalo Gap going into construction, that gets us to about 600 megawatts of capacity that is either in operation or under construction. So we're moving towards that goal.

I think it is possible that because we do have a strong pipeline and that pipeline is growing, that we could see that number be greater. A lot of it is associated with the timing. There are some issues with when can you get the wind turbines, which has caused us to go out and basically preorder the turbines so we have enough turbines to meet that goal. But I think as we continue to evaluate the business, this week we have our budget meetings, and we will be talking a lot about what can we be doing with respect to our goals in the future, how much we're going to spend to get to those goals. That is something we will be talking about.

But I think it is very possible that we could exceed that 2100 megawatts. It does look like it is a market that is growing faster. Lots of opportunities out there. And I think one of the advantages that we have as a Company that is I think the most -- even though we see the greatest opportunities for there in the United States and Europe, it is the other countries that we think could be the biggest opportunity for us down the road.

You're seeing the wind projects getting a lot of attention in China. We're seeing these in India. We're seeing them in Bulgaria. We have a joint venture in Turkey where we are developing small hydro projects. But with our team on the ground there, they found that the wind opportunities in Turkey are also very attractive. So I think this global footprint we have is the kind of thing that could cause us to really do some exciting things, not just in the wind area but I think the whole renewable sector as we find out more and more about the opportunities of those countries. And more and more countries are moving towards finding ways to encourage renewables into their generation mix.

Okay. So to summarize what you said, then that 2100 megawatt target is likely pretty conservative, and we could see some upside to that number sometime in the not too -- or in the reasonable future?

That is spinning my comments more than summarizing, but I do think there is some upside there.

Okay. And then one last question is, what is the status of the third-party valuation of Brasiliana? I mean I know you touched on the timing a little bit in your opening comments, but can you give us a little bit more clarity on that?

Yes, they had two valuations. The difference in valuations exceeded the amount allowed under the rules. I believe it was 10%. So they dug out a third-party valuation going on. It will take an average of the three to cover the final number. That should be done in time for the bids to be submitted, which will basically set the floor price at that average. We expect the bid would happen sometime in the -- or the bids would be in sometime in the early part of December, so that valuation must be in sometime before then.

That would then give us a 30-day period, a one-month period, to exercise our right of first refusal. So we would look at the number that comes in, and then we could make the determination whether that is something we would like to do or not.

And it sounds like based on your earlier comments that you have a number of proposals for partners in evaluating that option?

Yes, that is correct.

Thanks a lot, Paul.

Yes. Andres Gluski, he has been more involved. He may have a comment or two also.

I would also like to comment that we also have nonrecourse financing should we choose to exercise the right of first refusal.

Brian Chin, Citigroup.

I am sorry I jumped on the call a little bit later, so I may have missed some comments. But when you say that you are on track to achieve your 2011 growth targets, I just want to confirm the outlook that you have got in terms of EPS increases has not changed, right?

That is correct.

Okay. So we are still looking at a 13% plus EPS growth target year-over-year between now and 2011?

That is right. I think in each year we actually gave ranges of EPS, and we are not making any changes to those.

I would like to hand the floor over to Ahmed Pasha for closing remarks.

Thank you. I want to say thank you very much for everyone for participating today. If you have any follow-up questions, please contact either Hilary Maxson or myself in Investor Relations. And for any media inquiries, please contact Robin Pence. Thanks again and have a nice day.

Thank you. This concludes today's AES conference call. You may now disconnect.