愛依斯電力 (AES) 2010 Q1 法說會逐字稿

Welcome to the AES Corporation's first quarter earnings conference call. All lines have been placed in a listen-only mode until the question-and-answer session. (Operator Instructions). Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Ahmed Pasha, Vice President of Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. I would like to welcome you to our investor update call covering our first quarter 2010 results. Joining me today are Paul Hanrahan, our President and Chief Executive Officer, Victoria Harker, our Chief Financial Officer, and Andres Gluski, our 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 to vary is contained in the filings, and in our Investor Relations section of our website at www.aes.com. And now, I would like to turn the call over to Paul.

Okay. Thank you, Ahmed. And good morning to all of you joining us today. This morning I will focus my comments in two areas. First, the performance for the quarter and the implications for the full year, and second, the potential uses and timing of needs for capital and growth investments. Let me start with my view of the performance for the quarter and the implications for the rest of the year. The results for the quarter were in aggregate in line with our expectations, but we did have a few material variances by region, and it is worth noting what these were. In Asia, we are seeing a continuation of strong demand growth for power. Our results in Asia benefited from this need for power in tight supply margins. In Brazil we also saw strong growth in demand for power, resulting in favorable results for our businesses there.

These positive results and projections for the rest of the year, however, effectively offset the negative impacts of lower gas prices and reduced volumes of our US portfolio, however, those are plants that do not have long-term off-date contracts. While we have most of our plants in the US with long-term contracts, we do have some commodity price exposure. The net result of the strong performance in Asia and Brazil, which offsets our commodity exposure in the US, allows us to maintain our guidance for the year, excluding the near-term effects of the CIC capital injection.

In the past, we have talked about some of the benefits of having geographic diversification. This year I really think that we are really seeing the benefits of being a global player, as we are benefiting from the stronger economic growth, and therefore, growth in demand for power, in Asia and parts of Latin America, such as Brazil. While developed economies, such as the US, have less demand growth and lower pricing associated with the lower gas prices for those plants that are not contracted.

Looking beyond our operating plants, this benefit of being diversified geographically, was also further evidenced by our reaching a major milestone in Vietnam this past month. We signed a power purchase agreement for a 1,200 megawatt greenfield mine mouth coal project. The economic growth in Vietnam is resulting in a tremendous need for new generating capacity, and I will discuss this and some of our other growth projects following Victoria's presentation of our financial results. Now I will turn the call over to Victoria to review our performance for the quarter, and what we see going forward. Victoria?

Thanks, Paul, and good morning everyone. As you have heard we are off to a good start this quarter. From a quarter-over-quarter perspective, we saw improvements in nearly all of our key financial metrics. Operating cash flow increased by more than 90% due to higher gross margins, improved collections, and lower quarter-over-quarter payments for swap-related settlements in Brazil. Adjusted earnings per share, excluding the contract incentive payment in 2009 earnings to our Northern Kazakhstan businesses increased modestly. More importantly, these results are on pace to meet our 2010 guidance, adjusted for the impact of the CIC equity transaction.

These positive results for the quarter are driven by our continued operational successes at our Asia and generation plants, as well as at our Latin America utilities. Of course in the same period there were some challenges that partially offset this favorability, declining energy prices in North America, and flat demand in the US, the earthquake in Chile, and the expiration of a favorable US tax law related to the treatment of certain nonUS transactions. That said, as a result of the close of the CIC equity transaction in the quarter, and our focus on cash management, our corporate liquidity grew to $2.8 billion, which puts our balance sheet in a very strong position, and enables us to capitalize on the growth opportunities provided by our advanced pipeline, or other potential M&A transactions, in order to increase shareholder value.

Before I discuss the operational details that drove our financial results this quarter, let me give you some perspective on some macroeconomic industry trends we have seen this quarter. With many world economies recovering from recessionary trends at differing paces, monetary policy and currencies provided both opportunities and challenges. As a result, foreign currency exchange rates moved broadly in our favor when compared to the same period in 2009. During the quarter, all key currencies appreciated, with a 22% increase in the Brazilian Real providing the greatest lift.

The Columbian Peso and Euro also increased 19% and 6% respectively. Likewise the economic recovery began in earnest in the latter part of 2009, electricity demand to support manufacturing and construction in those regions has started to show signs of rapid expansion as well. For example, our volume of electricity sold in Brazil has increased by 5% through March, and is projected to increase 4 to 5% for the full year. In Northern Chile we also realized a 4% increase in volume. This compares to an expected GDP growth rate of 4% to 5% for both Brazil and Chile respectively. On the other hand lower natural gas prices in North America resulted in lower dispatch of coal-fired generation, in favor of gas-fired generation, consequently our coal-fired businesses in New York were negatively impacted, experiencing a 25% decline in power prices and a 9% decline in volume.

In addition, the February earthquake in central Chile suppressed demand in its immediate aftermath. In March, we saw an 11% year-over-year decline, which offset what was previously a positive trend there, bringing the year-to-date results to a decline of 2%. However, much of the economic activity is back in full swing, and our plants in this region have been back on line since late March. As a result, we do expect an uptick in volume as the economy in Chile shows no indication of a permanent retrenchment, with projections improving by 2% over 2009, despite the first quarter impact of the earthquake.

Now let's discuss some specific results for the first quarter. For the quarter earnings benefited from a strong operating performance at our businesses in Asia, particularly in the Philippines, and higher volume in our Latin America utilities, as well as favorable foreign exchange rates. In addition, the non-cash gain mark-to-market from our gas hedges associated with the merchant businesses in New York, contributed over $44 million of favorability versus the first quarter of 2009. These were offset partially by lower volumes in central Chile, lower energy prices in New York, and a higher effective tax rate.

Our strong operating performance was largely driven by our 660 megawatt plant in the Philippines, Masinloc, which had begun to meaningfully contribute beyond its prior operating forecast. I am pleased to report that this improvement has also continued into the current quarter, as we completed the reconditioning of equipment there, including the steam turbine generator, the boiler, and ancillary equipment. Compared to the first quarter of 2009 the plant's availability increased from 48% to 74%, which enabled it to increase net production by 129%. This improvement helped us to capitalize on supply shortages in the Philippines. As a result, Masinloc's gross margin improved by approximately $50 million during 2010 compared to 2009.

Our consolidated gross margin increased $144 million, or 17% relative to 2009, with favorable foreign currency exchange rates accounting for $101 million. Excluding foreign exchange impacts, these results were better than the first quarter of 2009, driven by operating results in our Asia generation facilities and Latin America utilities. On a proportional basis, we earned $626 million of gross margin, an increase of $93 million, or 17% over 2009, driven by Asia generation and Latin America utilities. During the first quarter, tax expense was unfavorable as our effective tax rate increased from 27% in Q1 2009, to 34% in Q1 2010, as I mentioned. This is due in part to discreet factors that lowered the effective tax rate in the same quarter 2009, as well as the already mention expiration of a favorable US tax law, which has not yet been extended. Adjusted EPS decreased $0.11 to $0.26. This decline is primarily related to the $0.12 of earnings that was earned in Q1 2009, relative to our contract incentive payment from the sale of our Northern Kazakhstan businesses.

Now turning to cash flow, on a consolidated basis, our operating cash flow increased $327 million over last year, to $684 million. This increase was the result of higher gross margin, increased collections, and a few discreet items that negatively impacted the first quarter of 2009 comparatively. For example, last year Eletropaulo and Uruguaiana paid approximately $70 million in swap-related settlements. Also collections in the Dominican Republic in this quarter of 2010 benefited from payments of approximately $90 million in receivables. Likewise proportional free cash flow has increased, up $141 million to $335 million, or 34% of our full-year guidance. Subsidiary distributions were $303 million in the first quarter of 2010, which puts us on track for our full-year guidance of $1.1 billion to $1.2 billion.

Now I would like to give you a brief update on some key transactions, which we have referenced in prior calls. First, the asset sales where we expect $390 million of proceeds. Of this total, we expect $200 million from Oman and Pakistan. The sales process for Oman and Pakistan have achieved several important milestones, such as lender and regulator approvals. We would expect that they will close by the end of the second quarter of this year. Second, with regard to our previously announced joint venture with CIC, a non-binding letter of intent to sell a 35% stake in our wind business is progressing on track, with expectations of being signed by the end of June.

Now turning to liquidity. As Paul mentioned we have an advanced pipeline, nearly 9,000 megawatts which is achieving development milestones at a rapid pace, for which we now have $2.8 billion of liquidity, of which $2.1 billion is in cash for support. This is a $1.5 billion increase from last year, largely due to the receipt of the CIC equity sale proceeds and cash management. This liquidity will be further enhanced by the $390 million in asset sales in the Middle East and Pakistan. We also anticipate $149 million repayment of a loan from the Brazil wind investment. These additional sources will bring our total liquidity to $3.3 billion, including $2.7 billion in cash. As Paul previously outlined, we have more than enough projects under assessment to make solid use of this cash. In the interim, we have already announced $400 million in temporary debt retirements, generating annualized interest savings of $35 million.

In addition, we have also identified $670 million of growth investments which includes approximately $200 million related to our ongoing construction program. These investments will contribute to our growth beyond 2010. We also have our existing $214 million senior unsecured notes due in September of this year, which we may elect to refinance. The balance of liquidity will be applied to our advanced pipeline projects, and possibly additional temporary prepayment of debt.

Now I would like to give you a brief update on our 2010 guidance. With the exception of EPS, we are maintaining all of our previous guidance elements. As I mentioned on our last call, our prior guidance did not reflect any impact of the pending CIC equity transaction, as it had not closed at that time. We did, however, provide an estimated dilution range of $0.07 to $0.09 depending on the exact use of proceeds and timing. We are now updating our EPS guidance to reflect these impacts, in addition we are bringing our FX and commodity-sensitivities forward to March 31st, 2010, as well as reflecting the earnings impacts of the Ras Laffan sale, which will be reported as discontinued operations as of January 1st, but effective in the second quarter.

Now let me walk you briefly through the drivers of EPS. Our previous 2010 adjusted EPS guidance was $1.00 to $1.05, which was based on preCIC share counts of approximately 670 million. Holding everything else constant, the increasing shares combined with the interest expense savings from $500 million of debt repayment, was bringing our previous guidance down by $0.09. This is consistent with the dilution range we provided on the last call. The movement in FX and commodity curves from December 31st to March 31st, 2010 lowered our EPS outlook by $0.06, primarily due to lower gas prices. This is consistent with EPS impacts implied by our application of sensitivities provided in February, when adjusted for addition shares.

We also recently announced the sale of our business Ras Laffan, this facility was expected to contribute approximately $0.02 of EPS in 2010, which will be moved into discontinued operations. Offsetting these negative market trends is our favorable operating performance from our businesses in the Philippines, Hungary, and Latin American generation, which had exceeded the expectations in our previous guidance, especially in the first quarter by approximately $0.07. So in total, this is a $0.10 decrease in our adjusted EPS. For diluted GAAP earnings, our outlook for EPS from continuing operations has declined by an additional $0.02 due to make hold premiums and deferred financing and cost write-offs, associated with the early retirement of debt. However, these costs are already excluded from adjusted EPS metrics.

In summary, we are off to a good start with solid first quarter results. We are poised to leverage the benefits of our liquidity, as projects from the advanced pipeline reach new milestones, and we are successfully executing on our construction program. Now let me turn it back over to Paul, to provide additional commentary on our development pipeline.

Thanks, Victoria. I would now like to talk about the potential uses of the proceeds from the recent investment by China Investment Corporation into our Company. As we discussed before, we see the proceeds from the CIC investment as providing us with capital that can be used for both acquisitions, as well as for greenfield investments. I can provide the specifics on the greenfield projects in our portfolio, and I will do that in just a moment, but let me first talk about our thoughts on acquisitions. With respect to acquisitions, we do see multiple opportunities to acquire attractive assets in the market today. As we begin to move forward with potential acquisitions, we will not be able to talk about the specifics of the deals, or go through the various processes which generally will require confidentiality throughout any bidding and subsequent negotiation process. I can however, give you a sense of the general directions or themes that would drive our thinking on potential acquisitions.

The first would be to target geographic areas and business lines that we expect to have relatively higher growth and return prospects. These areas would include high-growth geographies such as Asia, the Middle East, Turkey and parts of Latin America. In addition, we see continued high growth in the renewables business line, especially in OECD countries, and increasingly in high-growth emerging market countries too. The second type of acquisition would be to target opportunities in countries where AES already has a presence. And we see some of the compelling value opportunities that others might not see, or might not be able to capture. These sorts of opportunities would exploit our advantage of having quality people on the ground, who can quickly understand the potential business targets, and determine how we might be able to create more value by integrating these with our existing platforms in these locations. It is obviously difficult to predict the timing of any acquisitions, as it will depend on multiple factors, but we will continue to scan the markets for opportunities that bring the right kind of value and strategic proposition to AES.

Now I would like to talk about some of our more advanced greenfield opportunities. In summary, we have roughly 3,600 megawatts of projects in advanced development, representing $1.4 billion of equity that would be needed through the end of 2001 to fund the equity for these projects. Some of the projects are listed on slide number 12 from our package which was distributed this morning. We obviously have many other projects in development, but these are the ones on this list that we think are most likely to proceed, based on progress to date. I would like to highlight some of these advanced greenfield opportunities now. I will start with our renewables business line. In wind, we recently announced the acquisition of 700 megawatts of greenfield pipelines in the UK and Poland. We believe that we can start construction on 200 megawatts by then of 2011, requiring equity from AES of $133 million.

We also have another 224 megawatts of advanced wind projects in the US, that will require approximately $195 million in equity. In solar, as part of our AES Solar joint venture with Riverstone, we continue to see attractive opportunities in southern Europe, as well as the US. We believe another $100 million will be invested in 2010 to construct 146 megawatts. In hydro, we one 500 megawatt hydro project that has acquired water rights and received a number of its required permits in Chile. This project will require approximately $400 million of equity, and should close in the first half of 2011. We are also continuing with the development of several small hydro plants in Turkey.

In thermal power, in addition we have two major coal-fired projects, one in India, a 1,320 megawatt mine mouth expansion of our 420 megawatt plant in the state of Orissa. This will require about $200 million of equity, and the other is a 1,200 megawatt mine mouth coal-fired project in Vietnam, which will require roughly $400 million of equity, and both of these should enter construction in the first half of 2011. All-in the advanced development projects that we have highlighted as I mentioned earlier, represent over 3,600 megawatts, and would require over $1.4 billion of equity contributions, and this is in addition to our projects currently in construction, which will require roughly $300 million to complete. I also expect to see our pipeline of advanced projects continuing to grow in size. With capital now available to fund new equity investments, we can continue to pursue those projects that are a good fit strategically with our portfolio, and to add more projects to our pipeline over time, in addition to continuing to scan the markets for attractive acquisition opportunities.

I would also like to mention we did have three more construction projects come online during the quarter. In Chile, we had our 152 megawatt Guacolda IV plant come online, in Bulgaria our 156 megawatt wind project in Kavarna also started operation, as did a small 35 megawatt wind project in France. In summary, the year is off to a good start, we have capital and we have a number of potential economically attractive uses for that capital, which will increase the value of our Company going forward. At this point, I would like to open up the call for questions. Pappy, if you could open up the line for the investors.

Thank you. (Operator Instructions). One moment for the first question. The first question comes from Brian Russo, Ladenburg Thalmann.

Hi, good morning. Thanks for slide 12 and the late-stage development projects. Could you, I get the sense earlier that you are seriously considering M&A, or it might even be involved in some discussions. And I just wanted to get a sense for what your portfolio management strategy is? There have been several large mergers and asset-sale announcements in the US, and I just wanted to get your sense as to what your strategy is?

I think what we have been seeing that has been looking most attractive has been, where there are some assets or a portfolio of assets that might be going up for sale. I think any of these that would come with development opportunities attached to them could be attractive. I think it is hard to tell how lucrative the M&A would be. We have participated in some bids for assets. In some cases, the decision was made by the sellers not to proceed. We think there is going to be attractive opportunities out there just because there are a number of people who are either deciding that they don't want to be in this business or need capital for other reasons, and we think that is going to create opportunities.

I think in terms of our portfolio management strategy though, it is to look for the opportunities like I said, either the high-growth emerging markets, we see a lot of growth. It is going to be renewables business line, or it is going to be places where we have some existing assets where we can see guys that others might not, where there is not going to be much competition. In terms of our portfolio-management strategy, we have capital right now, but as we start to see opportunities to acquire things, and we get deals close to closing, we will start looking at the portfolio, where we may be able to transact out of certain assets or to sell down pieces of them that would help finance growth beyond that. But right now I think we are in pretty good shape with respect to capital. We don't need to sell anything to get capital to grow.

Paul, could you just maybe discuss a little bit, AES's corporate strategic vision? Do you consider yourself a developer of global generation assets, or do you view yourself as an owner and operator of regulated utilities?

We see ourselves as developer and owner of greenfield assets or even doing acquisitions of power-generation assets. I think the utility assets, I think we found have been, some have been attractive, but we don't see that as a big line growth for us in the future. I guess that could change if we saw compelling value opportunities, but we haven't see any out there that would cause us to think that they are the most attractive way for us to grow.

Do you still consider the utility assets core assets?

We do, I think particularly in some locations where they actually can result in, where we have got integrated utilities, and that can result in additional generating plants being added, we see that as being attractive. In some places like Brazil, we think it is critical to be on the distribution side of the business, in order to maintain enough of a presence in the country. We also think they are good returns on those assets. But I would say probably not so much in the US. We wouldn't be looking to see utility acquisitions in the US. And I think overseas it really hasn't been on our radar screen as being terribly economically attractive. There aren't many assets out there that would be for sale.

Okay. I noticed you left out the 2011, earnings per share guidance that I think you provided in the last conference call. I think it was $1.15 to $1.25. Any reason why that was excluded with this update?

This is Victoria, Brian, what we had done here is especially updated the guidance for the CIC proceeds relative to 2010, in part from a timing perspective, and just to try to make sure that that was clear. In terms of 2011, we are not changing our guidance relative to the baseline, and we are looking obviously at a number of different scenarios in terms of what the investment of the CIC proceeds would do to the baseline for 2011. I think there is more to follow-on that, but it is early days relative to what the implications would be.

Right. I guess at this point we could just take a full year of CIC dilution plus the full year of the interest-expense savings from the temporary debt reduction as kind of an offset to your previous guidance, as a starting point?

Yes, that would be a starting point. I would go with that as being worst case, it will depend on how we deploy that capital.

Okay.

And I think as we go through and have announcements about what we are doing, then we can provide a little bit more clarity as to what that looks like. And towards the end of the year I think we will have a much better feel for that.

Okay. And one last question the sensitivities on slide 15. Could you just maybe go through some of the major subsidiaries or assets that are impacted by the changes in the various commodities, like New Castle coal impacts I believe the Philippines, [Internomics] coal Eastern Energy, just give us a sense of kind of the subsidiaries that have the greatest sensitivity?

Yes, what I will do is have Rich Santoroski, who is our Chief Risk Officer, and knows it in great detail, I will have him kind of walk you through that.

Sure. Okay. In terms of the commodity sensitivities, the international coal is as you said, primarily Masinloc and [Hen air] are really the largest associated with that. It includes Hawaii for international coal as well. The NYMEX coal would represent much of our US coal exposure. So, Thames, Eastern Energy, primarily in terms of the NYMEX. Crude effects largely power prices in a lot of our Latin American businesses, so in a lot of those markets where diesel generation sets power prices, and then we have cost price exposure, we really get a net benefit from a higher crude oil price. And obviously Henry Hub Natural Gas impacts power prices in North America. So IPL wholesale sales, sales from Deepwater in Texas, and Eastern Energy in New York, are the primary businesses affected by natural gas pricing.

And just on the euro, given what is occurring in the euro zone, what are the major subsidiaries that we should look for that have the sensitivity of the euro?

Well, I mean in 2010, there is really the linkage with --Well, there is Cartagena and Cameroon linkage.

Thank you very much.

The next question comes from Lasan Johong, RBC Capital Markets. Mr. Johong your line is open.

Thank you. Let me just run over the 2010 guidance one more time. If I am not mistaken, the positive side is that you have strong operations out of Latin America and Asia, which contributed $0.07 to first quarter results, so if we kind of extent that, that is plus the $0.28. Going against that is commodity pricing decline of $0.06. Qatar coming out at $0.02, and headwinds potentially from commodity and US operations. It sounds like net of, and also currency potential, because the dollar is continuing to strengthen right now. So the net effect of all of this says that it should be approximately zero effect. But that seems very conservative.

Including the CIC it is about $0.10 total. So for the $1.00 to $1.05, moved to the $0.90 to $0.95, including the positives that you just referred to on ops which were $0.07, and the negative $0.17, the $0.09 of CIC, plus all of the other factors you just mentioned.

So you are saying that the positive operating results going forward will be canceled out by all of these other negative effects?

Essentially at first quarter we are not saying there is going to be a tremendous upside beyond what we are currently seeing for the first quarter, but obviously it is early days within the year as well.

I see. That is interesting. Paul, I am a little confused about your strategy in the Middle East. On the one hand you basically got rid of everything, and on the other hand, you are saying that you might see further growth opportunities in the Middle East. Why this kind of sell out and come back in strategy? What motivated that?

Well, very simply, it was the value. We saw that there were opportunities to raise some capital at effectively attractive prices. At good multiples, if you think about what, if you think about what return are you selling, It is a return that we probably wouldn't want to keep in the Company. And I think strategically we talked about a lot, but we felt owning the assets that were there wasn't critical to us doing more in the region. We are still, for example, we own a plant in Jordan, and we see some additional expansion opportunities there for some peaking plants, for some wind plants, that are getting pretty aggressively into renewables. We see other opportunities in the region, which we will continue to pursue. But I think as a rule, where there are some good opportunities to transact out of assets at good prices, where it doesn't strategically harm us, we will look very hard at doing something like that. So that is effectively what happened there. And we are pretty confident that by selling down, it is not going to hurt us from investing, or finding more opportunities in the Middle East.

Okay. In terms of Brian's question about utilities in the US, any chance that you would look to sell IPL?

We don't have any plans to sell IPL right now. It has been a good business for us. It is one that, we get that question often. We have thought about at it lot, but right now we don't have any plans to sell it.

And the flip side is any updates on Brasiliana?

Andres Gluski is engaged in that on a pretty regular basis. He could probably comment.

Sure. Hi, Lasan, hi are you?

Good.

We have no change in the status of Brasiliana, in terms of the government going forward with an auction, or the sale, we are continuing to be in a situation, where should any opportunity open up, we are capable to take advantage of it, and to increase our share of Brasiliana.

Okay. Last question is for Victoria, if you don't mind, the liquidity charts that you showed were very helpful, but I am assuming status quo, fast forward to the end of June, and you close on the wind deal with CIC, that your liquidity from this level will go up another $570 million, correct?

The intent is for that, and I think it as we said to basically stay within the business for reinvestment, so it would not be necessarily used for other corporate means.

Oh, I see. Interesting. Okay. But basically, then, that means that you have $2 billion remaining to kind of, quote unquote, play with, after the listed identified uses of cash, correct?

Yes, in CIC we have looked at the opportunities for the wind sector, and think there are some opportunities out there, both in the greenfield pipeline that we have, but also to have that kind of the capital in the wind business allows us to look pretty seriously at the acquisitions, and there are some portfolios that are out there that we think could be attractive.

The last question for Andres Gluski. Andres if you do exercise your right of first refusal on Brasiliana, about how much would that soak up in terms of acquisition price?

Okay. As of yesterday, the [inaudible] of BNDS' position in Brasiliana is at about $1.8 billion. Right. But we have lines of credit locally, and we also have the opportunity to, say partner up with somebody. So that is sorted of a ballpark figure of the value of BNDS' share in Brasiliana.

Perfect. Thank you very much.

The next question comes from [Dan Lipshitz for Tree] Partners.

Hey, guys, I had a question on, again the 2011 guidance, and that is, do the sensitivities that you have given previously still apply, in terms of us doing our own work, to try to update where those numbers stand right now? Or have there been changes in those underlying FX [exposure] sensitivities?

We would need to obviously adjust it on a per-share basis for the increased CIC, but the baseline itself at this point would be the same.

Got it, great. And just wanted to say that I really appreciate you rolling forward from December to March, and if you could do that every quarter, I think it would be really helpful on helping people stay on top of those commodity shifts, and modeling for the Company, so thanks a lot, guys.

Sure.

The next question comes from Clark Orsky, State Street Global.

Hi, I just wanted to ask a question about the liquidity bridge on Slide 8, and you talk about the temporary reduction in debt, similar to what you have said before. What is your sort of long-term strategy for non-recourse parent debt? What is the right level that it makes sense to move it down over time, et cetera?

I think we are comfortable with our coverage ratios as they exist today in terms of the BB range. I think we have continued to go down a path, particularly when we sell an existing facility, that we pay down debt commensurately. So we wouldn't be look to be changing that from a coverage ratio stand point. I think we are making sure we are clear on the fact that some of these are either prepayments or early retirement, may in fact be in a future roll forward or refinance depending on what our liquidity needs are.

So you are comfortable, sort of long-term financial flexibility, carrying, I don't know, $5 billion or $5.5 billion of non-recourse debt?

The way I look at it is we are looking for the metrics that would be associated with a strong BB.

Okay.

We think that is really, we don't think we need to get to BBB. We would need to be a strong BB, and I think that is long term where we would like to be. The other thing we are going to try to do, I think is where we can, is have non-recourse debt at the subsidiaries and less at the parent. I think over time that is a better place to be.

Okay. Thank you, that is helpful.

The next question comes from [Amit Bhatia] Bank of America.

Good morning, guys.

Good morning.

Good morning.

Could you just remind us what your hedge percentage is at Eastern Energy and Deepwater, and if you could just provide us what, historically your hedging philosophy has been for the merchant US assets?

Sure. This is Rich again. For Eastern Energy for the balance of the year, we are probably hedged on a capacity basis, a little bit more than 50% of the output, or 50% of the capacity that is largely hedged with natural gas futures, and some power. But if you think about it in terms of actual margin hedged, because gas prices are so low, and expected generation at those levels is lower, effectively 80% of the margin is hedged for this year, but 50% of the capacity. So effectively there is more upside to downside in terms of commodity movements in North America. There is a very small amount of hedging at Deepwater. Traditionally, we had hedged a little bit more moving forward what is different recently is forward power hedges, the actual implied heat rate of power, was the implied conversion between natural gas prices and power prices was far lower than historical or spot prices, because of that we were hedging far less of the power and trying to realize that heat rate gain through spot, and that is what ultimately lead to using the natural gas hedges versus the power hedges for Eastern.

So you are largely open on a heat-rate basis both in Eastern and at Deepwater?

On a heat-rate basis, yes.

Just coming back to Brasiliana real quick, it sounds like if I heard Andres directly, are you saying you are more predisposed to be a buyer rather than a seller?

It is going to depend on the price obviously, but we think it is going to be difficult to get a buyer who can step up with the amount of capital that is needed to buy the whole thing. So I think we like the asset. We like the business. We think there is a lot of growth potential in Brazil. So we are predisposed to be a buyer for sure. Clearly, if the price is crazy, we would be a seller. And we would still own some assets in Brazil, and then we would look to grow elsewhere. But right now we don't see that likely being the case, that the price would be extremely high.

And the $1.8 billion I guess value of BNDS' stake, does that largely consist of the public equity then, Eletropaulo and NTSA?

Yes, that is right. The mogul of the value of those two.

Okay. Thank you very much.

The next question comes from Kush Patel, Kingsland Capital.

Just a quick one. You had mentioned the debt repayment as a potential use of the large amount of cash that you currently have, and will have. With the term loan going current at the parent in a few months here, what are your thoughts of taking that out, and just cleaning up the cap structure a little bit?

At this point we are committed to what we had discussed in terms of the $400 million of the parent debt, I don't think we are actually getting much beyond that, we are going to continue to monitor it as the summer goes on, the use of, the need for cash, and use for proceeds for taking out the term loan is not our current projection.

Okay. Thanks.

The next question comes from Patrick Elliott, Ivory Capital.

It has been asked. Thanks.

Okay.

Mr. Elliott, your line is open.

I think his question was already answered.

At this time, there are no further questions.

Okay.

Okay. Well, thank you, everyone for participating in today's call. If you have any follow-up questions please don't hesitate to contact either Chris or myself in the Investor Relations group. For media inquiries please contact Meghan Dotter. Thanks again, and have a nice day.