The AES Corporation (AES) Q3 2012 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] As a reminder, today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ahmed Pasha. You may begin.

Thank you, Kathy, 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, and 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 impacted areas, sending more than half of our available field resources from DP&L and IP&L (sic) [IPL] to help out affected service providers. Now turning to the third quarter results. I'm 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 9 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 redundancies. These changes are in line with our strategy and build on the cost savings that we had implemented over the past year. I will discuss the financial benefits of this reorganization in some detail later on in my remarks. Today, I'd like to focus on 2 main topics: first, an update on recent developments in our core markets, including DPL in the U.S., 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'd 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're 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-based 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 pre-hearings 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 rate 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 represent 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 multiyear deleveraging and refinancing program. In 2012, we expect that DPL will distribute to AES $122 million, of which we've already received $87 million as of the end of September. Over the next couple of 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 1/3 of this planned reduction is expected to be driven by lowering indirect taxes on the sector. The remaining 2/3 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 the 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. Tietê, 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 Tietê's output is contracted with Eletropaulo through December 2015. Beyond 2015, it's 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 2 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 initiatives 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'm 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, it's 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've also seen positive results at some of our other important businesses, including Masinloc in the Philippines, Maritza in Bulgaria and Southland in the U.S. 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 3 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 nonstrategic 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 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 prepayment will bring our total debt repayments to approximately $717 million since September of 2011, including both corporate-level debt and expensive nonrecourse 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're 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 Creando Valor [ph] 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 sourcing and in operations and maintenance expenses. For example, we presently purchase $2 billion of coal a year, and we're saving about $80 million as a result of implementing a comprehensive global sourcing framework, including the blending of coals 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'm pleased to report that we have closed and received $86 million in the process for 2 of the 3 businesses. We expect the third transaction for $49 million to close within the next few weeks. To date, we have sold 9 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'd first like to say that I'm very pleased to be here. In the past couple of months, I've 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've 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'll cover the following topics: first, our third quarter results and key drivers of gross margin, adjusted earnings per share, adjusted pretax 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 9-month earnings to $0.91 or about 3/4 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 U.S. 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'd like to review a new earnings metric that we're introducing this quarter. We hear frequently from investors that with a 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 pretax contribution, a metric that we use internally to measure financial performance. This measure is calculated by taking the pretax earnings from each business, including those accounted for as equity in 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've 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 at 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 on to 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 via 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'd 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've already allocated 67% to returning cash to shareholders and deleveraging, including the $225 million debt paydown 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'll be due to 2 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'll 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'll 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're 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 that it's 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 would be a noncash impact as we have an outstanding net operating loss carryforward of about $2.1 billion. Overall, we continue to project a tax rate on adjusted earnings in the low 30% range. As 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'll 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 3-year average annual total return target of 8% to 10% comprised of EPS growth and dividend yield. Since our last earnings call, we've made considerable progress on our annual planning process. And though not fully complete, it is evident 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 '15 due to the issues that Andres has covered. We had been anticipating some improvement at DPL, which is no longer the case. In addition, the compounding effect that 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 at Eletropaulo. These will be partially offset by improved performance at our businesses in Chile, IPL in the U.S. and the additional cost savings we recently announced. In light of these factors, we're 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'd like to cover the progress we're 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've 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 a couple of 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've 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're especially 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 of output and are close to bringing in a strategic partner. We're focused on finalizing project financing, and construction is expected to begin in 2013. With regard to Alto Maipo, a 530-megawatt hydro project also at Gener, we've successfully executed the principal construction contracts, moved forward with preliminary works, continue to work on the remaining project milestones and expect to begin construction also in 2013. Similarly, here in the U.S., we plan to upgrade 100% of our baseload, 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 U.S. We expect this investment to begin in the second half 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 the EEI, and I'll now turn it back over to Andres.

Okay. 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're 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 remained 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's 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're committed to pulling all levers to improve risk-adjusted returns from our platform businesses. Finally, along with Tom, Andy Vesey and I will also be at the EEI next week, and we look forward to seeing many of you. Operator, we will now open the line for questions.

[Operator Instructions] Our first question comes from Jon Cohen with ISI.

I guess 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 was 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? I mean, how do we think about what that's going to be longer term? And 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 holdco?

Okay, Jon, 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 a couple of businesses. As I mentioned, IPL and, secondly, Gener. The number of the-- so we expect that to be lower. We'll 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'll be lower, below the -- 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 half that amount. One of the issues is that Gener, it's been a great performer for us, great grower. They are building the 2 projects: coal and the hydro. Coal will come first, Cochrane I mentioned. But the issue was that they will need some equity 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 with good market cap, trades well, trades better than us. So as -- one of the things we'll 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's a splitting the baby concept, then that $200 million could be as little as $100 million to $125 million. That's just something we'll have to give some thought to. In terms of -- going back to the third part of your question, the 6 -- I think it's $6.2 billion of parent debt, including some trust preferreds, but we will look for coverage ratios. I think we've said that we want to maintain our rating and work it up over time. But the coverage ratio we look at in terms of debt-to-cash flow. I think we've used the range of 4.5 to 5.5. That continues to be a target that we've got. Near term, we're a little -- we're skewed towards 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. But 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's a more appropriate indication of credit quality.

Jon, this is Andres. What I'd like to say about Gener, we'll continue what we've done very successfully. So it's really very capital and tax efficient to really use some of the resources at Gener rather than sending them up and sending them back down. And as Tom mentioned in his speech, we're also looking at partners, partners that bring not only financing, but they bring access to bilaterals, Exims, et cetera. So really, we're optimizing. Gener, will continue to do that. And 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'll 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.

And just one quick question on Page -- on your Page 19, drivers of growth in '13. I noticed that you don't have a tariff reset at AES 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.

Our next question comes from Julien Dumoulin-Smith with UBS.

In terms of debt reduction, could you just provide perhaps a multiyear view? I mean, in -- within that 4 to 5.5 range, just kind of how quickly do you want to get there, if you will?

Yes, it's 4.5 to 5.5, Julien. Don't upgrade me to quickly here. But 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 a, let's say, a 3-year period. As we talk about our overall numbers here, we think about things through '15, that would be where we'd want to get to, in that same kind of '15 range. So as you know, that's a function both of the cash flow of the business as well as the -- as well as absolute debt.

Great. And could you provide just a little bit -- I mean, in the past, you've described discrete project EPS contributions going into '13 like Kribi or something. Like to that extent, could you kind of provide a little bit of sense here on your growth drivers? More granularity?

Sure. I mean, the 2 main -- what we basically have happening in 2013 is, one, we have Campiche coming online, we have a full year of a more [ph] contract at Angamos. In Chile, one of the things that has affected our results was that this year, we were somewhat short in the -- thick in the South, and prices were very high because of poor hydrology. And we were actually somewhat less contracted than the -- 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 get corrected. We also have, in terms of some of our wind projects in the U.S., as the tax equity, let's say, matures, that we will have more earnings from those assets in the U.S. And we'll also have the new plants that have been brought on for the full year. And so I think that, that -- those are some of the main drivers that we have. We can give you perhaps a more -- a specific breakdown of the small plants. But it's 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.

Which that kind of weighed, I mean...

And then maybe just a quick follow-up on asset sales. I mean, you've kind of executed, for the most part, on the bulk of what you described, call it earlier this year. What's the next round? Or is there another around here that we're -- 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?

So that's a great question. I think that sort of going back to what we've laid out, we said we had a universe of about $2 billion of equity in assets that we could sell -- and so we've executed about half of that -- and that we would be concentrating on those that weren't sort of platforms for growth that had unused leverage capacity or the ability to raise our own money, or really places we didn't feel we had a sustainable competitive advantage. And so I think we've done that pretty much to date. Now going forward, what will we do? Well, look, the same framework is in place. We don't like to really give specific names because, of course, we're operating these businesses. And if we say they're up for sale, this -- 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 sort of geographic units that we have. So wind becomes just another way of providing energy. And what we've seen is where we really exploit the sort of 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 a 50-50 JV with Riverstone. And, of course, both of us will be seeking to monetize this asset over time. But other than that, I really can't give you more specifics. But I would say you should expect over time, a continued asset sales. This will also help us reduce cost, help us reduce our focus. And what we'll 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.

Our next question comes from Ali Agha with SunTrust.

Hey, Andres, and you alluded to this a little bit in your closing remarks, but I want to pick up on that. The 6% to 8% total return that you're projecting for the next 3 years, I'm just curious who you benchmark yourself against. And, I mean, how do you justify that as an acceptable return for investors looking forward when they look at alternative investments particularly in the power utility 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 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're growing earnings 20%. So I think that would probably certainly rank us among the top of our peers in this space. So I think what we're 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 just saying we want to be prudent, we want to overachieve whatever we give out there as guidance. So that's really what's causing this step-down of 2%. But I think that if you think of our portfolio, again if you take a longer period of view, we do have very competitive growth rates. I think that we provide the advantages of a diversified portfolio. Obviously, we're concentrated in fewer markets. You have less of this. But I do think -- and we have said from day 1 that we do think that we're in too many markets. And so we do want to focus, and then we can have all the advantages of a portfolio diversification. We don't have to 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're doing. I mean, we're -- we've reduced overhead. By next year, we'll be close to 25%. And the longer term, it's more like 1/3. And that's just overhead in terms of managing these businesses. So regarding your question, I do think that we will provide compelling returns. We are in the right markets, markets where there's growth. Chile's 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. So I think it's 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're not where we want to be at the end, but we've certainly taken big steps in the right direction.

Also, just to clarify your return expectations over the next 3 years. The portfolio expansion opportunities that you guys highlighted in your slides, are those already baked into that growth rate as well?

Yes, well, 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.

The only -- Ali, the only thing -- it's Tom -- I'd add is that of the growth that has not yet gone into construction, which is IPL and the 2 projects at Gener. IPL, we do get earnings between now and '15. They do have a neck [ph] -- a tracker where they get a current return on construction in progress. The 2 projects at Gener are not going to be earnings generators until '15 -- '16 and '17, respectively.

Got it. And then separately, if my math is right, I think you've 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's 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. Well, 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're exactly executing on that. And so we have done share repurchases 4% from the starting point of total outstanding shares. And as Tom mentioned, we will now be 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.

Okay. One last question, one a bit of clarification. You alluded to TIPRA extension assumption. Was that just talking about 2012 and the $0.02 to $0.03 impact? Or is that baked in for the full to next 3-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, yes, 6-month 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 would be in high single digits. But we've been very successful in mitigating that down and we'll continue to do that. I think in general, our view of -- there has been good support, in our view, of the election results last night. Just on a TIPRA-only basis is that the current administration, the Senate Finance Committee, Ways and Means, they've all generally been supportive of this. And if that same folks are generally coming back to their desks, then that's helpful to a TIPRA extension.

Yes. And what I would say is 2 things. Remember when we talked first about the non-TIPRA extension at the beginning of the year, is we're talking about 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 noncash, that we have $2 billion of NOLs. So yes, I -- 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 to sort of the range that we have this year for next year as well.

Right. And 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. It would not be our -- as Andre said, that would not be our -- our expectation would be that we would have some further mitigations, as we have in the past.

Our next question, Brian Russo with Ladenburg Thalmann. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: The outlook for IPL, can you just elaborate on that, maybe quantify the level of CapEx to upgrade the several thousand megawatts of plants? And then just a little more detail on how the tracker works. Is that a return of and on the capital as it's spent on an annual basis?

Sure, I'll hit that. It's Tom. The equity we expect to put in was about $300 million. The equity ratio, I think, is 45%. So that gets you around $650 million, $700 million, whatever that math works out to be. It would be about 3 years between '13 and '16. The tracker is a recovery of and on. I believe there's a modest delay. It could be 3- to 6-month delay in the mechanism. But it's a recovery of and on construction in process. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: And what's the ROE embedded in that?

The ROE is embedded from the -- it's actually -- the WACC is from the last rate case, which is in the 90s. So it's a good WACC. And it's above what other utilities in the state are getting. I'll 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, just as they've done well in the regulatory structure. But maybe.

Our next question comes from Gregg Orrill with Barclays.

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

Yes, I'd say that's -- 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. So it's -- I'm probably getting ahead of the game in terms of talking about that in any kind of detail.

Yes, Gregg, this is Andy. I mean, the fundamental issue is that we 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 the -- 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's pretty straightforward, and we've already submitted our certificate of public convenience and necessity and we're expecting that back relatively shortly. I think I mentioned on the last cost -- 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 -- 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's out there. And as we get further along that process, we'll update you probably in the next call where we are, but that's really what Ton was alluding to, the potential that if we deem -- have to do the retirements and we do add in capacity, at that point we will need to consider going through rates so we -- to recover on that investment.

And then on -- sorry for the question, but on 2014 earnings, you kind of couched 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 in '14, how do you see '14? Would that be below trend? And then catch-up in '15?

I think it's 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 U.S. wind, for example. By the end of '15, we'll be adding about $80 million of pretax contribution, or adjusted PTC, because -- due to the tax equity. So right now, it's too soon to give that. But obviously, if you have 1 year that's below, you're going to have other years that are above to get you to the average.

Right. And sorry, last question. Just coming back to the $2 billion asset sale target, that was kind of 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?

Yes. No, no, I would like to just make one clarification. I never said there was a $2 billion target. I always said that there was a universe of $2 billion and that we expect it -- 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, I mean, I -- 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're going to sell judiciously in the sense that we really want to maximize that -- the value of these. And I can give you just an illustration, is we could have sold and packaged all of our China assets, and we did have offers to sell it right away. But we took our time and sold to separate buyers, and we received a 40% premium versus the sort of altogether. And that's how we're going to continue with these asset sales. So I think that when we have several things under discussions that are -- 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. So do I feel that if we reached, let's say, $1.7 billion or $1.5 billion, if we got the right prices, then that's probably the right amount. I think what's important is that we got as much value out of it. And the second thing, which is also very important, is 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's really important is not just the amount of money that's coming in, but do we end up with the right company at the end of the process.

Our next question, Brian Chin with Citigroup.

Just a question on the dividend. You gave a little bit of color that each year, you'd 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 now around 2%. Am I right in thinking that the next time you'd 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?

Yes, that's correct. But what we said is -- what Tom said is that we evaluate it 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 an 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 this. So that was basically it. We're basically 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 those are -- that is our objective longer term.

Perfect. And then to -- 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. So some of the comments when you say in terms of how our growth rates compare, well, 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 we're -- that -- we're including, of course, also the dividend as well. So that's our total return to shareholders.

Right. And then one last unrelated question. You had indicated that part of the reason why you were changing the growth outlook was DPL and what's going on with the new ESP and also different 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 just talk a little bit about what you're seeing out there with regards to switching? I mean, 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?

Yes, I'll ask Andy Vesey. Answer that one?

Hey, Brian, it's Andy. Let me talk about our outlook on switching, and I want to sort of 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. And we also had proposed somewhere through 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 the rate case. That said, most of the battle right now is around residential customers. We have seen an increase in residential customers switching. It's 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's really what we're seeing. It's 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're going to see continued very intense competition in the residential class. We see that potentially saturating long term at about 80% -- 86% switched. So where competition is intense, so as Andre said, we are replacing more customers than we've lost, more load than we've lost. But clearly, it's an extremely competitive environment.

So given that you've embedded a rough 60% switching number plus the tracker in your assumptions and 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?

Well, I think 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.

Our last question comes from Angie Storozynski with Macquarie.

I actually wanted to follow up on the DPL questions. So could you explain briefly what the issues are with this 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 to do during the acquisition of the company. Could you talk specifically about that issue, how it links to the ESP negotiations?

Sure. Well, this is Andy, and I will talk a little bit about the first part of your question and let Tom talk about the issues around generation restructuring. Getting right to that piece, as you know, the issues that have been around the discussions in the beginning when we filed the MRO and have the settlement discussion, there are 3 main issues. It's time to market of our loads before competitive. It's been the non-bypassable charge. And emerging during those initial settlement discussions have been this question of legal separation of the generation assets even though we believe that the functional separation that we have today actually is fighting competition. What we've done in the filing is we addressed all these issues. We have made -- we are not asking for any approvals to separate generation in the current ESP filing. And as you know, we filed ESP on October 5. What we have done is we 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.

Yes, just in terms of the debt, obviously when we come back with that filing later this year, we'll talk about financial viability for the 2 business, especially the financial viability of a stand-alone generation company and also take into consideration what the appropriate time line is before that's a reasonable thing for us to do. In general, we've -- we do have debt at DPL, as you probably know, about $900 million at the DP&L level and about $1.7 billion at the DPL holdco level. At least for the next couple of years, we're in reasonably good shape on maturities. We do have a refinancing of about $460 million at DP&L utility next year, and then the first major refinancing for the DPL -- I believe it's August of '14 -- of $400 million-plus. So that's something that we'll look to get ahead on. Obviously, we -- you may have seen that we did have some discussions with the banks before our release last week on modifying some covenants, and that's consistent with our theme of trying to get ahead of things on the financing side.

Well, with that, I'll 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.