愛依斯電力 (AES) 2008 Q2 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 Corporation second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Ahmed Pasha. Sir, you may begin.

Thanks, Elsa. Good morning, everyone, and welcome to our second quarter 2008 earnings conference call. Joining me today are Paul Hanrahan, President and Chief Executive Officer, and Victoria Harker, Executive Vice President and Chief Financial Officer. Paul will begin today's discussion followed by Victoria who will provide more detail and context around the quarter's results.

Before we begin this morning, I would like to remind you that any statements made herein about future operating results or other future events are forward-looking statements and under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the filings and in the Investor Section of our website, www.aes.com.

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

Thank you, Ahmed. Good morning, everyone, and thank you for joining us today. Our performance for the quarter was in-line with our expectations. Combining our year-to-date financial performance, which was slightly ahead of expectations, and our forecast for the remainder of the year, we are increasing our adjusted EPS guidance by $0.02 per share to $1.16 per share.

To date we have benefited from increased demand in Latin America and higher prices in our European businesses. As you know, we also focus fairly heavily in operating cash flow and free cash flow. Regarding those two metrics, we are adjusting our guidance to the lower end of the ranges we have given earlier in the year, primarily due to the increased working capital needs associated with higher fuel and energy costs which are generally recoverable through our various pricing mechanisms.

We are also continuing to make substantial progress on the growth front. We are making good progress in terms of projects and construction, as well as in development. We currently have 3,200 MW of projects under construction in nine countries. During the quarter we started construction on four projects with a total capacity of 954 MW. Two of these are in Chile, and I mentioned them during our last call; one in Northern Ireland, and one in Cameroon.

In particular, I would like to note the progress in one of our construction projects. It's a greenfield, combined cycle, gas turbine project in Jordan. This is a 370 MW gas-fired project, and in late July we achieved simple cycle operations on schedule. We are on track to commence combined cycle operations in mid-2009.

Also in our wind business in the United States our Buffalo Gap Three 170 MW project with Siemens turbines achieved commercial operation date. This is one of our projects in the Buffalo Gap site in Texas. The construction loan was paid down with the proceeds from our equity partners.

Looking at wind, we also, in the development front, continue to leverage our global footprint. One example includes our efforts in China where we see significant potential for wind growth. We have worked with our local partners to secure permits and turbines for two projects totaling 100 MW. In Scotland, we signed a long-term power purchase agreement for a 22 MW greenfield wind farm. In the United States, we have signed power purchase agreements with Delmarva and Old Dominion for our 100.5 MW Armenia project located in PJM in Pennsylvania.

I would like to talk for a second about our solar joint venture. We added two additional projects in Spain to the five we mentioned on our last call. Construction in all of these projects is close to completion and they are undergoing performance validation and registration procedures. Once all the projects are online this will give us combined capacity of about 24 MW. These are all small projects, but we are getting reasonable returns on these investments. We continue to make good progress also in securing permits for a number of other solar projects in development in southern Europe.

Let me just move briefly to climate solutions. Currently, we have a pipeline of projects in advanced development, or what we call aggregation, that represents 11 million tons per year. Approximately 40% of these deals are in the wastewater management sector for contained animal farm operations, another 23% are in wastewater management for palm oil mills, 15% are related to renewable projects in the hydro and wind sectors, and 7% are in landfill gas. The balance are in small biomass to steam, coal mine methane, and lighting efficiency projects.

One noteworthy development was that during the second quarter our climate solutions group registered its first palm oil mill affluent methane capture and destruction project in Malaysia. This means that the project is officially recognized as producing CERs, or certified emission reductions, of which it will produce 20,000 tons per annum on average. This is the first AS Greenfield CDM carbon project. While this is just one small project, it does demonstrate that we are beginning to get projects through the UN system.

While we entered 2008 with a limited number of projects in construction, at the end of the second quarter through a combination of indigenous growth and acquisitions, our Climate Solutions group now has projects that are fully constructed and registered that will average 1.8 million tons per year over their project lives. We also have 15 projects totaling an addition 1 million tons per year that are in construction.

I would like to comment also and note that following the removal of certain restrictions on our debt our Board has authorized a stock buyback program of up to $400 million, which gives us the flexibility to buy back stock as we said we would do in previous calls. Clearly, the recent pressure in our stock and resulting prices have made the purchase of our stock a compelling value creation opportunity for us. We believe we can fund both this program and our growth investments through our internally-generated cash flows and our portfolio management activities for asset sales program.

Now I would like to turn the call over to Victoria, who will give you a detailed review of our financial results. Victoria?

Thanks, Paul, and good morning, everyone. As you have heard already, it was a good quarter in many respects both in terms of operational results and the completion of several key transactions that reposition our portfolio and provide us with additional financial flexibility going forward.

Before I go into the details of the quarterly results I would first like to update you on some of these achievements. During the quarter we completed the acquisition of Masinloc, a 660 MW coal-fired plant in the Philippines and closed the sale of our northern Kazakhstan businesses for $1.1 billion with a three-year management agreement that provides the opportunity to earn up to an additional $380 million.

On this transaction we recorded a non-taxable gain of $908 million, or $1.31 a share, which contributed strongly to our second-quarter GAAP earnings results. We are very proud of the work of the team there that allowed such a strong return on our investment initially made over 12 years ago.

We also completed a number of capital restructuring transactions during the quarter, including a $625 million debt offering and subsequent tender offer. They were used to impact -- in part to restructure and refinance parent debt. These transactions also lowered our borrowing costs, providing more flexible covenants and evened out our maturity schedule.

As a result of these transactions, our senior-secured second lien notes and our senior-secured credit facility now reflect more current market terms for comparable debt, including rights to repurchase shares when economically feasible. In fact, we are pleased to report, as Paul mentioned, that yesterday our Board of Directors authorized us to repurchase up to $400 million of AES' common stock over the next six months. While we continue to enjoy a healthy pipeline of projects worldwide offering attractive returns, this authorization will allow us to opportunistically buy back shares if the current market volatility provides a window.

Now back to the quarterly results. Quarter-over-quarter we saw significant growth in both revenue and gross margin, with revenues up 24% and gross margin up 14% exceeding $1 billion. We reported diluted earnings from continuing operations of $1.31 a share and adjusted earnings of $0.17 a share, which included $0.08 of foreign currency transaction losses as well as $0.02 of one-time tax expense due to the repatriation of a portion of the Kazakhstan asset sales proceeds.

As I mentioned before, the Kazakhstan sale yielded a net gain of $908 million, or $1.31 a share, in the second quarter. Additionally, the repatriation of approximately $636 million of those sales proceeds, which were partially used to pay down debt, generated approximately $144 million of additional tax expense, or $0.21 a share. The net impact of these two items on adjusted earnings per share was a drain of $0.02.

Operationally, the second quarter benefited from strong demand in Latin America, particularly in Argentina and Brazil, as well as higher pricing trends in our Kilroot facility in Northern Ireland and our businesses in Kazakhstan. The benefits of these were somewhat offset by planned outages at Eastern Energy in New York and Ironwood in Pennsylvania, as well as higher fuel costs that could not be fully passed through at our oil-fired plants in Pakistan and our coal-fired plants in China.

During the second quarter, revenue grew by $806 million, or 24%, to $4.1 billion. Specifically, $305 million, or approximately one-third of that growth, was attributable to favorable foreign currency rates, primarily in Brazil. The remaining two-thirds of the increase was primarily due to higher volumes and prices across all regions, as well as a contribution from Masinloc, our newest power plant in the Philippines.

Year-to-date revenues have increased $1.8 billion, or 28%, with approximately $620 million, or roughly a third of that increase, attributable to favorable foreign currency rates. Excluding FX impact, the increase in revenues year-to-date has been primarily driven by higher prices due in large part to the pass-through of higher commodity prices at our generation businesses.

Compared to second-quarter 2007, gross margin increased by $125 million, or 14%, to $1 billion, primarily due to a favorable mark-to-market derivative gain on a coal supply agreement that was executed in June at our subsidiary in Hawaii. It also reflects a combination of higher volumes in our Latin America businesses, in particular our generation businesses in Argentina, and higher prices at our European businesses, primarily Kilroot and Kazakhstan, of approximately $74 million as well as favorable foreign currency impacts of approximately $94 million. These increases were offset in part by the July 2007 period tariff reset at Eletropaulo, one of our utilities in Brazil, and planned outages in North America at Eastern Energy and Ironwood.

Year-to-date gross margin increased by $322 million, or 18%, to $2.1 billion. This increase is primarily driven by increased volume in Latin America and higher pricing in our European generation businesses of approximately $403 million, as well as foreign currency translation impacts of approximately $155 million, primarily in Brazil, as well as the Hawaii derivative adjustment. These increases were offset in part by the July 2007 tariff reset at Eletropaulo which negatively impacted margins by approximately $165 million.

Given these positive operational trends in Latin America, let me spend a minute now to specifically discuss the performance of our businesses in Argentina and Chile and their respective impacts on our quarter and year-to-date results. During the quarter, Argentina was once again a strong contributor to our overall results as we continue to benefit from higher spot market prices resulting from lower than normal rainfall, higher demand, and less gas availability due to the onset of winter.

Just as we were able to do in the first quarter, we captured the beneficial market pricing by increasing our thermal generation at our 675 MW CTSN plant. In contrast, the second-quarter results from Gener, our generation business in Chile, were less favorable to expectations than they were in the previous quarter. Spot market prices in Chile have come down from the abnormally high levels we experienced in first quarter 2008, due to the anticipated arrival of winter rains and the replenishment of reservoirs. As a result, we did not operate our diesel generation power plants to the same extent that they ran in the first three months of the year.

In addition, second-quarter results were negatively impacted by the unfavorable translation effect caused by the devaluation of the Chilean peso and its impact on the node price. Further, due to tightening gas supplies in Argentina, the Argentine government redirected 100 MW of output that our terminal [Andes] plant had been selling in northern Chile during the first three months of the year for sale into Argentina at a substantially lower margin.

All of these factors, while generally expected, contributed to the decline in the above average contribution from Chile that we had experienced in the second quarter relative to the first three months of the year, as well as last year's second quarter results. For the remainder of the year, we do expect the Chilean market will be less volatile due to moderately filled reservoir levels in contrast to what we had experienced during the second half of last year during the drought.

Turning our attention back to the income statement, G&A costs for the quarter increased $9 million when compared to last year -- to $98 million, primarily due to higher spending associated with the ongoing implementation of SAP worldwide and remediation of our two remaining material weaknesses. Interest expense net of interest income increased by $61 million for the quarter when compared to the second quarter of 2007. This was due to foreign currency translation impacts, as well as slightly higher corporate debt levels than in the prior period.

Other expense increased $70 million, primarily due to the lock on retirement of corporate debt and at [EPACO] in connection with our recent refinancing.

Other income decreased by $111 million, primarily due to the combination of $135 million contract settlement gain related to the acquisition of our lesser interests in our Eastern Energy subsidiary and a $93 million gain related to the recovery of tax assets in Latin America, both recognized in the second quarter 2007. These were offset by $117 million gain and extinguished amount of tax liability of one of our Brazil subsidiaries in the second quarter of 2008.

Asset impairment expense was $25 million for the quarter, primarily due to a $20 million impairment charge at our Uruguaiana subsidiary in Brazil, triggered by the combination of gas curtailments and increase in the spot market price of energy there. With no additional fixed payment obligations due under the turbine purchase contract, this amount should represent the final write-off to be taken at Uruguaiana related to the turbine investment made earlier this year.

Our effective tax rate for the quarter was 22% compared to 35% in 2007. This decrease was primarily due to the effects of the non-taxable gain associated with the sale of the northern Kazakhstan businesses offset in part by the $144 million of tax expense incurred in connection with repatriation of a portion of the sales proceeds to facilitate early retirement of parent debt. Excluding the impacts of these two items, the effective tax rate for the second quarter 2008 would have been 32%, which is in-line with our expectations.

Weighted average shares outstanding were $694 million for the quarter versus $692 million in the second quarter of 2007. Both periods include 15 million shares related to (inaudible) convertible security debt instrument, which was deemed to be dilutive in both second quarter 2007 as well as 2008. We have summarized the drivers of both GAAP and adjusted earnings per share from a quarter-over-quarter standpoint.

Let me highlight a few of the key points here relative to the adjustment factors. Excluding the impacts of the Kazakhstan sale transaction and repatriation of tax expenses in second quarter 2008, as well as the impacts of the New York lease gain and Latin America tax recovery in the second quarter of 2007, both GAAP and adjusting earnings per share were favorably impacted by increased volume in Latin America and pricing at our businesses in Europe of approximately $0.05, offset primarily by planned outages in North America combined with increases in fuel prices at our facilities in China and Pakistan of approximately $0.04.

While we benefited from currency translation impacts of $0.03, due primarily to the depreciation of the real relative to the U.S. dollar, these gains were more than offset by the $0.08 of foreign currency transaction losses incurred primarily as a result of the devaluation of the Chilean and Philippine pesos. In Chile, the transaction losses resulted from the impact of the devaluation of the Chilean peso on peso-denominated receivables held by Gener, a U.S. dollar functional currency business.

In the Philippines, the transaction losses resulted from the impact of the devaluation of the Philippine peso in U.S. dollar-denominated debts held by Masinloc, a Philippine peso functional currency business. In addition, increased G&A costs impacted the quarter by approximately $0.01 per diluted share, as did the impairment recorded at Uruguaiana.

We reported diluted earnings from continuing operations per share of $1.31 compared to $0.42 in the second quarter of 2007. Adjusted EPS was $0.17 for second quarter 2008 and $0.41 for second quarter 2007. As I mentioned earlier, 2007 adjusted EPS included $0.15 of gains attributable to the restructuring of the New York lease.

2008 results include $0.08 of foreign currency transaction losses associated with our businesses in Chile and the Philippines, two countries which fall outside of our current definition of adjusted earnings. It also includes $0.02 of benefit from one-time tax expense associated with the repatriation of a portion of the Kazakhstan sale proceeds and $0.02 of additional interest expense. Excluding these impacts, improved operations in Latin America and at our European generation businesses drove the positive quarter results.

Here are some additional financial highlights from the second quarter. Net cash from operating activities decreased by $194 million to $320 million, primarily due to planned outages at our North American generation facilities, higher interest payments, as well as the previously noted tariff reset. Depreciation and amortization expense from continuing operations was $255 million for the quarter. Total CapEx was $794 million with $609 million of this spent on growth CapEx, principally associated with projects in Chile, Maritza, and wind development initiatives.

Maintenance CapEx was $185 million for the second quarter with $20 million of that related to environmental projects, primarily at Eastern Energy, Puerto Rico, and IPL. Free cash flow decreased by $72 million to $135 million, primarily due to the same drivers of reduction in consolidated operating cash flow offset in part by lower maintenance CapEx. Subsidiary cash distributions were on track at $269 million for the quarter and $490 million year-to-date. Parent liquidity remained strong at $1.5 billion.

We have included details regarding our segment results in our earning slides, so I will just hit now on a few of the key highlights. As I mentioned earlier our Latin American generation segment revenues increased by $358 million, approximately two-thirds of which was generated by our businesses in Chile and Argentina. Gross margin increased by $121 million in comparison to second quarter 2007, approximately 70% of which was contributed by our Argentine businesses and by the Brazilian hydro.

In Latin America, our utility segment revenues increased by $257 million, benefiting from favorable foreign currency translation gains and increased volume sales. Latin American utilities contributed $36 million of lower gross margin, due primarily to the impact of a four-year periodic tariff reset at Eletropaulo that took effect last July of approximately $74 million.

In North American, generation revenues decreased year-over-year by $12 million, attributable to the planned outages I mentioned earlier. Gross margin increased by $55 million compared to the second quarter 2007. However, excluding any mark-to-market derivative gains, gross margin would have decreased by approximately only $28 million, again due primarily to the impact of the planned outages.

At IPL, our North America utility, revenue increased by $9 million, due primarily to the pass-through of higher energy costs. Gross margin decreased by $18 million, due to higher O&M costs. In Europe and Africa, generation revenues increased by $63 million, due primarily to higher contract pricing at our generation facilities in northern Ireland and Hungary of approximately $41 million, as well as favorable foreign currency translation of approximately $17 million. Gross margin increased by $26 million. In addition to the $20 million contributed by our northern Ireland and Hungary businesses, we also benefited from higher prices in Kazakhstan.

Europe and Africa utilities revenue increased by $38 million, mainly due to increased tariff rates of approximately $17 million in the Ukraine as well as favorable foreign currency translations of approximately $14 million. Gross margin remained largely flat due to higher fixed costs at Sonel, our utility in Cameroon, offsetting improved tariff rates in the Ukraine.

In our Asian segment, revenues were up $70 million, primarily due to higher fuel costs being passed through the energy component of the tariff at our Pakistan facility. Gross margins decreased by $21 million, primarily due to higher fuel costs in Pakistan and China not fully recovered through the tariff.

In closing, we are pleased with our second-quarter financials and results achieved thus far and expect to continue to see positive operating trends in both Latin America and Europe, as well as other segments. As Paul previously noted, we have increased our full-year adjusted EPS guidance by $0.02 to $1.16 per share. Although we have slightly lowered our full-year guidance for operating cash flow due to higher working capital needs resulting from largely recoverable increased commodity prices, we are reaffirming our $1.4 billion free cash flow guidance at the lower end of the range.

Now I would like to open the call to any further questions you may have.

Operator, do you want to open up the lines for questions, please?

(OPERATOR INSTRUCTIONS) Lasan Johong, RBC Capital Markets.

Good morning. I wanted to ask you, just getting rid of all the noise and changes in this and that and ups and downs and everything else, sounds like operationally the second quarter was better than the previous quarter in '07. Is that a fair statement?

Yes, I think -- this is Victoria. Particularly in the Latin America operations, I think that continues to be the trend that we have seen in the first quarter as well.

Great. On the working capital changes, those are basically increased fuel prices that you are waiting to recover, perhaps end of this year, early next year, correct?

Yes, and just to be clear on that, it's the higher cost of those pass throughs that causes the receivables' absolute value to be higher. It's not -- we are not seeing trends that are indicating worsening collection rates than the receivables themselves.

Okay. So if we exclude this working capital noise, is operating cash flow expected to be higher than you previously thought or lower than you previously thought?

Without the working capital increase, I think it would be about in the middle of the range.

Okay, so basically this is all temporary consumption of working capital?

Yes.

Okay. Then, Paul, if the stock is at what I would call impressively stupid valuation levels, would the Board continue to authorize higher and higher share repurchase amounts?

At these incredibly stupid pricing levels, as you mentioned, I think that would certainly be a possibility. The thing we do have to recognize though is we do need capital to grow the company, which is part of the value proposition we offer. So that is what we are going to balance here. But clearly, when you look at the levels that we have reached recently those kinds of returns are tough to match with any new investment.

I don't think it necessarily means we have to put off the new investments. What it really means is there are going to be some assets that it would make sense to trade out of, use that capital to then go buy back stock. But that is what we will be evaluating is that trade-off.

Then why stop there? Why not leverage your balance sheet a little bit more and use that money to go after the stock, if the returns are there?

I think if the returns are there, we will look at all the different options we have to fund all the investment opportunities. But as you mentioned, at prices below $15, clearly, that is the kind of -- that is a good investment opportunity for us.

Agreed. On Eletropaulo, any progress on what the government is thinking in terms of timing?

No, not really. I think, I mean, it continues to be something that is -- appears to be going to go forward. The sale of the Braziliana shares, which includes Eletropaulo, Tiete, Uruguaiana -- the definitive timing, I think, just because of the difficulties in the global financial markets, I think has caused the government to just contemplate what is the timing of that. But we will be prepared to go forward whenever the time is right to go forward with that opportunity.

Okay, great. One other follow-up question on China, there is a lot of noise about the Chinese shutting down coal plants. Is this having any kind of -- not just temporary short term because of the Olympics, but medium to longer term as well. Any concerns, thoughts, opportunities regarding that line?

No, I think we have a few small power projects in China. One of the things that is going on, in some cases, the government is encouraging shutting down of the smaller units in exchange. But they are being shut down and essentially bought out in the process. So there may be possibilities for us to shut down plants, recover some capital or shut down plants and possibly build bigger projects.

In some cases that would be the case, where you would shut down one project but then have a right to build a larger project as a result. The economics of that are going to be attractive, whichever way we decide to go. So no concerns about that. But we haven't been impacted by the short-term impacts of things being shut down for the Olympics.

Can you quickly comment on the global coal scenario, where you think coal prices are going? You guys have the biggest global coal fleet out there that I know of, so you should have every good understanding of where coal prices are going. Could you kind of comment on that?

I'm not going to be able to give you a lot of guidance. I can tell you what we think and from what we have gathered from speaking with people is there has clearly been a spike in coal prices due to short-term demands. And bottlenecks have crept up in the various infrastructures around the world, ports, rail lines, whatever. We think that is a dislocation, it's not a long-term dislocation.

But what we have always tried to do is where ever we can is to hedge our sales with purchasing coal so we don't get caught in a squeeze there. But I think we are, in the short-term we are very sensitive to it and paying attention to it because we want to make sure that we don't get caught in a situation where we have gone out and sold power at a price or committed to sell power at a price that won't make sense with future coal prices. But our view is that the coal prices -- the pressure should come off as these various congestion points get relieved.

Great, thank you.

You are welcome.

Elizabeth Parrella, Merrill Lynch.

Thank you. On the business development front, Paul, you provided an update on some of your construction projects and some of the smaller projects in the wind and alternative energy arena. Can you walk through for us where things stand on some of the larger conventional projects that you have been pursuing, such as those in India and Vietnam? Are you seeing anything versus a few months ago, your last call in May, in terms of the, obviously, capital market and commodity market volatility that has had any impact on pursuing those projects?

No. I mean in terms of going forward with those, nothing. I think we are making progress in all of those. I think we are very close to signing the agreements in Vietnam for the fuel and the power purchase agreement. We have had a number of meetings. The Prime Minister was here about a month or so ago. Things are progressing well on that front.

In India with our project in Orissa, that is the expansion, that is getting its initial permits. I think it has gotten a couple of its environment permits, its coal utilization permits. So that one seems to be going a little bit faster than the one in Chattisgarh, but that one is also progressing. The critical path there will be land acquisition rights.

But in terms of the desire and the demand for electricity, India continues to have a shortage of power of something in the order of 10%. So they -- irrespective of any growth in the economy, they still need more power. These are still continuing to be attractive projects. We are not seeing any kind of a slowdown.

For the -- also for the Vietnam and India projects, they are using indigenous coal, so they are linked up with the coal mine, particularly the ones in India, this is not coal that can be exported. So you are somewhat delinked from the world markets there, so it actually, to some extent, makes these more attractive as projects. But no major accomplishments and we will keep you posted as we do hit the various milestones there. But nothing to report this quarter on those projects.

Then turning to the guidance, if I'm doing my math correctly, I think the $1.16 of adjusted EPS implies a second half number of about $0.60. I think last year on an adjusted basis the second half was like at $0.36 or thereabouts. Can you identify just for us some of the key drivers of that expected very strong rate of increase in the second half?

This is Victoria, Elizabeth. There are a couple of items and I am not going to get into the specifics of some of them, because they are still moving in terms of consummation. But the largest drivers, last year we had somewhat compressed results in terms of the Southern Cone gas curtailments. We also took a negative impact of about $0.06 -- $0.065 to $0.07 for the Mexico tax charge in the fourth quarter of last year, which we had said at the time we had anticipated working through restructuring of that in this year which we have not yet finalized. But we anticipate that will happen by year end. So essentially a reversal of the same impact by the second half of this year.

In addition to that, we have the earn out from Kazakhstan, which we anticipate to occur in the fourth quarter of this year, as well as the baseline improvements year-over-year that we have continued to see out of Latin America as I talked to on the call. So those are sort of the big drivers of both the second half '08 relative to the second half of '07.

Thank you. Then just one other question on the guidance. You had obviously an $0.08 drag on adjusted EPS in the quarter from foreign currency transaction losses, primarily in the Philippines and Chile. Can you tell us what your guidance assumed on foreign currency transaction gains and losses that you would have to absorb, because they wouldn't be out of back, meaning they are in markets outside Brazil and Argentina? How does that $0.08, for example, compare with what you had assumed in your $1.14 number?

We haven't -- it's essentially flat from a -- we are not assuming it either gets better or worse relative to the second half of this year.

What I am really getting at is that the $0.08 was a hit to the number in the second quarter, yet you are raising the guidance $0.02. I am wondering if -- do you expect in any of that $0.08, or what you are saying is you are absorbing it?

No, I think what is going on though is you have had some appreciation of currencies. Looking forward to the year, we would expect the currencies to remain relatively -- we've used the forward curves, so it wasn't a lot of appreciation or devaluation. What is happened is we have had some devaluation, but we have also had some appreciation of currencies, which has benefited us.

So I think the net impacts are slightly positive to us, I think, year-on-year with the expected -- compared to where we were at the beginning of the year. So I think -- but the $0.08 is a drag, but it's relative to the other gains that we had had just in the translation adjustments associated with our businesses down in Latin America, Brazil, predominately.

Okay. So what you are saying is that relative to the beginning of the year, currency overall has had a slight positive impact on the adjusted EPS outlook. Is that --?

Yes, that is right. Compared to where we were at the beginning of the year we expect to be slight positive, even taking into account the negatives in Chile and Philippines.

Okay, thank you.

Brian Russo, Landenburg Thalmann.

Good morning. Could you talk a little bit more about the Eletropaulo tariff reset that looks like it hit gross margin of about $74 million? What was the net EPS impact of that? And is that something we are going to see a similar magnitude in the third and fourth quarter?

This is Ahmed, Brian. It was about less than $0.02, and we did factor that in our guidance because it happened July 2007. It was part of our long-term guidance. I don't think it will affect us going forward, that is why we called it out specifically, that it was preannounced.

What you will see is these tariff resets are things that are built into the system. You have got -- I can't remember if it's every four or five years --

Four years.

Four years.

-- four years you have a one-time tariff reset, which is meant to really adjust and set new targets for the distribution companies. Then you have the annual tariff resets. And we will -- I think you will see with distribution companies, as you improve the operations you get to keep some of that. But every four years there has been a reset, which will start to take some of that away. But that is part of the overall regulatory framework for most of the distribution companies that have been privatized around the world.

All right. What was -- can you remind us what the EPS impact of the Southern Cone gas curtailment was last year?

In Q3 it was about $0.07, Brian, alone, surplus. All-in-all, I think it was about $0.08 in the second half and it was primarily in the second half of 2007.

Then just lastly, could you comment on your comfort level with the stages of development of your various projects in your pipeline to meet your long-term financial guidance?

Yes, I think we still feel pretty comfortable. We haven't seen anything that would lead us to believe that we can't hit those numbers. What we are likely going to see is we have got a number of projects and some are going to slow down, some are going to go faster, some will get dropped. But some new ones will come on.

I think -- we really do believe that we have got enough projects out there that are moving forward that we still feel comfortable with that guidance. I think if we ever get to the point that we don't, we will come back and adjust the guidance.

Okay. But just to clarify, and I forget how many megawatts you have in construction today, but we should begin to see a rather significant ramp up in the number of megawatts in construction, say, over the next six to 12 months, correct?

That is correct.

Okay, thank you.

Dan Lifshitz, Fir Tree Partners.

Just wanted to understand a little bit better the various FX impacts and there are some that you add back into the adjusted earnings and some that you don't. So I guess we are just left to understand which of these FX impacts really have a true earnings impact in terms of cash flow and which ones don't, and why some get added back and some don't?

It's really, quite frankly, a definitional problem that we created for ourselves. I think we will look at fixing that next year. We didn't think we wanted to change -- we had to set this up in the past because it was primarily Brazil, Argentina that were creating the bulk of the problem. So I think we could find a way to take those out, but we didn't take into account the fact that we are doing a project in the Philippines. So I think to some extent that is why -- it's nothing more than a definitional problem.

But we decided to keep the definition consistent through the year, because what we don't want to do is half-way through the year change the definition to clarify this. But that really is the only reason is we tried to pull out things that we thought were one-time impacts. I think we will, as we get into next year, we are going to look at trying to make it more consistent. We just hadn't defined it properly, I think, in terms of thinking through the new businesses we might have.

Got it. Just conceptually, if you operate in so many different countries and you always have the currency fluctuations going on, why -- are these currency moves a one-time thing rather than just an ongoing part of your business that sometimes is a positive, sometimes is a negative, but you really should include it? I'm thinking about the earnings power of the business.

Well, particularly when you talk about transaction losses, when you are talking about the translation, or basically the fundamentals, what you are actually generating in cash, it's when you have got debt. Let's say you have got -- like in the Philippines, you have got dollar debt, you have got the Philippine peso as the functional currency, if there is a devaluation you might have $1 billion of debt. You are going to basically take that as a loss in that quarter. Now if it reverses and comes back, you are going to take it as a gain.

I think our view was that might create a little bit too much noise. As we try to come up with adjustable earnings per share, it's more the ongoing earnings power of the business. If you thought that a currency was just going to continue to devalue time and time again and not have ups and downs, you would take that approach.

But our view has been, for the transaction losses or gains, it could distort the numbers because you have a lot of debt in some of these companies. Whether it's a functional currency, U.S. dollar functional currency, local currency, tough to do. So that is the only reason we have pulled it out.

We will rethink that, as I said, as we go into next year. But we don't want to in the middle of the year try and change how we define things. I think that might just be perceived as being somewhat misleading, so we are going to keep the definition as it is. But we will relook at that and really would appreciate any input any of you have on that.

That makes sense. Just to kind of paraphrase and make sure I'm understanding it, the FX that is just related to your earnings and country X are higher or lower in dollars because of currency moves. That is included in your earnings, but where there is some type of one-time transaction where you buy a property or you sell a [spot] or something like that, those FX impacts is what you are stripping out?

Yes, think about it, it's almost -- think about it, it's the cash versus non-cash. It's when you have items on the balance sheet that are moving around because of the functional currency relative to the currency that is moving. We are trying to strip those out, because they really aren't going to be -- we wouldn't expect them to be consistently moving up or down.

The movement is related to the revenues going up and down, the costs going up and down, we do include those in the adjusted earnings. So those would be taken into account. Those are, I think, really part of the ongoing earnings power of the business.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Neil Stein, Levin Capital.

Good morning. I had a couple of questions with respect to what you include in adjusted earnings and what you are excluding. So I'm just going to go through a few items and if you could say yes or no. The first one is this $110 million mark-to-market gain related to Hawaii, is that excluded?

Yes.

From the adjusted -- okay. Then the next one is there is this $30 million mark-to-market loss from deepwater is that --

Yes.

-- is that excluded?

Yes.

Okay. Then the $25 million Uruguaiana impairment?

Yes.

That is excluded as well?

Yes.

Okay, great. Then just shifting gears from --

I am sorry, just to interrupt you for a second. We do on the investor presentation that is on the website, we do go through a listing of what is in and out, so it's easier to map if you have any other questions after the call.

Okay. Then shifting over to the share repurchase. I just wanted to understand a little bit of the analysis and thought process you went through there. It seems like an interesting change in policy for your company and management to the extent -- I think it's the first capital return you have done in 15 or 14 years.

The intention really isn't to return capital from my perspective. The view I am taking is at a certain stock price we can look out -- we can see a fundamental value in the Company, particularly when you look at the growth that would be coming, or even just the existing assets. Think about it in terms of NPB creation or internal rate of return. The lower the stock price is relative to the -- what we consider to be the fundamental value of the Company, the better return that is.

We then take money, invest in that, and it should increase the return to the other shareholders, so the rate of growth and value for the other shareholders. We could also do it through a dividend, but that is just sending money out to shareholders. But it's not really taking advantage -- I sort of think about it in terms of when your stock is undervalued you can really increase the value of other shareholders, for those that don't sell, by buying stock back at low prices. So it really is, to some extent, a way to increase the value of the remaining shares in the Company.

What about the idea -- another way to do that also, and it could be done in tandem with further share repurchase, is to pursue additional asset sales.

Yes, that --

Kazakhstan was nice. But what others are you considering?

I think as you mentioned, it's a shift in policy in the sense that we have finally got the flexibility to go do this. The other thing is we have been exploring asset sales. It's our view that there are opportunities to go out there and do this. What we didn't want to do was utilize so much capital that we couldn't execute on our growth plan. We felt it was important -- we needed to have that in order to deliver the growth and value that is there.

But with the ability to do asset sales, and we have done the Kazakhstan asset sale and we have others that we would be looking at, and I'm not going to disclose which ones they are, but the simple way to think about it is if we look at it strategically and it's not critical, it's not providing a platform that we can expand, that we can grow the value, that becomes a candidate for asset sales. There are going to be other reasons why we keep it.

Then we look at what is the value somebody else might pay for the asset versus what is our internal view of the value. If we see we can sell it for a price that is attractive, we would then do that. Particularly, we can take that capital and redeploy it into stock purchases. That is helpful from our standpoint just in terms of growing the value of the rest of the Company for the remaining shareholders that don't sell through, since they aren't selling through the stock buyback.

This is Victoria. Just to add just a little bit of color to that. I think we have talked about this on previous calls as well, we have a fairly rigorous process that we actually go through on a quarterly basis to look at, to Paul's point, the assets we feel are non-strategic to our core growth. So we actually go through a re-evaluation of whole value and the contribution to the five-year plan versus what we currently see by way of market value.

It's not something that we just wait to see if we get something from a market perspective. We actually do look at it analytically every quarter.

In terms of the size of potential future asset sales, how might those compare to the Kazakhstan transaction?

They would probably be smaller on an individual basis. We don't have many businesses that would be that order of magnitude. You look at Brazil, that is one we are very interested in. It's one that we believe, through our right of first refusal, that we could -- we would like to have the other half of that asset. Of course, at some price we would be willing to trade out of that and take the cash. So that is one that could be well in excess of that order of magnitude of Kazakhstan.

But it's not a preferred option. We think, we would be willing and would like to keep that asset and would be willing to buy the other half either alone or in conjunction with a partner. So I think -- but most of the asset sales are probably going to be in the order of magnitude of a few hundred million dollars, if you look at the equity value of many of our other assets.

Then another question related to this topic, at a certain point, at a certain stock price the way your thought process works, does it make sense to cancel some of your growth projects and instead pursue more share repurchases?

It could or more likely differ. I think these projects generally you don't have to kill. The harder part, quite friendly, of development is keeping them moving along at a pace; getting all the permits, getting all the approvals, getting the structuring done in a way that we are happy with. I think you would balance the share price, the opportunities, but I don't think you would be canceling projects as much as you might defer them, if you got to that point.

I don't think we are going to get there because I think we see enough assets that we could sell at attractive prices, where I think we can cover both.

Why a $400 million program and not a larger one? I understand you might have liquidity constraints near term, but obviously with these programs you are not obligated to complete them in their entirety or in a short period of time. So why not have a larger program to -- that gives you the flexibility as you announce transactions and so forth to take --?

I think it's just an opportunity for the Board to authorize something, go back, look at it again to see where we are. Then you can always re-authorize it at a moment's notice. We could always do that down the road.

But it was just to get an initial amount out there authorized to give us flexibility, and that is plenty of flexibility for the next several months.

Okay, great. Thanks so much for all of your time and answers. I appreciate it.

Thank you.

Thank you. There appears to be no further questions at this time. I would like to turn the floor over to Ahmed Pasha for any further 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 don't hesitate to call either Michael Cranna or myself at Investor Relations. Any media inquiries should be directed to Robin Pence. Thanks very much and have a nice day.

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