愛依斯電力 (AES) 2003 Q2 法說會逐字稿

Good morning ladies and gentleman, and welcome to the AES second quarter financial report conference call. At this time all participants have been placed in a listen only mode and the floor will be open to a question and answer session following the presentation. It is now my pleasure to turn the call over to your host Mr. Paul Hanrahan, sir the floor is yours.

Thank you Maria. Thank you everybody for joining us this morning. Today, we'd like to report on the financial results for the second quarter, I'd also like to report to you on how we're progressing on a three-phase turnaround and growth plan. I would just like to remind you that these will include some forward-looking statements so please see our SEC filing disclosure for a full statement about the risks.

I'd first like to make a few general comments about our financial results. Our operating income, consolidated operating cash flow, distributions from subsidieries and earnings for the first half of 2003 were generally in line with our expectations. Some of our businesses performed exceptionally well, while others did not meet our expectations. Barry Sharp, our Chief Financial Officer, will discuss these points in greater detail in a few minutes.

I'd like to spend a few minutes on the highlights of the second quarter. Some of the major achievements we had for the quarter were, one improving the maturity profile of our corporate debt, two, increasing corporate liquidity, and three, demonstrating out ability to regain access to the capital markets. Just as a reminder, these are all fundamental elements of the first phase of our plan., which is achieving financial security and these were all completed well ahead of schedule. In combination, these elements provide a renewed flexibility for us. In terms of our ability to improve our credit profile, they're also showing our ability to enjoy some attractive growth opportunities.

I'd like to cover, a little more in depth, how we've improved our maturity profile of our debt, we've completed at 1.8 billion refinancing, that was a big step in terms of matching our security profile in terms of our asset lines. We also announced yesterday, a $950 million debt refinancing in addition to reducing our interest costs, we now have no significant maturities before the second half of 2007 and Barry will cover this later on in the call.

With respect to improving corporate liquidity, there were a number of positive developments this quarter. In this quarter we completed the refinancing of our China business, of 175 million and that allowed us to send back to AS Corp $400 million. Along the same lines, we're also expecting to complete a $500 million refinancing of our Hawaii project very shortly which should allow us to send the proceeds to AS of another $230 million. We also closed the sale of our SunGas project in Tangenia in May, with proceeds of $93 million and in June we completed a stock offering of net proceeds of $335 million. The cumulative result of all of this is that we now have roughly one billion dollars of liquidity today.

Let me mention a relative point to that in terms of the impact on asset sales. This now allows us to shift from asset sales and start focus on improving liquidity of the past access sales focusing on enhancing equity value as we go forward. As I mentioned, all of this provides flexibility for us to execute the second two phases of our plan. That's term improvement and disciplined long-term growth.

First let me talk about deleveraging which is a key part of our term improvement plan. Since September of '02 we've repaid $663 million of debt. We've also announced plans to call our $198 million, 101/4% [INAUDIBLE] And we'll continue to reduce debt in accordance of our plan over the next few years. The second aspect allows for growth opportunities.

In addition to our focus on performance improvement, liquidity allows us to initiate the growth phase of our corporate plan and this recruall. We currently have a portfolio project in advanced development. We've been involved in this pipeline for several years. We rigorously and regularly review every project in our development portfolio. Some of these projects will meet our standard in the projects and risk profile portfolio while others will not.

One example of one that does meet our standards and is proceeding well is our Energia Cartagena project in Spain which is a 1200 megawatt combined cycle gas turbo plant generation business. This one is attractive because it's [INAUDIBLE] is France, which has good credit, total cost is estimated to be $650 million. And the investment is anticipated to be in the range of $120 million. This is going to be project finance -- the finance is actually proceeding well and we expect to close that project this year.

The project CCGT in Honduras, however, is one that did not meet our standards and is projected to be sold at a loss. This loss is reflected this quarter's results. We have several other projects we continue to evaluate, including projects in Poland, Uganda and Bulgaria. We continue to evaluate each of these as it relates to our risk adjusted economic returns and the impacts to our overall balance of the portfolio. We expect half the seasons and the viability projects by year end. It is also worth noting with our current liquidity and access to the capital market, we've begun scanning the various markets for other attractive opportunities. We're in the very early stages of this, so it is too soon to state any definitive conclusions, but our process is one in which our approach would be extremely disciplined. Our focus will be on as much of the economics of the projects as the incremental impact on the portfolio. Moving toward a more balance in our portfolio is an important objective for us.

It’s also like to comment on our performance improvement program because that's an important part of our asset to create value. In addition to looking at potential growth opportunities there remains an intense focus within our company on improving the performance of our $30 million asset base. In the past I mentioned our global sourcing initiative and we're now beginning to see it's values work on a global scale. One example of this is we've been able to package our water treatment chemicals purchased from our California plant seeing savings on a recurring basis of about 45%. Another example would be the packaging of plant overhauls working at three different locations around the globe, leading to savings of $.5 million. These are just a few early examples that demonstrate the so very real savings and benefits for us in the savings are, we expect to see more of this since our global sourcing initiative continues to be an attraction.

I would also like to provide an update on the restructuring office. First I'll start with an update of Electro Paulo. In Electro Paulo we continue to remain engaged with the facility but we still need to find a long-term, economically sustainable solution to deal with the leveraging of the Electro Paulo business. We remain hopeful that we can find a solution that will [INAUDIBLE] involved. Meetings will continue next month and we hope that we're close to having a resolution.

I'd also like to give an update on DRAX. As was supported earlier, there is a firm offer to buy the 60 millions pounds of debt to operate the business under contract. International Power, which is a competitor of ours, is taking a look at the case, subsequently expressed interest in becoming involved in the process, and it suggests it would buy debt at a higher price. I would just like to highlight as the owner and operator of this facility, we have a good sense what the business is worth and we will not pay more than a what we perceive will be fair value. Thus we've noticed the banks that we do not intend to offer our firm over, but we will in fact withdraw our current offer if the banks and the funds do not agree to commit to go forward with our proposal by August 5.

I would also like to highlight -- I believe this distress model of restructuring distress debt and investing as the owner and contractor is replicable. It'll allow us to attend to many other distressed assets in markets where we have an interest. It is also going to commit our turnaround skills of the people in our restructuring office thereby tapping into additional growth opportunities for AES. It also means we're prepared to walk away from a situation if their proposition does not make sense to us as there are plenty of other opportunities in the market today that are very similar to this.

I would just like to comment on our businesses in the Republic of Georgia. There have been a lot of comments in the press recently about our possible exit from the country. We're making some progress in finalizing the arrangements in this respect. We expect to be able to make an announcement on this topic in the near future.

At this point I would like to now turn the call over to Barry Sharp who will cover the financial results. Barry?

Thanks Paul.

I'd like to go through a brief summary of our results for the second quarter. Our press release package includes significant detailed discussion about the earnings and cash flow results for the quarter along with balance sheet information. There are also several slides included on your web site which include our parent only and consolidated cash loan information as well as parent debt information, sources and maturity.

It is also important to remind you as Paul mentioned that several of the comments we'll make today as well as the schedules included on the web site include what may be considered forward-looking statements. They aren't historical facts but statements that involve risk and uncertaintities. Our actual results will differ, they may differ materially, from those we've projected. As Paul mentioned we have a discussion of those risk factors in our filings with the SEC including our 10 K report.

Beginning with cash flow today, we continue to be on track for our expectations for the year with regard to consolidated cash flow as well as cash distributions received by the parent. Cash flow from operating flow on a consolidated basis which is shown on the slides on the web site on page 7 and 8 was $291 million for the quarter. That brings our year to date totals to $737 million. These amounts represent GAAP cash flow from operating activities after all interest payments and our subs for both project debt as well as parents recourse debt.

Our performance today is in line with expectations for 2003 which continues to be consolidated operating cash flow of approximately 1.5 billion for the year. Although we were ahead slightly in the first quarter, that was partially due to the included operating cash flow results of DRAX. With significant payments on senior debts in the second quarter, positive operating cash flow of DRAX from $109 million from the first quarter reversed with negative cash flow at the DRAX level of $131 million for the second quarter. This results from a cumulative negative operating cash flow included in our consolidated results for the first half of the year of $22 million.

Our current expectation is that at some point during the remainder of 2003 our controlling equity interest in Drax for accounting purposes will be eliminated to reflect what is really our actual economic ownership position in that business, which is one of not controlling the business. As such, we were below the threshold of consolidating [INAUDIBLE] which will in turn eliminate the remaining associated operating net flow from our consolidated figures. Slide 7 also showing the components of the second quarter operating activities divided between the subs and our parent. Operating costs slowed in the second quarter, from 471 million down from $633 during the first quarter. Aghain primarily resulting in including DRAX, the negative amounts during the second quarter.

Maintenance capital expenditures of operating businesses for the quarter included $121 million as compared to $94 in the first quarter. They were primarily Palco, Electro Paulo and EDC, Aghain consistence with the first quarter.. Growth CAP-X and other investments were $172 million for the second quarter compared to 198 in the first. These related primarily to amounts invested to complete assets and accounts under construction at Roslafon, Panama and Barca, Andres and Dominican Republic and Texas. Also at the subsidiary lever we repaid $308 million of project level financing during the quarter.

At the parent level, distribution from the subsidiaries to the our parent holding companies were $300 million during the second quarter, up from $180 million in the first quarter. This amount was slightly above our expectations in the quarter because of higher than expected cash flow from Trygen associated with releasing operating cash flow coming out of the result of the recent financing of Trygen bonds. As well as better than expected cash distributions for the quarter from Euroguana, OPGC, Shady Point and Althigh. These were offset by lower cash flowing during the quarter in Puerto Rico because of delays from a conversion from construction loan into a term loan [INAUDIBLE] operating cash being utilized in the project level to provide debt service reserves.

The parent and qualified holding company also received approximately 87 million net during the quarter in proceeds from asset sales and 335 million from our net equity. These sources combined with our debt refinancing activity during the quarter, as we outlined on slide 3, resulted in a significant increase in our parent company liquidity, as Paul mentioned, which stands at approximately $1 billion at the end of June. As we announced yesterday, we also completed a $950 million refinancing of our bank loan revolver and our final sales loan that reduce our interest cost to liable +400 from a previous liable of +650 in our original December refinancing and a liable of +450 on the sales loan.

This refinancing also returns all AES shares held by the lenders that were never issued under those sales loans and extends the maturities under those bank loans from 2004 and 5 to 2007 and 2008. This allows us to continue our deleveraging our parent subsidiaries to reduce our debt [INAUDIBLE] while surrounding both cost and maturity going forward. For the full year of 2003, as I mentioned, we continue to expect operating cash flow consolidated basis of approximately $1.5 billion. And approximately $2.2 billion is expected from subsidieries during the year. At the parent level, distribution from our holding company for the full year is expected to be approximately 1 billion 059 which is about 6 million lower than our earlier projections.

Some of the components of that projection have changed. Most notably our expectation for Apalco for 2003 has been reduced to 116 million from 140 million in our previous projections. This is because our expected dividends from Apalco have been levelized over the 2003 and 2004 period by phasing the plans and the new ILP debt issues that was just launched levelized over 2003 and 2004 to better coincide with the Knox equipment construction schedule at this business.

We've also increased our expectations for Eastern Energy, our New York coal plants to $115 million. That's up from $70 million earlier this year. This is due to improved performance during the first half of 2003 because of higher electricity prices and that busniess' successful program to capture those prices. The remaining portion of that $115 million total from Eastern Energy is received in early July so that business was experienced its two semi annual distributions for the year and has reached the 115 million level as we sit today.

We've increased our expectations from Hawaii and Trygen in part due to the release of operating cash flow held at debt service reserves as well as unpaid tax riding amounts. And finally we've reduced our expectations from Argentina because of weak conditions in the market. We continue to expect $984 million in net asset sale proceeds to date and in additional returns of capital of approximately $304 million by year end.

We currently estimate year end liquidity of approximately 1.5 billion after reducing debt by an assumed amount at this point of 924 million net. The estimates for both the breakout between liquidity and net debt reductions will vary as we implement our delevering program over the remainder of 2003 and also to the extent that we complete DRAX metropolitan potential amounts may be invested in those restructured businesses.

Earnings per share for the quarter for continuing operations were 11 cents a share. There is significant detail in the press release packet covering the segment and geographic contributions for earnings. There are a few components of note included in the quarter as well as some unusual items included in the GAAP results that I would like to cover individually. This quarter we have a loss representing 7 cents per share that arises from our current ownership of Drax -- our 100% ownership of Drax. We wrote off our investment in Drax and we're included in an asset held for sale, such accounting loss will reverse in whole or part dependeding ultimately on our position with the DRAX lenders.

On a year-to-day basis these losses from Drax represents 10 cents per share in our first six months. During the second quarter we also wrote off an amount representing 3 cents per share, as Paul mention earlier, determined by the termination of our Elfaro project development in central America. These losses included in this quarter’s results were offset of a gain by approximately 8 cents a share net from the impact of all foreign currencies gains and losses in FAS 31 mark to market amount.

In addition to gains in Brazil and Argentina where the currency is depreciated during the quarter, we experienced losses in Venezuela and the Dominican Republic. Aghain represents in total 8 cents of positive earnings included in the results this quarter. We also experienced net gains this quarter from early retirement of debt -- previously outstanding bonds at a discount. Net of the elimination of the preferred costs related to the payment. These items represented 10 cents a share during the second quarter. Historically our second quarter is general the low point, in our poorly operating trends as April and May represent a shorter season in both hemispheres. As Paul mentioned we have certain businesses performed ahead of our expectations and others below for reasons I'll cover now. Our four operating segments combined operating income of $491 million and income before taxes of $205 million for the second quarter excluding corporate interest and other cost. The income before tax amounts also now include the impacts of both foreign currency, gains and losses as well as FAS 143. Overall your gross margin from our operating businesses sak -- excluding corporate SG&A for the quarter was 22% versus 21% second quarter 2002. The gross margin contribution was most significant in the amount of $285 million for the second quarter of 2003. That's up from $260 million in 2002. This represents a margin percentage of 39% during the quarter as compared to during 2002. The PRIMARY reason for the year-on-year reduces due to a step-down in the contract rate as well as an outrage -- lower Marilyns of a beaverer valley. Margins were generally flat year on year in Europe, Africa and Asia and improved year over year in South America and the Caribbean. In the second quarter of the both years. Although the dollar amount declined in 2003 to $164 million from $185 the prior year. Decline was due to lower margins due to implement tariff recovery. Both of which we expect to continue somewhat through the rest of 2003. Additionally we experienced lower margins during the second quarter of 2003 because of the negative impacts of milder weather during the quarter. These were partially offset by margin and margin increase in Venezuela. Our competitive supply segment showed a significant increase in margin year on year -- excuse me. Significant decrease in margin year on year. Drax accounted for a reduction in margin year-on-year of approximately $73 million. Aghain as we mentioned before, it is important to remember that we continue to reflect Drax as a consolidated subsidiary, including the losses of that business. The accounting treatment is not consistent with the economic reality of the Drax business because they're at a standstill waiting on construction . We experienced improved margins in other competitive supply businesses. New York plant where we're currently 69% during the remainder of 2003 as well as improvements in the Argentina generation business year on year. Finally, in the growth distribution segment showed a significant improvement year on year, although the improvement was primarily due to the 2002 write-off of the second quarter in Brazil last year. After adjusting for this change, we saw a risk in overall margin in this growth distribution segment primarily arising from declines prior to tariff increases that occurred in the middle of this year. In the restructuring office because of our concerns with regulatory tariff environment that continues to deteriorate. These margin reductions are offset in part by improvements in our distribution business in El Sal Vador. Net interest for the quarter increased primarily due to higher interest costs associated with the loans at Electro Paulo. Higher interest costs at the corporate level due to the December refinancing at -- plus 650 which we've just refinanced at plus 4 snurks. The bottleneck we'll be reducing over the course of the first and sixth months. Net Puerto Rico and as a result of reduced cash balances at Electro Paulo -- finally with respect to the second quarter we also recorded a loss of 33 cents per share which is almost entirely due to our decision to discontinue and sell our businesses in the Republic of Georgia. The resulting write-off of our enrich of approximately $204 million before income taxes for those businesses. With respect to the remainder of 2003 as Paul mentioned, we continue to expect EPS with continuing operations. Our projection is based on several assumptions and risk factors we've outlined previously included the general assumption that we will lose control of accounting in Drax and that the currencies of Brazil, Argentina and Venezuela will average approximately 3.15 -- to the dollar. .05 pesos to the dollar and 2500 to the dollar for the second half of 2003. We're assuming there are no -- also be examining several remaining projects and development and early stage construction. Some of which have capitalized costs mole land. If we decide to discontinue the development of these businesses which Paul mentioned we will determine by year end, we may experience write-offs that likely will not qualify continued operations for those businesses. Currently we have total capitalized development of construction costs of these businesses at $118 million. So that, I would like to turn it back over to Paul before we go to questions.

Why don't we go ahead and open it up to questions now. For scheduling purposes, we'll try to get this wrapped you a few minutes before 10:00.

Thank you. The floor is now up for questions. If you do have a question, please press the number one followed by four on your touch tone phone at this time. If at any point you question has been answered, you may remove -- we do ask when you pose your question you please pick up your hand set to provide apt mum sound quality. That is one followed by 4 on your touch tone phone at this time. Your first question is coming from Elizabeth Parrella from Merrill Lynch.

A couple of questions. One is you mention that you're doing refinancing. I'm a little confused as to where the proceeds from the parent to those show up. You had a very big number in the second quarter obviously. How much of that is from the refinancing. And did some of that show up in this 304 of return of capital to the parent? I guess most of which looks like it would come in the second half.

Yes. It shows up in both places, because some represents cash flow from operations sitting in the business and other represent returning of capital. It was roughly $72 million of operating cash flow out of the bbs. And the remainder is reflected as returns of capital. And then obviously Hawaii hasn't happened yet. And so in Jen we're expecting that to be included in the amounts for some combination of cash flow and return to capital when it is finished.

And that 304 for the year, Aghain most of which would come in for the second half, would most of that be the Hawaii, the piece that is coming in from Hawaii.

A large chunk of it is Hawaii.

Okay. Thank you.

I think it is fair to say we just -- the Hawaii financing has been in process and I think we'll have funding later today. We understand it is now closed. So we'll have a press release on that as it is completed later today. But we have closed that financing this morning. It did say it would be completed shortly. [Laughter]

One other question for you on the subsidiary distributions, page 4, you have 259 other which is disproportionally in the second half. Is it possible to get a flavor for how much of that in the second half might be coming from other businesses in Latin America that are not in the top 15, if any?

In general terms, the remaining amounts roughly are about 19% from North America, 30% from Asia, 39% from Europe and Africa. 1% from South America. And 11 percent from the Caribbean. The larger contributors include -- OPGC.

That's the second half other piece.

-- that's correct.

Thank you. Your next question is coming from Lee Cooperman of Omega Advisors.

Good morning thank you. I actually have three questions. Two are relatively simple. What are the actual shares outstanding primarily and fully diluted at the present moment, as of today?

619 million shares actually out Tang.

And is fully diluted the same or is it higher?

Well, fully diluted is calculated on a weighted average basis. For the quarter it is 577. There are some shares that get knouted --

So these fully diluted will be higher than 619?

That's correct. on the basis, I don't have the average. It wouldn't be that significant. There are some options.

Secondly, in terms of liquidity, what is the level of liquidity you're comfortable with. How much of that billion you now have you which will be growing is in excess of what you would call desired liquidity?

We're looking at right now -- in today's environment we're thinking 4 to 5 million -- we'll continue to evaluate that. That may change over time as we get our financial health restored. For the time being, we think that's the right number.

Maybe $500 million available for debt repayments and or other asset investments?

Yeah, actually a little bit more than that with our projected liquidity at the end of the year.

Third is a question and a suggestion. There are tremendous number of moving parts here. And I think we're selling ourselves short by not looking at a little bit of vision. Certainly speaking for myself, coy use your help. We've got four things going on currently. Reduce debt. Significant reduction in interest rates on the variable rate debt, we've been on this program of cost reduction. We're now going into a global economy theoretically that is going to provide growth and demand. I would like to have a handle, maybe we'll get this in September, what is your guy's vision for the company? You've done a masterful job in helping it survive. The stock at 90 cents was reflecting insolvency. 6.5 whatever, it reflecting we have a growing concern. The question is,, do you guy versus a vision or goal in three years as to what percent this enterprise is capable of earning.

Lee, that's a very good point. That's one of the topics we're going to cover in a lot more detail in the September 9 meeting. We've been out of the market a while as we've been recovering from our financial problems. We've gotten back in the market with our renewed liquidity. We've been scanning the market fairly intensively with our development people and we're seeing things have changed dramatically and there are interesting opportunities out there. The trick for us is to try to determine -- there are lots of opportunities but try to figure out which ones will make sense strategically and where we think the returns will be appropriate for the risk we take. We'll talk about that in a lot more detail on September 9. As we've recovered from this the past two or three months, this had been the PRIMARY focus of the company in terms of thinking about, where are the new opportunities, economically attractive opportunities, best returns relative to the risks we take. And leverage the existing skills and asset base we have. We'll be able to talk about that in a lot more detail and provide some guidance in terms of the numbers from that.

Would it scare you could more than double your earnings in three years.

It won't surprise me if you said that, Lee.

I said would it scare you. Thanks. I can't wait until September. How is that?

Sound good.

Good luck, guys.

Thank you. Your next question is coming from Ali Agha --

Ali Agha Thank you. I just wanted to make sure I've taken all the items you talked about correctly. If I did my math right, if I exclude all the other nonrecurring items but include Drax I come up with a 4 cent loss. If I exceed I come up with 3 cent earnings. Does that sound right now.

For those four items, I guess I don't want to get into a discussion of what is occurring and nonrecurring. Because the weather is kind of a nonrecurring item during the second quarter in terms of a lower than average weather result. But your math is correct. In terms of the second quarter.

Ali Agha Okay. Ask when I look at the second half of that year, about from the same currency and weather moves, are there any other internal sort of moving parts on any of the businesses to be aware of, any cost reduction initiatives that may or may not play out. What would you say would be a major swing factors?

Well, I think there are several factors to be thought of that can have an effect on our earnings numbers GAAP our continuing debt factors the results of Drax and when that business gets turn over to the lenders. And also the results of electro Paulo we're trying to restructure the debt -- of several of those businesses. So that will obviously have an impact on the earnings over the next six months. I think from a cost standpoint as Paul mentioned, we've seen some significant progress in things like global sourcing and cost reduction. It does take a little while for that to work its way through the full pl. We do see some improvements on that through the rest of the year. We continue to see improved rates from our New York businesses. As I mentioned, we're in the high 60s in terms of percentage hedge through the rest of the year. That team has done a good job of stretching that into 2004. So we hope to continue to see higher prices in that arena. Also the fact we've reduced our debt at the corporate level and now reduced the interest rate we'll have a positive impact over the rest of the year.

Ali Agha My final question, in terms of the internal profit improvement program that you have ongoing, all they are looking at it from the outside based on publicly available data, what measure should we be looking at financially that you look at to give us a sense of how well you're doing in that program? Is it margin improvement? Return on investment capital? What should we be tracking to hold management accountable for that program?

It's Paul. I think the best thing to look at is operating margin. How is that progressing. That's where we're focusing, that where we're looking to see our results. If you look at operating margins, our EBITDA margin, that's where it really should start to come through.

Ali Agha And Paul, do you have a target, your current portfolio should be at?

We've looked at the different possibilities for cost improvement. We can see there are a few percentage points that could come off the operating margin, the EBITDA margin, to make it better -- what we try to do, we're going through a series of meetings through this week, three days of meetings to go through with each business, and outline what we think the gaps are between where we are today, the top praying are, the top debts are. We'll have a little bit more detail in terms -- we're focusing on a business by business basis. We'll have a better sense by September what kind of margin improvement we can see and a lot more details based on the meetings we have this week.

Ali Agha Thank you.

Thank you. Your next question is coming from Clark Orskey of KDP Investment Advisors. Go ahead with your question.

Thanks. I wanted to circle back to your discussion on the change of focus to growth. I was just wondering if you could talk a little bit in more detail about -- you talked about stand alone credit evaluation of each project. And just going through sort of what your new criteria are for projects, just to ensure that future projects don't end up in some of the same problems that we had in the past.

We spent a lot of time thinking about this. One thing I would like to stress, there are really two different focuses right now. We think we have to keep those two focuses almost separate. One is the performance improving. Because it is trying to level up the performance of $30 billion worth of assets. The other is the growth business. We're spending a lot of time and have spent a lot of time thinking about how we would do that. Essentially what is different now -- having an independent team involved in Terrell’s of reviewing projects. Skilled developers coming in who know the business well to outline all the potential risks we might face in a project. That would then result in a report being filed by that group which would be reviewed by our executive office and finally the board before we decide to go forward. So be looking at each of those projects. And what we'll be focusing on, so what's the right way to average the costs for each particular business given the risk associated with it. We've developed fairly sophisticated methodology to evaluate that. We want to beat these kinds of return by 10 to 20% let's say. We don't want to do projects equal to the black, that's one element of it. The other piece, how are we going to balance our portfolio so we aren't subject to these uncontrollable risks that might be region or country specific and not have excessive exposure to any one particular area, any one particular business line. We've come up with limits that will provide guidance how much we're willing to investment in one particular country, region or business line. We'll be looking at those two aspects together to make sure we one, have a balanced portfolio that can withstand the kinds of shocks we might face in this industry and secondly, we're not going to have projects -- might be taking on within each project.

That's very helpful. The last thing was, do you have any targets for sort of a steady state leverage at the parent?

Well, we said our objective in the short term and call that kind of 12 to 18 month is to get to a double B credit level both from a statistical standpoint and a ratings perspective. And the delevering that we've been going after is really directed in this direction. I think then the move from double B to triple B will be more of a strategic type of view based on how the industry develops. Clearly, continuing the strength beyond that as the business conditions make sense. Effectively looking at interest coverage ratios, north of two times at the parent level and debt of five times cash flow are left.

Okay. Thank very much.

Thank you. Your next question is coming from William Patser of Merrill Lynch. Please go ahead with your question.

Hi, guys. I just want to say -- can say double, I can say triple over three years. I'll put my bid in. The question I have for you, first, Barry, interest savings, now that you've got this refinancing closed yesterday, could you then take us from the interest costs you experienced this quarter in the first half of '03 and tell us based solely on that interest saving you just signed, the refinancing you just signed where you'll be for the full year?

At this point on a differential basis analyzed, it is roughly 250 basis points on about $800 million. So in this context, we're looking in the neighborhood of kind of net about $16, 17 million savings on an annualized basis. So a couple of pennies a share assuming we don't pay it down. As you notice, we just called the tentative quarters from '06. So that will help reduce that rate further as we go into 2004.

So 2 cents a share impact this year or impact on an annualized basis?

On an annualized basis in the refinancing.

What impact do you expect from them.

As mentioned before, we're at least projecting at this point to get our debt down over the course of 2003 on an overall basis from 900 to $950 million. That will change as we go through the year and see how things develop. But at an average rate of 10% a year, that drops about 10 or 11 cents on an annualized basis out of the P&L moving forward. So the combination of those two factors as we get through 2003 should be in the neighborhood of kind of 10 to 12 cents.

Okay. And then I think the other question I had was, has probably been asked. But I was just looking down the subsidiary distributions. Is there any either subsidiary distributions that have what I call timing differences that we should know about? Just because obviously you already commented on the eastern energy and Palco. Is there any others where there is a timing difference where you expect a lot more or a lot less in the second half and that would represent a change in your views?

No. I think we've covered most of the significant ones. Basically in January and July. So we know where that one comes out. For the most part, no other significant variation.

Okay. And then at Palco for 2004, is 116 what we should expect for 2004 from Palco.

We haven't given a firm number for 2004 yet, but given what we've done to find of levelize it based upon the capital expenditures, we would expect it in and around that range. A little less, a little more.

That's what I thought. Great. Thank you very much.

Thank you. Your next question is coming from Tim Shannon.

Thanks guys. I'm looking at the 10 Q you put up and I'm seeing that operating expenses and maintenance were essentially higher given the size of the business this year versus last year. Can you comment as to why? What is going on there?

I mean, there are a couple of things going on. One is we've got the crane eased -- in part associated with the knocks retrofit and adding that equipment. Some portion of it is a capitalized expenditure. Some portion of it is operating expenses coming through the P and L. We also had this quarterly lower margin because of reduced weather. On a year over year basis, it is about a -- probably about 60 or 70% of that is weather.

Now, the weather would make your absolute number of operating expenses and maintenance go up?

No. It affects of the revenue side also. So you add the construction side to the equation and do get some increase on the cost --.

Last year, they deferred some of the maintenance from last year into this year, so you're seeing a higher maintenance number.

So the maintenance type activity, you don't put that through cap X, you put it through the operating expenses?

It only ends up on CAPEX if it is something changing the asset and extending its life.

Okay. Thanks.

Thank you. Your next question is coming from Sandy Leaning of Bear Stearns.

I've got a couple. The first one is another distribution question. I'm just wondering. There was a change in outlook for the distributions from the nonstop 15 down about $100 million since the first quarter to $259 million. And I'm just wondering what the origin of that change. And the other question is, looking ahead beyond 2003 in say 2004, 2005, should we think about distributions to the parent being a constant payout ratio? Do you intend to increase that ratio as earnings go up or should we think as a billion as kind of a steady state that is sufficient to service all of your parent obligations?

In terms of the variance quarter and other, some portion of it is we did add another one business to the total top 15. We've reflected it as 16 including additional tax shelter payments this quarter. So we've added some decal to the top and that has some piece of the switch.

Would that have been filtered?

Yes, that's right.

And on the run rate, I think we're continuing to evaluate our overall cash flow projections. But I think we look at that billion as sustainable. Obviously it can flex wait with respect to timings and distributions and operating activity. But it is a reasonable number to think about going forward on kind of an average basis.

One comment I would make, the Palco business, it is actually an asset -- I look at it the investment theory, it is going to be get be a return on the investment. You might see a dip. We haven't finalized what that capital expenditure looks like. You probably see that starting to grow. For the next year or so, you might see a slight dip in that because of the increased capital expenditures so should the environmental control.

thanks.

Thank you. Your next question is coming from Greg Oro of Lehman brothers. Go ahead with your question.

Thanks. Good morning. A couple of clarifications. What was the impact of FAS 133 on the quarter?

It is about 3.8 cents negative.

Okay. And then Barry, following up on another question, on another comment that you had made in your opening remarks, regarding the parasail -- Brazil restructuring. Is there a way you guys would look at putting more cash into Brazil?

Yeah, I think -- I would say in a limited amount that's a possibility. What we're really focusing on, though, is can we come up with restructuring that real accomplishing two things. Is it a long term sustainable St. Louis meaning we're not going to be facing the short term maturities every six months, every year. If we have a long term sustainable solution. The second part of it is, is it in economically attracted investment for us to make? And that's are the cue issues we're wrestling with, the various pieces move in Brazil, can we in fact do that. I think that's something I hope we can have resolved I would hope within the next couple of months. That's our plan. I can assure you if we can't meet those two criteria, we will not invest money in Brazil.

Okay. And then the guidance of subsidiary dividends on the parent in '04.

At this point we haven't provided a specific projection.

thank you.

Thank you. Your next question is coming from Lasan Johong. Please go ahead with your question.

Thanks, Lasan Johong from Blaylock. The -- what is that made up of?

It is a combination primarily of the gains on foreign currency transaction amounts net of the foreign currency losses and the income from settling debt at a discount. Those are the two biggest pieces. And then FAS 133, a portion of FAS 1 loss is included in that line.

So these are going to be all categorized as one-time items.

The foreign currency is you’ll going post ways. The debt fans are most significant in the second quarter. We're hoping we can still capture some of those. We also had a borrow in that category this quarter which is a write-off of a development project.

Can you break out the debt gains in Elfaro please.

repped -- represented about 3 cents a share in terms of loss. After writing offer associated captainized cost in terms of the gain.

Thank you. And you mentioned that the transaction on the affects on FS was about -- I assume about 11.8 cents, if you do the math.

Yeah. FX and FAS 133 together why approximately 8 cents.

And you said it was negative 3.8. So the transaction gain would be 11.8 cents?

That's right.

Was there any translation gain from foreign currency, the balance sheet stuff.

There is a translation gain that goes through the balance sheet and raised our equity this quarter because of the improvement in Brazil and Argentina. So it actually brought the equity up on the balance sheet. And then obviously you have the translation effects on revenue and expenses on charges in the currencies throughout the P-and-L but the translation gain itself shows up on the parent.

Did I miss that somewhere in your presentation --

it's included on the balance sheet in our package Lasan.

I'll take a look at that.

So we show accumulated other comprehensive loss has gone down. And our equity is at $206 billion at the end of June positive.

Excellent. Just to clarify, I want to get a lump sum number, how much of the $304 million -- lump sum?

Most of it. It is primarily Hawaii and abut Taiwan would characterize close to about $200 million of that number.

Okay. Maintenance cap, you mentioned -- I couldn't quite hear because there was noise in my office. Can you tell me what that was?

That's included on the slides. The number for the second quarter is on page 7, maintenance cap kpks for the second quarter and -- total for the six months.

That was it. Thank you, Barry.

Okay.

Thank you.

We'll take one more question, Maria.

Your final question is coming from Jason West with J.P. Morgan. Please go ahead with your question

Hi,, thanks. I was wondering if you guys could tell us what the electro Paul lo impact on the quarter? Was it losing money, making money.

In general it made money because of the foreign currency dpan included in the numbers on an overall basis it was positive. Although it was down from a perspective compared to what our expectations were for the quarter.

Were there any other sort of South American Caribbean businesses that you guys would consider distressed or under review at this point that were losing a lot of money that maybe if those were to go away that you could see a benefit in the future, or were most of those businesses from an income statement perspective still positive?

Most of them are. The one I would mention I mentioned in notes before was Edeate and that one is spurns losses from an operating perspective. We also had foreign currency losses associated with the business. From an operates perspective that is one if it were not in the portfolio, we would be better off.

And this came up earlier. I was wondering bare if you could give us an estimate of what you see parent interest expense for '04. I believe this year you're talking about 572 now which is down a little bit where you why in the first quarter? I want to know how this looks next year.

At this point we're probably not comfort with the 2004 estimate yet as we continue the process through the rest of the year. We should see significant improvement in terms of our estimated $900 million reduction of debt as well as the $250 basis point improvement on your corporate debt side. So you can apply that to the interest number and say that's in the neighborhood of about 100 to 115 million. Over all. Year on year. But to turn that into a full projection for 2004 would really require kind of more specific settlement on where we're going to be delevering through 2004. I think we're not quite yet at a point where we want to make that project.

All right. Thanks a lot.

Thanks. I just have two closing points. First as a reminder about our September 9 investor call. Please contact Sandra Ross here at AES if you would like to get more information about that conference.

The second is a general comment on the future outlook for AES. It is relevant and Lee brought that up. The sector is going through a period of dramatic change. We've been engaged in looking at the various opportunity and we see some very attractive possibilities out there. It is my believe that the companies that have strong operating, and restructuring and new witness development skills are likely to have success in this environment. I think we're positioned very well in this regard because we have these skills. We're also ahead of schedule with respect to the execution of our recovery plan to participate in these growth opportunities going forward.

I would like to thank all of you for joining us this morning. Hope to see you at the investor conference. Have a good day. Thanks.

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