愛依斯電力 (AES) 2002 Q4 法說會逐字稿

Ladies and gentlemen. Thanks for joining us. Welcome to the AES 2003 Outlook Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question and have -- please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Thursday, February 13, 2003. I would now like to turn the conference over to Paul Hanrahan, President and Chief Executive Officer. Please go ahead.

All right, thank you, operator. Good morning. Thanks for joining us this morning. We have an unusually large amount of material to cover today. Our comments will be longer than normal. Please bear with us as we discuss everything. We will be sure to leave enough time at the end to address questions you might have.

Before we start I want to point out the call will contain forward-looking statements. They are predictions about the future and involve risks that actual results might differ. Please see our filings with the S.E.C. to get a better understanding of these risks. I would like to point out we have slides that have been provided on our website in the investor relations section, so please refer to those as we go through the call today. Let's start with the review of 2002.

It will come as no surprise to you that 2002 was an incredibly challenging year for AES and everyone else in the nonregulated energy industry. Low demand, excess capacity, economic and regulatory problems in Latin America, coupled with extreme industry-wide liquidity prices put incredible financial pressure on the companies in our sector. Nevertheless we survived the test of 2002, and we at AES are emerging as a stronger company as a result.

Because of the changes we have made at AES to respond to the challenges we face in 2002, we are now a company focused on delivering value to our shareholders through excellence and operating performance. It really is an exciting time at AES and I am pleased to have this opportunity to tell you more about what we achieved and where we are heading in the future. We developed and are now intensively implementing a three-stage plan to restore the value of our company. I will summarize them and circle back and provide additional details.

The first stage was to stabilize our financial condition. We have essentially done that through the actions we took last year and in the early part of 2003. Through our concentrated focus on cash flows and liquidity and our successful efforts to restructure debt maturities we made good progress in 2002.

The second stage is to focus on improving our global business performance. The mandate to every AES businessperson is clear -- every AES business must improve performance in 2003, with a goal that every business will reach the top quartile in performance in its industry category in three years. I know we have set the bar very high, but I see no benefit in settling for anything less. AES has never been a company that celebrated mediocrity.

The measures we are taking to clear that high bar include further developing our leadership team, the aligning of our many business units into two core business lines. And putting in place new systems to support this effort. The new systems intended to support the efforts of the leaders in our business units include cost-cutting, global sourcing, and risk analysis. We have also raised a corporate prominence of our restructuring office bringing our best minds and most valuable experience to bear on a challenges faced by underperforming business units.

The third stage of the plan aims at restoring long-term growth for AES. There are and will continue to be many attractive opportunities in our industry going forward. Our plan will provide us with the foundations that we need to continue to be a major player in the industry.

In essence those are the three basic stages in our strategic plan. I would like to provide you some details on the progress made to date and our plans going forward.

First, let's focus on the progress in stabilizing our financial situation. At the beginning of 2002 we faced significant problems. Those included Argentina, the entire country suffered from currency deterioration and political instability. Our concession contracts were abrogated as a result. In Brazil, we and other electricity providers faced low demand post-rationing as well as the impacts of a major currency devaluation. In the U.S. we experienced low spot prices, pretty much across the board. In the UK, we saw extremely low market prices, and these of had significant negative impacts on our Drax business.

Beginning last February in Venezuela, the country experienced political uncertainties, and unusually high exchange rate volatility. The situation grew worse as the year progressed. As if that wouldn't be enough for one company to deal with, we also faced significant liquidity hurdles due to large debt maturities looming ahead of us at a time we didn't have meaningful access to the capital markets.

How did we respond? We took drastic steps during the stabilization stage of our plan, we preserved liquidity by taking six key steps. First, we dramatically cut current level investment activity, second we halted the construction of merchant plants in the U.S. While this wasn't an easy decision, it was the right thing to do from a shareholder value point of view. Third, we instituted a company-wide cost-cutting and revenue enhancement program. As many of you know last year we set a target of $200 million. AES people stepped up to the challenge. We finished the year beating that goal by nearly 50%. Fourth, we cut off all cash from the parent company to nonperforming businesses. Fifth, we sold nonstrategic assets generating $800 million of cash. These sales were done at good values ahead of schedule. We have also executed agreements to sell an additional $200 million of assets. Sixth and most importantly, we refinanced our $2.1 billion of bonds and bank debt which was coming due in late 2002 and 2003. Just as we said we would.

As a result, we have a very manageable debt maturity schedule going forward. As a result of our business performance in 2002 we generated roughly $1.1 billion in current operating cash flow or POCF, which is a cash measure that reflects the liquidity at the parent level. It beat our October projection by roughly $25 million. So today we are sitting here with over $500 million of liquidity at the parent level, which isn't bad considering the speculation by some in the latter part of 2002 about the financial viability of AES.

Next I want to talk about what is happening on the performance improvement front. Now that we have resolved liquidity problems, we are in the second phase of the turnaround effort and are focused on improving the operating and financial performances of our businesses and straightening our balance sheet in a major way.

AES has always been considered to be a world-class operator of businesses in the power sector. But now we want to move beyond that. Our new goal is to become the absolute best in our industry. I don't want this to come across as being arrogant but that is our goal. One of the things I have learnt from my past is when you take a talented group of highly motivated people, becomes the best is very possible. It takes hard work but it is a goal that can be achieved when people set their minds to it.

Therefore, we at AES have decided that every business in AES must improve its performance with the goal that all of our businesses will rise to the top quartile of performance in the industry within three years. And to the top [decile] within 5 years. The best news of all is the people at AES are committed to meeting this challenge.

Having set these demanding goals, what are we doing to achieve them? First we revamped the organizational structure along two business lines. One is generation and the other is integrated utilities. John Ruggirello is the Chief Operating Officer of generation; for the integrated utilities, we are conducting worldwide search for the new COO to lead this unit. We are looking outside of AES for this person, because having grown from roots in the power generation business we need to look more broadly for the right person. With the right experience, and most effectively lead our integrated utility business.

I see a number of advantages with this new organizational structure including better opportunities to get some traction in our global sourcing efforts, more opportunities to transfer hard-won experience and knowledge from one business unit to the other. Easier benchmarking of performance internally and externally. And providing a platform for continuous performance improvement.

Within the context of discussing our new management structure I would also like to note Stu Ryan will leave the company this month to pursue other opportunities. He has served AES well for 16 years. Most recently as the Executive Vice President and Chief Operating Officer for North America. All of us are grateful for his contributions to AES. And his many assignments around the world.

We are also continuing to make use of the restructuring office for our most troubled businesses but with the heightened profile for this group in the company. Joe Brandt will lead the restructuring offices which has seen success in our businesses in Argentina. The basic idea behind the restructuring office is to provide a forum for our best and brightest people to step in and assist in the management of our challenged businesses. This group will make a difference in our performance going forward.

Even though we are changing the management organization along these lines I would like to note that we will continue to report our financial results along our traditional four business lines and five geographic regions, as we have done in the past. Aside from providing continuity in our reporting, we feel these specific business lines and geographic focus provide a very useful framework for understanding the performance of our company. We also need to continue building financial strength to position AES for future growth opportunities.

It is clear that our capital structure is not appropriate for the mix of assets that we have. I expect we will further reduce our consolidated debt at the AES level by at least $1.3 billion this year. All these efforts will clearly lead to a stronger financial performance that all of us at AES can be proud of. It will position us not only to participate in the future long growth that we expect in our industry but to lead it. I hold other great deal of optimism for the future of AES for two reasons.

First, electricity is a critical component of everyday life. Demand will continue to grow, although somewhat cyclically, especially in markets outside the U.S. AES is a strong competitor with positions internationally. We have unmatched experience at dealing with multinational issues. Our truly global presence and experience provides us with a significant head start over our competitors.

Second, our focus on performance gives us the means to win. In the same way a football team trains harder and is in better condition is more likely to prevail. In a fiercely competitive and cyclical business, nothing provides as much advantage as being the low-cost producer.

We combine those two factors, we will be an exceptionally strong position for future growth. I do want to stress, and I cannot say it too strongly, we will undertake the growth initiatives with absolute discipline, with the sharp focus on enhancing shareholder value.

It is worth noting that today, we still have a few high-quality projects in our development pipeline. Projects such as our 1200 megawatt combined cycle project in Spain. This will be a contract generation project being that it is hedging its price risk and will therefore be able to support strong nonrecourse project financing. With this and similar projects we are getting back to our roots in terms of minimizing risk and developing new business with the limited amounts of AES capital.

Before I turn the discussion over to Barry for a discussion of our financial results, I would like to offer a few comments on our reporting approach going forward.

I am sensitive to your desires we provide more information to you to allow you to better value our company. I have heard from many investors we are complicated and hard to value. We are working to fix that, and we will. We are currently surveying a number of investors and analysts about how AES can continue to provide better visibility and more transparency into our financial performance, and that people can value our company more easily.

You can expect to see more information about this throughout the year. But if you have some strong thoughts on the subject and would like to participate in the survey process, please call Ken Woodcock, our head of Investor Relations. Even though we haven't completed the survey process yet, I would like to start today by providing additional information, which I feel is essential to understanding the value of our company. As Roger Sant mentioned in the past we are focused on measuring the cash flow generation capability of each our businesses and managing our company accordingly.

We will continue to report POCF which is a useful measure but it does have limitations. It was most relevant when we had current company liquidity concerns last year, and to the holders of our corporate debt. It does not reflect the substantial delevering we are undertaking at the subsidiary level, however, which is creating real value for our equity shareholders. As of today in a response to the request of many people on this call, we will begin reporting consolidated free cash flow, which is very simply the GAAP measure of consolidated operating cash flow minus maintenance capital expenditures, or the ongoing capital expenditure needs of our subsidiaries.

We believe that the net of these two numbers represents the best measure of cash flow generating capability of our businesses as a whole. It is useful in understanding the equity value of our company.

I would also like to point out today the guidance we are giving includes some contingency to reflect the fact we are facing volatility around the globe that has impacts on our businesses. Let me walk you through our guidance on consolidated free cash flow for the year 2003.

The operating cash flow from our subsidiaries this year is expected to be $2.2 billion. When you deduct the corporate costs of .7 billion, we are projecting a consolidated operating cash flow of over $1.5 billion. The ongoing maintenance Cap Ex of our subsidiaries is expected to be half a billion dollars resulting on -- in a consolidated free cash flow for our business of roughly $1 billion. When you compare this to the consolidated free cash flow for last year, it represents an increase of roughly $300 million, which reflects the expected performance improvements in our businesses.

It is also worth looking consolidated free cash flow on a per share basis. We project this number will be $1.78 per share. That is a number that reflects the ability of businesses to generate free cash flow on a per share basis.

We think in terms of valuing the equity of our company, consolidated free cash flow is one of the most useful measures available. It is also the way we manage our business. Therefore, we will continue to report this going forward, and we hope you will find it helpful.

Of course we are also going to continue to report GAAP earnings. However, we will no longer be reporting proforma earnings, but will continue to provide a breakdown of noncash charges, however, so those of you who would like to adjust for certain items can do so as you deem appropriate. I think as you saw in our press release we are giving GAAP earnings guidance of 50 cents per share for 2003. While we are disappointed with this result, I want to reemphasize that we are managing our company for shareholder value not for GAAP earnings.

A good example as to why we do this is Drax. We are currently working to restructure our investment in that business. During this time, we will not be putting any more -- money into this business, but we will generate noncash losses. These could be eliminated by committing to sell the project and placing it into discontinued operations.

While this might be preferable from a GAAP standpoint we would probably lose the opportunity to restructure and preserve value. Thus our focus is on cash-based measures of our financial performance.

At this point I would like to turn the call over to Barry Sharp, Chief Financial Officer, Executive COO - Large Utilities. He will discuss the results of 2002, our guidance for 2003, in greater detail.

Thanks, Paul. And just a reminder for those that might have joined late. We do have slides on the website in addition to our press release package that have some information with respect to 2003 outlook and 2002 performance that I will refer to as I go through my comments.

First, I would like to go through a brief summary of results for 2002. As our press release package does include significant detail and discussion about the results for the year.

As Paul mentioned despite the difficulties in our markets during 2002 and the concerns through the year about our liquidity. We have stabilized and improved our current and forward-looking liquidity position. We had a solid year in operating cash flow performance both at subsidiaries and the parent. The executed asset sales at good prices. We reduced Cap Ex and we reduced debt across the portfolio. We plan to continue these activities through 2003 as we enhance our performance and prepare for growth.

We completed 2002 with parent operating cash flow, or POCF of $1.095 billion. That's 25 million higher than our estimates after Q3, which was $1.70 billion. For the year our top 15 businesses generated $841 billion, or 1.14 billion distributed to the parent. The details of this information are on page 4 of today's slides.

After considering overhead, interest income and development costs and taxes, as well as related interest charges at the parent, our resulting calculation of parent free cash flow per share was 90 cents per share for 2002. Which is consistent with the amount we generated for 2001. Our parent level cash flow performance during 2002 provided the foundation for the stabilization of our financial position, and we were able to successfully complete our refinancing in mid-December. At year end we had liquidity, represented primarily by cash and availability under our credit facility, a total of 216 million. The sources and uses for 2002, in more detail, is shown on page 3 of our slides.

Currently, after having completed the sales of Cilcorp and Mount Stewart we have liquidity of 520 million. We have also repaid 251 million of our refinanced credit facilities with a portion of our asset sale proceeds.

Turning to earnings, EPS on a proforma basis for 2002 were 78 cents a share, and as a result fourth quarter results were approximately 3 cents per share of earnings. This is shown in significant detail in our press release package, covering both segment and geographic contributions.

As for the business segments, they generated combined income before taxes EBT of $1.169 billion for 2002. And on a geographic basis, that EBT was generated 50% from North America, 14% from Europe and Africa, 13% from South America, 12% from Asia and 11% from the Caribbean.

Overall, operating margins or operating income as a percent of our revenues for 2002 on a proforma basis was approximately 27% as compared to 28% for 2001. The slight decline during a difficult year, in some of our businesses, because of lower competitive supply prices in the U.S. and the UK, as well as declines in margins at EDC and Electropaulo actually masks improvement in several areas. Specifically for contract generation which contributed 44% of the total margin in 2002, the overall segment margin for the year increased to 42%, from 35% in 2001. And within contract generation every geographic region improved margin year-over-year. Beginning to reflect the impacts of our performance improvement efforts in several locations.

In large utilities, IPALCO improved 27% in 2002 up from 34% in 2001. The growth distribution businesses also showed margin improvements across the segment except for Sule. Our fourth quarter results were reduced by the bankruptcy on the operation of Drax and Barry in the UK and a continued slower recovery of electricity demand in Brazil.

Additionally during the fourth quarter, our final income tax rate for the year on a proforma basis increased to 39% as compared to our estimated rate of 36% throughout the year. And this affected the fourth quarter in full.

As far as reported GAAP earnings, we recognize significant noncash charges associated with assets and goodwill impairments during the fourth quarter of 2002 aggregating a total of 2.7 billion, or $4.96 per share. These were primarily related to our investments in operating businesses in troubled markets in the UK and Brazil as well as in the U.S., where we were selling or terminating the construction of our operations of several businesses.

Total write-offs and impairments for the year including discontinued operations and the cumulative effect charges related to the change in goodwill for Brazil and Argentina were 3.75 billion after-tax or $6.94 per share for 2002. As we mentioned in our previous press release, these write-offs did not result in any covenant compliance issues in our corporate or subsidiary financing arrangements.

The remaining balance sheet exposure to us at year end for Brazil is approximately $5 billion in assets, $6 billion in liabilities, and the resulting equity deficit of approximately $1 billion net of translation losses and other comprehensive income items. In comparable amounts for Argentina are assets totaling .8 billion, liabilities of .7 and equity of positive .1. So from an accounting perspective this means if we were to dispose of all our businesses in Brazil and Argentina as of the end of the year our consolidated net equity position would increase by approximately $1 billion.

Now, let's look ahead to 2003. With 2000 behind us we are moving forward. We are providing 2003 outlook for parent operating cash flow as well as Paul mentioned, consolidated operating cash flow. Which we believe is important to understand for us particularly for a company structured like AES as well as GAAP earnings before discontinued operations.

First of all, we expect parent operating cash flow, which is net of corporate costs before proceeds from any sales of assets or project financing, to be approximately 1 billion for 2003. This represents a reduction of approximately 100 million from 2002. Primarily due to decreases associated with the reduction of contract prices at Shady Point and lower expectations for EDC and Electropaulo for 2003. These decreases are partially offset with improvements associated with Puerto Rico, Eastern Energy, Tri-Gen, and several other businesses in our portfolio.

In order to understand the parent sources and uses we have provided a schedule that covers this in more detail along with the top 15 contributions to POCF for your reference on pages 3 and 4 in today's slides. Reducing POCF by development costs and taxes and parent interest interest aggregating .6 billion, our free cash flow for 2003 at the parent level is currently forecast to be approximately .4 billion or 73 cents a share.

Beginning with this call today we will provide guidance and will report going forward using a summarized version of the consolidated statement of cash flows. Because of the volatility and impacts of noncash mark-to-market and foreign currency amounts in the income statement we believe this cash flow information is critical to understanding the operation and the significant cash flow generating and deleveraging capacity of AES's operating subsidiaries in addition to the activities of the parent. We have included a detailed schedule for 2003 on page 6 in our slides. Which outlines our expectations for operating cash flow, investing and financing cash flows of our subsidiaries of the also for the parent and in some on a consolidated basis.

We believe this is important information to understand, let's briefly walk through each component, although I believe many of you are familiar with the general format, I would like to explain how it does apply specifically to AES as a holding company of operating subsidiaries.

Net cash from operating activities for 2003 represented the traditional calculation of net income, adjusted for or adding back noncash charging such as depreciation, deferred taxes, as well as adjustments for changes in other working capital items that provide or use cash. For 2003, we expect our operating subsidiaries to generate approximately 2.2 billion of net cash from operating activities. That compares to approximately 2.1 billion in 2002. And the 2002 amounts include operating cash flow generated from Cilcorp and New Energy, that have recently been sold.

If we then reduce the subsidiary cash from operations by expected parent uses of cash for operations by approximately 680 million, that is primarily for interest, G&A and taxes, the result is that we expect consolidated net cash from operating activities to be approximately $1.5 billion for 2003. This amount compares to operating cash flow of 2002 of approximately 1.4 billion, which is shown on page 5 of the slides. In both years show the significance of our ability after interest to generate recurring operating cash flow.

Also looking forward to 2004, we currently estimate that operating cash flow will grow closer to 1.7 to a 1.7 to $1.9 billion amount in that year. But clearly our assumptions have a while to materialize and several will affect the estimates of that amount in the future.

From this point we can measure free cash flow as Paul mentioned for 2003 on a consolidated basis. We define this to be consolidated net cash from operating activities less maintenance type capital expenditures to sustain ongoing operations of our existing generation and distribution businesses.

We currently anticipate maintenance capital expenditures of approximately 500 million across our operating portfolio, and therefore reducing that 1.5 billion of operating cash flow, we derive our measure of consolidated free cash flow of $1 billion for 2003. That's approximately $1.78 per share. Again, showing we have significant capacity to generate free cash flow after maintenance Cap Ex. It can be used to delever our operating portfolio and the parent.

A couple of remaining components to the statement of cash flows are important to note. We show growth capital expenditures, which represent costs to complete businesses under construction, of .7 billion, as well as our expected proceeds from agreed asset sales of approximately .7 billion during 2003. This results, when combined with the maintenance capital expenditures and an estimated net use on a consolidated basis for investing activities of .5 billion during 2003.

Financing activity shows expected financing during the year of approximately .1 billion related to the maintenance capital expenditures up above. Project financing for growth capital expenditures of 500 million, and net repayments or delevering across the portfolio of 1.3 billion. Of which .5 million is related to our subsidiaries and .8 is corporate related repayments from our cash flow generated by subsidiary distributions to the parent which is primarily POCF and asset sale proceeds. Net cash used in financing activities is estimated to be approximately .7 billion for 2003. This results in a net increase in consolidated liquidity of 300 million and ending consolidated liquidity of approximately 1.1 billion at the end of 2003.

It is important to notes a part of the subsidiary cash flow column on that statement, the net distributions to the parent of 1 billion, which is a POCF and other distributions net of the parent investments into new businesses, is reflected as the use of cash by the subsidiaries. The same amount shows as a source of cash at the parent level and eliminates in the consolidated column.

In general, as Paul mentioned, we believe this operating cash flow information provides a valuable insight into the cash generation and deleveraging capacity of the company. As well as its subsidiaries. It shows we are capable of consistently improving equity value through delevering at both levels.

Going forward, we will also be giving earnings guidance based on annual expectations for GAAP earnings before discontinued operations. Therefore our guidance will include our estimates of the net effects of foreign currency transaction gains and losses as well as our estimates of mark-to-market impacts of FAS 133.

For 2003, beginning in 2003, it also includes the estimated costs of long-term incentive compensation including stock options expensed over the vesting period. It does exclude discontinued operations and the effects of asset sales and further reductions from those asset sales that might occur in the future. As well as noncash charges related to FAS 143 or other changes in accounting principles.

Currently for 2003 our expectation for that measure of GAAP earnings is 50 cents per share. After excluding effects of write-offs and impairments the income decreases year-over-year due to the effect of increased expenses associated with long-term incentive compensation and options, as I mentioned, of approximately 3 cents per share. And by increased interest costs primarily at the corporate level that accounts for a reduction of approximately 20 cents per share year-over-year.

Of this amount, approximately half is due to the increased spreads on our recently refinanced corporate debt, and the remainder is due to a significant decrease in the amount of capitalized corporate interest in accordance with GAAP to minimal levels due to the termination write-off and sales of plants under construction that were financed with significant equity or corporate investments up through most of 2002.

Other operating income improvements during 2003 from newer businesses in the Caribbean and Middle East as well as several other operating businesses are expected to be offset by declines in certain contract generation businesses, such as Shady Point, where the contract amount reduces, as well as anticipated lower earnings in 2003 in our large utility segment, particularly associated with EDC, due to the current economic conditions, as well as from Simig and IPL.

In terms of margin expectations for 2003 we anticipate the overall operating margin at approximately 29%. Up from 27% in 2002. The chart on our 2003 earnings outlook on page 7 of the slides provides detail about our expectations for segment contributions to pretax earnings by both line of business as well as by geography. You will note that on an overall basis we expect segment contribution before taxes to be slightly below the 2002 amounts at 1.15 billion. You will notice also on that chart that the shift is largely due to improvements in all of our segments except for the reduction in the large utility segment as I mentioned.

Covering a few assumptions and sensitivities on our earnings. Our assumption with respect to the exchange rate for the real is the average exchange rate for 2003 will be approximately 3.75. At the ending, it will be 3.9. This is consistent with the average current forward-market curve as well as the expectations of the Bank of Brazil.

If that curve were to devalue 10% for 2003, our earnings would be reduced by approximately 12 cents per share. Or roughly 1 cent per share per 1% of annual devaluation. Of the 12 cents per share for a 10% devaluation, approximately 5 cents would be related to transaction losses and the remainder would be due to effect of the devaluation on the operating earnings of our businesses in Brazil.

Our assumption with regard to the Venezuelan Bolivar is the average 2003 exchange rate will be approximately 2,110 per dollar. And that the year tend rate will be approximately 2500.

As Paul mentioned, the situation in Venezuela is fairly fluid. And the economic conditions are difficult to predict with any accuracy at this point. But our expectation is if the currency controls were maintain the through the year at approximately 1600 Bolivars to the dollar we would see a reduction of approximately 4 cents per share for the year due to the offsetting benefits on the operating margin that would be reduced by FX transaction losses on the net Bolivar liabilities.

With respect to our assumptions about electricity prices, that affect coal plants in New York, where we benefit from higher electricity prices even as sparks spreads contract, we are currently assuming an average on peak price during 2003 of approximately $50 per megawatt hour. If that price were to decrease by 10% for the unhedged portion of that business, and about 52% is currently unhedged, our earnings would be impacted by approximately 2 cents per share for the full year.

We also have a minor sensitivity to changes in spark spread associated with our gas-fired plants at Granite Ridge in New England and Wolf Hollow in Texas. If spark spreads were to move 10% from our current annual assumption -- assumptions earnings would vary by 1 penny per share per each 10%. We are currently assuming an average on peak spark spread of $14.38 megawatt hour in New York and $13.15 in Texas.

One other sensitivity to note is the impact on earnings that would result if B&DS they were to exercise their right to take the shares of Electropaulo and we were to lose Sule and Uragana. Our GAAP earnings after FX losses for 2003, if that were to occur would be approximately 3 cents per share higher, if we were to lose these three businesses as discontinued operations. Additionally, our parent operating cash flow would not change as we are assuming no cash distributions from Brazil in 2003. But our operating cash flow, which is a consolidated figure representing cash generated at the business level irrespective of whether it is payable to dividends to the parent or not, would be reduced by approximately 400 million if those three businesses were to disappear.

So in sum, 2003 continues the trends of further delevering at parent and subsidiary levels with nearly 1.3 --1.5 billion in anticipated cash flow net of interest costs. And anticipated debt reductions of 1.3 billion. We also expect to continue to see the benefits of our focus on operating improvements as we go through the year.

With that I would like to turn it back to Paul before we go to questions.

Thanks. We have covered a lot of ground here, and we talked about how we resolved our liquidity issues, our plans going forward to be the best and our expectations for the future. Now, at this point I would like to open up the call to questions. Operator, if we could open up the lines for questions, please.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Bill Paxer (ph.)with Merrill Lynch. Please go ahead with your question.

Hi, guys. Thanks for the information. I will be back to you later to get the details written down, but a couple of questions I had --

Bill, can I make a comment?

Sure.

Bill, just to make a comment, we'll be putting the transcripts out on the website a little later today, so that will help you out.

The question I had first, Paul you had mentioned you are ahead of your cost-cutting targets by about 50%, which I take to mean you have gotten to about $300 million in cost takeouts identified; is that correct?

Yes.

So what is the amount you expect to realize, what was kind of the run rate you exited the year in terms of what you got into the income statement and what will be the incremental benefit you expect to see in '03?

The -- it is -- the number has been built into our guidance. We are basically projecting that an ongoing run rate should be above $200 million. Some of the things we got last year were one-time effects. I think we see building those up to long-term sustainable numbers. We will say in the range of -- or higher than 200 million. We will have a better sense of that through the year. We expect to do in excess of 200 million. In this year, you mean?

In 2003, that's correct. Great. Turning on to am couple other smaller, or different topics. Were you willing to quantify what you expect the GAAP loss from Drax to be this year?

It -- at this point I think it is too certain to do that, because I think although we currently have a hundred percent of it on our books, the likelihood is that won't be the result for the full year. You know, the loss will be effectively a loss that doesn't get realized from a cash flow perspective at the corporate level. So it could be a few pennies a share in the first three to six months, but I think, you know, as you know, we have a standstill there that goes through May, but our expectation is we will see changes in how the project is structured through that period of time.

And I guess the last thing I will ask is just with respect to Brazil and the various options that might happen or results that not might happen from Electropaulo and the action down there, are there covenant issues you face with respect to losing any of those operations?

No, there aren't. As part of the new credit facility we finished in December, effectively, we made I think what was a fair trade. We have an obligation to not continue to put any funds into those businesses in Brazil, other than [Geatay], and as a result, the impact of losing them or writing them off as we did at the significant portions at the end of the year doesn't affect our covenants either. So no impacts from those businesses.

Okay, thanks.

Our next question comes from the line of Elizabeth Parrella with Merrill Lynch. Please proceed.

Thank you. Just a follow-up to the last question. If Electropaulo were to go into default while you owned it, do you still think it would have no impact on the AES covenants?

If it were to go into default, it -- in fact, it is in default.

I guess I mean --

You mean bankruptcy?

Yes.

So default doesn't cause any issues. We do have significant subsidiaries under some of our unsecured paper and effectively those two subsidiaries for '03 are Drax and Electropaulo. We don't expect, and we have the ability to manage that situation, we don't expect that those things to happen or for those effects to cause problems for us.

Okay. Moving to the '03 parent company, distributions chart, I think you mention you didn't have anything coming out of Electropaulo. It does look like you have 20 million from [Uragana]. I wanted to ask you in general how comfortable you felt with the Uragana number as well as the Argentina numbers on that chart and whether you had anything coming from Venezuela in the parent company cash flow number?

Just a small amount from Venezuela. It doesn't make the list. But really 10 million or less at this point for the year.

We do have amounts coming out of Argentina and you are right ut out of Uragana. Uragana does not have a financing arrangement our expectation is we have the ability to get some cash out of that business. So it is in project finance.

With respect to Argentina, again at [Alicura] in particular we have a hydrofacility that is not levered at the project business. It is an equity financed company. We believe we can get cash flow out of them in 2003. We did get cash out of them in 2002, although not quite to this level. But we have seen improved operations as well as, you know, the fact that we benefit from the lack of leverage and the low operating costs of a hydrofacility.

And Hennaire, 30 million from there. Would your bank agreements permit you to cash out of Hennaire this year?

You want to talk about that?

Sure. There are no bank restrictions on distributions coming out of the Hennaire business to AES.

Okay. And one other question, just looking at the consolidated funds flow chart on page 6, the 2003 forecast, could you just walk through for us how the committed investments at the parent of 180 million for this year show up in this chart as well as the project financing at the parent of, I think it is 120 million, where that shows up here on that chart?

You need the page 3, which is previous, and look at the funds flow, but effectively it is the combination of 1 billion 80 distributions from our subsidiaries on the top line of page 3, combined with the project financing proceeds and inflows of 120 million to get to total inflows to the parent of 1.2 billion and reducing by the committed investments of 180. Those three numbers net to a billion 20.

Okay. Okay. And the reduction of debt at the subsidiary of 500 million forecasted for this year, does that reflect debt that comes off the balance sheet as you sell things? I mean, for example, Cilcorp, the amount of debt that would have come off the balance sheet would have been over $800 million, is that in addition to, you know, debt coming off as a result of asset sales?

Yeah, this is net repayments from operating businesses.

Okay. Thank you.

It doesn't include the debt reduction associated with Cilcorp.

Okay. Thank you.

Our next question comes from the line of Lee Cooperman with Omega Advisers.

Good morning. I have a bunch of questions. I don't know whether I should get them out and you handle them however you want to handle them. I think some of this debt reduction stuff could be presented in a more readable fashion. Specifically, I mean Paul has stated earlier I guess last year, the goal of getting to an investment grade rating or having a debt sell at par, so we really have to take a two, three-year look here. What is presently a net debt position of the parent company adjusted for the asset sale to close in January? And what kind of debt repayment schedule do you think is reasonable over the next two or three years? Where do you see that parent company debt going to over the next few years? Where is it now, where do you think it will be in two, three years?

The bonds are -- other than the refinancing, you know, continue to be outstanding. As you know, we refinanced approximately 2.1 billion in December. We have repaid, of that amount, 251 million, with the proceeds from Cilcorp and Mount Stewart. We have a couple other asset sales we hope to close in the next couple of months. So that number -- we will get you the exact number, is a little bit -- is about 1 billion 850 today. We would expect that over the course of 2,003, as we showed in the cash flow statement we would reduce from existing asset sales only as well as our projection of cash flow sweeps we will reduce debt by $800 million for the year through the course of '03. We actually expect to probably do better than that, because we have some other asset sales we are working on and would further reduce that. As well as we hope to beat obviously our projection for cash flow.

So from an overall viewpoint, if you look at '03 and '04, our current expectations is we would -- are that we would reduce parent debt by the amount before the end of 2004 by a billion 450 or so, which is the required amortization by the end of that period. So we believe we will be paying down the parent piece to the tune of about a billion 4 to a billion 5 before the ends of 2004. We will also look, as you know, we have done some debt reduction through debt for equity swaps over a period of time. We will look at doing some of that as well as other strategies. Including additional asset sales.

Basically the starting point is roughly 6 billion, in a couple years you will be down to 4.5 billion?

I think we can do a little better than that hopefully with asset sales and others. That is a reasonable low-end view.

I apologize, you may have covered this, but on page 4 of your exhibit, you have other of $365 million. If I could observe, I think it is a pretty big category, a pretty big number relative to the top 15 to consolidate into one category. Where are the risk, and assumptions and that other, you know, is there anything that we should be aware of where you could get a big surprise?

No. This is -- it is really a lot of other factors, you know, some of our facilities have small operating lines of credit, and other amounts they will borrow and use from time to time. So it is really a combination of lots of small activity across the portfolio, so there is, you know, the amounts that are probably more subject to question would be financing proceeds for growth Cap Ex. In that piece. You are looking on page 5?

4.

Page 4. There was a pretty big number, 365. I don't know how many individual numbers add to it, but it might be helpful to --

They are just a bunch of different businesses, but they are all individually small numbers. So -- and there's -- so I think, you know, anyone surprised at those numbers, it wouldn't have a significant impact. They all will be less than $20 million.

Going back to page 3, given the fact this thrust on reducing corporate overhead or operating expenses for the entire business, you know, is there anything to be talked about by the fact that the corporate overhead is projected to go up by $27 million this year versus last year?

I think most of that, as Paul mentioned, it is really reducing costs across the company. We are instituting several programs at the corporate level that will increase to some extent our corporate G&A costs like the global sourcing program, performance improvement program, risk management and those processes in the company. So there is some level of increased activity at the corporate level that will, you know -- where we see the benefits coming through net in our cost reductions across the whole company.

Just to let you know, we are focused very hard on those numbers. In terms of return on investment, we see those as having incredibly high returns by putting in those systems at the corporate level. We think the returns we will get from the operating businesses will be fairly significant. Just last year you can look at return of $300 million we got with very little increase in those costs.

Okay. The -- again, I apologize, but you have also on page 3, a bond repayment number of 90 million. My -- I thought there was a 7/38ths bond due in 2014 that was putable in '03, that may have been part of the exchange I forget.

It was part of the exchange.

That answers that. We won't spend time on that. In terms of the interest cost, you know, you are rapidly paying down your debt. Yet we only have an $8 million reduction in the projected interest costs. For 2003. When do you start to see that number drop in a more material fashion? I assume as you pay down debt your credit situation gets better and so anything you have that's with the banks, you should get a better deal and you have less debt so you are paying less interest.

No, that's correct. But obviously comparing '02 to '03, our refinancing raised interest rates spreads, LIBOR plus 650 is the borrowing rate under the new facility. There is some -- although we are starting to pay down debt early in 2003, we would also pay down a significant portion at the end through the cash flow sweep in the refinancing. So you are right, we will start to see that decrease,particularly as we move into 2004, as well as, you know, our goal would be to reduce that spread as we move forward and continue to show strong liquidity. Hopefully we have a conservative estimate.

Two last questions. To help me out in terms of looking at the exhibits, I know to continue to prepare your preferred dividend, which is your intention, you have to have a two-to-one coverage, what are the numbers one looks at to derive what your coverage is?

That's calculated as coverage over our borrowing interest, not including the preferred. So it doesn't come quite off this chart. We will get you those details in terms of how to break out the differences.

If you could, I would appreciate it. Lastly I note a number of your facilities, the financing has a term substantially less than your contractual right to provide power. And if you look around your portfolio of, you know, assets, is there a substantial buildup of hidden asset value by virtue of contract terms that exceed financing terms and you are building up an equity that is accruing to the shareholders?

I think that's true in a couple of ways. We clearly have contract terms that exceed our financing terms, that has generally been true across the board particularly in contract generation segments. I think what the cash flow statements show, as Paul mentioned, moving forward into 04, we are kind of reducing the leverage at those businesses. We are paying down the debt at those businesses even if we are not getting, you know, POCF or parent cash flow out of the business which further improves equity value. Most of our assets have lives much longer than the contracts associated with them.

From the standpoint of meeting all your debt maturities and amortize your payments, there is hidden assets here you could call upon if necessary?

Yeah, Lee, this is Paul. I want to -- you have brought up a good point. That's why we have focused on this operating cash flow concept, because that is the number, when you take out the maintenance Cap Ex, that is the number that shows you how much cash is being generated independent of the financings. And I think you are right, that there's a lot more generated coming up to the parent. It is just for that reason, it is going, paid on the debt. We will be left with assets at the end that will have less debt as a result of that.

One last thing, on page 9 of the exhibit, you have the signed and pending asset sales. You had to make a guess, if you look at your portfolio, I realize for competitive reasons and employee relations, you can't identify the specifics, but what kind of level of asset sales do you think we would be looking at, you know, 2003, 2004 that as you look at your portfolio the things are maybe not strategic or you can get good prices for?

I think we have a lot of flexibility on that front. Because the liquidity situation is better and has been improving. But we have teed up another 400 million of asset sales in addition to the 200 million already committed. And I could see in addition very easily we could go out, if it makes sense, and it might from a value standpoint to maybe go out another 400 million on top of that without too much effort based on preliminary conversations we have had. So, you know, looking at that you are easily looking at the potential to do another billion if in fact it's the thing that makes the most sense from a shareholder value point of view.

Thank you. Good luck, guys.

Just to finish the question on the 2003 chart on page 3, that 570 in total interest costs includes 78 million in interest costs that wouldn't be included in that. So it would net down to about 492.

That should over the next couple years should drop down quite nicely?

Yes, that's based on our current level of outstandings. We would expect it to change.

Thanks, much.

Our next question comes from the line of David Silverstein with Merrill Lynch. Please go ahead.

With respect to parent operating cash flow, you had mentioned that you thought that was conservative. Last year you gave us a range of 900 to 1.2 billion. And set out the hard number now. Could you give us a range for this year, to give us a sense for the conservatism in that number?

I mean, I think what we are a little more comfortable giving the point both for earnings and cash flow, but in general, I think we would see that number, you know, ranging from 900 and feel pretty confident about the low end of that range to 1.1 or slightly higher. I am not sure we would go to 1.2 given what we see in some businesses in, for example in Venezuela.

Okay, so we still use the lower end of the range. Does that reflect some of the Latin American risks here? Because you do have a good deal of cash that is coming out of Latin America on that one.

Yeah, I think on an overall basis, I don't know that it's any different or more dramatically different than 2002, it is coming from a broader portfolio of businesses in 2003 than it did in '02. But it does -- it reflects our view of the volatility of that -- those numbers. Again, I think we feel pretty confident above that minimum.

Is that because for instance, something like Uragana, are you expecting to get a lot of the cash early in the year, such that it is hard to predict later in the year, is there a lumpiness, that you can you put a higher degree of confidence on some of these cash flows? Argentina they are talking about nationalizing utilities and other stuff like that, do you -- they have elections coming up.

It reflects all of those kinds of variables. Certainly if we expect it to come sooner it is easier to predict than later in the year. We have a history with several of these businesses, and as well as, you know, a recent history in 2002, even through the difficult periods in Argentina. So we have a reasonable degree of confidence. But again, they are projections, and it can turn out better or worse.

One quick one. Can you give us an update in terms of asset sales under way, how many -- what your potential proceeds would be in the timing of which and can you give us clarification as to which assets are kind of on the block that people already may know about in the M & A environment?

Bill Luraschi will discuss that. He has led that in the past.

As Paul said earlier in response to a different question, we think the sort of near-term crop of five or six transactions will yield 400 million in proceeds. Our hope is to sign those up within the next 60 to 90 days. The longer -- I will not get into specifics about which ones are currently in advance negotiations since we are pursuing more than I think we will ultimately decide we want to sign up. The longer stage asset sale program is really going to get wrapped up into the efforts that Barry's group is doing with ways to improve our capital structure and balance sheet, and the amount of proceeds will be dependent on how successful we are on those efforts, and also the operational improvements that Paul has mentioned earlier in the call. But target proceeds for that next stage is approximately half a billion. We are in the process of finalizing which businesses we are going to target to reach those proceeds. And if we go forward, with that piece of it, I think third or Q4 is about the time we will sign those up.

Okay, so you expect to sign up the initial group of five to six transactions within 60 to 90 days and close shortly after unless there is regulatory issues?

They each close on different conditions depending on where the business is and what approvals are required as well as local regulatory issues. Some of them we think will close shortly. Some may three to six months to close.

Those five to six would be 100% incremental to what you already have now baked into your liquidity forecasts; correct?

Correct.

Thank you very much, guys.

Our next question comes from the line of Derek Cribs (ph.). Please proceed.

Can you hear me?

Yes.

My questions have to do with bank and debt maturities in '04 and '05. You have laid out '03. Could you give us those numbers in '04 and '05?

With respect to the corporate debt, it is flexible to the extent that we are obligated, probably as you know, to repay a portion of our new corporate debt as we sell assets, or a cash flow sweep over the course of a full year. So approximately about 1 billion 450 of our corporate debt needs to be repaid by the time we get to the end of 2004. Our current expectations are that given cash flow in the business as well as our asset sales program, is we will meet that before we hit the end of 2004. The rest of it would then at the corporate level be due at the end of -- near the end of 2005, or refinanced.

Okay. Next question is IPALCO, what's the reason for the falloff in cash flow from IPALCO?

It has -- it is not really. From 2002 to 2003?

Right.

The 150 to 140?

Yes.

It is an expectation that IPALCO experiences normal weather in 2003, as opposed to what has been a little abnormal and beneficial weather in 2002 as well as some downtime in their operating facilities for construction work related to capital expenditures for pollution control equipment.

In '01, wasn't the number 200 million at IPALCO?

That 200 million included tax sharing payments which we have now put as a different line item on the statement. So it was 200 million or so in total, but that included a tax-sharing payment. We get tax-sharing payments from several facilities. We have included those as kind of separate lines.

Okay. So an apples-to-apples basis, is it basically flat from '01 to '03 or is it still lower?

It is basically flat.

Okay. And my last question, I hate to go back to Brazil issue again, but your early why statement does that mean if Electropaulo or any of the other subsidiaries in Brazil file for bankruptcy we don't need to worry about any of the bonds also being cross-defaulted?

The only subsidiary in Brazil that is a significant subsidiary is Electropaulo. If Electropaulo files for bankruptcy, it would be a cross-default under the bond activity. There are significant reasons for it not to do that because of the concession that's in place. And so we wouldn't expect that to occur. Because the value of the business is on the concession. We also have some abilities to manage that situation with respect to other ownership percentages and other items.

When can we expect the Brazil situation will play out, either the government will take back the equity stake or you will come to a deal on the terms of refinancing? What kind of timing can we expect?

I think that's -- I will let Mark Fitzpatrick comment on that, since he's been leading it. One comment I make is we now have a new president in Brazil and new administration, and the -- there is a crisis in the electricity sector there, big problems. I think we, and others, are watching how the government will respond to this. You know, I think we are in active dialogue with B&DS, and I think there's an sense we want to get this thing resolved quickly. We don't know. We will all have to watch that and see how it goes.

We are not sensing any interest in doing anything as drastic as taking back the shares. There is a desire to try and work something out as best we can tell. I don't know, Mark, if you want to add anything to that.

We are working with all the ministries and the bank that is involved in this. We sense there is a strong desire on the part of the new government to simultaneously reexamine the privatized electricity industry as well as come up with an amicable solution on the debt that Electropaulo holding companies owe to B&DS. We have heard that several ministries have put deadlines out there. They are unofficial, and we can't confirm them, but our expectation is that in the next 60 to 90 days, we would hear something reasonably definitive about the long-term solution of our Electropaulo holding company debt.

And the only other subsidiary that has these same type of cross-default provisions is Drax; is that right?

That's correct.

Okay, thank you very much.

Our next question comes from the line of Jason Coh with Sandel Asset Management. Please proceed.

Yes, hi. Could you break out the parent level cash flow by geography and line of business?

It's in the press release, in that -- in the back schedules, in terms of geographic and line of business distribution.

It is in the press release, not the slides?

Yeah, not in the slides but in the press release schedules.

Got you. Thank you.

The next question comes from the line of Chris Cook with Da Cove.

We will take this question and one more.

Our next question comes from the line of Clark Orski (ph.) with KDP Investment Advisers. please proceed.

Thanks. All my questions were answered.

That was an easy question.

Last one.

This will be the last question, then.

All right. Our next question comes from the line of Chris Cook. One moment, please.

Is there a question there?

I'm sorry, there is no further questions at this time. Please continue with your presentation or any closing remarks.

Okay. Thank you, everybody, for joining us. It was a long call. We appreciate your patience. I would just like to say it is an exciting time to be at AES. We have a lot of good plans ahead, and we look forward to telling you how we are progressing with meeting our goals as we go forward. Thanks for joining us. Have a nice day.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation. And ask that you please disconnect your lines.