愛依斯電力 (AES) 2010 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's conference is being recorded. If anybody has any objections, you may disconnect at this time. Now I'd like to introduce your host for today, Mr. Ahmed Pasha. Sir, you may begin.

Thank you, Chandra, and welcome to AES Corporation's fourth quarter earnings call. We appreciate you being with us this morning. Joining me today are Paul Hanrahan, our President and CEO, 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 document 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. Paul?

Okay, thanks, Ahmed. And good morning to all of you joining us today. On this morning's call, I'll first comment on our performance for 2010, both from a financial and an operational viewpoint. Victoria will then review the financial performance for 2010, as well as our expectations for 2011 in more detail. Following her comments, I'll discuss our plans for allocating capital in 2011 in ways that we believe will increase the value of the Company on a per share basis.

First, our 2010 performance. I'm pleased to announce that we have achieved our 2010 guidance for all key metrics. We earned $0.94 a share of adjusted EPS, which was at the high end of our guidance range of $0.90 to $0.95. Also our proportional free cash flow of $1.3 billion, exceeded guidance by approximately $200 million. I think our results very simply reflect the fact, that economic growth and power demand increases in some of the emerging markets in which we operate were stronger than anticipated, particularly in Asia and Latin America. Higher demand and improved operations in these two markets helped offset the continued erosion of our profitability in North America, primarily driven by continued low gas-based electricity prices and high coal costs.

Our financial results were also driven by strong operational performance, supported by the continued implementation of initiatives across our portfolio, including the global sourcing of solid fuels and freight, long-term service agreements, transformers and other major capital equipment. Our asset management program, which maximizes the efficiency of our capital expenditures, also helped drive the strong performance for the year.

In 2010, we also improved operating cash flows through strong collection rates and increased sales. For example, our Dominican Republic business benefited from new power purchase agreements and a high collection rate, due to the receipt of past due government receivables. In our generation businesses, a fundamental metric to assess operational performance is the forced outage rate, which captures unplanned outage time at a plant. A lower outage rate is better, as it results in higher profitability by increasing the ability to generate kilowatt hours, and lowering unplanned maintenance costs. In 2010, our global forced outage rate improved to 4.3% from 7.3% in the prior year, and was significantly below our five year average of 5.9%. Much of this improvement can be traced to the performance turnarounds of the plants we acquired during the past few years, such as our coal-fired plants in the Philippines and Mexico. And this is one of our skill sets that gives us a unique competitive advantage in the marketplace.

In our distribution businesses, a key indicator for operational efficiency is the ability to reduce non-technical losses, or power which was supplied to final users, but was never billed due to theft, fraud, or billing system issues. As a result of the focused efforts in this area in this 2010, non-technical losses declined to 3.1% from 3.4% in 2009, contributing to an improvement of 15% over the prior five-year average of 3.7%. A significant driver of this performance came from our Brazilian utility, Eletropaulo, through the use of new metering equipment, improved collection rates, and customer connection activities. The results of these efforts can be seen in the operating cash flow trends for Latin America in 2010.

Turning to the construction side of our portfolio, we brought approximately 800 megawatts online last year. We currently have just over 2,000 megawatts capacity under construction, of which 1,800 megawatts is expected to come online by the end of 2011, and over 95% of our current construction capacity is under long-term contract for it's output. While construction milestones continue to be achieved, including the resumption of full activity in our Campiche plant in Chile, the strong performance has been somewhat dampened by continuing delays at our 670 megawatt coal-fired Maritza plant in Bulgaria.

As you will recall, we expected Maritza to be fully commissioned by the year-end 2010. To date, however, we have not achieved commercial operations at Maritza. The ongoing delays, in terms of reaching full commercial operation, have also resulted in a dispute with our EPC contractor, who was late in delivering a completed plant. Resolution and mitigation of the impacts of this delay are top management priority for us in 2011. And once we resolve the legal and technical issues, and the plant is fully operational, it should be expected to add $0.105 per share per year on a steady-state basis.

Beyond Maritza, we also have another 1,100 megawatts of capacity projected to come online during 2011, primarily in Latin America. And all these projects are progressing well in terms of meeting their schedules. This includes our 500-megawatt Angamos coal plant in northern Chile, which is locationed of much of the country's copper mining operations. We've already achieved full load operations on Unit 1, and are progressing rapidly in commissioning of Unit 2. This puts us on track to meet 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, and the construction of the dam itself is approximately 80% complete. We expect the Changuinola project to be completed by it's guaranteed completion date, which will occur in the second half of 2011. Also, we have 150 megawatts of wind generation capacity in the California and PJM markets that will be completed by the end of 2011.

Finally, I'm extremely pleased to confirm that we have cleared all remaining permitting hurdles with respect to our 270-megawatt Campiche coal project -- coal-fired project in Chile. In January of this year, the Supreme Court of Chile upheld the ruling of the Appeals Court, with regards to the validity of Campiche's construction permits. This action removed the last obstacle, and we have resumed full activity, and expect to complete the project in early 2013. Now I'll turn the call over to Victoria, who will discuss the 2010 financial results and 2011 expectations. Victoria?

Thanks, Paul, and good morning, everyone. As Paul mentioned, we delivered on all aspects of our 2010 guidance. Our fourth quarter results were slightly above our expectations, putting full-year results at or above the high end of most guidance metrics. Cash flow, in particular, came in very strong, driven by better than expected performance in our Latin American generation segment and a non-recurring receivable collection there. Our results compared to 2009 also reflect improved trends. Demand in Asia particularly in Philippines and Latin America remain strong, while helping to offset continued deterioration of dark spreads in North America. Now let's discuss results for the fourth quarter in greater detail, starting with the most significant drivers affecting gross margin.

Higher volumes at our generation businesses in Latin America, particularly in central Chile and Panama, is the key driver of our improved earnings in the fourth quarter, in comparison to the same period last year. Chile's volumes improved, as demand returned to it's robust pre-earthquake levels. As a reminder, immediately after the earthquakes last February, volume had declined by 10% from the prior year. Recovery was relatively quick and sustained, as demonstrated by our fourth quarter results where demand increased by 1.9%, compared to third quarter of this year, and is up fully 6.6% compared to the fourth quarter of 2009. Panama experienced record rainfalls this quarter, which enabled higher volume at our businesses there. In addition, our recently acquired business in Northern Ireland began to contribute earnings. Foreign exchange was not a material driver of earnings growth, compared to 2009.

Our consolidated gross margin was just over $1 billion, an increase of $197 million, or 24% relative to 2009. This increase is driven mostly by the Latin America volume increases I just described. On a proportional basis, we earned $550 million of gross margin, an increase of $86 million, or 19% over 2009. In the fourth quarter, diluted EPS from continuing operations was a loss of $0.56. This was the result of $0.76 impact of long-lived asset impairment losses, primarily related to our merchant businesses in New York and Texas. These non-cash impairments are the result of the same trends we've been discussing over the past few earnings calls, the compression of merchant margins due to low electricity prices, driven by low natural gas combined with higher coal and pet coke costs.

In the fourth quarter, based on recent legislative and regulatory activities, we also refined our outlook relative to the expectations for our New York and Texas generation plants, which required us to writedown the full value of those long-lived assets. Excluding the impacts of these impairments, adjusted EPS was $0.23, an increase of $0.02 over 2009. This favorability reflects the positive gross margin trends I just discussed, as well as the December renewal of a favorable US income tax law relating to the treatment of cash dividends from certain of our non-US subsidiaries. This renewal lowered our full-year tax provision, as we had originally projected.

Now let's discuss cash flow. On a consolidated basis, our operating cash flow increased $773 million from last year to $1.1 billion, and increased $410 million on a proportional basis. It is important to note that the fourth quarter of 2009 included a one-time tax payment of $326 million at one of our businesses in Brazil. Excluding this payment in 2009, our cash flow shows healthy year-over-year growth of $447 million on a consolidated basis, and $357 million on a proportional basis.

This was driven by favorable gross margin and lower working capital requirements in Latin America, which were the result of higher collections in the Dominican Republic, as well as regulatory asset recoveries in Brazil. These events in the Dominican Republic and Brazil are not expected to recur in 2011. Similarly, consolidated free cash flow increased by $653 million to $785 million for the quarter, driven mostly by the same factors I just discussed. On a proportional basis, our free cash flow increased $324 million to $374 million.

Now turning to our parent Company liquidity. Our parent liquidity of $1.8 billion is down $260 million versus the third quarter of 2010, and year-over-year has increased $579 million over December 31, 2009. During the quarter, liquidity benefited by $333 million, from a combination of the proceeds from the sale of our Qatar business in October, as well as subsidiary distributions net of corporate overhead and interest expense.

We talked last quarter about our capital allocation policy. In the fourth quarter we continued to operate within this same framework. We redeemed the remaining $294 million of senior secured second priority notes, and we repurchased $84 million of AES stock at an average price of $12.26. We also renewed our repurchase program at the end of the year, to insure that we could continue to leverage this value driver through 2011. Finally, we invested $244 million in various construction and development projects. In summary, we exited 2010 with positive momentum, based on the initiatives that are continuing into 2011.

Now, I'll spend a few minutes on our guidance for the year ahead. For the next 12 months, our adjusted EPS guidance is $1.08 to $1.14, which represents earnings growth of 15% to 21% over 2010 actuals. This growth is driven by several factors. First, earnings from new plants completing construction in 2011, as well as the Ballylumford acquisition contribute $0.17 of incremental earnings. Second, we have $0.06 of incremental interest savings, from the nearly $1 billion of parent Company debt that was retired in 2010. Third, we have favorable operations, driven primarily by the strong demand growth in Latin America. Partially dampening this momentum, is the unfavorable movement in tax rate, a higher share count, and foreign currency. Lastly, we benefited in 2010 by $0.06 from withholding tax reversal at one of our subsidiaries in Chile, which will not recur in 2011.

In addition to comparing results to 2010, I also want to briefly explain the major drivers of change, versus the $1.04 to $1.07 range we discussed on the third quarter call. Since then, we have removed the negative impacts of AES Eastern Energy in New York, and adjusted for lower depreciation expense at Deepwater in Texas for a benefit of $0.11. In addition, a change in the 2011 projected effective tax rate yielded a $0.05 improvement. Partially offsetting these positive drivers is the construction delay at Maritza, and the impact from the loss of earnings from our coal-fired plant in Connecticut, Thames, which entered reorganization earlier this year.

The year-over-year trend for cash flow guidance requires a bit more explanation, as it does not follow the same trajectory as adjusted EPS. Our 2011 proportional free cash guidance range is $900 million to $1.1 billion, a decrease of approximately $300 million from 2010 levels. However, please remember that 2010 actual results included several large non-recurring items, such as a receivable collections in the DR, which boosted cash flow on a one-time basis. Therefore, it's better perhaps to look at the trajectory since 2008, our proportional free cash flow, which has grown by 29%. Further evidence of continued strong underlying operations is our 2011 subsidiary distribution guidance of $1.2 billion to $1.3 billion. The mid point of this range is higher than 2010 actuals.

As you may recall from our prior calls, over the past year we focused on several key assessments of our support costs, given that we've now moved to much greater stability and rationalization of our corporate systems and platforms. These reviews highlighted some quick hits, as well as some longer term projects that will require additional automation and process improvements. We've moved out quickly on efficiency initiatives, ranging from leveraging share buying power for commodity purchases across the portfolio, generating significant savings on our $2 billion annual spend.

In addition, similar efforts in hardware and software purchases combined to save us nearly $10 million. Enhanced inventory and plant maintenance management across the merchant fleet, also enabled us to save nearly $25 million in 2010, at a time when a rising cost of fuel squeezed margins there. Likewise, our increased focus on greater automation, shared service environments, and audit reductions in finance and IT, saved another $11 million year-over-year. All told, these efforts permanently lowered the AES cost of providing power wherever we operate. Some of these costs savings benefits us directly at the business unit operating level in cost of sales, while others reduce our support costs, at corporate and the regions, and SG&A. In 2011, we will be continuing with these initiatives, and I look forward to sharing our progress on them in the months to follow.

In summary, operations continue to execute well, and market demand is increasing in select markets, positioning us well to deliver earnings growth in 2011. In addition, our balance sheet remains strong, allowing us to invest in the best available options, ranging from stock repurchase, debt retirement, investments in M&A , or greenfield development. With that, let me take it -- turn it back over to Paul to provide additional commentary on 2011 and capital allocation.

Thanks. As Victoria just mentioned, we ended the year with liquidity of $1.8 billion, of which just over $1.1 billion was in the form of cash. In terms of allocating that capital, we'll continue to do so in ways, that we believe will create the most value per share for our shareholders. In 2010, we reduced our debt by approximately $900 million. And since launching our stock buyback program, we've invested $116 million to date, by repurchasing 9.7 million shares, at an average price of $11.93 per share. Share repurchases were made an important tool to increase shareholder value. We also invested in 1,625 megawatts of generating capacity through acquisitions, in addition to the nearly 800 megawatts of capacity that was brought online, as plants completed construction. Nevertheless, our stock price did not move to reflect the value that we think is inherent in our portfolio of businesses. And none of us at AES were satisfied with the performance of our stock in 2010. We're committed to pulling all the levers that we can, to return value to shareholders.

It's worth noting we have shifted to a more focused approach to making new investments. There are a number of very attractive markets around the globe today, but we will be concentrating our efforts in those markets where we see the greatest long-term value creation potential for AES. We believe this will also move to reduce some of the complexity in our portfolio, which may also be one of the factors weighing on our stock price. As we look forward to 2011, we'll continue to approach allocating capital in ways, that make the most sense from a shareholder value standpoint. And with some additional portfolio management opportunities that might exist, these would only increase the financial flexibility that we have to allocate to debt and stock buybacks, as well as value-accretive new investments.

I'll now talk about a few of the areas, we see the potential for value-accretive investments in 2011. In Southeast Asia, our 1,200-megawatt greenfield coal plant in Vietnam has achieved significant milestones. Last week, we signed a turnkey EPC agreement with Doosan Heavy Industries & Construction. And we executed documentation for the sale of a 49% interest in the project to POSCO Power in Korea, and China Investment Corporation, or CIC, in order of 15% of the shares of AES.

This sale will not only -- not only add valued -- valued strategic partners with significant presence in Asia, but also enhances our return on investment, and demonstrates a significant value added during the greenfield development process. In addition to confirming the value that AES creates through greenfield development, it represents an excellent example of, in a template for cooperation on future development opportunities. Strong partners like POSCO and CIC are important to AES's growth strategy. In many markets, it's a competitive differentiator that will allow us to earn attractive returns, in the face of what can be a very competitive market for new power development and acquisitions.

In Turkey, another market of interest to us, the upcoming privatization process affords us the valuable opportunity to develop a pipeline of projects, in concert with Koc Holding, another key strategic partner for AES. As Turkey's largest conglomerate, Koc Holding represents approximately 7% of the Turkish GDP. This well-respected Company owns a broad range of businesses including various industrial, mining, and refinery businesses. Once approved by the authorities in Turkey, this partnership will be anchored by Koc's 300-megawatt natural gas facilities which is will be transferred to the joint venture, as well as some hydro plants owned by AES.

In addition, the partnership will diversify it's other energy sources, coal, hydroelectric, wind, as well as natural gas by pursuing greenfield projects and acquisitions, including those associated with Turkish plan to privatize 15 gigawatts of generation assets. And these efforts, the joint venture will benefit from AES's global development and operations experience, and from Koc's market strength and local energy -- local energy sector insight. We see a lot of potential in the Turkish power market. GDP is expected to grow between 4.5% to 5%, and to help meet this growth, in what is currently an under-served market, system capacity is projected to increase from it's current 46 gigawatts to approximately 59 gigawatts, about a 5% increase per year through 2015.

In addition, the privatization will put 15 gigawatts of generation capacity on the market in two phases. It's worth noting the benefits of privatization for AES are twofold. First, we've demonstrated multiple times, that we have an unique skill set, in terms of upgrading or turning around the operations of privatized assets. And second, the near term earnings profile for acquisitions are more attractive than greenfield investments.

And in another market of interest to us, India, we've made progress in several fronts. We signed a long-term PPA for 50% of the output of our 1,300 megawatt OPG coal-fired expansion project in the state of Orrisa. And in addition, AES Solar signed a PPA, and closed on debt financing for 5-megawatt solar photovoltaic project in the state of Rajasthan. And finally, we achieved financial close, and commenced construction on our 39-megawatt wind project in Gujarat. Commercial operation of this wind plant is expected in the third quarter. Each of these projects is a testament, of not only the immense market potential in India, but also our ability to capitalize on our position in the country, to execute across diverse technologies where we have expertise globally.

And finally I'd like to mention our solar joint venture with Riverstone. AES Solar delivered a strong performance in 2010. As of the end of last year, AES had invested $323 million into this venture. For 2011, we anticipate the Solar JV will complete construction on 125 megawatts of projects, of which 58 megawatts are already under construction. We also expect the JV will commence construction on an additional 200 megawatts, and it's development pipeline has [growed] rapidly to over 1,000 megawatts and spans six countries. We are very pleased with how things are going with this business.

In conclusion, we start 2011, in a very strong position to increase the value of the Company. We have a strong balance sheet, with adequate liquidity and growing free cash flow. In addition, we have strong strategic partners in key areas of future growth for us. And most importantly, we are committed to delivering near term return to our shareholders. We think that value exists in our portfolio of businesses and operations, construction, and development, and we intend to convert that value into returns to you. I'd like to thank all of you for joining us today. And we now look forward to any questions that you might have. Chandra, could you please open up the lines?

Thank you. (Operator Instructions) Brian Russo of Ladenburg Thalmann.

Could you talk a little bit more about what options are available for you with the Eastern Energy assets?

Yes, with Eastern Energy assets, what we're looking to do is to sell those assets. The main reason for doing that is we think there's value in those assets, and just because of the earnings profile that we don't think it's going to make sense for us or another public Company to be owning those assets. But we do think that there are people out there that see the value potential, and we've seen that in other market transactions. We think we might get better value for it, if we were to transact and put that out in the market. So we're in the process now of marketing those assets, and as we move forward we'll be able to update you on that.

Okay. And it looks like, on the commodity sensitivities for 2011, it appears to be a little bit more modest than I think the sensitivities we saw in the past. Is that just a function of -- you have more of your generation hedged?

No, it just reflects the fact that we don't have Eastern flowing through, in terms of the portfolio impacts, but we have no additional hedging.

Understood. And just how is the Newcastle coal recent price strength? How is that impacting your Philippines assets?

Yes, in terms of our Philippine assets, we're looking at getting coal from Indonesia and Australia. So in terms of the price spike that we saw last month, we're seeing prices return to normal.

Okay. And the Maritza, when is the revised commercial operation date for that?

I'll have Andres Gluski, our Chief Operating Officer -- he can provide a little bit more detail on what's happening there.

Oh, sure. Give you perhaps a little background first. The EPC contractor on December of last year, issued a notice of dispute alleging the lignite that had been supplied for commissioning was out of specifications, and therefore entitled to an extension of time to complete the power plant, and an increase in the contract price and other relief. On January of this year, the EPC contractor advised Maritza that it had stopped commissioning on the power plant's two units, and initiated arbitration of it's alleged lignite claims. Now, Maritza disputes that the lignite is out of specifications, and intends to defend the arbitration, and assert counterclaims for the delay of liquidated damages and other relief relating to the contractor's failure to complete the power plant and other breaches of the EPC contract.

In terms of the power plant itself today, we expect to start selling energy at two-thirds capacity, about 420 megawatts during the second quarter. This, of course, will depend on discussions that we have with the lenders, with NEK, and with the EPC contractor. And we expect to reach the full load of 600 net megawatts by the end of the year.

Okay, and I think you mentioned $0.10 of annual earnings contribution, once that asset is online for a full-year?

Yes, that's correct.

Is there anything in your 2011 guidance for a partial year?

Yes, $0.105, would be full-year, and for this year we've built in roughly $0.04 into the projections. That's what's built into it, because as Andres said, we wouldn't be operating at full load for part of the year, and get it commissioned by the end of it, but we think we would end up with, subject to getting everything resolved on a technical and legal front, probably about $0.04 a year. We think that's a reasonable expectation.

Okay. Thank you very much.

Ali Agha of SunTrust.

Thank you, good morning.

Good morning.

During the, in the slide, I believe it was 13, where you lay out your, the waterfall slide between '10 and '11, I was curious, where does the Eastern -- roughly $0.12 of loss elimination, where does that show up? I didn't see that in that slide.

That's been pulled out. That was what we had originally projected prior, and then we have no expectations on having those losses this year.

Understood. So where do you demonstrate that in this slide that those losses are no longer going to be there? That's an incremental $0.12 of earnings, right, in 2011 versus 2010?

Ali, this is Ahmed, I think in 2009, it was essentially breakeven, if you wish, or $0.02 I think. Yes, 2010, sorry, it was breakeven, and 2011 is essentially $0.10 loss as we discussed in our last call, but I think you don't see that, because we have assumed in our 2011 guidance that Eastern is discontinued.

Right. So in 2010, it was -- Ahmed, you said breakeven, or plus or minus?

It was roughly $0.02, something in that range.

Okay. And also, to be clear, you said you want to sell the plant; you have that process ongoing. So from an accounting perspective, is this going to be reported as a discontinued operation, or the asset held for sale, or how is the accounting treatment this year?

Ali, this is Victoria. The expectation is that, as we go down this process of this sale, in concert with our auditor, are marking certain milestones. And that would be recorded as discontinued operations, which would get grandfathered back to the beginning part of this year. But we are still continuing to go down that path, to make sure that we've hit all of the milestones.

I see. And on a different note, Victoria, you talked about some cost reduction initiatives, et cetera, just to be clear, one of the areas that we have seen a pretty big ramp up has been your corporate SG&A expense. If you go back to 2006, for example, it's gone significantly up to where it was in 2010. What is a good run rate for that going forward, and should we expect that to trend down 2011 onwards?

The corporate SG&A is essentially flat at this point. It's about a 2% increase, relative to our people costs. I think the thing that requires a little bit more detailed discussion, and we are happy to help with this, is the mapping of cost of sale reductions and SG&A. Cost of sale is SG&A that's held in the businesses, so as we've moved, for example, certain organizations from the businesses to the corporate SG&A line, it reflects an increase in SG&A that's not an increase in cost per se.For example, we've had business development that's moved from the specific businesses to the regions and corporate, same thing with the finance functions that move to the hubs. So we can walk you through the detail, in terms of which were remapped, but we've also had real increases in some of the costs to run our business development over the last 12 months.

So in total --

Ali, just to comment quickly, you picked up on the same thing that we did, which was that we've had to ramp up the corporate SG&A. And partly, if you go back several years ago with restatements and all, we had to put in systems in place, and control systems to make sure we got our financials done timely and accurately. And I think we've done a good job of that, but a lot of that has been done manually. What we want to do now is start to automate that, and make it more efficient, because we believe we can do this at a much lower cost. And it's probably going to be about a three-year program to start working the costs out.

Can't give you a number now, because we really want to fine tune that a bit more, but maybe in the next call or so -- by mid-year we should have a pretty good handle on how much we think we can take out, and when it would come out. We don't think there's going to be much room in this year's numbers, but probably start to see some improvements, which will drive earnings growth beginning in 2011 in a meaningful way, because we think this could be a -- for the next two or three years, another driver to earnings growth for the Company.

Okay. And Paul, off that cash that you currently have on the balance sheet, how much would you say is excess cash that you would like to invest or spend, whether it's buybacks or new projects? And you talked about the capital allocation, but I want to come back to that again. Since the last time you gave us your share buyback count, I think it was at the end of the third-quarter call, which was the end of October -- incrementally, if my math is right, you spent another $26 million since then for buybacks. So I'm just curious how that is being factored into the capital allocation, as we look into 2011? And I'm assuming your guidance does not assume any more buybacks in that EPS range.

You're correct. The guidance doesn't assume any more buybacks. But if you think about that $1.1 billion of cash, I would say we would really look at almost all that being available for ways to allocate to productive investments over the next -- I mean, some of it is already going to be committed for things that are in the works. The others would be really competing against each other for uses of capital, so the new investments we talked about, also stock buybacks. I think they are both going to be things that we would be doing on a regular basis.

I think the other part of it is that -- it's also, we see in some cases, it's a good market for portfolio management for selling assets. And that might give us some additional capital that we think we could deploy if we have good investments to trade into, or the stock price remains at the levels it is, it would be another attractive way to use that capital.

Okay. Thank you.

Gregg Orrill of Barclays Capital.

Thanks. Good morning.

Good morning.

Good morning.

I was wondering if you could provide a little bit more detail on the privatizations upcoming in Turkey, and what you're looking for there, if there's a traunch coming due soon that we should be watching?

I think there's several groups of assets that will be coming up for sale. And I think we and Koc have identified several that we think would be attractive for us to invest in, that they know reasonably well, that we're learning more about. The timing of this is a little bit unclear. I think it could begin as early as the latter part of 2011, maybe towards the fourth quarter. The exact timing, of course, can move around a little bit, but you'd start to, I think, expect to see things happening around then or early 2012. I think in the meantime though, there are probably some one-off assets that we might have an interest in in Turkey, to just start building that portfolio of businesses. I think we're very well aligned, in terms of how we think about the business, the kinds of returns we're looking for, but we think it could be attractive. And I think of the competitors out there, we and Koc together are a pretty formidable force.

Thank you.

You're welcome.

Brian Chin of Citigroup.

Hi, good morning.

Good morning.

Can you give a little bit more color on how and when the upcoming Brazilian tariff review cycle will affect Eletropaulo's outlook?

Okay, this is one of Andres's area of expertise, so I'll let him talk that through.

Sure. Well, as you know, ANEEL came out with a new methodology proposal, the beginning of this year.

Right.

I think the key elements are the WACC, determining their regulatory asset base, using a reference Company, and the ex-efficiency factor. This is basically gone for review. It's currently under discussions between ABRAGE, which is the association of all the electric sector companies, and ANEEL. And I don't think that you'll have a final determination on that until the fourth quarter. So, I don't think it's going to have a major impact this year. I think we're all waiting to see how the WACC turns out.

Under the old methodology, the WACC would be about 8.06%. And the first proposal that's come back from ANEEL is 7.115%. So I think that this will, again, is in negotiations, and we have to see where this turns out, and other factors as well. So what I am certain is that by the end of the year, I think we will have a resolution to this, and it most likely will be somewhere between the old and the initial proposal. And this is nothing new; we always go through this every year. And then finally, once that's determined, then you have the Eletropaulo and ANEEL specific discussions, regarding asset base and other things.

When would Eletropaulo's discussions with ANEEL come up? If I understand it right, it's in maybe the fourth group or the third group that's going to be reviewed, so could you give us a better sense of timing on that?

It should be in December.

December, so it would be in December of 2011?

Of 2011, that's correct. And Sul, which we own in the south, it's cycle is in 2013, April of 2013.

Okay. And then lastly, what is the rate-base equivalent for Eletropaulo, just as a refresher?

Rate-base equivalent?

Or rate base that we would apply that weighted average --.

Are you talking about the dollar value or the Brazilian real value of the rate base?

Yes.

Yes, we're going to have to get back to you on that.

Yes, that has to be -- again, specifically the regulatory asset base, if that's what you're referring to.

Right.

That's part of the discussions at the end. I believe it's somewhere around BRL9 billion that we're talking about.

BRL9 billion?

Yes.

Okay, great. Thank you.

Maura Shaughnessy of MFS Investment Management.

Good morning. A couple of questions, two for Chile and two for Brazil. First, in terms of Chile. I was wondering if, given the hydrology situation in the south -- and I don't think the government has definitely put in rationing yet, but perhaps may -- I was wondering where AES Gener is in terms of its contracting situation, and if it could potentially benefit from a tightening market? And the second question is, with some of the new environmental controls on emissions there, I think there's a three-year timeline to lower emissions by 50%. What capital requirements are required at AES Gener? And then jumping -- well, why don't I ask those, and then I'll ask the Brazil questions.

Okay, sure. This is Andres. First about the tightening market, yes, this year we have a La Nina phenomena. And it's the seventh driest year in the last 40. So on February 17, the government came out with a decree, which had three elements. The first would be to save approximately 500 gigawatt hours of water equivalent. So what they're asking is the generators to dispatch, and then there will be a netting effect from basically using higher-cost generation that's basically saving that water. The second part of the decree was to have the ability to lower voltage between 5% and 10%, as needed. And the third will be some sort of consumer saving initiatives.

Regarding Gener, we are pretty much contracted. We have the ability to meet our contract with what we call the efficient generation. But in addition, we have generation, which are our older coal plants, which can be used to dispatch above this. So Gener is well placed for this drought, in terms of its contracts, and in terms of its generation capacity.

Regarding the second part of your question, Maura, in terms of the new environmental rules which have come out, I think what's important is, first, that the new requirements do not apply to Campiche or Angamos, because they were under construction prior to the new decree coming out. So that's, I think, important, and that will give us an advantage. The decree also differentiates between, of course, new plants and existing plants, and there is a time period for putting in the new emission reductions equipment that is needed. A ballpark figure for Gener right now would be around 200 million, basically SGDs, that would be necessary, for example, on [Jacold] and some of the unscrubbed plants that we have, but all of the new plants that we have in place are coming in within the limits for the existing plants under construction.

Okay, great. And then jumping to Brazil. First question on the Brasiliana situation. As I understand it, some of the Board members of BNDES maybe changed out next month. And then potentially, even by this summer, given all of the checks that BNDES has written to for other areas and other projects, the potential sale may actually occur. But that's just me pontificating, I have no idea, so maybe if you had any comments on that?

And the second question is, vis-a-vis the review for Eletropaulo that Brian was asking about in terms of the third cycle, I guess the thing that bothered me about what came out in September was the chance that on a volume and efficiency basis, that would be taken away each year, in a first-time methodology. But as I understand it, in the concessions, the X-factors can't be changed, they can only be done cycle-to-cycle, versus on a yearly basis. So that would actually be pretty positive news to the distribution companies, it would seem. And the rate of return is what it is, and I guess they made some mistakes by not including FX risk, and some of the debt costs seemed kind of bizarre. So that there's a chance that the 7.15% goes up 7.5% to 8% or whatever. But I was just wondering if any specific comments on the X factor, and that the chance of that gets thrown out?

Okay. Regarding the first part of the question, Brasiliana and the changes -- as you know, BNDES is very stable, a long-lived institution, it carries a lot of weight in Brazil, and we are in constant talks with them. We're partners at the Brasiliana level, and we've done a number of operations jointly that had been very good for both of us. For example, we cleared the SEB that defaults last year, and so we're in good standing with them. So again, I think this is an institution which I expect to continue its current policies. And I really don't have any additional insight, in terms of if they would decide to make any changes there.

I think regarding the comments of the FX, the efficiency factor, the X factor, I agree with you. I think an important element here -- this is under a lot of debate with ABRAGE -- is whether you could change the X factor to on a yearly cycle, and this would have a significant difference. We think that it should remain on a three-year cycle. And also, I agree with your comments regarding the WACC, that it's very likely that in these discussions, there will be some allowance made for FX and other risk factors in that WACC. So regarding both, I tend to agree with your view of that. But of course, this will depend on the discussions between ABRAGE and the public hearings, and ANEEL, and we will know in the following months. It's not just an Eletropaulo factor or a Sul factor.

Great. Thanks.

Brian Taddeo of Gleacher.

Good morning, thank you. Just want to follow-up quickly on AES Eastern. I was wondering if you could comment, if you are -- are you having any discussions with the banks there? And where I'm going with that is, your comments on the asset sale, with the two facilities maturing in July, do you expect that this will be resolved by, I guess before that point, or do you think this could actually spill into the second half of 2011?

Ned Hall, who heads up North America, he is the closest to that. He could comment on that.

Hi, Brian. The process is ongoing, and the timing to conclude it, by the end of this year, we should get our first round of indicatives between now and July, so depending on how that goes, we may be in a position to comment.

Okay. And then, just following up on that, what's your expectation of having to get bondholders involved in an asset sale process? Do you believe you need consents, or do you think you could do it outside of bondholders?

Well, it depends on how it's done, but if we need consents, then we'll go get them.

Okay, and then one more, still on Eastern. Could you just update us or remind me, actually the hedge situation there? Are there any power or coal hedges left within the book? And then also just on the rail transport situation, is there a long-term agreement still there, or has that rolled off as well, and that's purely -- or that's being renewed as well?

There's some legacy hedges, a small amount of hedges that are still rolling through. But just based on the lack of availability of hedges that make sense, we haven't continued to hedge. And the rail transport agreements are not long term.

You mean, they are expiring some time in 2011, or have already expired, and now you're at pure market rates?

I don't have the dates. We'll have to get back to you.

Okay, thank you very much.

Ben Sung of Luminus Management.

Hello, I wanted to ask about AES Eastern, as well. I think in the past, you guys have talked about wanting to resolve this over 2011, and then from a cash flow perspective that made a lot of sense. With changes in commodity prices, does that change the timing of when you guys think that you guys will, or will want to make some decisions around the assets, or how do you think about that right now?

Let me just answer first from the impairment standpoint, obviously, we had to look at it a couple of years, in terms of the curves, and so that's what triggers the fourth quarter, just in terms of the analysis that we just took down. I think the -- obviously, that flows through economically, in terms of how we look at the strategic process, in terms of the disposition of the asset, as well. And I'm sure Ned can probably speak to that as well.

The timing on the decision, as we've already stated -- as you stated, is to get it done this year with indicatives due on the near term. The facility does have a six-month debt service reserve available, so that will assist with cash flow. It also is hitting on significant cash at this point, based on positive results from last year with its hedges, but we had a dividend block in place because of coverages. The timing on -- we think we can get the process run, but obviously without hedges, without additional -- with the cash that's in the business, but obviously, it's very volatile at the moment. There's a lot of movement, as you're well aware, in commodity prices, and that changes day-to-day, so we obviously watch that, and we'll adjust accordingly.

Okay, thank you.

Jason Mandel of RBC.

Hello, thanks, guys. This is Jason. Just to -- again, on AES Eastern, can you discuss if there's any complications with regard to the sale of the assets due to the lease structure, not necessarily just the debt in place, but the fact that it is a lease structure, and a tax recapture or other issues that may come of that in unwinding the lease? And also, where the, exactly where the banks sit in that part of the capital structure, and what they are collateralized by?

Yes, there is probably a very detailed answer to the collateral that I won't be able to give at this point, that we can provide later, but the banks are collateralized by the assets at Cayuga and Somerset, and the cash flows out of the remaining businesses. The tax recapture will obviously be dependent on the individual owners, including us, so I can't comment on the others or even us at this point, but that will obviously be a complication that comes with the lease. And I certainly would agree with your statement that the lease complicates this significantly, as we step through the process.

And just to quickly follow-up on the banks, given the LCs that are drawn, and the July terminations, is it expected that those LCs will be ultimately cash collateralized?

The business has the cash it needs at the moment, to do what it needs to do, in terms of being able to sell power forward on a short-term basis and buy coal. So that would be the plan when the LCs expire, is to use the cash that the businesses have.

Thank you.

Jeff Rudner of UBS.

Good morning, Paul. A question on a longer-term basis. You've fairly clearly indicated what your expectations are for 2011, but looking forward on a, say, three- to five-year basis, what is your vision as to what we should look for for earnings growth in the Company?

Well, we're not going to use specific numbers here, but we may over time give a little bit more of a further look out, but it's really going to be the plant's construction coming online; that's the big driver, where we'll see some earnings growth there. I think that the next piece is, when we talked a bit about answering all of these questions about the costs, we see some room to continue to move the costs down the corporate piece a bit. It's run up quite a bit, which we had to do to put the systems in place, but we could become a lot more efficient there. So that provides another couple year's worth of growth on that front.

And then I think we have $1.1 billion of cash sitting around doing very little, which we want to deploy, and that has value. If you deploy that -- let's say you take that and get a 12% return, you're earning something like $132 million, that's over $0.10 a share of earnings. If you deploy for stock buybacks, depending on price at which you buy it back, that could also be accretive, so you also have that element to it. And we have liquidity beyond that.

And I think the other part of the earnings growth really comes from, as we've thought about, really over the past several months, where we want to focus -- as I said there are a lot of really neat markets out there. We can't compete in all of them, and we've started to really select the ones we want to put the most effort. And I think what you'd see over time is us starting to manage the portfolio to take some of those assets, sell them down where there's not a whole lot more value we can add in markets that might not be strategic, and investing that into markets where we could get returns above our cost of capital. And I think by having a global portfolio like we do, that gives us the ability to go out and do some more things, without having to go out and tap the capital markets again for new equity; I think that's important. So I think you could see another four to five years of good earnings growth. And that's what we're really trying to work through, as we think about the various options we have to invest, to buy back stock, to reduce debt, to swap assets, it could create some interesting opportunities for us, combined with the ability to go out and reduce costs in a pretty significant way.

I think just as a parallel to Paul's statements, I think it's also for the reasons he's articulated, in terms of the asset sales, it's important to continue to focus on the cash growth. And we just saw with the Middle East asset sales, 20%-plus kinds of returns on those, on our equity investment. And that's increased our cash growth, obviously, that would take earnings out of the portfolio temporarily until they're replaced. So that's another important metric for us is the cash growth, as well as the earnings.

Chandra, can we take one last question, please?

We have no further questions, sir.

Perfect.

Good. Well, thank you all, again, for joining this morning. If you have any questions, please feel free to call either Chris Fitzgerald or myself. Thank you, and have a nice day.

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