愛依斯電力 (AES) 2007 Q4 法說會逐字稿

Good morning. My name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the AES fourth quarter and full year 2007 financial results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Ahmed Pasha, Vice President of Investor Relations. Sir, you may begin today's conference.

Good morning and welcome to AES Corporation's fourth quarter and year-end earnings call. Joining me today are our principal speakers, Paul Hanrahan, President and Chief Executive Officer; Victoria Harker, Executive Vice President and Chief Financial Officer; and Andres Gluski, Executive Vice President and Chief Operating Officer.

Paul is joining us by phone due to travel. Victoria will provide an overview of our results and a discussion of our outlook for 2008, followed by Paul who will provide an update on our business development and our long-term forecast.

The presentation that accompanies our financial review, together with the earnings press release and our 2007 10-K, which were acquired this morning, are available on our website at AES.com.

Let me remind you that our comments today will include forward-looking statements within the meaning of 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.

Actual results may differ materially from such forward-looking statements. Our discussion of factors that could cause actual reserves or events to vary is contained in our filings and in the Investor Section of our website. Now I would like to turn the call over to Victoria.

Good morning everyone. As you have seen from our press release by now, 2007 was a very good year for AES, one in which we achieved record revenues, solid profits and strong cash flow generation from our businesses. 2007 revenues were up 17% compared to 2006 and eclipsed the $13 billion mark for the first time ever. Consolidated operating cash flow and free cash flow were also particularly strong at $2.4 billion and $1.5 billion, respectively, resoundingly beating our expectations.

We generated adjusted earnings per share of $1.02, which includes a $0.07 onetime deferred tax charge related to a change in Mexican tax law, which was referenced in our March 3, 2008 8-K filing.

We were also pleased with gross margin for the year which totaled more than $3.4 billion, despite severe gas curtailments and low hydrology in the Southern Cone. Our businesses in Chile and Argentina were particularly hard hit, facing increased fuel costs and reduced volumes available throughout the second half of the year. We were able to dampen their overall financial impact to AES through improved operations in our existing North American and European businesses, along with contributions from several new businesses which came online in 2007.

In addition to the performance of existing operations, we also had a very good year with respect to the completion of a number of important transactions. As you know, we went to market in October of 2007 with a planned debt offering of $500 million, which was immediately upsized to $2 billion to meet tremendous demand. This transaction added flexibility to our capital structure, allowing us to use $1.4 billion to refinance secured debt with unsecured debt at lower interest rates, extend maturities, and locking in more favorable terms and conditions.

We also sold a 10% interest in Gener, our generation business in Cuba later that same month due to strong market demand, with net sales proceeds of approximately $300 million. In addition, we recently announced the sale of a portion of our Kazakhstan business. The Kazakhstan sale is expected to close shortly, and will yield approximately $1 billion in immediate cash proceeds to AES, as well as up to $380 million in earnings over a three-year period as a result of negotiated management fee and performance bonuses.

All of these transactions are illustrative of the real progress we're making with respect to managing portfolio risk and increasing the flexibility in our capital structure, better positioning us to pursue and execute the strategic initiatives inherent in our five-year plan.

While Paul will be providing a more comprehensive update on the business development activities later in the call, I would like to now focus on some key financial and operational accomplishments made during the past year. These include finalization of the acquisition, financing and integration of the TEG and TEP facilities in Mexico. We were also recently announced as the winners bids in South Africa. In addition, we also made progress to secure approximately $650 million financing to close our 660 megawatt Masinloc project acquisition in the Philippines. We expect this acquisition to be completed in the early part of the second quarter in 2008.

Beyond this we added more than 400 megawatts of wind capacity to our operating portfolio and initiated construction on the 170 megawatt third phase of Buffalo Gap, which when complete in 2008 will make Buffalo Gap on of the largest operating wind farms in the United States. Our rapid growth in wind generation in 2007 helped us jump into the top five in the U.S. and the top 14 worldwide wind generators according to EER. All of these projects underscore the continuing strength of our pipeline contributions to our long-term projections.

For now though I would like to turn our attention to the fourth quarter results. The fourth quarter of 2007 was particularly strong for us, generating adjusted earnings per share of $0.19, including the $0.07 non-recurring charge related to the change in Mexican tax law. The positive results were primarily due to improved operations at our North American and European generation businesses. In the quarter we also benefited from the onset of the summer season in the Southern Cone region of Latin America, which has brought a measure of relief from the diminished hydrology and gas supply issues experienced during the third quarter.

Overall we continue to feel very positive about the proactive steps being taken by the Chilean regulator to address gas shortages, including raising the price of energy, or node price, by 45% this past year, and providing incentives for new, more cost-effective thermal generation projects to be added to the system. This is a great market opportunity for us to leverage that Paul will discuss further later in the call.

As new, non-natural gas fired plants come online in the Chilean system, we would expect residual impact from the natural gas restrictions from Argentina to be diminished.

During the fourth quarter revenue grew $739 million, or 25%, to $3.7 billion. Of this, $258 million, or 7%, was related to favorable foreign currency rates, principally the appreciation of the Brazilian real and the euro. Much of the remaining improvement is associated with higher prices and volumes across all four of the Company's regions. It also reflects the financial benefit of the addition of TEG and TEP, the two plants in Mexico acquired in the first quarter of 2007.

When compared to fourth quarter 2006, gross margin increased by $20 million to $809 million, benefiting from higher prices in North America and Europe, as well as favorable foreign currency translation, and the contributions from TEG and TEP. These gains were offset in part by higher fixed costs at Eletropaulo, one of our distribution companies in Brazil, and SONEL, our integrated utility in Cameroon, coupled with the previously anticipated tariff reset at Eletropaulo in July of 2007.

G&A costs for the quarter decreased by $5 million to $118 million. Interest expense, net of interest income, increased by $27 million to $358 million, primarily due to the addition of $600 million in senior debt raised as part of the $2 billion senior unsecured debt financing in October 2007, which I referenced earlier.

Other expense, net of other income, decreased by $108 million to $142 million. The higher expense in 2006 by comparison was due primarily to losses associated with the early extinguishment of debt at several of our Latin American businesses.

Gain on investment increased $124 million quarter over quarter due to the Gener secondary share sale in October, while asset impairment expense increased $358 million largely due to a $352 million impairment of Uruguaiana, a Brazilian subsidiary, and a $14 million impairment related to a prepayment advance to AgCert. Both of these impairment were also previously reported in our 8-K filing dated March 3, 2008.

Our effective tax rate for the quarter was negative 226% as compared to 75% in 2006. This rate in the fourth quarter was primarily due to the impairment of Uruguaiana and a change in the Mexican tax law, both of which significantly impacted our effective rate on a onetime basis in the quarter.

Weighted average shares outstanding were 676 million for the quarter versus 670 million in fourth 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 fourth quarter 2007.

In the online presentation you will find a summary of additional details of drivers of earnings from both a quarter over quarter and year over year standpoint.

Adjusted earnings per share was $0.19 for fourth quarter 2007 compared to a negative $0.02 for fourth quarter 2006. Our 2006 results included an $0.11 loss, primarily driven by higher development in overhead costs related to remediation work, restatement charges in Brazil, and restructuring charges at our subsidiaries in Latin America. As discussed earlier, financial improvements in several key businesses account for a significant part of the positive momentum, contributing $0.07 in quarter over quarter improvement.

This improvement is largely related to higher pricing and volume in Eastern Energy, higher capacity payments at Kilroot, and higher pricing and volume in Kazakhstan, as well as contributions from the new businesses, such as TEG and and TEP in Mexico. We reported diluted earnings from continuing operations per share of $0.00 in the quarter compared to $0.02 in the fourth quarter 2006.

Now let's focus for a moment on full year results. Not surprisingly many of the same factors that led to a successful fourth quarter, such as improved North American and European generation performance, the addition of new businesses, and favorable currency translations, also played a key role during the second half of 2007, helping to offset the negative impacts of the gas supply curtailments experienced earlier in the year.

Overall we consider 2007 to have been a very strong year with revenue having reached a record high of $13.6 billion, representing an increase of 17% over 2006. While gross margin did remain relatively flat on a percentage basis, improved operations in North America and Europe and contributions from recent acquisitions lifted gross margin in absolute terms to a robust $3.4 billion, despite the gas supply curtailments and lower hydrology which dampened the operating performance in many of our businesses in the Southern Cone. In addition, reduced energy losses and cost reduction programs at Eletropaulo are helping ameliorate the effects of the 2007 tariff reduction there.

G&A costs for the full year increased by $78 million when compared to last year to $379 million, primarily due to higher spending associated with the higher levels of business development activities, as well as financial restatements, Sarbanes-Oxley remediation projects, and the ongoing implementation cost of SAP worldwide. Interest expense, net of interest income, decreased by $47 million to $1.3 billion in 2007. The decrease is driven primarily by favorable currency translation in the Brazilian real and higher cash and short-term investment balances at certain of our subsidiaries.

With all of the press associated with the current financial turmoil, we should probably point out a few important facts now about AES' investments and financial assets and our capital structure where investors may have some questions.

AES made significant investments in hard assets around the world. That is the nature of our business. However, we did not invest in financial assets, except in those cases where we have temporary pools of liquidity awaiting investment in our core business activities. Most of these cash, cash equivalent and short-term investments are subject to specific covenants in our recourse and non-recourse credit agreements which restrict such investments to conservative, liquid instruments. As a result we have steered clear of auction rate securities, mortgage-backed securities and other related instruments.

AES does access many different debt markets and utilizes many specialized debt financial products in its funding strategy around the world. A key part of the funding strategy is the use of non-recourse financing, particularly called project finance. We have found that even during periods of corporate credit pressure there is still a strong supply of such financing opportunities for well structured projects. The anticipated near-term funding and related financing of Masinloc in the Philippines is an example of the strength of the project finance market at this time.

Returning to our financial results, our other income increased by $242 million to $358 million. The increase is primarily due to a $135 million contract settlement gain at one of our subsidiaries in New York, and a $93 million tax recovery at two of our Latin American subsidiaries.

Other expense decreased by $197 million to $255 million. In 2007 there was a loss on retirement of senior notes at the parent, as well as higher losses on sales or disposals of assets at two of our Brazilian subsidiaries. Gain on the sale of investments increased by $36 million to $134 million. This gain in 2007 is primarily due to the sale of 10% of our ownership interest in Gener. It is important to note that there was no loss in subsidiary investment in 2007, but the loss on subsidiary investment of $535 million in 2006 was associated with the Brazilian restructuring.

Asset impairment expense increased $391 million year over year due primarily due to $352 million charge taken at our Uruguaiana subsidiary in Brazil, resulting from the low volumes of natural gas expected to be available from Argentina. For the full year we recorded foreign currency transaction gains of $24 million.

Our effective tax rate for the year was 42% compared to 36% in 2006. The increase in the 2007 effective tax rate was due primarily to the onetime impacts of the Uruguaiana asset impairment and a change in Mexican tax law in fourth quarter. Excluding the impact of these two items, the full year effective tax rate would have been 32%.

Weighted average diluted shares outstanding were 678 million for the full year, as compared to 672 million for 2006. Our trust preferred securities were not dilutive to the full year 2007 results. The year-over-year increase reflects an increase in basic shares arising from the exercise of stock options.

In terms of earnings, adjusted EPS was $1.02 for 2007, including the $0.07 of charges for the change in Mexican tax law and $0.93 for 2006. As discussed earlier, we benefited from significant operational improvements in North American and European generation businesses, as well as contributions from newly acquired businesses and favorable foreign currency translations. These improvements generated $0.20 EPS, helping to offset the $0.09 impact caused by the hydrology and gas curtailments in Southern Cone, as well as the $0.08 higher G&A in business development spending. We also reported diluted earnings from continuing operations per share of $0.73 compared to $0.27 in 2006.

Overall cash flow continued to be quite strong, both for the quarter and the year. It is worth noting that even with the sale of EDC in the second quarter of 2007, net cash flow from operations for the quarter increased by $12 million to $488 million. Excluding EDC, the year-over-year increase would have been $30 million.

For the full year net cash flow from operations was approximately $2.4 billion, up $6 million year over year. Excluding any contribution from EDC during the year, net cash from operations would have increased by $119 million or 6% compared to 2006.

Depreciation and amortization expense was $249 million for the quarter and $942 million for the year. Maintenance CapEx was $199 million for the quarter. Of this amount, approximately $64 million is attributable to environmental projects, primarily at Kilroot, New York and IPL. Of these, Kilroot's contract has a pass-through cost mechanism, while the other projects are expected to generate a positive economic return for the Company.

For the full year maintenance CapEx was $878 million, with approximately $235 million of that amount invested in environmental projects. This was slightly below our 2007 guidance of $900 million to $1 billion range.

Gross capital expenditures were $705 million for the quarter, and approximately $2.5 billion for the full year. This includes $506 million in expenditures related to growth investments, $393 million of which is associated with projects in construction, including [Marseth] in Panama.

Free cash flow for the fourth quarter increased by $105 million to $289 million, driven mainly by the decrease in maintenance CapEx. For the full year free cash flow remained relatively flat at $1.5 billion. This amount exceeded our 2007 guidance of $1.2 billion to $1.4 billion due to the higher than anticipated cash flow from operations and lower than expected maintenance CapEx. Excluding the impact of EDC, the improvement in free cash flow would have been $82 million or 6% greater than 2006.

Distributions from our subsidiaries, which reflects cash flow generated by subsidiaries prior to paying parent interest expense and G&A, were $343 million, bringing full year distributions to $1.1 billion, which is in line those our 2007 guidance.

Parent liquidity increased to a robust $2.2 billion at year end due to EDC and Gener share sale proceeds, as well as the corporate debt issuance in the fourth quarter. This will provide us with a strong springboard for the pipeline of new projects we're now pursuing in 2008.

In the interest of time I will skip over the segment analysis today, but you will find these in detail in the Investor Relations online presentation. However, before proceeding on to our outlook for 2008, I would like to briefly touch on the positive $3 million noncash operating income adjustment for the period 2004 to 2007, which was restated in our 10-K.

As you know, we previously identified and reported several material weaknesses related to our system of internal controls of our financial reporting. Many of these have now been remediated, leaving only two remaining for testing in 2008. As part of the 2007 year-end closing process in connection with our efforts to mediate a material weaknesses for contract derivative accounting, we reviewed several hundred contracts. Through this extensive review we identified only one contract which required a material adjustment, an agreement between our deepwater business and [a stock ticker TXU] between 2004 and 2007, which had been previously reviewed with the appropriate accounting treatment identified.

Upon further consideration, this agreement contract penalty provision could have been interpreted as a derivative in hindsight. We now believe that it should have been treated as a derivative under FAS 133. This change resulted in a cumulative non-cash adjustment of positive $3 million to operating income for the periods between 2004 and 2007, which on its own while not material in the aggregate, was material on a percentage basis to both 2005 and 2006 operating income, given other financial restructurings in those years.

While no one is pleased with having to restate prior periods for such a small net effect, its size clearly indicated the results of our significant investment in time and resources over the past three years to improve our financial systems, processes and controls. We expect to remediate the final material weaknesses this year. And I'm very encouraged by the hard work and dedication of the finance team worldwide to address these issues while producing the current results in both an accurate and timely fashion.

Now I would like to discuss our outlook for 2008. Coming off a strong 2007, we feel very good about our financial trajectory in 2008, as we continue to pursue projects in our core business and undertake investments in new markets. We expect 2008 diluted earnings per share from continuing operations of $2.43, including a net gain of $1.29, or approximately $900 million, from the sale of our Northern Kazakhstan businesses, which we expect to close in the first half of this year.

We have projected adjusted earnings per share of $1.14 for 2008. This is in line with our May 2007 guidance range of $1.12 to to $1.20 for 2008. It is important to note that our 2008 guidance includes $0.02 of dilution from our trust preferred securities due to anticipated higher GAAP income resulting from the sale of the Kazakhstan assets.

In addition, our revised guidance also reflects approximately $0.04 of additional interest cost associated with the $600 million of incremental senior parent level debt raised during the fourth quarter, $0.02 related to acceleration of our global implementation of SAP, and $0.02 of non-cash impacting expense resulting from the change to Pakistan lease accounting referenced earlier in 2007.

Our guidance also assumes that both the sale of the Kazakhstan assets and the pending acquisition of the Masinloc project in the Philippines are expected to close in the first half of this year.

For 2008 gross margin is expected to be between $3.6 billion and $3.7 billion, an increase of $200 million to $300 million above 2007 levels. Net cash from operating activities is targeted at $2.3 billion to $2.4 billion. We project free cash flow between $1.4 billion and $1.6 billion after maintenance CapEx of $800 million to $900 million, which includes $100 million to $200 million of environmental capital expenditures. Subsidiary distributions are expected to be $1.0 billion to $1.1 billion.

In a few minutes Paul will link our 2008 projections to EPS projections for the next five years, our development pipeline, and compare this to our previous guidance issued in May 2007. And while it is still early in the year, based on the positive business trends we have seen thus far in the year, we believe the 2008 forecast to be achievable, as we leverage existing core power businesses, as well as new opportunities in climate solutions, wind and solar.

I will now turn the call over to Paul Hanrahan for his insights into the current trends, as well as a look at our five-year projection.

Good morning everyone. Let me just start by saying that many good things are happening at AES. We met our 2007 commitments, including operating cash flow and free cash flow, which were two financial metrics that I have focused on particularly. We're also creating a number of good options for investment in our development pipeline in our core power business, our renewables business, and our climate solutions business, which is what we call our greenhouse gas offset business.

With respect to financing our investments, we have accessed the debt markets when conditions have been good. We have used portfolio management as a source of funds, and if you look at optimizing the cost of financing, by focusing on sources that we believe have the lowest cost to us.

Let me start with an overview of some of our potential investment opportunities. There continues to be a significant demand for power in many of the regions in which we currently operate or are poised to enter. Many of these countries already face significant needs for power. In some cases there are supply shortages, for example in India, South Africa, Turkey and Vietnam, or there are dramatic needs for new capacity in the near future, for example in the Philippines.

In India, for example, you have got a 9% GDP growth rate in recent years. The government in India estimates that there needs to be infrastructure investment at $350 billion over the next five to seven years. And power demand is expected to grow by over 7% per year. The current projected needs are 80,000 megawatts in the next five years through 2012. This represents approximately 60% of the current installed capacity of 135,000 megawatts.

The government of India has recognized that meeting demand for electricity is a potential bottleneck for growth of the economy. As a result, they have put key incentives in place, which includes the allocation of coal mine reserves to potential power plant developers. And they have made policy decisions, including tax breaks and priority purchases of renewable power, which have helped to draw investments into that sector.

In Chile, another country where we have been putting a lot of effort, we have seen annual GDP growth of 4% per year. And annual demand growth in electricity is expected to grow at 6% per year. Additionally there's a need for securities supply reasons to replace the existing natural fired gas capacity and for gas-fired capacity. The recent gas cutoffs from Argentina and the subsequent actions by the regulator, which included the increasing of node prices by 45% in 2007, which Victoria referenced, have confirmed our view that there is a near-term opportunity to add new capacity, particularly non gas-fired capacity.

Historically the high margin marginal energy cost in the SIC, which is the Central grid in Chile, and the SING, which is the Northern grid, have been key indicators of the shortage of efficient generation capacity. In the Central grid the average marginal cost during 2007 was $170 per megawatt hour compared to $46 per megawatt hour in 2006. This again reaffirms our view that there is a genuine need for new and diversified capacity in Chile.

Looking at South Africa, a market which we hope to enter in 2008, the GDP is increasing at 5% per year, and the demand for power is increasing at 7% per year. Currently South Africa has a negative reserve margin, which means that it is currently experiencing rolling blackouts. South Africa needs to add 1,200 megawatts each year. And AES is the first international IPT developing greenfield projects in the country. Due to the impending shortage of generation in South Africa and other surrounding countries, they are also planning generation projects to serve the South Africa market, and AES is participating in some of those.

Let me just spend a few minutes on the development momentum and progress in our business lines. We really have a deep pipeline of growth projects. Our core power pipeline is over 30,000 megawatts, of which 16,000 megawatts is in medium to advanced stage development. The geographic breakdown of these projects is in Asia, 39%; Europe, CIS and Africa, 25%; Latin America, 16%; and North America, 20%. We also have a renewable power pipeline of 9,000 megawatts, which includes over 5,000 megawatts of wind, with the remainder being hydro and other renewables.

In our climate solutions pipeline, by the end of December our pipeline of projects in development had the capacity to produce, or more importantly to issue, 19 million offsets annually, up from 12 million at the end of the third quarter of 2007.

Now I would like to provide some additional details about some of the projects that we're pursuing. First, in our core power business I will start with Asia. In the Philippines our acquisition of the 660 megawatt Masinloc coal-fired project is expected to close in April of this year. Nonrecourse financing of approximately $650 million has already been secured.

In India we have a couple of projects that are in advanced stages. First is the expansion of our OPGC project called OPGC 2. This is a 1,200 megawatt coal-based power plant project, with an integrated coal mine located in the state of Orissa, where we already have one coal-fired project operating. This is really a good example of what we refer to as platform expansions, as it is adjacent to our existing 420 megawatt minemouth coal-fired power plant.

Since this new plant already has land, water and other ready support infrastructure, this gives the project inherent permitting and cost advantages. Discussions are in advanced stages with the government of Orissa, our partner in both projects, to finalize the expansion project.

With our development teams' efforts and the state government support, two coal blocks with the total reserves of 530 million tons have been allocated for the project. This was really a major development milestone for the project. We currently expect closing to occur in early 2009, with the commercial operation date in 2012.

The second project in India is called the Chhattisgarh project. This is a 1,000 to 1,200 megawatt coal-based power plant project with an integrated coal mine located in the state of Chhattisgarh. This project is a negotiated coal-based power project being developed by AES in a high demand and capacity short Western grid region. Under the agreement signed with the state government, the government has agreed to provide the allocation of a coal mine. In November of last year the Ministry of Coal allocated to the project a coal block with total estimated reserves of 150 million tons. The water allocation for the project has also been approved, and the Company has made significant development progress in terms of identification of the project site, applications for land acquisition, transmission studies, etc.

Currently our project team is actively working to secure all the required permits. And our financial closure is expected to occur by the third quarter of 2009, with a commercial operation date in early 2013.

Next let me talk about Vietnam. Here we have the Mong Duong project. And this is a project that we have been developing over the past few years. And it is based on an agreement with the government of Vietnam to develop a 1,200 megawatt coal-fired power plant. There the environmental impact assessment is already approved, and the power purchase agreement is expected to be signed during the second half of 2008, with financial close expected to occur in the first half of 2009. Then we would expect the commercial operation date to occur some time in the second half of 2012.

Moving on to Europe and Africa, in Turkey where we have formed a joint venture to develop small and medium-sized hydro projects with our partner in Turkey. In addition to our pipeline of hydro projects, we have also have the potential to close a 196 net megawatt open cycle combustion turbine for the Anatolia region of Turkey. This really is a good example of how we can source potentially attractive projects with local partners, once we become established in new markets. This could represent the first thermal project for AES in Turkey.

Next I would like to talk about South Africa. There we have 1,100 megawatt combined capacity for two peaker projects in South Africa. And these are two projects where AES has been selected as a developer of badly needed peaking capacity in the country. As these are the first IPT projects in the country, we're facing some not inconsequential challenges. These primarily relate to the fact that the country desperately needs the capacity and the financings must close quickly to meet the requisite deadlines imposed by the government. At the same time, addressing the typical project finance issues, with a new program for IPTs add a layer of complexity that can add time. Nevertheless we're committed to this market, and to helping the government add peaky capacity to their system as quickly as possible.

Moving over to Latin America, in Chile we have 700 megawatts of projects in advanced development, in addition to this that are the under construction. One of these is the Angamos project. It is a 470 megawatt coal-fired plant. This has the environmental impact assessment approved, the engineering procurement and construction contract signed, and then power purchase agreement is in the final stages of negotiation. The financing has the lead arrangers appointed, and the port agreement has been finalized for this project. Construction could start in 2008 with a commercial operation date being achieved by the end of 2011.

Another project in development in advanced stages in Chile is the Campeche project. This is 242 megawatt coal-fired plant. The environmental impact assessment is in the final stages of approval, the EPC is signed, and a PPA has been signed with AngloAmerican. And the financing is in negotiation as we speak. Construction here is expected to start in 2009 and having a commercial operation date by the end of 2011.

Let me now talk about our renewable energy business line. First, wind. Wind continues to be a good growth opportunity for us. As of the end of 2007 we had 1,000 megawatts in operation, approximately 200 megawatts in construction, and over 5,000 megawatts in various stages of development. And about half of our pipeline is in the United States. Our access to quality sites, our relationships with major turbine manufactures has provided us with an advantage to grow our wind portfolio in an equipment constrained environment.

I would also like to mention a new area of interest for us, and this would be in the solar photovoltaic project sector. We have had an internal team that has been tasked to identity, to develop, to invest in, and to operate photovoltaic solar generation projects around the world to address the growing global demand for renewable energy sources. We think solar is a natural extension of our existing business, much as wind generation has been, and we see tremendous opportunity for growth in this market.

I personally think that solar photovoltaic business could be where the wind business was say 5 to 10 years ago. Solar represents a good fit for us. It has a good fit with our core contract generation business. These have long-term contracts, typically 20 plus years. They are in stable countries with creditworthy offtakers, and they could be project financed. Solar photovoltaics is a multibillion dollar industry growing at an average rate of 30% a year. And continued rapid growth is expected due to attractive feed-in tariffs, declining manufacturing costs, particularly in the thin-film technology, and carbon reduction targets becoming more important.

Today attractive returns can be achieved in European markets in Spain, Italy, Greece and France, where they have already put in place feed-in tariffs to incentivize solar projects. It is our belief that as costs decline, more countries will find solar PV investments to be economic. And AES is well positioned to expand into other markets with our presence in many countries with high solar potential at our existing expertise in project development, financing, and operations.

Today most of the projects we have been pursuing have been small, but with the ability to aggregate and with an expanding market, this will be in area of increasing interest for us.

Let me now talk about our climate solutions business. We continue to see significant growth opportunities for AES in our climate solutions, or greenhouse gas offset business. In 2007 the global market for carbon offsets improved overall, but we also experienced some significant challenges.

With respect to favorable developments, the market prices for certified emission reductions or CERs, and other offsets continues to strengthen, with CERs starting out in 2007 at EUR14 per CER, and ending the year at EUR17 per CER. Also carbon regulated -- carbon regulatory developments with respect to reducing carbon continues to support an increasing demand for offsets both internationally and in the United States. Further, the pace of CER issuance increased from the previous year, with a total of 76 million CERs issued by year-end, as did volumes of offsets traded estimated at $950 million.

We made meaningful progress to expand our development efforts in Malaysia, Ukraine, Russia and Brazil. Our development pipeline as of year-end 2007 represented prospective projects totaling approximately 19 million tons per year, up from 12 million tons per year at the end of the third quarter of last year. With over 9 million tons per year under AES' control, meaning these have been aggregated, which are subject to our final due diligence and approvals.

We also reached some important milestones in our construction and operations activities. We achieved commissioning on the first two AES AgriVerde methane recovery projects in Malaysia. And in addition we started construction on another seven projects in the agricultural sector. We began construction of our first landfill gas to energy project.

On the regulatory front we achieved many firsts since our last earnings call. Our Tiete Guaiba hydro project in Brazil has achieved registration. Our first projects in Malaysia also achieved registration. I received our first letters of endorsement under the joint implementation mechanism in Russia in Ukraine.

We currently have nine projects in validation, with another 40 to enter validation in the first quarter and second quarter of this year. These are important milestones for us as we continue to proveout this new business line for AES.

Let me turn to financing now. Given the potentially large amounts of investment that might result if we have a reasonable success rate with the various opportunities that I just covered, I would like to give some perspective on how we might finance these. First, we continue to be able to access the limited recourse project finance market on a global basis. Our recent experience has demonstrated the depth and strength of the project finance market. For example, we accessed this market for projects in Mexico for $450 million, which closed in the fourth quarter of 2007; for Masinloc in the Philippines, which requires a financing at $650 million. The financing is are secured and funding is expected in early April of 2008. We also completed $112 million in financing for our Turkey hydro projects. And these were the first true project financings in the country's hydro energy sector.

These financings in all cases have been at least as attractive as we had assumed at the time of our initial bids with respect to amounts, tenure and price. We think these transactions demonstrate not only AES' ability to work closely with our customers to close value-added deals, but also the financing communities' confidence in our operating expertise to improve projects with previous operating problems.

I think it is also worth highlighting that we also see opportunities to selectively sell part or all of our position in certain assets to raise capital we need for growth. For example, we have sold 10% of our stake in Gener at a price that we felt was attractive, generating approximately $300 million in proceeds to AES. Additionally, we announced to sell 100% of our stake in two [Kazak] businesses for over $1.4 billion. These particular transactions for example free up capital to invest in growth projects without needing to leave particular markets where we see strategic value in retaining a position in the countries.

You'll likely see an increased willingness on our part to sell assets to finance our growth in cases where, one, the businesses have limited strategic value; two, our ability to add value is decreasing; and three, the value that others are willing to pay exceeds our hold value.

We're also optimizing our capital structure when the market allows us to do so on an attractive basis. For example, we issued $2 billion of senior unsecured notes in the third quarter of last year, using approximately $1.4 billion of the proceeds to pay down approximately 60% of the senior secured notes outstanding and 95% of the senior unsecured notes due in 2008.

Let's talk about some of the challenging dynamics we face, however. For one, the time between investment and returns for greenfield projects results in a near-term drag on earnings and cash. Although Greenville projects offer much higher returns, the development cost and no return during the construction phase dampens our near-term earnings power. We're projecting to expense roughly $125 million in development costs every year. By the end of 2011 2,650 megawatts, or $2 billion of equity, is projected to be invested in projects under construction.

Another factor is that corporate issuers have seen increased volatility in the U.S. Capital Markets, which could continue for the foreseeable future. As a result, we believe it makes sense to postpone optional debt retirements that we might have otherwise made in order to maintain a strong cash position so that we are better able to take advantage of near-term growth opportunities. This decision creates some headwinds with respect to our earnings outlook as a result of higher interest expense, but it preserves flexibility in what may well be a market where access capital could be an advantage.

Now also the climate solutions ramp up is taking longer than planned. The principal challenges the market is facing are the limited capacity of the U.N. to process increasing volumes of carbon offset projects, and a longer certification process the relevant U.N. agency is imposing on the creation of offsets. Having said that, I believe this is a good business for us, as there is clearly a growing need, and we see a lot of potential growth in this area.

And finally, volatility with respect to fuels. Rising fuel prices, particularly coal, along with delays in the ability to see prices pass-through, could have an impact on our portfolio. And the continued lack of gas availability in the Southern Cone also impacted our ability to maximize the value of several of our plants in Chile, Argentina, and Brazil.

Now what I would like to do is talk about the long-term guidance. Looking forward as to how we think our current portfolio of businesses in operation, construction and development will translate into future financial performance, let me just refer you back to last May when we gave you our five-year guidance, with the projection that we would deliver somewhere between $1.75, to $2.15 earnings per share in 2011, delivering 13 to 18% growth over a five-year period.

As we have gone through our annual process to update our projections for the future, we now project that we will be growing our earnings at 14 to 17% per year for the next five years, through 2012. Our target EPS for 2012 is $1.95 to $2.25. This would reflect a five-year growth rate of 14 to 17% per year. By 2012 we also project our consolidated free cash flow to be between $2.5 billion and $3.3 billion.

Let me give you how that compares to our previous guidance. As you can see in the earnings call presentation which we provided, we're now projecting $1.70 to $1.95 EPS in 2011, yielding 13 to 16% per year growth from 2006 through 2011. This updated guidance range is $0.05 to $0.20 lower than our May 2007 guidance. In the base case that would be roughly $0.12. Last year our base case EPS forecast for 2011 was $1.95 as compared to our updated guidance of $1.83 in 2011.

The key drivers to this $0.12 change in our base case include the following factors. The current base case assumes 3,000 megawatts in our core power business will be online by 2011 versus the previous guidance of 4,000 megawatts online by that same time. Under our new guidance the remaining 1,000 megawatts will be online during 2012. Longer development leadtimes with our coal project in Vietnam and our hydro project in Panama have contributed to this change in assumptions.

Also based on the best information we have today we are estimating that there is a $0.03 per share expense relating to the Regional Greenhouse Gas Initiative, or RGI, compliance costs for the United States. In addition we have lowered our estimates for CERs, greenhouse gas offsets that would be issuable, given what we have earned regarding the offset issuance process.

We have lowered our estimates of the runrate at the end of 2011 by 2 million tons per year. So now we are at 24 million tons per year as opposed to 26 million tons per year, which we had estimated previously. We're also seeing the ongoing EPS impacts associated with the lease accounting for Pakistan businesses, as well as the lease buyout in New York.

Now let me highlight some of the key assumptions behind our guidance in 2012. Our base case, which is the mean of the low end and high end of the EPS range, or $2.10 EPS in 2012, is based on the following assumptions. In core power we're projecting to have an additional 6,500 megawatts of core power projects, with 4,100 megawatts of that online by year-end 2012 and 2,400 megawatts under construction at the end of 2012.

This is in addition to any projects that AES has under construction today, which is approximately 2,000 megawatts which includes our Maritza project in Bulgaria for 670 megawatts, four projects in Chile for 670 megawatts, in Panama, a project for 233 megawatts, Jordan for 370 megawatts, and Turkey for 63 megawatts. It is also worth noting that the bulk of the 6,500 megawatts is expected to be in greenfield projects.

Looking at renewable energy we expect to have 2,600 additional megawatts of wind generation by 2012. Since we announced our long-term guidance last year we achieved approximately 600 megawatts of our commitment from the following projects, Buffalo Gap 2, 233 megawatts; Buffalo Gap 3, 170 megawatts -- and those are two projects in Texas; an acquisition of 186 megawatts in the Midwest. And we also recently closed another acquisition in California of 67 megawatts.

In climate solutions the issuance rate is expected to be at 34 million metric tons in greenhouse gas offsets CERs annually by the end of the year 2012. In 2012 our projected free cash flow nearly doubles in four years. It grows from $1.5 billion in 2008 to $2.9 billion in 2012.

So in conclusion, I am pleased with the progress that we made in 2007. I believe that we are continuing to build a deep pipeline of projects that can help us achieve our growth goals. By 2012 we will increase our core power generation by approximately 15% over our current capacity of 45,000 megawatts. We will be a leading player in renewable energy. We will add 2,600 megawatts of wind capacity, reaching a total installed capacity of 3,200 megawatts. And we also think we will be a significant player in the developing solar power market. In addition we will continue to be an active player in the greenhouse gas offset business, producing over 30 million tons of greenhouse gas offsets per year.

I would like to thank all of you for your attention this morning. Operator, at this point why don't we turn the call over to any questions that people would have.

(OPERATOR INSTRUCTIONS). Elizabeth Parrella, Merrill Lynch.

Just to clarify one of the follow-ups on something you said, Paul. With respect to your base case growth assumptions, the 2,000 megawatts that is currently under construction on core power type projects doesn't count towards the 6,500, that's correct? That what counts is in terms of what you announced recently is the Philippines acquisition and potentially South Africa, if that actually goes to closing?

That is correct.

With respect to the $1 billion that will be coming in from Kazakhstan, it sounds like what you're indicating is you are going to take a conservative view on holding onto cash. It sounds like it is not likely, or that we shouldn't really be assuming that you would go out and try to call the remaining senior secured debt that is callable this spring?

Yes, I think probably not. I think what we're going to do though is we're just going to continually evaluate the projects we have in front of us for near-term investment needs, and how much liquidity we want to keep on hand to meet those needs. I think if we see the right opportunity, it could make sense to call some or all of those. But I wouldn't put that in as our base case right now, but we're always going to maintain that flexibility to do that if it looks like is the best use of funds at the time.

Lasan Johong, RBC Capital Markets.

Just following up on Elizabeth's question, you have over $2 billion of cash at year-end '07. You have got another $1 billion at least coming in from Kazakhstan. And you have probably something close to $1 billion in change I believe in free cash flow minimum. That is quite a chunk of change to have on your balance sheet. What exactly would you'd be spending on over the next several years if you didn't pay down debt? It doesn't seem like you could effectively or efficiently use all that cash?

This is Victoria. Just to clarify, the $2 billion is not all-cash, it is about $1 billion in cash and $1 billion in credit facilities we have available to us.

But that is still a lot of money.

Yes, but in general we're currently looking at a price line that would effectively use large portions of that, depending on what types of acquisitions (inaudible) in terms of greenfield opportunities, as well as the new lines of business that we're going into with wind, and its capital requirements as well.

Am I to assume that all the cash that you plan to generate should be earmarked for growth projects and not for any kind of debt repayments going forward?

I think, as Paul said, we are obviously -- we will continue to assess our options particularly as we move into 2008. Given market volatility at this point, we want to make sure that we have got available cash and financing opportunities before we consider the debt -- more optional debt paydowns.

Can we assume that new equity issues are unlikely going forward for at least the couple of years?

I think we will have to continue to monitor the market and see what the opportunities look like. I'm not sure we want to close out any options right now.

Then in the Southern Cone the gas shortages is starting to get really ugly over there. What kind of impact are you assessing for that in '08 guidance -- in the 2008 guidance?

this is Andres Gluski. We are assuming a continuation of the gas shortages in the Southern Cone, which basically affect Chile, to a lesser extent Argentina and the Uruguaiana, which we have impaired. So we are assuming a continuation. However, the hydrology conditions are better at this moment than they were last year.

The impact I think last year was $0.08. Do you expect that to be something less than that this year?

Basically we are saying that the situation would be similar to last year. Hydrology is better and we have had the first two months of the year.

Then organic growth rate, in the past AES had talked about organic growth rate being about 5 to 6% compound annual. Is that still true? Should we shift our focus slightly differently?

It is up 2 to 4%.

Yes, I would say up to that amount, and I think we're currently seeing closer to 4%.

Gregg Orrill, Lehman Brothers.

I had two questions. The first one was on the status of the Brasiliana restructuring, sort of the right of first refusal on the purchase there. And then secondarily on the ;09 guidance you've provided a lot of factorial analysis there. The updated year was below your prior range, and just talked around a few things, including RGI and rising A&B costs, etc. I was wondering if you could just try to provide the same analysis for '09. Thank you.

This is Andres Gluski. I will talk about the Brasiliana option. As you know, our partner, BNDES, has been going through the process of bidding, having bids for its stake in Brasiliana. Currently the process has been postponed. We believe that what indications from BNDES that it would take place sometime in June. The situation remains the same. We have the first right of refusal. We're keeping our options open. We have local lines of credit in place. And we're also exploring possibilities with partners to exercise our first right of refusal.

In terms of the '09 question that you had, and a member of these factors are already referenced, but I would just give you the view of the lineup in terms of what we are seeing on the drivers. The delay in the Orissa and [Chaganola] projects, which are obviously impacting from a timing perspective more than anything else, given what it pushes out past '12 results as well, is about $0.05. We also had, as Paul referenced, the lower sales in climate solutions in '09. That was another $0.05. And then the Pak Gen lease in New York, lease buy outs for another $0.02. And the RGI cost compliances, as Paul also referenced, was about $0.03, which is an ongoing $0.03 per year from a mitigation -- risk mitigation, cost mitigation standpoint. Those are the significant drivers of EPS relative to '09.

Brian Russo, Ladenburg Thalmann.

Most of my questions have been asked and answered. I am just wondering what is the income tax rate assumed in the 2008 and beyond guidance?

It is effectively about the same range from the low to mid 30s.

John Kiani, Deutsche Bank.

The wind business appears to be growing pretty meaningfully in scale and in pipeline. It looks like your new target, I think as you mentioned, is now 2,600 megawatts. And Paul, I believe you also talked about 5,000 megawatts in the pipeline, some of which might overlap with the 2,600. But do you have any interest in spinning or IPO'ing that business to highlight the value and fund future growth once the market stabilizes?

This is Victoria. (multiple speakers).

I will go ahead and take that one, Victoria. It is a good question. I think one of the things -- the previous question on what are you going to do with all that money, a big chunk of it is going into wind. What we are finding in wind is that we're having to put the money down to buy the turbines well in advance of starting construction to make the turbines reservation payments. It is using up a fair amount of capital.

I think in a sense of portfolio management looking to find other ways to finance that, that would not the 100% on us, would be an attractive way to do it. But only if we could see there is lower cost of capital out there to help us do that, or we can bring on somebody with some additional skills that could accomplish some other objectives.

But something like an IPO or spinning it off to other parties who might be willing to provide capital and essentially [pay] a form of promote would be attractive to us. Not so much to highlight the value, but rather as a way to finance the investments to make sure we've got adequate capital. Because I don't want to put too much into buying the equipment, because it is not the most efficient way to do it. Over time we could finance that out through tax equity in the U.S. or other debt financings, but in the interim we're stuck with a lot of capital being put into that business.

That is helpful. Then on a separate topic, it sounds like for now you are not looking at taking out the $750 million of senior secured notes. You are going to continually evaluate that I guess on an ongoing basis. My question is that tranche of debt it is what really stands in the way from a covenant perspective between you all being able to do some type of a stock buyback. And I understand that your growth pipeline is very robust, but I'm trying to understand your interest in taking some of the excess cash from the Ekibastuz sale, and some of the free cash flow that is generated, and looking at buybacks instead of some of the greenfield investments.

With the stock at $16 and change, effectively where it was in the beginning of 2006 over two years ago, I am trying to understand why your stock isn't also a very compelling investment opportunity with some of your cash flow.

I think that is the tricky part in it. That really is the problem we're facing in terms of thinking so where will we put the cash. The stock represents a great buyback opportunity, we think, but we also have other opportunities. And do we have ways to finance all of that? And that is the trade-off we're trying to make as we look at the conflict we have there.

We are thinking about it. We're constantly looking at it. If it weren't for the fact that we would be willing to pay off those notes, it would be an easier decision, but having to put that much capital into paying down debt, clearly it starts to use up a lot of capital. And do we really want to slow down our growth rate in order to achieve that? That is the trade-off we're trying to evaluate.

So I don't know the answer to it, but it is something we're continually trying to balance. And as we see good growth opportunities -- and what we don't want to have to do is go out buy back stock, and then have to go out to reissue equity, and it is a way to continue to grow the Company. That is the trade-off we're looking at.

As far as additional asset sales is concerned, you touched on that a little bit, Paul. Are these assets that you are looking at sort of like Kazakhstan where the multiple in the private market order to another party is substantially greater than the multiple that your stock is trading at? Those are the types of things you have identified in your portfolio that you might be interested in monetizing.

We think about it more along the lines of what is -- looking at the cash flows coming from the business, the BCF value, what is the value of the business to us? And what would somebody else be willing to pay? And I think, particularly where we have gotten the operations to a point where we can't really do a whole lot more to increase the value of the asset, or where we look at the market and say, owning this asset doesn't particularly give us any insights for advantages to expanding our growth pipeline. Those are the kinds of things we look at trading out of.

Not so much looking at the multiples as much as it is we believe the whole value is X, and somebody is willing to pay something that might be 20% higher than that, and those strategic value, those are the ones that will be easier for us to trade out of.

But where there is significant value in holding them -- for example, in Chile we don't want to leave the Chilean market, because there's a lot of good growth opportunities there. We might trade out of bits and pieces of it over time, but we still want to maintain a controlled position there. Kazakhstan, where we feel like the market that there was an opportunity to maintain our position in the market without having to own all those assets, that is another way we looked at trading out of a couple of those assets, in order to get some capital to keep growing the Company.

At this time I would like to turn the floor back over to Ahmed Pasha for any final remarks.

Thank you. And I want to say thank you very much for everyone for participating today. If you have any follow-up questions, please don't hesitate to contact either Michael Cranna or myself in Investor Relations. Any media inquiries should be directed to Robin Pence. Thanks very much, and have a nice day. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. Have a wonderful day.