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Executives

Caroline Dorsa - Executive Vice President and Chief Financial Officer

Tom O’Flynn - Executive Vice President and Chief Financial Officer, AES Corporation

Analysts

Brian Chin - Bank of America Merrill Lynch

Public Service Enterprise Group Incorporated (PEG) Bank of America Merrill Lynch Power and Gas Leaders Conference Call September 25, 2013 10:15 AM ET

Brian Chin - Bank of America Merrill Lynch

We will get started with our second the last panel. This panel is going to focus on what is the right capitalization and way to create value in an era of potentially rising interest rates. And I know that as the Merrill Lynch Utilities analyst usually the question I get when I have a Merrill Lynch financial advisor calling me up, usually the first question I get is what is our view of the interest rates and how do I know that I can look at utilities in a period of rising interest rates?

With me today to help navigate this kind of question and to help look at things from a utility perspective, I am joined by two Chief Financial Officers. To my immediate right, I am joined by Caroline Dorsa. Caroline was named Executive Vice President and Chief Financial Officer for Public Service Enterprise Group in April 2009. She has held a number of different positions at PSE&G, but prior to joining PSE&G, she also had a senior management position at Merck and then she was also the Senior Vice President and Chief Financial Officer at Avaya. Caroline holds a BA from Colgate University and an MBA from Columbia Business School.

And then to the far right, to my far right, I am also joined by Tom O’Flynn, who is the Executive Vice President and Chief Financial Officer of AES Corporation. Tom joined AES in September 2012 as the Chief Financial Officer. Prior to that, Tom had served for more than two decades in energy finance and utilities or has had two decades of utility and energy finance experience. He was also the Chief Financial Officer at PSE&G. So we have little bit of a PSE&G family tree here. Prior to PSE&G, Tom spent 15 years at Morgan Stanley’s Global Power and Utility Group ultimately serving as head of the North American Power unit. Tom has a BA in Economics from Northwestern University and an MBA from the University of Chicago. Thank you very much for joining me on the panel, very much appreciate it.

And in a similar way into one of the other panels that we had earlier rather than having prepared remarks from the panelists, we are going to go ahead and jump right into the Q&A, just a little bit more of a macroeconomic oriented panel here. And so I thought just having a broad discussion about interest rates, how to create value as an utilities CFO in a period of rising interest rates, we are just going to go right into it. To get us started, let me ask you the same question that I get from many of the investors that call me, what’s your view on the direction of interest rates going forward? Are we in for a moderate or a sharp rise in interest rates? And how do we think about historical periods of precedence that might reflect where we are at today? Caroline, what’s your general thought on the outlook?

Caroline Dorsa

Sure. I am certainly not Ben Bernanke, so I can’t really forecast as well as see perhaps. I think what we have seen has been truly historical aberration in terms of how lower rates have been. So we talk about trending and things right. It’s very, very different the environment that hopefully we are coming out of which really doesn’t have almost historical precedence. So I think what we have been seeing is maybe a move back to a more normal interest rate environment and more normal forward curve environment rate than we have had in the past.

In terms of how I think about what that has meant for us as we think about creating value, one of the things that we know and we have all seen this is when we coming into and through this abnormally low interest rate environment, the important thing for us of course is the ability to earn a reasonable ROE and the authorized returns that we are getting consistent with spreads and the interest rates. And those ROEs did not come down ratably as well. So you saw ROEs continue to provide reasonable return. I think what that means is as the interest rates appear to be coming back up and of course we had always back and forth this year, we really see ROEs going up ratably, because you didn’t see them coming down, right. So there has been reasonable prudency as we have thought about the ability for regulators and utility investments. So I look at that as the opportunity to continue presumably a relatively consistent pattern of ROEs and of course on some of the things that we have and cause recovery mechanisms they also reflect as we get approvals our actual embedded cost of debt.

Brian Chin - Bank of America Merrill Lynch

Right, right. Tom?

Tom O’Flynn

Like Caroline, I am not sure we try to be prognosticators of global interest rates I think we more try to prepare take advantage of where we are really very low and prepare for changes going forward. So from our standpoint as we think about our financings we are in 20 countries. So we really think about rightsizing and aligning the currencies and the duration of the debt at the local businesses, so many of our projects of businesses are either projects financed with long-term debt or where we have businesses, then we do it on a more genco or corporate style within the country or in a couple of cases within a region. So certainly this year we have seen very low interest rates we have done many billions of refinancing. Certainly, we have done at the parent level we have done over $1 billion. We have done at Midwest we have done almost a $1 billion. We have done it – we have done in the Southern Cone and in Asia really just programmatically have gone through refinancing opportunities. Some of them we have been to take advantage of very low interest rates and some of them have been to also push our maturity. So at this point, we are about 85% long-term and it still feels good to keep on taking advantage like a lot of other – of our peers. I think it’s our job to take advantage of these low rates and very attractive markets, where we can get low cost and long duration and long maturity. So we are basically prepared in the event to wrong kind of speech, to wrong kind of hand [leaves] comes out of Washington things happen, that’s less impact to us to be honest.

The other thing we do look at is the obviously being in multiple countries we are probably less focused on impacts on ROE and things. We have some adjustments overseas if it’s – it’s a modest impact was perhaps the Midwest and Indiana, because we are more – we are focused on currency changes to the extent that interest rates change on a relative basis in the U.S. versus globally. So that’s something we also look and so certainly all our debts in our functional currency locally gives us protection. We do do some hedging, but we are cognizant that on an open basis about $0.06 of our earnings or so for 10% change in relative currencies, that’s about a $0.06 impact on an open basis to EPS. So we try to manage that thoughtfully.

Brian Chin - Bank of America Merrill Lynch

Right, right. So I guess on that point when we talk about refinancing different parts of the capital structure to take advantage of lower rates, is there a lot more room for that that you see not only at AES, but for the utilities industry as a whole, do you think that there is still a lot of firepower in terms of refinancing or to capture a little bit of extra value or do you think that most of that has largely been done by now?

Tom O’Flynn

No. I think we still have firepower and I think we will do this whether we have done $6 billion, $7 billion this year, I don’t think we will do that, but I think there is still some firepower especially as we look forward, just recall protection of other things that makes it more expensive in ‘13 but it maybe more economic in ‘14 or ‘15. So do you have the – we have some more flexibility where it’s worth it to go after it. So we will certainly keep on doing it and also we have spent occasionally we have a realignment of our businesses maybe modest changes, so that allows us to also look at refinancing in conjunction with that (inaudible) rate case.

Brian Chin - Bank of America Merrill Lynch

Okay, okay. And then Caroline you had mentioned that you might be in a historically low aberration in terms of interest rates, let’s say, that your general view ends up being right that we are in a period now of more rising interest rates, does this tilt the value proposition of the CFO more towards non-regulated businesses, does it tilt the value proposition more towards less bond like areas of organic investment, less moving away from dividend growth and work towards earnings growth or other types of recovery sensitive business model, how do you think about that?

Caroline Dorsa

So a good question Brian, so we think about in terms of the business model and the business mix what we look to in the utilities is the ability to get a reasonable ROE on a reasonable capital structure and we have a lot of investments as you know Energy Strong and over the years in our base business the transmission investments that we have which earn 11.68 or more on the ROEs. So our core is to ensure that we can earn that authorized return as I said some of us as we get clause approvals, they get interest rate resets on the weighted average balance sheet cost of debt for the utility.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

So a little bit of protection there, but in some of the business mix between utility to power, I look at it fundamentally from if we are looking at power investments, so those investments generate a positive NPV at an appropriate WAC. So rather than think about it, well if there are higher interest rates, that means I should think less about the utilities.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

I do it from the perspective of what is the NPV generation opportunity potential of the power investment in an appropriate long-term WAC and of course we need a long-term interest for that WAC, so we are not moving it every month or so. And on the utility, what is the opportunity for us in terms of getting an appropriate ROE and putting that capital to work. It doesn’t have an impact for us relative to thinking about trade-offs with our investment to dividend at all given where we are starting, because obviously we start from a position of having a very nice and strong balance sheet on the power side right we start with ingested cap at about 30% and the rating agencies will conditionally upgraded us. So we started nice positioning with that balance sheet and with power not having a lot of capital needs, we got a lot of free cash flow.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

So one doesn’t have to be traded off against the other, it’s really about we got a balance sheet, we have got capacity, we do compete for capital in the company. So we earn a reasonable ROE on utility investments. Do we have positive NPV investment opportunity to power, I mean, that’s how we think about the business mix? What falls out falls out, because it’s all about where is the shareholder return.

Brian Chin - Bank of America Merrill Lynch

That actually makes a lot of sense. I guess in other words, your hurdle rate goes up as interest rates go up to offset the change in rates and so you end up – it ends up being approached.

Caroline Dorsa

Exactly.

Brian Chin - Bank of America Merrill Lynch

One question that I think sort of an interesting development in this space over the last year was the creation of the yield curve mechanism which arguably one could view as taking advantage of very, very low interest rates and helping to separate out a bond like set of assets with a bond like valuation. How do you think about this development in the industry? Is this something that you view as potentially a game changer for how utilities look at long-term contracts of assets or do you view it more as this is potentially a little bit of a cyclical development here in the forward period of rising interest rates, we will probably going to see less in this activity going forward?

Tom O’Flynn

Yes, I would say for certain situations, it could make sense, but I think those will be more limited. We did try something of a similar thing up in the Toronto Exchange in the second quarter. We have had a JV in (inaudible), which we have just known for many years and that is an entity to generate very strong cash core that could be probably about $0.01, $0.015 dilutive to us this year, but it had good cash flow. So we looked at doing a yield curve vehicle. We made the judgment over a year ago to look at Toronto, because that seemed to be perhaps going to a few more yield vehicles. I think NRG has shown that, that kind of vehicle can also look here, but that was essentially for us that has been a separate JV. So it’s easy for us to call that as that’s been independent since its inception, but it was really playing out the arbitrage of strong cash flow earnings. So it was natural. We stepped back from that, that portfolio is a mix of European solar and then we have a large solar project out in California is still under construction. Then we think it is the right time to step back, but we may well look at another shot at doing something like that. I think we would wait until next year to do that when that signal or project under construction is fully operational. So it makes more sense.

On a broader basis, clearly we take a note of the yield curve structure. I think all the sites have to be aligned and we haven’t found of those be aligned and we see it in our portfolio. When I say aligned, I think we have to see a differentiation between earnings and cash. There has to be a tax path, tax utilities given the same way as well as find the right mix of assets. So for us nothing jumps up a page, but the opportunities like that we continue to look at. We obviously have carve-outs in our business at a country level. We have three publicly traded equities. We have two in Brazil and one in Chile. So certainly see the benefits of countries who have an independently traded public vehicle, but it may not be in local etcetera.

Brian Chin - Bank of America Merrill Lynch

Right. Let me go ahead and pause here and see if there are any questions from the audience. We do have two Chief Financial Officers here talking about value creation in a rising interest rate environment, any questions from the group? We do have a couple of topics that I want to touch base on, both of you are in positions where you are cash flow positive if you look at things from an operating cash flow maintenance CapEx perspective. So you have lot of options on which to deploy your capital. Does the rising interest rate environment tilts you a little bit away from de-levering both of you have been in positions where you are actively de-levering the balance sheet or have the ability to do so, does it actually make more sense to lever up the balance sheet here in the reverse course or how do you think about that?

Caroline Dorsa

So from our perspective the things that we are doing in the utility programs and obviously what we filed to Energy Strong, we would in our forecast provide incremental leverage at the utilities completely consistent with the capital structure.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

And if so we have been taking as Tom mentioned taking advantage of interest rates as they have been low. We did two 30-year issuances, because we really thought that was a good cash or so.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

I don’t – we will not be from a net perspective de-levering as we have got the utility growth, but of course because we are keeping out regulatory capital structure we are going to do that ratably as it’s appropriate for the capital structure as opposed to doing a lot of financing in advance.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

From the power side because of the position that we are and we have flexibility some of that power flexibility will be used if we have all of the approvals that we are seeking we would have a little more leverage on the power side, but we are balancing between that issue of how much leverage do we put on. We want to have an appropriate balance WAC rate consistent with an appropriate capital structure and then looking at the cost of debt. So I think there is more opportunity for us if we have all of Energy Strong approved as I think I mentioned earlier in the year we talked about Energy Strong and we would be a little bit more power than where we are now and that would be consistent with growing the company’s overall investment opportunities. So we can get out ahead of that. So I see that as opportunity and we have got the room to do that. We still don’t have an interest rate environment that is popped out right. So we are still at rates that have a nice profile for us even if we don’t issue tomorrow. So we are in a good shape.

Brian Chin - Bank of America Merrill Lynch

Okay. Tom?

Tom O’Flynn

Yes. From our standpoint, I think a lot of our financial direction would remain the same and sometimes it might tweak a little bit, but from a dividend policy standpoint, we started dividend last year we think we have room for growth. We are still on a metric how we do that and we would continue on that path. As I said, we don’t have a lot of near term risk for interest rates, that’s really how our businesses are setup. I think it comes really more into capital allocation going forward. As we look at expansion opportunities obviously your rates of return we look at rates of return and obviously interest rates, local interest rates as well, global interest rates have been part of that. So we got to move that bar up so probably, we already in the construction businesses, we are already developing things. So it is pretty much locked in, but you need to make sure that you are agile enough to raise the bar if things are underway.

Brian Chin - Bank of America Merrill Lynch

Right.

Tom O’Flynn

And you have enough of a dynamic dialogue did those messages are made live and clear and the teams can adjust I think we have a process in place. The offsetting thing as interest rates go up, it may raise the cost of doing some things, but from our side we may see it as an opportunity as a good thing, but presumably going up as economy is doing better.

Brian Chin - Bank of America Merrill Lynch

Right, right.

Tom O’Flynn

In the U.S., obviously U.S. is hopefully accompanied by other places in the world. So if the economy picks up and you are like we were a few years ago in some of our regions, that’s a good thing.

Brian Chin - Bank of America Merrill Lynch

Right, right. I guess a more specific question to you Tom, I think that’s the growth emphasis at AES that started to shift a little bit, tilt a little bit more towards the U.S. we have got some interesting proposals in Indianapolis Power and Light. We have a little bit more stability in the Dayton Power and Light situation now we set aside. And so when we look at the growth proposition of AES tilting a little bit more towards the U.S., one of the elements I have debating is well, Indianapolis Power and Light hasn’t really gone in for a rate change in many decades what since the 80s or so?

Tom O’Flynn

Since we have owned it.

Brian Chin - Bank of America Merrill Lynch

So in what sort of potential major changes to the rate structure in Indianapolis Power and Light, given that’s been so long since there has been a rate case, what sort of issues do you foresee there that we need to be cognizant of those investors?

Tom O’Flynn

The Indianapolis Power and Light business has run really very cost effectively. And since we bought the company that was 15 years still on us, they have not had a rate case, they still would all see the balance there, the spend with their cost structure. That said they don’t given a smaller geographic area they haven’t had large transmission projects or things like that that maybe greater challenge. So they have done well. The two big things we have going on there we have over $500 million of spend from that to improve the environmental footprint of the coal plants. Those are plants that are still economic firms coal from Indiana, so obviously very helpful to the overall structure of Indiana. We got few weeks ago we have done all the final approvals on that, so we got a cash tracker on that so that will be really outside of any kind of standard rate procedure, right.

Brian Chin - Bank of America Merrill Lynch

Right.

Tom O’Flynn

As we look at it right now given the utility and given that we don’t see the need for rates as we see it, obviously that could change, but that’s not at least the near-term communication between our IPL teams and the Indiana regulators. The thing that could change that is we are looking to build the combined cycle that we have a placed a retired generation. We are well along the process that I would hope to get final approval for that, call it, Q2 of next year. If we did do that, then we do that more I would say old school utility regulations build it and then put it into rate base in say 2017 and we would need a rate case.

Brian Chin - Bank of America Merrill Lynch

Right.

Tom O’Flynn

At least as we see it now, our rate case is still three years off.

Brian Chin - Bank of America Merrill Lynch

Okay, I understood. And I guess Caroline to you Public Service Enterprise Group is in the fortunate position of not having to necessarily going for a rate case until it still chooses to do so. With the Energy Strong program now sounding as though there is a fair amount of municipality support behind it and that the hearings are going on right now. At what point would there need to be if any sort of rate treatment to reflect the fact that you are going to be spending a fair amount of capital on that program?

Caroline Dorsa

Right. So in terms of how we think about the progress there, so addressed still like 70 townships and municipalities for us and we do have two I think very net positive public hearing days, 1 more to go. We continue to have dialogues with the government’s office at the BPU. The timeline that the BPU itself is in our formal schedule which puts some formal Dayton account with the BPU hearings in early next year, it doesn’t preclude settling earlier. So we are talking to them on an ongoing basis. The public hearings are happening. That’s a good thing. We have got a lot of support. We would like to see some things settle before the end of the year. It might go into early next year, but that’s because we are in active ongoing dialogues. We tried in our filing and in the information we have got given to the BPU. We are very explicit about we are talking about Energy Strong as enhanced news to an already reliable system, right, because that’s something that we have been recognized for. We have been very explicit on where we think (inaudible) could benefit the state by locations, by risk, high, medium, low by type, gas electric. So that gives the regulator a very good view on if I am looking at different things in terms of the approval relative to what are asked, which is $2.6 billion over the next 5 years. That’s what was asked within the program, we do not ask for the full 10 that we are having active dialogues around which things would vary as that sort of conservations. So I think it’s very positive. I think there is definitely recognition in most of our public hearings, so it results where people recognize these things need to be done.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

It’s just a matter of how do you then decide how much and when and we are flexible about working with them on that. The one thing that we have been pretty clear about is we want the contemporaneous return mechanism that will be part of whatever our settlement argument turns out to be. And we say that not because we think this is something we should have with no history here. We had over $2 billion in rate base investments approved with contemporaneous return mechanisms going all the way back to 2009. I think we have done well in executing on those at PSE&G. We have benefited the customers. We have really demonstrated our prudency there. So this is just a continuation of that sort of approach, which means it doesn’t touch the base rates. We don’t need to go in for a rate case we can do all these things with incremental pauses, continue to earn the authorized return and continue to make the investments consistent with the ongoing reliability and basis.

Brian Chin - Bank of America Merrill Lynch

Right, right, right. Let’s shift gears a little bit to dividend policy. Tom, you recently implemented a dividend at AES for the first time in quite a while. We have covered AES for almost 10 years and I think I have never seen a dividend like this.

Tom O’Flynn

I will agree it was our first dividend.

Brian Chin - Bank of America Merrill Lynch

And then we can contrast that with the experience of PSE&G which at the onset of the economic recession, the management team chose to actually hold the dividend which is a very controversial decision at the time, but it proved to be the right one in my perspective from the standpoint that you guys conservatively managed your cash flows and your balance sheet. And then in a period where the interest rate environment is starting to pickup a little bit, do you as the CFOs of your respective companies view the dividend that’s having a greater appeal or a lesser appeal to you as your value proposition of shareholders, can you just talk through your thought process on that a little bit?

Tom O’Flynn

Yes. So I think unlike PSEG that I know they are paying a dividend for over 100 years. This is our first year of paying a dividend. We basically thought that the primary diver of our value is in earnings growth and cash flow growth, which is eventually part of the story. And so we initiated a dividend, our yield is now about 1.2%. What we said and we thought over time, our yield should move up to be more, it came to the S&P 500 not the utility basket, but the S&P 500 that’s a low 2ish kind of yield. So we take dividend into the picture and that continues to be our expectation. And I think we will continue on that path independent of changes in interest rates (inaudible) obviously dramatic locations in Texas, but so from our standpoint we then provide a little more clarity on how we are going to measure dividend capacity. We have parent free cash flow, which is a function of subsidiary dividend less parent G&A and parent interest of around $500 million a year. We currently pay out about a ratio of that in the low 20s. What we said is I mean it’s appropriate to pay out that 30% to 40%. So I’ll call it up to $200 million in dividend on an annual basis. Over time, you can get $500 million number to grow. So in the near term, we have room to go into that range longer term we can grow the range. So we think it’s important component, it’s less of a component than many other folks, most other folks in the S&P utility group, but we think it’s reasonable for a balanced side. That probably has less exposed as I said to changes in interest rates that may seem impact valuation from the yields (inaudible) impacted our net sales.

Brian Chin - Bank of America Merrill Lynch

Right, right. Caroline?

Caroline Dorsa

And for us we recognized that the dividend is a very important component of total shareholder return. So – and as Tom said we have paid that for over 100 years. We do look at the opportunities for the dividend growth as an important thing as we know our investors look at that. And a few years ago we had a dividend policy that would pay out ratio based, but one of the things that we know is happening in our business which we talked about a lot and obviously everybody sees from our results is our business mix is changing very significantly. So about 5 years ago, we were 75% power in terms of the contribution to earnings from 25% utility this year it’s about 50-50. And given the opportunities we have in the utility obviously that mix will continue to change. So what we did was we moved away from a payout ratio policy and went to a policy that recognizes that the growth in the dividend will be associated with. And I don’t mean we will follow, but will be associated with our outlook for two things and they are distinct and they are different metrics for the two businesses. The earnings growth at the utilities, because we are talking about double-digit earnings CAGR in the utility through 2015 with approved programs without needing Energy Strong. So that earnings profile gives us a lot of good regulated if you will support in terms of income for the dividend and the cash flow generation power.

Brian Chin - Bank of America Merrill Lynch

Right.

Caroline Dorsa

So even though we all know what the issues are and the forward curves and all the rest, we will forecast power be on the current year because of the low CapEx, power still is a very strong cash flow generator. So those two things together is what we look at for ongoing dividend growth opportunities which the board recognizes it very important for shareholders. In terms of where we are this year, we are at our payout, if you look at the midpoint of the guidance, this is about 61%, but we are guiding it to the upper end. So we have a nice position relative to the payout percentage relative to our peer group and certainly relative to those who are more and more regulated which obviously is the direction we would be going over the last years. So those are the factors we look through a little bit independent of the interest rates, because we believe over the long-term our shareholders looking for a dividend trajectory and we honestly going that it’s moving one direction or the other based on interest rates. What we are saying is we know what’s the very important component of the overall shareholder return over the long-term.

Brian Chin - Bank of America Merrill Lynch

Right, right. If I could ask both of you to take off your company’s specific hats for a second, and just comment more on a macro trend in utilities, it seems as though right now with low commodity prices affecting merchant generation and there is a lot of interest in utilities getting into long-term either regulated assets or long-term contracted assets, it is very large industry shift away from commodity sensitivity and more into long-term stability. Is this happening at exactly the long time with interest rates potentially rising. Our utilities potentially looking at in order to shift their business mix cheaper, are we in an environment where utilities might actually be buying regulated utilities at the top of the valuation cycle? How do you think about that? Is that realistic even think of it that way? Well, what’s your expectance on that?

Tom O’Flynn

Yes, I would say from an investing we break it down perhaps investing with obviously PSE&G and to a less extent and I talk at least on a smaller scale, but we are both making large investments in our utilities and we have got to make sense. That’s we are doing a book value, we are not going up buying (inaudible), it’s a different calculus. I think from our perspective, we do look at contracted generation that’s been really the core of the company moving around 30 years and that’s been the core of the company. When we have had merchant generation we haven’t done as well again one notable example in the Midwest. So, we will continue to as we grow the company we will really continue to look at contracted generation. That said it’s very hard to do that in the U.S.

Brian Chin - Bank of America Merrill Lynch

Yes.

Tom O’Flynn

To the extent, there is already contracted assets that’s the cost to capital, we are not going to spend a lot of time trying to compete with to the extent we have redevelopment opportunities of existing assets we will be further out for us to be towards the end of this decade. Things are working on now, but we would actually the real work we get done towards the end of the decade would be in California (inaudible) facilities that are 350 megawatts of gen around the LA Basin. So we will look to redevelop those consistent with the environmental standards in California in 2020.

Brian Chin - Bank of America Merrill Lynch

Great.

Tom O’Flynn

And we will look to do that with a contract-based structure, but as we look through other markets, prices in many other markets unlike $4 gas, most of markets we don’t have $4 gas most of them don’t have gas as the gas is $14 gas, because it’s LNG based.

Brian Chin - Bank of America Merrill Lynch

Right.

Tom O’Flynn

So we still see coal as being quite attractive, obviously you got to do all the right things environmentally we have a portfolio of things, but coal is attractive only because it can reach to $14 gas. And so we do continue to as we build majority of our expansion would be predicated on longer term contracts, but it is different. The U.S. is really fortunate to have cheap gas and low energy costs which is not always the case in the rest of the world.

Brian Chin - Bank of America Merrill Lynch

Right, right, right. Well, certainly I can see from AES’ standpoint, you guys are in a different bucket of opportunities altogether, I guess as a general comment on some of you are more domestically oriented to?

Tom O’Flynn

Yes, well I mean, I guess I was just thinking as an energy investor globally, but as a broader investor, I mean I think you have to look at your risk bucket I suppose to the extent that you are looking at contracted generation, I think you have to be prepared to be extremely competitive both on cost and on a cost of capital basis. Then on the merchant generation, yes, I think it is actually if this industry is known for having cycles and whatever the mood of the herd is and the mood is different a few years later.

Brian Chin - Bank of America Merrill Lynch

Yes.

Tom O’Flynn

Whether that will turnaround at some point and if anybody can count it right it’s interesting certainly spend a little bit of time between [Peggy] and AES’ private equity shop and that’s certainly more there this mentality and we see some private equity players certainly they can play on low cost assets in a down cycle and seeing whether it’s are they going to hold them in rates will be up.

Brian Chin - Bank of America Merrill Lynch

Right, right, right.

Caroline Dorsa

I say Brian from the perspective of regulated in multiples and premium that we have to be applied there was multiple that certainly goes to make M&A in that environment challenging given where things are right now. In terms of investments in the regulated assets, we have been making regulated investments in growing our regulated infrastructure as you know. And to me it should be a distinction between any regulated investment is good in the current environment and that’s changing it’s really about the rate right. So going back to the earlier comments about where ROEs did not go when the rates went down. We do look at that carefully so regulated investments are not just good in and of themselves, no matter, what it really depends upon whether you are getting and ROE that is reasonable for a long-term investment and we really want to take a long-term view as opposed to any regulated ROE. So it has to be one that really sustains over the long-term to create shareholder value. So I think that’s important on the regulated side.

On the merchant side I agree with Tom and contractually this is difficult right in our economists (inaudible), but we haven’t closed the door on that. It’s really about the price right. So when there are generation assets that makes sense to investing again because they generate a positive return we don’t look at that and say well, we can’t do that because everybody is investing in regulated or no one will give you credit if you invest in merchants. So, if there are things like nuclear upgrades as you know we have done a lot of in the past and we are still investing in one and each bottom positive return. We will do those investments. While there are investments that give us more opportunities through enhanced megawatts will reduce cost or whatever, those investments in merchant makes sense. They generate positive returns. We are not afraid of those, those really does makes sense to (inaudible) it is neither one all the way or the other not at all, it really depends on what kind of value do you think it can create and are you using the right long-term view of value creation, are you not getting yourself in the [case] rates at a certain level now ROE to the certain level now because really living with those through the cycles in the herd and you should probably be picking numbers that you will be comfortable talking about for a long period of time.

Brian Chin - Bank of America Merrill Lynch

Right, right. Last question to you Caroline you had started off in your – one of your initial comments about how the allowed rate of return in the U.S. had stabilized for a while actual cost of capital we are following and so now that they are going down you are not expecting the allowed rates of return to go up, because in some sense there is a catch up right there. The actual interest rates are now bouncing up and so the allowed rates of return are probably just going to remain flat going forward?

Caroline Dorsa

Yes. So I think just couched this a little bit differently, so generally speaking yes, because when you saw rates go like this, you didn’t see ROEs go like this right? You saw a sort of lagged averages kind of little bit down right and so now you are seeing rates coming back up what I am saying is I don’t expect to see ROEs from this lag modest declines shoot up like rates have shot up right. There is a lag and an averaging sort of effect going on there. So I think of that as more the regulators are looking at the long-term stability and that makes sense. They want to make some long-term investments, but I don’t think we are going to see ROE, I don’t think we should, the ROE bounce backup like rates went up.

Brian Chin - Bank of America Merrill Lynch

Allow me to save myself for my incredibly convoluted question, when do you think we will start to see meaningful allowed rates of return rise?

Caroline Dorsa

Well yes, I don’t want – I am not going to forecast interest rates and it’s hard to forecast ROEs as well. But I do think that it would really be more sustained interest rate increases before you see that sort of average I think ROE.

Brian Chin - Bank of America Merrill Lynch

Okay, maybe like a 2ish year period, 3ish year period?

Caroline Dorsa

That depends on the regulator.

Brian Chin - Bank of America Merrill Lynch

Okay, fair enough, fair enough Tom and Caroline. Thank you very much for joining us on the panel. Very much appreciate your time.

Caroline Dorsa

Thanks Brian.

Tom O’Flynn

Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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