The AES Corporation (AES) Q3 2014 Earnings Report, Transcript and Summary

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' 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, and 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 currency 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 that 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 has been a very challenging year for AES with headwinds from poor hydrology and untimely plant outages. At the time of our last call, we expected poor 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 9-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 that we're seeing across our portfolio and provide an update on a few of our businesses, beginning on Slide 5. Poor hydrology in Latin America has had a substantial impact on our earnings over the past 2 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 are encouraged by the higher-than-expected inflows and the 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 affecting currencies, interest rates, commodities and GDP growth expectations. While we largely manage market risk through contracts, fuel pass-throughs 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 '18, the headwinds 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 spreads and 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 megawatt OPGC II 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 II 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 I adjacent to the site of OPGC II that utilizes coal supplied by Coal India. We are working on multiple options to optimize the coal supply to OPGC II and deliver much needed electricity in India once the plant is operational by 2018. Next, turning to Slide 8. In our accomplishments since our second quarter call in August. With 3 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 sell down of 8% of our position. These transactions represent a total of $382 million in equity proceeds to AES, which translates into 13x 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 9 countries. This quarter, we have 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 equity 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 around on 2 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 are 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 5-year PPA with a 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 U.S., we achieved important milestones on 2 development 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. And this 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 a combination of our expertise and a 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 wastewater regulations and to convert our Harding Street Station from coal to natural gas. If approved, the majority of this investment will begin earning regulated returns during construction. When combined with the $1 billion 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 towards 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 shareholders. Additional asset sales 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 dividend. 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 repayments aren't necessary for the next few years. The remaining $1.9 billion is therefore available for investment at attractive growth projects and returning cash to shareholders through buybacks and/or dividend increases. After dividend growth, which I will discuss in a moment, our other 2 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 and Southland repowering, I just discussed, as well as additional platform expansions such as Masinloc 2, Mong Duong 3 and energy storage. Of course, as we have demonstrated, we are likely to bring in equity partners from 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 invest 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, and 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 are providing our 2015 guidance and longer-term expectations today, a quarter earlier than our normal practice. I'll go with 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 the 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 the 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 a minority interest in Masinloc, which was largely offset by the benefits of capital allocation. We also benefited from a slightly lower tax rate during the quarter. Before I go over our businesses in more detail, I'd like to comment on the $0.02 negative impact during the quarter from low hydrology on Slide 19. Our generation business in Brazil, Tietê, saw a $0.04 impact from hydro. The system inflows were lower relative to last year resulting in higher spot prices impacting Tietê who's had to cover part of the contract position in the open market. As we discussed on our last call, Tietê was net long in the first half of the year and short in the second half. Consequently, although their margins benefited in the first half, Tietê 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 impact 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 Colombia, where our facility had stronger 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 year impact to be $0.10 a share versus $0.13 last year. Turning to Slide 20, I'll discuss each of our SBUs, focusing on adjusted PTC or PTC. In the U.S., we reported an increase of $24 million in 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 Colombia due to the hydrology I just covered. Next in Brazil, PTC decreased $84 million for the quarter. This includes about $50 million at Tietê, 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 at Maritza 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 affected by an outage at 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 midpoint 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 at Eletropaulo in Brazil. Further, our fourth quarter '14 results will benefit from improved operations in Chile and at IPL in the U.S., 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 9 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 in 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 in subsidiaries, primarily for platform expansion projects under construction. So far in '14, 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 returned to shareholders in 2014 of up to above $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 into '15. Of course, we may use some of that before year end. Now to Slide 25. I'd like to provide some 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 carryover from '14, this would 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'll 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 U.S. dollar, which has affected 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 '16. Accordingly, we've lowered our 2015 and '16 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 with the macro headwinds I just discussed continuing through '17 and '18, 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 the 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 would be, of course, noncash, given we have nearly $3 billion of NOLs outstanding. Further, if the CFC look-through rule is not extended, we'll 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 for 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 midpoint of our 2014 revised guidance. Approximately half of this increase is expected from the recovery of working capital, mostly from our utilities in Brazil and in Gener. The remaining amount is expected from improved availability at DPL and improved hydrology in Latin America. We continue to believe proportional free cash flow is one of our key value drivers with a strong double-digit growth over the longer term. We'll continue to show the value of our cash flow through disciplined capital allocation that maximizes risk-adjusted returns for our shareholders. With that, I'll now turn it back to Andres.

Thanks, Tom. To summarize, despite lowering our near-term expectations, we're executing our strategic objectives, including narrowing our geographic focus and reducing costs while expanding our platforms in a profitable manner. We are ahead of our expectations on asset sales and on track for cost reductions. Our construction pipeline represents $9 billion in total project cost 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.

Andres, I guess my first question to you -- you mentioned that the board will look at the dividend in December and you currently have this 30% to 40% payout ratio on your free cash flow. And 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 perhaps rebate the dividend on a higher payout ratio? Also, given the conditions and 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 that today, we're at about 29% payout ratio, 29% payout [ph]. We have said that our policy is a 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. But 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'd say is we want to be within the 30% to 40%. And currently, we're below that at about 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 '16 no longer is valid, given the new numbers. And so I guess a 2-part question. One, the $0.05 of macro headwinds 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 2, the normal hydrology that you have assumed for '15, 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 '15 numbers?

Okay, Ali. Let's take it by parts. In terms of the first one, the cost reductions. We're aggressively pursuing cost reductions. As we've stated, now we're moving from G&A to fixed costs in our business and we have an addressable spend of around $3 billion that we're going after. And we're working hard on this. Now 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. So that's well underway and I think that Andy and the team are doing a great job there, but that does take some time. But we certainly are 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 in terms -- question regarding hydrology. I would say, break it into parts. We've had this unusual event that the hydrology was correlated negatively, quite frankly, everywhere, for the prior 2 years. Now even with the $0.10 negative impact, this is $0.03 less than it was in 2013. So we have improved. Part of it is some of the actions that we've taken on commercial policy, that we've taken with regards to Panama. Now we are seeing differences. In Panama, as I mentioned, we're actually seeing very good inflows into the reservoirs in September, October and carrying over to the first week here in November. So in Panama, we are seeing a recovery of the hydro. The question really is a little bit, some transmission constraints. But in terms of the physical rainfall in Panama, we've seen a significant recovery. In the case of Colombia, Chivor is in a different watershed than a lot of the country's hydro, and 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, it's 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 that 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 indicates that rationing is possible, but it's not the most likely scenario at this point. And as I 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, let's say, 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, and that's what we'll 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'll 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 allocation for 2014, as -- Tom, as you mentioned, there's still about $200 million that you kind of unallocated and maybe even assume it sticks around till 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 or all of that $200 million is added on to the $150 million of buyback by year end?

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

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

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

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

What I would say is that, 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 correct decision in holding on to them and we're -- there's a number of things which could occur in the PJM and in Ohio, specifically, that could even improve the value further. So what I'd 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 in the long-term if conditions changed and value were to change for those assets?

Well, again, we tend to think in terms of the medium term with our assets. In terms of the value we can create. We are talking about costs and synergies. You need to be able to plan into the medium term, and I think we also think about this in terms of our portfolio. One of the things we've done is bringing partners to reduce our exposure to certain risks, to increase, quite frankly, our capacity to do bigger projects. So we will always figure into that mix. But we also do portfolio fine-tuning. So I wouldn't exclude it, but what I'm saying is that 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.

Okay, understood. And then just shifting over to the California contracts. Would it be possible for you to give us a sense of the aggregate EBITDA that's associated with these contracts?

Stephen, it's Tom. I'd say it's tough. It's obviously, fresh off the presses. 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 too early for that.

Your next question comes from Chris Turnure of JPMorgan. Christopher Turnure - JP Morgan Chase & Co, Research Division: Sticking on the theme of the SoCal Ed contracts that were announced yesterday. Could you kind of walk us through the long-term plan there? I know you have at least another gigawatt of potential capacity that you can kind of repower there. What are you thinking about that? What are you thinking about the 500 or so that you could just sell for other uses right now to redevelop that property? And how does all of this, including yesterday's contracts kind of fit into the idea that you are losing EBITDA, I guess at the end of 2018, because the existing contracts will go off?

Yes. I think this is a good point. We have like, 4,000 megawatts. This is a very important step in terms of getting about 1,300 megawatts under a PPA in California. And we are looking at -- the main site is Huntington Beach. We also have Alamitos and we will 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 resource that can be positive and negative. So this is 200 megawatts of resource, which is equivalent to the 100% of what we all have done to date. So that -- again, getting to your question here, Southern California is important to us. We'll be looking at getting the maximum value out of these sites. Our locational advantage is very important. We're very happy to have won this contract. And yes, we'll 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 sufficient total presence there to offset everything that we'd be retiring. Christopher Turnure - JP Morgan Chase & Co, Research Division: Okay, great. And then switching gears to the Dominican Republic. You guys sold that small stake of the assets there. Kind of, can you speak to the future of that business? What you were thinking in terms of the sale price there, the multiple that you got on valuation? And was it kind of more of a price motive? Or was it a strategic motive that drove you to make that decision?

Yes, 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 2 modern regasification facilities in the Caribbean, and this is one of them. The other one is in Puerto Rico. So this business has done well. As you know, we are selling compressed gas to third parties for vehicles and for other industrial purposes on the island. And this is very solid business. The gas that we bring in is at Henry Hub base. So what we saw here is that there's a 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 won't be, of course, burning any more fuel, but we'll get 122 more megawatts. So it really was a strategic motive. Now 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 sort of hub and spoke system from the Dominican Republic. Now, of course, this -- we would have -- our business is the large business. It's the holding 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.

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

So first, turning back to the Southern California for a quick second. Can you talk about sort of the net EPS change after the contracts roll off or the existing contracts roll off into the next round with the 3 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 -- still early just given it is really hot off the presses. We have just been through a -- quite a lengthy competitor process. So it's a little early for us to be putting out detailed numbers.

Yes, Julien, just to give you a big picture. This is Ahmed. In terms of the uptick -- I mean, just comparing these current existing capacity against what we've just have been awarded, the 1,300, 1,400 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 is another capacity, about 1,000 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 our existing sites.

Right. Absolutely, very clear. And just in terms of capital allocation around the SCE assets. Can you just elaborate a little bit more what the thought process is around equity? And broadly funding it, if you will, just from a timeline perspective?

Sure. Once again, it's early, but I think if you take a $1.9 million, $2 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 60% -- probably more likely 70%. So that will leave about 30% equity commitments. And we will -- as Andres said, we'll strongly look to bring in a partner that could help us leverage ourselves further and manage our commitments and also potentially enhance our return.

Right. Let me -- perhaps I may be a little clearer, also. What is your thought process around YieldCo selldowns? 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 YieldCo. I'm saying we have nothing philosophically against them. We really haven't seen that we could at this stage of the game sort of carve out assets that would make sense because we -- lot of our PPAs in the U.S. and other markets are highly levered and have a lot of nonrecourse debt on them. So again, at this stage of the game, it's a little early. But again, we don't have anything philosophically against something like a YieldCo. And in fact, we have done, what we've done at Gener and what we've done at some of the other ones. But if you're saying sort of spin it off to somebody else for them to do YieldCo -- that's not sort of in the cards.

Got you. All right. And then just -- let me just clarify little bit of what your response on prior question was. When you assume normal hydrology in 2015, that's a transition to normal hydrology, I imagine, right? And to the extent to which that it would be a transition, is there an incremental benefit as you think about this going from '15 to '16 or even '17, right? I mean, how much of a multiyear process is this in normalization?

It's going to be a -- I mean, it's going to be a benefit. As you become normal -- I think what we mean by normal has to do -- within, let's say, one standard deviation in terms of getting it back on track and we really had sort of 2 outlier years. So I guess the -- if I understand your question, what we're saying is that we're not predicting a continuation of the sort of drought conditions and we're not using in our numbers any sort of rationing in the case of Brazil. And what we're seeing in Panama and Colombia is a return to, say, normal hydrology. I don't know, Tom, you want to add something?

Yes, I just say, Julien, in terms of transitioning into '16, we'll certainly -- once our contract, long-term contract, Eletropaulo, ends at the end of '15, we have the ability to manage our hydro risk through hedging ratios. So we've shown in the past we're kind of in the low 80s in terms of percentage of our shared energy that we have sold for '16. We'll certainly -- we may creep up somewhat, but we will be certainly at lower levels to provide ourselves the comfort that if there is poor hydrology in '16, we have set ourselves up so we don't have hydro risk.

Right. And then lastly, could you elaborate a little bit on the legislative changes you need for the end of this year around the tax extenders?

The CFC look-through rules -- I mean, those have -- in the past, they've been, say, renewed -- at sort of the 12th hour at the end of the year as part of larger packages. So everything that we're seeing is, we feel that it's very, very likely that they'll be extended this year once again, as part of an extender package at the end of the year. So as Tom said that -- because of this year, we -- the impact would be minimal. And in '15, there could be more of an impact, but we'll also take measures as we have in the past should it not be extended.

And I apologize if this is a naive question. Tipper [ph], CFC tipper [ph] -- is that all related? I know we used to talk about that, but just want to bring it up.

The answer is yes.

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

Just 2 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. I mean, this is not a change -- this has always been our view all along. I would like to emphasize that even in the unlikely case that we're not extended, this is not cash, as Tom mentioned. I mean, we have $3 billion of NOLs. So yes, this would affect our adjusted EPS, but not our cash.

Got it. And then I think you commented that '17, '18, you've got some offsets that you put in place to help you. DPL, I think is one of them that you called out and -- so just curious as to what that is specifically.

Gregg, the DPL improvement would be a combination of darks as well as some value for the PJM premium capacity product. We're obviously watching that closely, still some moving parts in that, but we believe that if gets implemented in something near its current form that could be some good value for us also.

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

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?

I think, let us get back to you on that one.

Okay.

The vast bulk of it is in CCGT.

Right. That's what I would have assumed, but just to get a little bit more color on that would be helpful. And if anything, I can follow-up with you at EEI.

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 bit more color on what exactly happened there and why did it happen the way it did?

Sure. Going back some time, I guess, about -- probably about 2 years ago, it started with an issue with the coal allocation, then there was a scandal in India called Coalgate. And really it was that people had received coal allocations and then flipped them for significant gains. So that, let's say, started the issue. We weren't, quite frankly, involved at all of this because we had received our allocation and our partner is the state government of Odisha. So we had our coal allocation and we were proceeding with the project. Then the Supreme Court did something that, which they had done in telecom spectrum, which was, really, to say that all prior allocations were invalid because the process was not, say, sufficiently transparent. And this was very politically successful in India. So really what they did was come out with a very similar decision regarding coal, basically saying that 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 plans. 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 it includes state companies. Then subsequently, they came out with a decree saying that state government companies' allocations were also valid. So in our case, we're in sort of the gray zone because we're a JV and it's a state government of Odisha. So the good thing is we have been -- of this whole process, we've been extremely transparent and we think that the state government may get the coal allocation. From 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 it helps us to assure the quality of the coal that we would be receiving. But even if it doesn't go forward, this is still a good project because this is located right next to OPGC I, and we have all the line permits for developing a -- and it's under construction, a 1,300 megawatt coal plant. So 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 will of course prefer to have this -- more control over it with the coal allocation. So 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 sign or renegotiate contracts?

No. And it has not. Basically, what's happened is they have granted a temporary license to those who've 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. So in essence, Odisha, our OPGC II project is pretty close to sort of a mine mouth type project. So it's very well situated. There's a shortage and we have a good contract for the offtake. So it's caused more noise, we think, than anything.

That's very helpful. And then one last question for me. I realize I've asked a few here. You guys gave out '15 and '16 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 us a sense of how much you're hedged with regards to currency exposure in '15 and '16?

Yes. We've got some sensitivities in the back, Brian, of our deck. But we generally hedge about 6 to 12 months forward in Brazil and about a year forward in other currencies. So, yes, some exposure in '15, a little the more in '16, but there's a page in the back of the deck.

If you're referring to Slide 49, that's '15. How should we think about those sensitivities in '16? Maybe like 25%, 30% more sensitivity in '16?

No, I think -- Brian, this is Ahmed. I think you should look at it because that's why we provided it on open basis. So even if you assume it's all open, so it's $0.04 versus $0.035. So it's not as significant.

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

I had a bigger picture question. So 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 flow generation of your business is undeniable and you keep trading at a higher and higher cash flow. 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 -- your share price? I mean, 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, I think, very well. I mean, if you actually look at our selldowns that we've done, our timing was very good in terms of when we disposed of the assets. So 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 inconsistency because the effect of buying back our stock today is much -- of course, is immediate versus having to invest 3 to 4 years. But we do look at that, Angie. And that's a very good question and 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 that you will ever be fully paid a high multiple for that growth, right? As opposed to the free cash flow yield that the stock currently generates and the cash that could be used to really significantly reduce the share count? I mean, it's -- I know that you're 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.

Well, we do look at it. We do sort of NPVs on this, but we can discuss that more off-line. I think it's a very good question that you raise and we do look at sort of the big pictures. And we know 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 one is Mong Duong and other -- some of our 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, we've had 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 you look at the next year. So when we talk about this growth, it is occurring from tangible projects that we have on hand. But thanks for the question.

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

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

Sorry, Charles, can we -- you can call me on my landline.

I'll tell you what, I'll save it for EEI.

Okay, that sounds better. Okay. Good. We thank everybody for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Thanks and have a nice day.

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