The AES Corporation
Q4 2011 Earnings Call Transcript

Published: 27 Feb 2012

[Operator:]

Good morning. Thank you, all, for standing by. [Operator Instructions] Today's conference is being recorded. If you do have any objections, you may disconnect at this time. [Operator Instructions] I would now like to turn the call over to Ahmed Pasha, Vice President of Investor Relations. Thank you, and you may begin.

[Ahmed Pasha:]

Thank you, Angie, and welcome to our Fourth Quarter Earnings Call. We appreciate you being us this morning. Joining me today are Andres Gluski, our President and CEO; Victoria Harker, our Chief Financial Officer; our Chief Operating Officer for Generation, Ned Hall; and Andrew Vesey, our Chief Operating Officer for Utilities; and other senior members of our management. Before we begin our presentation, let me remind you that our comments today will include forward-looking statements, which are subject to certain risks. For a complete discussion of these risks, we encourage you to read our documents on file with the Securities and Exchange Commission. Our presentation is webcast, and the slides are available on our website, which you can get at www.aes.com, under Investor Relations. With that, I would like to turn the call over to Andres Gluski, our Chief Executive Officer. Andres?

[Andres Gluski:]

Thanks, Ahmed. Good morning, everyone, and welcome to our Fourth Quarter Earnings Call. As you may have seen in our press release this morning, we reported solid performance in the fourth quarter. For the full year, adjusted earnings per share grew 6%, and we achieved record subsidiary distributions of more than $1.3 billion. Despite a volatile macroeconomic and commodity price environment, we met or exceeded our 2011's guidance of all key earnings and cash flow metrics. We also delivered on our key strategic initiatives, including several large asset sales, closing on a major acquisition and commissioning 2000 megawatts of new generation capacity. Before I delve into the detail of these initiatives, I would like to share my thoughts on 2 key questions that I heard repeatedly during our meetings with investors and analysts during our East and West Coast Roadshows. The first was asking for greater clarity regarding our capital allocation strategy and the second was projected earnings and cash flow growth beyond 2012. As I said on our last call, we intend to maximize shareholder value by flowing our businesses in those markets, where we have – or have a heavy plan to create a competitive advantage, exiting over time, those markets where we do not and focusing on creating value on a per-share basis by competing investment in growth with debt paydowns and share buybacks. Our discretionary cash consists of our distribution from subsidiaries, plus proceeds from asset sales, less corporate overhead, taxes and interest payments. We will allocate our discretionary cash to 3 primary uses

[Victoria D. Harker:]

Thanks, Andres, and good morning, everyone. I'd like to briefly cover the following topics

[Andres Gluski:]

Thanks, Victoria. Last fall, we announced our plan to unlock shareholder value and I am pleased with our execution over the past 6 months. In 2011, we achieved or exceeded our guidance for our earnings and cash flow metrics. 2012 should be another good year as we expect to deliver 21% growth in adjusted EPS. Furthermore, we will use the multiple levers at our disposal to deliver on our average annual total return target of 8% to 10% from 2013 through 2015. We'll remain focused on executing on our business strategy and growing per-share cash flow in earnings in a disciplined way. I am very encouraged with the potential for growth that exists in our core markets. In addition, we are committed to strengthening our balance sheet and returning cash to shareholders through a dividend to be initiated later this year. I look forward to seeing many of you as we continue our investor outreach efforts over the next several months, including a visit to investors in London next month. Operator, we will now open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from Julien Dumoulin-Smith.

[Julien Dumoulin-Smith:]

Julien Dumoulin-Smith, UBS. Why don't you -- great quarter guys. I wanted to ask first, here, with regards to redeployment of cash, you guys talked about potential near-term dilution. What are you seeing out there in terms of organic opportunities. And then maybe on the second -- the other hand, what about timing of debt buyback and potentially, greater share buybacks? At what point should we start this bidding kind of building that into our models and thinking about that -- achieving that EPS growth rate you guys just described?

[Andres Gluski:]

Okay, Julien, in terms of the redeployment of cash, what we have done to date with the money we have received from the asset sales is to repay the revolver at the parent. So currently, we had used the revolver to help with the acquisition of DP&L. And currently, we only have a balance of around $50 million outstanding. In terms of the sort of organic opportunities, that's a very good question. We think that in our key markets and from our platforms, there are opportunities to make relatively small investments to help boost profitability, and we will be looking at these as well. And in terms of the buybacks, that will depend in debt buybacks or other buybacks -- it will be dependent in terms of when these monies come in. So I think the framework is very clear. Of course, any of these transactions have to go through FERC approval, so the timing of this is probably in the later half of the year.

[Julien Dumoulin-Smith:]

Great. And then maybe addressing the EPS growth rate that you guys just threw out there. I mean, knowing your underlying organic growth projects that you've described, would you imagine that, that EPS growth would be backward, sort of backloaded, if you will, to get to the, call it, $1.50, $1.60 that you're talking about?

[Andres Gluski:]

Again, we're committing to this 8% to 10% and we feel very confident about it. The exact profile of that, we will update over time as we see things progress and that will include, of course, what assets we sell and what other sort of investments we've made, where do we redeploy that cash. Obviously, some uses will be more immediately accretive than others. So we'll get back to you that -- over time as things develop.

[Julien Dumoulin-Smith:]

Great. And then maybe just in terms of the organic projects, you guys have talked a little bit about it on the call. In Chile, how are the permitting and TPA processes going? When should we think about closing those transactions and seeing a financial closure and moving forward?

[Andres Gluski:]

Well, I think they have different timelines. I think the fastest timeline would be the Cochrane project in the North. As you know, there's a very big expansion of a mining sector in Chile. People have talked about numbers of $50 billion of new investments coming into the mining sector. They will need energy and so, we are, right now, talking with various counterparties to see if we get the PPA. This is a -- basically, an Angamos 2 project, if you think about it. And we have the best track record in Chile of delivering plants on time. So we -- we're in a very strong position right now.

[Julien Dumoulin-Smith:]

Great. And final question here and then I'll leave you guys. At Masinloc 2, you guys, I believe, in the quarter, got a contract on Masinloc 1 -- just be curious to hear to what extent that's impacted earnings? And then secondly, what is the latest on expanding Masinloc 2? You've kind of alluded to it a little bit.

[Andres Gluski:]

Regarding Masinloc 2, right now, we're quite advance in the permitting stage. The contracts that you were referring is with the big distribution group of Meralco in the Philippines that we're in sort of final process of closing those. So I would say that going forwards, to do a Masinloc 2, there's very strong demand for growth on Luzon, which is, really, this is the Luzon grid that we're talking about, and we think this is one of the projects that can come online fastest to meet that growing demand. But -- so right now, we're advancing with the permitting and we will be looking at contracting some of this event -- some of this capacity.

[Operator:]

Ali Agha.

[Ali Agha:]

I'm from SunTrust. A couple of questions here. Just first of all, I wanted to just get a little more clarity on the assumptions you laid out for your 2012 guidance? If I have read it correctly, you're assuming no more share buybacks or debt reduction from what's already been done in the '12 guidance, is that right?

[Victoria D. Harker:]

In the baseline, that's not to say we won't use cash for those purposes once it's available and on hand. But in the baseline set of ranges that I spoke to, that is not assumed as an uplift.

[Ali Agha:]

Yes. Also, as I recall, when the DPL acquisition was done, you had assumed, originally, I think it was 6x of accretion in '12. Andres, in your remarks, you mentioned that gas prices and switching has impacted it by negative $0.03, but then I also heard you say that DPL would actually be dilutive in '12. Could you just clarify exactly DPL's contribution in '12 versus the original $0.06 you had assumed?

[Andres Gluski:]

Let me clarify it. The $0.03 that I referenced, that is the sensitivity to lower gas prices. Did it make that clear? I don't know, Victoria, you want to comment on the second part of the question?

[Victoria D. Harker:]

Yes. See, right now, our current projections, which are still being assessed since, obviously, we are just only a month or so into operating DP&L. So the remainder of the $0.05 to $0.07 that we had assumed, the $0.03 down for the commodity prices is -- probably puts us another $0.04 or below in terms of customer churn and rate erosion that we've seen. That said, obviously, the team has just gotten underway in terms of their efforts on the retail side, so we're continuing to assess that. But embedded in the baseline plan, we have it at 0 to slightly dilutive.

[Ali Agha:]

I see. Also, Victoria, I guess, for you. You mentioned, of course, TIPRA extension is still built into your guidance and then you alluded to the fact that if TIPRA does not get extended, there were some offsets. Could you elaborate a little more on what those are? And let's just make it clear that if TIPRA doesn't get extended, are we still looking at a $1.26 midpoint for '12?

[Victoria D. Harker:]

The question, pull [ph] on this, as we have talked about in the past, is that, obviously, that part of income comes from the Latin American, the countries Argentine, Brazil and Chile predominantly. So as we look at mitigation strategies, as we go into the latter half of this year, we could choose to make other decisions relative to repatriation of cash and using it for investment locally, which will obviously have some other flow-through impacts from a parent operating cash flow and use of funds standpoint. So my point was to layout what's assumed in the baseline. If we took no further mitigation actions, it would have a $0.12 full-year impact. As we go further into the year, we're obviously accruing, assuming it is going to occur and then we will take those actions as we see fit later on this year.

[Andres Gluski:]

Yes. To answer the question, I mean, we feel very confident that TIPRA will be extended. We lived through this in 2010. So to realize, we will have to accrue it to higher tax rates until it gets actually passed and then we, of course, make the adjustments. But what would this mean for us? Well, basically, it would mean that if you had some major tax changes and you no longer have the subpart and TIPRA exemptions, then you would basically have to, I think, upstream less cash and use more of the cash locally to grow that way. So it's something that we've thought about very well and it's differing structuring opportunities. And we would do so, again, seeing what's going to happen here. But again, we feel quite confident that once again, TIPRA will be extended.

[Ali Agha:]

And Andres, just to be clear. If it is not, you're still committed to the $1.26 guidance for '12 -- the midpoint?

[Andres Gluski:]

We would have to come back to you at that time and see what are the changes that are made. And as Victoria said, probably, from sort of the baseline, where we are today would be the $0.12 and then we would have to have mitigations and we would have to see what's the timing of those mitigations for 2012.

[Ali Agha:]

Okay. And my last question, going back to your longer-term guidance that you laid out. Again, just to be clear on the assumptions there. So while in '12, you’ve not assumed in your base case any more debt or share reduction or buybacks over that '12 through '15 period -- or '13 through '15. You have assumed some additional paydowns coming from the debt or share buybacks happening. Also a little bit from that is indeed the case? And then secondly, just on a high-level basis, over that period of '12 through '15, how should we be thinking about the DPL contribution? Is it flat, is it declining, is it going up? Just directionally, how is that playing out?

[Andres Gluski:]

Okay. Let me answer sort of the multiple questions if I remember them all. First, starting from the growth rate, from, again, 2013 through 2015. So this is off the base of 2012, which already has grown 21%. So starting from that base, our assumption is that our -- that we are using 50-50 debt paydown and share repurchases. That's what we've modeled in there with some very sort of modest asset sales. Then the -- so then next question, sorry, which was...

[Victoria D. Harker:]

Debt paydown versus share buyback, it depends on, obviously, the asset-sale proceeds and amounts that we received and the timing, that we've essentially modeled as a convention of 50-50 split between share buyback and debt paydown.

[Andres Gluski:]

Yes. And the second one about DP&L. What we're -- basically, the view is that we will be, again, filing in March. We'll have to see the outcome of that filing. I think if you look at the capacity of price auctions, these have improved for '14 and '15. So we think that probably '12 and '13 would be the 2 most difficult years at DP&L and then we see improvements after that.

[Ali Agha:]

And last question, sorry for that. On the dividend, Andres, should we assume -- the payout -- the $120 million that you have laid out is about 20% payout on your midpoint parent [ph] free cash flow for '12? Is that the payout, ultimately, you're comfortable with? Or what is your comfort level on the payout for that dividend?

[Andres Gluski:]

Yes. I would say we're comfortable with at least that at this stage. And I would like to clarify that when I was talking about sort of the market -- more in line with the market, I was talking about the S&P, sort of the 2% range.

[Operator:]

Gregg Orrill.

[Gregg Orrill:]

Barclays Capital. I was wondering if you had looked at what the impact on the sensitivities would be to the 2012 guidance? I know you used end of year -- end of 2011 as a benchmark for your guidance. But it looks like it would be a more positive driver at this point?

[Victoria D. Harker:]

Yes, this is -- Gregg, this is Victoria. I think the -- our view right now is somewhere in the $0.05 to $0.06 range for the combination of the 2. That was as of year end and we'll obviously continue to update that, as we go through the year, with other factors along with commodities, as well as currencies.

[Andres Gluski:]

Yes. We've really chosen sort of the year end, that's what we've always done. And it has been moving back and forth. So we couldn't sort of up -- what is today's. But you're right, they have moved in the other direction since the end of the year.

[Gregg Orrill:]

And in your earnings drivers for 2012, there was also -- Victoria called out $0.02 for the tax rate as well. Was there anything specific there? Or were...

[Victoria D. Harker:]

You're talking about from a year-over-year standpoint?

[Gregg Orrill:]

Right, right.

[Victoria D. Harker:]

Yes. We had a change in income mix between the 2 years relative, as well as an evaluation allowance release in Brazil at the end of 2011. So that naturally improved 2011 on a one-time basis.

[Gregg Orrill:]

Okay. And then when should we look for the DP&L filing, the ESP filing?

[Andres Gluski:]

Maybe, Andy, who's with us here and he's Chief Operating Officer of the Utilities, he should be able to answer.

[Andrew Martin Vesey:]

It should be a short answer. We're targeting that stipulation, March 31. So that's when the final will be made.

[Operator:]

Brian Russo.

[Brian J. Russo:]

Ladenburg Thalmann. Just to be clear on the 7% to 9% earnings CAGR, is that based -- is that supported by yet-to-be-announced asset sales and the corresponding use of that as a sale proceeds to pay down debt or buyback stock?

[Andres Gluski:]

No. No, I mean, basically, you were laying out that target, there's a lot of organic growth there. But if we do asset -- additional asset sales in line with what we have announced, again, there'll be lumpiness as Victoria had noted, between the sale and redeploying that cash in some instances. So I think we've played out in terms of what's the criteria we're going to use about redeploying that cash. We do think that -- what we're looking at now, we think, we'll get a much better sort of capital efficiency in terms of the NPV created for AES equity use and we really want to use those -- our ability, where we have either trapped cash, cash on hand or unused leverage at the local level. All of these ways is really a way of leveraging even more AES returns.

[Brian J. Russo:]

Okay, great. And just also -- in terms of -- you've spent -- you've targeted about $2 billion of asset sales, and I think you've achieved roughly 1/2 of that. Can you talk about non-core markets or particular assets to help get you to that $2 billion target?

[Andres Gluski:]

Sure. I mean, we've been quite careful about we announce. Obviously, our primary focus is to sell well and to optimize our operations until the sale. What we -- what is out there is we're selling all of our China assets and I think that's out there as well. And what we consider non-core, I mean, or, let's say, nonstrategic, I think the real key is, do we have a compelling competitive advantage or can we get one? Because we may be in some new markets, we just started. Now, where we think we'll get to have to be really -- the size and the scale and the diversity to have an advantage in that market. But when we see that we can't have that, we will sell. So take the 2 gas plants that we sold in the U.S., those are plants that were contracted for a long time and we really felt that we could better redeploy that cash and increase our shareholders' reserves. So that's sort of the view. I mean, if you look at the sale of the telecoms in Brazil, we really thought that the market had peaked. If we wanted to stay in that market, it would require very significant investments. That's not one of our -- telecoms is not a core market for us. So we will sell out. The long-term view is to simplify our portfolio and that also feeds into our cost reduction targets here in terms of corporate overhead and cost of goods sold. But we have to do it in a prudent manner. We really don't want to go and have a fire sale of markets – some markets have been quite depressed. But we've been, I think, very effective at executing well on sales like in Cartagena in Spain.

[Operator:]

Maura Shaughnessy.

[Maura A. Shaughnessy:]

Maura Shaughnessy, MFS. A couple of questions. First, can you just characterize -- I know the initial start to Maritza was a little bumpy. And how is that operation is doing now? And you had mentioned some issues in your Panama facility last year and what the status of that asset is as well?

[Andres Gluski:]

Okay. I think both are doing well. So let's start up with Maritza. With me is Ned Hall, our COO role for the Generation Groups and give a little update on what's happening in Maritza.

[Edward C. Hall:]

Maura, on October 7, we passed 600-megawatts test and then on December 30 of 2011, we achieved 690 megawatts of gross output. So we're fully commercial dispatching into the market. We have had a couple of outages to continue to improve the operations but it's operating under its PPA updated.

[Andres Gluski:]

It's going well. I mean, there was even a coal miners strike in the midst of the winter in Bulgaria. We produced fully through out it. I think our Maritza operations are going well and we're getting paid. And now we're getting Panama, I'd like Andy to sort of give you update on some of, let's say, the repairs at Estí and just the general Panamanian markets.

[Andrew Martin Vesey:]

Maura, this is Andy Vesey, excuse me. With Estí, just, and just to remind you on the call, this was the -- it's 120-megawatt running river plant in Panama. We suffered a tunnel collapse, the intake tunnels, repairs are underway. We're basically on target to return that to service in the early quarter second half of this year. So that continues to go well. We have some exposures there because we have PPAs that are recovering as Hydro plant and spot pricing was relatively high during the outage. But through business interruption insurance and negotiations, with the supportive Panamanian government, we’ve managed to eliminate most of that exposure. So it's been relatively smooth to date. There's actually been some issues in Panama regarding indigenous protests, which has to do with certain legislation that President Martinelli has been moving forward, but it hasn't impacted our operations so as, again, we continue to believe we'll have that plant back in commercial operations by early second quarter of 2012.

[Maura A. Shaughnessy:]

Great. Any update on the infamous Braziliana estate sale?

[Andres Gluski:]

No. Not really. I think we're -- again, what I would report is that our relationship with BNDES is very good, and that we're really working hand-in-glove together and I think nothing succeeds like success. So I think that they have seen their investment and Braziliana is probably one of their best and they have received a lot of cash back through the sale of Atimus. So I think that's -- nothing new to report. But I would say that we feel very much -- that we have a good working relation with BNDES in terms of working together to create more value there.

[Maura A. Shaughnessy:]

Great. And last question. Can you tell us a little bit more about this capital investment program? And you talked about changing compensation on project NPV and capital efficiency measures trying to drive better returns on invested capital? Can -- is there a return invested capital goal? Or what are you trying to do here? And how does it actually work?

[Andres Gluski:]

Great question. What we've basically done -- I think, traditionally, we've been compensated on the basis of NPV created on new projects. And what we are changing is to not only have the NPV created, but what is the capital efficiency. So it's not the same to produce $100 million of NPV if it's going to require $300 million of corp equity in, as it's 0, right? So basically, the idea is to try to favor and get people more motivated to see ways that we can create NPV without requiring AES equity. And we think that's the way we're really going to improve our return on invested capital. Our return of invested capital in the last -- in the short term, we've had a number of impairments, and the like, in 8% to 9% range. I think we can do substantially better over time. This is not something -- this is -- we have a lot of assets, it's going to take a while to move it. But we think with this new focus -- what does that mean? That means, for example, if you have $1 billion of leverage capacity at Chiate [ph] that is a key way of improving returns to AES. It doesn't require any money. If you have, essentially, cash in India with our partner or the state of Orissa, which is not being utilized in OPGC, you've got to utilize it there. So you're absolutely right. We really haven't had a sort of -- say, what was going to go from, say, 9% to 12%, but we will be looking at this and seeing how fast we can change that. And just wanted to sort of complement. One area where we haven't -- we're looking at is, for example, what can we do with our renewables portfolio in the sense that we have about $1,250,000,000 invested, are there ways that we can unleash some of that value there, too?

[Maura A. Shaughnessy:]

And what does that mean?

[Andres Gluski:]

What does that mean? Well, that means that that's one the focuses we have in terms of seeing how we can structure things differently to have better earnings from that invested portfolio right now.

[Operator:]

Carlos Rodriguez.

[Carlos Rodriguez:]

Hartford Investment Management. Victoria, I wanted to understand how to reconcile the guidance for 2012 subsidiary distributions? It looks like it was noted in the press release as $1.2 billion to $1.3 billion and then in the presentation, it looks like it's substantially higher than that. How do I reconcile those 2?

[Victoria D. Harker:]

In the -- I'm sorry, which presentation?

[Carlos Rodriguez:]

2012 guidance metrics on Page 17, subsidiary distributions, looks like $1.325 billion to $1.525 billion versus the press release -- looks like -- Oh, I'm sorry, that was the full year 2011 guidance. Apologize for that. Another question for you. The run rate expenses at the parent level, what are those running at right now?

[Andres Gluski:]

It's about $300 million to $350 million.

[Victoria D. Harker:]

And we have taken the metrics that you're looking at, assume that we will continue along the path of the $100 million reduction program, which is $100 million by the exit of 2013. So the $50 million that I had referred to, we will be generating over the span of 2012, and then another $50 million will be coming online after that.

[Andres Gluski:]

And, Carlos, what I think is important is that we're really looking at just reducing expenditures in terms of the classification, some of it might cost of goods sold, et cetera. So what we're counting on is we are targeting $50 million for this year, and by the end of next year, we're having another $50 million. So if you thought of sort of the base of 2011, actually, you'll have a run rate of about $100 million.

[Carlos Rodriguez:]

Okay. So $100 million run rate including the expense reductions at the parent level?

[Andres Gluski:]

Yes.

[Unknown Analyst:]

Okay. And lastly, Andres, you talked about the core markets being Brazil, Chile and the U.S. with, I assume, the latter with the utilities focus in the U.S. Some of these growth markets that you've embarked on, perhaps under your previous leadership in the Philippines and India, how should we think about those in terms of the strategic nature of those? Are those sort of opportunistic growth projects? Or do you view those as core markets like you do Chile and Brazil and the U.S.?

[Andres Gluski:]

Well, again, I think that the key -- when we say core, those are our largest markets, that's what our primary focus will be. If you look at the value of those -- basically, Gener, which includes Colombia as well, Brazil and the U.S., about 70% of the value of AES, so that's where our focus is going to be on. So you're right, I mean, we do have projects underway in places like Turkey and we have to see how this flow, let's say, develops. Do we really develop a compelling competitive advantage? In the case of the Philippines, we're very well positioned. We have been very successful in that market and we expect that we can add on to there and we have some of these other opportunities like in India. But you're right in the sense that our focus is going to on expanding platforms. We will execute on these other -- these upper growth markets that we have. We don't plan to enter any new markets that haven't been announced to date.

[Operator:]

Raymond Leung.

[Raymond M. Leung:]

Yes, Goldman Sachs. A couple of questions. One, with respect to your comment on reaching a possible one notch upgrade target, can you sort of talk a little bit about what you're financial leverage targets are at the parent? Can you sort of give us an update what you guys are thinking there? And then also, can you talk about -- you've mentioned about $500 million of potential debt maturities. I know that is predicated on some asset sales, but can you talk about how you would go about that? It doesn't look like you have any significant maturities until 2014.

[Victoria D. Harker:]

Yes. And we were -- just to be clear, I wasn't referring to maturities. We were talking about the expected use of cash, whether it be organic cash in the businesses or asset sale proceeds, depending on the timing of when those occur using $500 million for debt paydowns in the relative near-term, so over the span of 2012 and then into '13. So the sign of maturity driven is the use cash, where we think that, that would be an improvement to our credit metrics, obviously, reducing interest costs as well. In terms of the ratios that we look at in terms of coverage, we have historically been in sort of the 3.5x to 4.5x, but we've got slightly higher than that in terms of DP&L acquisition when we raised about $2 billion. And so far, the intent is to debt paydown to get back to roughly that same 3.5x to 4.5x debt-to-cash ratio.

[Andres Gluski:]

I think, Raymond, as is also seen, our paper tends to trade better than our credit rating. And the other -- over time, as we do these portfolio, let's say, sales of certain assets and growth and others, I also think that our -- the quality of our cash flow continues to improve.

[Raymond M. Leung:]

Okay. And as you think about credit ratings, is the double-Bs' sort of that optimal rating for you guys, then?

[Andres Gluski:]

This is what we're saying over the medium term, yes. Today, we're talking about double-B. And I think, again, we expect to be trading better than that, but we also think it's -- the general perception of risk of AES. Okay, with that, I want to thank everybody for being on the call, and the questions and I would like to turn it over to Ahmed.

[Ahmed Pasha:]

Thank you all for joining us in today's call. Please call us for any follow-up questions from this call, and we look forward to speaking to you. With that, I will ask Angie to close the call. Thank you.

[Operator:]

Thank you. That does conclude today's conference. Thank you for your participation. You may now disconnect from the audio portion.