愛依斯電力 (AES) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AES 2003 financial review and 2004 outlook conference call.

At this time, all participants have been placed on a listen only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, to Mr. Scott Cunningham. Sir, you may begin.

Thank you, Holly, and good morning everyone. This is Scott Cunningham with AES Investor Relations.

Joining me today are our principle speakers, Paul Hanrahan, President and Chief Executive Officer, and Barry Sharp, Executive Vice President and Chief Financial Officer.

The press releases and presentation materials we will be reviewing today are available on our website at www.aes.com in the investor relations section.

Before we begin, please note that the Safe Harbor and forward-looking statements in the earnings press release and in the presentation on page 2 also apply to this conference call.

This morning, Barry will first review our 2003 financial results, beginning on page 3 of the presentation, and the financial guidance for 2004.

Paul will then discuss recent business developments and comment on the outlook. We will then finish with a question and answer period. With that, here is Barry.

Thanks, Scott, and good morning. AES today reported 2003 income from continuing operations of 56 cents per diluted share. That's a significant increase compared to $2.99 loss per diluted share last year.

Consolidated cash flow from operating activities was $1.58 billion for 2003, representing also a 9% increase over 2002.

I think it's important to note that our financial results for both 2002 and 2003 reflect decisions that were taken in the fourth quarter to discontinue participation in four businesses.

That includes for us two merchant generators in the U.S, Wolf Hollow in Texas and Granite Ridge in New Hampshire, a small facility in Colombia, and EDE Este, a distribution business in the Dominican Republic.

This has resulted in a new basis of comparison for our continuing operations numbers for both 2002 and 2003 that is reflected in today's press release throughout.

We have included in the press release on supplemental data page a revised quarterly EPS profile from continuing operations that ties to the reported EPS per diluted share for continuing OPS for 2002 and 2003, and a more complete profile will be included in our form 10K.

Turning to the overall results for the fourth quarter, AES reported an income from continuing operations of 1 cent per share, compared to a $2.58 loss per diluted share a year ago.

Impacting these results in Q4 2003 were several nonoperating items, totaling a loss of approximately 10 cents per share, arising from sales of partial interests, asset and goodwill impairments and the write off of a now terminated development project in Poland.

I will discuss these in more detail in a few more minutes. We also want to point out that we recorded a gain of 7 cents related to an accounting change in mark to market accounting rules for certain long-term contracts that qualify under the rules for commodity hedge transactions during the quarter.

We will be required to amortize this gain over the next four-years, which will flow through operating results going forward. That gain is reported at the bottom of the income statement as a change in accounting principle.

Turning to the P&L, sales growth was strong in 2003, with full year sales up 14% or 1 billion, to 8.4 billion. Fourth quarter sales were up larger at 23%, or 431 million to a total of 2.3 billion.

New operations since late 2003 represented approximately 400 million increase year over year, with the most significant contributions from operations in Puerto Rico and the Middle East. Existing businesses benefited from stronger currencies in South America and higher electricity prices in the New York region.

And overall, our contract generation and large utilities segments aggregated 76% of total revenues for 2003 as compared to 77% for the same segment in 2002.

Our four operating segments generated combined gross margin, or sales less cost of sales, of 2.4 billion for 2003. That's up 25% over 2002.

Income before income taxes and minority interests was a little over 1.2 billion for the year, compared to a loss a year ago. These comparisons are as-reported, and exclude corporate interest and other costs.

Overall, gross margin from our operating businesses for the quarter was approximately 29% versus 26% for 2002, showing continued margin improvement and performance improvement for the year.

The gross margin contribution was again most significant in the contract generation segment for 2003 in the amount of 1.27 billion.

That is up 19% from 2002. This represents a margin percentage of 41% for the year, a 1% decrease from 2002.

New businesses contributed better than average margins in the Caribbean and in the Asian segments, but there was also significant year over year improvements in margins occurring in [INAUDIBLE] Chile, [INAUDIBLE] in Brazil, our plants in Pakistan and at Red Oak in the U.S.

These improvements were offset partially by a reduction in the margin at Shady Point, due to a step down in the contract rate at that plant in 2003, and lower margins at Beaver Valley in Kilroot during 2003.

Margins in the contract generation segment remained strong because of strengthening performance and overall reductions and forced outages over the course of the year.

In the large utility segment, the overall margin percentage improved year over year to 23% in 2003, up from 22% in 2002, while the total margin improved 11% to 762 million for the full year.

Improvements occurred year over year primarily in Electropaulo, due to higher adjusted tariffs, reduced bad debt costs, and improved currency conditions in 2003, as well as at EDC in Caracas, due to improvements in courier performance and higher adjusted tariffs. These were offset partially by a margin reduction in IPALCO, due to a cooler summer in 2003.

Our competitive supply segment also showed margin improvement year over year up 20% to 220 million, up from 183 million in the prior year, due to improvements in New York from higher captured prices and availability, and in Argentina due to strengthening of the currency.

These improvements were offset by declines in Deep Water due to an extended turbine outage during the third quarter, and accruals related to a mine closure in Hungary related to our operations there.

The growth distribution segment also saw and improvement in overall margins year over year, excluding the consideration of the $141 million [INAUDIBLE] spot market write off in 2002, primarily driven by improvements in our distribution companies in El Salvador and at Sonel in Cameroon, offset slightly by declines in margins in our distribution business in Argentina.

For the fourth quarter, gross margin from continuing operations were 28%, similar to the full-year average for 2003, and represent a significant improvement over the fourth quarter of 2002 by approximately 233 million, which is up 57% year over year.

The improvement stems primarily from increased margin contributed by our contract generation businesses in the Middle East, Asia and at Tiete in Brazil, along with improvements year over year improvements at Electropaulo, EDC, and Soule [PHONETIC]. These were slightly offset by declines over 2002 in margin contributed by Kilroot during the fourth quarter, due to an outage in December, and a small decline year over year in the margins at our New York plant.

As many of you know, this year we have sold, discontinued several business, as we have made substantial progress in restructuring our portfolio and reducing debt at the parent level.

As a result, we have experienced both gains and losses unrelated to our recurring operations.

In an effort to enable investors to better understand what we believe is the underlying earnings performance of the core portfolio, we have also included in our slides today on page 4 a reconciliation of income from continuing operations per share, adjusted on a pro forma basis for the impact of unusual and nonrecurring items. We show it for the fourth quarter and for the full year of 2003. Several of you have requested this, and we believe it is particularly important as we look ahead for our performance in 2003 as we look to our outlook of 2004. Looking at that information, during the fourth quarter we had items representing a net loss of approximately 10 cents per share that reduced diluted EPS from continuing operations.

A loss -- number one, we had a loss associated with the sale of partial interest in our Oasis business in the Middle East that represented 4 cents per share in the fourth quarter. We also experienced a gain on our sale of Medway in the U.K. of approximately 2 cents.

These two sales in total generated net proceeds to the parent of approximately $230 million during the quarter. We also sold a small interest in EDC at a loss of approximately 1 cent per share during the quarter. The net effect of these transactions is a loss of 3 cents per share, as shown in the slide.

Asset and goodwill impairment charges totaling 3 cents per share related to termination of the development project in Poland and a small limestone mining operation in the Caribbean. There was also an additional 2 cents of impairment charges associated with assets in Europe and South America, a minor 1-cent per share loss on debt retirement in the quarter; and finally, 133 mark to market losses were 1 cent.

As a result, the earnings per share amount prior to considering these items was 11 cents for the fourth quarter of 2003. For the full year, we add to this reconciliation the impact of net gains on early debt retirement, representing approximately 12 cents per share in the first three quarters, or a net 11 cents for the full year.

We also experienced net foreign currency gains associated primarily with depreciating currencies in Brazil and Argentina of approximately 18 cents a share for the full year.

Offsetting those were mark to market losses under FAS 133 of 6 cents for the first three quarters and 7 cents for the year; and other asset impairments associated with terminated development projects, such as Bujagali in Africa, that totaled 13 cents.

As a result, EPS for the full year adjusted to exclude these items was approximately 53 cents per share, as compared to the reported GAAP amount of 56 cents per share for the full year.

Both compared favorably to our previous guidance for 2003 at 50 to 52 cents. Overall, we believe we had a good result in 2003, but we continue to see the potential for continuing improvements in the performance of the portfolio.

Paul will cover more of that in his remarks. We continue to focus on the cash flow performance of our business, and during 2003, we made great strides.

Our consolidated cash and equivalents balance has more than doubled to over 1.7 billion at the end of 2003. Consolidated net cash from operating activities increased 9% to almost 1.6 billion in the year. This amount is net of the impact of our corporate costs and debt.

Net cash from operating activities generated by our subsidiaries during 2003 was 2.3 billion. Of that 2.3 billion, we were essentially on target, with 1.054 billion that was distributed to the parent, along with an additional 242 million in returns of capital, for a total of approximately 1.3 billion distributed from our operating businesses to the parent during the year.

Capital spending in 2003 included 541 million in maintenance capital expenditures, and gross capital spending 667 million on new businesses, financed primarily with project financing proceeds.

As a result, cash and equivalents at our subsidiaries increased to 846 million at the end of 2003. At the parent level, in addition to the 1.3 billion of total distributions received from subsidiaries in 2003 that we just mentioned, the parent also received 1.1 billion of proceeds from asset sales during the year.

Significant uses of cash include continued delevering at the parent by a total of 1.1 billion during 2003, including the repayment of the last remaining sales loan and investments in new and existing businesses of 246 million.

Accordingly, if the parents and unrestricted holding companies' cash increased to 891 million at year end and when combined with the amounts available under our revolver of 180 million, that brings total availability at the parent to 1.07 billion of liquidity at the end of 2003.

We have provided a more detailed reported on cash flow and distributions from our subsidiaries by segment in the appendix. That leads us to our discussion of our 2004 outlook, where if you would please turn to page 5 in the slides we have provided.

Beginning this year, we look to improve our forward-looking disclosure by noting the key elements in the presentation slide, as well as our prepared remarks. This should make it easier for investors to judge our progress during the year.

We believe the key drivers of our financial performance will continue to be based on cash flow and EPS growth.

Additionally, we will continue to look to improving margins as we see increase in benefits from our global performance, productivity and scale initiatives, and provide a greater focus on sustained sales growth -- all of which we believe will be important to meeting our long-term financial objectives.

We expect sales to grow approximately 7% in 2004, led by a combination of increased pricing and improved availability from existing businesses, and contribution from new facilities coming on stream.

I will discuss our operating assumptions on the next slide, but our sales growth assumptions assume only minor currency impacts for the year. We expect diluted EPS from continuing operations for 2004 of 62 cents per share on a GAAP basis.

Within this estimate are assumptions related to FX transaction losses and mark to market amounts for 2004, aggregating a net loss of 2 cents per share. As a result, our continued expectation is that EPS before these items would therefore equate to 64 cents a share.

This compares to actual performances we just discussed for 2003, adjusted for such items at 53 cents per share.

We believe our restructured business portfolio has greater business, greater visibility on future sales, earnings and cash flows than in the past; and we believe sales growth productivity initiatives and corporate interest expense reductions will all be important contributors to our EPS growth.

Importantly, based on the final terms of Eletropaulo restructuring in Brazil, we do not anticipate any restructuring costs to result from completing this transaction, as it will be reflected as a capital transaction under the relevant accounting rules. We have factored into our guidance our assumptions for the performance outlook for the business, based on its new capital structure.

We have also assumed that the Chilean restructuring will be completed, and as a result, reflect the reduced ownership interest in that business. Our guidance, however, does exclude any loss on the potential Venair [PHONETIC] transaction, and it is likely we would incur such a loss on the sale of a portion of our investment in that business. Paul will provide an additional update on that in a minute.

With respect to cash flow for 2004, we expect consolidated net cash from operating activities of between 1.6 and 1.7 billion for the year, and we expect consolidated capital expenditures of 1.2 billion in aggregate.

Of that, maintenance capital is expected to be approximately 600 million, with the remaining 600 million going to growth capital funded primarily through project finance proceeds. We expect our subsidiary distributions, excluding returns of capital, to be approximately 1 billion for 2004.

Our expectation for those subsidiary distributions has increased somewhat from the amounts we discussed during our September investor conference, because of continuing improvements in Chile and further favorable hedging at our New York businesses for 2004. Currently, the New York business is about 80% hedged for the coming year.

In addition, we will use a portion of our available cash of a parent during the year to further reduce parent debt by the end of the year of 800 million. Reduced interest expense and lower average borrowing costs from core financing activities will also be an important contributor to our earnings growth in 2004.

For example, yesterday we announced that we are beginning a process in 2004 by calling for redemption of our 8% senior notes due 2008, and a $34 million partial redemption of the 10% senior secured notes due in 2005 associated with recent asset sales.

In terms of gross margin expectations for 2004, we currently anticipate gross margin will run approximately 29%, consistent with 2003.

Overall, after considering the project finance interest costs associated with our operating businesses, we anticipate that the four business segments will contribute a total of 1.56 billion at the income before taxes and minority interest line in 2004. That's before considering corporate costs and minority interest. We expect the contract generation segment will drive about 52% of this contribution, followed by our large utility segment at 28, our competitive supply segment at 13%, and the remaining 7% from growth distribution.

Turning to page 6, the operating context for our guidance assumes a moderate growth in our global portfolio, along with contributions from new projects coming on stream. We assumed oil and coal prices are roughly at today's level, with no macroeconomic shocks during the year, although we are projecting a rather significant devaluation of the Bolivar over the course of 2004.

The key currency assumptions are also shown on that slide. Overall, our sensitivity to our basket of currencies shows that approximately a 10% movement in that basket, either in appreciating or depreciating currency against the dollar, would changed our diluted EPS for 2004 by approximately 3 to 4 cents.

Finally, we do want to remind investors that in developing quarterly models, there is important seasonality in our business, and that seasonality is also impacted by currency movement. With our current business portfolio, we would anticipate peak quarterly earnings in the third quarter, generally followed by the fourth and then the first quarter.

With that, I would like to turn the call over to Paul Hanrahan. Paul?

Thanks, Barry, and good morning, everybody. If I could summarize 2003, I would simply say that we did what we said we would do. We stabilized our company, we started to improve our business performance, and we laid the foundation for sound growth going forward.

We set some challenging goals to reposition our business portfolio, and we are largely there today. We delivered our key financial goals and restored investor confidence in our debt and equity securities.

As we move into 2004, our plan to increase the value of the company has not changed. Continued improvement in our credit quality is a necessary cornerstone of our long-term strategy. We intend to continue to improve our credit statistics, and to earn higher credit ratings.

The financial flexibility offered by an investment grade credit rating makes it an essential long-term goal for us. In 2004, a number of very important restructurings were completed by the company. One of the more significant ones closed just last week.

This is the restructuring of several of our Brazil businesses, including our Electropaulo distribution company in Sao Paulo.

The final [INAUDIBLE] agreements were consistent with the terms that we announced in December. We preserved some equity upside in our Brazil businesses and the new holding company which will own these businesses and we will be partners with the Brazilian development bank called BNDES. As a result, we now have capital structure that's proper for the long term.

This is a very major milestone for us, and we are very pleased with the outcome.

I would like to point out that the Brazilian government played a very constructive role in this process, and the government officials clearly understand the need to have appropriate industry and regulatory structures in place in order to attract foreign investment into the power sector.

We've also reached a major [INAUDIBLE] milestone with the restructuring of our Chilean generation business, called Gener. I am pleased to announce that we're launching our Gener restructuring, and expect the transaction to be concluded by the end of this quarter. As part of this transaction, we will be contributing approximately $300 million to cancel an intercompany loan, the so-called mercantile account, which has served as a dividend block over the past two years.

By eliminating this intercompany loan, we will be able to release approximately 100 million in dividends this month. Additionally Gener will purchase those bonds that have been tendered as a part of the restructuring and will shortly issue approximately $400 million in bonds in the international capital markets.

As previously announced, we will be selling down some of our Gener equity in the capital markets in March, which will likely have the effect of further reducing our investment in Gener.

This is a good transaction, which will properly capitalize one of our most promising businesses and position it well in the strong and stable Chilean market.

We have also dealt with our remaining problematic U.S. merchant businesses. As you know, AES does not have much in the way of gas-fired merchant generation exposure in the U.S.

We have generally opted for generation businesses with long-term sales contracts, but we did invest in a few gas-fired merchant businesses in the past. The last two investments, one in New England and the other in Texas, have turned out not to be attractive businesses, given their original capital structures.

As a result, we have opted to dispose of those businesses in 2004 to clean up our portfolio. We have also placed our distribution company in the Dominican Republic called EDE Este into discontinued operations this past quarter.

Given the economic and sectoral [INAUDIBLE] problems in the country, it became clear that the distribution business under the current industry structure was not an economically attractive business for us.

We have however decided not to sell our generation businesses the DR. We intend to keep these businesses, because we feel that there is a reasonable probability of them being sustainable and having some potential equity upside.

The situation in the country is very fluid, however, and our businesses are under technical default under certain loan agreements.

As a result, I believe that there is some risk that these businesses will not be able to remain economically attractive, if the situation at DR and its electricity sector erodes further.

But aside from this potentially problematic situation in the DR, I believe that we have a sound portfolio of businesses going forward. It is getting closer to all of these major restructurings that permits us to turn more of our attention to the company's future now.

We do so with the following clear goals: We will continue to maximize the contribution from our existing businesses, both in terms of sales growth and productivity improvements.

First, we have a portfolio of businesses with real demand growth. As a global company, we will always benefit from the higher demand growth rates in non-OECD countries.

Together, with a lack of exposure to gas-fired merchant generation plants, this is one of the key differentiating features between AES and our more U.S. domestically-focused peers. Second, potential productivity gains will leverage the sales growth.

I believe the opportunities today for productivity improvement continue to look as promising as they did when I discussed these during our September investor conference.

Global sourcing, operations and maintenance, best practices, and high return capital investments are all at the top of the list of productivity improvements that are being worked business by business throughout AES, and you can expect to hear more throughout the year about our progress in this area.

Working our assets hard will help drive the sustained cash flow growth, as well as improve our return on capital.

In addition, we'll continue to benefit from our ongoing efforts to retire debt and strengthen our balance sheet. Our ability to create value isn't just restricted to strengthening our balance sheet and getting our existing businesses to run better, however.

We see the potential for attractive new investment opportunities in both green field and acquisitions that we feel could contribute in a significant way to increasing the value of our company. I would like to make four observations about how we look at these possible opportunities in our sector going forward.

First, the long-term need for new capacity globally in the future is significant. It's easy to forget about this potential in the face of severe overcapacity in the U.S. and several other OECD countries, but on a global basis investments of almost $4.2 trillion will be needed for new power generation capacity alone between now and 2030.

The amount of new capacity needed worldwide in the next 7 years will be equivalent to adding an electrical system the size of the United States. In other words, the size of this market for green field plants is substantial. There are also many factors that are driving changes in who will own assets in the power sector.

Many strategic investors are returning to their home markets, thanks to foreclosing on assets. And governments are recognizing the enormity of investment required if they do not privatize their electrical sectors. All these factors, I feel, should lead to some interesting and attractive acquisition opportunities for global players like AES.

We recognize that markets across the globe or asset classes will not be equally attractive, however. The key will be for us to look at many opportunities, but only to pursue those that have the right structural characteristics for investment on a very selective basis.

To do this well, the company will require a global footprint and worldwide execution capability. This is something that AES has.

And finally, the pull back of many of our strategic players in the industry has reduced competition in some regions, but this gap has been filled to some extent by financial investors who are new to this sector.

This is particularly true with respect to generating plants with long-term contracts in the U.S. As a result, we have seen very aggressive pricing at several auctions that have been conducted recently.

We have participated in a few of these auctions, but have demonstrated the discipline to stick with the kinds of returns that we feel are attractive and necessary to build the value of our company, and we'll continue to maintain this discipline in our approach to investment, just as we did when the prices for the [INAUDIBLE] business which bid two prices that were in our view not sufficiently attractive to invest our shareholders' money.

To lead our new growth efforts, I am extremely pleased to announce today that Bob Hemphill has agreed to rejoin AES to take charge of our new business development and acquisition efforts on a global basis.

Bob has served as a director of AES for eight years; and prior to this time, he very successfully led our efforts during a time when we developed some of the strongest projects in AES's portfolio.

Having worked closely with Bob in the past, I can say he brings a wealth of experience and an extremely disciplined approach to our development function.

While we will miss his contributions as a director, we will benefit enormously from his full-time involvement in the company.

With Bob at the helm of our worldwide development activities, you can count on a very sound approach to growth going forward. In summary, I would just like to thank all of our investors in our equity and in our bonds for the confidence you have shown in our company over the past year.

I want you to know that all of us at AES will continue to work as hard as we have been to maintain that trust and to deliver the kinds of results that you expect. Thanks for your attention this morning.

I would now like to open the call up for any questions that you may have. Holly, if you could open this up for questions, please.

Thank you, sir. The floor is now open for questions. If you do have a question, please press the numbers 1 followed by 4 on your touch-tone phone.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you please pick up the hand set to provide optimum sound quality. Once again, ladies and gentlemen, that is 1, followed by a 4 to ask a question.

Please hold off while I poll for questions. Thank you, our first question is from Elizabeth Parella of Merrill Lynch.

Thank you. Paul, could you walk us through the Gener restructuring again, I just want to make sure I understand it. That 300 million intercompany loan that's going to be cancelled, does that require a cash infusion from AES, or is that an accounting entry? And then you mentioned also getting 100 million in dividends. When would that be? Maybe you could make it so we understand that in terms of how the cash -- what the cash needs are on this.

That's a good question, Elizabeth. What I would like to do is, Joe Brandt is here, who heads the Integrated Utilities group and the restructuring office, and has really led this effort[INAUDIBLE]. I'll let Joe walk you through that in more detail.

Elizabeth, the intercompany loan between Gener and a holding company above it, the so-called mercantile account, is a cash obligation of the holding company back into Gener.

So the $300 million that will be injected by AES will be a cash injection into the company. The mercantile account has served as a dividend block for the last two-years, so there has been significant build up of cash in Gener.

Although we have been paying dividends to the 1.5% minority, the AES share of the dividend has not been paid. So by eliminating that mercantile account, we will be able to pay a dividend this month of approximately $100 million, representing essentially the cash that has been building up inside the company.

When we discussed the transaction back in -- on the earnings call, for the third quarter, we talked about the business needing essentially $300 million of new equity, in other words, $300 million of debt pay down, as part of the transaction, and the core of the transaction that was described then will continue.

We will be issuing $400 million in new bonds, approximately, the proceeds of which, together with the additional equity, will be used to finance the existing debt, the so-called convertible debt and the so-called Yankee debt.

We have tenders that have been launched and have received for the Yankee and U.S. convertible of approximately $200 million -- $225 million.

Then in March, next month, we will be selling a minority position of equity in the business in the Chilean and U.S. capital markets, to complete the recapitalization of the company.

In essence, you can look upon the combination of the U.S. equity, the AES equity investment, and the issuance of the new equity as providing net the $300 million that will be needed to delever Gener and complete the restructuring.

And so that the new equity in March sounds like it might be something about $100 million?

The sizing of the new equity sale, which will essentially be AES's shares in Gener, will depend, you know, on a number of factors related to the relative valuation of the business in the market.

Oh.

Essentially, Elizabeth, we like that investment, we think it is a good opportunity. It really does straighten out Gener for the long term.

And we really have an option through an equity issuance in March, if we think it makes sense, to reduce that amount of additional investment beyond the 100 million that we take out through dividends.

And the $300 million that would be going in this month to cancel this intercompany loan, I would assume this would come from parent liquidity?

Yes, it would.

Okay, and the second question, if I may -- could you tell us, in the fourth quarter, had you not discontinued these four businesses, what would they have lost on an operating basis? I realize you have given us the total amount, but that includes, I would assume, a big impairment?

Yeah, that's correct. We have effectively written off our investments in the discontinued operations line for all Wolf Hollow and the [INAUDIBLE] and Granite Ridge.

On an operating basis for fourth quarter, those businesses would have lost in the neighborhood of about 3 cents a share -- 2 to 3 cents a share in operating losses.

Okay. Thank you very much.

Thank you. Our next question is coming from Terran Miller of UBS.

Good morning, just a follow-up on Elizabeth's question.

Is the $300 million of requirements to Gener in the 600 million of growth Cap Ex, or is that separate.

No, that's separate. The growth Cap Ex is for existing businesses. So --

Okay. So can you discuss like you used to your equity commitments for 2004?

Is there anything above the $300 million at Gener?

In general terms, we are in -- they are small, in terms of new businesses, so about $200 million.

Additional?

Yes.

Okay, and what do you anticipate for corporate overhead and corporate interest in '04?

At this point, we are not giving a projection on that, you know, as we are planning to delever on 800 million, so we will do that over the course of the year, but we haven't determined the exact timing for that.

Okay. All right, thank you.

Thank you. Our next question is coming from Leslie Rich of Banc of America.

Yeah, I wondered if you could -- looking at the slide that describes the top of the subsidiary distributions for 2004, there are some big changes in terms of contributions between the segments; for example, CHIGEN drops down from one of the top contributors to one of the bottom, and Gener and EDC rise way up to the top.

I just wondered if you could talk about the big moving parts there in terms of the year over year delta.

Yeah, probably the most significant items that are changing from '03 to '04 -- reducing from '03 would be the distribution from CHIGEN, as you mentioned, and Hawaii.

Those two reductions are primarily due to the fact that in '03 we did significant refinancings of those businesses that released operating cash from those businesses and therefore, won't be replicated in 2004.

Additionally, both of those created additional cash to the parents in terms of returns of capital that's not included on this chart. So they added significantly both from an operating cash flow perspective and return of capital perspective.

As a result, in Hawaii we have slightly higher interest costs this year, and the same would be true of CHIGEN. So those have the effect of dampening the annual cash flow distributions to some extent. The other business that drops slightly is IPALCO. As we've mentioned before, that has to do with the fact that they are continuing to finish off their pollution-control investment during the course of 2004.

Moving up in '05, we do see improved cash flow from Gener, as Joe mentioned and Paul mentioned, with respect to the upcoming transaction and cash that is partially in the business already, and we do see EDC's ability to add cash flow during the year.

Also, the Pakistan business has kind of dropped down the list, to some extent primarily because we just sold a minority interest in those businesses. So those are the big changes.

Yeah, just for clarification, I think Barry said '05 -- that was '04.

2004.

Okay, and just to clarify on your growth Cap Ex number. You said that was for existing businesses, or for new opportunities?

For opportunities that are under construction and completion.

Not for anything -- no new investments are included in our projection at this point that haven't been agreed to today.

So what are your plans in that regard?

Well, as Paul mentioned, we will look at several opportunities and see what we can find from a disciplined investment perspective.

But at this point, we are not making any projections as to what we might invest in 2004.

Yes. If I could just comment on that. You have probably all seen various reports that we're looking at many opportunities -- interested in opportunities in various parts of the world. I would say in many cases, this is research and development for us.

We are scanning the globe, looking for opportunities, recognizing that not all of them are going to meet our criteria. But we think it's important from an intelligence-gathering perspective and understanding what is out there.

I think we are looking at a handful that do look potentially promising. But we are not nearly far enough along to say that we would be actively pursuing those yet.

I think as we get to the point where we see something that meets our criteria that we think is, in fact, a sound investment for the company, we'll come back and let people know.

But we are not at a point now where I could say any of those has gotten to that level of seriousness.

Okay. Thank you.

Thank you, our next question comes from Clark Orsky of KDP Asset Management.

Oh, hi, thanks. I just wanted to ask whether you would venture a guess on when you think you might actually see some cash flow coming out of Brazil, with restructuring over.

I think on that point, to me, the key thing will be -- we have now got a good long-term capital structure, but we are not going to be able to take out much cash for the next several years, and that's primarily because the real ability to take cash out will be when we can refinance the remaining BNDES debt.

That's going to be the key thing. So I think it's going to depend on when we can refinance those businesses. What's different now, though, is you've got a refinanceable capital structure, depending on really the return of capital markets to those regions, when they get stronger.

So it's probably not going to happen in the next couple of years, but beyond that I think is a time when we can start seeing some cash coming out of those businesses.

Okay, thanks. Also on Gener, some of that cash that is coming out is sort of one-time that's accumulated at the sub.

What's kind of a run rate, assuming your equity interest stays the same?

In a rough guess, I would say it's probably in the neighborhood of about 70 million, you know, plus or minus.

Okay, and you talked about selling an equity interest. Any idea on putting a boundary around kind of how much you think you might raise from that?

Well, I think the way to look at the equity component of the transaction is that we will be putting in $300 million now, and then paying a distribution.

The business needs about $300 million of pay down of debt in order to be properly capitalized. So after the injection of the 300 million and following the payment of the dividend, there will be 200 million of additional pay down of debt.

There will be required an additional 100 million of debt pay down, which would suggest there needs to be an additional $100 million of equity sale to third parties to achieve that.

To the extent that we sell any amount above 100 million in March, then that would be a return of capital to AES, which would further reduce our investment in the Gener business.

So I would look at the March equity sale as upwards of 200 million, between 100 and 200 million, but it would depend significantly upon the price of that business, since we like -- the business as part of the portfolio, and we like the performance of Gener.

Okay. I just want to -- one last question -- I wanted to clarify, the 1.2 billion of capital spending, that's all below the parent level, correct?

Yeah, that's a subsidiary level, subsidiary capital spending.

Thank you very much.

Thank you. Our next question is coming from Ali Agha of Burnham Securities.

Thank you. Just a couple of clarifying [INAUDIBLE] questions.

Barry, could you give us a sense of, from an earnings -- ongoing earnings perspective, what the Brazilian restructuring and your thoughts on the final restructuring of Gener will do incrementally to your earnings base -- ongoing earnings base?

Well as we said, on an overall basis, our 2004 guidance does include that.

The net effect of restructuring Brazil is slightly negative on a year over year basis, because we are obviously reducing our ownership interest by half.

So it's -- although we do see improved margins at Gener -- excuse me, in Brazil -- and overall improved profitability of business, because of the reduction associated with the reduction of debt at both the holding company level and the conversion of some of it to local currency debt, it will have a small net negative impact on us year over year, because of the reduction in our ownership interest.

It also has a more dramatic effect on our exposure to the Brazilian currency effectively, because we’ve moved half of that off to our investors in terms of total participation.

On a Gener basis, it will depend on the amount of equity that we sell. Reducing debt and the current plan is probably about neutral.

Okay. Separate question. Could you update us on what is the current cost reduction target that you have, and, you know, where are you in that process currently?

Ali, this is John Ruggirello. As we talked in the investor conference in September, we have an overall target of about 350 to 400 million of improvements in gross margin by 2008.

And just as a kind of quick update, some of the bigger elements of those improvements were to come from reliability or availability improvements and also sourcing. On the reliability, we are actually ahead of schedule, ahead of target through -- in '02, we had an average fleet availability of 84 to 85%, and '03 was up to 88%.

So we are close to our target of hitting the top quartile. So we are close to our target of hitting the top quartile. And, if so, we would be one-year ahead of schedule.

We think -- we believe that equates to about a $40 million improvement in gross margins from the improved reliability availability. In sourcing, our first -- not even our first full year -- but we began in March, and the progress has been very good.

We have now established an annual run rate improvement through our sourcing efforts of about $50 million that we will capture in '04.

We expect to make a further improvement through the course of '04 -- total performance improvement of about $120 million. So we are on track, we are making good progress towards the targets we laid out in September.

So, John, just if I have got those numbers right, out of the 350 to 400, you have identified or on track for about 200 of that? Is my math right?

200 by the end of '04. About 90 so far this year that we baked into the budgets, and then about another 120 by the end of '04.

Okay. And my last question, from the cash flow tables for '04, I think you guys are more optimistic about cash coming of Venezuela and Argentina.

Can you give us a quick update on the regulatory/financial climate in those two countries?

Yeah, Joe, you want to -- I'll have Joe Brandt discuss Argentina. I can cover Venezuela.

Sure, in the case of Argentina, a couple of things to note. The cash coming out of 2004 is projected to come out of the generating companies, principally Alacura [PHONETIC], which is our 1,000 megawatt hydro facility in New Caan [INAUDIBLE]; and CTSN, [INAUDIBLE], which is a thermal facility outside of Buenos Aires. In 2003, those businesses sent about $13 million. Both businesses are unlevered -- there is no debt on either business.

And CTSN, the thermal facility has a contract in dollars in contract to export business through -- export electricity through a counter party into Brazil. That contract was restructured towards the end of 2003, which limited the number of dividends that could be paid out of CTSN.

In 2004, what we are really saying is that we expect Alacura to perform slightly better than it did in 2003, that CTSN will realize the full benefits of the contract in 2004, and that one of the two businesses will put a small amount of incremental debt in the capital structure, which is the driver of the increased dividend.

In terms of the regulatory structure in Argentina, the key point to note is the regulatory environment on the wholesale generation side, although it continues to be very turbulent and unsettled, it has not seen the more draconian [INAUDIBLE] imposition of price controls that you have seen on the distribution side.

And so we have at this point, 2.5 years of experience with the regulatory shock that came in January of 2002, and we know that these generating companies, particularly because they are unlevered, have the ability to distribute significant cash even in that environment so that is the basis [INAUDIBLE] for the Argentine GENCO (ph), which is CTSM and Alcura (ph) projection for 2004, this year.

Yes, just on Venezuela, with respect to the regulatory environment, it is pretty much working as it should. We haven't had any difficulties there.

We are seeing some demand growth return to the market. What you have seen, I think, last year, was an anomaly in the sense that, because of the devaluation, which occurred -- the maxi [INAUDIBLE] deval which occurred previously, that impacted the U.S. then GAAP earnings balance earnings sheet and effectively resulted in some blocks in the dividends.

What has been going on in EDC, though, is they have been paying down debt, which we look at as essentially increasing the equity value of the company.

The number that's in there for next year, I think, on a -- is probably lower than what it should be on a continuous run rate, but we think is achievable, just given where the company is in circumstances in Venezuela. So it is a big step up, it's a step up from a very low number.

Thank you much.

Thank you. Our next question comes from Richard Hayden of Omega Advisors.

Good morning. First, a point of clarification. You are showing debt at the current level of 5.862. Is that now including the trust preferred?

Yes. That's -- under the new rules with respect to where that debt shows up on the balance sheet, and we have included it in our numbers before.

It is now included on the balance sheet that way.

Okay, yeah, so a little confusing.

Yes.

Maybe you can think about this, I will go to the third question.

You know, at your presentation in September, you outlined a base case, a reinvestment case and a growth case, all of which had far different growth rates. Which path do you think you are on now?

And maybe thinking about that, I could come to a numerical question. If you just take a look at the fourth quarter, and look at what I will call controllable expenses, and just scroll down from gross profit?

Yes?

And assuming a tax rate of 40%, don't you come up with earnings that are substantially higher than that?

You broke up right at the end -- earnings that what, Richard?

Be substantially higher than that which you suggested.

Well, that was the purpose of kind of going through the slide on page --

I did not get the slide.

Okay, we did -- you are right. There is -- effectively there are 10 cents' worth of items in the fourth quarter related to asset sales, gains and losses, write offs of terminated projects and some goodwill impairments in the Caribbean.

So, you know, if you exclude those items, which we do for purposes -- for analytical purposes on page 4 in the slides, you will see that on kind of an adjusted basis we are looking at about 11 cents for the fourth quarter.

I guess my thought was, relative to the data I have before me, if you just look at controllable expenses, it could be substantially higher than 11 cents.

Maybe we could go through that off line, but I come up with a different number. Maybe you then could go back to the second question about what path do you think you are on at this juncture?

Yeah. I think we really laid out a couple of options there. We are clearly on the case where we would be paying down debt.

That's where we would go now. We are going forward in that path. That's almost a default case for us, that we generate the cash, pay down the debt.

The performance improvements, which provided some range of outcomes here, I would say we are at least -- John covered it -- but we are at least in the midpoint there and I think we have got at least the potential to get to the higher end of that performance improvement category.

The reinvestment was taking some of the cash that we generate internally and reinvesting into new businesses, I think we are not at a point to say -- we clearly are not reinvesting into new businesses.

We have not found businesses that we think meet our criteria right now. But from what we have seen, I do think there is a lot out there, a lot of opportunities, which I have alluded to in my comment.

I think the levels of competition are down on a global basis. That's creating some opportunities for companies like us.

So I think we could be, in that case, very easily -- but I don't want to commit to that yet, just until we know we have a deal that meets our investment criteria, we can come back to you and say this is the deal we are investing in.

But if I did that, I would say that's where we are going to end up.

But in the meantime, we are just going down the path of, you know, paying down debt with our existing cash flow, but recognizing that with Bob Hemphill leading our development efforts, I think we could see some pretty attractive opportunities down the road.

The reason, obviously, Paul, that I am trying to derive what your secondary growth rate is in terms of valuing the stock, and I think what you're saying now is that we should at least think that the upper end of the base case is where you are at right now, is that a fair conclusion?

Yes. I just don't have the evidence to say that we are -- until we can show you that we have found a good deal and we have invested in it, I can't tell you there's a guarantee that we're going to get there.

But I think that's a judgment call. I think what you need to think about is just looking yourself, look at the opportunities in the industry, I think we are well positioned to take advantage of those.

So I would say, given the amount of investment -- cash that we will have to invest -- compared to the number of opportunities that are likely to be out there during the next four to five-years, I don't see any problem with us being able to find quality investments to put that money to work on that basis.

Okay. If someone could give me a call back on that reconciliation and operating earnings for the quarter, I really would appreciate it.

Richard, this is Scott, I will.

Thank you.

Thanks. I'm just thinking, we are getting close to the closing time.

Could we just take one last question?

Thank you, sir. Our final question is from Craig Shere of Standard & Poor’s.

Hi, good quarter. Couple of quick questions. First, Paul, you kind of talked a little more about the benefit you have been getting from the cost cutting, global outsourcing -- global sourcing initiatives.

But did I hear correctly that the margins are expected to be flat year over year? Are you just being conservative on that? And then I had one quick follow-up question.

In overall terms, you are right. The overall margins are flat.

That is partly due to the changes in some of our distribution portfolio. On the generation side, we do see increasing margins, as John mentioned, in the current terms. We have also projected currently, as you can see from the supporting slides, the devaluation in most of the currencies, which would have a slightly dampening effect year over year on our margins to kind of bring them back down in line.

So there is --, in local terms, improvement and reduced, reduced currency levels that bring it back down.

Additionally, we do see, you know, continued adjustments in our Shady Point contract. We have a slightly negative effect there; and at this point; as we mentioned in New York, we have about an 80% hedge.

Right, and then last question on the discontinued operations, I think you all mentioned to Elizabeth that you totally wrote down those four assets.

What are the -- to take a 100% write down, seems, well, can't get any worse. So I am just wondering if you anticipate financials having any recovery on any of those businesses?

It is certainly possible. We have not planned for it at this point, and -- but -- so we have written them down to get our investment down to 0.

Do you expect to have any results during this calendar year as to how you are going to deal with the exits from those businesses, and what, if any, recovery may happen?

Yeah. That should occur within 2004, and we plan for it to occur in 2004.

We will reflect as it has happens and any transaction closes.

Thank you.

Mr. Cunningham, I turn the floor back over to you for any additional comments and closing remarks.

Thank you, Holly, and thank you everyone for joining us this morning.

If you have any follow-up questions, such as Richard's, please contact Tom [INAUDIBLE] and myself in investor relations. Have a good day.

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