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Executives

Paul Hanrahan - Chief Executive Officer, President, Executive Director and Chairman of Finance & Investment Committee

Ahmed Pasha - Vice President of Investor Relations

Andres Gluski - Chief Operating Officer and Executive Vice President

Victoria Harker - Chief Financial Officer and Executive Vice President

Analysts

Brian Russo - Ladenburg Thalmann & Co. Inc.

Brian Taddeo - Broadpoint Capital

Jason Mandel - Chapdelaine

Jeffrey Rudner

Gregg Orrill - Barclays Capital

Ali Agha - SunTrust Robinson Humphrey, Inc.

Ben Sung

Maura Shaughnessy - MFS Investment Management

Brian Chin - Citigroup Inc

The AES (AES) Q4 2010 Earnings Call February 28, 2011 10:00 AM ET

Operator

Welcome, and thank you for standing by. [Operator Instructions] Now I'd like to introduce your host for today, Mr. Ahmed Pasha. Sir, you may begin.

Ahmed Pasha

Thank you, Chandra. And welcome to AES Corporation's Fourth 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; Andres 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?

Paul Hanrahan

Okay. Thanks, Ahmed. And good morning to all of you joining us today. On this morning's call, I'll first comment on our performance for 2010, both from a financial and an operational viewpoint. Victoria will then review the financial performance for 2010, as well as our expectations for 2011 in more detail. Following her comments, I'll discuss our plans for allocating capital in 2011 in ways that we believe will increase the value of the company on a per-share basis.

First, our 2010 performance. I'm pleased to announce that we have achieved our 2010 guidance for all key metrics. We are at $0.94 a share of adjusted EPS, which was at the high-end of our guidance range of $0.90 to $0.95. Also our proportional free cash flow of $1.3 billion exceeded guidance by approximately $200 million. I think our results very simply reflect the fact that economic growth and power demand increases in some of the emerging markets in which we operate were stronger than anticipated, particularly in Asia and Latin America.

Power demand and improved operations in these two markets helped to offset the continued erosion of our profitability in North America, primarily driven by continued low gas-based electricity prices and high coal cost. Our financial results were also driven by strong operational performance, supported by the continued implementation of initiatives across our portfolio, including the global sourcing of solid fuels and freight, long-term service agreements, transformers and other major capital equipment. Our asset management program, which maximizes the efficiency of our capital expenditures also helped drive the strong performance for the year.

In 2010, we also improved operating cash flows through strong collection rates and increased sales. For example, our Dominican Republic business benefited from new power purchase agreements and a high collection rate due to the receipt of past due government receivables.

In our Generation businesses, our fundamental metric to assess operational performance is the forced outage rate, which captures unplanned outage time at a plant. A lower outage rate is better as it results in higher profitability by increasing the ability to generate kilowatt hours and lowering unplanned maintenance cost. In 2010, our global forced outage rate improved to 4.3% from 7.3% in the prior year and was significantly below our five-year average of 5.9%. Much of this improvement can be traced to the performance turnarounds of the plants we acquired during the past few years, such as our coal-fired plants in the Philippines and Mexico. And this is one of our skill sets that gives us a unique competitive advantage in the marketplace.

In our Distribution businesses, a key indicator for operational efficiency is the ability to reduce non-technical losses or power which was supplied to final users but was never billed due to theft, fraud or billing system issues. As a result of the focused efforts in this area in 2010, non-technical losses declined to 3.1% from 3.4% in 2009, contributing to an improvement of 15% over the prior five-year average of 3.7%. The significant driver of this performance came from our Brazilian utility, Eletropaulo, through the use of new metering equipment, improved collection rates and customer connection activities. The results of these efforts can be seen in the operating cash flow trends for Latin America in 2010.

Turning to the construction side of our portfolio. We brought approximately 800 megawatts on-line last year. We currently have just over 2,000 megawatts capacity under construction, of which 1,800 megawatts is expected to come on-line by the end of 2011, and over 95% of our current construction capacity is under long-term contract for its output. While construction milestones continue to be achieved, including the resumption of full activity in our Campiche plant in Chile, the strong performance has been somewhat dampened by continuing delays at our 670-megawatt coal-fired Maritza plant in Bulgaria.

As you will recall, we expected Maritza to be fully commissioned by year-end 2010. To date, however, we have not achieved commercial operations at Maritza. The ongoing delays in terms of reaching full commercial operations have also resulted in a dispute with our EPC contractor, who was late in delivering the completed plant. Resolution and mitigation of the impacts of this delay are a top management priority for us in 2011. And once we resolve the legal and technical issues and the plant is fully operational, it should be expected to have $0.105 per share per year on a steady-state basis.

Beyond Maritza, we also have another 1,100 megawatts of capacity projected to come on-line during 2011, primarily in Latin America, and all these projects are progressing well in terms of meeting their schedules. This includes our 500-megawatt Angamos coal plant in Northern Chile, which is the location of much of the country's copper mining operations. We've already achieved full load operations on Unit 1 and are progressing rapidly in commissioning of Unit 2. This puts us on track to meet 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, and the construction of the dam itself is approximately 80% complete. We expect the Changuinola project to be completed by its guaranteed completion date, which will occur in the second half of 2011. Also we have 150 megawatts of Wind Generation capacity in the California and PJM markets that will be completed by the end of 2011.

Finally, I'm extremely pleased to confirm that we have cleared all remaining permitting hurdles with respect to our 270-megawatt Campiche coal-fired project in Chile. In January of this year, the Supreme Court of Chile upheld the ruling of the appeals court with regards to the validity of Campiche's construction permits. This action removed the last obstacle, and we have resumed full activity and expect to complete the project in early 2013.

Now I'll turn the call over to Victoria, who will discuss the 2010 financial results and 2011 expectations. Victoria?

Victoria Harker

Thanks, Paul. And good morning, everyone. As Paul mentioned, we delivered on all aspects of our 2010 guidance. Our fourth quarter results were slightly above our expectations, including full year results at or above the high of most guidance metrics. Cash flow, in particular, came in very strong, driven by better-than-expected performance in our Latin American Generation segment and a non-recurring receivable collection there.

Our results, compared to 2009, also reflects improved trends. Demand in Asia, particularly in the Philippines and Latin America remained strong, while helping to offset continued deterioration of dark spreads in North America. Now let's discuss results for the fourth quarter in greater detail, starting with the most significant drivers affecting gross margin.

Higher volumes at our Generation businesses in Latin America, particularly in central Chile and Panama, is the key driver of our improved earnings in the fourth quarter in comparison to the same period last year. Chile's volumes improved as demand returned to its robust pre-earthquake level. As a reminder, immediately after the earthquake last February, volume had declined by 10% from the prior year. Recovery was relatively quick and sustained as demonstrated by our fourth quarter results where demand increased by 1.9% compared to third quarter of this year, and is up fully 6.6% compared to the fourth quarter of 2009. Panama experienced record rainfalls this quarter, which enabled higher volume at our businesses there. In addition, our recently acquired business in Northern Ireland began to contribute earnings.

Foreign exchange was not a material driver of earnings growth compared to 2009. Our consolidated gross margin was just over $1 billion, an increase of $197 million or 24% relative to 2009. This increase is driven mostly by the Latin American volume increases I just described. On a proportional basis, we earned $550 million of gross margin an increase of $86 million or 19% over 2009.

In the fourth quarter, diluted EPS from continuing operations was a loss of $0.56. This was the result of $0.76 impact of long-lived asset impairment losses, primarily related to our merchant businesses in New York and Texas. These non-cash impairments are the results of the same trends we've been discussing over the past few earnings call, the compression of merchant margins due to low electricity prices, driven by low natural gas, combined with higher coal and petcoke costs.

In the fourth quarter, based on recent legislative and regulatory activities, we also refined our outlook relative to the expectations for our New York and Texas generation plants, which required us to write down the full value of those long-lived assets. Excluding the impact of these impairments, adjusted EPS was $0.23, an increase of $0.02 over 2009. This favorability reflects the positive gross margin trends I just discussed, as well as the December renewal of a favorable U.S. income tax law relating to the treatment of cash dividends from certain of our non-U.S. subsidiaries. This renewal lowered our full year tax provision as we had originally projected.

Now let's discuss cash flow. On a consolidated basis, our operating cash flow increased $773 million from last year to $1.1 billion, an increase of $410 million on a proportional basis. It is important to note that the fourth quarter of 2009 included a one-time tax payment of $326 million at one of our businesses in Brazil. Excluding this payment in 2009, our cash flow showed healthy year-over-year growth of $447 million on a consolidated basis and $357 million on a proportional basis. This was driven by favorable gross margin and lower working capital requirements in Latin America, which was the result of higher collections in the Dominican Republic, as well as regulatory asset recoveries in Brazil. These events in the Dominican Republic and Brazil are not expected to recur in 2011.

Similarly, consolidated free cash flow increased by $653 million to $785 million for the quarter, driven mostly by the same factors I just discussed. On a proportional basis, our free cash flow increased $324 million to $374 million.

Now turning to our Parent Company Liquidity. Our Parent liquidity of $1.8 billion is down $260 million versus the third quarter of 2010, and year-over-year has increased $579 million over December 31, 2009. During the quarter, liquidity benefited by $333 million from a combination of the proceeds from the sale of our Qatar business in October, as well as subsidiary distributions, net of corporate overhead and interest expense.

We talked last quarter about our capital allocation policy. In the fourth quarter we continued to operate within this same framework. We redeemed the remaining $294 million of senior secured second priority notes, and we repurchased $84 million of AES stock at an average price of $12.26. We also renewed our repurchase program at the end of the year to ensure that we can continue to leverage this value driver through 2011. Finally, we invested $244 million in various construction and development projects.

In summary, we exited 2010 with positive momentum based on the initiatives that are continuing into 2011. Now I'll spend a few minutes on our guidance for the year ahead.

For the next 12 months, our adjusted EPS guidance is $1.08 to $1.14, which represents earnings growth of 15% to 21% over 2010 actuals. This growth is driven by several factors. First, earnings from new plants completing construction in 2011, as well as the Ballylumford acquisition contribute $0.17 of incremental earnings. Second, we have $0.06 of incremental interest savings from the nearly $1 billion of Parent Company debt that was retired in 2010. Third, we have favorable operations, driven primarily by the strong demand growth in Latin America. Partially damping this momentum is the unfavorable movement in tax rate, a higher share count and foreign currency. Lastly, we benefited in 2010 by $0.06 from withholding tax reversal at one of our subsidiaries in Chile, which will not recur in 2011.

In addition to comparing our results to 2010, I also want to briefly explain the major drivers of change versus the $1.04 to $1.07 range we discussed on the third quarter call. Since then, we have removed the negative impact of AES Eastern Energy in New York and adjusted for lower depreciation expense at Deepwater in Texas for a benefit of $0.11. In addition, a change in the 2011 projected effective tax rate yielded a $0.05 improvement.

Partially offsetting these positive drivers is the construction delay at Maritza and the impact from a loss of earnings from our coal-fired plant in Connecticut, Thames, which entered reorganization earlier this year. The year-over-year trend for cash flow guidance requires a bit more explanation as it does not follow the same trajectory as adjusted EPS. Our 2011 proportional free cash guidance range is $900 million to $1.1 billion, a decrease of approximately $300 million from 2010 levels. However, please remember that 2010 actual results included several large non-recurring items such as the receivable collections in the DR, which boosted cash flow on a one-time basis. Therefore, it’s perhaps fair to look at the trajectory since 2008, a proportion of free cash flow which has grown by 29%.

Further evidence of continued strong underlying operations is our 2011 subsidiary distribution guidance of $1.2 billion to $1.3 billion. The midpoint of this range is higher than 2010 actuals. As you may recall from our prior calls, over the past year, we focused on several key assessments of our support costs, given that we've now moved to much greater stability and rationalization of our corporate systems and platforms. These reviews highlighted some quick hits, as well as some longer-term projects that will require additional automation and process improvements. We've moved out quickly on efficiency initiatives ranging from leveraging share buying power for commodity purchases across the portfolio, generating significant savings on our $2 billion annual spend.

In addition, similar efforts in hardware and software purchases combined to save us nearly $10 million. Enhanced inventory and plant maintenance management across the merchant flea also enabled us to save nearly $25 million in 2010, at a time when the rising cost of fuel squeezed margins there. Likewise, our increased focus on greater automation, shared-service environments and audit reductions in finance and IT saved another $11 million year-over-year.

Also, these efforts permanently lowered the AES cost of providing power wherever we operate. Some of these cost savings benefit us directly at the business unit operating level in the cost of sales, while others reduce our support costs at corporate and the regions in SG&A. In 2011, we will be continuing with these initiatives, and I look forward to sharing our progress on them in the months to follow.

In summary, operations continue to execute well, and market demand is increasing in select markets, positioning us well to deliver earnings growth in 2011. In addition, our balance sheet remains strong, allowing us to invest in the best available options, ranging from stock repurchase, debt retirement, investments in M&A or Greenfield development.

With that, let me turn it back over to Paul to provide additional commentary on 2011 and capital allocations. Paul?

Paul Hanrahan

Thanks. As Victoria just mentioned, we ended the year with liquidity of $1.8 billion, of which just over $1.1 billion was in the form of cash. In terms of allocating that capital, we'll continue to do so in ways that we believe will create the most value per share for our shareholders.

In 2010, we reduced our debt by approximately $900 million. And since launching our stock buyback program, we've invested $116 million to date by repurchasing 9.7 million shares at an average price of $11.93 per share. Share purchases will remain an important tool to increase shareholder value. We also invested in 1,625 megawatts of generating capacity through acquisitions in addition to the nearly 800 megawatts of capacity that was brought on-line as plants completed construction. Nevertheless, our stock price did not move to reflect the value that we think is inherent in our portfolio businesses, and none of us at AES are satisfied with the performance of our stock in 2010. We're committed to pulling all the levers that we can to return value to shareholders.

It's worth noting that we have shifted to a more focused approach to making new investments. There are a number of very attractive markets around the globe today, but we will be concentrating our efforts in those markets where we see the greatest long-term value creation potential for AES. We believe that this will also move to reduce some of the complexity in our portfolio, which may also be one of the factors weighing on our stock price.

As we look forward to 2011, we'll continue to approach allocating capital in ways that make the most sense from a shareholder value standpoint. But with some additional portfolio management opportunities that might exist, these would only increase the financial flexibility that we have to allocate to debt and stock buybacks, as well as value-accretive new investments. I'll now talk about a few of the areas where we see the potential for value-accretive investments in 2011.

In Southeast Asia, our 1,200-megawatt Greenfield coal plant in Vietnam has achieved significant milestones. Last week, we signed a turnkey EPC agreement with Doosan Heavy Industries & Construction, and we executed documentation for the sale of a 49% interest in the project to POSCO Power in Korea and China Investment Corporation or CIC [ph] of 15% of the shares of AES. This sale will not only added value to strategic partners with significant presence in Asia, but also enhances our return on investment and demonstrates a significant value added during the Greenfield development process.

In addition to confirming the value that AES creates to Greenfield development, it represents an excellent example of, and a template for, cooperation on future development opportunities. Strong partners like POSCO and CIC are important to AES' growth strategy. In many markets, it's a competitive differentiator that will allow us to earn attractive returns in the face of what can be a very competitive market for new power development and acquisitions.

In Turkey, another market of interest to us, the upcoming privatization process affords us a valuable opportunity to develop a pipeline of projects in concert with Koc Holding, another key strategic partner for AES. As Turkey's largest conglomerate, Koc Holding represents approximately 7% of the Turkey's GDP. This well-respected company owns a broad range of businesses, including various industrial, mining and refinery businesses. Once approved by the authorities in Turkey, this partnership will be anchored by Koc's 300-megawatt natural gas facilities, which will be transferred to the joint venture, as well as some hydro plants owned by AES. In addition to partnership, we'll diversify its other energy sources, coal, hydroelectric, wind, as well as natural gas, by pursuing Greenfield projects and acquisitions, including those associated with Turkey's plan to privatize 15 gigawatts of generation assets. In these efforts, the joint venture will benefit from AES' global development and operations experience. And from Koc's market strength and local energy sector insight, we see a lot of potential in the Turkish power market. GDP is expected to grow between 4.5% to 5% and to help to meet this growth in what is currently an underserved market. System capacity is projected to increase its current 46 gigawatts to approximately 59 gigawatts, about a 5% increase per year through 2015. In addition, the privatization will put 15 gigawatts of generation capacity on the market in two phases.

It's worth noting the benefits of privatizations for AES are twofold. First, we've demonstrated multiple times that we have unique skill set in terms of upgrading or turning around the operations of privatized assets. And second, the near-term earnings profile for acquisitions are more attractive than Greenfield investments.

And in another market of interest to us, India, we've made progress in several fronts. We signed a long-term PPA for 50% of the output of our 1,300-megawatt OPGC coal-fired expansion project in the state of Orissa. In addition, AES Solar signed a PPA and closed on debt financing for our 5-megawatt solar photovoltaic project in the state of Rajasthan. And finally, we achieved financial closing and commenced construction on our 39-megawatt wind project in Gujarat. Commercial operations of this wind plant is expected in the third quarter. Each of these projects is a testament of not only the immense market potential in India, but also our ability to capitalize on our position in the country to execute across diverse technologies we have expertise globally.

And finally, I'd like to mention our solar joint venture with Riverstone. AES Solar delivered a strong performance in 2010. As of the end of last year, AES had invested $323 million into this venture. For 2011, we anticipate that the solar JV will complete construction on 125 megawatts of projects, of which 58 megawatts are already under construction. We also expect the JV will commence construction on an additional 200 megawatts. And its development pipeline has grown rapidly to over 1,000 megawatts and spanned six countries. We're very pleased with how things are going with this business.

In conclusion, we start 2011 in a very strong position to increase the value of the company. We have a strong balance sheet, with adequate liquidity, and growing free cash flow. In addition, we have strong strategic partners in key areas of future growth for us. And most importantly, we are committed to delivering near-term returns to our shareholders. We think the value exists in our portfolio of businesses in operation, construction and development, and we intend to convert that value into returns to you.

I'd like to thank all of you for joining us today. And we now look forward to any questions that you might have. Chandra, could you please open up the lines?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Brian Russo of Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Can you talk a little bit more about what options are available for you with the Eastern Energy assets?

Paul Hanrahan

Yes, with the Eastern energy assets, what we're looking to do is to sell those assets. The main reason for doing that is we think there's value in those assets, and just because of the earnings profile that we don't think it's going to make sense for us or another public company to be owning those assets. But we do think that there are people out there that see the value potential, and we've seen that in another market transactions. We think we might get better value for it if we were to transact and put that out on the market. So we're in the process now of marketing those assets, and as we move forward, we'd be able to update you on that.

Brian Russo - Ladenburg Thalmann & Co. Inc.

And it looks like on the commodity sensitivities for 2011, it appears to be a little bit more modest than, I think, the sensitivities we saw in the past. Is that just a function of you got more of your generation edge?

Victoria Harker

No, it just reflects the fact that we don't have Eastern flowing through in terms of the portfolio impacts. But we have no additional hedging.

Brian Russo - Ladenburg Thalmann & Co. Inc.

And just how is the Newcastle coal recent price shrink? How is that impacting your Philippines assets?

Paul Hanrahan

In terms of our Philippines asset, we're looking at getting coal from Indonesia and Australia. So in terms of the price spike that we saw last month, we're seeing prices return to normal.

Brian Russo - Ladenburg Thalmann & Co. Inc.

And the Maritza, when is the revised commercial operation date for that?

Paul Hanrahan

I have Andres Gluski, our Chief Operating Officer. He could provide a little bit more detail on what's happening there.

Andres Gluski

Sure, I'll give you perhaps a little bit background first. The EPC contract on December of last year issued a notice of dispute, alleging the lignite that had been supplied for commissioning without a specification. And therefore entitled to an extension of time to complete the power plant and an increase in the contract price and other relief. In January of this year, the EPC contractor advised Maritza that has stopped commissioning on the power plant's two units and initiated arbitration of this alleged lignite claims. Now Maritza disputes that the lignite is out of specifications and intends to defend the arbitration and assert counter claims for the delay of liquidated damages and other relief related to the contractor's failure to complete the power plant and other breaches of the EPC contract. In terms of the power plant itself today, we expect to start selling energy at 2/3 capacity, about 420 megawatts during the second quarter. This, of course, will depend on discussions that we have with the lenders, with NEK, and with the EPC contractor. And we expect to reach the full load of 600 net megawatts by the end of the year.

Brian Russo - Ladenburg Thalmann & Co. Inc.

And I think you mentioned $0.10 of annual earnings contribution once that asset is on-line for full year?

Paul Hanrahan

Yes, that's correct.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Is there anything in your 2011 guidance for a partial year?

Paul Hanrahan

Yes, $0.105 would be a full year, and for this year we built in roughly $0.04 into the projections. That's what's built into the guidance. Because as Andrés said, we wouldn't be operating at full load for part of the year and get a commission by the end of it. But we think we'd end up with -- subject to getting everything resolved on a technical legal front, probably about $0.04 a year. We think that's a reasonable expectation.

Operator

Our next question today is from Ali Agha of SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc.

In the slide, I believe it was 13, where you lay out your sort of the waterfall slide between '10 and '11. I was curious, where does the Eastern roughly $0.12 of loss elimination -- where does that show up? I didn't see that in that slide.

Victoria Harker

That's been pulled out. That was what we had originally projected prior. And now we have no expectations on having those losses this year.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Understood. So where do you demonstrate that in this slide, that those losses are no longer going to be there? That's an incremental $0.12 of earnings, right? In '11 versus '10?

Ahmed Pasha

Ali, this is Ahmed. I think in 2010, it was essentially breakeven, if you wish, about $0.02, I think. It was breakeven. And in '11, there is essentially $0.10 losses we discussed in our last call. But I think you don't see that because we have assumed in our '11 guidance that Eastern is discontinued.

Ali Agha - SunTrust Robinson Humphrey, Inc.

So in '10 it was, Ahmed you said, breakeven or plus or minus?

Ahmed Pasha

I think it was roughly $0.02, $0.01 or $0.02, something in that range.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And also to be clear, you said you want to sell the plant, you have that process ongoing. From an accounting perspective, is this going to be reported as a discontinued operation or an asset held for sale? Or how is the accounting treatment going to go this year?

Victoria Harker

Ali, this is Victoria. The expectation is that as we go down this process of the sale, in concert with our auditor are marking certain milestones, and it would be recorded as discontinued operations, which would get grandfathered back to the beginning part of this year. But we are still continuing to go down that path and make sure that we hit all the milestones.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And on a different note, Victoria, you talked about some cost reduction initiatives, et cetera. Just want to be clear, I mean, one of the areas that we have seen a pretty big ramp up has been your corporate SG&A expense. If you go back to '06, for example, it's gone significantly up to where it was in '10. What is a good run rate for that going forward, and should we expect that the trend down, '11 onwards?

Victoria Harker

The corporate SG&A is essentially flat at this point, minus about 2% increase relative to our people cost. I think the thing that requires a little bit more detail of discussion, and we were happy to help with this is the mapping of cost of sale reduction in SG&A. Cost of sale is SG&A that's held in the businesses. So as we've moved, for example, certain organizations from the businesses to the corporate SG&A line, it reflects an increase in SG&A that's not increasing costs per se. For example, we've had business development that's moved from the specific businesses to the regions in corporate, same thing, with the finance functions that moved to the hub, so we can walk you through the detail in terms of which will remap. But we've also had real increases in some of the costs around our business development over the last 12 months.

Paul Hanrahan

Ali, just comment on that quickly. You pick up on the same thing that we did, which was that we have to ramp up the corporate SG&A. And partly, if you go back several years ago with restatements that we had put in systems in place and control systems to make sure we got our financials done timely and accurately, and I think we've done a good job of that. But a lot of that has been done manually. What we want to do now is start to automate that and make it more efficient because we believe we can do this at a much lower cost. And it's probably going to be about a three-year program to start working the costs out. I can't give you a number now because we really want to fine tune that a bit more. But maybe in the next call or so, by midyear, we should have a pretty good handle on how much we think we can take out and when it would come out. We don't think there's going to be much room in this year's numbers. We'll probably start to see some improvements, which will drive earnings growth beginning in 2011 in a meaningful way. Because we think this could be, for the next two to three years, another driver to earnings growth for the company.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And Paul, of that cash that you currently have on the balance sheet, how much would you say is sort of excess cash that you would like to invest or spend, whether its buybacks or new projects? And you talked about the capital allocation, I want to come back on that again. I mean, since the last time you gave us your share buyback count, I think it was at the end of the third quarter call, it was at the end of October. Incrementally, if my math is right, you spent another $26 million since then for buybacks. So I'm just curious how that is being factored into the capital allocation as we look into 2011? And I'm assuming, your guidance does not assume any more buybacks in that EPS range?

Paul Hanrahan

You're correct. Guidance doesn't assume anymore buybacks. But then, if you think about that $1.1 billion of cash, I would say, we'd really look at almost all of that being available for ways to allocate to productive investments over the next -- I mean, some it's already going to be committed for things that are in the works. The others would be really competing against each other for uses of capital. So the new investments we talked about, also stock buybacks, I think they're both going to be things that we would be doing on a regular basis. I think the other part of it is that it's also -- we've seen some cases a good market for portfolio management for selling assets. And that might give us some additional capital that we think we could deploy if we have good investments to trade into, or the stock price remains at the levels it is, it would be another attractive way to use that capital.

Operator

Our next question is from Gregg Orrill of Barclays Capital.

Gregg Orrill - Barclays Capital

I was wondering if you could provide a little bit more detail on the privatizations upcoming in Turkey, and what you're looking for there if there is a tranche coming due soon that we should be watching?

Paul Hanrahan

I think there's several groups of assets that will be coming up for sale. And I think we and Koc have identified several that we think could be attractive for us to invest in that they know reasonably well that we're learning more about. The timing of this is a little bit unclear. I think it could begin as early as the latter part of 2011, maybe towards the fourth quarter. The exact time, of course, can move around a little bit. But you’d start -- I think, expect to see things happening around then or early 2012. I think in the meantime though, there are probably some one-off assets that we might have an interest in, in Turkey to just start building that portfolio of businesses. I think we're very well aligned in terms of how we think about the business, the kinds of returns we're looking for that we think it could be attractive. And I think the competitors out there, we and Koc together are a pretty formidable force.

Operator

Our next question is from Brian Chin of Citigroup.

Brian Chin - Citigroup Inc

Can you give a little bit more color on how and when the upcoming Brazilian tariff review cycle will affect Eletropaulo's outlook.

Paul Hanrahan

This is one of Andres' areas of expertise, so I'll let him talk that through.

Andres Gluski

Sure. We'll as you know, ANEEL came out with a new methodology proposal beginning of this year. I think the key elements are the WAC determining their regulatory asset base using a reference company and the x efficiency factor. This has basically gone for review. It's currently under discussions between ABRADEE, which is the Association of all the electric sector company, and ANEEL. And I don't think that you'll have a sort of final determination on that until the sort of fourth quarter. So I don't think it's going to have a major impact this year. I think we're all waiting to sort of see how the WAC turns out. I mean, under the old methodology, the WAC would be about 8.06. And the first proposal that's come back from ANEEL is 7.15. So I think that, again, is in negotiations, and we have to see where this turns out, and another factors as well. So what I am certain is that by the end of the year, I think we will have a resolution to this. And most likely, will be somewhere between the old and the initial proposal. And this is nothing new. We always go through this different year. And then finally, once that's determined, then you have Eletropaulo and ANEEL specific discussions regarding asset base and other things.

Brian Chin - Citigroup Inc

When would Eletropaulo's discussions with ANEEL come up? If I understand it right, it's the fourth group or the third group, that's going to be reviewed. So could you give us a better sense of timing on that?

Andres Gluski

It should be December.

Brian Chin - Citigroup Inc

It going to be in December of 2011?

Andres Gluski

Of 2011, that's correct. And [ph] as you know, which we own in the south, its cycle is in 2013, April of 2013.

Brian Chin - Citigroup Inc

And then lastly, what is the rate base equivalent for Eletropaulo, just as a refresher?

Andres Gluski

Rate base equivalent?

Brian Chin - Citigroup Inc

Or rate base that we would apply that --

Paul Hanrahan

Just sort of the dollar value there, the Brazilian real value of the rate base?

Brian Chin - Citigroup Inc

Yes.

Paul Hanrahan

I think we're going to have to get back to you on that, we're unsure of that.

Andres Gluski

Yes, I mean that has to be again specifically the regulatory asset base if that's what you're referring to?

Brian Chin - Citigroup Inc

Right.

Andres Gluski

Yes, that's part of the discussions at the end. I believe it's somewhere around BRM 9 billion that we're talking about.

Brian Chin - Citigroup Inc

BRM 9 billion?

Andres Gluski

Yes.

Operator

Our next question comes from Maura Shaughnessy of MFS Investment Management.

Maura Shaughnessy - MFS Investment Management

A couple of questions, two for Chile and two for Brazil. First in terms of Chile, I was wondering if given the hydrology situation in the South, and I don't think the government has definitely put in rationing yet, but perhaps may. I was wondering where AES Gener is in terms of its contracting situation, and if it could potentially benefit from a tightening market? And the second question is, with some of the new environmental controls on emissions there, I think there's a three-year timeline to put in -- to lower emissions by 50%. What sort of capital requirements are required at AES Gener?

Andres Gluski

Okay, sure. This is Andres. First, about the tightening market. Yes, this year, we have a La Nina phenomenon, and it's the seventh driest year in the last 40. So on February 17, the government came out with a decree, which sort of had three elements. First would be to save approximately 500 gigawatts hours of water equivalent. So what they're asking is the generators to dispatch, and then there'll be a netting effect from basically using a higher cost generation, specifically saving that water. The second part of the decree was to have the ability to lower voltage between 5% and 10% as needed. And the third will be some sort of consumer saving initiatives. Regarding Gener, we are pretty much contracted. We have the ability to meet the requirement -- our contract with what we call the efficient generation. But in addition, we have generation, which are at our older coal plant, which can be used to dispatch above this. So Gener is well placed for this drought, in terms of its contract and in terms of its generation capacity. Regarding the second part of your question, Maura, in terms of the new environmental rules which have come out, I think, what's important is first is that the new requirements do not apply to Campiche or Angamos because they were under construction prior to the new decree coming out. So that's I think important, and that will give us an advantage. The decree also differentiates between, of course, new plants and existing plants. And there is a time period for putting in the new emission reductions equipment that is needed. Sort of a ballpark figure for Gener right now would be around $200 million basically SGDs that would be necessary, for example, on Guacolda, and some of the unscrubbed plants that we have. But all the new plants that we have in place are coming in within the midst for existing plants under construction.

Maura Shaughnessy - MFS Investment Management

And then jumping to Brazil, first question on the Brasiliana situation. As I understand it, some of the Board members of BNDS maybe changed out next month. And then potentially, even by this summer, given all the checks that BNDS has written to for other areas and other projects, the potential sale may actually occur, but that's just me pontificating. I have no idea. So maybe if you have any comments on that? And the second question is vis-à-vis

the review for Eletropaulo that Brian was asking about in terms of the third cycle, I guess the thing that bothered me about what came out in September was the chance that on a volume and efficiency basis, that would be taken away each year in the first time methodology. But as I understand it, in the concessions, the x factors can't be changed. They can only be done cycle-to-cycle versus on a yearly basis. So that would actually be pretty positive news to the distribution companies, it would seem. And the rate of return is what it is, and I guess they made some mistakes by not including FX risks and some of the debt cost seems kind of bizarre. So that there's a chance that the 7.15 goes up 7.5 to 8, or whatever. But I was just wondering if any specific on the x factor and that the chance of that gets thrown out?

Andres Gluski

Regarding sort of the first part of the question, sort of Brasiliana and the changes. As you know, BNDS is very stable, long-lived institution, carries a lot of weight in Brazil, and we're in constant talks with them. We're partners at the Brasiliana level, and we've done a number of operations jointly that have been very good for both of us. And, for example, we cleared the SEB debt default last year, and so we're in good standing with them. So again, I think this is institutional as I expect to continue its current policies. I really don't have additional insight in terms of if they would decide to make any changes there. I think regarding the comments of the FX, the efficiency factor, the x factor, I agree with you. I think an important element here -- this is under a lot of debate with ABRADEE, is whether you could change the x factor into a yearly cycle, and this would have a significant difference. We think that it should remain on a three-year cycle. And also I agree with your comments regarding the WAC, that it's very likely that in these discussions there must be some allowance made for FX and other risk factors in that WAC. So regarding both, I tend to agree with your view. But of course, this will depend on the discussions between ABRADEE and the public hearing and ANEEL. And we will know in the following month. It's not just an Eletropaulo factor or a [ph] factor.

Operator

Our next question is from Brian Taddeo of Gleacher.

Brian Taddeo - Broadpoint Capital

I just want to follow up quickly on AES Eastern. I was wondering if you could comment if you're -- are you having any discussions with the banks there, and what I'm going with that is, your comments on the asset sale, with the two facilities maturing in July, do you expect that this will be resolved, by I guess, before that point? Or do you think this could be actually thrown to the second half of 2011.

Paul Hanrahan

Ned Hall, he heads up North America, he’s the closest to it, he could comment on that.

Ned Hall

Brian, the process is ongoing. And the time to conclude it, by the end of this year, we should get a first round of indicatives between now and July. So depending on how that goes, we may be in a position to comment.

Brian Taddeo - Broadpoint Capital

And then just kind of following up on that, what's your expectation of having to get the bondholders involved in an asset sale process? Do you need any consent, or do you can do outside of bondholders [ph]?

Ned Hall

Well, it depends on how it's done, but if we need consents, then we'll go get them.

Brian Taddeo - Broadpoint Capital

And then just one more, still on Eastern. Can you just update us or remind me actually the sort of hedge situation there? Are there any power or whole hedges left within the book? And then also just on the rail transport situations, is there a long-term agreement still there? Is that rolled off as well or that's being renewed as well?

Ned Hall

There's some legacy hedges, a small amount of hedges that are still rolling through. But just based on the lack of availability of hedges that make sense having to continue to hedge. And the rail transport agreements are not long term.

Brian Taddeo - Broadpoint Capital

You mean, they're expiring sometime in '11 or have already expired and now your [ph] market rates?

Ned Hall

I don't have the dates. So I'll have to get back to you.

Operator

Our next question is from Ben Sung of Luminus Management.

Ben Sung

I was going to ask about AES Eastern as well. I think in the past, you have talked about wanting to resolve this over 2011. And then from a cash flow perspective, it kind of made a lot of sense. With changes in commodity prices, does that change the timing of when you guys think that you guys will or will want to make some decisions around the assets? Or how do you think about that right now?

Victoria Harker

Let me just answer first, from the impairment standpoint, obviously we had to look out a couple of years in terms of the curves. And so that's what triggers the fourth quarter just in terms of the analysis that we just took down. I think obviously that flows through economically in terms of how we look out the strategic process in terms of the disposition of the asset as well. And I'm sure Ned can probably speak to that as well.

Ned Hall

The timing on the decision as we've already stated, as you stated, is to get it done this year with the indicatives due on the near term. The facility does have a six-month debt service reserve available so that, that will assist with cash flow and also is sitting on significant cash at this point based on positive results from last year with its hedges. But we had a dividend block in place for the coverages. The timing on -- We think we can get the process run, but obviously without hedges and without additional cash that's in the business. But obviously, it's very volatile at the moment. There's a lot of movement as you're well aware in commodity prices, and that changes day-to-day. So we obviously watch that, and we'll adjust accordingly.

Operator

Our next question is from Jason Mandel from RBC.

Jason Mandel - Chapdelaine

Just again on AES Eastern, can you discuss if there's any complications with regard to the sale of the assets due to the lease structure, not necessarily just the debt in place with the fact that it is a lease structure and a tax recapture and other issues that may come of that in unwinding lease? And also exactly where the banks sit in that power part of the capital structure, and what they are collateralized by?

Ned Hall

There's probably a very detailed answer to the collateral that I won't be able to give at this point, but we can provide later. But the banks are collateralized by the assets at Cayuga and Somerset and the cash flows out of the remaining businesses. The tax recapture will obviously be dependent upon the individual owners, including us, but I can't comment on the others or even us at this point. But that will obviously be a complication when it comes to the lease. And I certainly would agree with your statement that the lease complicates this significantly as we step through the process.

Jason Mandel - Chapdelaine

And just a quickly follow up on the banks, given the LCs that are drawn and the July termination, is it expected that those LCs will be ultimately cash collateralized?

Ned Hall

The business has the cash it needs at the moment to do what it needs to do in terms of being able to sell power forward on a short-term basis and buy coal. So that would be the plan when the LCs expire is to use the cash that the businesses have.

Operator

Our next question is from Jeff Rudner from UBS.

Jeffrey Rudner

Paul, question on the longer-term basis. You fairly clearly indicated that you're expectations are for 2011. But looking forward on a, say, three to five-year basis, what is your vision as to what we should look for, for earnings growth in the company?

Paul Hanrahan

I think we're not going to use specific numbers here, but we may over time give a little bit more of a further lookout, but it's really going to be the plants in construction coming on-line. That's the big driver. We're going to see some earnings growth there. I think that the next piece is when we talk a bit about answering all these questions about the costs, we see some room to continue move the costs down on a corporate basis. It's run up quite a bit, which we had to do to put the systems in place, but we can become a lot more efficient there. So that provides another couple of year’s worth of growth on that front. And then I think we've got $1.1 billion of cash sitting around doing very little, which we want to deploy, and that's got value if you deploy that, let's say, you take that and get a 12% return on your earnings, sort of like $132 million, that's over $0.10 a share of earnings if you deploy for stock buybacks depending on price of which you buy back. They could also be accretive. So you've also got that element to it, and we have liquidity beyond that. And I think the other part of the earnings growth really comes from is we've thought about really over the past several months, where we want to focus is I said, there are really lot of unique markets out there. We can't compete in all of them. And we've started to really select the ones we want to put the most effort, and I think what you see over time is we're starting to manage the portfolio to take some of those assets, sell them down where there's not a whole lot more value we can add in markets that might not be strategic and investing that in some markets where we could get returns that are above our cost of capital. And I think by having a global portfolio like we do, that gives us the ability to go out and do some more things without having to go out and tap the capital markets again for new equity, and I think that's important. So I think you could see another four to five years of good earnings growth, and that's what we're really trying to work through as we think about the various options we have to invest, to buy back stock, to reduce debt, to swap assets. It could create some interesting opportunities for us combined with the ability to go out and reduce costs in a pretty significant way.

Victoria Harker

And I think just as a parallel to Paul's statement, I think it's also for the reasons he's articulated in terms of the asset sale, it's important to -- you need to focus on the cash growth, and we just saw with the Middle East asset sale, 20%-plus kinds of returns on those on our equity investment. And that's increased our cash growth, obviously, that would take earnings out of the portfolio temporarily until they're replaced. So that's another important metric for us, is the cash growth, as well as the earnings.

Ahmed Pasha

Chandra, can we take the last question, please?

Operator

We have no further questions, sir.

Ahmed Pasha

Good. Well, thank you, all, again for attending this morning. If you have any question, please feel free to call either Chris Fitzgerald or myself. Thank you and have a nice day.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

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