愛依斯電力 (AES) 2008 Q3 法說會逐字稿

Good morning. My name is Vonda and I will be your conference operator today. At this time I would like to welcome everyone to the AES Corporation third-quarter 2008 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 session. (Operator Instructions). I would now like to turn the call over to Mr. Ahmed Pasha. Please go ahead, sir.

Good morning, everyone, and welcome to our third-quarter 2008 earnings conference call and webcast. Joining me today are 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.

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 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 investors section of our website, www.AES.com. And now I would like to turn the call over to Paul.

Thanks to all of you for joining us this morning. Today I'd like to keep my message is simple and focused around four key themes. These things are liquidity management; we continue to be a company that generates strong free cash flows and I will discuss how we are managing these cash flows going forward in a time where we have a great deal of financial market volatility.

Second, I'll discuss our financial results for the quarter which were essentially in line with our expectations when you adjust for the non-cash transaction losses associated with currency devaluations.

Third, I'll talk about our expectations for the financial performance for the remainder of 2008, then I'll talk about our expectations for the financial performance for 2009 and beyond.

So first let me start with liquidity management. The leaders in AES focus more on cash than any other metric because cash is what we rely on to repay our debt; to grow or, in today's environment, buy back stock at prices which create an incredible amount of value for our shareholders. One of the benefits that we have as a company is that we generate strong free cash flows, much of which can come back to the parent company.

One of the things that I've stressed in the past is that stock buybacks are a potential use of cash and must compete with new investment opportunities. When our stock is trading at the levels, such as it did yesterday, stock buybacks are very attractive.

I'd also like to highlight that we are taking steps to ensure that we have a strong liquidity position regardless of the state of the financial markets. In terms of what that means for us practically is that we are prioritizing the various potential uses of our liquidity. Our first priority is to ensure that we will be able to pay down parent debt maturities when they fall due.

Next will be to complete those projects that are already in construction. Beyond those commitments we are operating under the premise that any additional growth CapEx or stock buybacks must be funded by the cash flows that remain. This obviously means that we will be reducing the amount that we will invest in growth CapEx in the near term either by deferring or in some cases canceling projects in our growth pipeline. This approach will help insulate us from any other further downturns in the financial markets.

These are the assumptions under which we will operate and we have to be able to operate in such an environment where we are potentially limited only to our existing liquidity and the cash flows distributed from our businesses. That said, the markets may offer some sources of funding for select projects and, if that is the case, we intend to take advantage as we did in October with the $1 billion Angamos financing in Chile.

We also have other potential sources of liquidity. These would include asset sales and equity from partners to fund our growth pipeline. But given the current market we are not going to make any assumptions that these sources are available at reasonable prices until we execute these plans. But if we can we will clearly direct any additional sources of liquidity to the best investment opportunities that we have, whether that would be buying AES shares or investing in new business opportunities.

I want to be clear however that we are not stopping all development. Through the development process we create low-cost options to invest in the future. We are reevaluating all of our current development projects to ensure that they would be value accretive to our shareholders and any partners that might invest with us. And these projects will need to compete against the value that we can create just by buying back our own stock.

Now let me turn to our third-quarter results. Our operating cash flow and consolidated free cash flow results were in line with our expectations. Our adjusted earnings per share results were also in-line excluding the non-cash transaction losses associated with foreign currency devaluations in Chile and the Philippines. I'll discuss a bit more about this later as it relates to an incomplete definition of adjusted earnings per share which will be clarified beginning in 2009.

I'll now cover our 2008 financial expectations. As Victoria will discuss in more detail, we are reaffirming our cash flow guidance for 2008 while lowering our adjusted earnings per share from $1.16 to $1.07. This drop is direct result of non-cash FX transaction losses which I just discussed.

Looking out to next year, for 2009 we are lowering our prior guidance range by $0.05 or roughly 4% to a range of $1.15 to $1.20. This revised range is based on current foreign exchange rates and commodity prices. We have updated foreign-exchange commodity assumptions for 2009 which are in line with the current spot prices as of the close of the market on November 5th.

We recognize that foreign exchange rates in particular have been volatile recently, therefore we've outlined the sensitivities and key assumptions in more detail in slide number 5 in our earnings deck. For example, a 10% depreciation of foreign currencies against the US dollar will have a negative EPS impact of $0.08 per share.

Part of our plan to achieve the above target includes cost reductions of roughly $150 million that will result from reducing overhead and development costs. We're currently working through our annual budget process and do not have firm forecasts for operating cash flow and free cash flow that we feel comfortable disclosing at this point. Remember that changes in foreign exchange rates have a larger impact on consolidated metrics like operating cash flow and free cash flow.

Directionally however we currently anticipate that we will be at the lower end of our previously provided guidance ranges for the 2009 operating cash flow which is $2.2 billion to $2.5 billion and free cash flow which is $1.4 billion to $1.7 billion based on the current spot prices for foreign-exchange. We'll affirm or modify these preliminary views when we provide a full update during our call reporting the results of Q4 of 2008.

Now looking beyond 2009, we expect the majority of projects in our construction pipeline to come online in 2010 and 2011. These projects are projected to contribute earnings and cash flow which were included in our long-term guidance presented during our fourth-quarter 2007 call. That guidance also included development projects beyond these construction projects.

But because we are currently reviewing the broader development pipeline and our incremental capital expenditure program, we believe it is prudent to suspend long-term guidance beyond 2009. We'll provide a full update to our long-term guidance in a call reporting the results for the fourth quarter 2008.

Now I'd like to just highlight a few other matters. First, I'd like to give an update on construction. Turning to these projects, we remain committed to completing our construction pipeline containing 15 projects totaling more than 3,000 MW that are currently underway. We expect these projects to start contributing earnings and cash flows in 2010 to 2011 while requiring a relatively modest amount of incremental funding going forward.

All projects are proceeding as planned which we attribute in part to our decision to develop in-house engineering and construction capabilities. These are all promising projects. For example, our projects in Bulgaria and Jordan will enable us to meet electricity demand in capacity constrained markets. Further, more than 90% of the capacity of our construction pipeline has long-term power supply contracts which substantially reduces our risk and contributes stable earnings and cash flows. This pipeline represents future growth in our earnings and cash flows and the bulk of the investment required from AES has already been made.

I'd now like to come back to the adjusted earnings per share definition which I referenced earlier. As we discussed on last quarter call, our adjusted EPS definition excludes mark to market foreign exchange impacts on the net monetary positions in only two countries, those being Argentina and Brazil, which comprised a substantial portion of these adjustments when the definition was implemented.

As our business has expanded we are now incurring mark to market losses in currencies outside of these two countries. While we may be penalizing ourselves in 2008, we think it's better to lower our adjusted EPS guidance than to change the definition in the middle of the year. Beginning in 2009 we will expand the definition to include all countries which we feel will better reflect the true earnings power of the Company.

Now I'll come back to the parent sources and uses of capital in 2009. I'd like to emphasize our strong liquidity of more than $1 billion at the corporate level. We have funding commitments related to our construction pipeline and equipment purchases of roughly $200 million in 2009.

These commitments are manageable with our internally generated current cash flow and existing liquidity driven primarily by forecasted distribution from subsidiaries in the range of $1.1 billion to $1.3 billion which results in approximately $400 million of parent free cash flow for 2009. This means that we do not need to rely on asset sales or parent financing to meet our obligations and maintain sufficient liquidity. We'll invest any incremental available cash in a manner that provides the highest overall value to the shareholders.

I'd also like to give you a quick update on our stock buyback. Consistent with our efforts to preserve liquidity, we have not purchased any additional stock since the end of the quarter. Up to that point we have purchased 10.7 million AES common shares for $143 million related to the $400 million share buyback program that we announced in August. Now at this point I'd like to turn the call over to Victoria who will provide a detailed overview of the financials. Victoria?

Thanks, Paul and good morning, everyone. As Paul has discussed, we had a very strong quarter in many respects, generating significant gains in both earnings and cash flow quarter over quarter. Together with our results for the first half of the year we have now earned $0.81 through the end of the third quarter. Importantly, we've also generated $1.1 billion of consolidated free cash flow driven largely by growth in our Latin American and European generation businesses. For us that is a very strong bellwether of the ongoing health and liquidity of our businesses.

We reported diluted earnings from continuing operations of $0.22 per share and adjusted earnings per share of $0.25. Our quarterly earnings included $0.09 of unrealized mark to market foreign currency transaction losses primarily associated with the Philippines and Chile. Because this can be confusing to investors, as Paul mentioned, we will be clarifying our definition of adjusted EPS at year-end to exclude any non-cash unrealized mark to market foreign currency transaction gains and losses from all countries, not just Brazil and Argentina.

Revenue in the quarter grew by $861 million or 25% to $4.3 billion. Approximately one-fourth of the increase was attributable to favorable foreign currency rates, primarily in Brazil. The rest of the increase was primarily due to higher prices across all of our regions and increased demand in Latin America as well as first-year contributions from our new Philippines operation.

Compared to third quarter 2007, gross margin increased by $111 million or 13% to $1 billion. The improvements were largely driven by better operating results from our Latin American generation businesses, particularly in Chile and Argentina. These gains were partially offset by an unfavorable mark to market derivative loss of $57 million on a coal supply agreement at our subsidiary in Hawaii. As you may recall, the same contract resulted in a $110 million mark to market gain in the second quarter of 2008.

With respect to our operations in Chile, we benefited in the quarter from increased gas availability from Argentina as well as improved hydrology in Chile. By comparison, the lack of gas and lower hydrology negatively impacted our third-quarter 2007 results by $0.07. In Argentina we continue to benefit from increased generation at our Alicura hydro plant and higher dispatch of our CTSN thermal plant. In addition, favorable foreign currency impact of approximately $54 million also contributed to the increase in gross margin in the third quarter.

Turning to the income statement, our G&A expenses and interest expense remained relatively flat period-over-period as our accounting controls remediation efforts ramp down somewhat offset by SAP system implementation costs which be completed in 2010. Interest income has increased by $35 million when compared to third quarter 2007, primarily due to higher rates on short-term investments and cash equivalents at Elektra Paulo in Brazil.

During the quarter other income increased by $37 million to $63 million which includes a $29 million gain from a legal settlement at one of our North American subsidiaries. Impairment expense was $22 million for the quarter, primarily due to $11 million of additional charges resulting from our decision not to pursue the South Africa peaker development project as well as termination of a small early-stage climate solution project in Israel.

Our effective tax rate for the quarter was 32% compared to 39% in 2007. The lower effective tax rate reflects implementation of a tax strategy at our businesses in Mexico. As you may recall, in the fourth quarter of 2007 we incurred $0.07 of tax losses associated with a change in Mexican tax law. Through the third quarter of 2008 we have offset approximately $0.04 of this impact by implementing a tax planning strategy and we anticipate the remainder by year end. Weighted average shares outstanding remained flat period-over-period at $675 million.

In the investor presentation we've also summarized the drivers of both GAAP and adjusted earnings per share from a quarter-over-quarter standpoint, but let me just highlight a few key points here. We reported diluted earnings from continuing operations per share of $0.22 compared to $0.14 in the third quarter of 2007. Both gas and adjusted earnings per share were favorably impacted by operational improvements of $0.14 driven primarily by increased pricing across all regions and higher volume in Latin America.

The improved period-over-period performance in Latin America is attributable in part to the $0.07 of negative impacts created by gas curtailments and unfavorable hydrology in Chile and Argentina last year during the same quarter. While we benefited from currency translation impacts of $0.03 due primarily to the appreciation of the Brazilian reais relative to the US dollar, these games were more than offset by the $0.09 of foreign-currency transaction losses previously discussed.

Adjusted earnings per share also showed an $0.08 improvement period-over-period increasing to $0.25 for the third quarter 2008. Adjusted income during the quarter was also impacted by the previously discussed $0.09 of unrealized foreign currency transaction losses which are not excluded from our current definition of adjusted EPS at this time.

Here are some additional financial highlights from the third quarter. Net cash from operating activities increased by $26 million to $784 million, primarily due to improved operations in Latin American businesses and a decrease in net working capital for Latin American utilities. Maintenance CapEx was $142 million for the third quarter of which $19 million related to environmental projects. Free cash flow increased by $52 million to $642 million due to both improved consolidated operating cash flow and lower maintenance CapEx spend.

Significantly subsidiary cash distributions made during the quarter were right on track at $184 million for the quarter and $674 million year to date. This is a clear indication of progress being made. Overall we're pleased with both the quarter and our your two-day performance and we expect to see continued positive operating trends across the portfolio. Based on these projections we are reaffirming our 2008 operating cash flow and free cash flow guidance.

Although operating trends are positive, they are not enough to fully offset currency rate trends. Based on current currency forecasts $0.09 of non-cash mark to market transaction losses will negatively impact our 2008 adjusted EPS guidance to $1.07 per share, as Paul has said. Given currency pricing volatility we have also provided a sensitivity in the investor presentation.

Now let me take a moment to highlight a few key areas of focus for us which have been driving operational efficiencies and cost reductions which will continue to put us in a good position going forward. During the quarter we continued efforts to leverage combined purchasing power to create efficiencies and cost savings by forming a global purchasing team. As an example, we currently purchase 20 million tons of coal per year, leveraging regional volume pricing at a shared platform of information we are able to achieve savings that drop to the bottom line.

Regarding other cost initiatives, during the quarter we began to wind down our accounting remediation efforts on our two remaining mature weaknesses in moved into testing. We are optimistic that we can complete the work required in remediation in the first quarter of 2008 which will generate significant savings in 2009 while bolstering our controlled environment.

In terms of receivables management, we continue to focus on reducing the days sales outstanding, or DSO, to ensure that we receive timely payment for our services. As a result, since only two quarters ago we have seen an improvement of two days or nearly $88 million on a consolidated basis. This decrease in DSO is driven primarily by improved collections at our Pakistan, Brazil and Chile businesses.

Finally, we launched our finance hubbing initiative in eight locations worldwide which will eliminate the need for dedicated reporting and analysis infrastructure in many of our plants. These hubs will leverage the SAP platform to provide accounting and analytical support on behalf of the businesses in a more efficient way in more than 100 plants worldwide. This will not only immediately reduce operating costs in 2009 but also improve the ongoing quality and timeliness of our reporting through shared best practices and streamlined processes.

Turning to our debt and capital management strategy, we've taken proactive steps to increase financial flexibility and reduce financial risk. Our debt refinancing at both the parent level and at our businesses has provided us with a number of benefits. We have minimized our refinancing risk, modified our debt covenants to provide additional flexibility and reduced our sensitivity to volatile interest rates which has immunized our businesses from cross currency debt risk. I'll now provide more detail related to these efforts.

First, at the parent level we have no remaining debt maturities in 2008 and have reduced our 2009 obligations from $467 million to $154 million as a result of refinancings undertaken in both 2007 and 2008. This is easily managed within the $1 billion of parent liquidity and $400 million of free cash flow in 2009. Likewise at the subsidiary level, where similar refinancings have occurred, we have approximately $700 million of debt maturing in 2009 which is well within the scope of our nearly $4 billion of liquidity there.

As a result, all of the nonrecourse debt service requirements over the next several years are expected to be satisfied by cash flows at the businesses. This provides a comfortable position for the Company at both the parent and subsidiary levels, knowing that all debt over the next several years can be serviced as structured without relying on capital markets.

Second, we have modified covenants at both the parent and subsidiary levels. For example, in April we refinanced approximately $400 million of nonrecourse debt at IPALCO. The new notes offer more flexible covenants that are less restrictive than the previous notes. In addition, during the third quarter we amended our senior secured credit facilities with our relationship banks at the parent level. The amendments provided us with less restrictive financial covenants and allowed us to opportunistically repurchase our own stock.

Third, we've maintained our fixed interest rate obligations above our policy floor of 75%. This target is based on what we believe is a reasonable amount of interest-rate risk at the Company's debt levels to limit exposure to interest-rate fluctuations. Currently 79% of total debt has been hedged against short-term interest rate movements using fixed-rate instruments and swaps, leaving very little debt exposed to interest-rate movement.

Fourth, over the past several years we've converted most of our subsidiaries' debt to local currency to align with local revenue denominations. These efforts have been undertaken to protect our businesses from country specific currency fluctuations that would make it difficult or expensive for them to service their debt. Approximately 93% of subsidiary debt is now in the same currency as the revenue generated by that business.

Also, as we began to take note of early signs of credit market volatility in the second half of 2007, we undertook a series of debt-related initiatives to maintain liquidity and improve our financial flexibility. These efforts continued right on track into 2008. Over this period we refinanced over $2 billion of parent debt, achieving lower coupons, improved covenants and extended maturities.

As you've already heard, we're benefiting from these proactive efforts now. These initiatives were rewarded earlier this month when we were able to garner the confidence of a large syndicate of banks by raising $1 billion nonrecourse debt financing for the new project in Chile.

In addition to that financing we also raised approximately $350 million of additional nonrecourse financings during the third quarter in two transactions -- $240 million for our Buffalo Gap free wind project in Texas and $114 million for our Kilroot project in the United Kingdom. Although we are encouraged by these successes in these tumultuous times, we continue to take a very cautious view of the credit markets and are prioritizing our uses of capital accordingly.

In conclusion, our quarter was in line with our expectations. Operations performed well in spite of currency volatility, producing liquidity as we had projected. we were comfortable that these trends will continue and that we are well positioned to deliver on our commitments in the future. With that I'd like to hand the call back to Paul for a few closing remarks.

Thanks, Victoria. I'd just like to review some of the highlights before I open up the call to Q&A. The first one, a strong liquidity position. We generate good free cash flows and are managing the Company to maximize liquidity so we can deploy it where it creates the most value for shareholders. Second, as Victoria covered, our performance for Q2 is on track. And third, our expectation for financial performance for the remainder of 2008 is also on track, but we are lowering guidance to reflect the FX translation losses. And finally, as a result of currency movements and financial market volatility, we are reducing our adjusted EPS guidance range for the next year by $0.05 or roughly 4%.

While these are challenging times, we've been around for more than 27 years and have endured a number of difficult cycles. In the process we've learned some lessons on how to reduce our exposure to certain risks and make wiser investment decisions. Based on these lessons we've built a portfolio of businesses that generates growing, resilient and predictable cash flows. I'm confident that we're well positioned for the future. Now we'd welcome any questions that you might have. Operator, if you could please open up the lines for Q&A.

(Operator Instructions). Lasan Johong, RBC Capital Markets.

Good morning. A few questions on growth in the international and emerging markets. Are you seeing or expecting to see over the next 12 to 14 months a decline in or contraction in power consumption or how do you see that developing in the international markets?

I think that would be one of our expectations. You'll probably see economic growth decline -- what that probably means is the need for additional capacity will not go away but possibly slow down. And that's not necessarily a bad thing for us because I think given where we are I wouldn't mind deferring a few of those investments a little bit further out in time.

In many places though you find that there's already a shortage that exists. So I think people are anxious to get some projects in place in some of the emerging markets. But generally we think I'd say on balance we'd expect to see some of our projects deferred slightly, both because of the economic conditions in countries around the world, but also just because of what's going on with liquidity in the financial markets that might slow some things down too, because we will not start construction on projects until we actually have all project financing obtained and we'll have to see how that market develops.

As Victoria mentioned, the $1 billion Angamos financing was a good positive sign, but that's one we had started previously, it had been in the works. I think we're going to be watching that market very carefully, but there are some positive signs so far that things are getting done.

Okay. And if we do see this period of slower growth, do you expect to see an acceleration or reacceleration of growth coming out of these current economic doldrums?

That's tough to predict. I think people on this call have to make that judgment.

Well, what was it historically, Paul?

Historically growth of the economies or -- which growth are you --?

For the power consumption or power demand coming out of economic slumps?

I think your point is it's true, is in the emerging markets you tend to have higher demand increase than economic growth. In other words, if the economy grows by 4% you might see power demand increase by 5%. So that's true, you do see an acceleration of growth or a multiplier effect on the economic demand on what's coming out of this.

I do think though that it's not -- I mean, given where our stock price is, if there is a slowdown in growth and a slowdown in our ability to go out and close projects, what we do have is the ability to buy back stock. And I think at the recent stock prices -- obviously we thought the stock price was attractive at the $14 range, so today it's twice as attractive.

So I think to the extent we have more free cash flow, that actually enables us to do more in the way of stock buybacks which, as I said, we'll compete with new investments because we see that as a way to also increase shareholder value in this period of time where things aren't looking great, there is an opportunity for us to go increase value that way.

Can we talk about a little bit of that in terms of also -- not only are you going to potentially execute more buybacks, but how are you looking at your say returns on projects relative to the buyback of your stock?

Well, we'll compare those. And if you look at the returns on the buyback of our stock, they are obviously fairly high. When you look at just -- you look at replacement costs, you look at the cash flow streams that are coming in from our contracted plants. So I think what that means is the projects that go forward, low return or marginal projects will be more difficult for us to want to proceed with just because they'll have to compete in a much tighter environment. And we feel the cost of capital has gone up somewhat and that's something we'll take into account as we make our investment decisions.

If I may follow up on that. If you were not to do any more share repurchases and were to put all of your excess free cash flow, corporate wide as well as subsidiary wide, towards development projects, outside of the 3,000 MW that are under construction and in progress how many more megawatts can you put on line or start to develop over the next year assuming at least by the latest 2010 the capital market unfreezes itself?

If I could I'd like to defer that until our next call, only because that's the analysis we're going through right now to try and figure that out. And it's really looking at -- we've got a big pipeline of projects and what we're trying to do is prioritize those to figure out which are the ones that make sense to go forward with. I think we'll be able to give you more clarity on that in the Q4 call. At this point I just don't want to put numbers out there because we're still working through that.

Let me take another tact. Would you expect -- if there were a slowdown in your investments in the next year would you expect there to be an acceleration coming out, therefore say your three- to five-year growth projections won't change materially?

The way I think about it is what we want to keep doing, as I mentioned, we're not stopping all development, but we'd like to continue with development because development does create options to invest in the future. So we will make sure that we've got plenty of options out there for us to invest. We're also looking at the possibility of bringing in partners to take advantage of the good projects we have out there.

Even if we don't have all the capital available to go do them, we think bringing in partners, taking some form of promote would give us some additional growth. But comparing that also to the ability to buy back stock, they're all going to provide growth opportunities for our financials in terms of free cash flow per share, in terms of adjusted earnings per share.

I think if we have a nice pipeline of projects when we come out of this and the financial markets return, our intent would be to have enough of a pipeline that we could take advantage of that with the funds that we have available plus take advantage of any other third-party capital that's out there.

Great. Thanks, Paul.

Elizabeth Parrella, Merrill Lynch.

Thank you. Could you talk to what drove the $365 million reduction in parent liquidity in the quarter? Was that being used to fund equity contributions into projects like Maritza or were there some other factors? And I have a related question.

Elizabeth, this is Ahmed. I think out of there about $292 million is on our construction project. And also we spent about $140 million on stock buyback.

Okay. So $292 million for construction and $140 million for buyback, Ahmed?

Yes.

Okay. The other question I have, somewhat related, when I look at parent free cash flow this year to date, it looks very minimal compared to your projection of about $400 million for next year. So I'm just wondering what's driving that improvement on a year-over-year basis.

Elizabeth, this is Chip Hoagland. Approximately 35% to 40% of our POCF, or distribution from our subsidiaries, is expected to come in the fourth quarter. This is consistent with seasonality that we've had in the past.

Okay. Chip, just a follow up on that. In terms of your uses of parent free cash, when you look at the slide you have in -- I don't remember the slide number -- but if you look at cash payments for G&A and taxes and cash payments for interested, if we look at the nine-month numbers, is that 75% or the total or are there some seasonality adjustments or other adjustments that we ought to make to try to get a handle on what the number is for the full year?

I think that it does represent about three quarters.

Okay, thank you.

John Kiani, Deutsche Bank.

Good morning, Paul, Victoria. A question around your equity cost of capital and how you think about the business. I know you articulated I think pretty clearly that with the stock at this level and with at least $400 million of parent free cash flow in '09 and potentially more in 2010 your stock looks attractive, but that you're going to look at projects from a competing perspective.

When I look at your equity cost of capital based on where the stock is, I actually get it being fairly high in the 18% to 19% range on an after-tax basis and in the 28% to 29% on a pretax basis, which to me would make any projects that are not already under construction pretty tough to compete. And I guess that begs the question of how are you thinking about the overall corporate structure of the Company and the equity cost of capital it drives in AES' parent stock?

Have you thought about other alternatives to the conglomerate structure and the holding company structure? Some of your subsidiaries like Gener and Tiete and others that have publicly traded listings oftentimes I've noticed have traded at much higher multiples and valuations than the parent company has. What's your view on that disconnect that seems to have been there for quite a while now and how you might remedy that?

You're right. When you look at free dollar cash flow and to the extent we've started construction of projects we'll continue to fund those to get those completed. Where it becomes complicated is in the next project. But that's why I look at the private markets today as being maybe a lower cost source of capital than our own stock just because of where our stock price is.

The thinking is keep development going and that creates the options. Whether you exercise those options will depend on the cost of capital you can get, but we're looking at all those different sources. The other thing which we don't know is we've been looking at asset sales, we've initiated a couple and are trying to get some indications from the market, how the market is thinking about cost of capital.

My guess is the markets look for private asset sales, it's also looking at that number as having gone up. But the only way I can answer your question is in terms of what's happening in the various stock -- there's volatility in all the markets right now. We will take advantage of, in terms of portfolio management, where we think we can get a fair value for an asset that is not strategic, that would be an easy one to trade out of, particularly if we could take that capital and then buy back stock, that would make all the sense in the world.

In terms of longer-term structural changes, those are the kinds of things we're constantly looking at to see if there's anything we can do, but really nothing that we've seen right now that gives us any indication we could do anything extraordinary. I think the best opportunity for us is to continue to look at either things we can sell assets and use that money to buy back stock. Take the free cash flow to buy back stock. Keep development going and looking for alternatives to raise capital outside of our stock to fund the investment in new projects.

But we're looking -- we'll continue to look at those. And as we get a better indication as to where there are better costs associated with the capital, those are the ones we'll pursue.

Thank you, that's helpful, Paul. And just a follow-up on that same thought. Is there a way to use some of the cash at the subsidiary level? I've noticed you have a substantial amount of cash sitting at the subsidiaries as well. Obviously some of it is trapped, but is there a way to use cash at the subsidiaries to buy back stock as well?

We could take it back to the parent and that's -- I think our focus is really on freeing up all the cash that we can at the subsidiaries and take as much back to the parent because -- in some cases for example the subsidiaries may have had an investment plan to do some things that might enhance their profitability to some extent. But those projects we would probably defer (multiple speakers) capital up.

So wherever we can we're going to be taking capital up. In some cases it is trapped due to issues associated with retained earnings or reserve accounts, but Chip Hoagland is looking at a number of ways that we can get this freed up.

And just one more quick question if I may. From a debt pay down perspective, to the extent that you look at using some cash either on hand or free cash flow in the future to pay down debt, can you remind me of in general what your weighted average cost of debt is? Obviously you have some very tiny maturities over the next several years that it sounds like you're going to pay off with existing or future cash, but what is in general the weighted average cost of debt that the Company incurs right now?

It's between 8% and 9%, John.

And then with some of your bonds obviously trading below par, do you think those would be attractive as well?

Yes.

Great. Thank you very much. That's helpful.

Brian Russo, Ladenburg Thalmann.

Good morning. Just curious, what was the motivation to kind of postpone any incremental share repurchases since the quarter end? And when might we expect you to complete the full of $400 million?

I think as we just saw a lot of volatility both in the stock price and we also, with currency volatility, we want to get a handle on our liquidity to make sure first we could address the needs for debt and to complete our construction projects that are already in construction, make sure we get those handled. But I think as we get more comfort in that and we look at the possibility for asset sales we'll be in a better position to look at how much more we can do in the way of stock buybacks.

The $400 million stock buyback -- it is approved by the Board and is continuing. We haven't been doing any, but I think as we get more comfort in terms of our position, get a sense of the asset sales that might be able to be accomplished, we could then decide when we might pursue that. But right now it's approved up to a $400 million level.

When might we hear more on the asset sale initiatives?

I think next quarter we'll probably have a sense. We've initiated a few. We had initiated them back in the late summer and what's happened on those initiatives is that the various people who are bidding have come back and said they'd like a little bit more time to respond just because they're trying to sort out -- I think everybody in the world is just trying to sort out their own sources and uses of capital. And I think as that gets more stable we can see some results coming back. But clearly in the next call we'll have a much better sense as to what's feasible.

Could you maybe characterize the types of -- or the profile of the assets considered up for sale maybe by region or, I don't know, asset type contract generation or merchant?

I think we're really looking at where can you get attractive values in today's market and that view may be changing, we just don't know. Where the other factor is -- I think I mentioned last call, it's looking at projects that are -- there isn't much we can do to enhance the value that we can see. They're operating well. They to some extent look a little bit more like bonds.

Also, we're not interested in selling places that have long-term strategic value, but in places where we have good assets that would be possibly more attractive to other parties that want to be in a particular area than we -- than they would be for us where we don't see much potential in that market in the long-term.

All right. And then when looking beyond 2009, clearly these 3,000 MW under construction that should come online in 2010 and '11 are a huge visible growth driver for you guys. So all else equal, we can expect to see quite a meaningful step up in 2010 cash and earnings relative to your adjusted 2009 guidance, correct?

That is correct.

And when might you convey an updated multi-year guidance?

That's what we plan to do in the fourth-quarter call. But you're right. When I look back in the history of the Company, the one thing that we find is difficult to get full value for are construction projects. Because when you start construction you're sometimes two to four years away from seeing a project come online.

What's interesting though is from an NPV perspective you've effectively locked in that NPV. But you really don't start to get credit for it until maybe a year or so before these things come into operation just because it's not visible enough. But we will make sure we provide the visibility to that in the fourth-quarter call so people can make that evaluation.

Okay. And then just real quickly, on slide 11 -- well, you had mentioned earlier that subsidiary refinancing risk is very manageable. And it looks like you've got about an equal amount or a little bit more of cash at the subsidiary level than you have debt maturities and I was just wondering what the strategy there was? Are you going to look to refinance all that debt or will you look to just take it out?

I think it depends on a business-by-business basis. I know particularly in Latin America and Brazil in particular they're looking at a number of opportunities right now relative to that, but I don't think we're prepared to say that today specifically.

Okay. And then one last question. On the 2009 guidance range of $1.15 to $1.20, the currency assumptions of November 5th, would that get you to the midpoint of the range or the top or the bottom?

In terms of the $1.15 to $1.20?

Correct.

It's about the midpoint.

Okay, thank you very much.

[Sinton Bahiya], Barclays Capital.

On a year-to-date basis when we look at the parent SG&A and development expenses, they're up meaningfully year-on-year. Are there any one-time projects in there? And really looking ahead, as you potentially slow some of the new development activity, how should we look at that number?

I think -- let me just comment on the development piece and Victoria can comment on the SG&A. On the development side I think you'd expect to see that number come down just because as we prioritize we'll be doing less. The intent was to have more options to invest than we do capital for sure because then we could pick from the best. But I think given what's happened in the markets we'll probably defer some of those and slow down that development spending so you'd expect to see that number come down.

And in terms of the SG&A specifically associated with development obviously is SG&A related to headcount that would otherwise have been spending time looking on that. In addition, Andres and I have been spending a lot of time, and I alluded this earlier in the call, on a number of restructuring efforts within the Company to make sure we're making our platforms more effective and more efficient.

So taking into account things like shared pools of resources to leverage across the Company. And I think Paul in his previous comments talked to about $150 million worth of activities that are currently underway that will produce reductions in that number in 2009 in going forward.

So the SG&A development number of say $400 million this year, you could see that come down by $100 million just based on your comments?

Yes.

Great. And secondly, in terms of the subsidiary distributions, obviously about 45% come from North America. But of the total how much would you consider to be, if you like, dollar-denominated considering some of the project cash flows will be dollar-denominated? And really I'm trying to get at a sensitivity to the subsidiary distributions (inaudible) currency movements.

About 60% right now is US dollar-denominated.

Okay, great. Thank you.

The sensitivity we gave you on the adjusted earnings per share is another indication you can look at in terms of how -- because we tried to come up with a way for you to look at because it's very difficult to predict what foreign exchange rate is going to be in the future. If you look at forecasts they're all over the map.

So we just said take the spot rate the day before yesterday, peg that in and there's the average rate. But as you go through and try and look at that you can just use that sensitivity of a 10% devaluation in that basket of currencies gives you an $0.08 increase or reduction depending on what you think currencies will do.

Great. Thank you very much.

David Silverstein, Merrill Lynch.

I just wanted to recap a statement you had made, Paul, earlier about new investments in projects during 2009. Correct me if I'm wrong, but you had indicated $200 million?

Yes, what that represents are projects that are in construction that we will continue to build. In other words, you wouldn't stop those. I think anything beyond that is what I would consider to be optional.

Okay. But that would be from the parent level, where the parent level is planning to kick in dollars. But when you have your disclosure in your 10-Q about commitments to invest, does that include stuff that theoretically could be discretionary that you could pull back? Because what the Q does, it has two things. It says you have $326 million of commitments to invest in subsidiaries and then you also --.

Sorry. That is over a number of years, the $200 million is only in 2009.

I understand that. But you have $326 million of commitments to invest over a number of years which you lay out, $181 million during this quarter that we're in right now and $70 million in 2009, but that was separate and distinct from also $387 million that is supported by letters of credit. So I'm just trying to reconcile $713 million aggregate there, which might happen over a number of years, relative to your $200 million next year. So is the $200 million -- basically is $130 million of it discretionary and $70 million of it is committed?

The $200 million you're talking about in the Q is actually net of the LCs themselves.

Okay, but those LCs theoretically could be converted into borrowings at some point.

David, this is Chip Hoagland. Just to kind of -- just to address your point. Technically $130 million of the $200 million is discretionary in terms of legal commitments. However, the projects are in such a state that we feel like we're going to have to make those investments or give up substantial value. So while they're not legally committed they are in fact things that we intend to do.

Excellent, okay. So that definitely clarifies it. So then when I look at that schedule of $181 million this quarter, of $70 million in '09 and $25 million in 2010, in terms of -- that's basically the same as a claim on cash for the parent. So those are actually relatively low levels, '09 and beyond that -- real financial commitments. But when you have the aggregate of the commitments to invest of $326 million plus the $387 million that are supported by letters of credit?

Yes. Let me explain the letters of credit. The $200 million is shown net of those letters of credit. So in other words, we're calculating based on liquidity. So as the letters of credit are effectively drawn in the construction, what shows up on the balance sheet for the parent will actually be higher than $200 million, it will be something like $560 million next year. But of which a large portion (multiple speakers).

I'm sorry, Chip, $560 million of what, sorry?

Of cash investments from the parent of which $360 million have already been roughly taken into account by committed facilities. So in other words, that's not net incremental use of liquidity.

In other words, think about it as -- we put the cash in and the LCs are freed up. So from a liquidity standpoint it's $200 million. And I think what we're trying to do is just convey -- we've just lumped together legally committed investments plus the ones that it wouldn't make any economic sense to stop. We could, but there's a lot of value you'd be walking away from if you stopped construction. But those are the ones we look at as being essentially the ones we want to continue with.

The other thing you don't see is that you also have investments being made at subsidiary levels. For example, Gener has got a big investment program underway which essentially means that we're not getting as much cash up from Gener as a result. Where we've had environmental CapEx that's cash, it doesn't come up to the parent, but it's rather being invested in the subsidiary level. And those are the ones that we'll continue to look at.

But the Gener projects have a lot of value. And I think as you may have seen, we actually yesterday issued equity or sold equity in the Gener market; we're going to use that money to fund our Campeche project, which is a coal-fired project in Chile, just to make sure we've got those funds available at the Gener level so there will not be requirements for AES capital to go in.

So the parent is not going to receive that cash then?

That's correct. It will be used at the Gener level through a capital call mechanism. Basically we'll go out to the market, we'll provide our piece to that. But essentially that cash will go into the Company as cash to build out those investments because they're attractive projects.

Okay, great. I'll follow-up with some of the details later. Thank you very much, guys.

Okay. This is Ahmed Pasha. I wanted 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. Thank you very much and have a nice day.

Thank you. This concludes today's AES Corporation third-quarter 2008 earnings conference call. You may now disconnect.