The AES Corporation
Q4 2012 Earnings Call Transcript

Published: 27 Feb 2013

[Operator:]

Good morning, and thank you for standing by. [Operator Instructions] I would like to inform participants that today's call is being recorded. If anyone has any objections, you may disconnect at this time. And I would now like to turn the call over to your conference host today, to Mr. Ahmed Pasha. Sir, you may begin.

[Ahmed Pasha:]

Thank you, Cre [ph]. Good morning, and welcome to the fourth quarter and full year 2012 earnings call of The AES Corporation. 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.

[Andres Ricardo Gluski Weilert:]

Thanks, Ahmed, and good morning, everyone. We appreciate your joining us today. I will begin with a quick review of our 2012 and then update you on our longer-term strategy. Tom will then discuss our results and 2013 guidance in more detail. On Slide 4, we finished 2012 with strong operating and financial results with adjusted EPS of $1.24. This represents a 22% increase relative to 2011 and is the highest adjusted EPS that we have achieved in the last 10 years. Similarly, we recorded a 33% increase in proportional free cash flow. These results were achieved despite headwinds at 3 of our larger businesses, AES Gener, Eletropaulo and DP&L, and reflect our commitment to pull multiple levers, including share repurchases and cost reductions, to deliver results. Also in 2012, we made significant progress in executing on our strategic plan, which we laid out in September of 2011. At that time, we identified 3 primary objectives for enhancing shareholder value, as described on Slide 5

[Thomas M. O'Flynn:]

Thanks, Andres. Good morning, all. As you may have noticed from the revised format of our press release and slides, we're now presenting our results by SBU, consistent with how we manage the businesses. If you've had time to look at our 10-K, you'll also see that we've tried to provide an overview of the key drivers of each SBU. We hope you'll find these changes and additional disclosures useful and, obviously, welcome your feedback. This morning, I'd like to review our 2012 results, including our performance against our guidance, earnings by SBU, proportional free cash flow and, finally, the execution of our 2012 capital allocation plan. Then I'll discuss our 2013 guidance and plans for capital allocation, as well as a brief update on our expected earnings trajectory through 2015. On Slide 17, as Andres mentioned, we achieved our 2012 guidance on key metrics and delivered significant growth in earnings and cash flow. Turning to Slide 18, we've included an analysis of our adjusted pretax contribution, or adjusted PTC, in 2012. Adjusted PTC is essentially our pretax earnings adjusted in the same way as adjusted EPS. The pie chart displays the contribution of each SBU. As you can see, our earnings are fairly evenly distributed among our SBUs. Further, our list of subsidiaries, AES Gener, Tietê and Eletropaulo, and public filers in the U.S., namely DPL and IPL, account for 1/3 of our adjusted PTC in 2012. I'd like to point out that to make our financial disclosures more user friendly, on Slide 36, we provide U.S. GAAP earnings, adjusted earnings and, where relevant, market values for our interest in our publicly listed subsidiaries. And now these businesses file their quarterly financial results in advance of us, so we can disclose their earnings contributions along with our results. For example, as of yesterday, the public market value of our interest in Gener was about $3.9 billion, and our share of their 2012 adjusted earnings is about $200 million. Adjusted PTC increased roughly $300 million in 2012, largely due to our new businesses. We also had strong operating performance in our generation facilities in the U.S. and Asia, which I'll discuss in a moment. Partially offsetting this growth, we faced challenges at our Andes and Brazil SBUs, the lower spot margins in second quarter, outages at Gener and the impact of the Eletropaulo tariff reset. I would like to walk through the key year-over-year trends for each SBU. Given this is the first time we're discussing our results by SBU, I'll remind you of the key businesses in each. On Slide 19, the U.S. SBU includes our 2 utilities in the Midwest, IPL and DP&L, as well as our U.S. generation business with 6,300 megawatts of capacity across the country. Overall, adjusted PTC grew by $229 million. Of this, $125 million was due to DP&L's first full year of operations as part of our portfolio. In addition, we saw growth at our plant in Hawaii and also at Southland through the temporary restart of Huntington Beach Units 3 and 4. In 2013, consistent with earlier comments, we expect a decline in U.S. adjusted PTC due in part to lower capacity prices and increased customer switching at DP&L. And also, we have planned outages at IPL. Next, the Andes SBU on Slide 20 includes our Gener platform, which owns more than 4,700 megawatts. In addition, we have our businesses in Argentina. In 2012, Andes recorded a reduction in adjusted PTC of $139 million. In Chile, Gener was impacted by lower spot margins due to lower energy exports from Argentina to Chile. In addition, partially due to outages in the second quarter, Gener covered some of its contracted sales with higher-cost replacement energy. These outages did not continue in the second half of 2012 as we successfully addressed the operating issues. These negative impacts were partially offset by the addition of our Angamos plant with an adjusted PTC of $11 million, and also efficient reservoir management at Chivor in Columbia. Despite the shortfalls of 2012, Andes is positioned for growth in 2013, driven by Chile. Campiche, or Ventanas IV, reached full load in February and should achieve commercial operations in the next few weeks. In addition, we expect to benefit from higher availability due to the maintenance performed in 2012. Going forward, Gener's contracts are aligned with its efficient generation capacity so it's less exposed to the volatility in spot prices. On Slide 21, our Brazil SBU includes 2 generation companies and 2 utilities. In terms of generation, Tietê has roughly 2,600 megawatts of hydro, and Uruguaiana has over 600 megawatts of gas-fired capacity. On the utility side, Eletropaulo and Sul distribute power to São Paulo and Rio Grande do Sul, respectively. In 2012, adjusted PTC from Brazil declined $94 million with the largest impacts from the tariff reset at Eletropaulo and the depreciation of the real. We expect growth in '13 with the initial restart of operations at Uruguaiana and recovery at Eletropaulo. Next, in MCAC on Slide 22, we have our generation businesses in Mexico, Central America and the Caribbean. A key driver for adjusted PTC growth of $82 million in '12 is our new contracted hydro plant, Changuinola in Panama, with an adjusted PTC increase of $80 million. We expect adjusted PTC from this SBU to modestly increase in 2013, reflecting the 5-year tariff reset Andres mentioned in El Salvador. In EMEA on Slide 23, we primarily have our generation businesses in Europe, the Middle East and Africa. Again, our new business, Maritza in Bulgaria, accounted for most of the growth with an adjusted PTC contribution of $90 million. Onetime arbitration settlement at Cartagena in Spain also drove some results, as did higher dispatch at Kilroot in the United Kingdom. In 2013, we expect a decline in this SBU due to the non-recurrence of the Cartagena transaction and the impact of the sale of the Ukraine utilities. The Asia SBU on Slide 24 is primarily comprised of our 660-megawatt Masinloc facility in the Philippines, a 1,240-megawatt Mong Duong II project under construction in Vietnam, as well as modest contributions from our 420-megawatt OPGC plant in India. We recorded an adjusted PTC increase of $102 million, primarily due to higher demand and favorable spot prices at Masinloc. At the end of last year, Masinloc entered into a 7-year contract, which effectively hedges 85% of its output. Contract includes a fuel pass-through, and the revenue is denominated in local currency as indexed to the U.S. dollar. It should reduce the volatility from selling in the spot market, but at somewhat lower prices. With the decline through our China asset sales, we therefore expect a reduction in adjusted PTC from Asia in 2013. Going now to Slide 25. We've covered each of the SBUs, representing $2.1 billion of adjusted PTC. Offsetting this, we have corporate charges, including interest expense on our $6 billion of AES debt and most of our G&A expense. Year-over-year corporate charges increased slightly due to increased interest expense, which was partially offset by G&A reductions. In 2013, we expect a decline in interest expense as we continue to repay debt. In addition, through our SBUs, we're driving cost reductions as we achieve $145 million in annual savings by 2014. After adjusting for corporate charges, our total AES adjusted PTC came in at $1.4 billion. Adjusted EPS benefited from lower share count as a result of our 2011 and 2012 share buybacks. However, our adjusted effective tax rate in 2012 was higher than in 2011. Importantly, the 2012 tax benefit applicable through the retroactive extension of the CFC look-through rule will be recorded in 2013 results, in line with the early January 2013 enactment date of the legislation. This benefit is about $0.015 for the first quarter of 2013. Now turning to Slide 26. The trends in proportional free cash flow were similar for the year with the result of $1.2 billion, roughly 1/3 increase over 2011. The U.S. SBU accounted for most of this increase due to DP&L's first year of contributions as well as improved operating performance and lower environmental effects at IPL. The Asia SBU also increased due to the strong performance at Masinloc. Offsetting these trends, cash flow from Brazil declined as a result of higher working capital requirements and the impact of the Eletropaulo tariff reset. Turning to Slide 27, capital allocation. I'm pleased to report that we delivered on the capital allocation commitments we made last year. First, on the sources side, we collected $600 million of asset sales proceeds during the year. We also generated $500 million in parent free cash flow. During the year, 82% of our discretionary investments were allocated to debt repayment, share buybacks and dividends. In addition, we invested $195 million in our subsidiaries, which is $67 million less than we projected on our last call. Now I'll address our 2013 guidance on Slide 28. We're narrowing our guidance to 3 metrics

[Andres Ricardo Gluski Weilert:]

Thanks, Tom. Let me summarize our key messages on this call. Despite the significant headwinds we faced in 2012, we delivered 22% adjusted EPS growth and 33% higher proportional free cash flow. We are well positioned to deliver on our financial objectives in 2013, and we'll continue executing on our strategy. To that end, we will continue to cut costs and improve the profitability of our portfolio, de-risk the company through deleveraging and narrowing our geographic and business focus through asset sales and allocate capital in a manner which maximizes shareholder value creation. Before taking any questions, I would like to announce that we will be holding an Investor Day on Thursday, May 9, in New York. We look forward to seeing you there and in the coming weeks. Operator, we will now open the line for questions.

[Operator:]

[Operator Instructions] Our first question does come from Jon Cohen of ISI Group.

[Jonathan Cohen:]

Just a couple of quick questions. So the $400 million of targeted asset sales, have you identified yet what those might be? Or is that something that you want to talk about?

[Andres Ricardo Gluski Weilert:]

Sure, Jon. I would say that in the past, we have not given -- talked about specific assets until the deal is signed. And the reason for that, obviously, it affects the morale of the people or could also affect certain other things they're undergoing. So what I would say is that what we will be selling are those where we -- give priority to those where we have sort of one-off assets in a country or where we don't really see that we have a strong competitive advantage or the opportunity for profitable expansion. The other thing is that we will be looking at really the total cost of running those businesses. So in terms of is it a business that drives a lot of overhead here for the particular characteristics of that business. So I can't say much more than that but that we've been continuing to work on that. And two, what we will do will be very much aligned with our strategy, as we've outlined and as we've done to date. Now we're not going to do any sort of fire sales. I think we've been very judicious to make sure that we got the best value possible from these sales.

[Jonathan Cohen:]

Okay. And one other question. I was wondering if there's any way if you could frame for us the sort of swing factor in DPL based on what you filed and what the sort of status quo could be. So what's the sort of plus or minus in terms of EPS estimates in 2013 and beyond?

[Andres Ricardo Gluski Weilert:]

Yes. As I said in my talk, we're in the midst of the filings right now. We also have intervenors. But I really can't give you any color at this stage beyond what I've already mentioned.

[Jonathan Cohen:]

Okay. And just one last question. And I also wanted to thank you, Tom, for these new disclosures. I think this is exactly what we needed. But the -- there's a placeholder for $200 million of additional investments in subsidiaries. I think in the past, I presume a lot of that is going to Chile and into the Gener expansions. You had talked about equity -- raising equity at the subsidiary level. How do you think about that just given where the AES stock is trading relative to Gener?

[Thomas M. O'Flynn:]

That's a fair question, John. A lot of good work by the accounting team, the IR team and the people in the businesses to try to help our disclosures be more user-friendly. The $200 million that's on the chart, the capital allocation chart that I touched on, that does not include Gener. That's really spread out amongst a number of businesses. The -- I think 80% of it is in the top 5, little bits of telco. We do have an energy storage project that we expect to do but is not closed yet. And then we do have investment in Turkey. And probably the largest one is the Jordan project that started construction last year. That's about $60 million. So the $200 million is pieces of a number of things. With respect to Gener, Gener may do an equity offering. They would do that or may need to do that if they do both Cochrane and Alto Maipo and both of those close this year. Just the size of that, those 2 projects may have them do that. I should point out that Gener's not made any plans. They're still in consideration of doing that. I don't want to get too specific because they're a public company, and I don't want to front-run their own dialogue down in Chile with their public investors. That being said, to the extent they do an equity offering, our pro rata piece, which would be 71%, could be up to $200 million. It could be less than that, but our pro rata piece of that could be in the $150 million to $200 million range. So we'll essentially assess the value of us participating in that versus the -- versus our own stock. We're bullish on both stocks, so it's a relative bullishness analysis. Obviously, our stock trades cheap. At the same time, the Gener business has very good growth. So those are the kind of economic trade-offs, we'll say, that we'll go through. The only other thing I'd say is that we own 71%, and for some various governance issues, it's beneficial for us to stay above 2/3. It's not a requirement, but there's some modest benefits. So we'll take that into consideration as we do our thinking.

[Operator:]

Our next question does come from Julien Dumoulin-Smith of UBS.

[Julien Dumoulin-Smith:]

First question here, just talking about Ohio, I suppose, how do you think about that business structurally beyond resolution of the ESP? I'm thinking '13, '14, '15. You've seen some of your peers in that state kind of reevaluate their ownership with merchant, et cetera. I know it may be too early to tell, but I kind of wanted to throw that out there.

[Andres Ricardo Gluski Weilert:]

Yes, okay. What I would say is that there's not too much we can comment on. Maybe Andy can just talk a little bit of sort of the plans between generation and distribution down the road.

[Andrew Martin Vesey:]

Andy Vesey. I think you're right. There's not much we can say because, clearly, we're in the middle of both settlement discussions and preparing for a potential case. What you do know and I think is quite clear is that we have made a commitment in our initial filing to putting forward a plan for the separation of our generation assets in 2017. That said, once we either get a settlement stipulation or we get a rate order and we can evaluate where we stand, we will be very focused on how we're going to operate going forward. As you'll remember and I think we've said many times before, we sort of have 3 levers with Ohio. One is the -- having the right regulatory outcome, which we're close to being at the end of that. Second is making sure that we build our retail capabilities so that we can efficiently place our generation. I think we are doing that. And the third really is, once we see where we land, to make sure that we're optimizing around cost. And we'll be examining that once we get the outcome of the settlement or the case.

[Julien Dumoulin-Smith:]

Great. And then if you could talk, broadly speaking, just timing on expense of settlement, like what window specifically here could we be talking to?

[Andrew Martin Vesey:]

I'm having trouble hearing the question. Were you asking about...

[Julien Dumoulin-Smith:]

As to the Ohio ESP, what kind of timeline are we thinking about here for a fully litigated case versus a settlement? Just...

[Andrew Martin Vesey:]

Yes, a couple of things or comments about -- let me say that actually today, we're actually having a settlement meeting that's ongoing today. But regardless, the current procedural schedule of March 1, this Friday, intervenor testimony is due. We've actually put that back 4 days from the original schedule to give more time for settlement. The same with staff testimony, which is due on the 8th of March. The evidentiary hearing remains scheduled for the 11th. Now depending on where we go, if we have a stipulation to deliver by the 11th, then we could see a decision as early as the first half of May. If we go through a fully -- the full case, then we're really looking about most likely concluding the hearings by the middle of April and looking for a decision in the late June, early July time frame. By statute, the commission is required to make a ruling on a filed case 275 days after its filing. So we would be seeing a ruling by the commission on the case no later than July 6.

[Julien Dumoulin-Smith:]

Great. And then, Tom, going back to the financials here, if you will, when you talk about debt paydown, and you talk about a minimum level that you described in the slide deck, how do you think -- how do you weigh moving forward with the authorization that you've laid out today versus increments of debt paydown, and particularly as that relates to asset sales in '13?

[Thomas M. O'Flynn:]

Yes, it's a balance. I think the minimum debt paydown that we have on that slide was really reflecting what we thought was reasonable to continue a steady improvement in our credit profile. So that -- based on our business outlook, we thought that was reasonable. In terms of going forward, we will look at -- first, as we sell assets, we do need to consider debt paydown as part of that. Obviously, some of the assets, or really all the assets, generate cash. So to the extent -- if you were to sell an asset and not pay down debt, then that would be credit dilutive. So as a base case, we tend to look at things as a starting point on a credit-neutral basis, i.e. what's the cash flow they generate, what's the debt you should pay down to be credit neutral without that asset. That doesn't say that's the rule where you end up, but that's at least a starting point. That does, though, leave you with what we believe is still meaningful cash. And we will look at that maybe consistent with a question I got earlier on share repurchase versus investment in Gener, I mean, those are the things that we look at in terms of valuation of the stock, in terms of what the attractiveness on a risk-adjusted basis is of the investment, be it in a subsidiary or be it in a new asset. Now kind of bottom line, I think we have room for all of them. Especially if we load on more asset sales, I think we have room for increasing the debt paydown, increasing the growth investments above $200 million if they meet the standards of being a good investment and also being able to implement some of our share repurchase.

[Julien Dumoulin-Smith:]

Great. And just to be clear about this, when you think about asset sales and break down, would you roughly think 50-50 -- a 50-50 split between debt paydown and equity? That's fair?

[Thomas M. O'Flynn:]

Yes. No, that's a fair approximation.

[Operator:]

Our next question does come from Ali Agha from SunTrust.

[Ali Agha:]

Andres, perhaps firstly for you. The -- just to be clear, you had mentioned, I think, that there was, I think, about $0.03 of accretion you assumed in your '13 guidance from capital allocation. I want to be clear, is that all assuming debt reduction? Or are you assuming any share buyback in your '13 guidance?

[Andres Ricardo Gluski Weilert:]

It's really -- Ali, it's really a function of what we've done as well as what we'd expect to do. But it's frankly more a function of what we did in '11 and how that's already hitting us from the start of the year.

[Ali Agha:]

Okay. So no share buyback incremental out of the $300 million is assumed in your EPS range. Is that fair?

[Andres Ricardo Gluski Weilert:]

Well, we do assume some capital allocation. So we -- yes, we assume, as we get cash, we're not going to put it in the mattress. So we do assume some balance of -- that the cash is earning, either from paying down debt, some share repurchase and/or investments. I would say it's a -- that if we do share repurchase, it will be more back-end loaded as our cash -- some of the cash distributions we get tend to be more back-end loaded. And, obviously, to the extent we're getting things with asset sales, those would close and cash coming in the door more in the latter part of the year.

[Ali Agha:]

Okay. And Andres, the news flow coming out of Brazil has generally been negative for the last several months, apart from obviously the hydro, but just the government statements, the President's positions and statements. Now you guys have been clear that your concessions are not impacted. Just in the sense of impacting the valuation of your holdings and, hence, your own stock price, clearly every time something comes out of Brazil, it takes -- your stock takes a hit here. I'm just wondering, are you really looking at Brazil? I mean, what's your view right now on Brazil under the current administration? And is it a bit less attractive perhaps now given what we're hearing out there?

[Andres Ricardo Gluski Weilert:]

Well, yes. I think that -- put it this way. First, if you think of what we've done in terms of portfolio management in Brazil, we have sold a significant portion of our holdings in Eletropaulo. We started in 2006. We spun off to telecom. So if you look at our holdings today in Brazil, the 2 largest components are, quite frankly, first, Tietê, and the second one is Sul, actually. We have a larger value, we believe, in Sul than we do in Eletropaulo. But we do get a lot of, let's say -- we have to react a lot to the news in Eletropaulo because it's a large publicly listed company. And of course, we are trying to maximize the value for all shareholders, including those of, of course, of Eletropaulo shareholders. But having said that, I think that in Brazil, we have 2,600 megawatts of contracted hydro. We have a challenge in terms of what we do past 2015. We're working on a commercial strategy there. We also had the opportunity, for example, of restarting Uruguaiana, and we've done that successfully. Now what we have to have is a permanent solution. So I do think there are opportunities for us in Brazil. I think of Brazil -- if you think over the medium term, it's going to be a growth market. And again, I think we're well positioned. Now again, I -- if I think back, I think our strategy of focusing more on Tietê and trying to grow generation and reducing our position in Eletropaulo, for various reasons, was the correct one.

[Ali Agha:]

Okay. And last question. You seem to be on track for the 4% to 6% EPS growth you're now highlighting in '12 through '15 -- or '13 through '15. You've also said in the past that your goal would be to get you back to the 6% to 8% that you had previously been targeting. How confident are you of perhaps getting to that higher level? And where -- I mean, what would drive you to that higher level? What -- I mean, new projects that are not there? I mean, how would you get from the 4% to 6% to 6% to 8% if indeed that is still an aspiration?

[Andres Ricardo Gluski Weilert:]

Well, certainly, we're going to work very hard, as we've said in the past, to get back to the 6% to 8% growth. What are our levers? Well, some that I can talk about right now are we continue to have the cost cuts, we continue to have the efficiencies of a simplified portfolio. And that includes also better use of our synergies. And we also have our own sort of internal Six Sigma light APEX Programs, which are also contributing a lot. So I feel -- on the operational side, I feel that we're doing a good job, and that will add additional profitability into the future. The second, if you noticed when I talked about platform expansions, our new investment, we are basically expanding from our existing platform that takes less time. They have higher returns and especially risk-adjusted returns. So again, we feel very good about what we're going to do going forward. However, we feel also that in terms of the guidance that we are committing to today, we're staying on that 4% to 6% rather than the 6% to 8%. But we're going to really push to get there.

[Ali Agha:]

These things you talk about in expansions and maybe cost reductions, these are things that could actually help you in the '13 through '15 period? Or are you really talking about longer term beyond '15?

[Andres Ricardo Gluski Weilert:]

Well, it depends. I think when we're talking about the efficiency of the overall portfolio, it includes our G&A and it also includes our cost of goods sold, those are immediate. So -- and it depends on the type of extension we're doing to the platform. If it's a 20-megawatt battery storage, that's going to impact in 18 months. On the other hand, if it's building a significant addition to a new plant, well, that's more sort of in the '16, '17 framework. But realize we do have things like IPL's environmental CapEx, where we do get a tracker, and that's also short term. So it's a mix of things. And as we've said, we're going to -- we really feel that we're hitting on all cylinders in terms of looking at all the levers that we do have to fulfill our commitments.

[Operator:]

Our next question does come from Charles Fishman of Morningstar.

[Charles J. Fishman:]

Argentina, what got the additional gas there? What is it more supply? Was it better hydro conditions? What changed?

[Andres Ricardo Gluski Weilert:]

Well, we've been doing a number of restructurings at Uruguaiana in terms of the contracts that it had over the past couple of years. But the main driver right now was the poor hydrology that they had was in Brazil, which made it more of interest to get the plant up and running. So we've had the plant up and running now. But as part of this, we are working on a long-term solution to get -- receive capacity payments at Uruguaiana. And we -- again, we think we're well positioned. Again, we took advantage of our presence in both countries and our relationships in both countries to get this. So the -- what we really came up with was a win-win-win solution, which is win for Argentina, win for the Brazilian electricity sector and a win for us and BNDES and Uruguaiana.

[Charles J. Fishman:]

So what I think I just heard is it was more -- it was also due to getting a better energy and capacity price, as well as the gas being available.

[Andres Ricardo Gluski Weilert:]

Again, it was partly driven by the situation that -- we took advantage of the drought situation in Brazil. I don't know, Andy, do you want to add something to that?

[Andrew Martin Vesey:]

Yes, just for clarity, there hasn't been a change in the gas situation in Argentina. This was an initiative between the Brazilian Government and the Argentinian Government to sort a near-term problem that Brazil was having from the drought. This is Brazilian gas being injected. It's LNG that's coming into Argentina. It belongs to Petrobras, the Brazilian company, and what the Argentinians are doing are facilitating its transmission. They're regassing it, and they're sending it to Uruguaiana. So this is Brazilian gas using the regas and distribution and transmission network within Argentina. That's really the answer to the question that you asked. This is not Argentinian gas, this is Brazilian gas. And then...

[Charles J. Fishman:]

Okay, okay. And then the 650-megawatt CCGT in Indiana that you were talking about, would 100% of that be regulated and under IPL?

[Andres Ricardo Gluski Weilert:]

Yes.

[Charles J. Fishman:]

Okay. And then Masinloc, the second unit you mentioned there that you potentially start on, would you look to get a PPA before you began construction on that based on the fact you just signed a 7-year hedge on that one?

[Andres Ricardo Gluski Weilert:]

Yes, yes. If you look at most -- almost all of our project, I mean, we're not building, with the exception of Turkey, any sort of merchant projects. And that's just the characteristics of the Turkish market. But other than that, all of our projects have PPAs, and we do require very high levels of contracting before we start on a project.

[Operator:]

Our next question does come from Maura Shaughnessy of MFS Investment Management.

[Maura A. Shaughnessy:]

A couple of questions. First, just on the IPL situation. In terms of the environmental spend, the $500 million fix-up and the combined-cycle plant that was just discussed, what is the -- you mentioned that the environmental filing looks to be done by the second quarter. Are these 2 discrete filings? Is -- what's the process in Indiana from...

[Andres Ricardo Gluski Weilert:]

These are discrete and separate.

[Maura A. Shaughnessy:]

And so when should we hear about the plant?

[Andres Ricardo Gluski Weilert:]

Andy, do you want to give the details?

[Andrew Martin Vesey:]

Sure, Maura. It's Andy Vesey. Right now, it's still a process, and the process within Indiana requires us essentially to go after a sort of an all-source competitive bid, who can give us the least-cost solution. One of those is our own option that we're contributing, which is this combined-cycle self-build. There are a number of others. All those are under review right now. We will be providing a testimony in the first half of '13 going along with our filing of the CPNC (sic) [CPCN]. So that's the new generation piece. But the typical process is you file an application for a certificate of public convenience and need, and once that's approved, you go ahead because that's our certificate that requires that whatever cost we are incurring, we're going to be allowed to recover under a regulatory process. So for maximum...

[Maura A. Shaughnessy:]

Okay, great. It's integrated?

[Andrew Martin Vesey:]

Yes.

[Maura A. Shaughnessy:]

And so remind me again what IPL is earning on a regulated basis that both the environmental piece and potentially the gas plant would earn today if they were approved?

[Thomas M. O'Flynn:]

Yes, Maura, it's Tom. In the immediate set-up, with -- the MATS is -- would be a part of a tracker. So you get immediate recovery on it, and the CC [ph] would be more traditional. The IPL current ROE is a product of a settlement that's less than 10 years old. And it was...

[Maura A. Shaughnessy:]

Right. So it's more the black box?

[Thomas M. O'Flynn:]

Yes, it's a package deal, exactly.

[Maura A. Shaughnessy:]

Okay. So we don't need to discuss that, right?

[Thomas M. O'Flynn:]

Right. So that would be -- the tracker does have a return consistent with that package deal or black box, as you say. The new plant, if approved, would then ultimately be subject to a rate proceeding closer or at the time when it went in service. So that's out a number of years. And that would then be at -- ROE is consistent with Indiana practice at that time. So you probably can see some of the standards. I'd be cautious about pointing to a specific precedent, but it would be generally consistent with Indiana ROEs at that time.

[Maura A. Shaughnessy:]

Okay. Let me jump to Brazil. So we sort of had the hydrology freak show, November, December, January. I guess spot prices averaged in the 400s in January, and February in the 200s. So things have chilled out a little bit. But as I understand it, the government is trying to potentially continue to run some amount of thermal throughout the year, which, given the amount of hydrology base, it probably makes some sense. So I was just wondering, is there a chance that this deal with Petrobras via the Argentinians gets extended? Or your -- or the hope is that you get this one-off capacity payment, which -- yes, so I'm just trying to understand that.

[Andres Ricardo Gluski Weilert:]

Sure, Maura. I'll say first, it is your right. I think the government, until the reservoir levels reach higher levels, I think they're at 37% of capacity, they will run -- continue to sort of force more thermal production. In terms of Uruguaiana specifically, our intent here is to really have a long-term solution. And as Andy mentioned, what we're really doing is tolling the gas through Argentina because that's where the pipeline reaches, so right now, it's -- Petrobras is delivering the LNG at Bahia Blanca, but then we have other options going forward. So what we really want is to have a long-term solution there, and we're working on that. And so we would have options to where to source the gas where the Argentinians would get its a tolling agreement and the Brazilians would get the additional capacity. So that really is the sort of long-term solution. So there is a short-term component, which is the current hydrological conditions which facilitated this. Then there's a secondary component, which is having a long-term solution to Uruguaiana. We're working on that. We aren't in a situation to announce that yet.

[Maura A. Shaughnessy:]

And so in terms of at least for February and March, do I assume that Uruguaiana, however you say that, is being sold at spot prices, since you hadn't obviously contracted on that since it hadn't been operated for a while? Is that a fair...

[Andres Ricardo Gluski Weilert:]

No, no. We're not making the spot margins on Uruguaiana. We are basically getting capacity payments on it.

[Operator:]

Yes, our last question does come from Brian Chin from Citigroup.

[Brian Chin:]

Just with regards to the situation down in Southern California and the [indiscernible] situation, can you just get us a little bit more up to speed on what's going on with Southland? A lot of headlines between yourselves, Edison, JPMorgan. I just want to make sure we understand where we're at on that.

[Andres Ricardo Gluski Weilert:]

Okay, I would say, first, some of the headlines are that we're trying to get the plant expansions permitted. We have a unique footprint there, and we believe that they will have to be repowering up those plants sometime over the next 10 years and that nobody is going to be able to permit new plants. So those locations are very valuable and very critical for its stability. The second part of your question has to do with JPMorgan, right, and the tolling agreement. I don't know how much we can say there.

[Thomas M. O'Flynn:]

Yes, no, I'd just say there is a smaller project, a synchronous condenser project that we're trying to put in place for the summer that would be quite constructive to the area and provide some good stability and some additional power. We're working through some waivers in process with our toller. And also, the [indiscernible] is also involved in that dialogue. I believe those discussions have been going quite constructively. So we're hopeful that we can get that all tied up and then get our synchronous condenser project operating this summer.

[Brian Chin:]

Great. And then lastly, just latest thoughts on timing of when you're going to revisit the dividend again.

[Andres Ricardo Gluski Weilert:]

I would say that, again, as we get more results under our belt, we will look at it periodically. I don't really want to commit to anything at this point in time.

[Brian Chin:]

Understood.

[Andres Ricardo Gluski Weilert:]

With that, I'd like to take -- I'd like to turn the call back to Ahmed.

[Ahmed Pasha:]

Okay, we thank everyone for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Thank you, and have a nice day.

[Operator:]

Thank you. Today's conference has ended. All participants may disconnect at this time.