愛依斯電力 (AES) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AES Corporation second quarter earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question and answer session.

At that time if you have a question, you will need to press the one, followed by the four on your telephone. As a reminder, this conference is being recorded Thursday, July 25 of 2002.

I would now like to turn the conference over to Mr. Paul Hanrahan, president and chief executive officer. Go ahead, sir.

Welcome, ladies and gentlemen, to our second quarter earnings conference. Today on the call we are joined by a number of people who are available to answer questions. People from the management team are available today. We have Roger Sant, our Chairman, Dennis Bakke, one of our directors and founders; Barry Sharp, our CFO. We have our COOs Stu Ryan and Mark Fitzpatrick; general counsel, Billy Arachi [phonetic]. We have Lodge Lole [phonetic], Rich Bolger [phonetic], and from investor relations we have Ken Woodcock.

I would like to take a second to wish Ken a happy birthday.

We are going to discuss the second quarter earnings. We had a good quarter. Our 26 cents a share pro forma beat the street consensus of 21 cents a share.

We had a good quarter with respect to our parent operating cash flow. That was $263 million which was in line with our expectations and has been the focus of what we at the management team have been focusing on in terms of managing the company, the cash flow.

Barry Sharp will provide an update on guidance for earnings for the rest of 2002. To reiterate, these are forward-looking statements. There is risk involved because these are projections.

We will be providing expectations for liquidity and cash flow for the end through the end of 2003. After that, I've ask [inaudible] if he can provide a few comments at the end before we turn to questions.

I would like to give an update on the organization. What we are doing with respect to building financial strength. Cost cutting and our issues in South America.

First in the organization we restructured the executive office. We have added two people to that office. [the operator cut in.]

We have the CEO, chairman, three chief operating officers, CFO Barry Sharp and general counsel Billy Arachi [phonetic]. We restructured so we are organized geographically. A new member of the group is Mark Fitzpatrick is responsible for Latin America. Stu Ryan is going to be covering north America, which includes Mexico - [The operator cut in.]

Hello? Hello?

Operator? Operator?

Yes, sir, please go ahead.

We are connected?

I do apologize, sir, yes, you are.

Sorry about that. John Richrow [phonetic] is picking up responsibility for the rest of the world, here, Africa, Middle East, and Asia.

John also stepped up to lead our cost cutting efforts corporate wide and performance improvements. This is extremely critical to us as we go forward.

This organization geographically will provide more focus. A lot of the issues that we face are regional in nature. We also think it is going to make it easier to understand us in our organization.

Another new addition to the executive office is Bill Arachi [phonetic]], our general counsel. In addition to his responsibilities as general counsel, he will be stepping up to lead our assets sales process. We will do that in a coordinated and value maximization process.

We had a good quarter with respect to our financial strengths. We made progress on liquidity and delivering. We are on track to realize $800 million from the sales of Cilcorp and New Energy.

Cash from New Energy will be received no later than the end of the year and so co-we expect to be received in the first quarter of 2003.

We also received proceeds in total of $260 million from [phonetic] coast financing of our plants in Puerto Rico and our plant in Northern Ireland

We have taken advantage of an opportunity to swap debt for equity. We completed $53 million of face value on these swaps. We will be continuing to look at these kinds of opportunities as we go forward.

We also stepped up our efforts to roll over revolver due in March of 2003. Based on precedents set in the market we are confident we will be able to roll over the $850 million revolver that is due in March. In addition, the $425 million bank term loan which is due in August of '03. We believe we can roll over those in entirety.

This is a change from our thinking in the past. We believe it's achievable, particularly when you consider the low levels of debt maturities we have in 2004 and 2005.

The next comment I am going to make is probably to me the most important thing I will talk about today. That is, when you consider that all the debt can be rolled over, the $1.3 billion of bank debt in 2003 and assuming no new investments in Brazil which I will talk about in a couple of minutes. AES has adequate maturity to meet all our responsibilities in 2003 without needs for further proceeds from asset sales other than those that we have been committing to, Cilcorp and New Energy sales.

We provided 2003 cash flow projections. These show these liquidity effects in more detail. We have adequate cushion until the end of 2003 to avoid the need to raise any more capital.

Nevertheless as I stated about a month ago, we plan to add another billion dollars to our liquidity by the end of 2003. We will use this money to continue to deliver the company.

Given our current stock price, this effort is being entirely focused on asset sales.

Bill Arachi [phonetic] is leading a team of some of our most talented group managers. We will complete these sales in a manner that will be maximizing [inaudible]. We have the luxury to do this given our liquidity in 2003.

A lot of people ask for guidance on what assets we will pursue for sale. We won't do this until we get further along, like we did with the New Energy process.

We made good progress on cost cutting. As of today we achieved over $100 million in cost reductions. We are on track to meet $200 million in cost reductions by the end of the year.

Next I will discuss our issues in South America. In Brazil, met positively low, we have not yet received the final installments of loans, $330 million, using today's exchange rate. These loans are due from BMDS (phonetic) development bank. As a result of the delays in the receipt of these loans, plus the difficult situation we have in the Brazil financial markets, we began the process to roll over the debt that is due in the second half of this year.

The regulatory picture in Brazil is uncertain. The key for us is the 2003 rate reset. The methodology for that is yet to be established.

That is a concern to us. Given the uncertain regulatory situation, we are reiterating what we said before. We are unable to put additional investment into Brazil. We understand this could possibly jeopardize some of our investments in Brazil. It is important to emphasize all the debt in met row positively low is on recourse and there is no liability to AES to make additional investments.

Quickly, Venezuela, EDC. The tariff reset status. We did not receive the increase required to be given on July 1. As I mentioned in the last call, we talked about this. This is partly due to the ambiguity that existed by virtue of the fact that we got an early interim rate increase. Discussions are ongoing with the government. We believe a satisfactory resolution can be reached in the next couple of weeks, probably with some phase of tariff adjustment

The last thing I want to comment on is Argentina. We are seeing hopeful signs there. We are seeing signals that the government is willing to end the tariff freeze period. There is a lot that needs to be done in terms of renegotiating the agreements that are there. This demonstrates to us the benefits of using non-recourse financing and having a discipline not to put money into investments all the time when they get into trouble, especially if there's a way to resolve the issues without having to take that step.

I would like to turn the call now to Barry Sharp who will deal with the financials.

Thanks, Paul. Good morning everybody, as Paul mentioned from an operating standpoint we had a strong quarter. From an accounting perspective, however, and probably to say the least it's a complicated quarter with several non-cash items gains and losses affecting our GAAP income. I will go through those in maintain.

The entire company is focussed on cash flow. In the second quarter, despite those accounting complexities, it was also a good quarter for us not only from a recurring earnings perspective, but also a cash flow perspective progressing towards a stronger de levered balance sheet. I would like to go through the cash flow information and then we will turn to the earnings analysis and then guidance.

On the cash flow front, we have included in the press release this time not only the historical parent company operating cash flow information and interest coverage, but we've also included a second page that gives the quarterly and actual forecast parent operating cash flow information for 2002 and annually for 2003.

In addition, this goes through in a format that several lenders have requested, the overall parent sources and uses and any liquidity for the same periods. We hope for those people interested in that information that it's helpful.

Our historical parent operating cash flow which represents dividends from our subsidiaries

Less the certain costs was 1 billion - 317 for the last twelve months. It's about, for the - historical parent operating cash flow for the first half of 2002 was 594 million, which is 90 million ahead of our original target.

On an overall basis for the year, at 1.3 bill is up 30 percent from the previous year. The primary drivers of increased cash flow for the past year have been the acquisition of Palco [phonetic], additional dividends from Tri-Gen [phonetic] and Lal Pir as well as increases in dividends from several different businesses. These positives were offset by decreased distributions from Brazil caused by the effects of rationing. Parent operating cash flow for the second quarter of 2002 was slightly above second quarter 2001 at 263 million. The main contributors during the second quarter of '02 were EDC, palco [phonetic], EDC and Tri-Gen [phonetic]. As of the ends of the quarter, liquidity is 359 million, slightly ahead of the previous forecast we gave in February of 343 million, and it is due in the improvement of parent operating cash flow for the year offset by higher than originally expected amounts for commit the investments.

At the end of June we consolidated cash balance including the reposition was 1.3 billion.

We believe another relevant measure of parent cash flow performance is what we call internally parent free cash flow per share. We define this as parent operating cash flow less development costs, taxes, and parent interest charges. So that's parent free cash flow divided by the weighted average shares outstanding.

For the second quarter that was approximately 21 cents per share. That compares to a recurring earnings number of 26 cents per share. And year to date for 2000, year to date free cash flow per share is 54 cents per share as compared to recurring earnings of 59 cents a share.

Although this measure is not necessarily a sanctioned per share measure, it does in our view present an important comparison and analysis with respect to our recurring earnings and a consistent measure.

Looking forward to the rest of '02, we are currently expecting our year liquidity to be approximately 350 million. That is based on current expectation for 2002 parent operating cash flow of 1.175 billion. This expectation for 2002 is lower than our previous estimates by about 75 million, or roughly 6 percent.

This is mainly due to the fact that because of the uncertainties in south American economies, we are lowering our for cast. Although by no means our determination. For dividends from Brazil and hen air to zero, a reduction of 45 million from our previous forecast. Also reducing full year expectations for EDC to 90 million, a reduction of 50 million from the previous forecast.

These expected reductions are offset partially by increased expectations of cash flow from cost reduction efforts across the entire business.

Other expectations for 2002 including committed investment and interest costs remain approximately consistent with those we have previously given.

You will see them detailed on the final page of our press release.

We also announced recently the amendment to the terms of our secured acquisition loans, thus we will no longer be able to top of the number of shares to provide additional collateral for those loans.

The shares collateralizing can only be used to satisfy up to the outstanding amount of the loans if the loans are not repaid on due dates, which is '03 for the EDC loan and November 04 for the New York loan.

By capping the shares, we also help to ensure that the cash flow for these businesses continue to add to our ongoing parent company liquidity. In doing this amendment we have also agreed to pay down 25 percent of the outstanding balance, which amounts to 87 and a half for the AEC loan and 75 for the New York loan. These payments will be made on the earlier December 17 or the closing of the New Energy sale. We expect New Energy to close by the fourth quarter.

To go through the top ten cash flow contributors for 2002 and update those numbers for you. They are IPL, 200 million. Shady Point, expected at 95 million. EDC, 90 million. Which is a reduced number from our previous guidance. Eastern energy at 65 million. Lal Pir at 40. Pac-Gen [phonetic] at 40. Brazil in total, 65 million, which is effectively less than what has been received to date. Hawaii, 30 million, (inaudible) at 25 and beaver valley at 26. That represents a total of 676 million out of our expected total of 1 billion, - 1 billion, 175.

Remainder is spread out primarily between North America and Asia. We are adding up to roughly 379 for those two pieces.

So again, as of the end of 2002, including the proceeds of the sale of New Energy an the partial repayment on our acquisition loans, as well as our scheduled debt maturities during 2002 we currently anticipate liquidity of approximately 350 million at year end. Looking forward to 2003, we expect parent company operating cash flow to be approximately 1.2 billion. Which is a slight reduction in our previous estimate, which was 1.3 billion.

That's generally due to the fact that we have reduced our expectations, as Paul mentioned, from Brazil to zero. Both from a cash flow perspective in as well as an investment perspective into Brazil from our perspective.

Committed parent investments were forecasted to be approximately 200 million. Scheduled maturities of parent company debt in 2003 on the acquisition loans are approximately 1.7 billion over the course of the year. That includes 850 million associated with revolving credit facility that matures on March 31, 2003. As Paul mentioned we initiated the process and we are confident given the cash flows are agreed at additional asset sales and the ability to capitalize on our limited parent maturities scheduled in 2004, 2005 and 2006, that we will be successful in refinancing the revolver in the $425 million bank term loan. Despite the current turbulence in the bank markets. We are all committed to getting that accomplished.

I will focus the earnings comments on our comparable results from recurring operations. I will also look to the other items reflected in the GAAP results and explain those in a minute. It is worth mentioning why we have chosen to cover the earnings results in this manner.

Our purpose is to provide a comparison which a lot of our parent cash flow information we discussed we feel best describes in a transparent way the operating realties of our portfolio of businesses. From these recurring operations numbers we excluded several mark to market non-cash related items that are included under GAAP. I'll mention those in a minute. I realize particularly in this quarter the information is complicated from an accounting perspective, we are providing it in an effort to explain the results by its components. There are reconciliations included in the packets along with several other statements and reports covering both earnings and cash flow, with analysis. It's a lot of information, but we believe it will be helpful to those interested in it.

On an overall basis, for the second quarter total revenues were 2.291 billion from recurring operations. Up 22 percent from 1.87 billion during the second quarter of 2001.

The results for 2002 include the consolidation of Eletropaulo beginning in February of 2002. Because of the pending sales of sill Corp. and New Energy, the results from the recurring operations now exclude both the information with respect to sill Corp. and New Energy which is included net in the discontinued operations category.

Geographically revenues were distributed North America 21 percent, Caribbean 17, South America, 38, Europe and Africa, 18 percent, and Asia six.

The shift towards South America in the revenue line is due to inclusion of Eletropaulo in 2002.

Gross margin or sales less cost of sales excluding the provision for Sewell [phonetic] improved 30 percent to 600 million for the second quarter of 2002, or 26 percent of sales. That's up from 460 million in the previous year, which represented 25 percent of sales.

As a result, after income taxes with an estimated tax rate for 2002 of approximately 34 percent, net income for recurring operations was 132 million or 26 cents a share for the second quarter of 2002. As compared to 181, our 181 million for, or 33 cents a share in 2001 on a consistent basis. On a business segment basis, including our contract generation, large utilities, competitive supply and gross distribution business, we generated combined income before income taxes or E B T of 345 million for the second quarter of 2002. That's compared to 420 million during the same period last year.

On a geographic basis that was 37 percent in North America, 27 percent from South America, 9 percent from the Caribbean and 14 percent from Asia. And 14 percent from Europe and Africa.

In the contract generation business which consists of our power plants located around the world which have contractually limited their exposure to commodity price, primarily electricity for five years or 75 percent of their expected output, second quarter revenues were 646 million. That's a slight increase over 2001 and represented 28 percent of our total revenues for the quarter.

The most significant contributions continue to be from South America where in aggregate those region comprise 26 percent of the revenue base.

New businesses in 2002 enhanced the revenues, with the addition of a mix of 1684 megawatts added subsequent to the second quarter of 2001. The operating margin as a percent of sale through the contract generation business showed continued and growing strength at 40 percent of revenues for the second quarter of 2002. That represents an improvement from 28 percent during the second quarter of '01.

As a result, contract generation delivered 154 million of earnings before tax, or 45 percent of the total for the second quarter of '02.

That is an increase of roughly 69 percent over the second quarter of '01.

All geographic regions showed increases in earnings before tax within the segment except for a slight decrease in the Caribbean due to EBITDA declines from the contract generation plant in the dom rep.

On the competitive supply side, which consists primarily of preponderance selling electricity to wholesale customers in competitive markets and where the results are sensitive to fluctuations in those market prices, including electricity as well as natural gas and coal, revenues were 421 million for this quarter an represented 18 percent of total revenues for the quarter. Primarily in the competitive markets of the U.K. and the U.S..

As I mentioned before, New Energy is now excluded from this segment as a discontinued operation.

Competitive market prices declined in Argentina due to de valuation of the pest owe in 2002 and prices in the quarter were lower year on year in New York, California and the U.K.. Decreased from the second quarter of '01. Several base businesses did show offsetting benefits in improvements.

The operating margin for the competitive supply business was 22 percent in the quarter. That's an increase from 19 percent in the second quarter of '01. Despite the decline in revenues.

Improvements in margin and margin percentages were most significant at Drax in the U.K., where the margin improved seven percentage points year over year and overall for the supply business it improved 8 percent to 92 million from the second quarter.

As a result of these improved margins, not with standing lower wholesale prices in several regions, competitive supply generated 13 percent of the total for the second quarter. That's a significant increase over 17 million for 2001.

Large utility segment comprised now of our four large integrated utilities excluding sill Corp. because of the pending sale served 11 million customers in north and South America. Revenues for this segment were 892 million represented 39 percent of the total for the quarter, with the significant increase due to revenues resulting from the consolidation of Eletropaulo beginning in February of '02.

Additional revenues for Eletropaulo of 529 million for the quarter were offset by 5 percent decrease in revenues at a palco [phonetic]and IPL due primarily to milder weather in 2002 and 24 percent decrease in revenue EDC, 165 million primarily due to the de valuation of the Bolivar to date during '02.

The operating margin was 199 million for the quarter. That's an increase of 23 percent over 2001. Due to the consolidation of Eletropaulo and improvement actually in the margins at IPL. These increases were offset by decline in the operating margin at EDC resulting from de valuation. The percentage of sales at the operating margin for large utilities was 22 percent, down from 38 for the previous quarter because of the reductions in margin of EDC resulting from the de valuation of the Bolivar as well as lower than previous year's average margins at Eletropaulo during the second quarter of '02 because of slower than anticipated recovery in electricity demand from the effects of rationing as well as the accelerating de valuation in the latter part of the second quarter.

Large utilities generated 128 million of earnings before tax, 37 percent of the total for 2002.

Our final segment growth distribution businesses serving 5 million customers and consist of companies generally located in developing countries or region muchs. Generating revenues for the second quarter of 332 million. This is about 15 percent of total revenues, with revenues increasing in Eskay and Dominican. Georgia and (inaudible) in the Ukraine as well as (inaudible), a new business in Cameroon, which is acquired during the third quarter of 2001.

The operating margin as a percentage of sales was 15 percent and showed growing strength and improvement over the previous year across most of the segments, especially at (inaudible) and (inaudible). Despite the margin amounts (inaudible) arising from the de valuation of the Argentine Indian pesto during 2002, the percentages in the Argentine businesses remained stable, a somewhat impressive achievement given the change in the currency in the economic situation.

As a result, growth distribution generated 18 million of earnings before tax or 5 percent of the total for 2002.

Top ten contributed 67 percent to earnings before tax during the quarter and included IPL, Eletropaulo, Shady Point, Semig [phonetic], EDC, Drax, Lal Pir and Pac-Gen [phonetic] Sewell [phonetic] Hawaii and Southland.

Net income on a GAAP basis as I mentioned is a complicated quarter, although the (inaudible). Several cash related earnings affecting numbers under GAAP. Overall loss of 22 cents a share after all net charges cumulative changes in accounting principles.

These items are listed in the related per share items in the press release. There is a schedule for the three and six months that reconciles GAAP earnings for the earnings from recurring operations.

Income from continuing operation on the income statement is 44 cents a share and relate to, one, a loss from the impact of the regulatory action in Brazil related to AES Sewell [phonetic] that we announced previously this quarter. This relates to Sewell [phonetic] spot sales during the rationing period primarily in 2001. And the retroactive change by (inaudible) in the prices on Sewell [phonetic] sales in the south eastern market. We strongly object and have filed a claim against (inaudible) seeking a clarification of the ruling and expect a recovery of the full amount in the second quarter.

We wrote down telecom investments in South America, representing a telecom investment held by EDC in a Mexican telecom investment, 10 cents a share. Net transaction losses in south America because of the de valuations in currencies, particularly in Brazil and Argentina.

Of the 21 cents per share loss, it consists of 16 cents for Brazil, 10 cents from Argentina, and 5-cent gain in Venezuela.

Finally, number four, we had a gain of 5 cents a share. Including those items, the per share loss for continuing operations to GAAP is 18 cents. For the second quarter - 18-cent loss for the second quarter of '02 as compared to income of 27 cents for the second quarter of '01.

We also in this quarter recorded a loss of 27 cents a share from the results of discontinued operations during the quarter, primarily related to telecom investments in Brazil. And finally, a gain of 23 cents a share from the cumulative effect of the change in accounting principles related to a new FAZ [phonetic] 133 interpretation relating to long-term power sales contracts that went into effect on April 1, 2002.

This gain is created by mark to market based on the estimates for the next 28 years of a portion of the contract in March land. It is in fact items like these that in many respects make little sense to us in our analysis of earnings from recurring operations. It generates nothing but an estimated number. No cash or real earnings. In my view, just a number.

Nonetheless it is appropriate to include it in the GAAP earnings. But that is why we included -

(The operator cut in.)

Operator?

We expected these deals ...

Hello?

Hello?

We seem to have another -

Yes, just one moment.

This is the AES second quarter earnings call. (Laughter)

Operator, can we begin?

I'll keep going. After these items, the net loss after discontinued operations and the cumulative effect, we had a net loss for the quarter of 22 cents a share.

Turning to guidance for 2002. Economic and political environments in Latin America and impact of on currency exchange rates wells, underscore the uncertainties and risks in forward-looking statements on earnings. We must make certain sues to provide earnings guidance for the second half of '02. These assumptions include second half average and year end. From the Brazilian real to 3.0 and the second half and year end exchange rates of 1600 Bolivars and 1950 Bolivars at the end respectively. Based on these assumptions we expect earnings for '02 derived from the existing portfolio of businesses to be between a dollar and a dollar 10 cents per share. The reduction in this estimate from previous guidance primarily reflects the estimates of strengthening and weakening of those currencies relative to the U.S. dollar. Reduced activity in Brazil and Venezuela, slower than anticipated demand for electricity and also the rationing in Brazil.

AES is based on those listed currency assumptions.

We anticipate a 10 percent change in the average exchange rate for the rest of '02 from these currencies of assumed earnings for the year result in a change in anticipated earnings of approximately 2 cents per share for every change, every 10 percent change in the real and 1 cent per share for every 10 percent change in the Bolivar. We are pursuing transactions and other alternatives and the potential impacts of these if any are not included in our forward-looking statements.

I point out when we gave guidance in February, we gave estimates of the sensitivities for the Bolivar and the real. It was 2 cents of share for every one point in movement from our assumed average, which was 2.5 at the time and slightly less than 1 cent a share away from our assumed annual average of 100 Bolivars to the dollar. Things have changed since then. By applying those sensitivities to our assumptions it results in adjustment, and the guidance is close to the average for the year we are estimating given today's conditions and our current sues.

As I mentioned before it is important to remember that these sensitivities don't occur in isolation. These react in a dynamic manner to each other. The deniestivety to currency changes are different because of the expected change in results and the level of current assumptions.

Before turning it over to Roger, I would like to give the dollar to dollar guidance by a couple different factors, by geographic regions and by business line. On an overall business, using the lower range of a dollar, we expect 2002 earnings to be generated 65 cents from North America, 38 cents from South America, of which approximately 32 cents relates to Brazil. 18 percent, 18 cents from the Caribbean. 22 cents from Europe and Africa. And 22 cents from Asia. They are offset by SG and A charges of 63 cents to net 1 dollar per that I remember share.

Looking at it by business line, the dollar is roughly 28 cents, 15 cents from competitive supply, 15 cents from large utilities and 12 cents from distribution. Offset by corporate development and primarily interest costs net to go a dollar.

At that point I'll turn it over to Roger.

I would just like to make sort of three editorial comments following on to what Paul and Barry have said. First is a comment about Paul and the senior management team. In a little over a month that he has been on the job as CEO the circumstances couldn't have been tougher. South America has gotten worse. He's trying to get used to being the head guy. In my view he couldn't have done a better job. He stayed focused on the big three, cost cutting, delivering and fixes South America.

He has been resilient in the face of challenges. He never expected this. Nice going. Paul and I couldn't be thinking more alike at this point.

Adding Mark Fitzpatrick as chief operating officer in charge of Latin America, our toughest region, gave us a tough minded veteran in the time and place where he is really needed to follow up on some of the steps Paul started when he was in charge of that area.

Bill Arachi [phonetic] is a good addition as he heads up the asset sales activities. Keeping Barry as CFO and splitting the other responsibilities by region has focused the efforts of these proven managers.

I would also like to note we added dick ADR man to our board. Dick, as many of you recall, was director of the office of management and budget under president Reagan and was under secretary of treasury earlier. He is now a managing partner of the Carlisle group. We think he will bring a highly disciplined approach to the issues we are now facing and we hope to add a couple of additional people to the board of similar quality in the coming months.

Finally I would like to follow on to Barry's and Paul's comments about free cash flow and in particular about free cash flow per share. Like a lot of you, we have been struggling with the thoughts of, what is the best earnings information that we can provide? It is not a great deal about, you know, what the thoughtful investor, the person that wants transparency would like to have. I clearly don't know about the rest of you, but I share Barry's feelings that GAAP components, particularly some of the GAAP components are really hard to understand, particularly if you are trying to get a sense of value. I think that's where we are trying to get.

I think this quarter's results illustrate that confusion.

I understand that pro forma numbers as we have been given are a bit suspect because one assumes that they include what we would like you to see and excludes the rest. And other measures have similar questions. So we have been asking ourselves, what should we do? I think where we come out, particularly where I come out is that cash flow or more precisely free cash flow on a per share basis comes closest to telling the real story.

In our case, as a holding company, free cash flow amounts to the dividends paid to the parent. All of our non-radio course subsidiaries around the world minus the interest on our debt, corporate overhead and taxes and non-discretionary expenditures. Free cash flow becomes free cash flow per share.

Why is that so great? Primarily because it is kind of a hard number to fool with. Sure, there may be ways to tweak it. But for the most part when a subsidiary pays a dividend to us as its owner, it means that it has satisfied all of its local requirements and there is cash left over to distribute.

There is no mark to market. There is no anticipation of revenue, no amortization of intangibles. You either have the cash or you don't.

Cash per share makes sure you aren't diluting shareholders to increase it. What does that tell you in our case? For the last four and a half years, free cash flow per share has gone from 32 cents in '98, 36 cents in '99. 90 cents a share in 2000. A dollar 37 in the twelve months ending June 30, 2002.

Our forecast is that for all of 2002, that number will decline to a dollar five, dollar ten or so as Barry indicated, because of the troubles we are facing in Brazil and Venezuela.

That is important information, particularly if you are trying to get a sense of value as a company. If total cash flow, which we call parent operating cash flow is useful for bond shoulders, the equity equivalent free cash flow per share should be useful to common shareholders.

The point is that the most commonly accepted valuation method is to discount the future cash flows of the business or project. So why wouldn't we want to measure cash flow or give cash flow information?

Why wouldn't we want to provide that information on an ongoing basis? If we are managing the company and paying bonuses to our principal people on free cash flow, we probably should provide you those numbers. They will give you the best idea of what we are doing and how we are doing it against our projections.

So even though we will continue to provide GAAP and pro forma EPS going forward we also will provide free cash flow per share starting this quarter.

We think it's probably our best way to share information about what our businesses are worth and where they are heading.

Thanks for listening. This is important to us. And we would love to have your comments, particularly those who disagree because we are trying to get a handle on this. And your comments back to us will be quite helpful.

With that, operator, let's go to questions. 06:40:19

thank you, sir. Ladies and gentlemen we will now begin the question and answer session. If you have a question today, you will need to press the one followed by the four on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you would like to withdraw your request, do so by pressing the one followed by the three on your telephone.

As a reminder if you are using a speaker phone, lift the hand set before entering your request. One moment for the first question.

First question comes from Elizabeth Perella from Merrill Lynch. Go ahead.

Couple of questions on the liquidity forecast for next year. One is, would you be willing to share with us next year's number of 1.2 billion? You said zero comes from Brazil. How much comes from Venezuela and chill lay?

In total, roughly 100 million. Most of that, if not all of it, is primarily from EDC.

Okay. And I think that previously you really had been looking at the ability to pay down close to a billion dollars in debt. In other words, not assuming you would roll the 425 term loan.

You have cut the cash flow number by 100 million. Looks like you increased some of the parent company interest expense and overhead charges a little bit.

Are you just planning to end the year with a bigger - looks like you also will end the year with a bigger liquidity number. Could you walk us through your thinking on that in terms of why now you are assuming that you would roll the term loan? Is it more a concern that you are a little bit tighter on cash or liquidity in order - than where you were before?

In general terms, no. It's more a reflection of what we think, there has been turbulence in the markets with respect to the bank market side. It is our view the best solution for us is to use the debt maturities of 04, 05 and 06 to help with the bank loan side of the equation. We are comfortable that with the appropriate covenants and process, we can do a bank loan that works, that works well and that rolls it over.

We clearly, in our projection you notice we have $500 million of additional asset sales in there. Those haven't occurred yet. As Paul mentioned we are looking at numbers even higher than that. So that process will develop.

But most significantly we want to start that process and have started that process on the revolver now, which is about eight or nine months ahead of its due date.

And so it is not possible to absolutely predict. But we are confident that that structure and that process is kind of the best. That works for us in the current market conditions.

On the restructuring, you mentioned you capped the exposure on the unregistered shares. What have you capped it at?

We will get those numbers here in just a minute in terms of numbers of shares. It is 468 million total for both loans.

Okay. And the question on Brazil, would it be possible to talk a little bit more in detail as to an update on what you're trying to do with respect to electro Paulo with respect to the debt term maturities there and what the strategy might be or afternoon avenues that are open to you on that.

Mark, can you answer that?

The situation in Brazil is, I know a lot of people are impatient we didn't announce our strategy or move faster, but it necessarily had to go in a series. Most of the people involved in our August and September maturities were waiting to make sure that there was not going to be any slip ups in securing of the remainder of the BNBS funding of the rationing settlement.

It was announced early on we don't have the cash, but we are well in the 90 some percent a surety, and the cash is a matter of days away.

With that assurance we could go to the existing banks. We would have liked to have the insurance a long time ago. We could have gone and pursued other new money or refinancing strategies we have been talking about for awhile. Given the lateness of the day with respect to securing of the BNBS loans or fronting of the rationing settlement, we don't have a lot of choice but to go to the debt holders of the maturities due in August and September and talk about restructuring and rolling them over.

That is underway. Obviously it is not a big surprise to these people as we study stay in contact with them on a regular basis.

The next step following the successful, some type of renegotiation of those monies will move on to the holding company activities, but unnecessarily the BNBS people that hold our holding company loans want to make sure that the operating company is in good shape before we start that.

That is a serious process that is underway. We have retained financial advisors to help us in this regard. Our teams are in place and the people on the other side of the table are well acquainted with what our plans are and we are in active discussion with them.

Lastly, any update on Sewell [phonetic] given what happened. I know on the June 12 call you mentioned there's some liquidity pressures at Sewell [phonetic].

I think Sewell [phonetic] is in a similar situation where everything is looking forward tore what is - (inaudible). Some of those can be refinanced. It is not all that tight. I don't know the absolute numbers in terms of how much has to be refinanced, but it's not an extraordinary number.

It shouldn't be a problem to get through by the end of the year. What happens with the tariff reset in 2003 is what we are focusing on.

Thank you

Next question comes from Leon Cooperman [phonetic] with Omega Advisors. Please go ahead.

Thank you very much. I understand the theoretical issuance for the 468 million, but what is your view as to the probability of that actually occurring? Number one.

In terms of your cash flow projections and ability to pay back the debt.

There was a discussion in the paper this morning with regard to your exposure to Williams. Could you detail and discuss that?

Thirdly, the timing for your bank agreement to be resolved. Finally, within the context of a bank agreement that you anticipate, what is the earliest period you can see yourselves being in a position to enter the market to buy back some of the bonds reflecting solvency on the part of the company? Thank you.

Let me answer the third and fourth questions and turn it over to Stu for the Williams numbers.

First question is on the sales of shares. The probability of those shares being used to satisfy the loan is extremely low. As I mentioned, the shares are used if the loans aren't paid on due dates, which are July of '03 for the EDC loan and October or November of 04 for the New York loan.

So that the cash flows that we show include repaying those. The remaining balance of them on the due date, pre-paying the 1675 with the proceeds of New Energy.

So we don't see any issue with those loans with the proceeds and releasing those shares.

On the bank agreement side, it is difficult to predict actual timing. We are in the process of talking to most of our financial institutions, working with our agents to move forward on the bank agreement. I think we will begin that in earnest in September and it could be a September/October kind of time frame.

Obviously some of that depends on market conditions at the time.

In terms of timing to get into the market and buy back bonds, obviously the liquidity is a significant factor in that. We do have the proceeds of Cilcorp anticipated in the first quarter of '03 or potentially a little earlier. We need, get the liquidity and get the bank deal set to make any significant cash moves. We have done some (inaudible) as Paul mentioned on a 50 million, $53 million worth. We have been able to capture some of the value through that, those bonds, but I think it will be a few months in the future, Leon.

Stu, you want to cover the Williams issue?

Yes, let's talk about the three primary places where we have arrangements with Williams and their three power plant projects, one called iron wood that has been running since the beginning of the year. South land and red oak that is in start up mode now. We bracket our cash exposure a couple of ways.

With respect to cash flow, relying on this year 2002 from those three businesses in aggregate, approximately $8 million for calendar year 2002 that is included in Barry's cash flow projections and $35 million for 2003.

Of those two numbers, we can actually break those down and say that the dividend components, separate and apart from the management fees, it's $2 million in 2002 and $22 million forecast for 2003.

Another way of thinking about our exposure to Williams is -

Stu? Operator?

Yes, sir.

Our machine looked like it was dead here. Can you hear us?

I sure can.

Sorry to interrupt

That's all right.

Sorry. I was going to say another way of bracketing our exposure to Williams is to think about our total equity investment across those three businesses. That's approximately $210 million. Just in terms of short-term receivables or exposure across any of our other businesses at AES to Williams, which would include IPL, sill co-, eastern energy, the number is less than $100,000 in total.

Roger asked us a question. Let me ask you a question. Your bonds are selling for, depending on which one, 40 cents on the dollar. Your preferred, a redemption of 2,010 is trading at seven. With redemption value of 50. Your debt amortization is an average, something in the area of 800 to 100 bill I don't know dollars a year, 75 percent of your stock price.

What probability in your mind is it that the bonds or the equity have it right and your numbers are wrong? You asked us for our opinion. I'm asking for your opinion.

Maybe all of us can answer that. I think I told you a couple of days ago, Lee, as soon as the window is open, I'm going to buy some. Let's not - I don't know that there's any other way to demonstrate. You asked us a question, why can't we buy some of this back. We would dearly love to. We have been scrapping and scraping all over the place to try to find some cash.

I just think we feel very confident about that. I think that's what Paul was trying to give you in the numbers going through 2003.

[Inaudible]

One of the reasons we provided so much informs information this quarter is, you're right, it doesn't make sense. It doesn't make sense to us.

All we can do is give you our view as to what things look like going forward and tell you to make your own judgments on what those sues are. I agree with Roger 100 percent on that point.

Good luck and thank you.

Our next question comes from Andre Meade with Lazard.

My questions have been answered, thanks.

Next question from Michael Spiegel with First Boston. Go ahead.

Could you give us a year to date update on how much cash you actually received towards the top ten sources?

Sure. On the top ten sources for '02 for the full year, IPL, 200 million. Shady Point at 95. EDC at 90. Eastern energy at 65, which is a New York business. Lal Pir, 40. Pac-Gen [phonetic] 40. Brazil, 65. Hawaii is 30. Northern Ireland is 25 and beaver valley 26 for a total of 226 minimum.

The total distributions is expected to be 1 billion, 216. Reducing the overhead to get to the 175 of parent operating cash flow. And the difference between the 676 and the 1 billion, 215 is 63 from the Caribbean. 85 from Europe and 170 from Asia.

So far year to date from those top ten we received approximately 440 million or 68 percent.

Can you give us how much you have received from pop co-, how much from Shady Point and EDC and eastern year to date?

: Let me give you the top three. 110 for IPL. [Cough] and 63 from Brazil.

Okay. Did you have to post 60 million of liquidity on the rating downgrades (inaudible).

That was our estimate originally. It turned out to be $40 million of additional primarily letters of credit. Generally those were letters of credit to support obligations that were included in our commit committed investments line. It brought those forward from a liquidity standpoint.

It wasn't an incremental use. Is that what you are saying?

That's correct.

Couple quick questions. What happened to Puerto Rico? I notice it fell off the top ten.

Primarily because as we announced before, we did financing there that will raise by the time it's finished, we generated 190 million from that financing to date. It has about another 15 to go. That has an effect on the early year cash flows for us. We effectively by selling a piece of that business on the financing side we reduced our expenditure so it drops below the top ten.

Can you expand what you meant by, you swapped debt for equity, the 53 million face? What exactly happened?

We repurchased outstanding debt obligations using common stock of the company for a face amount of $50 million and 53 million through today, so we brought the debt back at a discount using equity.

You used your shares to a bond holder who sold you his bonds essentially?

Yes, yes.

Last question is, do you have a quick bridge on the liquidity from the June 13 call where it was 450 to the current liquidity of 360?

Primarily it is the dividends coming in towards the end of the month and debt payments that we made in late June. We can get that specifically. I don't have those time periods broken out.

Okay, thank you.

All right. Our next question comes from Ali Agha with Banc of America Securities.

Just to reconcile, Barry, the guidance that you mentioned, the dollar to dollar ten to prior guidance, I haven't done the math yet, but how much of that drop was just those two currency assumption changes? And what is the rest of it?

Can you quantify a little bit more on the different pieces that go into that?

Ali, from a currency standpoint it works out to be 16 cents from a currency perspective. That's Brazil and twelve of that is Venezuela.

The rest, or another roughly 12 cents because of declining demand in Brazil, particularly projected to be going forward forward. There was declines in May and June so it's recovering slower than we estimated. That's an estimate going forward.

The 3 cents is a piece for estimates for New Energy that dropped below the line that discontineed operations that previously we expected to be up the line.

Going to the cash flow schedule as you look at it for the rest of the year and using more the February data you gave us also on a quarterly basis, as you said things move around.

But just to get more clarity on the distribution part, I guess Q3 distribution you reduced much more significantly from what they were there, and the construction and other spending is much more up front, with almost nothing in the fourth quarter.

Can you just elaborate a little bit more on these pieces?

As I mentioned on the in flow side those are related to the expected dividends from Brazil, which we had 25 million left in the previous forecast, reduced ten air 10 million EDC by 50. Those were primarily spread out in the third quarter and fourth quarter for EDC. Those are the reductions on the outflow - in flow side.

On the outflow, Paul mentioned we are anticipating no further investments into Brazil. Taking out the expected cash flows, we have effectively reduced our expectation of outflows.

I see. And looking at (inaudible), and I look at your billion and two of operating cash flow, can you work back from that? What kind of an earnings base would support that kind of cash flow coming out of your businesses?

I think as we were trying to say earlier, that's a more difficult answer to predict on an overall earnings number.

Obviously there is some growth in the number from new construction activity. I'm a little hesitant at this point to predict, given the rate resets in Brazil, where I would think the earnings are going to be for that period of time.

Obviously we predicted no cash from Brazil. That's easier to handle. I'm not willing to say no earnings from Brazil at this point.

Finally, reconciling the timing, you mentioned the two term loan and the corporate loan (inaudible) work renewing, running over next year. You started discussions on the term loan. On the revolver.

When should we hear more definitively on what is happening on the term loan front?

Well, actually, they are fairly combined. Effectively is a fairly similar group of institutions. They are both in the bank market. There is significant overlap.

It really does fit together better if we are pursuing them together. We are pursuing it effectively in a combined process and as I mentioned, we have started that. August isn't a great month for anybody to go doing bank financing. There is a lot of activity in the market right now. We expect to be out in the syndication view by September. How long that takes, I'm not willing to predict that yet.

You are saying that you would expect both of those to be resolved at the same time in

That's a more likely outcome, yes.

Thank you.

Next question comes from Mike Granscog (phonetic) with Bukka and Rogers [phonetic].

I have just a couple quick ones here. One that was at the beginning of the year, you had been talking about the reduction in salaries that a lot of people were taking for options, obviously when the stock price was quite a bit higher than it is today. I'm wondering if there has been any sort of fall out, if that program is continuing, just any flavor you can add about that.

Secondly, I wonder if you can give a little bit more flavor about the shortfalls that you are seeing at Jenair [phonetic]. Is that primarily related to overflow from Argentina? Or is there something else going on there?

With respect to Jenair [phonetic], the general financing markets in South America have been affected by Argentine, Brazil to some extent, Venezuela.

What happened is, we had some portable debt where debt can be put to us. Those are currently being negotiated. We don't foresee any problem in terms of doing the amortization of those, of that debt. But aside from that, what I've seen, anything beyond that.

With respect to the salaries for options, I don't think we are seeing, in terms of people that have taken that step, I think there's a recognition that people made debts and we are working hard to make those bets come good. There is not a big fall out throughout the company.

There is no intention to reset or anything along those lines, strike prices or anything?

No.

No.

Thank you.

Thank you. The next question comes from Tim Dodman with Salomon Smith Barney.

Thank you. Most have been hit on. Can you talk about, can you update us on the plans in construction and if there's any delay on that, any type of liabilities you might face?

This is Stu. Let me touch on North America. Maybe, John, you want to comment on the ones elsewhere in the world.

Granite ridge is a project in New Hampshire that we anticipate coming on line during the fourth quarter. It is delayed from the original on line expected date, but essentially it has been, schedules remained about the same over the past three months. We expect that on before the end of the year.

Paulo is another project in Texas we anticipate coming on line around the end of the year. And hunting ton beach is a project that is now commercial in California, or a day or so away from it, anyway. That project is ready to go.

with the plants in New Hampshire and Texas, most of those have been merchant. Have you been looking to lock those up under contract?

The plant in New Hampshire is selling power at 10 percent and Texas is roughly half, previously sold under a long-term contract.

But yeah, we will be looking at, as time goes on, to, you know, hedge probably more the output from those facilities. But power prices are pretty low right now. The credit costs associated with those heads are high. I would imagine that for the reasonable, probably the next - first six months or year of operation at those businesses, they will be selling more in the short-term markets than entering into long-term agreements.

How about in California? Whatever happened with the new units at hunting ton beach? Did you enter into a technology with Williams? Are you tolling with Williams or are you on your own with that?

Just three and four.

One additional comment on that. Two of our plants, mountain view and gray stone, are ones that are in construction and we have suspended construction and we talked in the past about a turn around office which was a process by which we look at various businesses that we think are potentially troubled. And we are going to be using a similar process to look at those two plants in terms of whether we suspends that construction, or divest those units. That's something we will be looking at over the next month or so.

Most of the construction projects that we have coming up short-term for commercial operations are in the U.S.. The other projects in the middle east and Sri Lanka, Qatar in Africa and Tanzania are long-term and not expected to be on line this year, but they are on target and on schedule.

Lastly, the charge you took in Brazil on telecom, does that get you entirely out of that business? Is that does that write down your investment?

Almost. There is a small investment left, but it is 90, 95 percent of the total.

Are you still involved in the telecom as far as building the network?

We are still involved. We are not building nor network. It's the electric and light telecom which are regional networks. There's nothing going into those in terms of new CapEx. They are cash positive. So we will continue to work. Those are small businesses. You know, whether we - we may sell them or keep them. Not sure right now. They are not material in terms of their overall impact to the company.

Thank you.

Why don't we take two more questions.

Thank you. The next question will come from Bob Sullivan from UBS Warburg. Go ahead, please.

The cash flow forecast for '03 by business? Your top ten?

I'm sorry, we missed the beginning.

Sure. In general terms, the top ten for '03, in order are IPL, EDC -

Could you give the figures?

IPL 200 million. EDC 110. Eastern energy for 80, Drax for 60 and then several of the others add up to 670 for a total of 1 billion, 250, less the corporate overhead gives you 1 billion, two of parent operating cash flow.

You can't give top ten?

Generally consistent with other top ten items, Shady Point, Pac-Gen [phonetic], Hawaii and Lal Pir are all in the 30 to $40 million range. Shady Point steps down next year because of its contract. Also a new member is a Butai [phonetic] in Africa, around 40 million.

Is there any, going back to the plants that you have with Williams, is there any triggers on the debt on the project level debt that could be impacted?

No, no. No direct triggers linked to the project yet.

Anything at all? When you say no direct triggers, I'm not sure what that means.

It's a question of whether it's corporate or project. There are no triggers related to the parent debt at the - project debt at the corporate level related to Williams.

If your question is, is there a trigger that could render that subsidiary debt an obligation of the parent company, the answer is no.

How about in terms of making it payable or something along those lines by the project?

Well, the - with respect to iron wood and red oak, the credit down grade at Williams imposes a requirement upon Williams to post letters of credit to support their obligations to purchase electricity or toll the gas for us.

What if they don't post na?

That's where I'm headed. If they fail to do that, that could lead to an event of default under a tolling agreement. That could lead to default under the financing arrangements.

Could you give more detail on how much they would need to post and what type of - have they reached the down grade stage?

Well, yes. Williams was downgraded by S and P the day before yesterday and yesterday I believe by Moody's.

I'm not sure what level they had to get to

In both red oak and iron wood, they are now in a situation where they have an obligation to post that additional collateral.

How much collateral?

It's on the order of $400 million for iron wood and $500 million for red oak.

Thank you.

Last question?

Thank you. Our last question will come from Greg Orral [phonetic] at Lehman Brothers. Please go ahead.

Greg?

Sir, your line is open.

We don't seem to be getting Greg.

One moment.

I will go on to the last question, from Jason West of Deutsch Bank. Please go ahead.

Two quick questions. One, your '03 operating cash flow number, are you assuming that any project refinancings or roll overs get done at some of the subsidiary levels? That that would get you to the 1.2 billion?

The second question is, what is your net worth covenant, sort of at right now?

On the financing side, we are not assuming any financing proceeds in our parent cash flow assumptions for 2003. From subsidiaries. Obviously there are ongoing maturities. As Paul mentioned we do have, you know, expectations of roll overs in Brazil and EDC going forward. But nothing that affects in a significant way affects our cash flow at this point.

On the net worth covenant, there is, the tangible net worth covenant has on a gross equity basis about $3 billion worth of space in it. And on the debt to equity covenant, closer to about 1.3, 1.4 billion. of cushion.

Thanks.

Thank you, everybody for joining us today. I would like to remind people that Barry and I will be conducting routine investor meetings. We will be in New York City on August 6 and Boston on August 7. We look forward to seeing all of you then. I apologize for any problems we have had with the telecommunications here. It has been a little bit troubling. Thank you for bearing with us. Thank you very much and have a good day.

Thank you. Ladies and gentlemen that does conclude the conference for today. Thank you so much for participating. We ask that you disconnect your line at 07:13:52 this time.