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Executives

Ahmed Pasha – VP, IR

Paul Hanrahan – President and CEO

Victoria Harker – EVP and CFO

Andrés Gluski – EVP, COO and Acting President, Europe, Middle East and Asia

Ned Hall – EVP, Regional President for North America and Chairman Global Wind Generation and Energy Storage

Prabu Natarajan – VP, Tax

Analysts

Lasan Johong – RBC Capital Markets

Brian Russo – Ladenburg Thalmann

Ali Agha – SunTrust Robinson Humphrey

Maura Shaughnessy – MFS

Edwin Shen – Ivory Capital

Neil Stein – Levin Capital Strategies

The AES Corporation (AES) Q3 2010 Earnings Conference Call November 4, 2010 10:00 AM ET

Operator

Welcome to the AES Corporation third quarter earnings call, and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's conference.

(Operator Instructions)

Also, at this time, I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Ahmed Pasha. Thank you, sir. You may begin.

Ahmed Pasha

Thank you, Catharine, and welcome to AES Corporation's third quarter earnings call. We appreciate you being with us this morning. Joining me today are Paul Hanrahan, our President and CEO; Victoria Harker, our Chief Financial Officer; and Andrés Gluski, our Chief Operating Officer 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 and uncertainties. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC. Our presentation is being webcast and the slides are available on our website, which you can access at www.aes.com, under Investor Relations.

With that, I would like to turn the call over to Paul Hanrahan, our CEO.

Paul Hanrahan

Thanks, Ahmed, and good morning to all of you joining us today. Today, I'll briefly comment on our financial performance for the year-to-date numbers. I'll then give an update on our construction pipeline which will be delivering additional cash flow in earnings next year. In addition, both Victoria and I will comment on how we're thinking about allocating capital between our various investment opportunities including our own stock and debt securities.

First, our year-to-date operating performance. Overall we earned $0.68 of adjusted EPS in the first three quarters of 2010. At the same time last year, we earned $0.85 a share, although this included $0.17 a share of one-time payments in 2009. These included earn-out payment associated with the sale of our Kazakhstan asset and a settlement of our gas powered plant in Spain. So excluding those one-time payments, our performance was essentially constant on a year-to-year comparison basis.

The reality is that the underlying performance of our business improved a lot in 2010 and those improvements were needed to overcome the significant negative effects of lower dark spreads in the U.S. as well as a higher book income tax rate. In order to understand the underlying performance of our business better, it's useful to think about all big categories that have impacted our performance to date relative to last year.

These being, one, operations and FX primarily resulting from the strong performance of businesses in Latin America and Asia; two, commodity prices which includes the impacts of lower dark spreads in the U.S.; three, a higher share count associated with building up a cash balance for new investment opportunities; and four, a higher book tax rate.

We compared 2010 to 2009; there was an improvement of $0.17 from our underlying operations and FX, which by the way I netted out the increased BD expenses if you look at slide 17. This positive performance completely overcame the negative variances we experienced, those being $0.07 from commodities, lower dark spreads, $0.08 from higher share count and $0.02 from a tax rate. And even with the negative impacts of lower margins in our U.S. merchant businesses, our strong operating performance did result in increased proportional free cash flow on year-to-date basis allowing us to deliver $970 million of proportional free cash flow to date, which is $127 million or 15% higher than the same period last year.

So despite the compression in U.S. dark spreads, we've been able to meet our targets for both earnings and cash flow.

Now, I'll turn over the call to Victoria who will discuss our performance for the financials in more detail.

Victoria Harker

Thanks, Paul, and good morning, everyone. As you've heard, the third quarter was in line with our expectations. Proportional gross margin rose 2% attributable to higher volume in North America, high volume and rates in Asia, as well as favorable foreign exchange, primarily in Brazil.

Cash flow is relatively flat this quarter versus the same period in 2009, but has increased when you consider the businesses sold earlier this year. Adjusted EPS of $0.20, declined by $0.04, mostly driven by a higher share count. Adjusting to this, adjusted EPS is in line with last year, which is no small feat given commodity price moves and slower than expected economic recovery in some global markets.

Now, let's discuss the results for the third quarter in greater detail, starting with the most significant drivers affecting gross margins.

Our trends this quarter are similar to what we've seen in the prior two quarters. Economic expansion in Asia and Latin America continued to spur power demand growth as both manufacturing and construction in these markets surged. In the US, demand also increased during the warm weather this summer, which is especially evident in IPLs result, showing a 12% increase in retail volume.

Market prices also remained above prior year levels at certain businesses, most notably in the Philippines and in Argentina. Our generation plants in Argentina benefited from higher market prices while the Philippines saw both higher spot and contracted rates for generation. These beneficial price trends were offset by challenges from the compressed margins in North America, where our coal and pet coke fired merchant plants were impacted by lower gas prices again this quarter. We expect this trend to continue into the fourth quarter and beyond.

The favorable year-over-year trends in foreign currency exchange rates have slowed compared to earlier this year, but are still favorable when compared to the third quarter of 2009. For example, quarter-over-quarter, the Brazilian real and Columbian peso appreciated 7% and 10%, respectively.

Our consolidated gross margin was $985 million, an increase of $18 million or 2% relative to 2009 with favorable foreign currency exchange rates accounting for $32 million of the uptick. Excluding foreign exchange impacts, gross margin is down by $14 million versus the third quarter of 2009. This decrease is driven primarily by the recovery of $57 million receivable in 2009 at our Brazilian utility Eletropaulo that had been previously written off.

In addition, declining dark spreads in New York, a cumulative adjustment to regulatory liabilities at Eletropaulo and higher fuel cost at Gener all applied downward pressure on gross margin. These negative drivers were mostly offset by favorable volume in North America and higher prices and volume at Masinloc in the Philippines.

Excluding the non-recurring items in Brazil related to regulatory liabilities and receivable recoveries, gross margin would have increased by 10%.

On a proportional basis, we earned $553 million of gross margin, an increase of $11 million or 2% over 2009. Excluding foreign currency exchange impacts, proportional gross margin decreased to $51 million (ph).

In the third quarter, we earned $0.05 of diluted EPS from continuing operations. Excluding the impacts of impairments and unrealized non-cash foreign currency gains, adjusted EPS was $0.20.

I'd like to take a moment to review the impairments we booked this quarter. In total, these accounted for $314 million or $0.26 a share on a GAAP basis. The largest driver of this expense is at one of our gas-fired generation plants in California, whose impairment was caused by recently passed once-through cooling regulation 316(b) of the U.S. Clean Water Act. In addition, we recorded an impairment charge at our merchant business in Hungary as a result of our third quarter negotiations with the offtaker. Hungary continues to experience decreases in demand and margins resulting from the significant downturn in their economy as we've discussed on previous call.

Please remember that these are non-cash items impacting a GAAP EPS from continuing operations but they are excluded from adjusted EPS.

Also, on an adjusted basis, tax expense was unfavorable with the effective tax rate increasing from 35% in the third quarter 2009 to 37% in the third quarter of 2010. This puts our ongoing year-to-date tax rate at 33%, subsequent to the impacts of the Cemig transaction recorded last quarter. As indicated then, our actual results reflect higher tax rate due to the December 31, 2009 expiration of a favorable U.S. tax loss related to the treatment of certain non-U.S. transactions.

If this tax was not renewed, had been anticipated at the time we issued our 2010 guidance earlier this year, it would have had the effect of negatively impacting our full year earnings by approximately $0.11. We've identified mitigating actions that will offset $0.05 of this increase, bringing the net negative impact to $0.06.

We've summarized these drivers on slide 7, which bridges last year's third quarter adjusted EPS of $0.24 to this year's $0.20. Favorable operating performance and foreign exchange offset partially by higher business development costs drive a $0.03 improvement this year. In addition, our higher effective tax rate resulted in $0.01 decline. Commodities moved against this by $0.02 and the higher share count negatively impacted EPS by $0.04.

Now let's discuss cash flow. On a consolidated basis, our operating cash flow decreased $7 million from last year to $1 billion, and declined $13 million on a proportional basis. These results demonstrate the strength of the portfolio's ability to generate cash flow, given that we sold businesses that contributed $78 million of operating cash flow in the third quarter of 2009. These sales, which earned returns in excess of 20%, are excellent examples of our portfolio management opportunities.

Similarly, consolidated free cash flow decreased by $32 million to $827 million for the quarter, driven mostly by the businesses sold. In addition, higher maintenance CapEx at our Brazilian utilities and environmental CapEx at IPL contributed to the decrease in free cash flow. On a proportional basis, our free cash flow decreased $37 million to $412 million as a result of these same drivers.

Now, turning to full year 2010 guidance. Overall, we're very pleased that we remain on track to hit our key operational and financial guidance metrics. Through the third quarter, we have already achieved approximately 75% or more for each of the guidance metrics, except for diluted earnings per share, which includes the impact of the non-cash impairment charges I mentioned earlier.

Given the impact of these impairments, we have lowered our diluted earnings per share guidance by $0.17 to $0.63 to $0.68.

Cash flow has exceeded our expectations and we are, therefore, raising our consolidated operational cash flow and free cash flow guidance by $175 million. Likewise, our proportional operating cash flow and proportional free cash flow metrics have also been raised by $50 million.

Adjusted EPS guidance remains unchanged at $0.90 to $0.95 assuming the renewal of the U.S. tax law I discussed earlier. Should this not occur, our adjusted EPS expectation range would be $0.85 to $0.90, reflecting the impact of both a higher tax expense as well as the mitigating actions we are taking.

Potentially offsetting some of these actions is the renegotiation of a fuel related contract within one of our Latin American subsidiaries. While the timing of these discussions is uncertain, we expect it could be within the next three to nine months and could have a negative impact to adjusted EPS after tax of a $0.01 to $0.02. We'll continue to monitor this and update you accordingly.

Now turning to parent company liquidity. Our parent liquidity of $2.1 billion is relatively flat versus the second quarter of this year and has increased $689 million over September 30, 2009. During the quarter, liquidity increased by $221 million for business sales and subsidiary distribution, net of corporate overhead, and interest expense. Additionally, the revolver capacity was expanded by $221 million.

I am also pleased to announce that while not included in this balance, we also closed the sale of our Qatar business in October and received $180 million of net proceeds to-date subsequent to quarter end. In turn, these proceeds have helped position us to opportunistically repurchase $90 million in AES stock since July when we saw market discount to our intrinsic value.

Beyond this repurchase, our uses of liquidity included the retirement of our September 2010 notes for $214 million and funding of $354 million in new projects moving into construction and investments in growth initiatives.

Also, subsequent to quarter end figures, we paid down the remaining $290 million of our 2013 senior secured notes in October.

We're pleased to have such attractive opportunities for use of cash. In that light, I want to take a minute to review the financial framework through which we evaluate and allocate AES capital.

As we previously said, our strategy is to invest capital to maximize shareholder returns over both the medium and longer term as it fits any capital-intensive business. We believe we can achieve this objective through a combination of efforts. We serve to reduce our cost structure and fund future value accretive growth projects. We group these options into three categories; return of capital to shareholders, investing in growth projects, and paying down debt.

AES's objective is to allocate incremental capital by the levers that provide the greatest risk-adjusted return to our shareholders at any given point in time. While external factors such as share price, access to credit markets and growth opportunities will dictate the timing of use of these levers, our selection criteria does not change. Prior to making an allocation decision, we forecast cash requirements and then seek to invest any access to the most economically impactful alternative.

The first lever, returning capital to shareholders can be achieved in two ways. We believe that stock repurchase option delivers better risk adjusted returns when the stock is trading significantly below intrinsic value. In the future, we could also return capital to shareholders by initiating a dividend. We believe this is something that could be considered in the medium to long term once our construction program comes online and projects reach maturity.

Another lever is growth investment, which includes greenfield development and M&A. Our goal is to earn at least 200 basis points to 300 basis points spread over project cost of equity. Given our geographic and technological diversity, it is not a one-size-fits-all approach. Instead, we calibrate the return requirements for factors such as country risk and project risk. We focus our development efforts on opportunities that leverage our existing footprint or in new areas with high growth potential.

The third lever is debt paydown and cost reduction. This not only increases our future financial flexibility but also creates future borrowing capacity. So here are some tangible ways in which we've executed within this capital allocation of framework very recently.

Stock buyback: as I've already mentioned, we repurchased $90 million worth of AES stock at an average price of $11.86 and have our authorization to repurchase another $410 million.

Growth: over the past few months, we've demonstrated success in both M&A and greenfield development. We completed the acquisition of the 1,246 megawatt natural gas-fired Ballylumford plant in Northern Ireland for $160 million, where we expect to earn after-tax returns of 18%.

Business sales: as I discussed before, this year alone we sold three businesses for a total of $390 million.

Debt paydown: in the third quarter, we retired $214 million of note maturing in September. In October, we redeemed the remaining $290 million of our 2013 senior secured notes. This brings our total debt paydown by the parent company to approximately $1 billion during 2010, reducing carrying cost by $68 million. With these redemptions, our recourse debt now stands at $4.6 billion.

In summary, operations continue to execute well. Market demand is increasing in select markets, positioning us well to deliver on guidance metrics. In addition, our current metrics remain strong as we invest in the best available options, ranging from stock repurchase, debt retirement, M&A, or greenfield development.

With that, let me turn it back over to Paul to provide additional commentary on our construction program and development pipeline.

Paul Hanrahan

Thanks, Victoria. Now, I'll discuss those items that will drive the growth in our financial metrics in 2011 and beyond. These are important to cover as it will be helping to offset, one, the negative impacts of lower commodity prices, particularly the lower dark spreads in our U.S. merchant businesses as well as, two, a possible higher book tax rate in the event that TIPRA is not extended for 2011.

First, I'd like to review the status of our construction program, which continues to progress well. We currently have over 1,900 megawatts of capacity under construction of which 1,650 megawatts or 85% is expected to come online by the end of 2011. By the beginning of next year, we expect 720 megawatts to begin operations, including our 670 megawatts Maritza East coal plant in Bulgaria. The plant has already achieved full load operation during its testing and commissioning and is scheduled to be fully operational by year-end. This project represents an important foreign investment in Bulgaria and a successful completion marks an important milestone for the country and for AES.

We also have another 940 megawatts of capacity projected to come online during 2011. This includes our 520 megawatt Angamos coal plant in Northern Chile, which is the location of much of the county's copper mining operations.

We have already commenced preliminary testing of the first unit and are on schedule to commence testing of the second unit in the coming months, which puts us on track to meet or even possibly beat our target of finishing the project during the second half of 2011.

Additionally, our 220 megawatt Changuinola hydroelectric project in Panama has completed the tunneling required for the powerhouse. The construction of the dam itself is approximately 60% complete and we expect the Changuinola project to be completed on schedule during the first half of 2011.

Now, I would like to review a bit more about how we are thinking about allocating our capital. As Victoria discussed, we will always compare the returns of stock buybacks or debt paydowns with investing in greenfield or acquisitions opportunities. What I would like to do now is to update you on some of these opportunities, many of which we have discussed with you previously.

Let me start by just pointing out that right now we have $1.4 billion of cash available at the corporate level. Of that, $300 million has been approved for investments in the projects already closed and in construction, and this leaves us with $1.1 billion available for new investments, which could include acquisitions, investments into wind and solar projects or large thermal power projects like Mong Duong in Vietnam, OPGC in India or the Masinloc expansion project in the Philippines. Very simply this $1.1 billion of available cash has a potential to create something in the order of $0.18 to $0.21 a share of additional earnings, assuming returns of 13% to 15%, depending on when we deploy the cash and when it starts generating earnings.

A good example of this earnings power, as Victoria mentioned, is the Ballylumford acquisition which we completed this year. Ballylumford is expected to generate earnings of $0.05 per share in 2011 based on an investment of $160 million, which came from the proceeds of the CIC equity raise.

It's worth keeping in mind that our cash on hand has significant power to generate future earnings and cash flow, and that's why we are selectively focused on high quality acquisition opportunities in places like Asia, Turkey, Latin America and the U.S. in addition to greenfield opportunities that will generate longer term earnings growth.

And we do have a portfolio of attractive greenfield opportunities, and I would like to review a few of those with you now.

In our wind business, the wind business continues to evolve rapidly and globally based on local incentives and market conditions. Therefore, we are pursuing a geographically diverse and flexible wind strategy, focusing on a number of key markets across the US, Europe and Asia.

One of the benefits of our multi-market focus is that it affords us the flexibility to ramp up or down our development efforts in specific regions as fundamentals strengthen or weaken, such as they have in the US, without impacting our overall momentum. This is something unique to AES as a global power company. We truly do have a globally diversified set of investment opportunities and we're not constrained by the policy changes at any one particular market or country or region as others might be.

In our wind business, we currently have 1,750 megawatts of wind capacity in operation, 175 megawatts in construction and 1,250 megawatts in advanced development, of which about half of that amount is outside of the United States.

In the U.S. wind market in the near term we see weak fundamentals and uncertain policy environment and a lack of long-term offtake contracts. As a result, we have scaled back our development efforts in the U.S. wind market in the near term. Our current U.S. wind strategy is to focus only on the markets in California in PJM as these regions offer strong regional renewable portfolio standards in the absence of national legislation.

During the quarter we did achieve an important milestone on our 49 megawatt Mountain View IV project in California by signing a 20-year power sale agreement with the California Utility. We plan to start construction of the project in Q4 2010 with completion expected by the end of 2011. Progress is also made in PJM where we secured permits on the 50 megawatt Fox Hill project in Pennsylvania, which is expected be completed by the end of 2011.

In Europe, we see a much stronger market for renewables, including wind. We've increased our development activities in 2010 by acquiring large attractive development pipelines in both the U.K. and Poland. We anticipate reaching financial close in projects with a cumulative capacity of 65 megawatts during the fourth quarter of this year and we expect more to follow the 2011 to 2013 timeframe.

In Asia, in addition to our wind projects in China, we started some development in India, a country that desperately needs more generating capacity, which is also the fifth largest market for wind power. We have recently defined the definitive agreement to develop, construct, and commission our first wind power in India, 40 megawatt project in the state of Gujarat.

The project is expected to reach financial close by the end of 2010, with completion being scheduled for June of 2011. We are assessing other opportunities there and view the Indian wind market as increasingly attractive, due to the positive policy initiatives taken by the government over the past few years.

And with regards to the solar, our solar joint venture with Riverstone, although smaller than wind is rapidly catching up. The solar business is also subject to different incentives and market conditions around the world. We've decided to pursue a globally flexible solar business that could scale up or down based on how we perceive the various markets. This business currently has 123 megawatts in operation and construction.

We also have another 1000 megawatts in development in Europe, US and Asia. This quarter alone, we executed power purchase agreements for 47 megawatts in Puerto Rico, Hawaii, and India. Consistent with our other solar PV projects capacity under these agreements will be sold under long-term contracts. We think that it is fairly likely that this joint venture will have all of its $1 billion of committed equity invested by the end of 2011, with our portion of this investment being the $500 million. So things are going very well in our solar business.

Turning to our core power business, which includes our thermal power plants, our focus continues to be in rapidly growing emerging markets. We’re seeing many new opportunities in Latin America, Asia and Turkey. In the Philippines, we’re pursuing a platform expansion of our existing Masinloc coal-fired facility to meet the growing need electricity in the country. This year demand grew by 10% in this market.

Electricity demand in the Philippines is expected to grow by more than 5% every year. The current system is dependent on hydro and oil-fired generation, which creates opportunity to leverage our existing coal-fired asset to provide an additional, reliable, and economic source of generation.

Our existing 600 megawatt Masinloc facility was built in a way that included much of the critical infrastructure for an expansion unit, allowing us to provide one of the lowest cost alternatives for platform expansion, which we are currently pursuing. The expansion project will be another 600 megawatt unit that will leverage the existing facilities such as, transmission, interconnection, coal yard, ship unloading and an ash pond. We’re currently in the process of securing environmental permits and expect this project to reach financial close by the end of 2011.

In India, we’re also continuing the development of our expansion project in the state of Orissa, which is one of the largest coal resources of the country. This will be a 1300-megawatt coal-fired facility. We expect to reach financial closure by the end of 2011.

And finally, in Vietnam, subsequent to signing the 25-year power purchase agreement and fuel supply agreements for our 1200 megawatt coal plant, called Mong Duong, we have been focused on finalizing the construction contract and project financing. And based on the project progress to date, we expect to reach financial close in mid 2011.

All-in, we feel that we have a very compelling set of investment opportunities in development. In some cases, we expect to take on partners and capture some of the value created through development fees or similar compensation structures. But it's important to emphasize that we have been and we'll continue to be disciplined in our approach to allocating capital.

Having the capital available to invest in acquisitions through Greenfield opportunities, stock buybacks or paying down debt gives us an incredible amount of flexibility to create value on a per share basis. And given the cash flow generation of our businesses, coupled with a robust portfolio of management process, that only adds to our ability to create additional shareholder value over time.

I'd like to thank all of you for joining us today and I'll turn the call back to the operator, who will open up the call for your questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will now begin with the question-and-answer session. (Operator Instructions). Our first question is from Lasan Johong, RBC Capital Markets. Go ahead. Your line is open.

Lasan Johong – RBC Capital Markets

Thank you. Good morning, Paul, Victoria, Ahmed. Question on the capital allocation. It sounded like, Victoria that some time at the end of your construction period currently that a dividend may be contemplated. Does that suggest that you would be running out of significant growth opportunities at that point and if not, then how do you intend to finance future growth without doing any equity issue and pay a dividend or buyback additional shares?

Paul Hanrahan

Yes, Lasan, I think the point here is that we look out into the future and you can easily look out at a couple, three years, and see the need for capital. And beyond that I think what we'll always be doing is looking at the opportunities and the returns you can get on those opportunities.

I don't currently expect that we're going to be short of opportunities to grow the company good returns, but that's something we'll continue to evaluate and look at that we have better returns than paying dividends. So I think if you look at the places where we're investing capital, or we have established strong positions in places like India, we're developing good positions in Turkey, Southeast Asia, Brazil, Chile, and all these places have big needs for more capacity in the future.

And by becoming one of the biggest established players in these regions, I could look out to see easily at least another five years of higher return opportunities. But I think Victoria's point is that while we get through the construction – when these plants all get into construction, we stop investing in new projects, we'll be generating a lot of cash flow. And if we don't see good opportunities to reinvest the capital, then you could expect – we did look at a dividend.

And once we get to point, we don't think they are good returns, but we'd look at what's the best way to use capital whether it's buying back stock, paying down debt, or distributing capital back to the shareholders through dividends.

Lasan Johong – RBC Capital Markets

So what I'm hearing is that, you don't foresee a dividend in the next five years at the very least, and you're saying only if you have additional free cash flow above and beyond growth opportunities, would you even contemplate doing a dividend, is that a good fair characterization?

Paul Hanrahan

I'd say we seek growth opportunities that are value accretive. We look at that as we talked about in the past in terms of what's the cost to capital for a given project, and can we beat that substantially to create net present value, really net present value per share. But there are a lot of different ways you can do that. And it's not just the cash flow coming from our operations, it's the cash that we might generate through portfolio management, and we've seen some good opportunities to do that over the past few years. The recent asset sales in the Middle East are another good example of how we will do that.

So, I think we see the opportunity to source capital in ways that we can get the lowest source per cost for capital, for example selling assets where those are available where we can sell it effectively at low yields and then take that capital investment to higher yields, and that could be, as Victoria said, that could be investing in our stock, that would be investing in new projects. And ff we don't see those kinds of opportunities then it would be – we have the opportunity to then dividend cash back to shareholders.

At some point, I would expect we get there. But your timeframe of three to five years, I think is probably valid to say. We probably don't see ourselves in that timeframe having a lot of spare cash to dividend, but it's something we'll continue to evaluate each year.

Lasan Johong – RBC Capital Markets

Okay. Second question, Victoria you mentioned in your slides that you’re looking to invest capital or at equity capital, I'd just say, at least 200 to 300 basis points above your equity cost. Since you're targeting a kind of a 20% rate of return, does that imply that you think your discount rate on your equity is 17% or 18%?

Victoria Harker

Well, first I think, depending on the type of project, we've not been as high as 20% necessarily. I think we've continued to say we target mid-teen returns and it obviously varies across renewables versus thermal and that type of opportunity as well. So, I don't think it's quite as high as 20% return.

We were fortunate obviously with Ballylumford and also with some of these asset sales that were actually individually slightly higher than the 20%, but I'm not sure that they're consistently across all the new opportunities at 20%.

Paul Hanrahan

Yes, I think if you look at, for example, some of the projects in US, you might look at the cost of equity for those projects as being 9%, something in that order of magnitude. And we would then be targeting for those projects. And again, we see at least 200 to 300 basis points above the cost of capital.

As Victoria mentioned, the Ballylumford one, we exceeded that, that's really the objective. But it's almost a view that if you weren't beating it by enough, it's almost not worth doing in terms of shareholders value creation. It also gets to some extent to the size of the investment because we also think about in terms of NPV. And if you create a certain amount of NPV divided by 800 million shares, how valuable is that.

So it's a matter of how many deals are out there, how attractive are they and then how much can you invest. But it really comes down to what's the net impact per share in terms of the per share value that we create.

Lasan Johong – RBC Capital Markets

Then would it be fair to characterize in saying that you would not consider an investment until at the very least you’re looking at 200 to 300 basis points? That's your minimum threshold above your equity cost?

Paul Hanrahan

Yes, I think, again we'll figure that equity costs in each market for each type of project and we've got a fairly standard way of doing that, but it's looking at projects and the cost of capital of projects.

When you sort of consolidate all those, that's how you develop the corporate cost of equity effectively and that’s what we used as a way to compare stock buybacks as the corporate cost of equity.

Lasan Johong – RBC Capital Markets

So, your corporate cost of equity, in general, would be somewhere in the 12% to 13% range?

Paul Hanrahan

Yes, I think I mean you guys could figure out as well as we can, but it's probably in that range.

Lasan Johong – RBC Capital Markets

That seems very high, all right. This gain on CEMIG sale, can you tell us how much that was?

Andrés Gluski

The gain on CEMIG sale was around $20 million – $20 million, $25 million.

Victoria Harker

And that was a last quarter event. Just to be clear, obviously, we're referencing it in terms of the impact to the tax rate on quarter-to-quarter.

Lasan Johong – RBC Capital Markets

I see. Last quick question. Effects of the Brazilian Presidential election.

Paul Hanrahan

Andrés Gluski, he spends a lot of time down there, maybe he could comment on it.

Andrés Gluski

Sure, hi, Lasan.

Lasan Johong – RBC Capital Markets

Hi Andrés.

Andrés Gluski

Obviously, the results of the elections were widely predicted and it means I think more of the same. And a lot of the key players with which we've established relationships have been the same. So from our perspective its continuity and it means continuing with our current plans in country.

Lasan Johong – RBC Capital Markets

Thank you.

Paul Hanrahan

Thanks.

Operator

Thank you. Our next question is from Brian Russo, Ladenburg Thalmann. Go ahead.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Paul Hanrahan

Hi Brian.

Victoria Harker

Hi Brian.

Brian Russo – Ladenburg Thalmann

Hi. The $90 million of share repurchase in the third quarter at an average of $11.86, I can't recall exactly discussion on the last conference call, but it seems as if, it looks like you guys have raised the floor on the ranges in which you're willing to purchase stock relative to attractive growth opportunities. So I was just wondering if you can comment on that. And then, secondly, I believe the $500 million originally authorized expires at yearend, can we expect you to renew that?

Victoria Harker

Just for clarity, the $90 million all-in is through November 1st, I guess. So a portion of that was subsequent to the September 30th quarter-end. I wanted to make sure that we were clear on that relative to it being subsequent to the filing itself, but the all-in number is what we had mentioned.

I think in terms of the renewal, we'll obviously look at it at yearend and certainly be talking to the Board about a lot of prospects for investment and also the 2011 guidance in conjunction with whether it's a request to renewal. I don't think we've had those discussions yet, but we will be doing that, I think, in the month of December.

Brian Russo – Ladenburg Thalmann

But I guess at a current stock price of $12, you still view it attractive relative to your other uses of cash?

Victoria Harker

I think as you look out as we look out over the near term use of cash and what's coming up in terms of the need for cash payments in the next couple of quarters, we felt that to be true given the current prices. I'm not sure I would say that from a 12-month and beyond outlook. There, obviously, we did have cash in hand. But from a short-term perspective, we felt it was more compelling to buy back stock than to have in other short-term investments vehicles.

Brian Russo – Ladenburg Thalmann

Okay. And can you discuss more about your portfolio management initiatives? You mentioned a wind IPO last quarter, and it seems given you've purchased stock post the third quarter of this year at an average price north of $12. It implies that you believe the intrinsic value of the company is much higher. Any thoughts on harvesting the value of some of the assets or subsidiaries?

Paul Hanrahan

Yes, I think we're going to keep looking at that. One of the things we're looking hard at is where do we see the best opportunities for the future, where do we want to set up our – put the focus of our development efforts in which markets. We see a lot of really interesting and interactive markets out there.

We'll, probably as we do that, look at some markets and say they aren't as strategic in terms of growth opportunities, and those are places where if we can see assets where we could get good prices from selling them, they'd probably be good sources of capital or good ways to raise some capital, which should give us more money to buy back stock, to invest in new opportunities. But those asset sales typically take several months to get through. So there's a little bit of a lag time there, but that's something we will be and have been looking at pretty aggressively. I think we found a lot of success.

What we found is we may invest on a project which would have returns that would be in the mid teens, but by going through portfolio management process, and if the timing is right, you can sometimes get your return on capital be – the return on equity to be in the range of 20%. And that's going to create some opportunities for us to do some things that will allow us to, again, just get higher returns on the capital by flowing in through more quickly and taking advantage of the opportunities to divest those assets which strategically aren't that critical to us and it would give us more capital to then use for higher value opportunities, whether that be buying back our stock or investing in new opportunities.

Brian Russo – Ladenburg Thalmann

Okay. And the $0.05 of mitigation actions you mentioned before to offset I think the $0.11 noncash impact to the change in the tax laws, could you elaborate on that?

Victoria Harker

In terms of how comfortable we are with it or in terms of –?

Brian Russo – Ladenburg Thalmann

What are they?

Victoria Harker

They’re predominantly expense reductions from an SG&A standpoint as well also we also have some credit emission sales.

Brian Russo – Ladenburg Thalmann

Okay. Then just lastly, can you give us a sense of what type of margin Eastern Energy is contributing this year? And just given on your previous sensitivities you've kind of laid out for 2011, I mean is there any real significant year-over-year margin compression that we could expect in '11 versus '10 on that subsidiary?

Paul Hanrahan

Yes, I don't have those numbers right now. I think what I would say is we were hedged this year. We are partially hedged this year. We saw some margin compression this year. And next year it will be worse. I think what I've tried to flag in my comments was that we're unhedged for 2011and just given where gas prices are and the forwards are, we're not hedging because we don't think it make sense to lock in those kinds of margins.

So we're basically have exposure to the market in which as position we want to be in right now, because we think there's probably more upside than downside for those positions. Yes, we've seen a significant margin compression. I don't know Ned, is there anything else you want to add to that?

This is Ned Hall, who heads our North American business.

Ned Hall

On a full year, we're down about $70 million on gross margin impact on this year –

Paul Hanrahan

Compared to 2009, okay.

Brian Russo – Ladenburg Thalmann

Okay. So when we look at the sensitivities on gas that you've laid out, is Eastern Energy the bulk of that sensitivity?

Paul Hanrahan

Yes.

Victoria Harker

Yes.

Brian Russo – Ladenburg Thalmann

Okay, thank you.

Paul Hanrahan

Yes. I mean what we're really looking at is next year if you look at our US merchant assets there’s negative earnings will be coming from those assets with the current forwards, and what we're working on now is how could we mitigate that through mothballing our plants, some significant cost reduction efforts, which I remember some of these have leases, so you can't mothball a lease. So we’re going through a number of different things we could do to mitigate that earnings drag that we would have.

Victoria Harker

And just to clarify that further, we don't currently see that as the cash strength for next year. It's an earnings impact and we're working, so as Paul said how to mitigate that and what the options there are, but we don't anticipate having any cash from the parent required.

Ned Hall

Also testing multiple fuels.

Paul Hanrahan

Speak up.

Ned Hall

We’re also testing multiples fuels we're burning and not only in Central and Northern App coal, Illinois coal, PRB coal, and Pet Coke as alternatives trying to lower our costs.

Brian Russo – Ladenburg Thalmann

All right, thanks.

Paul Hanrahan

Yes. The other thing I'd point out is that, the one advantage we have is built into our portfolio as we've talked about is these construction projects coming online and they'll continue to come online and there the expectations are as they were before, so there's new earnings coming in from those.

Then you've got a little bit of a drag that's coming from the Eastern Energy assets primarily, that's where struggling with this, well how do we really reduce that drag, so we don't – on the cash side we are not worried about it, but it’s more on the earnings side, you sort of don’t want to have negative earnings coming out any plants which just doesn't help us with respect to seeing earnings growth.

Brian Russo – Ladenburg Thalmann

Thank you.

Paul Hanrahan

You’re welcome.

Operator

Thank you. Our next question is from Ali Agha, SunTrust Robinson Humphrey. Go ahead, your line is open.

Ali Agha – SunTrust Robinson Humphrey

Thank you, good morning.

Victoria Harker

Good morning.

Paul Hanrahan

Good morning, Ali.

Ali Agha – SunTrust Robinson Humphrey

Well, I wanted to flash out your thinking a little more if I could on your share buyback program. When you started that program you announced that stock was down I believe in the $9 maybe between $9 and $10 range. You brought a little bit at that time, but not much, when the second quarter numbers were reported. Today you're showing us you've bought stock since the third quarter at around $12.30 a share, if my math is right and you've talked about buying it as part of your capital allocation process, when it is well below intrinsic value. So, clearly you think $12.30 is well below intrinsic value. The stock today is around $12. So should we think, A, has your thinking changed on intrinsic value number one? Number two given where the stock is which is below where you've been buying it, is there any reason for us to expect once you’re out of the quite period why you should not be buying the stock given where the prices are?

Paul Hanrahan

I guess I would say a few things. One is I like buying stock better at $9 than $12 personally. So I think as a result we do believe that at the current range it's below the intrinsic value. And your question is, as Victoria mentioned, you wanted to be at a discount to the intrinsic value and you've really got to compare that discount to the other opportunities that are out there.

Some of those opportunities, we don't need the capital may be until the latter part of 2011 or so, but we do see some acquisition opportunities out there too. So the trade-off that we keep looking at, as Victoria said, we look out and try and figure what are the near-term cash needs. So with stock buybacks, I think the way to think about is we're going to pace ourselves a little bit and make sure we have enough capital for the high-return types of opportunities we think are to create shareholder value, but still think advantage of the fact that we’re trading at a discount to our intrinsic value.

Ali Agha – SunTrust Robinson Humphrey

And so your definition of your intrinsic value calculation today is no different than it was for AES when you announced the share buyback?

Paul Hanrahan

Correct.

Ali Agha – SunTrust Robinson Humphrey

Okay. And on those new opportunities, second question, there's a large amount of capacity set for privatization in Turkey, 15,000 megawatts or so. Could you give us a little more insight on how that is progressing, the timeline, what we should be looking at, and your sort of confidence level on the attractiveness and potential for that?

Paul Hanrahan

We like the Turkish market a lot, particularly generation assets. We've been operating in the country now for a few years. We look at the generation opportunities that are coming up as being attractive. Being in that market for a while, having the experience, having a Turkish partner, we're looking at the right strategy to go after those assets, but we believe in 2011 there will be opportunities.

We expect some of those to be coming up to the market and we plan on participating in those privatizations. We don't know as how competitive it will be, what the returns would look like, but that's again, why I think we really want to be disciplined about how we approach them. But I think we understand that market very well now. We like the market. We think it's one of the more attractive ones out there. So I think you'd probably plan to see us participating in those.

Exactly, how we do it? I think you will probably be talking a little bit more about that on our next call, there'll probably some announcements will be coming out about how we might do that down the road.

Ali Agha – SunTrust Robinson Humphrey

In the first set – Paul, remind us when is the first set due in the privatizations?

Paul Hanrahan

I think those states have move around a little bit. I'm thinking it's sometime in first half of 2011, but those dates tend to move a fair amount. But I think it's safe to say probably first half of 2011.

Ali Agha – SunTrust Robinson Humphrey

Okay. And final question; as I look at your Greenfield profile and the large projects that you have under development, the bulk of those are going to come on line 2015 and beyond. Your current construction portfolio is going to be largely complete by the end of next year as it stands. So when we look at the years between, say, 2012 and '15, the three-year period, is it fair to say the accretion we should think about is either acquisitions or share buybacks in terms of an EPS accretion? Is that the way to think about bridging the current construction end and the contribution from the new portfolio coming on?

Paul Hanrahan

Yes, I think the acquisitions would be in there to bridge that. We also have some renewables. The renewables tend to have shorter timeframes for coming on line. Solar and wind, you’re talking about a year or less, from the time you started, the time they come on line. So that will be part of it. We've got a lot of investment going into wind and solar projects as I talked about.

M&A is going to create some opportunities. For example, the privatizations in Turkey, if those were to go through, they are already operating. So I think its acquisitions it would be renewables, long-term Greenfield.

The other thing that we're finding is with some of these Greenfield opportunities particularly this large equity commitments to bring on partners would be a way to off load some of that Greenfield investment need, but at the same time maybe creating some development fees in the process.

Now that might come through additional carrying interest or management contracts, don't know how that shows up in the earnings, but it would be a way to potentially monetize some of those development opportunities as we going forward, because we do have a lot of projects that we're seeing interest on the part of partners to come in, in minority positions into some of our more advanced Greenfield development projects.

Ali Agha – SunTrust Robinson Humphrey

And one other thing, Paul, sorry, one last thing, obviously there was the news over the weekend regarding your interest in International Power. Could you just provide us any parameters on what would have attracted you there? It's trading at a nice premium to your stock price, so how that would have been accretive to AES?

Paul Hanrahan

Yes, Ali, let me just respond as I typically do that we don't respond to rumors or speculation.

Ali Agha – SunTrust Robinson Humphrey

Okay, fair enough. Thank you.

Paul Hanrahan

Yes.

Operator

Thank you. Our next question is from Maura Shaughnessy, MFS. Go ahead, your line is open.

Maura Shaughnessy – MFS

Yes, good morning.

Paul Hanrahan

Hi.

Maura Shaughnessy – MFS

A couple of questions kind of drive to point about the cash situation versus the earning situation at AES. First one, in terms of the tax rate, the stated tax rate, obviously, has some noise surrounding US policies et cetera, but can you just talk about where the cash tax rate is expected to be this year and next, versus, let's say, last year?

Paul Hanrahan

Yes, we've got Prabu Natarajan, he's probably the person who can speak to that most knowledgably.

Victoria Harker

And, obviously, Maura, this is Victoria. We are noncash tax payers and to any great extent we’re well positioned, but that's right.

Maura Shaughnessy – MFS

That's why your cash numbers actually went up this quarter even though the reported earnings because of the tax noise.

Paul Hanrahan

Right.

Victoria Harker

That’s correct.

Maura Shaughnessy – MFS

So the answer is I guess that the cash tax hasn't changed at all.

Prabu Natarajan

Not in the US, we still are in net operating loss position outside of the US, significant cash taxes in Latin America, but they have changed significantly year-over-year.

Maura Shaughnessy – MFS

Right, okay, good, yes. I guess then the second question, again a little bit surrounding the tax situation with regards to the renewables. Now when you are investing in the US solar and wind, given your tax position in the US, what does that do to earnings versus investing outside of the US that doesn't have the PTC/ITC kind of situation? What does that do to earnings?

Prabu Natarajan

Right. From a US perspective we think about monetizing PTCs through tax equity structure, so we take the cash upside whereas our tax equity partners take the depreciation coming from the alternative energy projects. On the non-US side, since we can have significant cash taxes at the project level, we prefer to keep the tax attributes such that we tend to see more of the earnings benefit than the cash.

Maura Shaughnessy – MFS

So, therefore, if I think about you winning some wind projects in California, the PJM for example, or solar projects, that actually wouldn't have any impact to your earnings, but it would have a positive impact to your cash. Is that a true statement?

Paul Hanrahan

It's going to depend a little bit. Ned Hall, he can talk a little bit. We think about this a lot because it does get complicated. Let me just pass down the speaker, so obviously you could –

Ned Hall

Hi Maura.

Maura Shaughnessy – MFS

Hi.

Ned Hall

It's not a simple answer unfortunately. In the current environment because of the cash ITC option, it doesn't have the impact that it has had historically with the straight production tax credit hypothetical liquidation at book value, tax equity, disproportionate allocation, sharing arrangements that we've done, which is a lot of words. So it’s not – that's why it becomes a less than straightforward answer.

It is fair to say that they are more favorable on cash from our perspective than they are on earnings in the early years and they ultimately, as they should, balance out over time. So we're frontloaded on cash and back loaded on earnings in the structures. In the environment that we're in for the next – through 2012 that's dampened a little bit. So they’re slightly less favorable on earnings right now, but that all reverse itself depending on what the next regime is that comes out.

Victoria Harker

And Maura, this is Victoria. We've spent some time helping them model out what that service level comps looks like over the longer term. We're happy to do that off line, if it's helpful.

Maura Shaughnessy – MFS

And when is AES a cash taxpayer?

Paul Hanrahan

2015

Victoria Harker

2015 is our current projection. I think it still depends on where our long-term guidance turns out to be in other M&A of any significant size, but currently 2015, 2016 timeframe.

Maura Shaughnessy – MFS

Okay. And is the Eastern Energy situation non-recourse to AES parent?

Victoria Harker

Yes.

Paul Hanrahan

Yes. We can all answer that one.

Maura Shaughnessy – MFS

So, I guess the way that I think about the situation with about $300 million in margin in '07 down to effectively zero, if not modestly negative this year in Eastern, it can't go that much lower since certainly the option would be to just walk away if things were to get so tough.

Paul Hanrahan

That's exactly right.

Maura Shaughnessy – MFS

Okay, and the then last question, what is your appetite given Brazil or wherever, other places, that you’re playing in you tend to invest on the generation side with PPAs in hand. What is the appetite for merchant generation assets?

Paul Hanrahan

I think, generally, we don't like merchant generation. Any time we have it, we try to contract it or get contracted assets. So we don't have a big appetite for merchant generation. But we do pick it up like we did in the Philippines, we, as quickly as we could, went out and contracted it for as long as we could.

Maura Shaughnessy – MFS

Okay, great. Thanks.

Operator

Thank you. Our next question is from Patrick Elliott, Ivory Capital. Go ahead, your line is open.

Paul Hanrahan

Okay. And then, maybe one more question after this operator, so other people can get to the rest of the day. Okay, please go ahead.

Edwin Shen – Ivory Capital

Hi, it’s actually Edwin Shen here with Patrick. Couple of questions. First question is on your August call, you had talked about a 2011 preliminary range of $1.07 to $1.10. Do you still believe that's a good range?

Victoria Harker

We are going to be updating guidance on our next call with our fourth quarter and year-end numbers. I think at this point we're still looking at. Not insignificant, obviously. It's a whole discussion that we've been having about North American gas prices that we're still working through that, but I think we just not – adjusted to any different range at this point.

Paul Hanrahan

The other thing I'll just comment on is, the real wildcard is with $1.1 billion of cash is what we do with that cash, when do we deploy it, because as I said, that's got some earnings power, just call $0.18 to $0.21. So that's the other big thing that is tough to predict because we are looking to deploy that in some acquisitions, but we've got to be disciplined and make sure we find the right one that's going to fit strategically and give us the right kind of returns on risk profile.

Ahmed Pasha

Hi Ed, this is Ahmed. I think in the last call when Victoria talked about $1.07 to $1.10 that was based on the forward curve as of July, and since then the curves have moved against us especially the gas. So I think if you adjust for that that I think probably you have net-net $0.03-ish down, if you just look at the gas and the currencies.

Edwin Shen – Ivory Capital

Okay, fair enough. And then second question is I just wanted to get a little bit more clarity on some of the items you mentioned that impacted your third quarter, specifically the higher purchased fuel and energy prices in Brazil and the cumulative tariff adjustment in Brazil.

Paul Hanrahan

Andrés

Andrés Gluski

Sure. Some of the things that impacted our results, one is the higher fuel and energy purchases in Chile. Chile is having a very high year. And so we had to run, for example, Nueva Renca plants on diesel and that's really drove off the cost of fuel and energy purchases in Latin America.

Regarding Brazil you had the Parcel A discussions at the beginning of – actually end of last year, beginning of this year with ANEEL. And as a result of that, we had a slight decrease in the tariff in one of the sectors. It was a negotiation between the Association of [inaudible] and ANEEL, the regulator.

The other issue that we had was the forecasted CapEx spend at Eletropaulo. The actual CapEx spend was less, and therefore, we did not receive the return on that capital which we did not invest. So those are really the items that we've had affecting this quarter's result.

As you know, they've come out with a new proposal going forward for tariffs in Brazil that has a – main element that says a lower WACC for the country risk, which is dropping from around 9 to 7.15. It's a proposal and I think the market has expecting 8. We're, again, in negotiations. Over the next four months we'll have a final resolution of that.

And the market in Brazil for companies like, Eletropaulo, CEMIG expect to have reflected this change. So those are the changes in tariff in Brazil. Backward looking it was really the Parcel A specific case. It was having invested less in Eletropaulo and going forward is this new proposal from ANEEL.

Edwin Shen – Ivory Capital

Okay. And can you give us a sense of how big those items were in Chile and Brazil?

Andrés Gluski

In Chile, as you know, Gener – about a third of Gener's income is coming from Columbia, which has also had unexpectedly a dry year. We also had a higher EFOR forced outages, which have caused us to burn the more diesel. So you're talking about maybe –

Ahmed Pasha

I think it's about $40 million to $50 million?

Andrés Gluski

Including EFORs and including the higher fuel prices in both those locations.

Edwin Shen – Ivory Capital

So $40 million to $50 million for Chile.

Andrés Gluski

No, Gener, including Columbia as well.

Ahmed Pasha

Yes.

Edwin Shen – Ivory Capital

Okay, I got it. Then what all for Brazil?

Ahmed Pasha

Brazil is roughly about $10 million because it's proportional of our interest because we own only 16%. So our interest is about $10 million.

Edwin Shen – Ivory Capital

Okay. So the $40 million to $50 million we saw in Gener that should continue to the extent that that hydrology doesn't get better.

Andrés Gluski

Well, hydrology is reflected really via the reservoir level. So they are low. On the other hand, in terms of the – we had a [inaudible] at the beginning of the year and we expect to have lower forced outages. So we can use our more efficient plants.

Edwin Shen – Ivory Capital

Okay. So we should expect that to get a little bit better. It will be a drag year-over-year.

Andrés Gluski

That's correct.

Edwin Shen – Ivory Capital

Thank you.

Andrés Gluski

Thanks.

Operator

Thank you. Our next question is from James Heckler, Levin Capital Strategies. Go ahead, your line is open.

Neil Stein – Levin Capital Strategies

Yes, hi, good morning, it's actually Neil Stein.

Paul Hanrahan

Hi Neil.

Neil Stein – Levin Capital Strategies

And I have a couple of questions if I could. The first is if you could just confirm and Ahmed's commentary on the prior '11 guidance was very helpful. Did it assume renewal of that tax benefit? I think you referred to it as TIPRA.

Victoria Harker

No, it did not.

Neil Stein – Levin Capital Strategies

Okay.

Victoria Harker

It's TIPRA, yes.

Neil Stein – Levin Capital Strategies

Yes. And then also could you clarify the expected – this is going back to Maura's question – the expected gross margin at Eastern Energy in '10. I know in '07 it was $300 million and I believe she said it went down to zero. But if you could –

Andrés Gluski

Minus $9 million.

Paul Hanrahan

Yes, minus $9 million in 2010.

Neil Stein – Levin Capital Strategies

What is the reason that it would actually be negative? I would think to the extent it gets to zero you could just choose to not run the plant.

Ahmed Pasha

Well, we have hedges in place basically, and we have fixed costs as well.

Neil Stein – Levin Capital Strategies

So the gross margin is net of sum of – net of O&M?

Ahmed Pasha

And depreciation, so gross margin is net of depreciation.

Paul Hanrahan

Yes, it's even.

Neil Stein – Levin Capital Strategies

Well maybe my thought was what is – I guess where revenue is minus cost of goods sold. That's what I would think of as gross margin.

Ahmed Pasha

The way we define gross margin, Neil, is the gross margin is revenue minus your variable costs minus fixed costs and minus depreciation. So it's EBIT basically.

Neil Stein – Levin Capital Strategies

Is revenues minus cost to goods sold, the number you could provide for '10 for that asset?

Ahmed Pasha

You can add about $40 million to that, so it's about $35 million, if you wish.

Neil Stein – Levin Capital Strategies

So maybe that's like the absolute, $35 million is the absolute downside we could think of for that asset to the extent your revenue minus cost of goods sold probably wouldn't go below zero?

Paul Hanrahan

If you look at that, I think it gets back to Maura's comment that, you hit down to that point, you've always got the option of walk away. I think the Board will be evaluating is, because it might be negative for a month, how do you think it's going to be the following year? We tend to think about things from our cash flow standpoint.

In other words, if you don't have to provide cash in then you'd certainly want to keep that option around if prices move around, because the prices have been volatile. The downside is you won't have much of a cash drag, but you might an earnings drag, because of depreciation, because of the lease payment. So that's what Ned and his team working through, what can we do to really mitigate that and how do we work through that.

And that's why, we’re not able to give lot of clarity in guidance right now, but it's something we're working through. But do I look at that and say if things are where they are today in terms of prices, the total impact of, if we just kept going probably $0.10 or less in terms of the negative impact of that. But on the positive side, we've got these other plants coming on line, which is going to make up for that. But that's really the issue for us just to think about how far would you take this before you just say, we're not going to keep going on this.

So that's really the issue that we and many others in the industry are facing right now.

Neil Stein – Levin Capital Strategies

But if your revenue minus cost of goods sold for '10 is $35 million, which if you tax effect it, it implies just a few pennies, why would the year-over-year downside be as much as $0.10? I would think that – that would be kind of the floor, losing that $35 million pretax would be sort of the floor as you move into next year?

Victoria Harker

We started the year hedged, obviously, and then we're exiting the year with hedges rolling off and we're uncovered in '11, so that got that impact as well in. And the $0.10 that Paul cited I think it was not just Eastern, it was across the North American plants.

Neil Stein – Levin Capital Strategies

I see. And just to make sure we are on the same page, my absolutely last question, the $35 million includes the benefit of the hedges?

Paul Hanrahan

Correct.

Victoria Harker

Yes, the net effect of having those in place earlier, Neil that have rolled off, yes.

Neil Stein – Levin Capital Strategies

Okay, that’s so helpful. Thank you.

Paul Hanrahan

Okay. Why don't we wrap up, I know we've kept people pretty long.

Ahmed Pasha

Okay. Thank you very much for joining us today. In the meantime, if you guys have any questions please feel free to call either Chris Fitzgerald or myself. Thanks again. Have a good day.

Operator

Thank you and that's concludes today's conference. Thank you for participating. You may disconnect at this time.

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