愛依斯電力 (AES) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AES first quarter earnings release conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Mr. Scott Cunningham.

Thank you very much, Marie (ph), and good morning, everyone. Welcome to the AES first quarter financial review. Joining me today are our principal speakers Paul Hanrahan, President and Chief Executive Officer, and Barry Sharp, Executive Vice President and Chief Financial Officer. The press release and presentation materials we will be reviewing today are available on our website at www.AES.com.

Before we begin, please note that the Safe Harbor and forward-looking statements in the earnings press release and on page 2 of the presentation also apply to this conference call. In addition, we would like to note that we have restructured the format of our press release and teleconference slide materials slightly beginning in the (ph) quarter. The objective really is to better focus the press release and our key messages and to include a cash-flow statement. You will continue to see significant supplemental disclosure in the teleconference slides, particularly in the appendix. With that I'll turn the call over to Barry Sharp, who will first review business -- first-quarter results. Paul Hanrahan will then discuss recent business developments and comment on our favorable business outlook.

Thanks, Scott. Good morning, everybody. AES reported strong first quarter 2004 financial results, with revenues increasing 18 percent to 2.3 billion, operating income up 18 percent to $618 million, and 2004 adjusted earnings per share from continuing operations of 17 cents, as compared to 13 cents on the same basis in 2003. On adjusted earnings per share, that represents an increase of 31 percent year-over-year, a strong quarter in all dimensions.

GAAP earnings per share from continuing operations were 12 cents for the first quarter of 2004 before considering discontinued operations. Consolidated cash flow from operating activities was $402 million for Q1 2004, and distributions received by the parent from our subsidiaries was $204 million. These amounts, as Scott mentioned, are in our press release as well as on Page 3 of the slide package that's included in our website.

You will also notice that included in our press release this quarter is the GAAP consolidated cash-flow schedule, in addition to the income statement and balance sheet that we've provided to you in the past. It is also important to remember that we define adjusted earnings to mean income from continuing operations, excluding mark-to-market gains and losses from FAS 133; gains and losses arising from foreign currency transaction impacts on net debt; gains and losses from early debt retirement; and losses from significant asset impairments.

For the first quarter of 2004 and 2003, a schedule in the press release and on Page 4 of the slides details the amounts that reconcile adjusted earnings EPS to GAAP EPS from continuing operations. For Q1 2004, we had a total of 4 cents per share in losses associated with FAS 133, which included 3 cents previously disclosed arising from the Gener refinancing and debt restructuring transaction. We also incurred a net loss of 1 cent per share from early debt requirements during the quarter. As a result, again, adjusted earnings per share are therefore 17 cents per share for Q1 2004, as compared to Q1 2003 of 13 cents per share.

I would like to spend a few minutes on the significant contributing factors to the strong quarter in each of our four segments. Our largest and most profitable segment continues to be Contract Generation. For the first quarter, sales in this segment grew 21 percent to $868 million, with increases in all five geographic regions across the segment. Year-on-year, the most significant contributors to this increase came in Chile, due to both price and volume increases at our businesses in Gener; at Uruguaiana in Brazil, because of price increases in its power sales agreement and favorable currency impacts; at Kilroot in Northern Ireland because of favorable currency and increases associated, as well, across the portfolio with recently completed businesses that had previously been under construction. Most significantly, this included Barka in Oman and Ras Laffan in Qatar.

Gross margin in the Contract Generation segment also was up 24 percent to $359 million, with increases again across all five geographic regions that were generated primarily again by businesses with concomitant sales increases. The gross margin percentage on increased sales for the quarter was consistent at 41 percent in both years. So overall, Contract Generation contributed 39 percent of our consolidated revenues and 53 percent of our consolidated gross margin for the quarter, both of those percentages up slightly from 2003.

Sales were up 17 percent to $818 million in AES's other significant segment, represented by our three Large Utilities. The increase in revenue is primarily attributable to a 35 percent increase in sales at Eletropaulo arising from tariff increases and favorable currency movements from 2003, and a 14 percent increase in sales at EDC resulting from tariff increases, partially offset by currency devaluation during the quarter. Gross margin in the Large Utilities segment increased 18 percent to $194 million for the first quarter of 2004, attributable again to improvements at Eletropaulo and EDC, and slightly offset by a year-over-year decrease of ITL (ph) because of lower wholesale generation sales in 2004.

The gross margin percentage also increased 1 percent to 24 percent for the quarter, with the most significant increases arising at EDC due to increased revenues, partially offset by an increase in the cost of fuel. In aggregate, our Large Utilities contributed 36 percent of consolidated revenue and 29 percent of consolidated gross margin.

Our smaller Growth Distribution businesses also showed strong sales growth of 24 percent to $328 million and margin improvement of 26 percent to $63 million for the first quarter of 2004. The most significant contributor to both increases was at Sul in Brazil, where increased volume and favorable currency fluctuations were partially offset by an increase in the cost of purchased energy. Significant revenue increases also occurred at SONEL in Cameroon because of volume increases, tariff changes, and favorable currency fluctuations.

The gross margin percentage for the Growth Distribution segment remained consistent year-over-year at 19 percent, with improvements at Sul and our El Salvador distribution companies, that were offset by slight reduction at SONEL. Growth Distribution represented 15 percent of total revenues and contributed 9 percent to consolidated gross margin. Both percentages again slightly higher than the first quarter of 2003.

Our fourth segment, Competitive Supply, is comprised of generation plants without long-term contracts. This segment also showed sales growth of 6 percent to $243 million for Q1 2004. Sales increases were most prominent at our Panamanian hydro plants, our distribution businesses in Kazakhstan and Argentina, offset partially by a reduction from New York due to a decline in capacity revenues. Gross margin declined $5 million to $64 million and 26 percent of sales this quarter due to the additional impact of higher coal costs in New York, with improvements in margins in both Kazakhstan and Panama dampening the impact. Competitive Supply contributed 11 percent of consolidated sales, which is a 1 percent reduction from the prior year, while it contributed 9 percent of gross margin in the first quarter of 2004.

As a result, our four operating segments generated combined gross margin of $680 million for 2004. That it up 19 percent over the same quarter in 2003. And overall, consolidated gross margin percentage from all of our operating businesses for the quarter was consistent at 30 percent across the portfolio for both years on the back of an overall increase in sales of 18 percent. These strong segment operating results drove an increase in operating income of 18 percent, or $95 million, for the first quarter of 2004, and resulted, as I previously mentioned, in adjusted earnings per share increase of 31 percent to 17 cents per share for 2004, compared with 13 cents per share on a comparable basis for 2003.

Net income on a GAAP basis, including a net loss from our discontinued businesses for the first quarter of 2004, was 8 cents per share, as compared to 17 cents per share for the same period in 2003. Discontinued operations this quarter primarily represented losses from our discontinued merchant businesses in Texas and New Hampshire and our distribution business in the Dominican Republic. These were offset partially by a gain and related proceeds of $20 million that was generated by the final installment from our previous sale of our former Mountainview business.

AES continues to focus on the cash flow performance of our businesses, and as a result, we also saw significant improvement in cash flow from operations in the first quarter of 2004, with consolidated cash provided by operating activities of $402 million. Included in this amount, as reported under GAAP, is a -$3 million from discontinued operations this quarter, or accordingly, a total of $405 million of operating cash flow on a consolidated basis is related purely to continuing operations. For 2003, the comparable continuing operations number for cash is approximately $326 million, with an additional $120 million in '03 for the first quarter arising from interest deferrals in our discontinued businesses.

So on a comparable basis, this represents an increase from $326 million in 2003 to $405 million for the first quarter of 2004. This is an increase year-over-year of 24 percent. Of the 2004 amount, $530 million was generated at the subsidiary level prior to being distributed to the parent. The full consolidating cash flow schedule, showing both subsidiary and parent-related cash flow information, is included as Page 13 in our slides for your reference.

Also this quarter, maintenance capital expenditures were approximately $122 million, of which just about half related to the financed environmental control improvements at IPL. This figure, combined with our cash flow from continuing operations, represents a free cash flow number, at least as I would define it for the quarter -- cash provided by operating activities less maintenance capital expenditures -- of approximately $280 million.

Growth capital expenditures were $68 million for the quarter, primarily representing completion expenditures at Ras Laffan, as well as project finance construction spending in Spain, Hungary, and completing a new generating facility in Cameroon.

During the quarter, we also repaid $351 million of parent debt and successfully completed significant debt restructuring and refinancings in Brazil and Chile that Paul will review in more detail in just a minute. Consolidated cash and equivalents and the end of March was $1.1 billion. Total distributions from our subsidiaries to the parent were $204 million in 2004, an increase over $180 million for 2003. The detailed contributors are again listed on Page 13 of our slides for your reference.

We also increased the availability under our corporate revolver during the quarter to $450 million from $250 million previously, which provides us additional flexibility as we continue to delever. And we also refinanced $500 million in unsecured notes at the corporate level, with a 10-year term and a coupon of 7 3/4 percent. That further extended the average life of our remaining corporate debt.

Finally, before turning it back over to Paul, I would like to reiterate our previously stated guidance with respect to both EPS and cash flow. Again, this information is also included in the slide package. We continue to see EPS from continuing operations of 62 cents per share for 2004, excluding the previously mentioned 3 cents per share cost associated with the Gener refinancing; and 64 cents per share for adjusted earnings, as we outlined in the definition earlier.

With respect to cash flow for 2004, we continue to expect consolidated net cash from operating activities of between $1.6 billion and $1.7 billion, expect consolidated capital expenditures in total of $1.2 billion across the portfolio. Of this, maintenance capital is expected to be approximately $600 million and the remainder with growth capital expenditures. Those expenditures on maintenance CAPEX would result in a projected free cash flow, as I defined it earlier, for 2004 of $1.0 billion to $1.1 billion for the year. We also continue to expect subsidiary distributions to the parent, excluding returns of capital, to be approximately $1 billion for 2004.

Finally, I would also like to remind investors that are developing quarterly financial models that there is important seasonality in our business and that seasonality can also be impacted by currency movements. 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. As such, we would expect the upcoming second quarter to be our lowest for the year. Thanks for your attention today and with that, let me turn it back over to Paul for his comments.

Thanks, Barry. I would like to cover four main points. As Barry discussed, the first point is we had a strong quarter. It's in line with our expectations and we are on a track to meet our estimates for the year. Second, I would also like to talk about the fact that we had a good quarter for the last few restructurings that are remaining. Third, I would like to give you an update on the growth prospects. And then finally, I would like to reaffirm and discuss longer-term EPS growth rate forecasts that we discussed in last fall's investor meeting in New York.

The first quarter for us was a good quarter. As Barry discussed, adjusted EPS of 17 cents a share was in line with our expectations, and those results allow us to reaffirm our earnings guidance for the year. I was also encouraged by the strong operating income and operating cash flow numbers, and as a result, we are on track to meet our numbers for the year.

The first quarter was also a good quarter for the completion of two restructurings, both of which create long-term sustainable capital structures and financial flexibility for the relevant subsidiaries -- and you can refer to Slide number 7 that we have provided, which provides a little bit more detail on this. First, I would like to talk about the restructuring of Eletropaulo and the Brazil companies, which was finalized and completed as it was envisioned in our last call. Overall, the restructuring of Eletropaulo resulted in $600 million of debt reduction and $1.6 billion of maturity extensions, including both the holding company and operating companies. That significantly extended the average life of our debt and aligned the capital structures with the cash flow profile of our Brazilian businesses.

We think that really positions us very soundly for the future. We have a strong partner, the Development Bank of Brazil, BNDES. We also have some other good news from Brazil, and that is that the tariff increase in our distribution company called Sul in the state of Rio Grande do Sul, was in line with our expectations. It also sets a good precedent for the Eletropaulo tariff adjustment which is coming this summer.

The second restructuring is the recapitalization of our Chilean generating company, called Gener, which was completed successfully. What we did is we successfully resolved about $700 million of maturities facing us in 2005 and 2006. The makeup of that was we paid down $300 million of debt, which increased the credit rating out there by three notches. We also were able, by doing that, to issue some long-term 10-year bonds -- $400 million worth -- to complete that restructuring. We think this positions our Company for growth in a market we think has a lot of future potential and also has a very stable regulatory regime.

On the last call, we also noted that we planned a secondary offering of Gener shares. This continues to be our plan, but I think as many of you saw, there with a lot of unusual market volatility in Chile following the announcement of the proposed reduction of gas deliveries from Argentina to Chile. While the impacts of this aren't likely to be material to Gener or our AES portfolio in the southern cone, the lack of details concerning implementation while we were conducting the roadshow caused us to defer our offering until the market stabilizes. We expect to be able to complete that offering by the end of the year. It's important to note, though, that the key elements of that recapitalization were completed, which secures significant equity value for AES in one of our more attractive markets.

Next I would like to talk about and give an update on the growth prospects. As we think about growth, we are continually comparing the potential growth opportunities with opportunities we have to deleverage the company. It's a useful discipline as we explore these types of opportunities. For example, this past quarter, we reduced debt by $350 million. Let me give you a partial list of the categories and an idea of some of the opportunities we're seeing today.

First, there are acquisitions of asset portfolio due to the changing strategic priorities of some of our competitors. A few of these look promising and we are pursuing those. Many, however, are attracting levels of interest that parallel the sort that we saw in the late '90s. We have many new investors in this sector, and these tend to be folks that are focused on plain vanilla deals, with limited need for capabilities to deal with commercial and operational complexities. These generally involve U.S. assets that are going to large-scale auctions. These are not of interest to us, given how low the returns that we're seeing in these types of projects and acquisitions.

The ones we are pursuing, however, do require unique skill sets and we're focusing our efforts on these, and that's where we think we're going to see less competition. In greenfield development, there are several water and power projects producing water through desalinization, while at the same time generating electricity. These are being bid in several countries in the Middle East, including Oman, Bahrain and Qatar. Building on our successful execution of construction of our water and power plants in Oman and Qatar, we believe that our skill sets provide AES with an advantage in terms of knowledge and execution capability in this segment.

I would like to also talk about LNG regasification. As many of you have read recently, we have been developing an LNG regas facility in the Bahamas to transmit gas by pipeline to southern Florida, where there's significant needs for gas due to transmission constraints. This is a good example of our leveraging our experience with our LNG-receiving facility in the Dominican Republic, and to date, we have received the approvals for our facility, the Ocean Cay facility, from FERC and the state of Florida. The last remaining approvals that we need are from the Bahamas. Given (ph) the location of our project, which is on a deserted island, we think we're well-positioned to receive these approvals. (indiscernible) we see a large number of potential opportunities, but we're going to continue to be very selective.

The final point I would like to make today, going back to what was discussed last September in our investor conference, we provided our forecasted EPS growth rates through 2008 under several scenarios. I received a number of questions from investors, so I would like to clarify it today.

Just to review, the forecasted EPS growth rates were based on our expected adjusted EPS of 50 cents a share for 2003, while the actual adjusted EPS for that year was 53 cents per share. Nevertheless, using the base number of 53 cents per share in 2003, the forecasted term (ph) line growth rates that we presented back in September remain valid and are provided to you as Slide number 8. Summarizing this, in the base case, which includes deleveraging and performance improvements only, we expect to see EPS growth rates on an annual basis in the range of 13 to 19 percent. What that would mean, using the 53 cents as a starting point, is that in the high case, in 2008 you could see earnings per share of $1.26 per share.

The next case we talked about was the reinvestment case. That is essentially the case where we start investing money through internally-generated funds only once we reach DD credit characteristics. In that case, we would expect to see a range of EPS growth rates through 2008 of 17 to 23 percent. In the high case then, again starting with the 53 cents per share, that would equate to an earnings per share of $1.49 per share in 2008.

Then the last case we talked about was a growth case, where we would actually be able to fund some of our new investments with external financing, and there we could see growth rates in excess of 23 percent. To my mind, these continue to be attractive growth rates and are very achievable. Certainly, I feel good about the progress that we continue to make, with the execution of performance improvement and improving our financial flexibility and about the opportunities for some high-quality growth prospects going forward. Thanks for your attention. Now I would like to turn it over for the Q&A period. Marie, if you could open up the forum for questions, please.

(OPERATOR INSTRUCTIONS)

This would be a world record if we had no questions.

Lee Cooperman with Omega Advisors.

Thank you. Good morning, everybody. Congratulations on the improving condition of the Company and on your growth plan. I'm just curious -- I know it's probably going to sound heretical this question, given where we have come from over the last two years. But historically, utilities pay dividends. And I was just wondering in your growth plan and business plan, do you see the prospect of the Company resorting to a cash dividend, or are we going to just strictly rely upon the change in the price of stock for our return?

The way I think about it is, what we have to do is we have to come up with a convincing case that we can reinvest the money at good returns in the Company. I think in the immediate term, deleveraging will probably be the thing we do for the next couple of years. That's probably the right thing to do, in addition to looking at opportunities in the market. But if we can't see good opportunities to invest, then the right answer would be the dividend money back to shareholders.

Given what I've seen, though, in the market, I think there are a number of good opportunities out there where -- electricity is a huge market and we're a global company, so I think there are good opportunities out there. But as I mentioned, we have to compare investments to deleveraging the company. I think that also goes to say you have to defer (ph) the dividending money back to the shareholders. We have the free cash flow vehicle to do it, so it's not out of the question, but I don't think in the near-term that's likely.

Two related questions. The actual free cash flow we are generating at a run rate now is what -- about 4 to $500 million a year? Is that about right?

As I defined it, Lee, it would be cash flow from operating activities less maintenance capital expenditures, and that number at least for 2004, given our forecast, would be $1 billion to $1.1 billion under that calculation.

And then the difference from my numbers to growth CAPEX?

That's correct.

So you're saying if we don't do anything to invest in growth, at the current run rate, we will generate $1 billion of free cash flow against roughly $5 billion in parent company debt?

That's correct. We continue to expect to pay down debt. Like I mentioned, we repaid $351 million this quarter. But that is about the right --

There's been a significant increase in the share count over the last year. I assume that is behind us now, because we take whatever we earn and whatever cash that we get, we have to divide by the number of shares we have. So the less shares we have, the better off we all are. There's about 628 million at March 3 according to your 14A filing. There's no plans to see that increase in any material way?

That's right. We don't have the need to go out and issue equity. To me, it would be purely opportunistic. If there are good opportunities out there and we thought -- we did look at all the different ways we could finance new investments. Equity would clearly be one of the things that would be considered. But we would always look at things like what is the stock price, where does it stand relative to where we think the value of the company is. But in terms of any significant increase in stock price or stock issuances, it would only be associated with something like that, that we think this is an attractive investment opportunity.

Let me give you a softball with the hope for some fair answer. How do you view the current stock price relative to the value of the business as you perceive the value?

Well, if you look at the earnings -- when I laid out the earnings growth rates, I was trying to get people to focus on the value of the company even if we don't make any new investments, and what the earnings could be out in 2008. I think if you take a look at that and look at just some moderate new investment, you can see that's a case -- the stock valuation, you could argue for a much higher valuation.

Wanted to give you a little softball to start your day off. Have a great day. Thank you very much.

Ali Agha with Wells Fargo Securities.

Thank you. A couple of questions. First, Paul, could you update us on how much is left in terms of your internal cost reduction program and how much has been completed? And related to that, as assuming everything goes on track, what would you consider to be the normalized gross margins for your four segments in total?

On an aggregate basis?

Yes. With the 30 percent that you reported this quarter.

If you remember, going back to the fall conference, we talked about using 2003 as the base, the beginning of 2003, we saw it to be $450 million with potential cost reductions that we thought were very, very achievable. As of 2003, we actually achieved a lot of cash savings -- onetime savings, but on the run rate, we were about $90 million of the $450 million. By the end of this year, we think we will be, on that $450 million base, somewhere on the order of about $200 million with another $200 million to go, and we seem to be on track with that. We are getting a lot of mileage out of what's going on around the Company, particularly out of the global sourcing group. We are starting to see some real savings coming out of that as it gets into gear. So that's a range we're talking about.

And when I gave the earnings growth rates, in our base case, we have only put in $300 million worth of savings of the 450, so there is some upside to getting the full $450 million worth of savings out of that. Barry, do you want to talk about the gross margins?

On the margin side, as we mentioned our guidance for 2004, Ali, the overall year we expect to be about 29 percent versus the first quarter of 23, because it will, like I mentioned, will be lower in the second quarter. But seeing it in that range and given the numbers Paul just mentioned, I think we could see margin improvements over the course of the next two or three years that could add 2 to 4 percent to the margin line. It's a little under $100 million per margin point in today's terms.

And so given the range of those growth rates and the movement in potential for those March (ph) improvements, it is in the neighborhood of that range -- some of it coming by enhancing the revenue side and some of it coming by reducing the cost side. So the combination of those two things would affect us on the margin. Some of it finally will make its way through depreciation through capital cost savings, but most of it being on the operating cost side.

Okay, separate question. When you look at your three big Latin American countries, Argentina, Brazil, Venezuela, or South American countries, could you just remind us what are the outstanding legal or regulatory issues that are still on your plate in those markets?

Joe Brandt, who heads up the Integrated Utilities, will talk about that.

Starting from Brazil, you would focus on the Eletropaulo tariff reset, which will include true-ups from the tariff reset of 2003 plus the 2004 adjustment. You also have the continued discussion in the marketplace about the new model, which Brazil is pursuing in the electricity sector in order to create conditions that will attract private investment, particularly into the generation infrastructure.

In Argentina, you have a rapidly evolving situation where the government is beginning to take steps to address the freezes in prices, both at the wholesale level and the distribution level, that were put into place in January of 2002. That's being driven primarily by the developments in the gas sector. You would expect to see in Argentina a continued regulatory activity related to distribution tariffs, as well as the freeze on wholesale prices, both on the gas and electricity sector.

In Venezuela, you don't have any systemic debate going on about the regulation of the electricity sector, but you have ongoing tariff adjustment and tariff resets that occur on an annual basis there. Those are the large regulatory areas that are under review in those three markets.

Okay. My last question, going back to New York, could you remind us what is your hedge position in New York in 2004 and 2005 currently?

John Ruggirello, who heads up our Generation group, will answer that.

We are roughly 80 percent hedged through '04 and '05 and about 20 percent now through '06.

And hedged means both the fuel and the power side?

That's right.

Thank you.

Elizabeth Parrella with Merrill Lynch.

A couple of questions, thank you. Just following upon the New York question, can you talk about whether the hedging for '05 that you have done, is it a lower unit margin than what we've seen in '04, and should we expect a decline in the earnings out of the New York plants from the hedges next year (ph)?

It's about the same pricing. As you know, the (indiscernible) have remained strong several years out now with the higher gas prices. So the margins for '05 are about what they are in '04. As far as coal goes, as you know, the coal pricing -- the market in the U.S. has spiked up. We are able to mitigate that to a large extent, though, because Somerset, Cayuga, and Beaver Valley in New York and Pennsylvania are fully scrubbed plants, so we can use a wide range of coals there, unlike some of the other competitors.

And Sames (ph), Warrior Run and Shady Point are circulating fluidized bed, where we can also use a wide variety of coals with a low emission rate. So we are able to mitigate some of the runup in the coal pricing.

So in terms of the margins in '05, you're saying the unit margins in '05 are pretty comparable to '04?

Yes.

Okay. Then turning to Latin America, just wondering if you could talk a little bit about your relationship with BNDES, now that Brazilian restructuring has been done, but I guess there's been news reports that they are suing on the Cemig debt situation. Can you talk a little bit about how things have evolved there and also just run through what is the Cemig situation, any financial exposure to the Company?

We have to let Joe Brandt answer this question because he spent many, many long nights and hours with BNDES. So he's the right person to answer that.

Elizabeth, as you probably know, part of the reason for restructuring the Brazil holdings in the way that we did was to align the interests of BNDES and AES in the holding company, to convert BNDES from simply being a lender to the businesses and interested in the businesses as only a lender would be to making them an equity partner as well.

In the case of Cemig, what you are seeing is BNDES and AES have had a very similar frustration with the Cemig business over the past five years since it was acquired, because we acquired that business thinking that we were going to be acquiring control, and were blocked by the state of Minas Gerais from exercising control. This left both AES and BNDES in the position where BNDES was unable to control the flow of dividends out of the Cemig business in order to pay off the acquisition loans and we were unable to get a return on capital that would come from controlling distributions out of the business.

The situation with Cemig has been that AES and BNDES for about four months have been working together to press Cemig, which has been performing quite well, but retaining most of its free cash flow in the company, to start to pay dividends. This would permit the business to do two things. First, it would provide cash flow necessary for our subsidiary, SEB, to restructure its loan to BNDES because cash would be coming out of Cemig. It would also permit the partners of SEB, AES being one of them, to receive a return on its initial capital.

The BNDES loan to SEB is not recourse to AES. It's recourse to only to SEB. AES, because of the developments that the level of the state of Minas Gerais wrote off most of its investment in the Cemig business. So what we see really is the opportunity to achieve some unexpected upside, and I would look at the steps by BNDES to file a formal claim against SEB as really the beginning of a process that BNDES can use at the federal government to start to put pressure on the state, which has a very big say in the operations of the Cemig business, to begin to let capital be paid out of that business in the form of dividends, which will benefit both us and the bank.

Joe, could you also update us on the Sul debt restructuring?

Sure. The Sul business throughout 2003 was focused upon restructuring three large through debt facilities and then one payable to a Electrobras. The three were a working capital facility of about $10 million, $70 million of debentures. There was a $45 million non-financial debt to (indiscernible) and then a $240 million syndicated loan facility at the holding company above Sul. We were successful in 2003 in negotiating three of the four. Those were settled in the first quarter of 2004. So the working capital facility for $10 million has been restructured successfully. The debentures were restructured successfully last month. And the (indiscernible) payable was restructured successfully about 1.5 months ago.

That leaves a syndicated debt facility of $240 million. We are essentially at the term sheet stage with that group of private lenders. We expect to see a resolution of that facility shortly. I would say there's a second quarter 2004 wrapup of that negotiation.

Okay. And last quarter you mentioned the Dominican Republic, I think, that you had moved the distribution businesses to disc ops, but you had some concerns about generation. Can you just update us on that?

Sure. The situation in the DR is not significantly changed from where it was in the fourth quarter of 2003. The electricity sector is in a crisis that is being driven by the financial sector. Much of the resolution of that crisis is dependent upon the outcome of the elections in mid-May.

We put our distribution company into discontinued operations because it was, frankly, an EBITDA-negative business from the standpoint of being able to pay out to the generating companies. All of the distribution businesses in the DR have been unable to make payments for fuel and energy. This has led the generation companies to accrue receivables to the distribution companies, and there is a history over the past quarter of intermittent interruptions of supply related to the inability of now the gencos to purchase fuel.

It is not a sustainable situation for the island. I expect that we will start to see steps towards resolving the situation post the May elections.

Last question for Barry. Last quarter you talked about for 2004 that EBIT number that you used, I believe was $1.56 billion. I'm just wondering if that is still based upon what your earnings per share guidance, or if there's any change, and the percentages that you gave us, are they roughly the same as what you have been looking at previously?

Yes, they are, Elizabeth. At this point in the year, I think we would hold at that place. We are seeing a little bit of positive movement in a couple of the segments and little bit of negative movement in the Competitive Supply segment because of the higher coal prices. But in general, I think those are consistent numbers at this point.

Okay, thank you.

Leslie Rich with Banc of America.

I wondered if you could tell us what the impact of currency was during the quarter. You mentioned several times that it was a positive impact.

Yes, over the course of the quarter, we had really two impacts -- the appreciation of the currency slightly in Brazil and Argentina, and the devaluation in Venezuela. So the net impact on the margin line is slightly positive year-over-year in the neighborhood of about 8 to $10 million.

Okay. And I noticed that there were no tax sharing payments in your distribution slide. I just wondered was that a timing issue or --?

It is timing. They are made over the course of the year, sometimes twice, sometimes three times, depending on the current year tax situation. But it is all timing.

Finally, on the LNG in the Bahamas, you talked about you are well on your way in terms of permitting. Are your plans -- there are several other computing projects being proposed in the Bahamas. At what point do you really decide whether or not to pull the trigger and break ground?

I think none of the projects are going to be able to proceed until the approvals are received from the government of the Bahamas. That is really the key piece, is to receive that approval. I would not expect that more than two projects would obtain approvals. That's our current thinking right now. So I think you would look it as the first project that gets approval will have a significant advantage in terms of being the first to market.

In terms of our thinking about breaking ground, this has been primarily a development effort that resulted from trying to leverage the experience we got from an LNG receiving facility in the Dominican Republic and looking at opportunities in Florida for power generation. It's turned out the power generation side didn't make sense, but this project would make a lot of sense. So it's likely if we were to proceed, we would be teaming up with a partner to go forward also. But the key thing will be to watch the approvals coming out of the Bahamas government.

Do you have any idea what the timing of that is -- is that in 2004 or --?

I don't, and I would hesitate to give a prediction. What I would refer you to is there have been some articles coming out in the past week that have talked about the possibility of approvals being granted in the next week or so. We have been feeling like that approval could be coming shortly for some time now, so I won't predict that it's going to come in the immediate future, but it does seem to begin close to a point where that approval could be received. The key step was the court approvals, which were received this month. So the next step would be Bahamas. But I would guess you'd expect to see something in the not-too-distant future.

And the project would entail a gasification facility and a pipeline?

Yes, that's right.

And total projected cost would be --?

Total projected cost of that -- just one second -- it would be $750 million total cost.

But you would likely try to get a partner?

Two things we would be doing. One is to obtain financing for this, and we would strive to structure the project so that we would be able to get some non-recourse project financing. And then we would also be looking for taking on a partner on the equity side for that, so that we would not envision putting a substantial amount of capital of our investment, other than what we have put in so far, into this business.

Okay, thank you very much.

Thank you. Tarin Mueller (ph) with UBS.

I was wondering if you can give us some idea of where you would like to see the total holding company debt by year-end, and also what a longer-term goal might be.

Sure. I think as we mentioned at the beginning of the year, our objective for this year, given our expectations for cash and distributions, was to reduce our debt over the course of the year by about $800 million from the beginning of the year. We have done through the first quarter about $350 million of that; about another $20 million subsequent to the quarter. So we are about 370 or so into that reduction of $800 million for the year. The timing will vary depending on cash flows from the business and other amounts, but that is our objective.

So that would get us below $5 million at the corporate level by the end of 2004. Our longer-term objectives, after getting the parent to BB, is to strategically look at the choice of the BBB rating, and I think, as we mentioned before, probably to get to something that would at least equate to BBB ratings -- not guaranteeing the ratings obviously, we need about another $1 billion or $1.25 billion. So something at 4 or slightly below --$3.5 billion to $4 billion would probably be that level.

But our first objective is to continue the current plan, get our parent rating into the BB category. We think we're on a path to continue that by sometime in 2005, and then we will look after that.

Thank you very much.

Maura Shaughnessy with MFS Investment Management.

I have two questions. The first -- obviously, there have been various deals -- (indiscernible), etc. -- which you've been rumored to be interested in. And I was just wondering how you think about the current cost of capital that you have relative to many of the people that you'd be bidding against. And I would assume that would prevent you from doing a lot of these growth investments, at least for the next year or two or three, as you continue to fix the balance sheet.

Second question is, given the returns on capital of the Company relative to the cost of capital, how have the incentive schemes of the Company's management changed recently? I know there's more of an S&P bogey (ph), etc. But in terms of the returns on capital for the Company, how is that driving management's incentive program? Thanks.

I think, as I mentioned when I talked about the growth prospects, as we've looked out in the market, there are a lot of people out there willing to invest money at rate to (ph) returns that we don't find attractive. Even if our cost to capital were lower today because we have been able to delever and reduce that cost of capital, we still wouldn't find those attractive. We really feel like if we are going to make an investment, there has got to be a way we are creating value in terms of being able to add value to the business, turn it around, use the operating experience we gather in other facilities, and use that to increase the returns of the businesses. That's why I think we're likely to stay away from deals that are what I call plain vanilla and teed up (ph) where somebody can just step in and invest money. If the business look like a bond, it is probably not the right place for us to be making investments. So really, independent of what our cost of capital is, I think we will see a hurdle rate that's always going to be in excess of that to make sure that we are actually creating value.

In terms of our incentives, it ties in with that. As you mentioned, one of the things that we started this year was we moved away -- for our long-term incentive program, we moved away from just having stock options as long-term incentive. That's the general trend around the world or at least the United States, and I think it makes sense, because it does get people to focus on a number of things. We really broke ours into three parts. A part that will continue to be stock options. Part of it will be restricted stock, but for the officers of the company, that stock will only vest in the event that we can beat the S&P 500 stock returns over a three-year period. So we have an incentive to essentially get the returns higher, to get the stock price higher.

And then the third part of --

And that clock started January 1, 2004?

The clock started -- I don't know if it was January -- yes, that's right. The other piece which we have, which I think is important, is we look at we have long-term projections and targets that we put together, and we look at a cash value added type of metric that really looks operating income. It's really looking at cash generation of the existing assets. And it's focusing on getting more return on capital out of those assets. We've got $30 billion worth of assets, so if we can get those to perform, that's got significant upside potential. So based on those targets and how we perform over a three-year period on a cumulative basis, that will determine, through these performance units, another form of long-term incentive compensation.

So it's a combination of options which focus on what is the absolute value of the stock price; the restricted stock, which is what is the value of the stock plus beating the S&P 500; and then getting good cash returns on our existing businesses, which would I think get us to continue to focus on improving the cost of capital across the Company.

Great, thanks a lot.

Brian Russo with Criterion Research Group.

My questions have been asked and answered. Thank you.

Tim Colter (ph) of JP Morgan.

Would it be feasible to get a breakdown of what debt was paid down in the first quarter of that $351 million? And the second thing is, with some of the instability that we've seen in Argentina and Chile, how confident are you with regards to getting the $100 million dividend from Gener and really what could delay or prohibit that?

Joe, do you want to talk about the Gener dividend first, so then Barry's going to get his numbers on the debt?

Sure. The projection from Gener was that the dividends received in 2004 would come from the extraordinary dividend paid in the first quarters, as well as dividend from the operating cash flow of 2004 for the year. The dividend paid in the first quarter is currently at a holding company, pending the capital increase of approximately $100 million at Gener that will be required within the next 30 days, concurrently with the retirement of what remains on the Gener convertible bond. The decision point towards the end of May will be whether to reinvest the dividend to solve the capital increase or finance it locally.

In terms of the operating cash flow and the impact of the prices on the gas side in Argentina, we have looked obviously at the effects of the Resolution -- Resolution 27 issued by Argentina -- on the operations of the Gener business, and continue to feel -- and have now about a month's worth of experience -- that this won't have a material impact on the business. So it won't have a material impact on the financial results of the company and its ability to pay dividends over the course of the year.

Of the debt refinancing front, the major components were we repaid $500 million related to our senior secured credit facilities, $75 million related to our first priority notes. We have reissued senior unsecured notes net for $337 million of proceeds. So the $500 repayment net of the $337 million gives us about 163 of net repayments on that factor. We also repaid $101 million of senior subordinated notes, $7 million of convertible notes, and $1 million in trust preferred, along with repayments of unamortized discount premium net of $2 million. So that is the $350 million.

Great, thank you.

This is Scott Cunningham. We thank you very much for participating in the call today. If you do have follow-up questions, please do contact either Ahmed Pasha or myself in Investor Relations. Thank you and good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.