愛依斯電力 (AES) 2012 Q3 法說會逐字稿

Welcome, and thank you for standing by. All participants will be on listen only until the question-and-answer session of today's conference. As a reminder today's call is being recorded. If you have any objections please disconnect at this time.

I would like to turn the call over to Ahmed Pasha. You may begin.

Thank you, Effie, and good morning. Welcome to our third-quarter earnings call.

Our earnings release presentation and related financial information are available on our website at AES.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

Joining me this morning are Andres Gluski, our President and Chief Executive Officer; Tom O'Flynn, our Chief Financial Officer; and other senior members of our management team.

With that, I will now turn the call over to Andres.

Thanks, Ahmed. Good morning, everyone, and thank you for joining our third-quarter earnings call. I hope that all of you in the northeast have had your power restored at home and have fully recovered from Hurricane Sandy. We at AES have done as much as possible to help the impacted areas, sending more than 0.5 of our available field resources DP&L and IP&L to help out affected service providers.

Now, turning to the third-quarter results. I am pleased to say that our financial performance this quarter improved over both the second quarter of this year as well as the third quarter of 2011. This was expected and keeps us on track for our full-year guidance.

Adjusted EPS of $0.36 in the third quarter brings our year-to-date total to $0.91, which is $0.10 higher than what we earned in the first nine months of 2011. The story is similar for our cash-flow metrics. All in all, we are confident in our ability to deliver on our guidance commitments for 2012.

Additionally, we recently announced organizational changes that will create greater efficiencies by placing functional and operational activities in the right place and eliminating overhead redundancy. These changes are in line with our strategy, and build on the cost savings that we have implemented over the past year. I will discuss the financial benefits of this reorganization in some detail later on in my remarks.

Today, I would like to focus on two main topics. First, an update on recent developments in our core markets including DPL in the US, Brazil and Chile; and second, progress on our strategic plans to unlock shareholder value, including deleveraging, returning cash to shareholders, and improving profitability. Later, Tom will work you through the specific drivers of our results as well as our near-term outlook.

Turning to slide 4, I would like to provide you with an update on recent developments at DPL. As we announced last week, we determined that a goodwill impairment of between $1.7 billion and $2 billion at DPL was required. As we have discussed on prior earnings calls, the fundamentals of the business have been adversely affected since the acquisition was announced in April 2011. This is primarily the result of sustained lower natural gas prices, and more customers moving to competitive retail providers, including our own, at reduced margins. Consequently, forecasted profitability and cash flows are lower, resulting in the goodwill impairment in the range we have provided.

Obviously, we are disappointed with these developments at DPL. That said, we are committed to reaching the most positive regulatory and business outcome possible. To that end, we are working to achieve a reasonable result in the rate case, and we continue to expand our retail customer base, inside and outside of DP&L's service territory, and we will strengthen DP&L's balance sheet by using its internally generated cash to pay down debt.

Our electric security plan, or ESP application, is designed to balance DP&L's need to maintain its financial integrity with the Public Utilities Commission of Ohio's desire for a more rapid evolution to a market-base rate. If approved, the proposed ESP will allow DP&L to collect a non-bypassable Service Stability Rider that will give the Company an opportunity to earn a reasonable return on equity.

The approval process is moving forward, and the prehearings and technical conference have been scheduled for November 9. We are hopeful that the new ESP will be in place by no later than the first quarter of 2013. In the event that a decision or settlement is not reached by the end of 2012, we have also filed a motion with the Public Utilities Commission of Ohio requesting an extension of DP&L's current rates until a final decision is reached.

Next, regarding our strategy to grow our retail customer base, we continue to expand our retail load inside and outside of DP&L's service territory in Ohio. Within DP&L's territory, we have retained roughly 75% of the switch load, although as I said earlier, at significantly lower margins. In markets outside of DP&L's service territory, both in Ohio and Illinois, our retail business is currently serving more than 150,000 customers. By year's end, we are projecting that DPL's retail business will be serving approximately 200,000 customers, which represents a net increase of approximately 175,000 in the Company's total number of customers during 2012.

Finally, we are working to strengthen DPL's balance sheet through a multi-year deleveraging and refinancing program. In 2012, we expect that DPL will distribute to AES $122 million, of which we have already received $87 million as of the end of September. Over the next two years, however, we expect to use, essentially, all cash generated from operations within the DPL group of companies for debt reduction.

Next, turning to slide 5 and our businesses in Brazil. As many of you are aware, in order to stimulate the economy, the government of Brazil recently announced an energy cost reduction program, or Provisional Measure 579, which targets a 20% reduction in electricity prices. About one-third of this planned reduction is expected to be driven by lowering indirect taxes on the sector. The remaining two-thirds of this reduction is being targeted through negotiations with various generators and T&D companies, whose concession contracts are up for renewal between 2015 and 2017. These rules are still pending Congressional approval and implementation is scheduled for February of 2013.

I would like to emphasize that the proposed rules are not expected to have any significant impact in the near term on our businesses in Brazil. Let me explain why. Tiete, our main generation business in Brazil, has a long-term concession expiring in 2029, and thus will not be subject to this regulation. Furthermore, we are insulated in the short term as 100% of Tiete's output is contracted with Eletropaulo through December of 2015. Beyond 2015, it is still too early to tell what the incremental impact of MP 579 will be on energy prices in Brazil.

As far as the impact on our two distribution businesses, Eletropaulo and Sul, we do not expect any meaningful impact on either. Both utilities earn a return on their regulated asset base, and energy purchases are treated as a cost pass through. On balance, the Brazilian government's initiative to stimulate economic growth should help increase demand for electricity, which will result in increased revenue for both Eletropaulo and Sul.

Now, turning to slide 6, I would like to give you a brief update on AES Gener. I am happy to report that all of our plants are fully available, including those that were offline in the second quarter for repairs and maintenance. As discussed on our previous calls, our Angamos plant in the north of Chile is now 90% contracted; and therefore, its exposure to low spot prices has been significantly reduced. In addition, we continue to see energy demand growth of between 4% and 6% in Chile. We have also seen positive results at some of our other important businesses, including Masinloc in the Philippines, Maritza in Bulgaria, and Southland in the US.

Turning to slide 7, I would like to provide you with an update on the strategic plan to unlock shareholder value that we laid out late last year. Just as a reminder, our three strategic objectives for enhancing shareholder value are -- first, optimizing capital allocation; second, improving the profitability of the existing portfolio; and third, narrowing our geographic and business focus by selling non-strategic assets.

Now, turning to capital allocation on slide 8. As we have discussed in the past, our goal is to maximize risk-adjusted returns on a per-share basis by allocating our discretionary cash across various uses, including deleveraging, share buyback, offering a predictable and growing dividend, and investing in platform expansions. Last month, the Board approved the prepayment of $225 million of corporate debt, which we expect to complete later this year or early next.

This will help us not only lower our interest expense, but it will also help us with our credit metrics by mitigating the impact of lost earnings and cash flows from assets that we have sold. Once completed, the pre-payment will bring our total debt prepayments to approximately $717 million since September of 2011, including both corporate-level debt and expensive non-recourse debt at our Brasiliana subsidiary.

With respect to share repurchases, in the third quarter we repurchased 4.3 million shares for approximately $49 million, representing an average price of $11.38. This brings our total investment in our shares since September of 2011 to $390 million, representing nearly 34 million shares, or approximately 4% of shares outstanding. Last but not least, we have also declared our first cash dividend in almost 20 years, which is set to be paid on November 15. The dividend is an important component of our total return proposition.

Now, please turn to slide 9, and let's discuss our actions to improve our profitability. As you may recall, in late 2011, we announced an effort to reduce SG&A by $100 million by 2014. For 2012, we are ahead of our original goal of $50 million, and we now expect to achieve at least $65 million in cost savings this year. As a result of the recently announced reorganization, we now expect to realize the full $100 million of savings in 2013. Ultimately, the reorganization will result in additional savings of $45 million, to achieve a total reduction of $145 million in annual overhead expense, relative to 2011.

I would like to point out that the cost saving numbers I just mentioned only reflect savings in overhead at the AES level, and they do not include additional cost savings at our businesses. Such as Brazil, where we are implementing our Criando Valor program to improve that company's performance by $224 million per year by 2015, of which $150 million will be achieved by the end of 2012.

We see additional opportunities for savings in fuel sourcings and in operations and maintenance expenses. For example, we presently purchase $2 billion of coal a year, and we are saving about $80 million as a result of implementing a comprehensive global sourcing framework, including the blending of coal and having the ability to redirect coal shipments. However, we believe we have not yet exploited all of the advantages from our global scale and possible synergies and are working hard to do so.

Moving to slide 10, let us review our progress in terms of narrowing our geographic and business focus through asset sales. Last quarter, we announced the sale of our China portfolio. I am pleased to report that we have closed and received $86 million in the process for two of the three businesses. We expect the third transaction for $49 million to close within the next few weeks. To date, we have sold nine assets for $933 million in net equity proceeds at an average PE multiple of more than 20.

We continue to seek additional opportunities to streamline our portfolio by exiting those markets where we do not have a competitive advantage or a strong platform with an opportunity for expansion. Once completed, we expect that this strategy will result in a lower overall risk profile and a more focused and efficient company.

In summary, we believe that we are consistently executing on the plans that we laid out in our first call last November.

Now, Tom will review the drivers of our quarterly results, guidance, and platform-expansion projects in more detail.

Thanks, Andres; and good morning, all.

Before I get into our results, I would first like to say that I am very pleased to be here. For the past two months, I have learned a lot about the Company, the people, the culture, and the businesses. Like any company, there are a number of exciting aspects and also some challenges. However, I have been impressed by the commitment of our people, as well as the potential for improving our portfolio, delivering attractive returns to our shareholders, and the other things that Andres laid out.

This morning, beginning on slide 11, I will cover the following topics -- first, our third-quarter results and key drivers of gross margin, adjusted earnings per share, adjusted pre-tax contribution, and free cash flow and parent liquidity; second, our near-term capital allocation plans; and finally, an update on our guidance and total return expectations.

As Andres mentioned, we reported $0.36 of adjusted EPS for the third quarter. This brings our nine-month earnings to $0.91, or about 75% of the low end of our full-year 2012 guidance.

Now to slide 12, our proportional gross margin increased by $168 million over the third quarter of 2011. The majority of this increase was driven by new businesses, such as Changuinola in Panama, Angamos in Chile, and DPL in the US. In addition, we saw favorable year-over-year trends at several of our larger generation businesses, such as Masinloc in the Philippines and Maritza in Bulgaria. These trends were partially offset by lower tariff rates and higher fixed costs at Eletropaulo in Brazil.

Now, turning to adjusted EPS on slide 13. Third-quarter results increased by $0.08, or 29%, to $0.36. This increase was primarily driven by $0.09 of contributions from the new businesses I just covered, $0.01 from lower share count, and $0.02 from our cost-cutting initiatives, which have lowered SG&A expense by $26 million in the third quarter, and $57 million year to date. These gains were partially offset by unfavorable foreign exchange impacts of about $0.03.

Now, to slide 14. I would like to review a new earnings metric that we are introducing this quarter. We hear frequently from investors that with our large number of businesses, it can be difficult to determine what has the biggest impact on the bottom line.

In an effort to provide additional transparency, we are introducing adjusted pre-tax contribution, a metric that we use internally to measure financial performance. This measure is calculated by taking the pre-tax earnings from each business, including those accounted for as equity and earnings, and adjusting for our ownership percentage. In addition, we make the same pro forma adjustments that we do for adjusted EPS.

On slide 14, we have graphed the relative contribution that each of our segments has made to year-to-date adjusted PTC of $1.5 billion. As you can see for example, Latin America generation, at 37%, is the single-largest contributor, driven primarily by our generation fleets in Chile, the Dominican Republic, and Brazil. Our generation businesses in Europe and North America were also significant contributors.

The measure also highlights that some of our businesses consolidated results are significantly different than their bottom-line impact. This is most notable in Eletropaulo, which we control and consolidate, but have an economic interest of only about 16%. As shown on the slide, our utility businesses in Latin America contribute only 8% of adjusted PTC. We hope this additional disclosure will help to simplify the AES story and allow you to focus on the biggest value drivers.

Now, to slide 15. On a proportional basis, our free cash flow has increased $41 million, compared to the third quarter of last year. This increase was driven primarily by contributions from new businesses, partially offset by a decline in Eletropaulo.

Now, onto slide 16 and parent liquidity. During the quarter, we benefited from $426 million of inflows from asset sales and cash flow from our subsidiaries. Also during the quarter, we returned $71 million to shareholders by share repurchases. After $157 million of corporate interest, overhead and investments, we ended the third quarter with more than $1.2 billion of parent liquidity, up from $1 billion at the end of last quarter.

Now, to slide 17. I would like to discuss our plans for capital allocation for the balance of the year. This year, we expect to generate $1.6 billion of discretionary cash.

Year to date, we have already allocated 67% to returning cash to shareholders and deleveraging, including the $225 million debt pay down expected later this year or early next. We've allocated another 17%, or $262 million, to growth investments. The remaining 16%, or $258 million, of year-end cash will be combined with parent free cash flows in 2013 to be allocated in line with our capital allocation framework.

Now, let me take a minute to review a couple of the segments for 2013. On the sources side, we expect parent free cash flow to be lower than the 2012 expectations of $550 million. It will be due to two major factors -- the first being DPL, and secondly, from AES Gener and IPL, as those businesses retain some cash to reinvest. In terms of the use of discretionary cash, we expect growth investments to be lower than the 2012 levels of $262 million. These 2013 investments, which could total up to $200 million, are largely in platform expansions that I will discuss in a moment.

Regarding the dividend and growth, we expect to evaluate the reasonableness of dividend increases, on an annual basis, in the beginning of the fourth quarter, consistent with the timing of our annual planning process. We appreciate the value of moving our dividend yield to be more in line with that of the S&P 500, and we will factor that into our future deliberations. Finally, the remaining cash will be invested in both debt reductions and share repurchases, with more weighting towards debt reductions in 2013.

Now, to slide 18. We are reaffirming our 2012 guidance elements as discussed on last quarter's call. Consistent with our comments from last quarter, we expect to come in at the low end of the range of $1.22 to $1.30 for adjusted EPS. Proportional free cash flow and subsidiary distributions are also expected to come in at the low end of our guidance range.

Now, to slide 19 and looking beyond 2012. We expect modest adjusted EPS growth in 2013, compared to our 2012 expectations. This modest growth is largely driven by improved operating performance at AES Gener in Chile, recovery at Eletropaulo in Brazil, and the full-year benefits of capital allocation and our cost-savings initiatives.

These benefits are partially offset by lower earnings from DPL and weaker foreign exchange. Please keep in mind this is based on foreign exchange and commodities as of September 30; our expectations of near-term regulatory proceedings, particularly at DPL; and the current macro outlook in each of our key markets. To the extent these items change, our guidance could be impacted.

This guidance assumes the extension of the controlled foreign corporation, or CFC, look-through provision, originally enacted under TIPRA. As in prior years, we expect Congress will retroactively extend this tax legislation later this year. If the CFC look-through rule is not extended before year end, we estimate an impact of $0.02 to $0.03 this year. Recall that this will be a non-cash impact, as we have an outstanding net operating loss carryforward of about $2.1 billion. Overall, we continue to project tax rate on adjusted earnings in the low 30% range.

Andres discussed we continue to look for opportunities to streamline our business focus. Although most of our efforts to date have been EPS neutral to accretive, this may be more difficult as we monetize some assets. Prior to releasing a defined 2013 guidance range during our year-end call, we will have an updated view of relevant macro environments and the impact of potential portfolio de-risking activities.

Now, to slide 20. Earlier this year we introduced a three-year average annual total return target of 8% to 10%, comprised of EPS growth and dividend yield. Since our last earnings call, we have made considerable progress on our annual planning process. And though not fully complete, it is evidence to us that our earnings growth rate through 2015 will likely be lower than previous estimates. This decline is driven by lower earnings from DPL in 2014 and 2015, due to the issues that Andres covered. We had been anticipating some improvement at DPL, which is no longer the case. In addition, the compounding effect of reduced cash flow also has an impact.

Secondly, lower-than-expected earnings in Brazil, driven largely by lower demand, unfavorable foreign exchange rates, and a more negative outcome than expected on the tariff reset Eletropaulo. These are partially offset by improved performance at our businesses in Chile, IPL in the US, and the additional cost savings we recently announced. In light of these factors, we are now expecting an average total return through 2015 of 6% to 8%. We appreciate that this is a difficult revision but believe it is a more appropriate reflection of our current outlook.

Before turning the call back to Andres, I would like to cover the progress we are making on our almost 1,800-megawatts of projects under construction as well as our platform expansions under development. Looking at slide 21, our construction program remains on schedule. In addition, we have already secured the necessary financing and funded 100% of our equity commitments for these projects.

In terms of progress on these specific projects, work at our 270-megawatt coal-fired Campiche project in Chile is progressing well. I was in Chile two weeks ago and had a good first-hand look at the progress. Synchronization of the unit is scheduled for November, and commercial operation is expected in early 2013. At our Kribi project, a 216-megawatt gas-fired power plant in Cameroon, we have energized a 60-mile transmission line and plant testing will begin in December.

Finally, our 1,240-megawatt Mong Duong coal-fired plant in Vietnam is progressing on time and on budget, and operations are expected to begin in 2015. We are specially pleased that this project has surpassed 5-million man hours without a lost-time incident and is achieving world-class safety standards.

Now, to slide 22. In terms of future value creation beyond these construction projects, we continue to move forward on developing power plants in the markets where we have a significant presence and a compelling competitive advantage. Our focus is to use the most efficient source of capital, including bringing in strategic partners, using low-cost project financing, multilateral funding, and operating cash flows generated at the existing businesses.

For example, at Cochrane, 530-megawatt coal-fired expansion of our Angamos platform at AES Gener, we now have in place a construction contract, long-term power sales agreements for the majority output, and are close to bringing in a strategic partner. We are focused on finalizing the project financing, and construction is expected to begin in 2013. With regard to Alto Maipo, the 530-megawatt hydro project, also at Gener, we have successfully executed the principal construction contracts, moved forward with preliminary works, continue to work with our remaining project milestones, and expect to begin construction also in 2013.

Similarly, here in the US, we plan to upgrade 100% of our base-load coal-fired fleet at IPL, with investments in environmental controls to comply with MATS. This investment will earn regulated returns and will also fulfill a majority of the necessary environmental upgrades required for MATS at all of our 7,000-megawatts of coal-fired generating here in the US. We expect this investment to begin in the seconds half of 2013, carrying on through 2016, with potential equity investment of up to $300 million.

In closing, I look forward to seeing many of you next week at EEI; and I will, now, turn it back over to Andres.

Thank you, Tom.

Let me summarize what I believe to be the key points of this call. We are pleased with our third-quarter results, which were in line with expectations. We are on track to deliver a 20% adjusted EPS growth this year, in line with our guidance.

Despite the challenges we have faced recently, the earning power of the Company remains strong, and we expect to deliver a 6% to 8% average annual return from 2012 through 2015, including dividend yield and EPS growth. Although we won't be satisfied with this rate of return, we believe it is prudent to lower expectations at this time, primarily given lower forecasts from DPL and Brazil. But we will, nonetheless, continue to strive for higher total returns for our shareholders.

We have taken actions to significantly reduce our overhead and streamline our organization. We will also aggressively pursue additional operating cost savings. We will continue to de-risk the Company through deleveraging and narrowing our geographic focus through asset sales. And, we are committed to pulling all levers to improve risk-adjusted returns from our platform businesses.

Finally, along with Tom, Andy Vesey and I will be also at the EEI next week, and we look forward to seeing many of you. Operator, we will now open the line for questions.

Thank you. At this time, we are ready for the question-and-answer session.

(Operator Instructions)

Jon Cohen, ISI.

Thanks for the additional disclosures, I think those are very helpful.

My first question is on the parent free cash flow, Tom, you said that next year you expect it to be somewhat lower than the $550 million midpoint of this year. And then you said growth CapEx is expected to be more in the $200 million range, and the remainder will be skewed more toward debt repayment. First of all, is there a good way of thinking about what the long-term parent free cash flow contribution from the subsidiaries is? Is that something less than $500 million? How do we think about what that is going to be longer term?

Secondly, of your $6 billion of recourse debt, do you have a target in mind of what you want to get that down to? At what point would you be comfortable -- with the current cash flow profile, what level of debt do you think is right at the hold co?

Okay, John, good questions.

In terms of next year, I touched on it briefly, but the $550 million, back from the slide 17 I think it was, will be lower next year, really partially because of reduced cash coming from DPL, but also we're making reinvestments in two businesses, as I mentioned IPL and secondly, Gener. The number of the -- so we expect that to be lower. We will give you a better idea of what our expectations will be at our year-end call when we give you guidance. I think though, the $500 million-ish range is a more indicative indication of a more normalized number. So, this year would be closer to what we think would be a more normalized number. Next year, it will be lower -- below the let's say a $500 million normalized number, really because of the reinvestments we're making.

In terms of the CapEx, I said up to $200 million; I do mean up to $200 million. One of the biggest things -- it could be as little as 0.5 that amount. One of the issues is that Gener, it has been a great performer for us, great grower. They are building the two projects, coal and the hydro. Coal will come first, Cochrane that I mentioned. But, the issue is that they will need some liquidity at the Gener level to do that. And, the $200 million would contemplate some equity being put in by AES.

Obviously, another alternative is them issuing shares in the market to do that, so well-known company, good market cap, trades well, trades better than us, so one of the things we will think about is what the right funding is. To the extent that they access the majority of the equity they need in the markets, or maybe there is a splitting-the-baby concept, then that $200 million could be as little as $100 million to $125 million. That's just something we will have to give some thought to.

In terms of -- going back to the third part of your question. The -- I think it's $6.2 billion of parent debt, including some trust preferreds. But, we really look for coverage ratios. I think we have said that we want to maintain our rating and work it up over time.

The coverage ratio we look at, in terms of debt to cash flow, I think we have used the range of 4.5 to 5.5, that continues to be a target that we've got. Near term, we are skewed toward the higher end of that range. That's why I said for '13, some of our cash flow available may be weighted more towards share repurchase. Once again, we see that as really a 2013-only focus. We've got the ability to do both.

But, we really focus -- kind of bottom line, we focus on the leverage, the coverage ratios, as you know, that that's a more appropriate indication of credit quality.

John, this is Andres.

What I would like to say about Gener, we will continue to what we've been doing very successfully. So it is really very capital and tax efficient to use some of the resources at Gener, rather than sending them up and sending them back down. As Tom mentioned in his speech, we are also looking at partners. Partners that bring, not only financing, but they bring access to bilaterals, [EXINs], et cetera. So really, we're optimizing Gener, and we will continue to do that.

I think the one change from the past is looking more at partners than we did, and that's partly due to project financing is getting tougher everywhere. So, we will continue to do at Gener what we've done and looking for the most tax efficient way to do so and create the most value.

Okay, thanks. One quick question on your page 19 -- drivers of growth in '13, I notice that you don't have a tariff reset at Sul in here. Is that something that you expect to be a negative for '13?

The tariff reset in 2013 at Sul with -- Sul is in a different situation than Eletropaulo, so we don't expect the sort of outcome we had in Eletropaulo. But, it will have the tariff reset, and we do expect some decrease from Sul as a result of that.

Okay, great. Thank you very much.

Julien Dumoulin-Smith, UBS.

In terms of debt reduction, could you provide perhaps a multi-year view -- within that 4 to 5.5 range, how quickly do you want to get there, if you will?

It's 4.5 to 5.5, Julien, don't upgrade me too quickly here. I think we want to stay within that 4.5 to 5.5 range. We want to bring it down to the lower end of that range over, let's say a three-year period. As we talk about our overall numbers here, we are thinking about things through '15, that would be where we would want to get to in that same kind of '15 range. So as you know, that is a function of both the cash flow of the business as well as absolute debt.

Great. Could you provide just a little bit -- in the past, you've described discrete project EPS contributions going into '13, like Kribi or something to that extent, could you provide a little bit -- a sense year-on-year growth drivers, more granularity?

Sure. The two main -- what we basically have happening in '13 is one, we have Campiche coming online, we have a full year of a more contract at Angamos.

In Chile, one of the things that has affected our results was that this year we were somewhat short in the SIC in the south, and prices were very high because of poor hydrology, and we were actually somewhat less contracted than our final objective in the north, and their prices were very low because of a -- basically, people had a take or pay gas contract. So, those things got corrected.

We also have, in terms of some of our wind projects in the US, as the tax equity matures, that we will have more earnings from those assets in the US. And, we will also have the new plants that have been brought on for the full year. So I think that -- those are some of the main drivers that we have.

We can give you, perhaps, a more specific breakdown of the small plants. But, it is a different situation than we were this year, where the big driver, we had a lot of megawatts coming online at the beginning of the year.

Then, a quick follow-up on asset sales. You've executed for the most part on the bulk of what you described, call it earlier this year, what is the next round? Or, is there another round here that you're contemplating? And where, at least, from a geographic perspective, where should we think about that? What kind of assets? Perhaps more renewables?

That's a great question. I think that -- sort of go back to what we laid out. We said we had a universe of about $2 billion of equity in assets that we could sell, so we've executed about 0.5 of that. And, that we would be concentrating on those that weren't platforms for growth, that had unused leverage capacity, or the ability to raise their own money, or really places we didn't feel we had a sustainable competitive advantage. So, I think we've done that pretty much to date.

Now, going forward, what will we do? The same framework is in place. We don't really like to give specific names because, of course, we're operating these businesses, and if we say they're up for sale, it makes it more difficult to continue operating them at the optimal level. But again, there would be those where we have like one plant, one off, where we don't see a platform of growing.

Regarding renewables, we have changed the way we think about most renewables, certainly wind. We're not thinking about a stand-alone wind business, but really thinking of placing wind into the geographic units that we have. So, wind becomes just another way of providing energy. And, what we've seen is where we really exploit this platform concept, we're more successful. If you think of something like battery storage, we are leaders in exploiting, let's say, this technology, and where we've really been successful is where we apply it to our existing businesses.

The one exception of this, of course, is solar. In solar, we have 50/50 JV with Riverstone; and of course, both of us will be seeking to monetize this asset over time.

Other than that, I really can't give you more specifics, but I would say you should expect, over time, continued asset sales. This will also help us reduce costs, help us reduce our focus; and what we will do is, as soon as we really have something firm, announce it, and make it public, but we don't want to get ahead of ourselves here.

Great. Thank you for the time.

Ali Agha, SunTrust.

Andres -- and you alluded to this a little bit in your closing remarks, but I wanted to pick up on that 6% to 8% total return that you're projecting for the next three years. I'm curious who you benchmark yourself against? And, how do you justify that as an acceptable return for investors looking forward, when they look at alternative investments, particularly in the power [utilities] space?

And, I guess a related question to that, does that cause you to step back and look at your portfolio and say -- are you in the right mix of business, given that that's the kind of return that this portfolio is generating for you?

Well, I think, first of all, let's step back a second. This year, we are growing earnings 20%. So, I think that would probably certainly rank us among the top of our peers in this space. What we are doing is coming off a growth of 20%.

Now, what we have done is really look at adapting to, what we see as the new forecast for DP&L, some of the FX and some of the tariffs in Brazil, and saying, we want to be prudent, we want to overachieve, whatever we give out there as guidance. So that's really what is causing this step-down of 2%.

But, I think that -- if you think of our portfolio, again, if you take a longer period a view, we do have very competitive growth rates. I think that we provide the advantages of a diversified portfolio. Obviously, if you're concentrated in fewer markets, you have less of this. But I do think, and we have said from day one, that we do think that we are in too many markets. And so we do want to focus, and then we can have all of the advantages of portfolio diversification. We don't have be in 30 countries, as where we started. So yes, do expect us to reduce.

Do expect us to become more efficient, as I think we are doing. We have reduced overhead by -- next year, it will be close to 25% and the longer term, it is more like one-third. And, that is just overhead, in terms of managing these businesses.

Regarding your question, I do think that we will provide compelling returns. We are in the right markets, markets where there's growth. Chile is growing 5% to 6%. Columbia is growing 5% to 6%. Panama is growing 8%. Even Brazil, longer term, is expected to be growing at 4% after 1.6% this year. I think it is hard for you to find another portfolio that has these growth rates. And, I think we have a clear strategy for executing on them.

So yes, we are not where we want to be at the end, but we have certainly taken big steps in the right direction.

Also, just to clarify, your return expectation over the next three years -- the portfolio-expansion opportunities that you guys highlighted in your slides, are those already baked into that growth rate as well?

Yes, those are baked in. Now, of course, if there's other things that we can do, in terms of some of the renewables that have shorter construction time periods, those are not in there.

Okay --

The only thing -- Ali, the only thing -- it's Tom -- I'd add is that of the growth that has not yet gone to construction, which is IPL and the two projects at Gener; IPL, we do get earnings between now and '15. They do have a tracker where they get a current return on construction in progress. The two projects at Gener are not going to be earnings generators until '16 and '17, respectively.

Got it. Then separately, if my math is right, I think you pretty much used up your current share buyback authorization with this last $49 million purchase. Is that right? And, when should we expect an increase in that authorization, or what is your thinking? I know you alluded to that. Tom, you did as well in your commentary, but when should we see some expansion of that authorization, assuming that you still want to buy back more stock?

Okay. Your math is right. We did execute on our authorization. What I would say is, just as I said in the past, we can always get, very quickly, an authorization to have more buybacks.

But I would say, if you go back to what I initially laid out a year ago, what we said is that we were going to buy back shares, we were going to strengthen our balance sheet by buying back debt, and we were going to execute on some of the growth projects. So -- and pay the first dividend. So, I think we are exactly executing on that, and so we have done repurchases, 4% from the starting point of total outstanding shares. And as Tom mentioned, we will be, now, focusing on deleveraging over the next short period. But, I will make clear that for us to get an authorization to buy back more stock, we can do that on very short notice.

Last question, one other clarification. You alluded to TIPRA extension assumption, was that just talking about 2012 and the $0.02 or $0.03 impact? Or, is that baked in for the full next three-year outlook?

Our guidance for '12 and our total return guidance, or expectations through '15, do assume an extension of TIPRA. The $0.02 to $0.03 I talked about would just be the impact in '12, in the event it wasn't extended. It would be in the high-single digit number in the event it was not extended permanently, so that would be, let's say, a '13, '14 number. Now, that's before other tax strategies that we can pursue.

To be honest, that high-single digit number, let's call it $0.07, $0.08, if you asked us six months ago that number would have been higher, but we continue to think about ways to mitigate, so a total TIPRA termination, if I can -- if that's technically correct, would -- as we sit here today, on an ongoing basis, it would be high-single digits, but we have been very successful in mitigating that down and we'll continue to do it.

I think in general our view of -- there has been good support, and our view of the election results last night, just on a TIPRA-only basis, is that the current Administration, the Senate -- Senate Finance Committee, ways and means, they have all been generally supportive of this and if the same folks are generally coming back to their desks, that that's helpful to a TIPRA extension.

What I would say is two things -- remember when we talked, first, about the non-TIPRA extension at the beginning of the year, we are talking about an impacts of about $0.10 before mitigation, we've got it down to $0.02 or $0.03. And, the second thing is, remember, this is non cash, that we have $2 billion of NOLs.

So yes, we do expect it to be extended, but if it weren't, as Tom mentioned, we would be taking other measures to decrease that impact. And, we think we can be successful to bring it down, sort of the range that we have this year, for next year as well.

The $0.07 to $0.08, just lastly, that was an annualized number, Tom, you were thinking about?

Yes, that would be an annualized number with no further mitigation.

Got it, thank you --

Would not be our -- as Andres said, that would not be our expectation -- expectation would be that we'd have some further mitigation as we have in the past.

Understood. Thank you.

Brian Russo, Ladenburg Thalmann.

The outlook for IPL -- could you just elaborate on that, maybe quantify the level of CapEx to upgrade the several thousand megawatts of plants? And then, a little more detail on how the tracker works? Is that a return of and on the capital as it is spent on an annual basis?

Sure, I will hit that -- it's Tom. The equity we expect to put in is about $300 million. Their equity ratio, I think it's 45%, so that gets you -- I don't know, $650 million, $700 million, whatever that math works out to be. It would be about three years, between '13 and '16. The tracker is a recovery of and on. I believe there is a modest delay, it could be a three to six-month delay in the mechanism, but it is a recovery of and on construction in process.

What's the ROE embedded in that?

The ROE is embedded from -- it is actually, the WAC is from their last rate case, which is in the 90s, so it is a good WAC. It is above what other utilities in the state are getting, just leave it there. I would say separately, IPL, aside from the tracker, they may consider going in for a rate case over the next 18 months -- they've done well in the regulatory structure, but --

Okay. My other questions were asked and answered. Thank you very much.

Gregg Orrill, Barclays.

A couple of questions. Tom, I was hoping to follow up on your comment about going in for a case over the next 18 months, what was the driver there at IPALCO?

I would say that the major driver of the financials at IPALCO is their capital expansion, and the tracker keeps them in comfortable position. Andy may have more comments. I'm probably getting ahead of the game, in terms of talking about that it any kind of detail.

Gregg, this is Andy. The fundamental issue is that we've managed in Indiana very well. We have a very constructive regulatory environment with the environmental trackers. We've managed our costs very well. We have among the highest level of reliability in the state, and we have among the lowest cost of service in Indiana.

I think that when we talk about the current investment that we have, which is to meet the federal regulations on hazardous emissions, that's not driving us anywhere near rates. We do have the tracker, and we believe the majority of those costs will be recovered, as Tom explained. It is pretty straightforward. We have already submitted our Certificate of Public Convenience and Necessity, and we are expecting that back relatively shortly.

I think I mentioned on the last call, what will make us think about whether we need to go into rates or not is how we deal with potential retirements of older coal units. We are looking at, and still evaluating, whether we may have to retire up to coal -- older small coal units, which represent about 15% of our generation. If we do that, we probably will have to bring on new capacity, either self build, or through the RFP process that we engaged in earlier.

Once we come to that decision, we would only be able to recover costs associated with that expansion in a rate case, and that's really what is out there. And, as we get further along that process, we will update you, probably in the next call, where we are. But, that's really what Tom was alluding to, the potential that if we did indeed have to do the retirements, and we do add in capacity, at that point, we will need to consider going through rate so we can recover on that investment.

Okay, thanks. And then on -- sorry for the question, but on 2014 earnings, you kind of couch 2013 as below the modest growth, below the trend line that you're laying out. Given that there aren't a lot of megawatts coming online at '14, how do you see '14, would that be below trend and then you catch up in '15?

I think it is a little bit too soon for us to provide that guidance. But we do have, again as I mentioned earlier, some of our businesses, such as US wind for example, by the end of '15, will be adding about $80 million of pre-tax contribution, adjusted PTC, because due to the tax equity. Right now, it is too soon to give that, but obviously, if you have one year that's below, are you going to have other years above to get you to the average.

Right. Last question, coming back to the $2 billion asset sale target, that was laid out a year ago. How do you think about that at this point? Is that up for revision? Or, what are your thoughts there?

I would like to just make one clarification. I never said that was a $2 billion target. I only said that there was a universe of $2 billion, and that we expect to sell a high percentage of that but not 100%, necessarily. So, we never had a $2 billion target.

Now, in terms of the sales, we did sell those. I think that we were in a good position to sell for very good multiples quickly, and I think our market timing was very good. Now, looking forward, we are going to sell judiciously, in the sense that we really want to maximize the value of these. And I can give you, just an illustration is, we could have sold, packaged all of our China assets, and we did have offers to sell it right away, but we took our time and sold it to separate buyers. And, we received a 40% premium versus the sort of all together, and that's how we're going to continue with these asset sales.

When we have several things under discussions, and when we really do have something that we can bank on, then we will announce it. So, we're working hard on this. But, I don't want to get ahead of ourselves, and say that we have something, until we actually have it signed.

Do I feel that if we reached say $1.7 billion or $1.5 billion? If we got the right prices, that is probably the right amount. I think what is important is that we got as much value out of it. And the second thing, which is also very important, do we end up with the optimal company. Do we have the assets that we can administer efficiently that help add to the whole, in terms of our synergies and our scale. So what is really important is, not just the amount of money that is coming in, but do we end up with the right company at the end of the process.

Great. Thanks very much.

Brian Chin, Citigroup.

A question on the dividend, you gave a little bit of color that each year you would come looking at the dividend level and thinking about the appropriateness or the reasonableness of that, and then you mentioned the reference to the S&P 500 dividend yield, which is right know around 2%. Am I right in thinking that the next time you would be thinking about that is sometime in the second half of next year? And, what are some of the considerations that you're thinking of in terms of moving that dividend to an S&P 500 level or not?

That's correct. What we said is -- what Tom said is that we evaluate as part of our normal process. This is our first dividend, and we will reevaluate it towards the second half of next year.

We had always indicated moving towards more sort of average for the S&P, and I also said that we had a lot of new businesses coming online and that we wanted to see how they all performed before reviewing it. So, that was basically it. We will, basically, be looking at what are our cash flows, how are the businesses performing, but I think our intention of giving a portion of our free cash flow back to our investors in the form of a dividend remains strong. And, that is our objective, longer term.

Just to be absolutely clear on this, the total return growth rate of 6% to 8%, that's based on a base year of 2012?

That's correct. Some of the comments, when you say in terms of how our growth rates compare, we're coming off a growth of 20%. So this is -- following 20%, we're saying 6% to 8%. And, I also want to make clear that with that we're including, of course, also the dividend as well. That's our total return to shareholders.

Right.

One last unrelated question. You had indicated that part of the reason why you were changing the growth outlook was DPL, and what is going on with the new ESP and also switching-level assumptions. Can you clarify a little bit more what level of retail switching are you assuming at DPL in your now, new outlook? And, can you talk a little bit about what you're seeing out there with regards to switching?

We hear a lot of competitive dynamics coming from FirstEnergy and Exelon and other folks out there in the space. So, what are you guys seeing out there right now?

I will ask Andy Vesey to answer that one.

Brian, it is Andy.

Let me talk about our outlook on switching, and I want to put this in the context of the ESP filing, which is essentially our view of Ohio. In the ESP filing, what we've done is we've locked in, a view going forward, of a switching rate of 62%. That is really what the switching was at the end of August. We also have proposed similar to the AEP case, a switching tracker. So that fundamentally, we would be able to not have to forecast switching going forward, but that we would be held sort of neutral to switching rates going forward to the outcomes of rate case.

That said, most of the battle right now is around residential customers. We have seen an increase in residential customer switching, it is about 2.5% a month. We see ending the year probably around 75% switched.

We're seeing most of the categories of customers, other than residential, reaching saturation levels. So, that is really what we're seeing. It is mostly been increases in organic switching because I think a lot of the municipal aggregations have slowed down, pending the outcome of all the cases and actually the elections that we've just had. So, we anticipate that we are going to see continued, very intense competition in the residential class. We see that potentially saturating, long term, at about the 80% -- 86% switched.

So we're -- competition is intense, and as Andres said, we are replacing more customers than we've lost, more load than we lost. But, clearly it is an extremely competitive environment.

Given that you've embedded a rough 60% switching number, plus a tracker, in your assumptions, then if you don't get that switching tracker and you believe saturation is closer to an 80%, then that might be one negative headwind down the road, if you don't get that tracker in ESP?

What we said is that we have -- if we don't reach a settlement on the new ESP, we would apply for a continuation of our current ESP for next year.

Got it, thank you.

I think we have time for one last question, Operator.

Angie Storozynski, Macquarie.

I actually wanted to follow up on the DPL questions. Could you explain briefly what the issues are with the proceeding, with the ESP proceeding? I understand that you have to file ESP and replace MRO, so that is extending the schedule, but I remember that in the past you mentioned something about the separation -- or legal separation of the utility from generation assets, and the debt financing that you used during the acquisition of the company. Could you talk specifically about that issue, how it is linked to the ESP negotiations?

Sure, this is Andy. I will talk a little bit about the first part of your question, and then I will let Tom talk about the issues around generation or restructuring.

Getting right to that piece, as you know, the issues that have been around the discussions, and beginning when we filed the MRO and have the settlement discussion, there are three main issues. It is time to market of our loads before we're competitive. It's been the non-bypassable charge. And, emerging during those initial settlement discussions had been this question of legal separation of the generation assets, even though we believe that the functional separation that we have today, actually, is fine in competition.

What we have done in the filing is we addressed, still, all of these issues. We have made -- we are not asking for any approvals to separate generation in the current ESP filing. As you know, we filed the ESP on October 5. What we have done is we have made a commitment in the current filing that we will come back by the end of the year with another filing, specifically talking about the transition of generation and looking towards legal separation by the end of 2017.

With that said, I think that answers part of the structural question. I'm going to ask Tom if he wants to answer the second part of your question.

Angie, in terms of the debt, obviously when we come back with that filing, later this year, we will talk about financial viability of the two businesses, especially the financial viability of a stand-alone generation company. And also, taking into consideration what the appropriate timeline is before that's a reasonable thing for us to do.

In general, we do have debt at DPL, as you probably know, about $900 million at DP&L level and about $1.7 billion at the DPL [whole-co level], at least for the next two years, we're reasonably in good shape on maturities. We do have a refinancing of about $460 million at D&PL, the utility next year, and then the first major refinancing is at DPL, I believe it is August of '14 of $400 million-plus. So, that is something that we will look to get ahead on. Obviously, you may have seen that we did have some discussions with the banks before our release last week on modifying some covenants and that is consistent with our theme in trying to get ahead of things on the financing side.

Okay, thank you very much.

With that, I will turn the call back to Ahmed.

We thank you, everyone, for joining us in today's call. As always, the IR team will be available to answer any of your questions.

Thank you, and have a nice day.

Thank you. That concludes today's conference call. All lines may disconnect. Once again, that concludes today's conference call. All lines may disconnect.