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Executives

Ahmed Pasha - Vice President of Investor Relations

Paul Hanrahan - President and CEO

Victoria Harker- EVP and CFO

Andres Gluski - EVP and COO

Analysts

Lasan Johong - RBC Capital Markets

John Kiani - Deutsche Bank

Elizabeth Parrella - Merrill Lynch

Gregg Orrill - Lehman Brothers

Brian Russo- Ladenburg Thalmann

Raymond Leung - Goldman Sachs

Wei Romualdo - Stone Harbor

AES Corp. (AES) Q1 2008 Earnings Call May 9, 2008 10:00 AM ET

Operator

Good morning. My name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the AES first quarter 2008 Earnings Call. All lines have been placed on mute to provide any background noise. After the speaker's noise there will be a question-and-session period. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Ahmed Pasha. Sir, you may begin.

Ahmed Pasha

Thanks, Elsa. Good morning, everyone, and welcome to our First quarter 2008 earnings conference call. Joining me today are Paul Hanrahan, President and Chief Executive Officer; Victoria Harker, Executive Vice President and Chief Financial Officer; and Andres Gluski, Executive Vice President and Chief Operating Officer.

Paul will begin today's discussion by providing a general overview of the quarter. Victoria will provide few more detail and analysis on the quarter results. Following Victoria, Paul will provide an update on some of our growth initiatives.

Before we begin this morning's call, I would like to remind you that any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. Our discussion of factors that could cause actual reserves or events to vary is contained in our filings and in the Investor Section of our website www.aes.com.

And now, I would like to turn the call over to Victoria.

Paul Hanrahan

Thanks, Ahmed. I am going to go ahead and leave up. Good morning, everybody. We had good first quarter with adjusted EPS of $0.39 per share versus $0.24 per share in Q1 of last year. Our results were ahead of expectations caused by some unexpected factors such in as the Southern Cone in Latin America, where the combined effects of gas and hydrological conditions in Chile and Argentina led to high power prices allowing our portfolio plans throughout the region to capitalize on these conditions.

We also adjusted the timing of certain outrages in the region to take advantage of this attractive power prices. We do not foresee, however, the few circumstances will continue throughout the year. However, if these trends continue through the second quarter, we believe there could be some upside to our existing guidance.

We'll continue to evaluate throughout the second quarter and update our guidance if and when appropriate. We'll also continue to make some substantial progress in the development of our growth pipeline in the three areas of strategic focus for us, those being core power, renewables and climate solutions.

I'll talk about our progress in more detail after Victoria Harker, our CFO covers the financial results.

Before turning over to Victoria, I would like to comment and how we think about allocating capital and how we might source this capital. With the number of attractive investment opportunities available around the globe, how we allocate capital and how we fund these investments becomes increasingly important.

To some extent having more opportunities in capital is a good way of imposing discipline on us to select the best of the available opportunities. And each investment opportunity has to compete against all uses of capital including potentially paying down debt or returning cash to shareholders to stock buybacks.

In the near-term, we see number of attractive investment opportunities, but we also want to be prepared and have the options available in the future to decide to allocate capital to buyback stock. If it offers the best return, it will increase the value of the company on a per share basis.

With our stock currently trading at low levels, this thus become an attractive option. It seriously competes with other investment opportunities. For these reasons, it remains a priority to remove constrains on our second lien notes and bank debt that prohibit us from buying back stock.

It's also important, however, that we do so in ways that are economically attractive. So we'll do so opportunistically as market conditions allow. As I think about how to fund these investments in Greenfield projects, acquisitions or potentially stock buybacks, it's clear that selling some of our assets may, in fact, be the most inexpensive source of capital to fund these investments.

As we've seen from the sales process of some of our existing assets, valuations remained attractive in today's market. So for those businesses, where we don't see a significant opportunity to further increase the value of the business through improving performance or using the business as a platform to grow, we will consider selling those assets.

In essence, we need to keep our capital invested in assets where we can earn superior returns by focusing on our operational, commercial and development skills. And then we can redeploy this capital to the potential uses, which I described previously.

At this point, I'll turn the call over to Victoria who will give you senses to how our business performed in the first quarter. Victoria?

Victoria Harker

Thanks, Paul and good morning to everyone. As you've heard from Paul already, we had very strong first quarter, generating GAAP earnings of $0.34 a share and adjusted earnings of $0.39 a share with most key financial metric showing significant improvement year-over-year.

During the quarter, there were several dynamics in play that caused this. We benefited from strengthening operations across the global portfolio of businesses particularly in generation businesses in both Latin America and in Europe.

In addition, our Latin America and European generation segments revenue benefited from both higher spot and contract prices as well as higher volumes due to increased demand in those geographies. And also, not unexpectedly, with so much of our revenue is now generated overseas, FX was a contributor in many locations. All of these trends seem to be moving in the right direction for us.

In addition, our portfolio management activities have gained momentum. We're making significant progress in completing the sale of our Northern Kazakhstan businesses and expect this transaction to close later this quarter.

Going forward, we will report only the management fee income from these businesses during the term of our three-year contract. We also expect to close the sale of the oil-fired Hefei plant in China in third quarter 2008. Net-net, these four elements drove better than expected results in the quarter, as we continue our focus on execution.

Now, to the details of the quarter. Revenue in the first quarter increased by 33% to $4.1 billion. Approximately one-fourth of that growth was attributable to favorable foreign currency rates while the remainder was due primarily to higher tariff, fuel price pass-throughs, and increased volumes in our Latin American, Asian, and European generation businesses.

Year-over-year, we also benefited from a full quarter of operations from the TEG and TEP plants in Mexico, which were acquired in February 2007. Likewise, in-quarter gross margins on a year-over-year basis increased by $197 million, or 23% to a full $1 billion. Approximately one-third of that improvement was attributable to favorable foreign currency rate with higher prices and volumes for our generation businesses in Latin America and Europe accounting for most of the remainder.

There were also significant financial impacts to EPS from operational improvements in Latin America and in Europe, which I will later cover in the call. Similar to revenue and gross margins, income before tax, equity earnings and minority interest improves significantly in the first quarter increasing like $219 million or $0.54 to $628 million, with a $197 million of the improvements beginning in gross margin.

Net cash from operating activities in the first quarter was $471 million. Excluding EDC which were sold during second quarter 2007, net cash from operating activities increased by $3 million year-over-year. Net operating cash flow benefited from improved operations as well, which were generated by higher energy sales.

As a result, there was a commensurate increase in receivables of approximately $292 million, which are generally payable within 30 to 60 days from the time of sale. As a result, we would not anticipate collections on those receivables until later in the second quarter.

Gross capital expenditures, combined with acquisitions were $640 million for the quarter. This was comprised primarily of projects under construction, including our Maritza project in Bulgaria, and our wind development projects in the U.S. It also now includes the acquisition of a 67 megawatt Mountain View wind farm in California and the Nejapa landfill gas project in El Salvador.

Approximately $232 million of our gross CapEx was finance through non-recourse debt. Maintenance CapEx was $179 million, including $30 million of environmental upgrade, the majority of which were at IPL and at our plants in New York.

Free cash flow for the quarter was $292 million excluding the impact of EDC year-over-year, free cash flow decreased by $3 million as compared to the first quarter of 2007. As discussed earlier, free cash flow is flat in the quarter, primarily due to increase in as yet unpaid receivables in our generation businesses.

In the first quarter 2008, GAAP earnings per share from continuing operations as compared to the prior year doubled to $0.34, while adjusted EPS increased by 63% to $0.39. Just as a reminder the $0.17 of GAAP earnings last year in the first quarter 2007 included $0.05 of impairment charges related to our investments in AgCert and $0.02 of FAS 133 mark-to-market losses. Similarly the $0.34 of GAAP earnings in first quarter 2008 includes impairments charges of $0.04 and a $0.01 of FAS 133 mark-to-market losses.

For the first quarter 2008, the impairment charges that have been excluded from our adjusted EPS calculations included $19 million or $0.03 write-off of business development costs associated with the discontinued peaker project effort in South Africa and a $14 million or $0.01 additional impairment taken at our Uruguaiana generation facility in Southern Brazil.

First quarter 2008 results also included an impairment expense of approximately $14 million related to the sale of our share in the Hefei facility, a 115 megawatt oil-fired plant in China for $39 million in March of this year.

Now, I will provide some additional color on the financial drivers of the year improvement in both GAAP earnings as well as adjusted EPS. The main drivers in the increased GAAP and adjusted earnings were improved operations as well as generally better than anticipated environmental condition in Latin America.

Specifically, we realized approximately $0.10 per share improvement from our generation businesses located in the Southern Cone of Latin America and an approximately $0.04 per share from our generation businesses located in Europe.

The improved operating results in the Southern Cone of Latin America came primarily from Chile, where we benefited from both higher regulated note prices for contract sales as well as higher stock market prices. This was due to significantly drier than expected hydrology and reduced gas from Argentina. In the past our results suffered from these circumstances, because spot prices were not high enough to allow us to employ substitute fuels economically.

By contrast, in this quarter, the hydrology and reduced gas led to spot prices high enough to enable us to capture positive margins by running some of our generation plans on diesel, including Los Vientos our 125 megawatt peaker facility, which came online in January 2007. This improved economics allowed us to differ a schedule maintenance outage at Norgener, our 277 megawatt coal fired plant to later this year.

Argentina was also another strong contributor to the improved Southern Cone performance this quarter. Similar to Chile, we benefited from higher spot market prices, resulting from lower normal rainfall. We responded to the unseasonably higher spot market prices by increasing both our thermal generation at Central Termica San Nicolas as well as our hydro generation at Alicura reservoir facility.

We were able to increase our hydro generation at Alicura despite comparatively low rainfall, due to higher than normal snowmelt. These environmental conditions occurred simultaneously to beneficial market pricing. So, we were able to maximize on both. In Europe, the key drivers behind improved operations were higher volumes at our Kazakhstan unit, higher capacity payments at Kilroot in Northern Ireland, and higher capacity in energy payments at Tisza II and Borsod in Hungary.

The higher capacity payments at Tisza II reflected the fact, that we are now receiving our full contract pricing from the Hungarian government there. It is important to note that several of these factors, which contributed to the strong operational results in the first three months of this year, are not necessarily expected to carry over into subsequent quarters at the same pace we experience in the first quarter.

For example the unseasonably high spot market in Chile and Argentina may decrease, since the region enters its winter season and rainfall increases. In addition we soon expect the arrival of colder weather to increase the demand for gas in Argentina, potentially tightening supply and limiting our ability to sell power from our TermoAndes facility in the Northern Chilean spot market.

These factors in combination with increasing overall coal and commodity price trends commensurate with oil prices, all suggest that while operations were quite positive in the first quarter, it may be premature to modify our outlook at this point. We obviously will continue to monitor events and update our forecast, as Paul has indicated, accordingly.

Turning our attention to back to the year-over-year comparison, foreign currency translation and transaction benefits, of $0.02 each, also contributed to improvement in GAAP and adjusted earnings. The increase in foreign currency transaction gains was primarily related to euro denominated notes held at the corporate level, and gains realized at Gener, as a result of the 14% appreciation of Chilean pesos over the past year.

These improvements were offset in part by higher expenses for the quarter, which increased $20 million, year-over-year, to $99 million or $0.02 per share. The increase in expense is associated primarily with the plant ramp and business development activity. As well as, higher corporate overhead costs, related to the strengthening of our financial reporting and analysis functions. And including, the implementation of SAP, worldwide.

Net interest for the quarter was largely unchanged year-over-year. The consolidated tax rate for the first quarter was 38%, as compared to 43% in first quarter 2007. The decrease in the effective tax rate from the first quarter 2007 to 2008 was primarily due to a $35 million non-deductible charge taken in 2007, associated with the company's investment in AgCert and changes in tax laws from 2007 to 2008.

Weighted average shares outstanding increased nominally by 2 million from 677 million to 679 million from the first quarter 2007 to first quarter 2008. The increase in shares was due primarily to the exercise of stock options.

Now, let's briefly hit on the key highlights of the segment results. As I mentioned earlier, our Latin American generation segment revenues increased by $468 million, approximately 75% of which was generated by our Chilean and Argentine businesses.

Higher spot prices and volumes of $36 million at our Dominican Republic and Panama businesses contributed as well. Gross margin increased by $150 million in comparison to first quarter 2007, primarily due to increased contract and spot market sales and volumes.

Consistent with the increased revenues, our Chilean and Argentine businesses, contribute the majority of the $150 million, year-over-year improvement, in gross margins.

In our Latin America utilities segment revenues increased by $292 million, primarily due to favorable foreign currency translation of $232 million. Increased volume sales of $91 million, and tariff adjustments of approximately $46 million, at Eletropaulo in Brazil contributed as well.

Gross margin increased by $12 million, primarily due to increased volume sales of approximately $91 million, at Eletropaulo in Brazil and favorable foreign currency translation of approximately $38 million.

The gain on those improvements was somewhat diminished by a lower pricing, as a result of the tariff resets in Eleropaulo in July of last year.

In North America, generation revenues increased, year-over-year, by $53 million, primarily due to $26 million in TEG and TEP in Mexico and $12 million to mark-to-me derivative adjustments as a result of a smaller loss recorded in first quarter of 2008, as compared to first quarter of 2007.

Gross margin increased in North America by $90 million compared to first quarter 2007, primarily due to mark-to-market adjustments and higher volumes, availability and a revenue adjustment of approximately $7 million at our Thames plant, in Connecticut, offset in part by a net decrease of $5 million due to revenue adjustment and Merida in Mexico.

At IPL, our North America utility revenue decreased by $14 million, due primarily to the establishment of a regulatory reserve of $30 million, related to a one time, proposed credit to customers. Offset in part by an increase in rate adjustments of $11 million, associated with recoverable fuel costs and environmental investments.

The regulatory reserve established in connection with the proposed credit to customers was the primary reason gross margin in the first quarter decreased by $29 million year-over-year.

In Europe and Africa generation revenues increased by $68 million, primarily due to higher energy pass throughs and accelerated capacity payments under terms of an amended power purchase contracts for Kilroot in Northern Ireland and an increase in capacity payments received at our Tisza II facility in Hungary. Higher volumes and spot prices due to continued demand growth in Kazakhstan contributed as well.

Gross margin increased by $33 million, $26 million of which was contributed by our Northern Ireland and Hungarian plants, due to higher contract pricing. While, the remainder came primarily from Kazakhstan, as higher energy sales offset increases and fixed cost.

Europe and Africa utilities revenue increased, by $37 million, mainly due to increased tariff rates of $18 million in Ukraine, as well as favorable currency translation of approximately $13 million at Sonel in Cameroon.

Gross margin increased by $3 million, primarily due to increased tariff rates in Ukraine and reduced fuel consumption in Cameroon, as a result of improved hydrology, year-over-year.

In our Asia segment, revenues were up a $135 million, primarily due to approximately $100 million of fuel cost pass throughs at our Pakistani facility. Gross margins increased by $5 million, primarily due to higher availability at Barka in Oman, and Kelanitissa in Sri Lanka.

In closing, we are very pleased with our first quarter financial results and many of the milestones that mark key successes in our operating trends. It is, of course, early in the year, so we are continuing to access our going forward EPS estimates.

It's important to note that some of the drivers of the first quarter favorability, like Kazakhstan, once sold, will have a diminishing impact going forward. And we will also expect to see continuing higher commodity prices. We will, of course, continue to update you, as we look at results and forecast, as the year progresses.

At this time, I'd like to turn the presentation back over to Paul.

Paul Hanrahan

Thanks Victoria. I would like to take couple of minutes and just walk through some of the progress we made in the development activities, developing our pipeline, and as I mentioned, we've made some good progress there.

In the core power business, we completed the acquisition of the 660 megawatt Masinloc coal-fired power plant in the Phillipines. As we've mentioned in the past, this plant was originally built with much of the infrastructure needed to double the size of the plant in a country that desperately needs core capacity is heavily reliant on oil for generation today.

So building a second plant is a very real option for us. It's also worth noting that we were able to fund 60% of the acquisition of this plant with long-term non-recourse debt. So the project finance market has remained robust for us.

In Chile, as we've mentioned in the past, we've been developing several power projects. One of these called the Angamos plant is a 520 megawatt coal plan in the Northern grid, where most of the copper production occurs.

During the first quarter, we signed a 15-year PPA for 370 megawatts with one of the largest copper producers in Chile. We also had an EPC contract finalized which allowed our business in Chile called Gener to move forward and to start construction last month.

This is also in addition to another 270 megawatt project in the Central grid of Chile, which is an expansion of our Ventanas facility, which also began construction in April. Thus, we've moved 1,450 megawatts of generating capacity from the development phase to the construction or operations phases since we last spoke of you.

In our renewables businesses, we also had a few accomplishments. In wind, we acquired a 67 megawatt wind farm in California, where we had been the operator of the facility and knew the assets quite well. Beside an interconnection agreement which is one of the critical pieces in any wind deal, for an 80 megawatt wind farm in California, which has a PPA in place and should go online in 2009.

We also achieved another major milestone where we received approval of our planning application for a 22 megawatt wind farm in Scotland, where we also have several other wind projects in the development phase.

In hydro our joint venture in Turkey, of which we own 51% started construction of three small hydros with the total capacity of 62 megawatts. These are expected to come online by 2011. We also have several more small hydros as well as some thermal projects in our pipeline in Turkey.

And in solar, our new joint venture with Riverstone made some early progress by initiating construction in several photovoltaic solar projects in Spain with a combined capacity of approximately 19 megawatts. We also have a number of other projects in development in Southern Europe that look promising. While these small projects we see this business continuing to grow in countries that are looking for more diversification of the renewable resources.

And in our Climate Solutions venture that produce this greenhouse gas offsets, we completed the acquisition of a landfill gas project in El Salvador that will be ramping up offset production levels from 180,000 tons per year to an average of 400,000 tons per year.

In addition, we'll be ramping up production of electricity from this gas from an initial level of 5 megawatts to 25 megawatts. It's worth noting, there was a combination of our climate solutions team along with our team in country that runs our distribution business in El Salvador that identified and closed this acquisition.

I think it's this combination of specific centralized capabilities in creating offset projects combined with the strong local know-how in many of the city and countries, where we have existing business that gives us a real advantage in this new market.

While we've learned about the offset business is that the process to create and to certify offset is extremely difficult and complicated. We clearly have seen that the process takes much longer than anyone would have expected, but the fact that its so complicated and involves locations and exotic ZIP codes, where we already operate gives me comfort that AES, more than others can create a real and sustainable competitive advantage in this area.

It's also a market that you continue to grow over time as governments recognize that developing some form of carbon emission offsets is really the only practical method to start reducing greenhouses gases in the near and medium terms.

I'd like to thank you for joining us today. We're off to a good start for the year with a strong first quarter, good progress and development which should lead to the creation of more options for us to deploy capital, but always in the context of what will result in the greatest value creation.

At this point, we'd be pleased to field any questions you might have for us. Operator, if you would please open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from Lasan Johong with RBC Capital Markets. Please go ahead.

Lasan Johong - RBC Capital Markets

Thank you. Good morning.

Paul Hanrahan

Good morning.

Lasan Johong - RBC Capital Markets

First of all, nice quarter. Can you give us an update on what's going on with the right of first refusal at Eletropaulo. I heard you guys said last time June might be the time when you guys said last time in June, might be the time when you guys revisit the market. Is that still on track?

Paul Hanrahan

Yeah. I think it's a little bit uncertain but Andres Gluski who is here, Chief Operating Officer. He's been working on this very closely and can give you the latest from Brazil.

Andres Gluski

Sure. The decision of when the auction or sale will take place as BNDES's, which is our partner Braziliana. So it's the sale of the position in Braziliana which includes Tiete, it also includes Uruguaiana. We think that it will probably take place toward the end of the second quarter beginning of the third. We continue to be interested in exercising our right of first refusal. We have in place local financing. We also have interest from local partners as well. So we feel we're in a very good position. But in terms of the exact timing, this is really up to BNDES.

Lasan Johong - RBC Capital Markets

Okay. Paul, I know you've got a big pipeline working, but probably development projects, but you haven't updated us with kind of like a global picture of how much you have in the pipe, what's in development, what's imminently signable. Can you give us big broad strokes of those kind of pictures?

Paul Hanrahan

So I think, I went through that in the last quarter call, and I don't want to go through it all again.

Lasan Johong - RBC Capital Markets

Well, nothing has changed, you say.

Paul Hanrahan

Nothing's changed. I mean I think it continues to look good. We're moving the projects forward in Chile with the other progress we're making, and it makes me think it's very achievable. What we will be doing though, we've heard from a number of investors, including you, what people are looking for is more of an update on these various projects.

So what we'll be doing going forward, is providing a little bit more detail, maybe to one of the investor conferences we'll have an opportunity to do this, that are coming up. And in our calls, we'll provide more detail on the specifics but since we last updated you, it looks pretty much the same and I think we're on track to hit those targets.

Lasan Johong - RBC Capital Markets

Great. Victoria, when do you expect to go the external testing?

Victoria Harker

I am sorry, for what?

Lasan Johong - RBC Capital Markets

For the systems and the accounting and everything.

Victoria Harker

We have remediated all, but two of our material weaknesses. We have the legal entity sensing schedule for the summertime, so essentially next quarter. And we are continuing to work through the contract remediation, which we actually had teed up for testing at the end of this quarter. So we will continue to good progress on that. My expectation is that we will be completed with both by year end.

Lasan Johong - RBC Capital Markets

Both as an internal and external testing by year end?

Victoria Harker

Yes.

Lasan Johong - RBC Capital Markets

Okay. Paul, do you have any plans to go marketing outside of the one or two conferences you usually do in a year?

Paul Hanrahan

Yes. I think now that our financial systems -- I think as you can see, we're getting a little bit better getting our numbers out in time. I think give us more flexibility to go out and talk to people. So it really is our intention for Victoria, me and Ahmed to get out to the various locations and talk to people and give more of an update. Especially, because we have so much in our growth pipeline I think for us to really get credit for all the development that's going on, we're going to need to communicate with people very clearly.

And let people know how that progress is going. Because I think that's what people are waiting to see what the stock price is. How we're doing in terms of executing on that development pipeline? And that's what I think we're going to need to as a catalyst to move the stock. So that's why it's going be important for us to get out and talk with people.

Lasan Johong - RBC Capital Markets

Couldn't agree with you more. I think there is only last issue for me, my understanding of the Southern Cone situation is that more or less what you're telling us is last year when this happened. Power prices were not high enough to take advantage of. This year, you did. Going forward there might be some more benefits in the second quarter but you're waiting to monitor it and there might be an adjustment to guidance now.

Last time you had given us guidance, it was a spot guidance of $1.14. Previously, it was a range of $1.12 to $1.20. Are we talking about busting through the $1.14 or are we talking about moving up the range from $1.12 to $1.20 to something else.

Paul Hanrahan

I will have Andres talk a little bit about the hydrology gas situation in Argentina and Chile, because it's more complicated than what it appeared first. But, I think, what we are seeing right now, is we are not adjusting guidance. And right now we've seen prices start to come down in Argentina and Chile. But they are still higher than we would have expected at this point.

We also have some other factors out there, with respect to coal prices, with some of our plants, that aren’t completely hedged, where we have seen movement in coal prices which could have a negative impact on the future. Right now as we are saying, we are not adjusting guidance. By the end of the second quarter, we have a better feel for how it looks for the year. But really, we would be talking with reference to the $14 possibly having some upside

Lasan Johong - RBC Capital Markets

Got it, understood.

Paul Hanrahan

Let me have Andres, maybe he could just explain what's happening in Chile and Argentina?

Andres Gluski

I think to understand the situation in Chile, if it's a very dry year, like this year, it allows us to run more of our plant and take advantage of high spot prices. If it's a mildly dry year, then the prices aren’t high enough to operate them at a less efficient price. So that's was the situation last year.

In addition, last year as you know, we had our CPSN plant, unit number 5 out for two crucial months, during the winter months of the Southern Cone. So, obviously we are operating better this year. The conditions are drier in Chile and that's more favorable to us. However, we as winter comes into Southern Cone more of cutoff in gas prices. And spike that we had in prices in the Brazilian and in Chilean markets in the end of the year 2007, beginning of this quarter have normalized. So we expect to go back to a more normal situation in future months.

Paul Hanrahan

And I would just like to add to what Andres said. It's more of a generic comment about our business. In many places you are seeing more volatility in power prices, and that's particularly true with different fuels having price volatility. The importance of having high availability, of having good operations is been driven home to us. I think that became clear really over the past few years, and the efforts of Andres, Dave Key and other Regional Presidents to upgrade the availability of plants has been a big focus for us over the last few years.

You have seen our maintenance CapEx actually creep up a little bit, but it's all been driven in order to have that flexibility. To be able to operate and run the plants when prices are high. So, it's something we are really focused on and I think in this last quarter you saw our ability to take advantage of that.

Lasan Johong - RBC Capital Markets

That's great. And just one other question on Chile, are there plans to perhaps find a way to bridge the gap between a good hydro year and a very bad hydro year, where in the middle you are kind of caught between a hard place and a rock? Is there plans kind of maybe to find a way to eliminate that spot?

Andres Gluski

Basically, I think, what's going to change the situation is the number of plants that we are building in Chile. We have a 1000 under construction, most of these are coal and therefore they will bridge the gap in future years and sort of even out our earnings at Gener.

Lasan Johong - RBC Capital Markets

Great. I appreciate it. Thank you.

Victoria Harker

Lasan just one last comment, this is Victoria, and I referenced it slightly in my comments. Besides commodity prices and Southern Cone performance, we also had at Kazakhstan, which is when the sale completes. It will no longer be part of our earnings going forward, other than the management contract. It did contribute to favorability in the first quarter, so that's the other piece that we're monitoring.

Lasan Johong - RBC Capital Markets

Got it, thank you.

Paul Hanrahan

Thanks.

Operator

Thank you. Our next question is coming from John Kiani with Deutsche Bank. Please go ahead.

John Kiani - Deutsche Bank

Good morning.

Paul Hanrahan

Good morning.

Victoria Harker

Hi, John.

John Kiani - Deutsche Bank

I have a few questions on capital allocation and portfolio optimization. Based on the high valuations that people are putting on Indian power assets right now, have you thought about IPOing or selling an interest in the 2,500 Megawatt development pipeline that you have in India, especially considering the meaningful value that's tied up in the coal concessions that you have already been awarded?

Paul Hanrahan

We talked about internally. I think our view is we probably need to get a little bit further down the road thinking about value creation. I think the amount of money that we have to spend to further those projects isn't that great. I also think its going to be a strong market for a long time to come, just given the potential there. I think we'd like to take it to little bit further stages of development, where we could capture more value by going out and doing something like that, some portfolio management.

It's also, I think, an important market for us to build on. Its going to have maybe one of the biggest power markets in the world for independent power producers over the next, say, 10 years. So, we really want to maintain little bit more control over that process, at least in the early stages, but clearly if we saw an opportunity to do something like that, that would be attractive to us. I just think its little bit premature at this point.

John Kiani - Deutsche Bank

Okay. That's helpful. And then, as far wind development is concerned, can you remind me of how many megawatts of wind generation you'll have in service by the end of this year?

Paul Hanrahan

Let me have Ned Hall, who is head of the wind business. He is here. Maybe he could just tell you what's going on there and how would be an operation.

John Kiani - Deutsche Bank

That'll be great. And also, what the pipeline is beyond that?

Ned Hall

Good morning. This is Ned Hall. We have in construction at Buffalo Gap, 370 Megawatts, and as Paul mentioned, we purchase 67 megawatts. We do some other deals in the works that will potentially add to that but those are the two things that we publicly announced, that it will come online this year. We also have, as we’ve referenced in the past, the pipeline of above 5,000 megawatts, a little more than half of that in the United States, a little more than half of that outside the United States.

And consistent with AESs past business development focuses, we are very much trying to grow our pipeline, and our business opportunities outside of United States right now, in the markets where AES has a strong presence.

John Kiani - Deutsche Bank

Okay. So, your development pipeline beyond the end of ’08 is about 5,000 megawatts and what will be the approximate number of megawatts you have in service by the end of this year then?

Ned Hall

The total, based on what I just told you, it will be just little over 1,000 megawatts.

John Kiani - Deutsche Bank

Okay. So, 1,000 plus roughly another 5,000 in the pipeline.

Ned Hall

Right.

John Kiani - Deutsche Bank

Okay. And then, one last question on capital allocation. Are the senior securities that are callable, I believe either this month or next, the last tranche of debt outstanding that you need to either pay down or refinance before you have flexibility to buyback stock?

Victoria Harker

We have two tranches. We have the main maturities and then we’ve also got the second leans. And we are looking at both.

Paul Hanrahan

And we have the, some bank debt on top of that. So I believe rough numbers are, the second lean is about $700 million, will be over $750 million. And bank debt, maybe something in that same order of magnitude, $950 million. And some of these, what we could do is, you don’t necessarily have to refinance them. There is possibility we could get covenant changes. There are number of different ways you could go out and attack this. But that’s something that Chip Hoagland and his team is trying to think through, what will be the best way to go forward.

John Kiani - Deutsche Bank

Okay. And the second leans are higher coupon from what I understand. So those could also be attractive from a cost perspective as well?

Victoria Harker

Not necessarily. They are not the highest. So, we will obviously refinance in the descending order of priority in terms of maturities and in terms of cost. But the covenants obviously will be our focus in terms of getting those out.

John Kiani - Deutsche Bank

Okay. So, the second leans and the bank debt. Okay. Thank you.

Operator

Thank you. Our next question is coming from Elizabeth Parrella with Merrill Lynch. Please go ahead.

Elizabeth Parrella - Merrill Lynch

Thank you. And Paul, your comments on capital allocation, certainly do seem somewhat different from how you prioritized things in mid-March in terms of making the removal of these covenants a priority. Whereas before in mid-March you were talking about, don’t necessarily look for us to do a lot of discretionary GAAP repayments, because of the opportunity you have on the growth side.

The stock has sort of been in the same range it has been for the past few months, are there other things that have changed or its just the more opportunities maybe to do something on the debt side now, more economically than before, or is it the return prospects you're seeing in you're seeing in the portfolio or maybe the timing, moneys is being laid out the growth; what has changed?

Paul Hanrahan

I think, in March, what I was concerned about really was the market ability to get capital. I think things were little uncertain back then, and our desire was not to do anything and use up lot of capital unnecessarily and potentially slowdown our growth. The stock reacted, it created some opportunities, but we didn’t had the flexibility to go do something.

I think now our sense is the market is offering floor opportunities. There will probably be windows where we can do something and windows where we can't. The Braziliana transaction has also been pushed out a little bit. So I think we see a little bit more flexibility, but most and in particular it’s the market where I think even we are going to see the things, situations where the market is tight. I think we are going to see windows, where it will open up.

We just want to be prepared to react to those windows and to take the steps to remove those because it makes sense to get it done. And our attention is always to do that. But I do think there is a lot of volatility in the markets, but it's offering opportunities to execute when the market is good. So our view is we'll probably find opportunities to do that.

Elizabeth Parrella - Merrill Lynch

Okay. And then I had a question for you on slide seven. You had a big reduction in parent liquidity this quarter, looks like most of the reasons for that was you had $644 million investments in subsidiary. Can you kind of indicate us what are the bigger pieces of that, $644 million?

Victoria Harker

Sure. Elizabeth, this is Victoria. Of the 644, I think the biggest drivers were Mountain View and the Brazil wind projects, which we referred to earlier, I think in both in mine and Paul's discussion. We also had the solar JV coming up behind those as well as wind turbines, which we had previously approved an aggregate but now we have pieces of that actually been deployed from a project standpoint and then Nejapa. So of that I think Brazil wind and Mountain View were probably about half of the 644 and all the remaining got you to the rest of the 644.

Elizabeth Parrella - Merrill Lynch

I'm sorry, Brazil wind?

Victoria Harker

Nejapa, I'm sorry.

Paul Hanrahan

Well, yeah. Brazil wind, what we've got there is we've been developing a project. We've been looking at flipping -- we've made a loan to a project. We may actually convert that to equity. Haven't done that yet, and probably want to get that done before we talk too much more about the project. But it's essentially as Ned mentioned, Brazil is an attractive market force. We see some opportunities. And it maybe a way to get involve in one where we could become the equity in the project and that's the Brazil wind project we're talking about.

Elizabeth Parrella - Merrill Lynch

Okay. Thank you.

Operator

Thank you. Our next question is coming from Gregg Orrill with Lehman Brothers. Please go ahead.

Gregg Orrill - Lehman Brothers

Thanks a lot. Congratulations on the quarter. On the wind pipeline of 5,000 megawatts, I was wondering if to any extent whether you could drill down on that, as to where you might have reached certain milestones, whether it's turbines, permits or wind analysis and just to flush it out a little bit better.

Andres Gluski

Yeah. That's something we are actively talking about how we communicate more clearly and broadly milestones around wind and other opportunities specifically. But what Paul did mention and I can reemphasize is, we have signed a contract -- a PPA in California for an 80 megawatt project that is working its way. It's this past quarter achieved its interconnection agreement, which is increasingly becoming a key milestone for wind projects globally.

So, we think that is a real milepost in that development to have achieved that. And that should go into construction and be completed in '09 or at the latest early '10. We also have received all the permits for a 22 megawatt project in Scotland, which is on its surface a smaller project, but the wind is so strong there, it has great economics.

The U.K. market remains short renewable energy, so we're very excited about that project and it's the first in a portfolio projects we expect to bring online over the next three or four years there. So, we think it's a good indicator.

We also received our permits and are moving and progressing a project in Bulgaria. And we have our portfolio in France, and it continues to go forward too. And we should be receiving permits in the interconnection agreement.

We're also very active in the United States just in terms of where the 5,000 megawatts sits in California, Texas PJM and in Europe, the roughly 2,000 megawatts there is spread out amongst the U.K., France, Greece Turkey.

We've also started to expand our efforts in China. We announced last year our first effort, a small investment in a 50 megawatt project and we've been working hard with Guohua, the partner in that project as well as other potential partners to expand that business. And I think we anticipate that will be a high growth opportunity especially with the Chinese recently coming out and saying they're going to expand their market to potentially as large as a 100,000 megawatts. So I think you'll see more from us in China as well.

Gregg Orrill - Lehman Brothers

Thanks. One other question. On the Braziliana process, should we be looking for the formal right of first refusal process really to be the one that produces an outcome? Or is there some other set of circumstances that we should look for that it's not just a matter of getting bigger or not. There could be some other sort of restructuring.

Paul Hanrahan

Well, I think the first step really is, it's in the hands of our partner, the Development Bank of Brazil, BNDES to decide whether they want to sell their piece or not. And really that starts -- when they pull that trigger that starts the process, a bidding process. Any bidding process that we have the right to come in and exercise our right of first refusal.

And I think as part of that right of first refusal, as Andres mentioned, how we would finance that with probably some combination of the AES money, potentially working with a partner and some financing that would go along with that. So that's the right of first refusal really is the process that would allow something like that to happen.

I think until BNDES goes forward with some sort of an auction process, if that's what they elect to do, that's really what's going to trigger it. But it's really entirely in their hands as to how they want to go forward with their piece. It's very possible they could elect to keep it. It's very possible they could elect to do other things with it. But right now, they have been moving down a path of some form of an auction.

Gregg Orrill - Lehman Brothers

Okay. Thank you.

Operator

Thank you. Our next question is coming from Brian Russo with Ladenburg Thalmann. Please go ahead.

Brian Russo- Ladenburg Thalmann

Hi. Good morning.

Paul Hanrahan

Good morning.

Brian Russo- Ladenburg Thalmann

Could you maybe highlight some of the assets that you would consider sale candidates or portfolio optimization?

Paul Hanrahan

I won't go through those specifically because we probably won't want to go forward and announce those. But generically, the way I think about it is, we've been focused on really getting the most out of our assets for several years now. And I think we've taken many of our businesses up to levels that they probably can't get much better.

What you then look at is -- look things you can do with restructuring the project itself. I mean, are there contracts that would make sense to buy out, other contracts you can go into, but where we look at an asset and say there's really not a lot more we can do with the asset to improve the performance, either commercially or operationally. And it really doesn't serve any strategic purpose in terms of being able to grow as a platform.

I think at those points there maybe other people who are going to be better owners, more efficient owners of that who have lower cost of capital than we would. Whereas I think our best way to deploy capital is to put it into assets that can benefit from operational turnarounds, that can benefit from commercial restructurings, or that are in the development phase, the Greenfield development, going through construction startup. That's really, I think, where we add the most value.

So, you probably see us when we see opportunities like that and the market is good, looking to do some things to transact. It's something, you hate to sell anything that you own, but at the same time, in many cases, it's going to be the right decision. So we've been going through a process over the past several months to identify which ones will make sense.

You'll probably see us over the next several months, start a process and maybe go through different waves of assets that we might put to the market, not doing it all at ones. But the specifics ones, you just have to wait until when we can finish the process to determine which ones to go forward with.

Brian Russo- Ladenburg Thalmann

Okay. Understood. Also the majority of these projects are in the development pipeline and are considered contract generation type projects, therefore the PPAs that you look to sign prior to financing have few pass-throughs?

Paul Hanrahan

Yeah. We generally won't enter into long-term PPA unless we've somehow hedged the fuel side of it. That's probably the biggest risk we face. And if we're not going to hedge that, it would be our preference then to probably go merchant. Because then you're relying on the market to effectively provide the hedge.

Brian Russo- Ladenburg Thalmann

Okay. And then lastly, maybe just kind of more of a bigger picture, type of color. We read and hear about mine closures in South Africa and copper mine closures in Chile, all due to inefficient power supplies. Maybe you can just comment on those markets and maybe the growth in India and in China, and how AES is positioned to benefit from that?

Andres Gluski

Well, you're right. South Africa, I think, is a great case. It's a country we like a lot. We'd like to invest. I think as you saw we had won a bid, and unfortunately, as we were going through the process of developing it, we couldn't get comfortable with the legal structure associated with the contract, that we could in fact have an enforceable contract, at the end of the process. And we, therefore, had to drop off, but the South African government is committed to add more capacity. Eskom the utility there is busily in the process of trying to add some capacity, because they are in fact having a cut back in their electricity supply and that has started to hurt some businesses. But that's why, I think its creating opportunities for us. We have other projects that we are developing, as far as South African market.

We talked about the projects in Chile, where there is a strong demand for more power. And what's helped us, for example in Chile, is been the experienced people we had with us were a known entity up there. We've been supplying power reliably for years. So, as we go through process, its giving us an edge, just because people know we can deliver, in terms of, developing the power plants, and delivering the electricity and keeping lights on reliably. Particularly important, up in the northern grid of Chile, because they just cannot afford to be without power.

So, I think, our expertise in terms of particularly coal fired plants, operating in countries like that has helped us a lot. You see that expanding to places like India, probably less so in China, because in China you have got the five large state owned power generation companies, which, I think, are quite capable. And matter of fact, they've been building a lot of coal fired capacity. That’s one of the reasons why the Hefei plant, oil-fired plant, is being shut down and dismantled and the assets sold, is because with all the coal-fired capacity coming online, there isn’t the need for the peaking oil-fired capacity, which is inefficient and expensive. But I think, in all this places, it's really our experience in operating countries outside the US, which we have been doing for many years, its giving us an edge over some our competitions.

Brian Russo- Ladenburg Thalmann

Okay. And given the shortages and the negative impact to some of these local economies, did you get a sense that there is a sense of urgency to maybe accelerate some of these development projects? And given your backend loaded growth nature of your earnings profile, do you think any accelerated projects could lead to accelerated near and intermediate term earnings growth?

Paul Hanrahan

No, I wouldn't change our guidance that we gave. Our long-term guidance that we gave just a couple of months ago. But you are right in the sense that the commitment, I think in the part of the governments to make sure they've got reliable power supplies. Not so much is going to expedite the projects, because you still going to have to go through the normal hurdles you do with respect to environmental permitting. But probably enhances the probability that they are going to get done, because there is just a serious desire on the part of all these governments to make sure they've got the power. And that's causing them to lean towards people like AES or companies like AES to provide their power. So, I would say it's probably not going to change the timing of these things, but probably does make it a higher probability that we're going to hit those numbers.

Brian Russo- Ladenburg Thalmann

Great. Thank you, very much.

Paul Hanrahan

You're welcome.

Operator

Thank you. Our next question is coming from Raymond Leung with Goldman Sachs. Please go ahead.

Raymond Leung - Goldman Sachs

Hi, everybody. Couple of questions. On the parent cash flows or dividends distributions to some subsidiaries, it's tracking about $1.275 billion for the trailing 12. I guess you got it roughly at about $1 billion, $1.1 billion one for 2008. Are you guys still comfortable with that $1 billion $1.1 billion number? And also with your thought process with respect to capital allocation and possibly returning capital to shareholders, how should we think about the parent debt to the subsidiary distribution number? What's the appropriate target for you guys?

Victoria Harker

On your first question, this is Victoria. I think you are currently comfortable with the guidance relative to the cash. We're obviously looking based on the first quarter's released earnings favorability. Whether there is some flowthrough relative to rest of year and we'll obviously update it as we forward. But, I think, that's a fairly good number. And there is obviously expansion, lot of projects going on at business level, which we will have to weigh relative to whether the return of cash to the parent is approved to be used as a reinvestment in businesses for [PLCF] specifically. On the second question I'm not sure I understood

Paul Hanrahan

Well, very simply, I think, the way to think about it is that our, think about BB metrics. What we're trying to maintain is a BB crediting rating. I think, that's kind of our floor. So, if we did sell some assets. In some cases you probably see a combination of debt pay down plus stock buyback, if that's where we decided to put the money. So the intent would be to maintain BB credit characteristics, whatever numbers that comes to it and I think we've got some views on that.

Raymond Leung - Goldman Sachs

Okay. Right.

Paul Hanrahan

Operator, why don't we just take one more question, because I know people have a lot to do. I don't want to have this run much over an hour and then any follow-up questions people can go through Ahmed Pasha or Michael Cranna. But why don’t we take one more question.

Operator

Thank you. Our last question is coming from Wei Romualdo with Stone Harbor. Please go a head

Wei Romualdo - Stone Harbor

You talked about your bank facility, $900 million. Are you referring to those LCs, or do you actually have any cash drawn on those revolvers?

Victoria Harker

We have about $750 million in the revolver currently.

Wei Romualdo - Stone Harbor

Okay. Are those just LC's or are they drawn? Whether you have a revolver, $750 million now, revolver, how much has been drawn on that one?

Victoria Harker

None

Wei Romualdo - Stone Harbor

Okay. Is that LC outstanding amount?

Victoria Harker

Yes. It's minimal, about a $100 million

Wei Romualdo - Stone Harbor

Okay. And then there is an unsecured LC facility, is that fully utilized too?

Paul Hanrahan

It is not fully utilized. No.

Wei Romualdo - Stone Harbor

Okay. So, when you are talking about stock buybacks, are you talking about those revolvers or something else?

Paul Hanrahan

Yeah. Chip Hoagland is our treasurer. He can give you just a very quick update on that.

Chip Hoagland

If you are asking about the covenants, the covenants are in the first lien debt, that is the bank covenant, not the unsecured, but the secured revolver for $750 million, it has covenants in there. Currently, there, I think, we have a basket of $85 million for permitted payments. So, we are allowed to make some payments, but they are capped at $85 million, which grows as a percentage of income.

Wei Romualdo - Stone Harbor

Okay. But there is not much drawn on that. There is nothing drawn on it and there is some LC outstanding on that one?

Chip Hoagland

That’s correct. But we use that for liquidity. Right?

Wei Romualdo - Stone Harbor

Okay. And there is a 6% convertible that’s maturing this month. Is that going to be repaid with cash?

Chip Hoagland

We are examining our options and it will be repaid in cash shortly, because of the short maturity, but we may refinance it.

Wei Romualdo - Stone Harbor

Okay. And that is allowed, given the first lien covenant?

Chip Hoagland

Yes. I think it would be a violation of our covenants if it crossed to Paul that we didn't make maturity payments.

Wei Romualdo - Stone Harbor

Okay. It doesn't count towards your restricted payment basket?

Chip Hoagland

No, it doesn’t.

Wei Romualdo - Stone Harbor

Okay. And last question I have is, in your press release you mentioned impairment that you took for investment in AgCert. Can you give some background on that? What type of investment you put in that company and what was the rational?

Victoria Harker

We actually, previously, had a impairment relative to AgCert and we talked about it in the 10-K, as well. The only thing that has changed is that because of where they are from a legal standing perspective and we are the sole secured creditor at this point. We are consolidating their results as they work through their process.

Wei Romualdo - Stone Harbor

Okay. What was the initial rationale to invest in that company then?

Paul Hanrahan

Yes, actually what we did is we formed a joint-venture with them, and essentially in order to do that one of the requirements was we put some investments in equity in that company. We also had some transactions, where we essentially prepaid for some covenant offsets, and that’s all been worked through the examinership process, which we expect to be completed by the end of the second quarter. And we could probably go into more detail. But it was all part of developing our business with AgCert, which by the way continues to look strong. We have projects that are in that joint-venture with them that continue to look strong and we are feeling about that part of the business.

Wei Romualdo - Stone Harbor

Okay thank you.

Paul Hanrahan

Alright thank you.

Ahmed Pasha

Okay. This is Ahmed Pasha. I wanted to say thank you very much for everyone for participating today. If you have any follow-up questions, please contact either Michael Cranna or myself in investor relations. For any media inquiries, please contact Robin Pence. Thanks again and have a nice day.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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Source: AES Corp. Q1 2008 Earnings Call Transcript
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