愛依斯電力 (AES) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AES second-quarter financial review conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Scott Cunningham. Sir, you may begin.

Thanks very much, and good morning everyone. Joining me today are principal 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 review today are available on our website at www.aes.com in the investor relations section.

Certain statements in the following presentation regarding AES business operations may constitute forward-looking statements as defined by the SEC. Such statements are not historical facts, but are predictions about the future which inherently involve risks and uncertainties. These risks and uncertainties could cause our actual results to differ from those contained in the forward-looking statements. In addition, AES disclaims any obligation to update any forward-looking statement to reflect future events or circumstances.

We urge investors to read our descriptions and discussions of these risks that are contained under the section "Cautionary Statements and Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2003, as well as our other SEC filings.

This morning Barry will review second-quarter results; Paul will then discuss progress on business topics related to our 2004 goals and business strategies. We will then take questions and answers.

For those of you that have our presentation in front of you, please turn to page three. With that, here's Barry.

Thanks Scott and good morning everyone. Thanks for joining us.

AES today reported strong second-quarter operating results. GAAP diluted earnings per share from continuing operations were 10 cents per share. On an adjusted EPS basis, which we think better reflects our underlying earnings quality, we earned 15 cents per share. This compares very favorably with the adjusted EPS of 5 cents per share for the second quarter of 2003. Overall on a consolidated basis sales growth remained strong, increasing 14 percent to almost 2.3 billion in the second quarter of 2004.

Beginning this quarter we have also provided supplemental information on the key components of sales growth which we think will be useful to investors. Much of this is included on the slide package on our website.

Stronger revenues resulting from both tariff increases in the utilities businesses and the effects of higher wholesale electricity prices in the generation businesses, together with higher demand, especially in the Competitive Supply and Growth Distribution segments, contributed 12 percent of the total 14 percent growth. New projects online during the quarter -- or since the prior year contributed another 4 percent to sales growth, while foreign currency translation effects reduced sales this year by 2 percent year-over-year.

Gross margins showed even stronger comparisons, increasing 20 percent to 648 million for the second quarter of 2004, while also improving across all segments of our portfolio. Gross margin as a percent of sales expanded to 29 percent from 27 percent last year, led by higher tariffs and performance improvements in the Large Utilities and Gross Distribution segments. Operating income increased 24 percent, driven largely by the same on a metal factors.

As the specific result of our deleveraging efforts and subsidiary debt restructuring, net interest expense declined 16 percent year-over-year. Equity and earnings of affiliates improved 10 percent, driven by improvements from our equity affiliates in Canada and China.

Income before income taxes and minority interest declined in the quarter due to foreign currency transaction and FAS 133 marked-to-market impacts, debt retirement gains and the development project write-off. We will discuss this a little more in detail in a couple of minutes. These are considered in the definition of our adjusted EPS.

On a basis comparable to the adjusted EPS results, income before minority interest in the quarter would have been about 230 million instead of the reported 185 million. The difference reflects 2 million in losses during the quarter from early debt retirement and 43 million in foreign currency transaction and FAS 133 losses.

By comparison, last year's second quarter would have been about 57 million compared to the reported 225 million. Here the difference reflects a $20 million asset impairment in the prior year, $84 million in debt retirement gains in the second quarter of 2003, and 104 million in foreign currency and FAS 133 gains last year also.

The effective tax rate of 32 percent is the same as it was in the first quarter, and represents an increase from 29 percent last year. This increase results from greater taxable income associated with distributions from international subsidiaries. This reduced GAAP EPS by about a penny year-over-year for the second quarter.

From a cash perspective, net cash from operating activities for the first half of 2004 was 610 million, declining from 736 million last year. This decline is due to several factors. First, discontinued businesses provided cash from operating activities in 2003 of a positive 17 million, while discontinued businesses this year used 14 million of cash for a difference in total of 31 million year-over-year. Additionally, last year some of our businesses, particularly Eletropaulo and Sul, were operating in a debt restructuring environment. Thereby, they were conserving cash and aggressively managing their working capital numbers. This resulted in a timing difference and larger cash payments during the first-half of 2004 that relate principally to 2003 expenditures for operations and interest paid during the 2004 year. Therefore, paradoxically, restructuring, recovery and returns to normal operation is reflected as a negative variance year-on-year in operating cash flow.

We're also seeing a timing mismatch between when advanced tax payments are remitted to the Brazilian government ahead of when formal tariff approvals, permitting a recovery of these taxes occur in our distribution company. This timing mismatch affects the entire industry, and we along with other Brazilian distribution companies have addressed this with the regulator. We expect to receive recovery approval later this year which will begin to reverse this particular impact on the operating cash flow numbers.

These negative cash impacts are being positively offset by lower interest payments in Brazil in 2004 due to the debt restructurings at the holding company for Eletropaulo, as well as at Eletropaulo and Sul operating company.

Looking to the last half of 2004, we are further expecting positive cash impacts from the 18.6 percent annual tariff increase that was received by Eletropaulo on July 1, 2004 and an inspected tariff increase it EDC, together with continued lower interest expense and lower interest payments.

The full consolidating cash flow schedule showing subsidiary and parent-related cash flow information is included in the appendix to our slides on page 14 and 15.

Of the second quarter net cash from operating activities, 400 million was generated at the subsidiary level. Year-to-date subsidiary net cash from operating activities was 930 million, maintenance capital expenditures for the quarter were 112 million and 234 million year-to-date, largely related to environmental improvement projects at IPL that benefit from accelerated regulatory recovery.

This results in free cash flow for the quarter net cash provided by operating activities less our maintenance CapEx of approximately 96 million and 376 million year-to-date for 2004. This is also summarized in the appendix on page 19.

As with earnings and operating cash flow, we expect free cash flow to be more weighted to the second half of the year.

Gross capital expenditures were 75 million for the quarter, primarily related to projects in Spain, Hungary and Cameroon, each of which are largely externally financed projects.

During the quarter we also reduced parent debt by 95 million. And consolidated cash and cash equivalents at the end of June was 1.25 billion.

Distributions from subsidiaries remained on track as we received 302 million in the quarter, comparable to 300 million received in last year's second quarter. This brings us to $506 million year-to-date. We have provided in the appendix to the slides on pages 11 and 12 detail of the subsidiary distributions ranked by size and summarized by segment and by region.

Now, if you will please turn to page four of the slide, I'd like the first draw your attention to note at the bottom of that page. Last quarter we formally reintroduced reporting of pro forma EPS, which we call adjusted earnings per share. Our intention was to reflect as best we can what we consider to be items that can historic distort the underlying earnings qualities and comparability of the business year-over-year and period-over-period.

Having worked with the definition, we have refined it slightly in the second quarter to better focus on key variables and not all variables in the calculation. As a result, we have shown pro forma currency transaction effects for only the three relevant currencies, those of Brazil, Venezuela and Argentina, where we have significant nonfunctional currency debt. Also, we include only significant asset gains or losses as pro forma items and we use specific tax rates appropriate for each major pro forma item. Overall, we think this is the better presentation and intend to use this going forward.

This refinement does not change the adjusted EPS reported for the first half of either year, though there were some minor reallocations. It does result in an increase in the full-year 2003 adjusted EPS of 3 cents to 56 cents for the year. These changes are detailed along with the 2003 quarterly adjusted EPS in the appendix on page 18.

With that background, please go back to the adjusted EPS analysis on page four.

Currency transaction losses of 4 cents and FAS 133 losses of 1 penny hurt this quarter's results, primarily because of the devaluation during the quarter of the Brazilian real, a portion of which was again reversed after the end of the second quarter. This means the adjusted earnings per share were 15 cents compared to the 10 cents reported as diluted EPS from continuing operations for the second quarter of 2004.

By comparison, last year's second-quarter results benefited significantly from currency transaction gains of 15 cents and debt retirement gains of 9 cents. These were partially offset by a 3 cent negative impact of FAS 133 market-to-market and a 2 cent loss on the write-off of a development project in Honduras.

The net effect was the GAAP diluted EPS from continuing operations of 24 cents to an adjusted EPS of 5 cents for the second quarter of 2003. Again, that compares favorably to this quarter's EPS adjusted of 15 cents.

With that I'd like to review performance highlights for each of our core segments, starting with the largest, Contract Generation if you turn to page five of the presentation.

In the second quarter Contract Generation sales increased 18 percent to 868 million. This increase was led by contract price escalation and increased capacity payments, representing an overall volume and price contribution of 10 percent of the growth year-over-year. In addition, new projects online in the Middle East and Asia and a smaller one in the US added an additional 8 percent to sales growth.

Segment gross margin increased 14 percent to 326 million, reflecting the contribution from higher prices and demand, as well as new projects. This was partially offset by higher costs for fuel and purchased power in Chile, which led to the 1 percentage point decline in gross margin as a percentage of sales. For the quarter, Contract Generation contributed 38 percent of consolidated revenues, slightly higher than last year, and 15(PH) percent of consolidated gross margin, slightly lower than last year.

Income before income taxes and minority interest for Contract Generation increased 46 percent to 208 million. On an adjusted basis, segment income before income taxes and minority interest after $4 million of foreign currency transaction and FAS 133 gains was about $204 million. Last year, after a $20 million development project write-off and a $4 million foreign currency transaction and FAS 133 losses adjustment was 166 million rather than 142 million reported.

Looking ahead to the second half, we expect the contribution of new projects to decline due to the timing of when projects were brought online later in 2003. We also expect some continued effect in the third quarter from gas interruptions in Chile, while we expect availability trends to improve in the second half, which should help our overall margin.

Turning to page six, in the Competitive Supply segment, representing generation plants without long-term contracts, sales grew 27 percent, led by significant growth and Argentina, reflecting the impact of both economic recovery and governmental policy on our hydroelectric and coal-fired capacity there. Our thermal generating plants in Argentina have benefited from the policies which have negatively impacted our generation businesses in Chile. Volume and price combined resulted in a 15 percent contribution in sales growth. Two new hydroelectric projects in Panama added 11 percent on top of that, while favorable foreign currency effects, principally in Kazakhstan, helped sales growth by 1 percent.

Gross margin increased 18 percent year-over-year, driven by sales growth and partly offset by higher costs associated with higher scheduled maintenance costs and coal prices in New York. This also impacted gross margin as a percent of sales, which fell 2 percentage points to 21 percent in the quarter. For the quarter, Competitive Supply contributed 11 percent to consolidated revenues, slightly higher than last year, and 8 percent of consolidated gross margin, slightly lower than the prior year.

Income before income taxes and minority interest for the Competitive Supply segment fell 3 million to 38 in the quarter from 41 million last year. This reflects the impact of foreign currency transaction and FAS 133 amounts, which favorably affect last year's results while unfavorably impacting the current quarter. On an adjusted basis, after adding back $8 million of foreign currency transaction and FAS 133 losses, income before income taxes and minority interest was about $46 million for 2004. This compares to about $30 million for 2003 on the same basis, excluding 11 million of foreign currency transactions and FAS 133 gains.

Looking ahead to the second half, we anticipate strong Argentina generation performance to continue based on favorable economic trends and government policies, and for margin to improve somewhat in New York in the seasonally stronger second half.

As discussed on page seven, sales increased 7 percent in the Large Utility segment to $834 million. The increase in revenue is primarily attributable to the sales growth at Eletropaulo in Brazil and at EDC in Venezuela, and was driven by tariff increases in the third quarter of last year in Brazil and the first quarter of this year in Venezuela. In addition, as an element of our performance improvements Eletropaulo achieved higher sales from reducing commercial losses. Demand growth was modest at EDC and declined slightly at Eletropaulo due to migration of certain low margin commercial customers. The IPL business in the US benefited from higher weather-related demand and increased wholesale power revenues. For the segment overall, volume and price together contributed 12 percent to our sales growth in the quarter. Foreign currency effects at the non-US utilities adversely affected sales growth by 5 percent.

(indiscernible) gross margin increased 27 percent or $207 million in 2004, attributable to improvements at Eletropaulo and IPL that I just mentioned. Gross margin as a percent of sales increased to 25 percent from 21 percent a year ago, also reflecting improved performance at Eletropaulo and at IDL. In aggregate, Large Utilities contribute 37 percent to consolidated revenues, slightly below last year, and 32 percent of the consolidated gross margin, which was an increase from 30 percent in the prior year.

Income before income taxes and minority interest increased to 93 million from 91 million in last year's quarter. Again, adjusted for the effects of $22 million in foreign currency transaction and FAS 133 losses, income before income taxes and minority interest for 2004 second quarter adjusted was about 115 million. This compares to about 17 million in the 2003 quarter after adjusting for 74 million in gains from foreign currency transaction and FAS 133 effects. This reflects the significant benefit to the Brazil restructuring, including much lower interest expense, as well as the performance improvements during the year.

Keep in mind these improvements were also significantly offset by our lower ownership in Eletropaulo as a result of the restructuring. We own roughly one-third of the economic benefits of these improvements at Eletropaulo, reflecting out reduced ownership position in 2004.

Looking ahead to the second half, we anticipate that the 18.6 percent Eletropaulo tariff increase announced July 1st will add significantly to sales and aid gross margin in the second half. We expect to continue working with the regulatory authorities in Brazil on the recovery of pension costs and the prior period impacts from the 2001 power rationing program, in addition to addressing the tax collection procedures I mentioned earlier. In EDC we're anticipating a second tariff increase during the second half of the year as is the normal practice, though the timing may be later than usual due to the August recall vote.

Please turn to page eight where our Growth Distribution segment sales show as increasing 11 percent to 313 million in the second quarter of 2004. Higher demand and tariff increases in Ukraine, Brazil, in our Cameroon utilities drove most of these gains, which totaled 10 percent in aggregate for price and volume combined. Foreign currency helped sales growth by 1 percent, principally in Cameroon.

Gross margin increased 38 percent from a year ago to 62 million for the quarter compared to 45 million in 2003. This largely reflects the higher tariffs and performance improvements in our Cameroon business. We've made good progress there improving distribution efficiency and better utilizing the hydroelectric system to reduce fuel consumption. The Ukraine business -- actually the businesses -- have also eliminated almost 500 jobs and lowered power losses significantly, while benefiting from strong demand growth. Overall for the quarter Growth Distribution represented 14 percent of total revenue, similar to last year, while the margin expansion increased segment contribution to 10 percent over our consolidated gross margin, up from 8 percent in the second quarter last year.

Income before income taxes and minority interest from the Growth Distribution segment declined in the quarter from 57 million to 8 million. However, on an adjusted basis, income before income taxes and minority interest was about 25 million due to 17 million in foreign currency transaction and FAS 133 losses in 2004. Similarly, last year's quarter would have been 21 million after adjusting for 36 million in foreign currency transaction and FAS 133 gains.

Looking ahead to the balance of the year, we expect continued solid sales growth and margin contribution led by the Ukraine and Cameron businesses. Foreign currency transaction effects in Brazil are expected to continue to affect segment income before interest and taxes comparison (indiscernible).

Finally, we remain on track with our EPS estimates for the year of diluted earnings per share from continuing operations of 62 cents per share for the year, excluding the 3 cent per share cost associated with the Chilean business restructuring as previously disclosed, and also with respect the adjusted EPS guidance of 64 cents per share, reflecting an additional net adjustment of 2 cents per share in foreign currency transaction and FAS 133 impact. As we look forward to the remainder of 2004, we have seen improving trends through the first half of the year, particularly with respect to revenue, and more importantly I believe margin and margin percentage improvement.

In addition to continuing our focus on extending these benefits across our portfolio, we're also focused on potential risk factors we see in the near-term horizon. One item, as I have previously mentioned, is the implementation of the anticipated tariff increase at EDC.

More significantly, we are watching next month's government changes in the Dominican Republic and their response to the electricity crisis currently plaguing that island. As we have mentioned previously, the situation has put significant pressure on our generation businesses there, as well as at ASA (ph), the distribution business we determined to sell near the end of 2003, which as a result has placed EdeEste (ph) in the discontinued operations segment of our income statement.

Our team in the Dominican Republic has been working tirelessly with incoming government and the multilateral financial organizations such as the IMF to address the current working capital deficit in the electric sector as there is insufficient cash to fund the generation company. As a result, we and other generations have curtailed power sales to the distribution system to avoid building up further significant accounts receivable.

Currently, our consolidated accounts receivable related to Los Mina and Andres, our generation businesses -- consolidated generation businesses in DR --totaled approximate $94 million at the ended June. And our remaining total net investment in that generation business, which includes the effect of the receivable exposure is approximately 500 million.

We've been assured by the new government that they consider this their top priority and will take the necessary steps to restore equilibrium to the sector, but the issue remains unresolved as of now and on the top of our watch list.

Thanks for listening to us today. And what I would like to do now is turn it back over to Paul Hanrahan.

Thanks Barry. I just have a couple of comments today.

First, we had a strong quarter. As Barry mentioned, operated income and the associated margins are up. We are really beginning to see the positive impacts of focusing our operations and running our businesses better. And it's not just looking at the cost side. As you know, the revenues and our tariffs are up this year, and on the revenue side -- in a generation business it's tied to having lower forced outage rates which gives you the opportunity to run your plants more. On utilities side it's a combination of reducing your commercial losses which translates to increase revenues. And also with respect to increased tariffs, a lot of that is linked to the quality of service, which has been a big focus of the integrated utilities group.

We have also seen continued balance sheet improvement. Year-to-date we've reduced our consolidated debt by $1.3 billion, and that's consisting of $450 million at the parent level and $850 million at the subsidiary level.

I would also like to comment on the impacts of the gas supply reductions to Chile from Argentina and how it's affected our businesses. Here we see the advantages of being diversified -- having multiple plants with multiple fuels in the southern cone -- and that's helped a lot.

As Barry mentioned, there was a slight negative impact on Gener, but this has been offset by the positive in both Argentina and Brazil as they have had more non-gas-fired generation. The net result for us is expected to be slightly positive overall.

I would also like to just talk briefly about development opportunities. Barry highlighted discretionary investment in Hungary, and this really is an example of two successful platform expansions which I think we will be seeing more of in the future. And these are opportunities for our existing installed base of businesses.

In this case we had the conversion of two brown coal plants to a mix of biomass, which in this case is wood chips and sawdust, and cleaner, higher-quality coals. These are very creative projects put together by our people which extend the life of these two plants, which consist of about 200 MW capacity; two plants that now have a portion of their output under longer-term contracts that are based on attractive prices established to encourage renewable generation such as biomass in Hungary. The level of investment to do this was not that great, but the returns on these incremental investments are fairly high. They also result in a reduction of about 75 percent of the SO2 emissions.

I think these are just two examples of the investments that are taking advantage of the platforms we have and talented people we have across 27 countries. And these are really unique opportunities that others are not able to replicate.

With that I'd now like to turn the call over to questions. Operator, if you could open it up for questions?

(OPERATOR INSTRUCTIONS) Elizabeth Parrella, Merrill Lynch.

Looking at the results in the first half, and then thinking about what you earned last year in the second half, it would seem that even if your second half this year were only about flat your guidance would be achievable. And yet I think your comments don't really lead us to come away thinking the second half would only be flat. So I just wanted to get a feeling for how conservative is the earnings outlook at this point. And then also more specifically, I think you started the year saying you have about 7 percent sales growth. And I think in the first half you're at 14 percent, is it? I was hoping that you might be able to comment on those questions.

Those are good questions.

On the first issue, we have seen significantly positive trends in the first half of the year, and we hope and believe that those will continue. But as I highlighted I think in my comment, we've got a couple of items which could have an effect on us in the second half of the year, which causes us to leave our guidance at this point where we see it.

The Dominican Republic is an area of significant focus. That receivable represents about 9 or 10 cents a share in terms of total numbers. And although we believe it will ultimately be recoverable, that's a significant issue for us, and is not an item that would end up being pro formaed out in the pro forma guidance, and would affect our GAAP. So that's one item that's affecting us. And we are also counting on that tariff increase in Venezuela which we believe will come, but hasn't factored in.

So I think hopefully we're conservative in our guidance in that both of those things that we're focused on from kind of a risk perspective don't happen, and that continued operating trends work well. But I think that's why you see sticking with the current guidance is at least our best view at this point.

There is a comment on the revenue growth. The sales growth number at 7 percent looks particularly conservative right now.

Some of that, it does look conservative right now. Part of the factored -- the sales growth doesn't always drop to the bottom line. We've had improvement on the margin side, but not all sales growth drops to the margin line. We've seen because of the stronger currency in Venezuela than we expected, as well as some increased pass-through costs in Brazil and other places, that the sales growth is up, which won't necessarily translate into bottom line growth. So I would expect the sales growth number is part of the same conservatism in terms of how we're viewing the rest of the year.

If I could just ask one follow-up question? You highlighted in the discussion of the Large Utilities the benefits you're seeing to gross margin, and I believe operating income from the debt pay down, Eletropaulo, the overall debt restructuring. But clearly your economic interest has been reduced. How should we think about the bottom-line impact of that deal this year and how does it change over the next few years?

The impact of reducing interest expense doesn't show up on the operating income side. It drops on the interest line. So on an overall basis interest is down significantly because of that swap. And we have reduced our ownership interest.

I think from a comparison standpoint, it's hard to draw the line and say what would 2004 have looked like if we had not restructured Brazil. It could have looked like no ownership of Eletropaulo, and so the differences could be fairly dramatic. But it's fair to say that I think on an overall basis we do see improvement in that business, and we probably are more encouraged about it than we were six months ago.

So in general terms it's performing better than we expected for the year. And the debt restructuring has been a success in terms of bringing the capital structure into line and enabling us really to run the business in a way that best fits the tariff profile and the capital structure.

Thank you.

Richard Hayden (ph), Omega Advisors.

Could you just share with us some thoughts on not asking specific numbers but how you see the GPM gross profit margin evolving in the year '05 and '06?

We haven't put any real projections out for next year in terms of 2005 or 2006. On an overall basis the growth rates we've talked about in the neighborhood of 13 to 19 percent in our base case remain there for us over the next five years. And we would expect that that trend over that five-year period would get us to margins probably closer to the 31 percent range, as we've mentioned.

So we expect them to improve, both in an absolute dollar sense and a percentage basis. That will vary some quarter-to-quarter, but on an annual basis we would expect them to continue to improve and move towards that kind of 31 percent range by the end of 2008.

I do think that that's -- a lot of people have asked how do we see performance improvements at AES. I really think that's one of the best ways to see from a P&L perspective what's happening to the performance of the business. We do have some factors, as I mentioned before, that will affect sales and margins equally and represent pass-throughs. But what really matters is growing that margin in terms of dollars from the existing portfolio and improving it in terms of efficiency by increasing that percentage.

Can I ask you another question?

Sure.

Your debt reduction goal for '04-'05 and specifically what is your current position on the Series 7 and the Series 3 Trust Preferreds?

Our goal for debt reduction remains as it has been, to get 800 million this year and about 600 million next year. And we're on the path to do that.

We don't take any specific position on the two series of Preferreds that you mentioned. We have, as you'll notice from the numbers, reduced that this year. Some of it has been done by replacing small amounts of debt with equity. But no specific position on the individual secured.

Thank you.

Ali Agha, Wells Fargo Securities.

A couple of questions. Paul or Barry, could you update on where you are on the cost reduction profit improvement program at the end of the quarter and remind us what the goal for the year is?

The goal for the year is we've set for ourselves is a run rate of about $200 million. And the way we're thinking about that is -- the way I think about it, on a macro level it is really focused on looking at the margins and what's happening to the margins in terms of our operating income, both absolute and percentage terms.

And it's really coming from a number of things, both on the revenue side and the cost side. And within each business we spend a lot of time going through and figuring out where the most critical KPIs (ph) for each business. And for each one of our businesses they've got three to five that they really focus on. That's what we track sort of at a micro level. And we focus on the ones for each business that are most important to them. And they're going to vary from business to business.

I think the way you can track it, and the way we're going to be held accountable, is really looking at the margins and what happens there. But in terms of getting to the $200 million, we're on track to do that.

What was the number at the end of June quarter, Paul?

The number at the end of the -- in April it was 120 million. And a rough number now would be roughly 140 or so.

Second question. The 15 cents of pro forma or adjusted results that you reported quarter, how does that compare to your own internal budget in terms of expectations?

We don't really publish our internal budget, Ali. But our guidance was based on our budget for the year, and from time to time we have variations in when outages occur and other things. So in general it was a good quarter. We're happy with the results. We still see some work to do to continue improving operations, but we're encouraged by what we saw for the quarter.

I guess what I'm getting at, Barry, is through the first half are you on plan, ahead of plan, slightly behind plan? Just qualitatively could you give us a direction of how things have been so far?

I think that for us our plans continually change with how the business results change. So you're not going to get me to say how we compare to our budget that was set seven months ago, which is quite a while. Our plan continually is updated for what is really happening in the business and what we think we can achieve.

Last question on Venezuela. Could you remind us what is the tariff increase we should be looking for at EDC in the second half? And also, the view on the ground that you are hearing on the impact from this recall election?

I don't remember off the top of my head what the expected tariff increase is. Oftentimes what happens in EDC is that there's a negotiation between the price of fuel in the tariff increase.

In terms of the situation in Venezuela, I think -- and this is what I think Barry is highlighting in his comments with respect to the uncertainty of the next six months -- the biggest impact to us I think is the timing of getting this tariff increase. When you're in the midst of a recall election it could delay that tariff increase, and that's probably one of our larger concerns looking ahead the next six months. But aside from that, I don't see any impacts on us with what's going on there. It seems to be progressing in an orderly fashion.

Paul, just to clarify, under normal circumstances when should that tariff increase come through?

They happen two times a year. It would be the beginning of the year, January 1st; July 1st. Typically there's some lag of several weeks in getting that done. But as I mentioned, I think this with the recall election you might see that slip a bit.

Thank you.

David Silverstein (ph), Merrill Lynch.

You mentioned that you're more or less online with your financial targets. You spoke only with respect to EPS. Could you talk with respect to distributions from subsidiaries for this year for the second half in meeting your $1 billion target, as well as '05?

We haven't given any '05 guidance at this point in specifics. But with respect to '04, we're on track to do the $1 billion in terms of the parent cash flow distribution from subsidiaries, and would expect that -- and there's detail in the package that shows kind of where we are with respect to individual businesses. We have hit 506 million year-to-date and we would expect to hit our target by the time we get to the end of the year.

You had laid out earlier the distribution of contributions that you expected from various businesses. Has that mix changed materially at all? And also, for potential downsides on the tariff increase for EDC in Venezuela, would that affect the $34 million that you expect to receive during the second half of the year for EDC?

On page 11 of the package you'll see we've laid out the actual distributions through the second quarter, and in general terms they're in line with our expectation. For the most part we've gotten to 100 million level of Gener. We are hopeful that we can do some additional cash flow out of Gener by the end of the year now that the dividend restrictions have been released and we're operating on a more efficient capital structure there. And there's a couple other variations in that mix. But we don't see any dramatic change in those numbers through the course of the rest of the year other than (multiple speakers)

And if you have a disappointment, though, on Venezuela with respect to the tariff would that impact your 34 million you had forecasted you would get second half based on what you have done first half?

It might have some effect, but not on the full amount. It's really more associated with getting financing done and appropriately structured in Venezuela, which seems to be going well but are not completed yet.

My liquidity number for the quarter was much lower than what you guys came out with. I have a feeling it might had to do with some timing and maybe with respect committed investments or things like Sul and Gener. What have you announced but not yet funded in terms of these various packages or restructuring that you would expect to do during the third or fourth quarter?

I think in general we're finished. We're through that exercise --

What I mean is that would any of the cash have hit the third quarter, though?

No, no significant amounts from the restructurings. We do have some debt financings we're working on existing projects that could potentially add some additional cash to the parent over the course of the third and the fourth quarter from financing proceeds, but nothing in terms of significant restructuring.

Just one quick one. In your parent cash flow breakdown you had 50 million of other that was incurred. I don't know what that is.

It's spread out over about 30 different businesses, but it's generally online with where we expect. That category in total, looking forward through the rest of the year, may be anywhere from our original expectations to 10 percent less. But in general that category is on track.

Thank you very much.

Annie Tsao, Alliance Capital.

A couple of questions, if I may. First of all, can you talk about your pension, whether you're under-funded? I remember at the end of '03 I think you had about 1.3 billion under-funded. And also talk about the assumption that you use for the pension. I think it is a little bit aggressive versus an industry. Do you have any intention to change that?

Second question has to do with -- Paul, you recently I think exercised some of your option, and if I may ask why you don't want to keep it and you sold it?

Let me address that question first, and Barry will talk about the pensions.

Yes, I had some ten-year-old options which were expiring. They were options -- I think their price was about $8.40. So as they were expiring I exercised those. You will probably see a few others in the Company as the ten-year options come due -- they are slightly in the money, and you'll probably see people going ahead and exercising them. But these aren't any of the recent options that we've received.

Barry, why don't you cover the pension question?

You had two questions. One was the under-funded, and most of the under-funding, as you know, comes from the Brazilian business at Eletropaulo where we in the privatization inherited a fairly significantly under-funded pension and have been continuing to fund it accordance with the government's regulation.

We have also been seeking some tariff recovery for some of that initial under-funding that came in the privatization, which has not been successful yet. But part of that is for employees that are not part of the Company. And we're not part of the Company. So most of that under-funding is coming out of Brazil.

In the US I think we're fairly typical for the funding levels, which is primarily at IPL.

So the significant pensions are at IPL and Brazil. They aren't obligations of AES, the parent. So they are individual obligations of those individual subsidiaries.

The funds have been performing reasonably well. And probably the rate in terms of expectation for future investment looks a little high, but you have to remember that that is a rate related to returns in the Brazilian market, not the US market, primarily associated again with that Eletropaulo pension. I think in overall terms it's reasonable for the market in which that pension resides. And we feel comfortable, at least at this point, that it's a reasonable view of the future. Obviously it's a long-term obligation and one that will continue to be funded as we move it forward.

Can you also talk about -- give a little bit of color on the Dominican Republic in terms of timing? What kind of timing are we expecting?

Joe Brandt, who heads up the utilities group will answer that question.

The new government will take control next month in August. The government has a team that it put together as part of the transition to the change in power. That team has been in touch with the sector representatives in the private sector on electricity side, as well as the multilaterals with respect to solving electricity crisis on the island.

We expect to see some pretty intense efforts between the private sector, the new government, and the multilaterals beginning formally when the new government comes to power next month. And I would expect the third quarter and fourth quarter to be a time of intense work between those three parties to address electricity needs of the island.

Thank you.

Lee Cooperman, Omega Advisors.

Just one simple question, and one that you are not going to answer. But the share count has been persistently rising. On April 30th at your last SEC filing you were 637.2 million shares outstanding, and I see the diluted count in the June quarter was 643 for the quarter; for the six months it was 638. What are the actual shares outstanding now? And what is the kind of annual option creep that results from grants? And what in the capitalization or the way of convertible securities that are convertible anywhere near, let's say, the current market? Let's say up to $15, if any? That's question one.

Question two, Elizabeth Parrella asked this and my partner Rich Hayden (ph) has been beating it in my head for four months now, telling me how the guidance makes now sense. Really if you look at your hand out, the guidance would seem to be very low. I understand your official guidance is 64 cents, but you're basically if you take where you're ahead year-to-date versus last year, you're I think 56 -- 14 sense ahead of the 56 cents of last year. The adjusted EPS of last year was 56 cents. Your 14 cents ahead already year-to-date, so that gives you like a trailing 12 of 70. And then I read all the qualitative comments in your hand out, and 9 out of 10 of the comments are constructed in terms of the outlook. I am just wondering -- I guess there's some virtue in conservatism, particularly given what you guys have been through the last few years, but is it simply conservatism or there something you know about that I ought to focus in on?

So two questions. First one is relatively easy. Actually, both are easy.

Good questions. Let me just take the second one first because Barry is getting information here.

I would not say it's really conservativism as much as it is just we're trying to be prudent about recognizing the uncertainty that we face in a couple of areas with respect to our businesses where it could have a big impact on the results at the end of the year.

So as we look at our guidance, you've got a situation in Venezuela, situation in the Dominican Republic, which are significant. And then when you look at our GAAP numbers, we still have issues related to what's going to happen with currency. So I think taking all that into account, I think what we're giving as guidance is prudent.

If things are going in the right direction next quarter I think we'll be a better position to evaluate whether it would make sense to increase guidance. But based on what we see now, it's really not trying to sandbag or be conservative. It really is an attempt to just be prudent in terms of what we see until we get more -- better views on where these various events could head.

So I know that's not going to completely answer your question, but that's really what we're trying to do.

That's reasonable.

Now Barry will address your other question.

To hit some of your points, outstanding shares -- actual outstanding shares at June 30th were 645,264,073.

The increase in the diluted number that happens year-over-year continues from a couple of factors. One is we did do an equity offering last year in June, which was not fully in last year's numbers, which now gets reflected in this year's weighted average. There is some additional diluted shares that do come from the outstanding options using the treasury stock method because of the increase in the price of the stock. That does have some marginal impact, although that will be reducing as we continue to move forward because our option program has been reduced in terms of its overall magnitude in the plant and we have got restricted stock and other factors which won't factor into those numbers. But we are expensing our options now on the expense side. So you see some of that effect in the P&L. So that number is going to move around some with respect to the change in the price of the stock.

And then finally, the other item that does have some effect, as we've mentioned, is we have done some repayment of debt over the last year with some debt for equity swaps to have an effect on that number.

Are you still doing debt for equity swaps given the current balance sheet and the current price of stock?

We've done some selected ones, yes.

So how should one interpret that basically, that you think your stock is adequately priced?

What we do is we look at the stock price relative to the price we can get the debt back and the yield we can get on those debt securities. So I think it's very selective, and you're probably seeing less than you would have seen otherwise. So I think it's just very selective where we see opportunities to do something that makes sense. You may not see much in the future; you might see more. depending on what happens in terms of debt prices.

I would think with the free cash flow you're generating where the parent company debt is now that probably that should really not be a strategy you use anymore.

It might be. I think you've got a good point there. And it's something we've been probably scaling back on a little bit as a result of that.

Thank you.

Greg Orval (ph), Lehman Brothers.

I had two questions. The first one relates to the receivable in the Dominican Republic. I was wondering if there's any particular milestone we should be watching on that process. And then secondarily, what's the way to think about the rate relief that you're getting in Brazil in Venezuela? Should we look for it to drop to the bottom-line? Or is that just sort of to cover inflation and creeping costs?

Joe is going to cover the first one, and I will hit your second question.

On the Dominican Republic, there won't be a particular point in time where you will look to for a digital (ph) answer that it is being resolved appropriately or not. You will want to pay attention to the process. I expect it to be a process that's fairly well covered, as the crisis has been on the island so far this year. And it will be the product of the negotiations between the electricity companies, and the government, and the multilaterals.

On the second question, the rate increase really is a cash-on-cash rate increase, so in affect the tariffs that are collected. The effect is not directly tied to a drop to the bottom-line because we are in part collecting in cash some of the tariff items that were incurred in the prior year for increased power costs or increased taxes, and then also recovering an estimate of current year costs which may differ from time to time. So there is the year-on-year deferrals.

But it does have a positive impact on cash flow. It has a positive impact on earnings, some of which is recognized in the prior year because we have basically accrued it as a receivable from our tariffs. And some of it is collecting cash a little in advance of when it shows up in the earnings. So it bounces around a little bit. But it does have an a positive effect on the overall earnings and margins, but not directly tied to 18.6 percent.

Thanks.

Ryan Watson, Stanfield Capital.

Just on the eastern energy side, can you just talk a little bit again about that 1 million. I believe those are all the coal plants in New York. Please correct me if I'm wrong. But can you talk about what your inventory situation is looking like there and how you have hedged coal purchases for the foreseeable future?

Distributions in eastern energy basically are done semi-annually in the first quarter and the third quarter. So there's a small management fee in there in the second quarter, but that's what that represents. And we have seen some increases in coal costs there because of market inactivity. What we do is we execute, and when we hedge revenue side we also lock in the coal side. We are I think this year remaining about -- John you (multiple speakers) want to cover it?

This year we're 85 percent hedged both on electricity and coal, so we're buying roughly 15 percent of the coal in a spot market, and it is more expensive than the ones last year.

But offsetting that in New York, the businesses are running very well. In fact, in the second quarter the overall availability was 97 percent with our biggest plant, Somerset, having the equivalent of a perfect game in the second quarter with 100 percent availability. So while we saw some reduction in gross margin percentages, gross margins actually went up quarter-to-quarter.

What is the situation? Where are your inventory days and how much are you hedged for '05?

We're hedged about 80 percent for '05. Inventory will actually ramp up a little bit through the course of '03. We have a little bit of higher inventories than we had going into the winter than we did last year. And we're having success with that. There have been, as you know, some difficulties with the railroads, but they're serving as well and we're getting all of our supplies on schedule.

So is it like 20 to 30 days of coal?

It varies from plant to plant, but yes in that range.

You guys aren't going to hit those for PRB coal are you? Are you sticking with just --?

You probably remember 80 percent of our capacity in New York is fitted with flue gas desulphurization (ph), unlike the other coal generators in the state. So we can burn the local coal. We also burn a mix of petroleum coke in our plant.

Thank you.

At this time I would like to turn the floor back over to the speakers for any closing remarks.

Thanks very much for joining us today. Please do contact either Ahmed Pasha or myself in investor relations for any follow-up questions you may have. Thank you.

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