愛依斯電力 (AES) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AES Corporation third quarter 2014 financial review conference call.

(Operator Instructions)

Please note that this call is being recorded today, Thursday, November 6, 2014 at 9:00 Eastern time. I would now like to turn the meeting over to your host for today's call, Ahmed Pasha, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to AES's third quarter 2014 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 senior management team. With that, I will now turn the call over to Andres. Andres?

Good morning, everyone. Thank you for joining our third quarter earnings call. Today I will discuss our current financial outlook and provide an update on the execution of our strategy and plans to create value for our shareholders.

Overall, while we are reaffirming our medium to long-term cash and earning projections, we are lowering our near-term guidance as a result of the persistent drought in Latin America and weak foreign exchange rates. Despite disappointing short-term expectations, we are executing well against our strategic objectives of reducing our footprint and costs and growing our business platforms profitably. To date, we're ahead of our expectations on asset sales and on track on our cost reductions.

Our construction pipeline represents $9 billion in investments and more than 7,000 megawatts of additional capacity and upgrades. And this year we plan to return up to $480 million to shareholders through dividends and share buybacks, the highest amount in AES' history. On this call, I will provide a discussion of our 2014 outlook, an update on macro trends we're seeing across our portfolio, a review of our accomplishments since our second quarter call in August, and my thoughts on capital allocation. Tom will then provide a detailed discussion of our results and guidance.

Turning to slide 4, as I mentioned, 2014 had been a very challenging year for AES with head winds from core hydrology and untimely plant outages. At the time of our last call, we expected core hydrology to have an impact of $0.07 to $0.10 per share on our full-year earnings with an additional negative impact of $0.06 from plant outages. At that time we expected to offset most of this impact through improved operational performance, accelerated G&A savings and capital allocation and be able to achieve the low end of our guidance range.

However, based on our nine-month performance and our updated outlook for the remainder of the year, we have revised our 2014 guidance to a range of $1.25 to $1.31. This revision reflects our current view of hydrology which we now expect to have a negative impact of $0.10 The reduction also includes a $0.02 impact from a modestly higher effective tax rate.

Now, I would like to review some macro trends we're seeing across our portfolio and provide an update on a few of our businesses beginning on slide 5. Core hydrology in Latin America has had a substantial impact on our earnings over the past few years. Although short-term weather conditions are difficult to predict, our numbers are based on a return to normal hydrology in 2015.

In Panama where we have experienced the worst hydrology in the last 50 years, we're encouraged by the higher than expected inflows and recovery in reservoir levels in September and October. In Brazil, reservoir levels are currently at approximately 23%, which is about half the historical average for this time of year, causing elevated spot prices. The rainy season begins at the end of November, so we will have more insight into 2015 at the time of our fourth quarter call in February. We're also seeing a slowdown in global markets that is effecting currency, interest rates, commodities and GDP growth expectations. While we largely manage market risk through contracts, fuel passthroughs and hedging strategies, we have some residual exposure to these fluctuations.

Relative to the long-term outlook we provided in February, we're now projecting more unfavorable euro and Brazilian real exchange rates and lower GDP growth and higher interest rates in Brazil. In 2017 and 2018, the head winds from foreign currency devaluation and lower GDP growth in Brazil are expected to continue but are offset by improvements at DP&L driven by higher dark spread in revenue. Therefore, net-net, our earnings power remains basically unchanged from our prior expectations. Accordingly, we have lowered our 2015 and 2016 adjusted EPS outlook, and we are reaffirming our 2017 and 2018 earnings power as well as our 10% to 15% cash flow growth for 2015 through 2018. Tom will discuss our guidance and expectations in greater detail in a few minutes.

Now I will provide a few business updates beginning on slide 6. In Bulgaria, a new energy regulator was appointed in September, and a 10% increase in the end user electricity tariff was announced soon after. This tariff increase is a step towards improving the liquidity of Maritza's offtaker, NEK. Furthermore, we have been reassured by the regulator that our capacity is critical to the Bulgarian electric system and will remain an important part of their energy mix. In October, elections were held, and we are awaiting the formation of a new government before resuming meaningful conversations on the outstanding issues.

Turning to slide 7, as you may have seen in the press recently, the coal allocation for most private companies, including our 1,320 megawatts OPGC 2 project currently under construction were canceled by the Supreme Court of India. Although there is no clear resolution at this point, with or without a direct coal allocation, we believe that OPGC 2 is still an attractive growth project for us. The plant is located in the state of Odisha, which has the second largest coal reserves in India, and we currently operate OPGC 1 adjacent to the site of OPGC 2 that utilizes coal supplied by Coal India. We're working on multiple options to optimize the coal supply to OPGC2 and deliver much needed electricity in India once the plan is operational by 2018.

Next, turning to slide 8, in our accomplishments since our second quarter call in August, with three new transactions, we have made continued progress towards reducing the complexity of our portfolio and expanding our access to capital. We announced the sale of 100% of our interest in assets in Turkey. We also closed the sale of our operating wind projects in the United Kingdom. And we brought in a strong local partner for our business in the Dominican Republic with the sale down of 8% of our position.

These transactions represent a total of $382 million in equity proceeds to AES, which translates into 13 times 2015 earnings. With these proceeds, we are 76% of the way towards the goal we announced this year of realizing $500 million in asset sale proceeds by December 2015. As a reminder, since September 2011 we have announced a total of $2.4 billion in asset sale proceeds to AES and announced our exit from nine countries. This quarter, also achieved a number of substantial milestones on key platform expansions.

As you can see on slide 9, we have more than 7,000 megawatts under construction, the largest construction pipeline in AES' history. The total investment in these projects is $9 billion, of which our portion is $1.5 billion. And $1.1 billion has already been funded. Our projected ROE on those projects is greater than 15%. Although our current earnings do not reflect any return from these investments other than at IPL, these projects will be contributing roughly $0.30 of adjusted EPS. And more than $200 million in dividends to the parent on an annual basis once they have all come online by the end of 2018. Since our second quarter earnings call in August, we closed financing and broke ground on two additional projects.

Turning to slide 10 in the Dominican Republic, we are closing the cycle at our DPP plant which will increase output by 122 megawatts to 358 megawatts without using any additional fuel. We're funding 100% of this project with available debt capacity in the Dominican Republic through $260 million in nonrecourse debt including participation by the IFC. This project is fully contracted and is expected to come online early in 2017.

Turning to slide 11, in Panama, we recently acquired a 72 megawatt fuel oil fired power barge and signed a five-year PPA with the state owned generation company for its capacity. The barge will be online early next year and modestly diversifies our portfolio in Panama away from hydro. In the US, we achieved important milestones on two developing projects with a total project cost of $2.2 billion which will likely be funded with a combination of debt, partner equity and AES equity.

Turning to slide 12 in California, where we currently own and operate almost 4,000 megawatts of gas-fired capacity, we were recently awarded a new 20-year power purchase agreement by Southern California Edison. We will build and operate a 1,284 megawatts of combined cycle gas-fired generation and 100 megawatts of battery-based energy storage to replace older capacity in the western Los Angeles basin.

I'm particularly excited about the energy storage award. It is the first time this technology has successfully competed against traditional peaking capacity to win a long-term PPA. The award of these PPAs is a recognition of our ability to deliver innovative power solutions through the combination of our expertise and locational advantage of our existing power plant sites. As our largest growth investment in the United States, this new capacity in California sets a solid foundation for continued earnings and cash flow contribution from Southland for years to come.

Turning to slide 13, in Indiana, IPL continues to grow by modernizing its fleet and is seeking approval from the regulator for a $332 million investment to comply with waste water regulations and to convert our Harding Street station from coal to natural gas. If approved, the majority of this investment will begin earning regulator returns during construction. When combined with a billion dollar investment in projects currently under construction at IPL, these projects represent an increase in rate base of 70%. Finally, before I turn the call over to Tom, I want to share my thoughts on capital allocation.

Moving on to slide 14, I would like to review the significant progress we have made toward enhancing long-term shareholder value through our strategy of disciplined capital allocation, which we outlined in late 2011. Since then, we've invested $1.6 billion to reduce or refinance debt which has helped us lower our corporate debt by 20% and our interest expense by $140 million annually. We've also returned $1.3 billion to shareholders through dividends and share repurchases. In fact, since 2011, we have lowered our share count by 9% by repurchasing 72 million shares at an average price of [$12.43]. Furthermore, we have selectively invested $831 million primarily in growth projects. As I mentioned earlier, these platform expansions, projects, will represent an important component of our earnings and cash flow growth going forward.

Turning to slide 15, we expect to have substantial excess capital available to us going forward. Our diversified portfolio generates strong parent free cash flow which is projected to grow at 10% to 15% annually on average through 2018, providing us with the wherewithal to fund growth projects across our key markets and deliver strong returns to the shareholders. Additional asset sale proceeds, including bringing in partners, would increase our available discretionary cash. But even without assuming any additional asset sales, we believe that available discretionary cash could total approximately $3 billion from 2015 through 2018.

Approximately $400 million of this will be required to fund our remaining equity commitment for projects currently under construction. A minimum of $580 million will be used for dividends. That is the amount we would pay if we assume we hold dividends constant at the current level of $145 million annually. Considering the amount of parent debt that we've already prepaid, we believe that additional meaningful debt prepayments are necessary for the next few years. The remaining $1.9 billion is therefore available for investment at attractive growth projects and returning cash to share holders through buybacks and/or dividends increases.

After dividend growth, which I will discuss in a moment, our other two alternatives for investment of our discretionary cash are growth projects and share repurchases. First, we have a strong pipeline of growth opportunities, including the IPL upgrades in Southland [repowering] I just discussed. As well as additional platforms expansion such as Masinloc 2, Mong Duong 3 and energy storage. Of course as we have demonstrated, we're likely to bring in equity partners for many of these growth projects to optimize our returns and market exposures.

Second, we view share repurchases as the benchmark against which all other investment decisions are measured, and as such, they remain a key part of our capital allocation. Although some of the macro factors that I have discussed this morning are having an impact on our near-term earnings and cash flow, our portfolio continues to generate strong and growing cash flow which we will continue to investment to create value for shareholders. Our board has increased our repurchase authorization to $150 million. In the past we have indicated that we will be opportunistic with respect to the timing of buybacks. This time we intend to use the majority of this authorization by the end of this year.

Turning to slide 16, with respect to the dividend, I appreciate that the current level of $0.20 per share or $145 million is relatively low given our strong cash flow. We believe there is room to grow the dividend, particularly since our current payout ratio is at the lower end of our 30% to 40% of sustainable parent free cash flow, and we see robust 10% to 15% annual growth in our parent free cash flow. As you know, we typically review the dividend with our board in December.

Now I'd like to turn the call over to Tom.

Thanks, Andres. Good morning, everyone. While we're disappointed that macro factors, higher working capital requirements and increased receivables have delayed our growth in near-term earnings and cash flow projections, our long-term outlook has not changed. In an effort to remain as transparent as possible, we're providing our 2015 guidance and longer term expectations today a quarter earlier than our normal practice. I will go over the details after discussion of our third quarter results.

Turning to slide 18, our third quarter adjusted EPS was $0.37 compared to $0.39 in third quarter last year. Four of our strategic business units experienced strong adjusted PTC growth driven by higher revenue and gross margin. However, these gains were offset by lower contributions from Brazil, largely due to poor hydrology and a plant outage at Masinloc in the Philippines in July, resulting in overall decline in our earnings for the quarter of $0.02. Our results also reflect a $0.01 impact from the sale of minority interest in Masinloc which was largely offset by the benefits capital allocation. We also benefited from a slightly lower tax rate during the quarter.

Before I go over our businesses in more detail, I would like to comment on the $0.02 negative impact during the quarter from low hydrology on slide 19. A generation business in Brazil, Tiete, saw a $0.04 impact from hydro. System inflows were lower relative to last year, resulting in higher spot prices, impacting Tiete, as they had to cover part of the contract position in the open market. As we discussed in our last call, Tiete was net long in the first half of the year and short in the second half. Consequently, although the margins benefited in the first half, Tiete is now covering some of its contract position in the spot market.

In Panama, where hydro Is now improving, we had a $0.01 adverse from hydrology, this represents a $0.02 improvement over last year. Partially offsetting Brazil and Panama was a $0.03 benefit from hydro at Chivor in Columbia, where our facility had stranger inflows versus the rest of the country, allowing us to benefit from short-term sales at attractive prices. This brings our overall year to date hydro impact to $0.06, and we now expect the full impact be $0.10 a share versus $0.13 last year.

Turning to slide 20, I will discuss each of our SBUs focusing on adjusted PTC or PTC. In the US, we reported an increase of $24 million PTC. This was largely driven by higher non-bypassable revenues at DPL which were approved late last year and contributions from our wind businesses. In our Andes SBU, PTC increased $11 million driven largely by higher volumes and prices in Columbia due to the hydrology I just covered.

Next in Brazil, PTC decreased $84 million for the quarter. This includes about $50 million at Tiete, largely due to poor hydrology, as I just discussed. Additionally our utilities experienced higher costs primarily related to storms at Sul. Moving to MCAC, PTC increased $28 million primarily driven by higher rates and lower fuel costs in the Dominican Republic. We also saw an improvement in Panama as a result of the actions we've taken to reduce the impact of poor hydrology.

Turning to EMEA on slide 21, PTC increased $13 million, largely driven by higher availability in Bulgaria and contributions from our IPP4 Jordan plant which came online in July. Finally in Asia PTC declined by $28 million. As you may recall, our second quarter results this year were effected by an outage by Masinloc in the Philippines which continued into July. Further, the results reflect the sale of 45% of our stake in Masinloc which was completed during the quarter.

To summarize this quarter, after corporate costs we earned $354 million in adjusted pretax earnings and $0.30 adjusted EPS. As you can see on slide 22, we are revising our 2014 adjusted PTC modeling ranges to reflect the same drivers as our revised adjusted EPS guidance Andres just discussed. We provided new PTC modeling ranges by SBU in the appendix of today's slide deck as well. Year to date, we've earned $937 million in adjusted PTC which is 71% of the mid point of our revised PTC range.

After taking into account a 1% increase in our expected tax rate which is now expected to be 31% to 33%, we're forecasting full year adjusted EPS of $1.25 to $1.31 with $0.89 already earned year to date. We expect higher earnings in the fourth quarter relative to $0.29 earned last year. Our fourth quarter 2013 results included the $0.04 provision we booked for potential customer refunds and in Eletropaulo and Brazil. Further, our fourth quarter 2014 results will benefit from improved operations in Chile and IPL in the US, lower G&A and lower parent interest.

Now to cash flow on slide 23, we generated $427 million of proportional free cash flow in the quarter, bringing our year to date proportional free cash flow to $604 million versus $923 million in the first nine months of last year. With our year to date performance and factoring in the impacts from working capital requirements in Brazil, Bulgaria, and Chile, we now expect full year 2014 proportional free cash flow of $900 million to $1 billion. Year to date we've achieved 60% of the midpoint of our revised guidance range, and we now expect about $300 million to $400 million of proportional free cash flow during the fourth quarter, which is in line with the $349 million generated in the fourth quarter last year.

Now to slide 24 and our capital allocation plan for the year. Starting on the left, we project roughly $1.7 billion of discretionary cash. This includes about $1 billion of cash from announced asset sales, except Turkey which we expect to receive next year. I'd like to highlight that although we're lowering our proportional free cash flow guidance for the year, we still expect to generate $500 million of parent free cash flow.

Turning to uses on the right hand side, we've allocated about $330 million this year for a portion of our equity commitments to investments and subsidiaries, primarily for platform expansion projects under construction. So far in 2014, we've used roughly $500 million for debt reduction and refinancing and expect to use about $100 million more during the remainder of the year. Approximately half of this prepayment is to maintain credit neutrality following asset sales, while the remaining amount is discretionary in an effort to accelerate our credit metric improvement and reduce financial risk consistent with our previously stated balanced capital allocation strategy.

In terms of returning cash to shareholders on the last call, we outlined our plan to return at least $300 million to shareholders this year. With $182 million of share repurchases so far plus our annual dividend of $145 million, we're already returning $327 million to shareholders in 2014. Further, as Andres mentioned, we expect to invest another $150 million in our stock largely by year end which will bring total cash return to shareholders in 2014 of up to about $475 million. After target closing cash balance of $100 million, we're projecting roughly $200 million of unallocated cash remaining at the end of 2014. For simplicity, we've assumed that this cash is carried over in 2015. Of course, we may use some of that before year end.

Now to slide 25, I would like to provide insight into our plans for capital allocation for 2015. We expect parent free cash flow of roughly $525 million and $125 million in proceeds from the sale of our businesses in Turkey. Together with about $300 million of unallocated cash carried over from 2014, this will put our total discretionary cash at about $1 billion in 2015. At this point, we expect to use this cash to fund roughly $200 million in equity commitments in our projects currently under construction as well as make dividends of $145 million at the current rate. This would leave us with about $550 million of unallocated cash in 2015 without assuming any additional asset sales. We will continue to require new growth investments to compete against share repurchases. We have ample capacity to also increase the dividend.

Now to slide 26. Last February we provided an initial outlook on earnings growth for 2015 through 2018, and today I'd like to provide an update on those expectations. We've seen a stronger US dollar which has effected us mainly in Brazil and Europe. Further in Brazil, we've lowered our GDP growth expectations, and we're experiencing higher interest rates. The impact from these macro factors is about $0.05 per year in 2015 and 2016. Accordingly, we've lowered our 2015 and 2016 expectations and are introducing a 2015 guidance range of $1.30 to $1.40 per share.

We expect flat to modest growth in 2016 consistent with our prior expectations although from a lower earnings base. However, the level of earnings power that we now expect for 2017 and 2018 remains unchanged as the macro head winds I just discussed continue into 2017 and 2018, but are offset by some improvements largely at DPL. We continue to expect that our projects under construction will drive our earnings growth which is now 8% to 10% off the lower 2016 base.

Turning to slide 27, although we include a modest contingency in our estimates, key assumptions in our 2015 guidance include, first a return to normal hydrology in 2015. Second, currency and commodity forward curves as of mid-October of this year. As always we're providing sensitivities in the appendix of today's deck. Finally, a 31% to 33% effective tax rate which assumes that the CFC look through rule is extended. We believe Congress will extend the CFC look through later this year. However, if it is not extended, the impact on 2015 earnings could be a negative $0.06. After considering mitigating actions we're currently pursuing, and this impact of course would be non cash given we have nearly $3 billion of NOLs outstanding. Further, if the CFC look through rule is not extended, we will continue to pursue actions to mitigate the impact as we've done in the past.

Shifting to cash flow on slide 28, despite the reduction in our near-term earnings expectations, we're maintaining our cash flow outlook through 2018. We continue to expect 10% to 15% average annual growth in our proportional free cash flow as well as in our parent free cash flow. In 2015, our expectation is for between $1 billion and $1.35 billion in proportional free cash flow. This range implies an increase of roughly $225 million over the mid point of our 2014 revised guidance. Approximately half of this increase is expected from the recovery of working capital, mostly from a utilities in Brazil and [Henair]. The remaining amount is expected from improved availability at DPL and improved hydrology in Latin America.

We continue to believe proportion-free cash flow is one of our key value drivers, with strong double digit growth over the longer term. We will continue to show the value of our cash flow through disciplined capital allocation that maximizes risk adjusted returns for our shareholders. With that, I will now turn it back to Andres.

Thanks, Tom. To summarize, despite lowering our near-term expectations, we're executing on our strategic objectives, including narrowing our geographic focus and reducing costs while expanding our platforms in a profitable manner. We're ahead of our expectations on asset sales and on track for cost reductions. Our construction pipeline represents $9 billion in total project costs or 7,141 megawatts of additional capacity in upgrades which is the largest amount in AES' 33-year history. This year, we expect to return up to $480 million to shareholders through dividends and share buybacks, and we believe that we will have significant capacity to return cash to shareholders in the future.

With that, we look forward to seeing many of you at the EEI financial conference in Dallas next week. And now I'd like to open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Ali Agha of SunTrust. Your line is open.

Thank you. Good morning.

Good morning, Ali.

Good morning.

Andres, I guess my first question to you, you mentioned that the board will look at the dividend in December and you apparently have this 30% to 40% payout ratio on your free cash flow. The consistent message that you've given us is that your cash flow growth profile for the next several years far exceeds your earnings profile.

Is there any thought by management to revisit the payout ratio and dividend on a higher payout ratio and given the fact that the market certainly in today's environment is more supportive of higher yielding securities and your higher free cash flow story would resonate more with investors if you were able to demonstrate to us a higher payout ratio. Any thought on that?

That's a very good observation, Ali. I think today we're at about 29% payout ratio, 29% payout. We have said our policy is the payout ratio between 30% and 40%.

So we are -- at this stage, what I would say is we want to maintain ourselves in that ratio, and that's what we will be discussing. I think you raise a good issue, and we will have the opportunity to look at that in the future. But right now what I would say, we want to be within the 30% to 40% and currently we're below that at 29%.

I understand that and we will discuss this more perhaps at EEI. My second question for you is with regards to the earnings profile that you laid out for us, and obviously the previous 4% to 6% guidance growth through 2016 no longer is valid given the new numbers, so I guess a two-part question.

One, the $0.05 of macro head winds that are incremental, I'm surprised given the size of your portfolio that there weren't other offsetting factors that you could come up with, whether it's cost reductions or perhaps even more aggressive buybacks and capital allocation to offset that because $0.05 in the scheme of things is not that big of a number. I guess that's part one.

And part two, the normal hydrology that you have assumed for 2015, how confident are you given that as you mentioned the Brazilian rainy season hasn't even started yet? And might we be looking at another potential reduction to the 2015 numbers?

Let's take it by parts. In terms of the first one, the cost reductions, we are aggressively pursuing cost reductions as we stated. Now we're moving from GNA to fixed costs in our business, and we spend around $3 billion that we're going after.

We're working hard on this. It does take some time because this is -- we have 38,000 megawatts under our management, and this requires standardization. This requires testing, this requires aggregations. That's well under way.

I think Andy and the team are doing a great job, but that does take some time. But we are certainly pulling all levers to meet our commitment. I can assure you of that, but on the other hand we want to make sure that everything we do is really creating a sustainable long-term shareholder value.

So we're not going to make cuts that could, say, harm the value of this company going forward. I assure you we are pulling all levers, and I think we've demonstrated we're quite good at that. I think we have a good track record in terms of that.

The second question regarding hydrology, I would say break it into parts. We've had this unusual event that the hydrology was correlated negatively quite frankly every year for the prior two years.

Even with the $0.10 negative impact, this is $0.03 less than it was in 2013. We have improved part of it in some of the actions we've taken on commercial policy that we've taken with regards to Panama.

Now, where we are seeing differences, in Panama as I mentioned we're seeing very good inflows into the reservoirs in September, October, and carrying over to the first week here in November. So in Panama, we're seeing a recovery of the hydro.

The question really is a little bit transmission constraints, but in terms of the physical rainfall in Panama we've seen significant recovery.

In the case of Columbia, Chivor is in a different watershed than a lot of the country's hydro. So it's actually done quite well as Tom mentioned because it's had a better relative rainfall than the rest of the country. So in Colombia, in Panama, we see things better.

In Brazil, still too early to tell. We got this question a lot whether -- the situation in Brazil regarding 2014 at the beginning of the year. At the time we said that we did not see rationing as the most likely scenario, that it was not likely to occur this year.

All the studies I have seen for 2015 indicate that rationing is possible but it's not the most likely scenario at this point. And as I've mentioned in the past, if we compare this to 2001, the Brazilian government has about 10 gigawatts of thermal capacity and is executing quite well in terms of using the water, holding back on the water and using hydro.

Now, this will depend quite frankly -- we really have no way of predicting when the rains will come at the end of November, beginning of December, and they run through April. That's what we will have to see what happens at that time. And how they handle it.

Now, there are different scenarios. It obviously would depend on the degree of if there were to be any rationing, the degree of it, the degree of compensations and what would be the price cap.

So we will give you information on the Q4 update when we have a better view, but it's difficult to predict whether in the short term and what we monitor very closely are the reservoir levels and the actions that the government is taking to comply with it, and also quite frankly it's a question of demand as well. It will be a question of how hot it is in the fourth quarter in Brazil, first quarter in Brazil and the economic recovery as well.

My last question in your capital allocations for 2014 as you mentioned, there is still $200 million that you unallocated and maybe assumed it sticks around in the year end. Any reason why you didn't add that to the $150 million of buyback that you've indicated to us, or is it possible that some of that $200 million is added on to the $150 million of buyback by year end?

Ali, I think -- excuse me. I think our thought with the $150 was to put out a number that we thought we could execute the major of it by year end and step by step. I think we've shown that we've put out more modest size amounts, we execute on them and then we think about the next steps going forward.

I think what's important here, I think we've shown that we really compete new investments against buybacks, and we've always been able to get the authorizations we need to do more buybacks. As Tom said, we think this is the correct amount for this year, and also in terms of the total return to shareholders this year, it will be a new record for AES. So we feel we have made the right capital allocation decisions.

Thank you.

Your next question comes from the line of Stephen Byrd of Morgan Stanley. Your line is open.

Good morning.

Good morning, Stephen.

I waned to revisit your Ohio generation assets just given we've seen some potentially favorable developments there. Is that at all altered your appetite for considering monetizing some or all of those assets?

What I would say at this stage we're happy with our decision. As you remember, we ran a sales process. We didn't think the price was right.

I think that the market has moved in a favorable direction since then. So we feel that we made the correction decision in holding on to them, and we're -- there's a number of things which could occur in the PJM and Ohio significantly that could improve the value further. What I say at this stage, we're happy with our decision to hold that we made this year.

Understood, but you're not necessarily wedded to that decision long term if conditions changed and value were to change for those assets?

Again we tend to think in terms of the medium term with our assets, in terms of the value we can create. We're talking about costs and synergies. You need to be able to plan for the medium term, and I think we think about this in terms of our portfolio.

One of the things we've done is bring in partners to reduce our exposures to certain risks and increase our capacity to do bigger projects. We will always figure into that mix. We also do portfolio fine-tuning. I wouldn't exclude it, but what I'm saying is what we are doing now is really trying to optimize our portfolio by bringing in partners and really looking at the mix of assets we have that give us really the best risk adjusted return.

Understood. Just shifting over to the California contracts, would it be possible for you to give us a sense of the aggregate EBITDA associated with these contracts?

Hey, Stephen. It's Tom. I'd say it's tough.

It obviously is fresh off the presses. And so we've been through a pretty rigorous competitive situation, so I think we may at some point, but I think it's a little early for that.

Understood. Thank you very much.

Thank you, Steve.

Your next question comes from Chris Turnure of JPMorgan. Your line is open.

Good morning, guys. Sticking to the theme of the SoCal contracts that were announced yesterday, could you walk us through the long-term plan there?

I know you have at least another gigawatt of potential capacity that you can repower there. What are you thinking about the 500 or so you could sell for other uses right now to redevelop that property, and how does all of this including yesterday's contracts fit into the idea that you are losing EBITDA I guess at the end of 2018 because the existing contracts roll off?

This is a good point. We have 4,000 megawatts. This is a very important step in terms of getting above 1,300 megawatts under PPA in California.

And we are looking at the -- main site is Huntington Beach. We also have Alomedos, and we will also be looking at what to do with the other sites. I think what's important here is the 100 megawatts of energy storage that we mentioned, and in the energy storage space, they often talk about resources that can be positive or negative. This is 200 megawatts of resource which is equivalent to the 100% of what we have done to date.

So that again getting to your question, southern California is important to us. We will be looking at getting the maximum value out of these sites. Our locational advantage is important.

We're very happy to have won this contract. And we will continue to focus on it, but at this time what I'd say is you're correct. These new PPAs start in 2020, and we have to make sure that we have a sufficient total presence there to offset everything that we'd be retiring.

Switching gears to the Dominican Republic, you sold that small stake of the assets there. Can you speak to the future of that business, what you are thinking in terms of the sale price there, the multiple that you got on valuation, and was it more of a price motive or was it a strategic motive that drove you to make that decision?

That's a good question. It was definitely a strategic motive. We've been doing very well in the Dominican Republic.

There are really only two modern regasification facilities in the Caribbean, and this is one of them. The other is in Puerto Rico. So this business has done well.

As you know, we're selling compressed gas to third parties for vehicles and for other industrial purposes on the island. And this is a very solid business. The gas that we bring in is at Henry Hub base.

So what we saw here is that there is the potential to do more in the Dominican Republic, but we thought it was very important to have, say, a deeper relationship with the country. And that's why we wanted to have local participation in our projects.

So we are expanding as you see with DPP. That's a very efficient project where we're closing the cycle. We of course won't be burning any more fuel, but we will get 122 more megawatts, so it really was a strategic motive.

In terms of the big business, what do we see there? We see there is still upside potential from our regasification and storage facility there. And we could see that in the future having a little bit a hub and spoke system from the Dominican Republic.

Now, of course, we would have -- our business is the large business facility, so others could come and use our facility. But we see upside potential in the Dominican Republic from the very strong base that we have in gas.

Understood. Thanks a lot, Andres.

Thank you.

Your next question comes from the line of Julien Dumoulin-Smith. Your line is open.

Good morning, guys.

Good morning.

Turning to southern California for a quick second, can you talk about the net EPS change after the contracts roll off or the existing contracts roll off into the next round with the three assets that you got locked in, and what that 2019 interim period might look like as well?

Yes, Julien, it's Tom. I think we may give a little bit of color, but as I said to Stephen, it's a little early given it is really hot off the presses. We have just been through quite a lengthy competitor process, so it's a little early for us to be putting out detailed numbers.

Julien, just to give you the big picture, this is Ahmed, in terms of the uptick, just comparing these current existing capacity against what we've just been awarded, the 1300, 1400 megawatts, just these megawatts will be contributing higher EBITDA earnings than what we are projecting today from existing capacity in 2017. On the top of that, there's another capacity of a 1000 megawatts that we have already permitted that will add even more. So I think the short answer to your question is it is accretive comparing the existing generation versus what we can do on an existing site.

Absolutely very clear. And just in terms of capital allocation around the FCE assets, can you elaborate a little more what the thought processes around equity and broadly funding it if you will from a timeline perspective?

Sure. It's early, but I think if you take $1.92 billion number, we think these are very leverageable and consistent with our financing process. We do debt for certainly a strong majority, maybe call it more likely 70% but 30% equity commitments. And we will as Andres said, we will strongly look to bring in a partner that could help us leverage ourselves further and manage our commitments and also potentially enhance our return.

Perhaps let me be a little clearer also. What is your thought process around sell downs and just broadly speaking your ownership of this versus perhaps in someone else's hands who might value this at a different level?

We've had a lot of discussions in the past about yield codes. We have nothing philosophically against them. We really haven't seen that we could at this stage of the game carve out assets that would make sense.

A lot of our PPAs in the US and other markets have a lot of recourse debt on them. Again at this stage of the game, it's a little early, but again, we don't have anything philosophically against something like. And in fact, we have done -- what we've done in some of the other ones. If you're saying you will spin it off for someone else to do the yield codes, no, that's not in the cards.

Got you. Let me just clarify a little bit of what your response to a prior question was. When you assume normal hydrology in 2015, that's a transition to normal hydrology I imagine, right?

And to the extent it would be a transition, is there an incremental benefit as you think about this going from 2015 to 2016 or even 2017? How much of a multi-year process is this in normalization?

There's going to be a benefit. What we mean by normal has to do within one standard deviation in terms of getting it back on track. We really had two outlier years.

If I understand your question, what we're saying is we're not predicting a continuation of the drought conditions and we're not using in our numbers any rationing in the case of Brazil, but what we're seeing in Panama, Colombia is a return to normal hydrology. Tom, you want to add something in.

I would say Julien in terms of transitioning into 2016, we certainly -- once our contract -- long-term contract ends at the end of 2015, we have the ability to manage our hydro risk through hedging ratios. We've shown in the past we're in the low 80%s in terms of percentage of our shared energy that we have sold to 2016. We will certainly -- we may creep up somewhat, but we certainly will be at lower levels to provide ourselves the comfort that if there is poor hydrology in 2016, we have set ourselves up so we don't have hydro risk.

Then lastly, could you see elaborate on the legislative changes you need for the end of this year around the tax extenders.

The CFC looked through rules. Those in the past have been let's say renewed, the 12th hour at end of the year as part of larger packages. So everything that we're seeing we feel that it's very, very likely that they will be extended this year.

Once again as part of an extender package at the end of the year. So as Tom said, the concern this year we -- the impact would be minimal, and in 2015, there could be more of an impact but we will also take measures as we have in the past should it not be extended.

I apologize for this next question. CFC tipper, is that all related? I know we used to talk about that, but I just wanted to bring it up.

The answer is yes.

Okay, great, thank you.

Your next question comes from the line of Gregg Orrill of Barclays. Your line is open.

Thank you. Hi, everyone. Just two quick follow-ups or clarifications. On the look through provision, just to clarify, is that a new view that you've had as a result of some changes in Congress or was it your expectation all along that that would be extended?

No, this is not a change. This has always been our view all along.

I would like to emphasize that even in the unlikely case we were not extended, this is not cash as Tom mentioned. We have $3 billion of NOLs. This would affect our adjusted EPS but not our cash.

Got it. Then I think you commented that 2017, 2018, you've got some offsets that you put in place to help -- to help you. DPL I think is one of them that you called out. I'm just curious as to what that is specifically.

Gregg, the DPL would be a combination of darks as well as some value for the premium capacity project. Watching that closely, still some moving parts in that, but we believe that it's implemented in something near its current form, that could be some good value for us also.

Great. Thanks.

Your next question comes from the line of Brian Chin of Merrill Lynch. Your line is open.

Hi, good morning.

Good morning, Brian.

Most of my questions have been asked and answered, but on the California contracts, can you give a breakdown of that $1.9 billion between the CCGT and the energy storage assets?

Let us get back to you on that one. The vast bulk of it is CCGT.

That's what I would assume, but to get a little more color on that would be helpful.

That's fine, Brian. We just want to make sure we're disclosing things that are consistent with the provisions of our bid process.

Understood. Secondly, you mentioned in one of the earlier slides that Supreme Court of India decision on OPGC and the coal allocations, could you just give a little more color on what exactly happened there and why did it happen the way it did?

Going back sometime probably about two years ago, it started with an issue with the coal allocation. There was a scandal in India called Coalgate. Really it was people had received coal allocations and flipped them for significant gains. That started the issue.

We weren't quite frankly involved in this because we had received our allocation and our partners, the state government of Odisha. We had our coal allocation and we were proceeding with the project.

Then the Supreme Court did something they had done in the telecom spectrum which was to say all prior allocations were invalid because the process was not sufficiently transparent. This was very politically successful in India.

So really what they did was come out with a very similar decision regarding coal, basically saying the coal allocation process was flawed and therefore the allocations were null and void. And this covered people from -- who actually were currently operating plants to people like ourselves who had future plants. It covered state governments. It covered JVs like us, and it covered private companies.

Then the decision actually came out that said it did not apply to federal companies but did include state companies. Subsequently they came out with a decree saying state government companies' allocations were also valid.

So in our case we're in the gray zone because we're a JV, and it's the state government of Odisha. The whole process we've been extremely transparent. The state government may get the coal allocation.

From the perspective of an investor in AES, even if we don't get the coal allocation, we'd prefer it. It does help modestly on the returns and help us assure the quality of the coal we would be receiving, but even if it doesn't, if it doesn't go forward, this is still a good project because this is located right next to OPGC 1 and we have all the line permits for developing -- and it's under construction -- a 1,300 megawatt coal plant.

If it's a question of receiving coal from Coal India as we currently do for the existing plant, again it's still a good project, but we of course would prefer to have more control over it with the coal allocation. It's not a positive, but it's not something that, say, threatens the viability of the project.

I guess one follow-up question on this. With that decision causing a reallocation of coal, have coal prices in India been jumping up as different parties try to resign or renegotiate contracts?

No, it has not. Basically what's happened is they've had granted a temporary license to those that had coal allocations that were operating, and the rest were very much future projects, but I think people expect the coal to be used one way or another. In essence Odisha, our project is pretty close to a mine mouth type project. So it's very well situated.

There's a shortage and we have a good contract for the off take. It caused more noise we think than anything.

That's helpful. One last question. I realize I asked a few here.

You guys gave out 2015 and 2016 guidance a quarter earlier than expected, and one of the factors that drove that decision was some of the volatility in macro factors. Could you give a sense of how much you're hedged in regards to currency exposure in 2015 and 2016?

We got some sensitivities in the back, Brian, of our deck, but we generally hedge about six to 12 months forward in Brazil and about a year forward in other currencies. We had some exposure in 2015. A little more in 2016, but there's a page in the back of the deck.

If you're referring to slide 49, that's 2015. How should we think about those sensitivities in 2016? Maybe 25%, 30% more sensitivity in 2016?

I think -- Brian, this is Ahmed. I think you should look at because that's why we provided on open basis. Even if you assume it's all open, so it's $0.04 versus $0.035, so it's not as significant.

Understood. Very helpful. Thank you very much.

Operator, can we take one last question, please.

Your next question comes from the line of Angie Storozynski of Macquarie. Your line is open.

Thank you. I had a bigger picture question. You operate in the industry that is valued based on earnings. You have a very complex portfolio every time there are factors you clearly cannot control, and they're moving earnings around.

Now, the cash generation of your business is undeniable, and you keep trading at a higher and higher -- I mean, why not just use the cash that you are getting from asset divestitures and from your operating assets to buy back stock in very large quantities and thus help the share price? It's hard for me to believe that the investment of the cash that you're getting in any asset would actually render higher returns than actually buying back the stock.

We have bought back as we said by the end of this year close to $1 billion, and we think at a good price and we have sold down very well. If you actually look at our sell downs that we've done, our timing was very good in terms of when we disposed of the assets.

You raise a valid point and we do look at that very closely. If you do -- our new projects do have ROEs that are higher than buying back our stocks.

Now, there is a time and consistency because the effect of buying back our stock today is much -- of course it's immediate versus having to invest three to four years. But we do look at that, Angie. That's a very good question. We have to keep ourselves to that standard.

Simply put, even if you really reinvest the money at the return that you're saying and you really get to that eventual 8% growth in earnings given the data that is associated with that growth, I don't think you will ever be paid a truly high multiple for that growth as opposed to the free cash flow yield that generates and the cash that could be used to really significantly reduce the share count. I know that you are trying to maximize the shareholder value, but it's really hard to believe that a buyback at this level wouldn't be more value creating than any investment at 15% plus ROE.

We do do MPVs on these. We can discuss hat more offline. It's a very good question that you raise, and we do look at the big pictures. We will be generating more cash, faster cash growth for fundamental reasons.

One is that we do have the NOLs, and our tax rate has gone up from 2013 to today by 10 points. So that's a big jump, but it doesn't have any impact on us. The other is Mong Duong and some of our other projects will be generating a lot more cash, but we have to even out the earnings due to the accounting rules.

But I would say that the -- what is important and that's why we stressed it on this call, if you look at us from having significant jumps in our revenues and in our earnings we have to have new assets come online because we have them contracted. And if you look at this year 2014, we only have -- we have less than 300 megawatts coming online. If you look at next year it's much, much higher and next year. When we talk about this growth, it's occurring from tangible projects that we have on hand, but thanks for the question.

Thank you. Hello?

Your next question comes from the line of Charles Fishman of Morningstar. Your line is open.

Did you want to take one more question? I thought you weren't.

You can call me on my line.

I will save it for EEI.

Okay, that sounds better.

Thank you. Have a good morning.

Good. We thank everybody for joining us today. We will be available to answer any questions you may have. Thanks and have a nice day. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.