愛依斯電力 (AES) 2010 Q3 法說會逐字稿

Welcome to the AES Corporation third-quarter earnings call and thank you for standing by. At this time all participants are in a listen-only mode until the question-and-answer session of today's conference. (Operator Instructions)

Also at this time I would like to inform all parties that today's conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the call over to Ahmed Pasha. Thank you, sir. You may begin.

Thank you, Kathleen. Welcome to AES Corporation's third-quarter earnings call. We appreciate you being with us this morning.

Joining me today are Paul Hanrahan, President and Chief Executive Officer; Victoria Harker, our Chief Financial Officer; Andres Gluski, our Chief Operating Officer; and other senior members of our management.

Before we begin our presentation let me remind you that our comments today will include forward-looking statements which are subject to certain risks and uncertainties. For a complete discussion of these risks we encourage you to read our documents on file with the SEC.

Our presentation is being webcast and the slides are available on our website, which you can access at www.AES.com under Investor Relations. With that I would like to turn the call over to Paul Hanrahan, our CEO.

Okay. Thanks, Ahmed, and good morning to all of you joining us today. Today I will briefly comment on our financial performance for the year-to-date numbers. I will then give an update on our construction pipeline, which will be delivering additional cash flow and earnings next year. In addition, both Victoria and I will comment on how we are thinking about allocating capital between our various investment opportunities including our own stock and debt securities.

First our year-to-date operating performance. Overall we earned $0.68 of adjusted EPS in the first three quarters of 2010. At the same time last year we had earned $0.85 a share, although this included $0.17 a share of one-time payments in 2009. These included an earnout payment associated with the sale of our Kazakhstan asset and a settlement of our gas-fired plant in Spain.

So excluding those one-time payments our performance was essentially constant on a year-to-year comparison basis. The reality is that the underlying performance of our business improved a lot in 2010. Those improvements were needed to overcome the significant negative effects of lower dark spreads in the US as well as a higher book income tax rate.

In order to understand the underlying performance of our business better, it is useful to think about four big categories that have impacted our performance to date relative to last year, these being -- one, operations and FX, primarily resulting from the strong performance of businesses in Latin America and Asia; two, commodity prices, which includes the impacts of lower dark spreads in the US; three, a higher share count associated with building up a cash balance for new investment opportunities; and four, a higher book text rate.

When we compare 2010 to 2009, there was an improvement of $0.17 from our underlying operations and FX -- which, by the way, I netted out the increased BD expenses if you look at slide 17. This positive performance completely overcame the negative variances we experienced, those being $0.07 from commodities' lower dark spreads; $0.08 from higher share count; and $0.02 from a higher tax rate.

Even with the negative impacts of lower margins in our US merchant businesses, our strong operating performance did result in increased proportional free cash flow on a year-to-date basis, allowing us to deliver $970 million of proportional free cash flow to date, which is $127 million or 15% higher than the same period last year. So despite the compression in the US dark spreads we have been able to meet our targets for both earnings and cash flow.

Now I will turn over the call to Victoria who will discuss our performance for the financials in more detail.

Thanks, Paul, and good morning, everyone. As you have heard, the third quarter was in line with our expectations. Proportional gross margin rose 2% attributable to higher volume in North America, higher volume and rates in Asia, as well as favorable foreign exchange primarily in Brazil. Cash flow is relatively flat this quarter versus the same period in 2009, but has increased when you consider the businesses sold earlier this year.

Adjusted EPS of $0.20 declined by $0.04, mostly driven by a higher share count. Adjusting for this, adjusted EPS is in line with last year -- which is no small feat given commodity price moves and slower than expected economic recovery in some global markets.

Now let's discuss the results for the third quarter in greater detail, starting with the most significant drivers affecting gross margin. Our trends this quarter are similar to what we have seen in the prior two quarters.

Economic expansion in Asia and Latin America continue to spur power demand growth as both manufacturing and construction in these markets surged. In the US, demand also increased during the warm weather this summer, which is especially evident in IPL's results, showing a 12% increase in retail volume. Market prices also remained above prior-year levels at certain businesses, most notably in the Philippines and in Argentina.

Our generation plants in Argentina benefited from higher market prices, while the Philippines saw both higher spot and contracted rates for generation. These beneficial price trends were offset by challenges from the compressed margins in North America where our coal and pet coke fired merchant plants were impacted by lower gas prices again this quarter. We expect this trend to continue into the fourth quarter and beyond.

The favorable year-over-year trends in foreign currency exchange rates have slowed compared to earlier this year, but are still favorable when compared to the third quarter of 2009. For example, quarter-over-quarter the Brazilian real and Colombian peso appreciated 7% and 10%, respectively.

Our consolidated gross margin was $985 million, an increase of $18 million or 2% relative to 2009, with favorable foreign currency exchange rates accounting for $32 million of the uptick.

Excluding foreign exchange impact, gross margin is down by $14 million versus the third quarter of 2009. This decrease is driven primarily by the recovery of a $57 million receivable in 2009 at our Brazilian utility Eletropaulo that had been previously written off. In addition, declining dark spreads in New York, a cumulative adjustment to regulatory liabilities at Eletropaulo, and higher fuel costs at Gener all applied downward pressure on gross margins.

These negative drivers were mostly offset by favorable volume in North America and higher prices and volume at Masinloc in the Philippines. Excluding the nonrecurring items in Brazil related to regulatory liabilities and receivable recoveries, gross margin would have increased by 10%.

On a proportional basis we earned $553 million of gross margin, an increase of $11 million or 2% over 2009. Excluding foreign currency exchange impacts, proportional gross margin decreased by $1 million.

In the third quarter, we earned $0.05 of diluted EPS from continuing operations. Excluding the impacts of impairments and unrealized non-cash foreign currency gains, adjusted EPS was $0.20.

I would like to take a moment to review the impairments we booked this quarter. In total, these accounted for $314 million or $0.26 a share on a GAAP basis.

The largest driver of this expense is at one of our gas-fired generation plants in California whose impairment was caused by recently passed once-through cooling regulations, 316(b) of the U.S. Clean Water Act.

In addition, we recorded an impairment charge at our merchant business in Hungary as a result of our third-quarter negotiations with the offtaker. Hungary continues to experience decreases in demand and margins resulting from the significant downturn in their economy, as we have discussed on previous calls.

Please remember that these are non-cash items impacting GAAP EPS from continuing operations, but they are excluded from adjusted EPS.

Also, on an adjusted basis, tax expense is unfavorable, with the effective tax rate increasing from 35% in the third-quarter 2009 to 37% in the third quarter of 2010. This puts our ongoing year-to-date tax rate at 33% subsequent to the impacts of the CEMIG transaction recorded last quarter.

As indicated then, our actual results reflect higher tax rates due to the December 31, 2009, expiration of a favorable US tax law related to the treatment of certain non-US transactions.

If this tax law is not renewed -- had been anticipated at the time we issued our 2010 guidance earlier this year, it would have had the effect of negatively impacting our full-year earnings by approximately $0.11. We have identifying mitigating actions that will offset $0.05 of this increase, bringing the net negative impact to $0.06.

We have summarized these drivers on slide 7, which bridges last year's third-quarter adjusted EPS of $0.24 to this year's $0.20. Favorable operating performance and foreign exchange, offset partially by higher business development costs, drive a $0.03 improvement this year.

In addition, our higher effective tax rate resulted in $0.01 decline. Commodities moved against us by $0.02. And the higher share count negatively impacted EPS by $0.04.

Now let's discuss cash flow. On a consolidated basis, our operating cash flow decreased $7 million from last year to $1 billion and declined $13 million on a proportional basis. These results demonstrate the strength of the portfolio's ability to generate cash flow, given that we sold businesses that contributed $78 million of operating cash flow in the third quarter of 2009. These sales, which earned returns in excess of 20%, are excellent examples of our portfolio management opportunities.

Similarly, consolidated free cash flow decreased by $32 million to $827 million for the quarter, driven mostly by the businesses sold. In addition, higher maintenance CapEx at our Brazilian utilities and environmental CapEx at IPL contributed to the decrease in free cash flow. On a proportional basis our free cash flow decreased $37 million to $412 million as a result of these same drivers.

Now turning to full-year 2010 guidance. Overall we are very pleased that we remain on track to hit our key operational and financial guidance metrics. Through the third quarter we have already achieved approximately 75% or more for each of the guidance metrics, except for diluted earnings per share which includes the impact of the non-cash impairment charges I mentioned earlier.

Given the impact of these impairments we have lowered our diluted earnings per share guidance by $0.17 to $0.63 to $0.68. Cash flow has exceeded our expectations and we are therefore raising our consolidated operational cash flow and free cash flow guidance by $175 million. Likewise, our proportional operating cash flow and proportional free cash flow metrics have also been raised by $50 million.

Adjusted EPS guidance remains unchanged at $0.90 to $0.95, assuming the renewal of the US tax law I discussed earlier. Should this not occur, our adjusted EPS expectation range would be $0.85 to $0.90, reflecting the impact of both the higher tax expense as well as the mitigating actions we are taking.

Potentially offsetting some of these actions is the renegotiation of a fuel-related contract within one of our Latin American subsidiaries. While the timing of these discussions is uncertain, we expect it could be within the next three to nine months and could have a negative impact to adjusted EPS after tax of $0.01 to $0.02. We will continue to monitor this and update you accordingly.

Now turning to Parent Company liquidity. Our Parent liquidity of $2.1 billion is relatively flat versus the second quarter of this year and has increased $689 million over September 30, 2009. During the quarter, liquidity increased by $221 million for business sales and subsidiary distributions, net of corporate overhead and interest expense.

Additionally, the revolver capacity was expanded by $221 million. I am also pleased to announce that, while not included in this balance, we also closed the sale of our Qatar business in October and received $180 million of net proceeds to date, subsequent to quarter end. In turn, these proceeds have helped position us to opportunistically repurchase $90 million in AES stock since July, when we saw a market discount to our intrinsic value.

Beyond this repurchase our uses of liquidity included the retirement of our September 2010 notes for $214 million and funding of $354 million in new projects moving into construction and investments in growth initiatives. Also, subsequent to quarter-end figures, we paid down the remaining $290 million of our 2013 senior secured notes in October.

We are pleased to have such attractive opportunities for use of cash. In that light, I wanted to take a minute to review the financial framework through which we evaluate and allocate AES capital.

As we have previously said, our strategy is to invest capital to maximize shareholder returns over both the medium and longer term, as fits any capital-intensive business. We believe we can achieve this objective through a combination of efforts which serve to reduce our cost structure and fund future value-accretive growth projects.

We grouped these options into three categories -- return of capital to shareholders, investing in growth projects, and paying down debt. AES's objective is to allocate incremental capital via the lever that provides the greatest risk-adjusted return to our shareholders at any given point in time.

While external factors such as share price, access to credit markets, and growth opportunities will dictate the timing of use of these levers, our selection criteria does not change. Prior to making an allocation decision we forecast cash requirements and then seek to invest any excess to the most economically impactful alternative.

The first lever, returning capital to shareholders, can be achieved in two ways. We believe the stock repurchase option delivers better risk-adjusted returns when the stock is trading significantly below intrinsic value.

In the future, we could also return capital to shareholders by initiating a dividend. We believe this is something that could be considered in the medium to long term, once our construction program comes online and projects reach maturity.

Another lever is growth investment, which includes greenfield development and M&A. Our goal is to earn at least a 200 to 300 basis point spread over project cost of equity. Given our geographic and technological diversity it is not a one-size-fits-all approach.

Instead, we calibrate the return requirements for factors such as country risk and project risk. We focus our development efforts on opportunities that leverage our existing footprint for new areas with high growth potential.

The third lever is debt paydown and cost reduction. This not only increases our future financial flexibility but also creates future borrowing capacity.

So here are some tangible ways in which we have executed within this capital allocation framework very recently.

Stock buyback. As I have already mentioned, we repurchased $90 million worth of AES stock at an average price of $11.86 and have our authorization to repurchase another $410 million.

Growth. Over the past few months we have demonstrated success in both M&A and greenfield developments. We completed the acquisition of the 1,246 megawatt natural gas fired Ballylumford plant in Northern Ireland for $160 million, where we expect to earn after-tax returns of 18%.

Business sales. As I discussed before this year alone we sold three businesses for a total of $390 million.

Debt paydown. In the third quarter we retired $214 million of notes maturing in September. In October we redeemed the remaining $290 million of our 2013 senior secured notes. This brings our total debt paydown by the Parent Company to approximately $1 billion during 2010, reducing carrying costs by $68 million. With these redemptions our recourse debt now stands at $4.6 billion.

In summary, operations continue to execute well. Market demand is increasing in select markets, positioning us well to deliver on guidance metrics.

In addition, our credit metrics remain strong as we invest in the best available options, ranging from stock repurchase, debt retirement, M&A or greenfield development.

With that, let me turn it back over to Paul to provide additional commentary on our construction program and development pipeline.

Okay. Thanks, Victoria. Now I will discuss those items that will drive the growth in our financial metrics in 2011 and beyond. These are important to cover as they will be helping to offset, one, the negative impacts of lower commodity prices, particularly the lower dark spreads in our US merchant businesses; as well as two, a possible higher book tax rate in the event that TIPRA is not extended for 2011.

First I'd like to review the status of our construction program, which continues to progress well. We currently have over 1,900 megawatts of capacity under construction, of which 1,650 megawatts or 85% is expected to come online by the end of 2011.

By the beginning of next year we expect 720 megawatts to begin operations, including our 670 megawatt Maritza East coal plant in Bulgaria. The plant has already achieved full load operation during its testing and commissioning and is scheduled to be fully operational by year-end. This project represents an important foreign investment in Bulgaria and its successful completion marks an important milestone for the country and for AES.

We also have another 940 megawatts of capacity projected to come online during 2011. This includes our 520 megawatt Angamos coal plant in northern Chile, which is the location of much of the country's copper mining operations. We have already commenced preliminary testing of the first unit and are on schedule to commence testing of the second unit in the coming months, which puts us on track to meet or even possibly beat our target of finishing the project during the second half of 2011.

Additionally, our 220 megawatt Changuinola hydroelectric project in Panama has completed the tunneling required for the powerhouse. The construction of the dam itself is approximately 60% complete, and we expect the Changuinola project to be completed on schedule during the first half of 2011.

Now I would like to review a bit more about how we're thinking about allocating our capital. As Victoria discussed, we will always compare the returns of stock buybacks or debt paydowns with investing greenfield or acquisition opportunities. What I would like to do now is to update you on some of these opportunities, many of which we have discussed with you previously.

Let me start by just pointing out that right now we have $1.4 billion of cash available at the Corporate level. Of that, $300 million has been approved for investments into projects already closed and in construction.

This leaves us with $1.1 billion available for new investments, which could include acquisitions; investment into wind and solar projects; or large thermal power projects like Mong Duong in Vietnam, OPGC in India or the Masinloc expansion project in the Philippines. Very simply, this $1.1 billion of available cash has the potential to create something on the order of $0.18 to $0.21 a share of additional earnings, assuming returns of 13% to 15%, depending on when we deploy the cash and when it starts generating earnings.

A good example of this earnings power, as Victoria mentioned, is the Ballylumford acquisition which we completed this year. Ballylumford is expected to generate earnings of $0.05 per share in 2011 based on an investment of $160 million, which came from the proceeds of the CIC equity raise.

It is worth keeping in mind that our cash on hand has significant power to generate future earnings and cash flow, and that is why we are selectively focused on high-quality acquisition opportunities in places like Asia, Turkey, Latin America, and the US in addition to greenfield opportunities that will generate longer-term earnings growth. We do have a portfolio of attractive greenfield opportunities, and I would like to review a few of those with you now.

In our wind business, the wind business continues to evolve rapidly and globally based on local incentives and market conditions. Therefore we are pursuing a geographically diverse and flexible wind strategy, focusing on a number of key markets across the US, Europe, and Asia.

One of the benefits of our multi-market focus is that it affords us the flexibility to ramp up or down our development efforts in specific regions as fundamentals strengthen or weaken, such as they have in the US, without impacting our overall momentum. This is something unique to AES as a global power company.

We truly do have a globally diversified set of investment opportunities, and we are not constrained by the policy changes in any one particular market or country or region as others might be.

In our wind business we currently have 1,750 megawatts of wind capacity in operation, 175 megawatts in construction, and 1,250 megawatts in advanced development of which about half of that amount is outside of the United States. In the US wind market in the near term we see weak fundamentals, an uncertain policy environment, and a lack of long-term offtake contracts.

As a result we have scaled back our development efforts in the US wind market in the near term. Our current US wind strategy is to focus only on the markets in California and PJM, as these regions offer strong regional renewable portfolio standards in the absence of national legislation.

During the quarter we did achieve an important milestone on our 49 megawatt Mountain View IV project in California by signing a 20-year power sale agreement with the California utility. We plan to start construction of the project in Q4 2010, with completion expected by the end of 2011. Progress was also made in PJM where we secured permits on the 50 megawatt Fox Hill project in Pennsylvania, which is expected to be completed by the end of 2011.

In Europe, we see a much stronger market for renewables, including wind. We have increased our development activities in 2010 by acquiring large, attractive development pipelines in both the UK and Poland. We anticipate reaching financial close of projects with a cumulative capacity of 65 megawatts during the fourth quarter of this year, and we expect more to follow in the 2011 to 2013 time frame.

In Asia, in addition to our wind projects in China we started some development in India, a country that desperately needs more generating capacity, which is also the fifth largest market for wind power. We have recently defined a definitive agreement to develop, construct, and commission our first wind project in India, a 40-megawatt project in the state of Gujarat. The project is expected to reach financial close by the end of 2010 with completion being scheduled for June of 2011.

We are assessing other opportunities there and view the Indian wind market as increasingly attractive due to positive policy initiatives taken by the government over the past few years.

With regards to solar, our Solar joint venture with Riverstone, although smaller than wind, is rapidly catching up. The Solar business is also subject to different incentives and market conditions around the world. We have decided to pursue a globally flexible Solar business that can scale up or down based on how we perceive the various markets.

This business currently has 123 megawatts in operation and construction. We also have another 1,000 megawatts in development in Europe, the US, and Asia. This quarter alone we executed Power Purchase Agreements for 47 megawatts in Puerto Rico, Hawaii, and India.

Consistent with our other Solar PV projects, capacity under these agreements will be sold under long-term contracts. We think that it is fairly likely that this joint venture will have all of its $1 billion of committed equity invested by the end of 2011, with our portion of this investment being $500 million. So things are going very well in our Solar business.

Turning to our core power business, which includes our thermal power plants, our focus continues to be in the rapidly growing emerging markets. We are seeing many new opportunities in Latin America, Asia, and Turkey.

In the Philippines, we are pursuing a platform expansion of our existing Masinloc coal-fired facility to meet the growing need for electricity in the country. This year demand grew by 10% in this market.

Electricity demand in the Philippines is expected to grow by more than 5% every year. The current system is dependent on hydro and oil-fired generation which creates opportunity to leverage our existing coal-fired asset to provide an additional reliable and economic source of generation.

Our existing 600-megawatt Masinloc facility was built in a way that included much of the critical infrastructure for an expansion unit, allowing us to provide one of the lowest cost alternatives for platform expansion, which we are currently pursuing. The expansion project will be another 600-megawatt unit that will leverage the existing facilities such as transmission, interconnection, coal yard, ship unloading, and an ash pond. We are currently in the process of securing environmental permits and expect this project to reach financial close by the end of 2011.

In India we are also continuing the development of our expansion project for the state Orissa, which is one of the largest coal resources in the country. This will be a 1,300-megawatt coal-fired facility. We expect to reach financial closure by the end of 2011.

Finally, in Vietnam, subsequent to signing the 25-year Power Purchase Agreement and fuel supply agreements for our 1,200-megawatt coal plant called Mong Duong, we have been focused on finalizing the construction contract and project financing. Based on the project progress to date, we expect to reach financial close in mid-2011.

All in, we feel that we have a very compelling set of investment opportunities in development. In some cases we expect to take on partners and capture some of the value created through development fees or similar compensation structures.

But it's important to emphasize that we have been and will continue to be disciplined in our approach to allocating capital. Having the capital available to invest in acquisitions, new greenfield opportunities, stock buybacks, or paying down debt gives us an incredible amount of flexibility to create value on a per-share basis. And given the cash flow generation of our businesses, coupled with the robust portfolio management process that only adds to our ability to create additional shareholder value over time.

I would like to thank all of you for joining us today and I will turn the call back to the operator who will open up the call for your questions.

(Operator Instructions) Lasan Johong, RBC Capital Markets.

Thank you. Good morning, Paul, Victoria, Ahmed. Question on the capital allocation. It sounded like, Victoria, that sometime at the end of your construction period currently that a dividend may be contemplated.

Does that suggest that you would be running out of significant growth opportunities at that point? If not, then how do you intend to finance future growth without doing any equity issue and pay a dividend, or buy back additional shares?

Yes, Lasan, I think the point there is that we look out into the future; and you can easily look at a couple, three years and see the need for capital. Beyond that I think what we will always be doing is looking at the opportunities and the returns you can get on those opportunities.

I don't currently expect that we are going to be short of opportunities to grow the Company at good returns, but that is something we will continue to evaluate and look at -- do we have better returns than paying dividends?

I think if you look at the places where we are investing capital or we have established strong positions, places like India, where we are developing good positions, in Turkey, Southeast Asia, Brazil, Chile, all these places have big needs for more capacity in the future. By becoming one of the biggest established players in these regions, I can look out and see easily at least another five years of high-return opportunities.

But I think Victoria's point is that when we get through the construction period, when these plants all get into construction, we stop investing in new projects, we will be generating a lot of cash flow. And if we don't see good opportunities to reinvest that capital then you could expect we would then look at a dividend.

And once we get to the point we don't think there are good returns, we look at what is the best way to use capital, whether that is buying back stock, paying down debt, or distributing capital back to the shareholders through dividends.

So what I am hearing is that you don't foresee a dividend in the next five years at the very least. And you are saying only if you have additional free cash flow above and beyond growth opportunities would you even contemplate doing a dividend. Is that a good, fair characterization?

I would say when you see growth opportunities that are value accretive -- and we look at that, as we have talked about in the past, in terms of what is the cost of capital for a given project, and can we beat that substantially to create net present value? Really, net present value per share.

But there are a lot of different ways you can do that. And it is not just the cash flow coming from our operations. It is the cash flow we might generate through portfolio management. We've seen some good opportunities to do that over the past few years. The recent asset sales in the Middle East are another good example of how we would do that.

So I think we see the opportunity to source capital in ways that we can get the lowest sourced -- or cost of capital from for example selling assets where those are available, where you can sell it effectively at low yields; and then take that capital and invest it into higher yields.

That could be, as Victoria said, that could be investing in our stock, that could be investing in new projects. And if we don't see those kinds of opportunities, then it would be -- we would have the opportunity to then dividend cash back to shareholders.

At some point, I would expect we get there. But your time frame of three to five years I think is probably valid -- to say we probably don't see ourselves in that time frame having a lot of spare cash to dividend. But it is something we will continue to evaluate each year.

Okay. Second question, Victoria, you mentioned in your slides that you're looking to invest capital -- or equity capital I should say, at at least 200 to 300 basis points above your equity cost.

Since you are targeting a 20% rate of return, does that imply that you think your discount rate on your equity is 17% or 18%?

Well, first, I think depending on the type of project we have not been as high as 20% necessarily. I think we have continued to say we target midteen returns, and it obviously varies across renewables versus thermal and the type of opportunity as well. So I don't think it is quite as high as a 20% return.

We were fortunate, obviously, with Ballylumford and also with some of these asset sales that were actually individually slightly higher than the 20%. But I am not sure that they are consistently across all new opportunities at 20%.

Yes, I think if you look at -- for example, some of the projects in the US, you might look at the cost of equity for those projects as being 9%, something in that order of magnitude. You would then be targeting for those projects -- and again we say at least 200 to 300 basis points above the cost of capital.

As Victoria mentioned, the Ballylumford one we exceeded that; that is really the objective. But it is almost a view that if you aren't beating it by enough it is almost not worth doing in terms of shareholder value creation.

It also gets to some extent to the size of the investment. Because we also think about it in terms of NPV. If you create a certain amount of NPV divided by 800 million shares, how valuable is that? So it's a matter of how many deals are out there, how attractive are they, and then how much can you invest.

But it really comes down to what is the net impact per share in terms of the per-share value that we create.

Then would it be fair to characterize it as saying that you would not consider an investment until at the very least you are looking at 200 to 300 basis points? That is your minimum threshold above your equity cost?

Yes, and again, we will figure out that equity cost in each market for each type of project. We have got a fairly standard way of doing that, but it is looking at projects and the cost of capital of projects.

When you consolidate all those, that is how you develop the Corporate cost of equity effectively. And that is what we use as a way to compare stock buybacks, is the Corporate cost of equity.

So your Corporate cost of equity in general would be somewhere in the 12% to 13% range?

Yes, I think you guys can figure it out as well as we can. But it is probably in that range.

That seems very high. All right. The gain on CEMIG's sale, can you tell us how much that was?

The gain on CEMIG sales was around $20 million, $20 million, $25 million.

And that was a last-quarter event, just to be clear. We were referencing it in terms of the impact to the tax rate on a quarter-to-quarter.

I see. Last quick question. Effects of the Brazilian presidential election?

Andres Gluski, he spends a lot of time down there. Maybe he could comment on it.

Sure, hi, Lasan. The result of the elections were widely predicted and it means I think more of the same. A lot of the key players with which we have established relationships have been the same. So from our perspective, it is continuity and it means continuing with our current plans in-country.

Thank you.

Brian Russo, Ladenburg Thalmann.

Hi, good morning. The $90 million of share repurchase in the third quarter at an average of $11.86, I can't recall exactly discussion on the last conference call; but it seems as if -- it looks like you guys have raised the floor on the ranges in which you are willing to purchase stock relative to attractive growth opportunities. I was just wondering if you can comment on that.

Then secondly I believe the $500 million originally authorized expires at year-end. Can we expect you to renew that?

Just for clarity, the $90 million all-in is through the November 3, I guess. So a portion of that was subsequent to the September 3 quarter end. I wanted to make sure that we were clear on that relative to it being subsequent to the filing itself. But the all-in number is what we had mentioned.

I think in terms of the renewal, we will obviously look at it at year-end and certainly be talking to the Board about our prospects for investment and also the 2011 guidance, in conjunction with whether to request a renewal. I don't think we have had those discussions yet, but we will be doing that I think in the month of December.

But I guess at a current stock price of $12 you still view it attractive relative to your other uses of cash?

I think as you look out -- as we look out over the near-term use of cash and what is coming up in terms of the need for cash payments in the next couple of quarters, yes; we felt that to be true given the current prices. I am not sure I would say that from a 12-month and beyond outlook.

But there obviously we did have cash in hand that from a short-term perspective we felt was more compelling to buy back stock than to have in other short-term investment vehicles.

Okay. Can you discuss more about your portfolio management initiatives? You mentioned a wind IPO last quarter. And it seems, given you have purchased stock which I guess post the third quarter of this year at an average price north of $12, it implies that you believe the intrinsic value of the Company is much higher.

Any thoughts on harvesting the value of some of the assets or subsidiaries?

Yes, think we're going to keep looking at that. One of the things we are looking hard at is where do we see the best opportunities for the future? Where do we want to set up our -- put the focus of our development efforts? In which markets?

We see a lot of really interesting and attractive markets out there. We will probably as we do that look at some markets and say they aren't as strategic in terms of growth opportunities. Those are places where, if we can see assets where we could get good prices from selling them, they would probably be good sources of capital or good ways to raise some capital.

Which would give us more money to buy back stock, to invest in new opportunities. But any of those asset sales typically takes several months to get through, so there is a little bit of a lag time there.

But that is something we will be and have been looking at pretty aggressively. I think we have had a lot of success. What we have found is we may invest in a project which would have returns that would be in the midteens; but by going through a portfolio management process and if the timing is right you can sometimes get your return on capital to be -- or return on equity to be in the range of 20%.

And that is going to create some opportunities for us to do some things that would allow us to, again, just get higher returns on the capital by flowing it through more quickly and taking advantage of the opportunities to divest those assets which strategically aren't that critical to us and would give us more capital to then use for higher value opportunities, whether that be buying back our stock or investing in new opportunities.

Okay. The $0.05 of mitigation actions you mentioned before to offset I think the $0.11 non-cash impact to the change in the tax laws, could you elaborate on that?

In terms of how comfortable we are with it? Or in terms of (multiple speakers)?

What are they?

They are predominantly expense reductions from an SG&A standpoint. It is also -- we also had some credit emission sales.

Okay. Then just lastly, just can you give us a sense of what type of margin Eastern Energy is contributing this year? Just given on your previous sensitivities you have laid out for 2011, is there any real significant year-over-year margin compression that we could expect in '11 versus '10 on that subsidiary?

Yes, I don't have those numbers right now. I think what I would say is we were hedged this year, we were partially hedged this year. We saw some margin compression this year, and next year it will be worse.

I think what I tried to flag in my comments was that we are unhedged for 2011. Just given where gas prices are in the forwards are, we are not hedging because we don't think it makes sense to lock-in those kinds of margins.

So we basically have exposure to the market, which is the position we want to be in right now. Because we think there is probably more upside than downside to those positions.

But yes, we have seen a significant margin compression. I don't know, Ned, is there anything else you'd want to add to that? This is Ned Hall, who heads our North American business.

On full year we are down about $70 million on gross margin impact for this year.

Compared to 2009? Okay.

Okay, so when we look at the sensitivities on gas that you have laid out, is Eastern Energy the bulk of that sensitivity?

Yes.

Yes.

Okay, thank you.

Yes, I mean what we are really looking at is next year -- go to our US merchant assets, there is negative earnings that will be coming from those assets with the current forwards. What we are working on now is -- how can we mitigate that through mothballing of plants, some significant cost-reduction efforts?

But you have got to remember some of these have leases, so you can't mothball a lease. So we are going through a number of different things we could do to mitigate that earnings drag that we would have.

Just to clarify that further, we don't currently see that as a cash drain for next year. It is an earnings impact. And we are working through, as Paul said, how to mitigate that and what the options there are. But we don't anticipate having any cash from the Parent required.

We're also testing multiple fuels. We are burning not only Central and Northern App coal and Illinois coal, PRB coal and pet coke as alternatives to try and lower our costs.

All right. Thank you.

Yes, the other thing I will point out is that the one advantage we have is built into our portfolio, as we have talked about, is these construction projects coming online. They will continue to come online, and the expectations are as they were before. So there is new earnings coming in from those.

Then you have got a little bit of a drag that is coming from the Eastern Energy assets primarily. That is what we are struggling with, as -- how do we really reduce that drag so we don't -- on the cash side we are not worried about it. But it is more on the earnings side, you don't want to have negative earnings coming out of any plant; it just doesn't help us with respect to seeing earnings growth.

Thank you.

Ali Agha, SunTrust Robinson Humphrey.

Thank you, good morning. Paul, I wanted to flesh out your thinking a little more if I could on your share buyback program. When you started that program, you announced it, stock was down I believe in the $9, between $9 and $10 range. You bought a little bit at that time, but not much when the second-quarter numbers were reported.

Today, you are showing us you have bought stock since the third quarter at around $12.30 per share, if my math is right. And you have talked about buying it as part of your capital allocation process when it is well below intrinsic value.

Clearly you think $12.30 is well below intrinsic value. Stock today is around $12, so should we think -- has your thinking changed on intrinsic value, number one?

And number two, given where the stock is, which is below where you have been buying it, is there any reason for us to expect once you're out of the quiet period why you should not be buying the stock, given where the prices are?

I guess I would say two things. One is I like buying stock better at $9 than $12 personally. So we -- I think as a result we do believe that at the current range it is below the intrinsic value.

The real question is, as Victoria mentioned, you want it to be at a discount to the intrinsic value. And you've really got to compare that discount to the other opportunities that are out there.

Now some of those opportunities we don't need the capital maybe until the latter part of 2011 or so, but we do see some acquisition opportunities out there too. So the trade-off that we keep looking at, as Victoria said, we look out and try and figure out what are the near-term cash needs.

So with stock buybacks, I think the way to think about it is we are going to pace ourselves a little bit and make sure we have enough capital for the high-return types of opportunities that we think are going to create shareholder value. But still take advantage of the fact that we are trading at a discount to our intrinsic value.

So your definition of your intrinsic value calculation today is no different than it was for AES when you announced a share buyback?

Correct.

Okay. On those new opportunities, second question, there is a large amount of capacity set for privatization in Turkey, 15,000 megawatts or so. Could you give us a little more insight on how that is progressing? The timeline, what we should be looking at, and your confidence level on the attractiveness and potential for that?

We like the Turkish market a lot, particular generation assets. We have been operating in the country now for a few years. We look at the generation opportunities that are coming up as being attractive.

Being in that market for a while, having the experience, having a Turkish partner, we are looking at the right strategy to go after those assets. But we believe in 2011 there will be opportunities. We expect some of those to be coming up to the market, and we plan on participating in those privatizations.

We don't know is -- how competitive it will be, what the returns would look like. But that is again where I think we really want to be disciplined about how we approach them.

But I think we understand that market very well now. We like the market. We think it is one of the more attractive ones out there.

So I think you'd probably plan to see us participating in those. Exactly how we do it I think we will probably be talking a little bit more about that on our next call. There will probably be some announcements will be coming out about how we might do that down the road.

In the first set, Paul, remind us. When is the first set due, the privatizations?

I think those dates have moved around a little bit. I am thinking it is sometime in the first half of 2011. But those dates tend to move a fair amount. But I think it is safe to say probably first half of 2011.

Okay. Final question, as I look at your greenfield profile and the large projects that you have under development, the bulk of those are going to come online 2015 and beyond. Your current construction portfolio is going to be largely complete by the end of next year as it stands.

So when we look at the years between, say, 2012 and '15, the three-year period, is it fair to say the accretion we should think about is either acquisitions or share buybacks in terms of an EPS accretion?

Is that the way to think about bridging the current construction end and the contribution from the new portfolio coming on?

Yes, I think acquisitions would be in there to bridge that. We also have some renewables, and renewables tend to have shorter time frames for coming online. Solar and wind, you are talking about a year or less from the time you start to the time they come online. So that would be part of it. And we have got a lot of investment going into wind and solar projects, as I talked about.

M&A is going to create some opportunities. For example, the privatizations in Turkey, if those were to go through, they would be coming on. They are already operating.

So I think it is acquisitions. It would be renewables, longer-term greenfield. The other thing that we are finding is with some of these greenfield opportunities, particularly where there is large equity commitments, bringing on partners would be a way to offload some of that greenfield investment need, but at the same time maybe creating some development fees in the process.

Now that might come through additional carried interest or management contracts. Don't know how that shows up in the earnings, but it would be a way to potentially monetize some of those development opportunities as we go forward. Because we do have a lot of projects that we are seeing interest on the part of partners to come in, in minority positions, into some of our more advanced greenfield development projects.

One other thing, Paul, sorry, one last thing. Obviously there was the news over the weekend regarding your interest in International Power. Could you just provide us any parameters? What would have attracted you there?

It is trading at a nice premium to your stock price; and how that would have been accretive to AES?

Yes, let me just respond as I typically do that we don't respond to rumors or speculation.

Okay, fair enough. Thank you.

Maura Shaughnessy, MFS.

Yes, good morning. A couple of questions that drive to the point about the cash situation versus the earnings situation at AES. First one in terms of the tax rate.

Now, the stated tax rate, obviously, has some noise surrounding US policies, etc. But can you just talk about where the cash tax rate is expected to be this year and next, versus let's say last year?

Yes, we have got [Pervu Nadarajan]. He is probably our person who can speak to that most knowledgeably.

Obviously, just Maura, just before, we are not cash taxpayers (technical difficulty) to any great extent (technical difficulty) NOL positions, but it is (multiple speakers).

Right, and that is why your cash numbers actually went up this quarter, even though the reported earnings because of the tax noise --

Right.

Correct.

So the answer is I guess that the cash tax hasn't changed at all.

Not in the US. We still are in a net operating loss position.

Outside of the US significant cash taxes in Latin America; but they have not changed significantly year-over-year.

Right, okay. Good, yes. I guess then the second question again a little bit surrounding the tax situation with regards to the renewables. Now when you are investing in the US solar and wind, given your tax position in the US, what does that do to earnings versus investing outside of the US that doesn't have the PTC/ITC kind of situation? What does that do to earnings?

Right, from a US perspective, we think about monetizing PTCs through tax equity structures. So we take the cash upside whereas our tax equity partners take the depreciation coming from the alternative energy projects.

On the non-US side, since we can have a significant cash taxes at the project level we prefer to keep the tax attributes such that we tend to see more of the earnings benefit than the cash.

So therefore if I think about you winning some wind projects in California, the PJM for example, or Solar projects, that actually wouldn't have any impact to your earnings; but it would have a positive impact to your cash? Is that a true statement?

It is going to depend a little bit. Ned Hall, he could talk, because we think about this a lot because it does get complicated. Let me just pass down the speaker to him so he can talk.

Hi, Maura. It is not a simple answer unfortunately. In the current environment because of the cash ITC option it doesn't have the impact that it has had historically with the straight production tax credit, hypothetical liquidation at book value, tax equity, disproportionate allocation sharing arrangements that we have done. Which is a lot of words, so it is not -- that is why it becomes a less than straightforward answer.

It is fair to say that they are more favorable on cash from our perspective than they are on earnings in the early years. They ultimately, as they should, balance out over time. So we are frontloaded on cash and backloaded on earnings in the structures.

In the environment that we are in for the next -- through 2012, that is dampened a little bit. So they are slightly less favorable on earnings right now, but that will reverse itself depending on what the next regime is that comes out.

Maura, this is Victoria. We have spent some time with (technical difficulty) helping them model out what that sort of double hump looks like over the longer term, and we are happy to do that off-line if it is helpful.

When is AES a cash tax payer?

2015?

2015 is our current projection. I think it still depends on where our long-term guidance turns out to be and other M&A of any significant size. But currently 2015, 2016 time frame.

Okay. Is the Eastern Energy situation non-recourse to AES Parent?

Yes.

Yes. We can all answer that one.

So I guess the way that I think about the situation with about $300 million in margin in '07 down to effectively zero, if not modestly negative this year in Eastern, it can't go that much lower since certainly the option would be to just walk away if things were to get so tough.

That's exactly right.

Okay. Then the last question, what is your appetite given Brazil or wherever, other places that you are playing in? You tend to invest on the generation with PPAs in hand. What is the appetite for merchant generation assets?

I think generally we don't like merchant generation. Anytime we have it we try to contract or get contracted assets, so we don't have a big appetite for merchant generation.

Where we do pick it up like we did in the Philippines, we as quickly as we could went out and contracted it for as long as we could.

Okay, great. Thanks.

Patrick Elliott, Ivory Capital.

Okay, and then maybe one more question after this, operator, so other people can get to the rest of their day. Okay; please go ahead.

Hi, it's actually Ed Shen here with Patrick. A couple questions. First question is on your August call you had talked about a 2011 preliminary range of $1.07 to $1.10. Do you still believe that is a good range?

We are going to be updating guidance on our next call with our fourth-quarter year-end numbers. I think at this point we are still looking at that.

Not insignificant obviously is this whole discussion that we have been having about North American gas prices. So we are still working through the. But I think the (technical difficulty) not adjusted to any different range at this point.

The other thing I would just comment on is that the real wild card with $1.1 billion of cash is what do we do with that cash when we deploy it? Because as I said that has got some earnings power, just call it $0.18 to $0.21.

So that is the other big thing that is tough to predict, because we are looking to deploy that in some acquisitions, but we have got to be disciplined and make sure we find the right one that is going to fit strategically and give us the right kinds of returns and risk profile.

Hey, Ed, this is Ahmed. I think in the last call when Victoria talked about $1.07 to $1.10, that was based on the forward curve as of July. Since then the curves have moved against us, especially the gas.

So I think if you adjust for that I think it will be your net-net $0.03-ish down if you just look at the gas and the currencies.

Okay, fair enough. Then the second question is I just wanted to get a little bit more clarity on some of the items you mentioned that impacted your third quarter. Specifically the higher purchased fuel and energy prices in Brazil and the cumulative tariff adjustment in Brazil.

Andres?

Sure. Some of the things that impacted our results, one is the higher fuel and energy purchases in Chile. Chile is having a very hard year. So we had to run for example our Nueva Renca plant on diesel and that really drove up the cost of fuel and energy purchases in Latin America.

Regarding Brazil you have the Parcel A discussions at the beginning of -- actually end of last year, beginning of this year with ANEEL. As a result of that we had a slight decrease in the tariff.

One of the factors there was a negotiation between the [Association Embrade] and ANEEL, the regulator. The other issue that we had was the forecasted CapEx spend at Eletropaulo. The actual CapEx spend was less, and therefore we did not receive the return on that capital which we did not (technical difficulty).

So those are really the items that we have had affecting this quarter's results. As you know, they have come out with a new proposal going forward for tariffs in Brazil that has a -- main element I would say is a lower WACC for the country risk which is dropping from around 9% to 7.15% is the proposal; and I think the market is expecting 8%.

We are again in negotiations over the next four months. We will have a final resolution of that. The market in Brazil for companies like Eletropaulo and CEMIG expect to have reflected this change.

So those are the changes in tariff in Brazil. Backward looking it was really the Parcel A; our specific case it was having invested less in Eletropaulo; and going forward is this new proposal from ANEEL.

Okay, can you give us a sense for how big those items were in Chile and Brazil?

In Chile, as you know, about a third of Gener's income is coming from Colombia, which has also had unexpectedly a dry year. We also had a higher EFOR, forced outages, which have caused us to burn more diesel. So you are talking about maybe (multiple speakers).

I think it is $40 million, $40 million to $50 million.

Including the EFORs and including the higher fuel prices in both those locations.

So $40 million to $50 million for Chile?

No. Well, Gener, including Colombia as well.

Okay, I got it. And what all for Brazil?

Brazil is roughly about $10 million because proportionally our interest, because we own only 16%, so our interest is about $10 million.

Okay, so the $40 million to $50 million we saw in Gener, that should continue to the extent that the hydrology doesn't get better?

Well, you know, hydrology is reflected really via the other reservoir levels. So they are low.

On the other hand, in terms of the -- the had (technical difficulty) at the beginning of the year, and we expect to have lower forced outage rates. So we can use our more efficient plants.

Okay. Got it, so we should expect that to get a little bit better. It will be a drag year over year.

That is correct.

Thank you.

James Heckler, Levin Capital Strategies.

Yes, hi. Good morning. It's actually Neil Stein. A couple of questions if I could. The first is if you could just confirm and Ahmed's commentary on the prior '11 guidance was very helpful. Did it assume renewal of that tax benefit? I think you referred to it as TIPRA?

No, it did not.

Okay.

It's TIPRA, yes.

Yes. Then also could you clarify the expected -- this is going back to Maura's question -- the expected gross margin at Eastern Energy in '10? I know in '07 it was $300 million and I believe she said it went down to zero. But if you could --

Minus $9 million. (multiple speakers) Yes, minus $9 million in 2010.

What is the reason that it would actually be negative? I would think to the extent it gets to zero you could just choose to not run the plant.

Well, we have hedges in place basically and we have fixed costs as well.

So the gross margin is net of some of -- net of O&M?

Yes, and depreciation. Gross margin is net of depreciation.

Okay, well maybe my thought was what is -- I guess we're at revenues minus cost of goods sold. That is what I would think of as gross margin.

The way we define gross margin, Neil, is the gross margin is revenue minus your variable cost minus fixed cost and minus depreciation. So it is (technical difficulty).

Is revenues minus cost of goods sold a number you could provide for '10 for that asset?

You can add about $40 million to that, so it is about $35 million, if you wish.

So maybe that is like the absolute, $35 million is the absolute downside we could think of for that asset, to the extent your revenue minus cost of goods sold probably wouldn't go below zero?

If you look at that, I think it gets back to Maura's comment that if you get down to that point you have always got the option to walk away. I think what we will be evaluating is -- because it might be negative for a month; how do you think it's going to be the following year?

We tend to think about things from a cash flow standpoint. In other words if you don't have to put a lot of cash in, then you'd certainly want to keep that option around if prices move around. Because the prices have been volatile.

The downside is you wouldn't have much of a cash drag but you might have an earnings drag because of depreciation, because of the lease payments.

So that is what Ned and his team are working through. What can we do to really mitigate that, and how do we work through that? That is why we are not able to give a lot of clarity and guidance right now, but it is something we are working through.

But I look at that and say if things are where they are today in terms of prices, the total impact of -- if we just kept going, would probably $0.10 or less in terms of the negative impact of that. But on the positive side we have got these other plants coming online which is going to make up for that.

But is really the issue for us, is to think about how far would you take this before you just say we are not going to keep going on this? So that is really the issue that we and many others in the industry are facing right now.

But if your revenue minus cost of goods sold for '10 is $35 million, which if you tax effect it, it implies just a few pennies, why would the year-over-year downside be as much as $0.10?

I would think that that would be the floor, the losing that $35 million pretax would be the floor as you move into next year?

We started the year hedged, obviously, and then we're exiting the year with hedges rolling off and we are uncovered in '11. So that has got that impact as well.

And the $0.10 that Paul cited I think was not just Eastern; it was across the North American plant.

I see, okay. Just to make sure we're on the same page, my absolute last question, the $35 million includes the benefit of the hedges?

Correct.

Yes, the net effect of having those in place earlier in the year that have rolled off, yes.

Okay. That is so helpful. Thank you.

Okay. Well why don't we wrap up? We have kept people on pretty long.

Okay, well, thank you very much for joining us today. In the meantime if you guys have any questions please feel free to call either Chris Fitzgerald or myself. Thanks again. Have a good day.

Thank you. That does conclude today's conference. Thank you for participating. You may disconnect at this time.