AES Corp (AES) — Q2 2015 Earnings Call Transcript

Thanks, Alica. Good morning, and welcome to our second quarter 2015 earnings call. Our earnings release presentation and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors. Joining me this morning are Andres Gluski, our President and Chief Executive Officer; Tom O’Flynn, our Chief Financial Officer; and other senior members of our management team. With that, I will now turn the call over to Andres.

Good morning, everyone, and thank you for joining our second quarter 2015 earnings call. Today, we reported second quarter EPS of $0.25 and proportional free cash flow of $62 million, and we are reaffirming our 2015 guidance ranges for all metrics despite facing increased headwinds from foreign currencies. Before Tom and I provide more color on our results for the second quarter and first half of the year, allow me to review our progress on the priorities for 2015 that I provided on our earnings call in February. First, we are making good progress to reach closure on key pending issues that could impact some of our businesses. At Eletropaulo in Brazil, we have had a reasonable outcome in our four-year rate case. At Maritza in Bulgaria, important milestones have been reached towards the resolution of our outstanding accounts receivable. Second, we are executing on our construction program and leveraging our platforms. In April, we commissioned our 1.2 gigawatt Mong Duong plant in Vietnam six months early and under budget. Our remaining $7 billion construction program is advancing on schedule, and we expect to bring 6 gigawatts online by the end of 2018. In July, we also broke ground on three new energy storage projects, including our first two in Europe. Third, we are expanding our access to capital through partnerships at the project and business level. Today, I’m very pleased to announce that we are forming a new 50/50 joint venture with Grupo BAL to invest in power and related infrastructure projects in Mexico. And finally, regarding capital allocation, we have delivered on our commitment to invest at least $325 million in share repurchases. Today, we are announcing that we intend to utilize the approximately $100 million left on our buyback authorization during the remainder of this year. In 2015, between buybacks and dividends, we will return $700 million to shareholders or approximately 8% of our current market cap. I will provide more detail on these achievements in a moment, but now I’d like to briefly discuss our financial results and our expectations for the remainder of the year. Our year-to-date 2015 adjusted EPS of $0.50 is in line with our results of last year, and our proportional free cash flow of $327 million is well ahead of first half 2014 results. Our earnings and cash flow are typically weighted towards the second half of the year. We expect our second half results to benefit from improved availability due to less plant maintenance, better hydrology in Latin America, and higher collections in Bulgaria and the Dominican Republic. Although there is still a lot of work to be done to deliver on stronger cash flow in the second half of the year, we remain confident that we will achieve our financial guidance for 2015. Now, let’s discuss some key issues at our businesses in Brazil. As we discussed on prior calls, we have seen a decline in electricity consumption in Brazil, caused by the economic recession and higher energy prices. Today, economists are projecting a 2% contraction of GDP for 2015. In addition, dry hydrology is leading to high electricity prices by requiring the dispatch of more expensive thermal energy. As a result, we are forecasting a 4% year-over-year decrease in volume at our Brazilian utilities in 2015. Nonetheless, we have already factored in the softness in our prior forecast. As a reminder, every 1% change in volume in our Brazilian utilities has a $7 million pretax impact on our bottom line. Turning now to hydrology. In Brazil, we have seen rainfall improve more than expected since our last call. In July, rainfall was 156% of the long-term average, and reservoir levels are projected to be 37% by the end of August, materially higher than the 20% levels at the beginning of the year. Improvement in hydrology in Brazil is reflected in spot prices, which are now around 120 reis per megawatt-hour, significantly lower than last year. We now see the risk of rationing electricity in Brazil in 2015 as remote, but we continue to expect a negative earnings impact of $0.07 per share from poor hydrology this year. In Panama, we are observing a return to normal hydrology and spot prices are about $100 per megawatt-hour, one-third of the prices we saw last year. In Colombia, our 1 gigawatt hydro plant, Chivor, is experiencing stronger inflows close to the historical average. While in the rest of the country, inflows are 90% of the long-term average. Turning to our progress on Eletropaulo’s four-year tariff reset, this outcome sets a strong foundation for predictable cash flow and earnings through 2019. Lastly, we have successfully negotiated the restructuring of Brasiliana, where we own various businesses in partnership with BNDES, the state-owned development bank. Through this restructuring, we are separating our generation business, Tietê, from other businesses under the Brasiliana umbrella. This separation will give us more control of operations and capital allocation decisions at Tietê. Once this transaction is completed, we will be in a more favorable position to grow Tietê by tapping into approximately $500 million of debt capacity at this business. Moving on from our strategic objectives, our construction program is the most important driver of our 10% to 15% average annual growth in free cash flow over the next few years. This strong growth is the foundation for our commitment to a 10% annual dividend increase as well as all other capital allocation decisions. From 2015 through 2018, we expect to commission 7 gigawatts of new capacity compared to roughly 600 megawatts we brought online in the three years from 2012 through 2014. Through June, we’ve already brought online 1.3 gigawatts, which is nearly 90% of the capacity we plan to commission in 2015. Our remaining 5.8 gigawatts under construction are progressing well and remain on time and on budget. As a reminder, total CapEx for our projects under construction is $7 billion, but the AES’s equity commitment is only $1.3 billion, and all but $400 million has already been funded. We expect an average return on equity from these projects of more than 15%. In April, we achieved commercial operation on our 1.2 gigawatt Mong Duong project in Vietnam six months early and under budget. The plant is operating at full load and will help meet Vietnam’s rapidly growing demand for electricity and provides us with a solid platform in the country. We are also the world leader in battery-based energy storage with 86 megawatts of installed capacity. We are seeing growing regulatory support and greater acceptance by utilities in our markets. As a result, we recently broke ground on three new energy storage projects totaling 40 megawatts in three countries. We are consolidating our global leadership and now have a total of 70 megawatts of energy storage under construction that we expect to come online through 2016 and 200 more megawatts in late-stage development. We are very well positioned to continue to take advantage of this emerging business opportunity given AES's portfolio and eight years of successful and profitable experience operating battery-based energy storage. On the new joint venture we are forming in Mexico, we announced that we signed a Memorandum of Understanding with Grupo BAL, a Mexican business conglomerate with a market cap of $11 billion to pursue new power, desalinization, and natural gas projects. Grupo BAL is one of the largest and most respected business groups in Mexico, and one of Grupo BAL's subsidiaries, Grupo Peñoles, is the off-taker of our TEP plant in Mexico. Mexico is in the process of implementing new energy sector reforms, which will allow for greater private sector participation. Over the next 10 years, it is estimated that Mexico will need 25 gigawatts of new or replacement generation. We have owned and operated a successful generation business in Mexico for more than 15 years, and now with Grupo BAL, we’re poised to take advantage of the opening of the energy sector. Looking at growth opportunities beyond our projects currently under construction, our future project mix is likely to be heavily weighted towards natural gas and renewables while using our platforms to provide energy storage, desalinization, and LNG-related services. In arid and semi-arid regions such as Chile, where our plants on the coast are already providing desalinization for their own needs, long-term desalinated water contracts can be an attractive business. Using existing infrastructure and permits significantly reduces the cost of providing desalinated water to third-parties such as municipal water authorities, mining, and industrial customers. Based on all of the opportunities we see across our portfolio, we believe we can invest $300 million to $400 million of AES equity in attractive growth projects each year, which is consistent with the amount of equity we are currently contributing to our growth projects. This amount of equity investment is quite moderate considering the strong growth in our free cash flow. In addition, we can use the debt capacity at our existing businesses such as Brazil, Chile, the Philippines, and the Dominican Republic to fund growth projects. Recycling capital has been and will remain an integral part of our strategy. Over the past four years, we have raised $3.1 billion in asset sale proceeds and another $2.5 billion in partner equity at the business and project level. These actions have permitted us to reposition our portfolio, pay down our debt, improve risk-adjusted returns, and accelerate our growth profile. Before turning the call over to Tom, I want to emphasize that as we have demonstrated to date, we will continue to compete all new investments against share repurchases to ensure that we are maximizing risk-adjusted returns for our shareholders. To that end, we are returning $700 million to our shareholders in 2015, which is 8% of our current market cap. We have returned a total of $2 billion to shareholders since September 2011 and reduced parent debt by $1.5 billion or 25%, while significantly lessening its average tenure. With that, I will turn the call over to Tom to discuss our second quarter and year-to-date results and full-year guidance in more detail.

Thanks, Andres, and good morning, everyone. Our first-half results and the reaffirmation of our guidance demonstrate the benefits of our proactive actions to mitigate the impact from currency devaluation and other macro factors we’ve experienced over the last several months. Today, I’ll review our second quarter results, including adjusted EPS, adjusted pretax contribution or PTC by strategic business unit or SBU, proportional free cash flow by SBU, then I’ll cover our 2015 guidance and our 2015 capital allocation plan. Second quarter adjusted EPS of $0.25 was $0.03 lower than second quarter 2014. We were negatively impacted by the following: $0.04 operating impacts, including timing of plant maintenance of certain businesses, as well as lower demand in contracting strategy in Brazil. These were offset by favorable hydrology in Panama, Colombia, and new businesses coming online. We had a $0.02 impact from a stronger U.S. dollar, which appreciated roughly 20% against the Brazilian Real, Colombian Peso, and the Euro. Finally, a $0.02 net impact from other adjustments, primarily the favorable reversal of liabilities in Brazil and Kazakhstan in 2014, offset by the favorable reversal of a liability at Eletropaulo in 2015. On the positive side, we benefited $0.04 from a lower tax rate of 30% this year versus 40% in the second quarter last year and a $0.01 from capital allocation net of asset sales, which resulted in 13% lower Parent debt and a 4% lower share count relative to last year. Our SBU's financial performance shows mixed results. In the U.S., adjusted PTC decreased by $24 million due to planned maintenance in Hawaii and an IPL, as well as lower wind generation at Buffalo Gap in Texas. Proportional free cash flow was roughly flat, reflecting working capital recovery and lower interest at DPL. In Andes, PTC decreased $23 million primarily due to the timing of planned maintenance in Chile and Argentina, as well as a weaker Colombian peso. Proportional free cash flow declined by $37 million due to lower earnings and higher tax payments at Chivor in Colombia versus last year. In Brazil, PTC decreased $74 million. In addition to the $17 million impact from the depreciation of the Brazilian real, the decline was driven by approximately $13 million net impact from liability reversals in each period at our distribution businesses Sul and Eletropaulo. Last year, our generation business Tietê benefitted from spot sales at favorable prices due to lower contract levels during the first half of the year; this year, Tietê's contract levels are flat in the first and second half, so we expect contributions to be evenly distributed. Last but not least, Sul has been affected by lower demand and higher costs. Proportional free cash flow decreased $18 million, primarily driven by lower operating income at Tietê as I just discussed. In MCAC, PTC increased by $11 million, largely driven by improved hydro conditions in Panama, where we generated more this year versus buying in the spot market last year. Proportional free cash flow improved by $12 million, primarily driven by improved operating performance. In Europe, adjusted PTC decreased by $32 million mainly due to lower energy prices and the timing of planned maintenance at Chilvers in the U.K. Despite the decline in earnings, proportional free cash flow was up $3 million, largely due to improved working capital at Maritza. Finally, in Asia, PTC increased $7 million, resulting from the early commencement of operations at Mong Duong in Vietnam, partially offset by the sale of minority interest in Masinloc in the Philippines in 2014. Proportional free cash flow was roughly flat. Overall, we earned $251 million in adjusted PTC during the quarter, a decrease of $89 million from last year, and we generated $62 million of proportional free cash flow, an increase of $15 million. Year-to-date adjusted PTC declined $80 million, largely driven by lower demand and contracting strategy in Brazil, a stronger U.S. dollar, as well as the net impact from the reversal of liabilities in Brazil and Europe. Our proportional free cash flow increased $151 million to $327 million, primarily due to higher contributions from the U.S. and MCAC, including higher collections at DPL and improved working capital in Puerto Rico. Year-to-date adjusted PTC and proportional free cash flow by SBU are in the appendix of today's presentation. Comparing our first half results to our full-year guidance, our earnings and cash flow tend to be more heavily weighted toward the second half of the year. Consistent with our prior expectations, in the second half of 2015, we expect EPS to benefit from improved availability as a result of planned maintenance that was completed earlier in the year in Chile, the Dominican Republic, and the U.S. Improved hydro conditions in Panama and Colombia, seasonality related to contract generation businesses in the U.S. and Chile, as well as IPL, the previously expected benefit from tax opportunities at certain businesses and contributions from Mong Duong in Vietnam, which came online in the first half of the year. Regarding proportional free cash flow, improved results in the second half of the year versus the first half are driven in part by higher operating performance in the second half consistent with our earnings profile. The remaining increase is largely attributable to lower pension payments and fuel payments in IPL in the U.S., timing of income tax payments and VAT collections, higher collection of receivables in the Dominican Republic, and collection of receivables in Bulgaria, a portion of which will be used at the business for deleveraging and fuel payments. We feel confident in our ability to meet our objectives for the year, and we are reaffirming our guidance on all metrics. Our reaffirmed guidance is based on forward curves as of June 30, reflecting a few improvements relative to our prior guidance which was based on March 31. Our gains also assume the current outlook for hydro in Latin America, which is in line with expectations, and an unchanged full-year tax rate of 31% to 33% versus year-to-date 2015 rate of 31%. On to our parent capital allocation plan for the year, total available discretionary cash for 2015 is roughly $1.65 billion, which is $70 million higher than our last call. We previously announced asset sale proceeds in the sale of a portion of our interest in IPALCO and Jordan, as well as from our solar assets in Spain, bringing our total asset sale proceeds this year to $573 million. We are also expecting an additional $45 million return of capital from operating businesses, which, along with our parent free cash flow, provides us with nearly $600 million available for dividends, growth, incremental share repurchases and other potential investments. In terms of incremental sources of discretionary cash, as Andres mentioned, we’ll continue to evaluate additional asset sale opportunities which could be $200 million to $300 million annually on average, but may be lumpy year-to-year. In terms of uses, we plan to invest about $350 million in our subsidiaries, with 60% already funded at IPL. We’ve invested $345 million in prepayment and refinancing of parent debt, leaving us with only $180 million in parent debt maturities through 2018. Finally, in addition to dividends, we are investing $420 million in our shares, which is $100 million more than we committed to on our last call. This brings total cash returned to shareholders through buybacks and dividends to $700 million for the year. We will continue to evaluate various investment opportunities to maximize per share value for shareholders. With that, I’ll now turn it back to Andres.

Thanks, Tom. To summarize, we continue to make steady progress on our objectives, specifically we are pulling all levers to achieve our financial objectives despite the headwinds from poor hydrology in Brazil, lower foreign exchange, and commodity prices. Overall, hydrology in Latin America is improving as a result of the El Niño phenomena. We have achieved a number of milestones towards resolving Maritza’s outstanding receivables after signing a Memorandum of Understanding with NEK in April. We expect to collect outstanding receivables in the second half of the year. We have completed the 1.2 gigawatt Mong Duong project in Vietnam six months ahead of schedule, and we are making good progress on the remaining 5.8 gigawatts under construction. We are bringing in financial partners to leverage our platform and maximize overall returns by forming a joint venture with Grupo BAL, a strong partner with significant presence in Mexico. In 2015, we are investing more than $1 billion in returning cash to our shareholders and debt paydowns, in addition to the $350 million we are investing in profitable growth projects. In conclusion, in line with the plans we laid out on previous calls, we continue to leverage our platforms and allocate our discretionary cash to maximize risk-adjusted returns for our shareholders. Now, I’d like to open up the call for questions.

Thanks. Good morning, guys.

Good morning, Greg.

Great quarter. Your commitment to capital allocation is best in class. Thank you very much. I know your shareholders are certainly very happy. The question is sort of an open-ended one. There are so many moving parts to the guidance. I know you are on track to hit earnings guidance for the year and doing a little bit better on proportional free cash but if you look at the balance of the year versus the plan laid out in March, are there any specific areas where you’re a little bit ahead or behind of where you expected? I know overall you're still within the channel.

I would say that one of the key drivers we have as I mentioned on cash is Maritza and we had said that we would get this in the second half of the year. We’ve really achieved the important milestones. We are quite impressed with the commitment of the Bulgarian government to fix the electricity sector and parliament approving some important reforms. So I think that’s the key component; we are on track there. I would say hydrology in July was quite frankly a little bit ahead of what we expected. FX is more or less in line with what we expect. I think if anything, the demand in Brazil is softer—perhaps a little bit softer than we had expected, even though we had those numbers in. So overall, we are kind of on track. The main points are that we have some seasonality, and in terms of collections, we tend to collect more in the Dominican Republic, and we also have Bulgaria. Those are two discrete factors in the second half. We had a number of planned maintenance in the first half which won’t happen in the second half. So overall, it’s not too far from our expectations on a case-by-case basis.

That’s good because one of your competitors in Brazil had a big disappointment in the second quarter as it pertains to their business. So I think there were some trepidation coming into your call that you might see a downward revision. Thank you. The second question is just to be clear: when you gave the first quarter guidance, you based your projections on the March 31 index, so Tom, you’re basically saying that if we roll forward to the end of July, we look a little more or less like we looked at the end of March, so obviously still inside the guidance range.

Yes, that’s correct. If you had asked us five weeks ago, we would have said we might be $0.01 or $0.02 up, but I think we lost that in the last five weeks. So basically back to where we were end of March.

And then final question from me, the $104 to $204 million discretionary cash to be generated, if the stock price doesn’t respond and you guys continue to execute, at what point would you go to the Board and potentially allocate that to further share repurchases?

Greg, as we’ve said in the past, our Board has been very supportive of our share buybacks, and we’ve always been able to go back and get a share repurchase authorization when we felt we needed it. So I think that there is—our sector has been hit in the last month by negativism, and certainly that’s been reflected in the stock price, which certainly affects our capital allocation decisions as we compare the value of buying back shares with our new projects.

Okay. Thank you, guys. Thanks again for a great quarter.

Thank you.

Thank you. Good morning.

Good morning, Ali.

Andres, first question to you on Brazil. So as you said, the hydro situation appears to be improving, but you still have the FX headwinds; the economic and political outlook there continues to be very challenging from what we can tell. I just wanted to get a sense: What is your tolerance level to absorb all of this? Are you there indefinitely for the long haul regardless of how this plays out, or how are you thinking about that relative to all the other jurisdictions where you have better opportunities perhaps?

Sure. I think a lot of our countries have cyclical patterns. Right now, Brazil is certainly not at the peak of one of these patterns. I remind people of two to three years ago. Lots of questions I would get on these calls were why I wasn’t investing more in Brazil, and that we were slow. What we did at the time, and continue to do today, is we only invest when we see long-term value. And we really see the value not just getting caught in the trends. Brazil is having a recession this year. It will probably have a flat 2016 and is expected to pick up in 2017. Brazil is a big market; it’s a country with great potential, and I think that as a company in the Americas, we should have a presence in Brazil. Now, of course, all of our assets, we look at their long-term value, what we could sell them for, and how they contribute to a balanced portfolio. Overall, what I would say is that I agree that the economic situations look challenging in Brazil, but realize this is a country with tremendous potential that could come back, and we can’t come in and out on a short-term basis. And the final thing is, look, we have been very prudent about again investments in Brazil; we still have $500 million of debt capacity at Tietê. Growth in Brazil will come from leveraging the Brazilian businesses. I hope that answers your question, but I think the point is that there are cyclical patterns; Brazil has a lot of capacity to rebound. As always, when times were very good in Brazil, we were always looking at what is the value, and I remind people that we sold a lot of Brazil at the peak.

Okay. The second question: I wanted to clarify the capital usage plan going forward. If I heard you right, Andres, you were saying you may be investing $300 million to $400 million a year in new opportunities on an annual basis. Your dividend is consuming about $300 million of your cash, and that's going to grow at 10% every year. So where is the cash coming from? Because I'm looking at Parent cash and I think these investments and the dividend, I don't think there's any cash left. Am I missing something here, or how is that being funded?

What you are missing from the equation is what Tom mentioned: that we will be selling about $200 million to $300 million in our existing asset platform. So if you include that, the equation does close. As our new plants come online, they will be generating more cash as well.

Okay. Got it. And then lastly, to clarify your point, you benchmark everything accordingly against share buybacks. Are you seeing those opportunities out there that can still give you greater returns on a risk-adjusted basis than buying back your own shares, that you're confident you can spend $300 million to $400 million a year on new projects?

Yes, we do. It really goes back to utilizing our platforms. We did mention the example, for example, of desalinization. If you basically upgrade our plants to use reverse osmosis technology and have the permit for intake of salt water and discharge of saline, you can basically put these in a modular fashion. These are very attractive opportunities. We are also seeing it in other places where we can add on energy storage and the new projects we are engaged in. So, what I can tell you is that we are seeing above 15% returns on equity from our projects on average. So, yes, we are seeing a lot of attractive opportunities. Of course, we are being very selective with our stock at these prices.

Thank you.

Good morning, guys. I wanted to get a sense of the potential for GSF reform in Brazil, to get your opinion on the potential for that in general and then the potential structure if it does materialize. And then also, on the flip side, have you sought an injunction for Tietê there? How would that work if others are successful with injunctions in penalizing you and the remainder of the companies out there that don't get injunctions?

Okay. Let me take the first one. This year, GSF will be between 17% and 19%, and it's a considerable cost to the generators. I believe the total is somewhere above BRL 20 billion that people are paying. There has been discussions between the government, the Ministry of Energy and Mines, and the associations, and there has been talk about capping the GSF. So, if it’s capped, let’s say 10%, the generators will be compensated for that difference. There’s nothing set yet, and I think the chances of something like this have improved with the government interest.

I just see the—I haven’t got all the details, but there was initially compensation to one or small group of generators that was actually detrimental to the rest of the generators, and we did participate with the larger generator community in stating that any decisions, any compensation should be consistent across the sector. That was some time ago, and I believe the discussions are now focused on sector reform as Andre said it goes into compensation.

Okay. And then switching gears, I just wanted to get an update on your Argentinian business or businesses down there. It's a little bit tough to break out in and of itself; how have earnings maybe trended the past couple of years there? Are those trends a function of regulatory changes to power prices? And how do you think about that business going forward, with the potential maybe for other regulatory changes to those power prices? And how do you think about things post the election?

I think that’s a great question. I’d say, of course, if you take a longer-term view, in terms of the past coming to the present, pricing has deteriorated in Argentina, no question about that. On the other hand, I think we have fared very well from a regulatory position because, as you know, until last year we were exporting energy from Argentina to Chile through our TermoAndes plant. We also have the only coal plant in the country. We have been selling energy under, in TermoAndes under the previous contracts, which was more favorable than it is today. But I’d say, in general, we have always been making positive earnings in Argentina. So even though they’re less than they were four or five years ago, they continue to be positive. We’ve been receiving 96% payment on our accounts receivable, some of these are Fannie Mae bank bonds, and for example, Guillermo Brown plant where we have a considerable number of these bonds is basically being used to fund that plant. Looking forward, what do we see? I think the elections in October, the two leading candidates would be favorable. I think you’ll have a gradual return to market-based pricing and a lifting of the exchange controls. We have a tremendous asset base in Argentina. Of course, we’re not putting any new money in at this stage, but I believe that within a year or two we will be paying dividends out of Argentina.

Okay. Would you characterize what you’ve embedded in your long-term EPS and cash flow guidance as incorporating a lot of upside there, or do you remain conservative?

We’re always conservative. We never embed big upside. So what I can say is we do expect sort of a continuation of what we’ve been doing there, which I think is managing the situation quite favorably.

Good morning.

Good morning, Steve.

Wanted to echo Greg’s comments on capital allocations, very clear. I did want to take a little further into that, following up on all these questions on the $300 million to $400 million in growth, in addition to asset sales. When you think about all of the other levers at your disposal in terms of retained cash flow at the country level, the project level, or other leveraged capacity, should we be thinking that those levers are quite significant and therefore could further reduce the amount of true equity at the parent, or are those more discretionary and not something that we should be thinking of as quite significant offsets in terms of the amount of equity needed at the parent?

Yes, Stephen, as we look for growth, we do look to drive as much as we can out of the businesses as possible. I think there are big growth drivers—Hahn Air has been a big driver. They’ve brought in partners, they’ve done project finance, and the only equity that's been done in the last few years was $150 million totally at the Hahn Air level. We did our 70% contribution. So that’s a great example of a multi-billion dollar construction program. We look around the business to do that as much as possible. We will continue to look for leveraged capacity at the business, look to see whether a partner for a project or business can come in to help increase the business's value and/or bring in more effectively priced capital, and then lastly, we’ll look at up to the parent. The $300 million to $400 million is just a general range. That’s the number we’ve been at the last couple of years.

Understood. Great. And then just shifting over to your announced joint venture, can you just discuss at a high level the nature of the arrangement? Is this effectively exclusive on both sides? Are there other elements of the joint venture in terms of more specific targets or anything else that you can give us a little further insight into the JV?

Sure, Grupo BAL is one of the most reputable business groups in Mexico and has a long tradition. They’ve been our off-taker at the TEP plant for the last 10 years, and we’ve been very pleased with that. They have another small joint venture with EDP for some wind projects, and we have our existing plants of TEG, TEP, and others which will be outside this joint venture. However, going forward, it’s exclusive on both sides that we’ll exclusively look at new deals. There’s no sort of target that we will invest X amount; it’s really that we will look at these projects together. We both bring strengths—ours is global size, E&C experience, and ability to manage these plants while they bring the local knowledge of the sector. Mexico is opening its energy sector, and there are expected bids for power plants not only from CFE but also from private sector clients. Our strategy of using our platforms for adjacencies such as desalinization or energy storage or for example LNG services can add those on. This will be a favorable structure.

Thank you. I wanted to talk about Eletropaulo. You have just concluded a rate case there. What kind of load assumptions do you have embedded in that rate case? And secondly, is the restructuring of Brazilian having any impact on Eletropaulo?

In terms of growth, we’re looking at a decline in growth in the weighted average for Sul and Eletropaulo. The decline in demand is stronger in Sul than Eletropaulo. We’re looking at pretty much flat demand for next year and then growing moderately after that. In Brazil overall, the expected growth historically has been about 3% to 4%. Regarding how Brazilian is affecting Eletropaulo, our 50% holdings were sold back in 2005, and we took that money and de-levered the company. Currently, we have about 16% each. The distributors have been more fairly treated over the past six months than they had before, and that’s why you’ve seen a recovery in the player. Eletropaulo’s stock should be up about 70% in dollars this year, and the sector has been the best performing within the sector by a considerable margin.

Hello, this is Bernerd da Santos. Yes, the plant was under forces earlier in the year. The management team has implemented a 180-day plan that is ongoing. We have already 30 days of that plan implemented, and we have our next preview with the team in 50 days. I was present with the management team two weeks ago, and we have seen improvement, so we expect that we’re going to calculate better force outage rates by the end of the year.

Great. Thank you guys.

Thank you everybody for joining us in today’s call. As always, the IR team will be available to answer any questions you may have. Thank you and have a nice day.