愛依斯電力 (AES) 2004 Q3 法說會逐字稿

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

Good morning, everyone. Welcome to the AES third-quarter financial review teleconference. Joining me today are principal speakers Paul Hanrahan, President and Chief Executive Officer, and Chief Financial Officer, Barry Sharp. 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's 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 events or circumstances after the date thereof. We urge investors to read our descriptions and discussions of these risks that are contained in the section "cautionary statements and risk factors" in the Company's annual report on Form 10-K for the year ended December 31, 2003, as well as our other SEC filings.

This morning Barry Sharp will review third-quarter results and our 2004 financial guidance. Paul Hanrahan will then add his comments. We will then take questions and answers. For those of you that have our presentation from the website or that we sent you directly, please turn to Page 3. With that, here is Barry.

Thanks, Scott, and good morning, everybody. As we reported earlier this morning, AES continued its strong operating performance and results for the year with sustained revenue and gross margin growth for the third quarter of 2004, and we are on track for a good fourth quarter. Accordingly, we have raised our full-year revenue and invested earnings per share guidance which I will talk about in detail later in the call. On a GAAP basis, reported EPS from continuing operations for the third quarter of 2004 was 20 cents per share, an increase over 2003 of 10 cents per share. Excluding the impact of 75 million of asset impairments last year, this quarter's EPS from containing operations was roughly unchanged year-over-year. This quarter's results significantly higher operating performance offset by 2 factors. First, an increase in our effective tax rate due to distributions from and earnings of our non-U.S. subsidiary -- improved distribution from those businesses. And second, a reduction in our ownership percentage in Brazil and some of our Middle Eastern businesses due to the successful restructuring and sales transaction after Q3 2003.

Adjusted earnings per share which is a non-GAAP financial measure is, we believe, more reflective of our underlying earnings performance, and was 21 cents for the quarter compared to 26 cents per share last year. As a reminder, adjusted EPS excludes the impact of gains and losses under FAS 133, foreign currency transaction impacts from Argentina, Brazil and Venezuela, recourse debt retirements and significant asset impairment. The comparisons were positively affected by improved operating results which we will cover in a minute, and negatively affected by the effective tax rate increase in the reduced ownership positions I just mentioned. The combination of the tax rate increase and minority interest increases had the impact of reducing adjusted earnings per share for the third quarter of 2004 compared to 2003 by approximately 7 cents per share. More significantly, though, as Paul mentioned in the press release, on a year-to-date basis adjusted earnings per share has increased approximately 16 percent to 52 cents per share, up from 45 cents from 2003.

(indiscernible) through the consolidated P&L, revenue growth continued for the quarter, increasing 9 percent to over 2.4 billion in what is our seasonally strongest quarter. This was driven by the effective execution and implementation of tariff increases in our large utilities and growth distribution businesses. It also reflects our electricity prices in the contract generation and competitive supply segment, with further increases driven by higher demand in the growth distribution and competitive supply segment. These generation plants online in the contract generation and competitive supply segments accounted for 2 percent revenue growth. This was offset by a 1 percent reduction arriving from negative foreign currency translation effects year-over-year.

Gross margin also showed strong growth that was generally consistent with the top line, gaining 8 percent to 731 million from 676 million last year. Gross margin as a percentage of sales also held steady year-over-year at 30 percent, thereby contributing to the improvement in both gross margin and gross margin dollars; this despite some margin pressure in the large utilities. On a year-to-date basis, gross margin has improved 15 percent by $270 million to 2.1 billion, while also expanding on a percentage of sales basis by 50 basis points to 29.7 percent. As Paul mentioned in the press release, gross margin is the most relevant and effective financial measure to see the impact of our long-term efforts to continuously improve operating performance and efficiency across our entire portfolio. We have made significant progress in these efforts, and they continuing with our efforts focused among other areas on improving our planned availabilities while reducing our core (indiscernible) rate, reducing non-technical excess (ph) losses in several of our distribution businesses, and expanding the benefits of global sourcing.

Interest expense fell 30 million for the quarter and 95 million for the year-to-date, about 6 percent in both cases. This reflects continued progress with debt reduction, which was offset in part by financings related to new operating businesses in 2004. We expect favorable interest expense reductions to continue in the fourth quarter with some improvement in interest income.

Minority interest which reduces after-tax earnings also increased $16 million due both to improved operating results and to increased minority interest in several of our Brazilian businesses due to the successful restructuring completed in the first quarter of this year and the sale of a minority position of our Middle East portfolio late last year.

Our effective ownership position currently in Eletropaulo was approximately 32 percent as compared to approximately 70 percent in 2003. As I mentioned earlier the third-quarter 2004 effective tax rate of 30 percent is higher than the rate for the same period of 2003 which was 25 percent. This increases to due to U.S. taxes on additional and improved cash distributions from and the earnings of some of our foreign subsidiaries. As a result, the effective rate on an annual basis for 2004 to date is higher at 31 percent as compared to 28 percent for last year.

P&L items included in income from continuing operations but excluded from our adjusted EPS measures this quarter are shown in more detail on page 4 of the presentation. These additional items include FAS 133 mark to market losses of 2 cents per share; these occurred largely in the contract generation segment. And second, net currency transaction gains of 1 cent per share largely in Brazil where the real strengthened slightly during the quarter. Excluding these items, adjusted earnings per share was 21 cents for the quarter compared to diluted EPS from continuing operations of 20 cents for the same period. Year-to-date adjusted EPS is 52 cents per share, up 16 percent or 7 cents over last year's results.

Turning to page 5 of the presentation -- we had strong cash flow performance in the quarter. Net cash from operating activities, which is net of corporate cash flows, increased to 499 million compared to 349 million last year. That brings year-to-date net cash from operating activities to 1,109,000,000 as compared to 1,086,000,000 for 2003. As you may remember, the 2004 second-quarter and year-to-date results were impacted by increased uses of cash at Eletropaulo and Sul as we came out of the 2003 restructuring environment.

Subsidiary net cash from operating activities, which reflects the operating cash flow generated by our business units before corporate cash flows, again was up to 605 million in the quarter compared to 454 million last year. Free cash flow, a non-GAAP financial measure which we define as the net cash from operating activities less maintenance capital expenditures, was 370 million for the quarter compared to 209 million last year. Year-to-date free cash flow is 746 million, up from 731 million last year. More detail on subsidiary and corporate cash flows as well as free cash flow is summarized in the appendix to the presentation you have today.

During the quarter we reduced parent debt by 24 million and 469 million year-to-date; we also increased cash on hand at the parent by $214 million. We did not repurchase significant debt during the quarter as prices have remained above par and we have opportunities for calling certain recourse debt issues in the next several months. And we expect to have ample parent liquidity to meet our full year recourse debt repayment targets of 800 million.

Distributions from subsidiaries remained on track as we received 221 million in the quarter totaling 727 million year-to-date. We also received an additional 121 million in return of capital from subs largely related to the successful project financing in Nigeria completed during the quarter. Details on the consolidated and corporate cash flow and subsidiary distributions are again provided in the appendix.

With that I'd like to review performance highlights for our four business segments starting on page 6 of the presentation with the contract generation segment. Third-quarter contract generation revenue increased 11 percent to 906 million or 10 percent on a constant currency basis. This increase was driven by contract price escalation partially offset by lower volumes related to operations in some regions. Price and volume together contributed 6 percent of the overall revenue growth and new generating plants online in the Middle East, Caribbean and the U.S. added 4 percent to the revenue growth line.

Availability for our generating fleet averaged 88 percent for the quarter and the rolling 12-month average was also 88 percent while the forced outage rate has improved over the last 12 months with a reduction of approximately 1 percent. Segment gross margin increased 14 percent to 372 million reflecting the contribution from higher revenue and gross margin as a percentage of sales also improved to 41 percent from 40 percent in the prior year.

Income before income taxes and minority interest for contract generation was 211 million. And excluding the 2003 asset impairment in this segment of approximately 76 million, income before income taxes and minority interest increased 18 percent. The higher gross margin and higher equity income accounted for most of this increase partly offset by 18 million in unfavorable foreign currency transaction (inaudible).

Looking ahead to the fourth quarter we anticipate less year-over-year additional contribution from new plants as one Caribbean plant moved into its second year of operation during the quarter. We're also assuming fuel prices comparable to those in the third quarter of this past year.

Please turn to page 7 where in the competitive supply segment revenues grew 15 percent or 14 percent excluding currency. Volume and price increases combined resulted in a 9 percent contribution to revenue growth. This increase was driven by increased demand in Argentina and higher realized prices in Argentina and Kazakhstan that were partially offset by lower prices in (indiscernible) this year. Additionally, full operation and completion of new hydroelectric capacity in Panama added 5 percent to the revenue growth.

Gross margin increased 8 percent to 64 million driven by the revenue growth that was partially offset by associated higher fuel and O&M costs. These combined factors decreased gross margin as a percent of sales to 24 percent for the quarter, a reduction from 26 percent last year. Income before income taxes and minority interest for the competitive supply segment increased 27 percent or $10 million to 47 million. This reflects both a higher gross margin and 9 million in favorable foreign currency transaction effects, partly offset by 3 million in unfavorable FAS 33 mark to market.

In the fourth quarter we expect continued strong performance in Argentina and, as with contract generation, we expect fuel prices to be comparable to the third. We will overlap new project comparisons for the larger of the new Panamanian hydroelectric plant during the quarter.

Now please turn to page 8. In our large utility segment revenue increased 3 percent to 938 million. Excluding currency translation affects this increase would have been approximately 7 percent. Reflects 2004 tariff improvements in all businesses. Although, as we mentioned last quarter, we have not received a tariff increase in Venezuela during the third quarter. We do currently anticipate that this increase will be announced prior to year end to become effective in early 2005.

These overall (indiscernible) improvements were partially offset by the devaluation of the Bolivar in 2004, a slight decrease in overall demand, and some unscheduled maintenance at IPL. Segment gross margin declined 4 percent to 234 million primarily due to higher power prices and transition costs at Eletropaulo, and the impacts of the depreciating Bolivar between years. Gross margin as a percent of sales declined to 25 percent compared to 27 percent a year ago. It's also important to note that cooling degree days declined for the quarter at IPL by approximately 15 percent from 2003.

As a result, income before income taxes and minority interest was 119 million compared to 127 million last year, largely reflecting the lower gross margin which was partially offset by 11 million in favorable foreign currency transaction effects.

Now if you'll please turn to page 9. Gross distribution segment revenue increased 14 percent to 314 million in the third quarter. This increase was driven by both volume and price. We saw higher demand in all regions led by Cameroon and Ukraine. Tariff increases in most of the businesses also benefited revenue and helped offset cost inflation. Gross margin increased 33 percent from a year ago to 61 million led by higher revenue. During the quarter we also benefited in Cameroon from a return to more normal hydrology in its largely hydroelectric based system which reduced the need for more expensive fossil fuel based electricity production.

Segment income before income taxes and minority interest increased to 47 million from 12 million a year ago. This reflects the higher gross margin as well as 22 million in favorable foreign currency transaction effects largely in Brazil and Argentina. Looking ahead for the balance of the year we expect continued solid revenue growth and margin contribution in this segment led by the Ukraine and Cameroon businesses.

Now if you'll please turn to page 10 of the presentation. As we mentioned in today's press release, we believe that AES will continue its strong operating performance through the remainder of 2004. As a result, we are increasing our full year guidance for adjusted EPS to 68 cents per share, increasing expected full year adjusted EPS growth to 21 percent compared to 14 percent under our previous guidance. This annual estimate results in a calculated 16 cents per share adjusted EPS for the fourth quarter of 2004 as compared to EPS of 11 cents per share for the fourth quarter of 2003. We continue to anticipate full year GAAP EPS from continuing operations of 62 cents per share or 59 cents after including the Chile restructuring cost of 3 cents per share as we explained in our first-quarter financial review.

Underlying our guidance are some important assumptions including, as I mentioned previously, that we are not assuming that we will see any financial benefit until early 2005 from the EDC tariff adjustment. We do expect that some adjustments will be announced during the fourth quarter of this year. The strong operating performance of our portfolio overall adds to our confidence in raising our guidance without the additional second half EDC increase this year. It is also important to remember, though, that EDC negotiates both its revenue and its fuel cost with the government and has not experienced additional fuel price increases this year -- serving to protect a portion of EDC's margin.

We also enjoy a good relationship with the Venezuelan government and recently received official approval for the issuance of EDC's $250 million bond offering as well as an exchange approval to pay nearly 70 million in dividends to EDS so far this year.

Secondly, it's important to note that the situation in the Dominican Republic has recently shown significant improvement in terms of increased cooperation from and negotiations with the new government including their appointment of a commission to reconcile and resolve the electric sector receivables. We have also been pleased to see more active participation and assistance from the multilateral financing institution in resolving these important issues for the country. We believe these efforts will result in meaningful reduction of the outstanding generation receivables by year end and progress helps to increase our confidence in the ultimate collectability of the receivables.

Though there are still some risks associated with these balances as significant negotiations and serious efforts from all participants in the sector remaining ahead of us, our guidance does reflect our increased level of confidence. These two assumptions equally affect our guidance for both adjusted earnings per share and for diluted earnings per share from continuing operations.

We have also updated our Venezuela currency assumptions. Our prior guidance assumed an average exchange rate of 2700 Bolivars to the dollar. We now assume the 19-18 Bolivar to the dollar exchange rate will continue through year end which implies an annual average of approximately 1900 Bolivars to the dollar. This lower devaluation assumption means we will experience less of a net earnings benefit on a GAAP basis as the dollar to the functional currency EDC. And we have significant net Bolivar debt exposure.

This reduction in expected foreign currency transaction gains on debt is included, only for GAAP purposes, in diluted earnings per share from continuing operations. As a result the differential between these two measures is now larger for 2004. We have also increased our revenue guidance growth for the year from 7 percent to 11 percent. Reflecting the impact of improved tariffs over the year, higher wholesale generation prices and stronger demand than originally expected as well as the effects of currency assumptions that I mentioned.

We see no change in our anticipated guidance for strong cash flow generation including net cash from operating activities of 1.6 to 1.7 billion and free cash flow of 1 to 1.1 billion for 2004. With do expect a reduction in gross capital expenditures to 450 million for 2004, down from our previous estimate of 600 million. Gross capital expenditures have been largely financed through drawdowns on nonrecourse project construction (inaudible).

To summarize, we had a strong third quarter and expect that operating performance to continue through the rest of 2004. We currently expect to end the year with adjusted EPS of 68 cents per share or 21 percent growth over 2003 on 11 percent revenue growth. And our earnings financial flexibility should continue to strengthen our credit quality while providing the financial underpinnings to support our longer-term growth. I'll now turn the call over to CEO, Paul Hanrahan.

Thanks, Barry, and good morning, everyone. I'd just like to go over a couple of points this morning. Performance for the year based on the first 9 months of operations is going very well. Gross margins are up by 270 million, as Barry mentioned, or 15 percent. This is one of the key financial indicators that tells me whether we are, in fact, running our businesses better. Net cash from operating activities is up slightly despite the increased working capital needs in Brazil following the completion of restructuring, and our adjusted EPS are up 16 percent -- representing 16 percent improvement here on year.

All of the above demonstrate that we're seeing the impacts of running our businesses better. I'd like to give you some examples. First with respect to reliability which has been a major effort for our generating plants. Our CTSN plant in San Nicolas, Argentina -- it put some reliability enhancements in place that allowed our CTSN coal-fired unit, which is one of our five units at that location, to be available to take advantage of the market opportunities due to gas shortages in Argentina. CTSN has increased its sales to the local market dramatically. It's gone up by about a factor of five. From march to September of this year CTSN's coal unit was running almost without interruption due to the reliability enhancements that were implemented.

Another good example is our Puerto Rico plant. It was the only plant in Puerto Rico that was able to stay online during hurricane Jeanne and was able to restore power to the island more quickly as a result of the efforts of our AES crew to keep the plant running under very difficult circumstances.

The other thing I look at in terms of our performance has been our improvements in regulatory management. Our regulatory relationships are impacted by how well and how reliably we served our customers. Tariff adjustments are much easier we show that we are improving the quality of service to our retail customers. Our revenue growth has benefited from the tariff increases that would have been much more difficult if we had not been delivering on the customer service front.

The other thing I'd like to point out is that -- what's going on with respect to financings at subsidiary levels. Here we're seeing a trend developing for an increased appetite for well structured, high-quality emerging market corporate credits. One example is the financing for EDC, our Curacaos utility, which we anticipate closing today. It's going to be a $260 million long-term interest-only facility. This is going to dramatically enhance the financial flexibility in EDC with respect to the payments of dividends.

And as Barry mentioned previously, we also completed a $107 million financing for our Ebute plant in Nigeria which allowed for return on capital to AES. We also closed the financing for our Linbe (ph) generating plant in Cameroon which allowed a much needed thermal plant to be added to a predominantly hydro system, therefore allowing our SONEL utility to better serve its customers reliably.

To me all these indicate are very favorable trends towards increased liquidity in the financial markets where many of our businesses have been operating in very challenging environments over the past couple of years. So in summary, the year is going very well and we feel good about ending the year with a strong performance. Now I'd be happy to answer any questions that you may have.

(OPERATOR INSTRUCTIONS) Douglas Lee, UBS. Paul Patterson, Glenrock Assoc.

I wanted to ask you about the impact of the new tax bill that passed and what you see the opportunity there being?

I think we've looked at this and we're not completely sure this is going to have a major impact for us. We're still looking at the final language that's coming out, but don't anticipate this is going to have a major impact with respect to problems or opportunities for us. But it's something we're still trying to get our arms around, but don't expect it's going to have a significant impact.

Okay. The second question I'd like to ask is looking through your press release -- and I haven't been able to read it completely -- but I wasn't completely clear on what the impact of currency changes was on EPS. I see currency transaction, I see currency translation mentioned with respect to revenues, and I see the impact for currency transaction on earnings. I was wondering just in general, what was the impact of currency if there was no change over the last 9 months on net income or on earnings?

It varies as we go down through the P&L, as we mentioned, on revenue it's about 1 percent year-over-year. And it's a similar impact on the bottom line, but probably a little bit more dramatic from the EDC devaluation.

So it's approximately the same as what it is on revenues for the 9 months?

Just a little bit larger.

A little bit larger, okay. And for the third quarter?

Similar.

Okay, great. Thank you.

Elizabeth Parrella, Merrill Lynch.

Could you refresh for us where you are on your gross margin improvement -- performance improvement program at the end of the quarter on say an annualized basis and what you expect to also realize looking forward say in '05 under that?

Elizabeth, what I'm really focusing on, because we measure a lot of indicators in the Company with respect to availability, losses, whatnot, costs that we think we're saving relative to looking at controllable factors, uncontrollable factors. I personally find that to be a little bit confusing. What I'm really focused on now is looking just at gross margin and how is that improving. And if you look at the first 9 months compared to the year before, we're up $270 million and that's what I look at as the key indicator. I think that's the easiest one for all of you to track also because it's one that -- it uses GAAP numbers. It's something you can look at and see. But to me that's the one that I'm tracking primarily.

I guess I -- I understand what you're saying. The only difficulty for us is in that $270 million number, some of it presumably is coming from new businesses. So if we were looking more of a same-store comparison, you can't really get that from that number, whereas you sort of I think could from the way you were talking about performance improvements previously. Is there any way that you can (multiple speakers) further?

We've mentioned that we're looking for about 200 million coming from the existing businesses and to date we are at about $170 million is where we are today. I think we're still on track to hit the $200 million number.

As you look at that number, though, and again try to tie it to gross margin for example, some of that is avoided cost, some of it is improvements over what would have occurred had we not implemented some of these programs and some of it relates to capital that does come through. So it has different effects throughout the P&L and that's why, as Paul said, I think the easiest place to really see the actual benefits is in gross margin. But in terms of being on track, we continue to feel like we're along the same track and continuing along the same path as we were earlier.

I'm sorry, that was kind of a 170 rate currently and 200 million by the end of the year?

Yes, we said at the beginning of the year that we thought we'd be at 200 million on a run rate basis and today we're at roughly 170.

Okay. And just one quick question on another subject. Barry, can you tell us what the receivables were at the end of the quarter in the Dominican Republic?

Yes. The total receivables between -- from the -- to the generators from the distributors is approximately $113 million in total between those two generation companies. There are also some significant amount between those businesses that are owed to the government, so the net receivable is closer to about 80 or 85 million at this point. And we're in negotiations on that whole balance.

Okay. Thank you.

Ali Agha, Wells Fargo.

A couple of questions. First of all, Barry, I see that the share count went up again in the quarter. Can you just remind why that keeps going up every quarter? And looking forward, what's the right shares outstanding number we should be using for you guys?

Well, Ali, two different numbers I guess. The shares outstanding is 6,048,464,000, the weighted average for the quarter was 651 million. And that number generally is going up over the course of this year because of the diluted share calculation includes the treasury stock method of outstanding options. So as the share price has increased there is some effect on that number as we go throughout the year in terms of increasing the diluted share numbers. Also throughout the year we have done some debt for equity swaps. As we mentioned, it was fairly small in the third quarter and so some of that did occur on a weighted average basis as we went through the first two quarters of the year. Those are the two primary impacts.

So the debt for equity swaps, should we expect those will be ongoing or are those done?

No, at this point I don't see that that's a significant issue for us in terms of additional debt reduction.

Okay. Separate question, Barry -- one or two just kind of points. When you've changed your currency assumption for Venezuelan currency, what is the impact on adjusted EPS from that change in assumption?

Most of that has already flowed through the P&L to date because it's really in the 9 months ended financial results. So it's not a significant change in the adjusted EPS except for basically our fourth-quarter projection which is included in our 68 cents guidance.

I guess what I'm saying is if the currency had been at 2700 verses being at 1900, what would have been the impact on adjusted EPS?

We'll have to get you that number, I don't have it calculated. There would have been several things that would have affected like the tariff and others maybe had also been in a different position. We can calculate the math, but I think the macroeconomics would have been in a different situation also.

And one final question on the debt reduction. I think I heard you say you should still have 800 million of corporate debt reduced by the end of this year. Can you just remind us what is the goal for '05 right now both at the corporate level and the project level and the sources of that debt reduction for '05?

Really we've only set targets for the parent debt reduction. We've got anticipated amortizations in the project companies. But at the parent side it's 800 this year and 500 to 600 next year through 2005. The sources of that come primarily from operating cash flow, the distributions from our subsidiary. We did have a good quarter this quarter also in terms of getting additional returns of capital, but it's continuing operating cash flow from the businesses as well as existing liquidity that's on hand that will support our ability to do those debt reductions over the next 15 months or so.

Thank you.

David Reynolds, Banc of America.

Just a quick question. I was hoping maybe you'd provide a little bit more detail on the contract generation segment. You'd indicated that revenues were higher from contract pricing. Could you just give us a little bit more detail on where that was as opposed to new projects?

Yes, pricing was the significant factor and the most significant positive placed were in Penar in South America, in Chile, TSA in Brazil where we've had recovery both in the price and the contract rate. Kilroot in Northern Ireland, Southland in California as well as Merida in Mexico and Uruguaiana in Brazil. Those were offset slightly by some reductions in price at Andres in the Dominican Republic because of the devaluation of the currency as well as a slightly lower price in Hungary given our lower production as we upgrade that plant to get it to be more reliable and higher capacity.

Thank you.

Leslie Rich, Columbia Management.

I wondered if you could talk about Brazil. I think there are some regulatory changes underway in terms of some -- I'm not certain if it's an auction in November of generation capacity and I wondered how that would impact your company?

Yes. I'll have Joe Brandt who heads up our Integrated Utilities group address that.

The changes to the market known as the new buyer model in Brazil go into effect probably in December. The auction was originally supposed to be in November but they pushed it by a month and it could go into '05 January. The changes the government has made both in the regulatory framework for distribution and generation and also the additional measures that have been taken to improve the financial health of the distribution companies through the capitalization program through BNDS (ph) and the ministry of finance are very constructive for both generation and distribution.

The market model is intended to reduce the risk in the regulated distribution companies such as Eletropaulo for us and Sul. They are also intended to provide certainty for the distributors and the generators about their long-term energy needs. And so the market is moving -- the new framework is moving the market to long-term contracts between generators and distribution companies. So you will see in this first auction a phase of contracting of about 4 to 7 years and then in the next auction you will see contracts that will be offered between generating companies and distribution companies that will go out as long as 25 years.

And is it still your intent not to put incremental capital into assets in that country?

I think right now we've got a pretty good investment in Brazil. And I think what we're trying to do is bring our portfolio into balance. And what that means is our long-term objective is to get more investments outside of Latin America relative to our investments there today. So that's our long-term objective and we don't see anything in the near term that would cause us to put more capital in there from what we've been able to see so far. I do agree that what's happening there is a very positive indication and should result in more investment coming into that market.

Will it improve your returns -- the new model?

Not in the near term and that's because our plants are already contracted. Our TSA plant has already contracted the bulk of its output. So it's not significant to us in the near term, but as those contracts start to unwind it's going to help us by allowing TSA to recontract in a good system. So it's got good benefits for the long-term value of the business, but nothing in the short-term. It won't be any different than what we expected.

Thank you.

Clark Orski (ph), KDC (ph) Investment Advisors.

I missed what you said about the dividends from EDC. I wondered if you could just kind of go back to that. There weren't any distributions this quarter?

No, it's anticipated that the dividend will be paid here in the very near future. It's been declared as going through the process and EDC has been approved by the currency approval authority and we should see it here shortly. So we expect it to be in the neighborhood of -- a total to date of about 70 million.

So that will be the full year, roughly 70 million?

We're still working through the rest of the year so we're not done yet in terms of getting through 2004. There's still some chance that we could see additional dividends in the later part of the year.

One thing that's been affecting a lot of our business in the emerging markets is the lack of liquidity. And that's one of the reasons why I mentioned what we're seeing now is this trends towards increased liquidity in the financial markets whereas EDC will be closing its financing today. That's going to provide more flexibility for EDC and many of our other businesses to distribute cash, we think, if the strength continues. So we think it's a very positive thing looking forward.

I appreciate that.

Richard Hayden, Omega Advisors.

Could you give us some sort of deal as to what your actual interest expense level might be for the fourth-quarter and how you see that developing in '05? And on a longer-term basis, could you refresh us as to what sort of growth rate we should be thinking about longer-term for this company?

On the interest expense, Richard, I think in general we'll see the trend that we've seen through the rest of the year continue. We're not going to give specific projections on exact amounts -- some of the interest expense does vary with currency assumptions. At this point we continue to see the fact that we've reduced parent debt is affecting, by 460 million year-to-date and about 2.1 billion since we started, affecting that number in a positive way.

We do also expect a slight return to normal on the interest income side where this quarter we had a slight decrease in our routine level of interest income primarily due to some renegotiation and settlement with the municipality at Eletropaulo with the San Paulo government. But on an overall basis we expect the trend to continue both this year and somewhat next based on that anticipated 500 to 600 million of debt reduction over the course of 2005.

To answer your question about the longer-term growth rates, nothing has really changed our view about the future. We still think those projections that we've given out in the past are good which is 13 to 19 percent growth rates in a -- basically (indiscernible) growth could be as high as 23 percent. We still think those are good. We're going through our budgeting process for 2005 in about 2 weeks and people are actually here I think from our utilities group going through that budgeting process. So we have a much better feel for how '05 looks within about a month or so. We'll be disclosing that on our February call. But right now it's looking good to hit those numbers that we've been providing in the past.

Could I ask you one other question? The tariff increase at the EDC in '05, how much could that add incrementally?

I think at this point, as I mentioned, it's a combination of what happens on the revenue side and the fuel side. So we do think it will benefit the margin and improve. I think we're still discussing that with the government so I wouldn't want to speculate on an exact amount. But it should show and reflect the changes in that economy as well as the increased prices for fuel in some respects.

Peter Monaco, Tudor Investment Corporation.

I actually had two quick questions if I may. The first is a follow-up to Elizabeth's. As with Elizabeth, I understand the difficulty of drilling down on that, Barry, but you have talked about your expectations that the gross margin could improve over time at a 50 bip per year clip I think to approximately the 33 level. Is that still in your thinking?

In general terms that's correct. I think it's closer to 31 to 32 percent range, not 33. But you're right in terms of that anticipation that our 5-year growth rate does anticipate and we expect a gross margin percentage improvement over that 5 years to get us into the 31 percent or 31 percent plus range for gross margin.

And the second question. I want to make sure that I understand something correctly. Right now this is, as you folks say, a 1 by 1.1 billionish free cash flow company on a consolidated basis after maintenance CapEx. As you make efficiency and cost save improvement at the operating level as some of those subsidiaries deleverage and have more financial flexibility as you get some growth consolidated cash flow will grow at some pace off that 1.1 base. When one considers the growth in distributions that can occur in the medium-term for the reasons that Paul cited and combine that with the debt reduction that has occurred and is occurring at the parent company level, is there any reason that parent company free cash flow shouldn't over time project upward toward the consolidated free cash flow level today?

In general terms the trajectory should continue in both metrics. Obviously the maintenance capital expenditures at the businesses are part of our efforts to reduce cost and improve efficiency so hopefully we'll also have some positive effect on those. But in general terms we should see both of those numbers increase at a reasonably consistent pace.

To some extent the amount of debt that gets repaid or refinanced at the subsidiaries will have some effect on that in the short-term, but over the long run it is that operating cash flow and therefore free cash flow at the subsidiary level which generates the distributions that we receive at the parent. And so we expect over the next several years to continue to see improvements in both and growth in both. And to the extent that we do delever at the parent additionally it should, on a percentage basis, probably grow faster at the parent only because we're starting from a slightly lower committee (ph).

Thanks a lot.

Greg Orval, Lehman Brothers.

I was wondering if you could outline what some of the key fourth-quarter distributions will be to get you to the billion dollar target that you affirmed today.

I think in general terms it's continuing distributions from IPL. We do expect some additional distributions from Chile, as I mentioned, potentially from EDC. And we've also got several distributions, smaller distributions around the Company. But I think it's probably those three factors that are the most significant.

Got it. Thank you.

Brian Russo, Criterion Research.

Could you please discuss some of the new larger projects currently under development and the timing of completion on those and any financial impact or expectations you have for those, specifically the Cartegena project in Spain?

Yes, Cartegena. Well, the -- (indiscernible) we had a Biano (ph) expansion, it's a hydro plant in (indiscernible) that went online in the first quarter of this year. The Cartegena project is in construction and it's on schedule, it's projected to be -- go into operation in the first quarter of 2006. In terms of the contributions, I don't know off the top of my head what the contributions from that are.

But we've included those in our guidance expectations. It's about an 800 MW facility -- on budget, on time at this point, moving along fine.

Okay, thank you.

Kevin Malone, Citigroup.

Just want to get a little bit more clarity about your debt reduction at the parent. Are you guys right now about 400 million of the 800 million through if you net out your capital rates?

Netting out the capital rates is $469 million year-to-date through the end of September.

Okay. And is that going to go up to 800 or your 800 was the gross?

Yes, 800 is the target for the year so we're $331 million to go to get to that level.

And you feel comfortable with the 800 still.

Yes, we feel reasonably comfortable with that.

Thank you.

Paul Patterson, Glenrock Assoc.

I just wanted to go over the cash flow statement for a second here. In operating activities there seems to be a pretty big swing in working capital. I was just wondering what drove that. And also the increase in other non-cash charges?

The major swing in working capital, as I mentioned, is really related to Eletropaul but also Sul where they have this year been effectively finishing off what was a successful restructuring in the first quarter. Effectively during 2003, because of the stress put on from the tariff issues last year and the debt restructuring, a fair amount of payables effectively got deferred until 2004. Particularly in the second-quarter of 2004 we were effectively paying current year amounts and prior year amounts. So that reduced working capital on a consolidated basis. That has leveled out pretty much to some extent here in the third quarter as you can see from the improvement in overall cash flow in Q3, but that effect was primarily happening in Q2.

And the other non-cash charges?

Other non-cash charges are driven by significant factors including things like pensions where we have obviously a difference in how we record it for GAAP versus how we're funding deferred financing costs that are expensed of about $67 million, pension is about 80 and those are the two biggest pieces.

And then there's just a bunch of other cats and dogs (ph)?

Yes, in terms of equity and earnings. So the distributions from our subs versus the actual cash that we get versus the earnings that they generates.

Okay, thanks a lot.

There are no further questions. I would like to turn the floor back over to management for any closing comments.

Thanks all for participating today. Please feel free to contact John, Tasha (ph) or myself on any follow-up investor questions and Robin Pence for media inquiries. Thanks and have a good day.

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