愛依斯電力 (AES) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AES fourth quarter 2004 earnings release teleconference. 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, Vice President of Investor Relations, Mr. Scott Cunningham. Sir, you may begin.

Thank you, Holly. 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 investors relations section.

As described on page 2 of that presentation, certain statements regarding AES's business operations may constitute forward-looking statements. 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 hereof. We urge investors to read our descriptions and discussions of these risks that are contained under the section cautionary statements and risk factors in the Company's annual report on Form 10-K for the year ended December 31st, 2003, as well as our other SEC filings.

This morning, Barry will review our fourth quarter and full year results and our 2005 financial outlook. Paul will then add his comments and we'll finish with a question and answer period. Please turn to page 3 of the presentation and I will turn it over to Barry.

Thanks a lot, Scott. Good morning, everybody. AES today reported strong fourth quarter and full year results led by record revenues, solid improvement in gross margin, along with improvements in return on invested capital and significant growth in adjusted earnings per share. We are also optimistic about 2005, expecting significant growth in earnings and cash flow despite a higher tax rate. We'll cover that in a minute.

On the call today, I plan briefly to cover the consolidated and segment highlights for the fourth quarter and the year, as well as a couple of other items with respect to 2004 results. And then we'll cover some of our guidance elements for 2005. As Scott mentioned for those of you who would like, there are slides available on our website that I will occasionally refer to as we walk through these results.

So beginning with the fourth quarter, revenues increased 11 percent to a record 2.5 billion. Foreign currency effects quarter-over-quarter accounted for about 1 percentage point of this increase. This resulted in a 10 percent fundamental improvement in revenues with contributions from new plants in service less than a year adding 2 percent, and the most significant contribution, aggregating 8 percent, arising from our existing portfolio. This was primarily driven again this quarter by tariff increases in the utility business, including a positive mix shift toward residential customers, and pricing improvements in our generation businesses.

Driven by the 11 percent increase in revenue, gross margin increased 10 percent to 709 million for the quarter, resulting from the tariff increases and new plant revenues just mentioned. And gross margin as a percent of sales was 28 percent for the quarter, a decrease of approximately 20 basis points quarter-over-quarter.

As a reminder, gross margin for us is the excess of total operating revenues over operating costs, and we believe it presents the most effective measure of improvements in our operating businesses. It is here that we focus all of our efforts day-to-day and year-to-year. Improvements in the absolute margin measured in dollar terms and improvements in the margin percentage measured primarily by segment. Shifts in our segment mix can also have an effect on our consolidated margin. For the year, as we'll discuss in a few minutes, we saw improvement in both measures.

Interest expense increased $18 million in the fourth quarter. Benefits from our $800 million reduction in parent debt throughout 2004, of which 331 million was done late in Q4, were offset by increased interest at businesses completed and operational after the fourth quarter of 2003. As a result, income before income taxes and minority interest was up considerably to 235 million, compared to 71 million in the prior year quarter. This reflects the improvements in operating performance for 2004, as well as several items that we exclude in calculating adjusted earnings per share, most notably the level of asset impairments that were recorded in 2003. Minority interest expense, a net of tax number, increased to 78 million from 33 million last year.

This primarily reflects the reduction of our ownership interest in most of our Brazilian businesses, resulting from the debt for equity restructuring completed in the first quarter of this year, coupled with improved operating results this year from our Brazilian businesses. If you recall, in our Brazil transaction we gave up 54 percent of our economic interest in several Brazilian generation plants and distribution business in return for a significant debt reduction and a newly restructured loan for the remaining balance of the debt.

The annual effective tax rate for 2004 was 29 percent, resulting in a rate for the quarter of 23 percent. The fourth quarter effective rate resulted from reviewing our 2003 tax positions, as a result of finalizing our consolidated tax return, and providing for these return to accrual adjustments. The final effective tax rate of 29 percent for the full year was slightly less than our 2003 rate of 30 percent, due to lower taxes on non-U.S. businesses.

We reported fourth quarter income from continuing operations of $0.16 per diluted share, up substantially from $0.01 a year ago. This increase is driven by the higher gross margin, lower tax rate, and the net effect of nonrecurring items in both periods, partially offset by higher interest expense and minority interest in the quarter. Adjusted earnings per share is a non-GAAP measure and one we think is more reflective of the underlying business performance. Adjusted EPS was $0.21 for the quarter, up 91 percent from $0.11 per share last year.

I would also like to point out that our net income of 169 million or $0.26 per diluted share includes $0.10 per share of earnings related to discontinued operations for the quarter. This is principally offsetting $48 million of net losses or $0.07 of diluted loss per share related to our discontinued operations in the first 9 months of the year, as several of these businesses completed their exits in the fourth quarter. These include the previously owned distribution business in the Dominican Republic and 2 gas fired merchant plants in the U.S. There are also some effects resulting from businesses that were disposed of in prior years, including tax adjustments related to completion of filing our tax returns related to these dispositions. We have now completed all significant sales of discontinued operations in line with our expectations.

Turning to the full year, we had a record year with revenues of $9.5 billion, an increase of over $1 billion or 13 percent from 2003. We performed well on our key operating performance financial measure with gross margin increasing 14 percent to approximately 2.8 billion and gross margin as a percentage of sales increasing approximately 30 basis points to 29.2 percent. As a result, income before income taxes and minority interest increased 38 percent for the year to 884 million, and EPS from continuing operations of $0.58 was an increase of 4 percent, as reported, and increasing 32 percent on an adjusted earnings basis to $0.74 per share. These increases continue to reflect better overall business performance and lower interest expense, offset only partially by higher amounts for income taxes and minority interest and on the per share measures, an 8 percent higher weighted average shares outstanding for the year.

On page 4 of the presentation, P&L items included in income from continuing operations, but excluded from our adjusted EPS measure this quarter, are shown in more detail. These include FAS 133 mark to market gains of $0.01 per share and currency transaction losses of $0.01 per share, both relating primarily to the large utility segment. Net asset losses and impairments totaled $0.05 per share and in the fourth quarter, we wrote off a development project associated with our competitive supply business in Texas, as well as writing down an investment in a small co-generation business in Asia that we intend to sell. Excluding these effects, adjusted earnings per share were $0.21 for the quarter, compared to $0.11 for the prior year.

Please turn to page 5 of the presentation and I will review our cash flow results. Net cash from operating activities, which is net of corporate cash flows, was 459 million down from last year's 490 million in the quarter. For the year, similar impacts were seen in the full year amount of net cash from operating activities that related primarily to Eletropaulo as AES generated 1.568 billion in 2004, as compared to 1.576 billion in 2003. The decrease in the course of the year is more than accounted for by the effects of Eletropaulo due to delays in payments at Eletropaulo during 2003 prior to the debt restructuring that took place in early 2004. Of the net decrease of $8 million between years, Eletropaulo contributed a negative 174 million to that change.

Operating cash flow for 2004 also included a reduction of cash provided of 35 million from discontinued operations. Subsidiary net cash from operating activities which reflects the operating cash flow generated by the business units, before the impacts of net corporate cash outflows, was 625 million in the quarter and 2.16 billion for the year. Free cash flow, which we measure as net cash from operating activities less maintenance capital expenditures, was 315 million for the quarter and just under 1.1 billion for the year. The full year result is the high-end of our guidance, with gains in both periods compared to last year. More detail on the subsidiary and corporate cash flows, as well as free cash flow is summarized in the appendix to our presentation on the website.

Distributions from our subsidiary to the parent remained on track as we received 277 million in the quarter and 1.004 billion for the year, again, in line with our prior guidance of $1 billion. We also received 127 million in return of capital from subsidiaries in the year, primarily related to the third quarter, distribution associated with our Nigeria project financing. As shown on the next 2 pages of the presentation, 6 and 7, 2/3 of the distributions in the quarter and 71 percent of the distributions for the full year came from our worldwide contract generation businesses and from our U.S. utility. Again, further information on both consolidated and corporate cash flows are included in the appendix.

We also completed our planned $800 million parent debt reduction program in the fourth quarter, with a previously announced call of $331 million in parent debt security. Over the last 3 years we have repaid $1.9 billion in parent-related debt, which has been an important element in our financial strategy to improve our credit statistic, as well as our financial flexibility. With that I would like to review the fourth quarter operating performance highlights for our business segments starting on page 8 of the presentation.

We will start with our large utility business. In that segment, revenues increased 11 percent to just over $1 billion driven primarily by higher tax rates, a shift towards residential customers in Brazil, along with the rate recovery of NOX compliance program costs and wholesale price increases at IPL. Demand increased at IPL in the quarter, but declined slightly in our Brazil and Venezuela utility. Currency translation effects were not a significant factor in the quarter, as translation gains in Brazil were more than offset by translation losses in Venezuela. We did not receive a tariff increase during the last half of the year in Venezuela consistent with our updated guidance that we provided this past fall. We now believe that increase will be effective in the second quarter of this year.

Segment gross margin increased 30 percent largely due to these revenue improvements and lower fixed costs in Brazil quarter-over-quarter. As a result, gross margin as a percentage of sales improved significantly to 24.6 percent from 20.9 percent last year for these reasons. As a result of these improvements income before taxes and minority interest was 145 million, up 63 percent, compared to 89 million a year ago. Excluding segment FAS 133 mark-to-market and foreign currency translation effects in both years, income before tax and minority interest increased to 47 million.

Turning to page 9 of the presentation, growth distribution segment revenues increased 16 percent versus the fourth quarter of last year. Currency translation effects contributed 3 percent of this revenue growth. The remaining increase was driven largely by higher tariffs in most businesses and, to some extent, increased demand in our Cameroon, Ukraine and El Salvador utilities. As mentioned in our press release, our business in Cameroon, AES Sonel, is currently embarking on a restructuring program. As a result, a $16 million severance provision was taken in the fourth quarter related to a significant work force reduction.

Segment income before tax and minority interest was 87 million compared to 8 million a year ago. The significant quarter over quarter increase was driven by the gain on debt restructuring in our Argentina subsidiary, improvements in operations as we mentioned earlier, and foreign currency transaction gains of 16 million.

Turning to our generation business, on page 10 of the presentation, you will see that contract generation revenue increased 8 percent or an increase of 6 percent excluding foreign currency. 40 percent of this quarter's revenue growth resulted from the completed Ras Laffan power and water desalination plant in the Middle East, with the balance due largely to contract price escalation, compensating for somewhat higher energy prices. Segment gross margin increased 4 percent primarily due to the addition of Ras Laffan and margin improvements in Puerto Rico, offset partially by decreases in contract rates at Shady Point and outages at Southland during the fourth quarter of 2004.

Gross margins as a percent of sales declined 150 basis points to 41.8 percent. In addition to the changes at Shady Point and Southland mentioned just above, this is primarily attributable to higher energy dispatch rates at several of our other contracted plants.

Segment income before income taxes and minority interest was 173 million, compared to 185 million a year ago. Higher gross margin in 2004 was more than offset by the combination of higher interest expense associated with new projects, the $15 million write-down this quarter of one of our Asian businesses mentioned previously, and the inclusion in the fourth quarter of 2003 of a $25 million gain from the sale of our interest in Medway.

Included in the contract generation segment is our Dominican Republic business, the remaining portion which is in the generation sector. We have seen some good progress with the new government in addressing the structural issues related to the power sector and we are currently in negotiations with them to reconcile and resolve outstanding balances. We continue to receive scheduled payments, as anticipated. While we aren't expecting a meaningful recovery in the business until next year, we believe the receivable issues are now manageable and the amounts we have recorded continue to be recoverable.

If you would, please turn to page 11. In the competitive supply segment, revenues grew 17 percent, or 13 percent excluding currency translation effects. Price and volume combined resulted in a 9 percent contribution to revenue growth. This increase was driven by higher realized prices primarily in New York, Kazakhstan and Argentina and higher volumes primarily in our Texas and Kazakhstan businesses. Full operation and completion of the new hydroelectric plant in Panama also added an additional 4 percent to revenue growth this quarter.

Gross margins increased 17 percent, reflecting these higher prices and volumes and gross margin as a percent sales at 20.8 percent was comparable to last year's performance. Income before income taxes and minority interest for the competitive supply segment was 10 million compared to a loss of $8 million a year ago. Segment results included a $25 million asset impairment associated with the development project at our Deepwater facility in Texas.

Before turning to our 2005 outlook, I would like to discuss just a couple of other items related to our 2004 performance and reported results. As you know, we have a number of important efforts underway in key areas such as global sourcing, improving plant availability, reducing commercial losses and improving non-fuel O&M costs. Our business have internal metrics to track these savings over the course of the last 2 years of this program -- the beginning 2 years -- and have made important progress in sourcing global supply contracts, improving plant operating practices and the like. The businesses have achieved their $200 million run rate goal for performance improvements at the end of 2004, which was relative to their 2002 cost basis. Based on our internal score card for that 2-year period of our program, about 120 million will come from global sourcing. These will result from expected recurring annual savings across 40 categories as contracts are implemented and as expected spend levels are achieved. There are additional one-time benefits of specific capital projects for our nonrecurring spend that have also been identified, but which are not included in the total. Over 150 contracts have been signed this year and over the past 2 years, more than 1.8 billion of cash expenditures have been sourced strategically. In 2005 we expect to see additional improvements from further embedding cost management into our culture and extending our supply relationships.

Second, our internal score card credited reliability improvements with 75 million of run rate improvements over the 2002 base. These were driven by the continued reduction of our forced outage factor. Although our overall availability was down 1 percent in 2004 compared to 2003, the decrease was driven by a greater amount of scheduled outages this year. Our forced outage factor improved over a half a percentage point and it is our forced outages that tend to cost us money in lost margin. Planned or scheduled outage time rarely costs us significant margin losses.

The AES fleet forced outage factor was 5.2 percent in 2002, 4.6 percent in 2003, and 4.0 percent in 2004, showing a continuing trend of improvement. The balance comes through our utility businesses efforts to reduce losses and commercial losses, in particular. Total utility business losses across the portfolio were reduced by 0.13 percent to 11.59 percent this year. This includes benefits from loss reduction initiatives, as well as energy that the businesses rebuild after identifying fraud. Typically a significant portion of these billings are reserved against until a collection history is established, but the message is a good one. Action plans are beginning -- are bringing customers into the system and, with time, we believe the contributions of both earnings and cash flow will become quite significant. There are some real benefits here in all of these programs, and we expect them to increase over time. And they will be a key driver in meeting our goals for gross margin, gross margin percentage, and ROIC improvement over the next several years.

We continue to believe our businesses are capable of performance levels that will drive increases in our gross margin, measured in dollar terms as well as increases in margin percentages, moving the margin percentage from the 29 percent range in 2004, towards a 31 percent range over the next several years. Improvements in these measures are now at the foundation of our operating plans going forward. And we believe we will continue to see real benefit.

One final comment with regard to the 2004 results, before moving on to 2005. As I mentioned earlier in the first quarter of this year, we completed the restructuring of several of our Brazilian subsidiaries in conjunction with our lender, BNDES. As you may recall in that transaction, we contributed 90 million in cash, also a 54 percent economic interest in the new entity, created by the contribution of our Brazilian and distribution -- Brazilian distribution and two generation companies was contributed. In exchange for this, we were -- a portion of the debt was reduced related to those entities and there was a restructuring of the remaining debt, at the time a balance of 510 million. In addition, BNDES was given an option to require that we contribute another AES to the subsidiary -- AES Sul -- to the newly formed entity at a later date, which would in effect give BNDES 54 percent ownership interest in Sul for no additional consideration.

It was an extremely complex transaction, both logistically and from an accounting stand point, the results of which are recorded in the first quarter of this year. We disposed a net loss on this transaction of 442 million, which did not go through the income statement, but was recorded as a reduction in our additional paid in capital, an equity account on the balance sheet. And that was comprised of basically two portions -- a gain on the minority interest transferred to the bank, which was 327 million, and a non-cash charge related to writing off the relevant share of our currency translation losses, realized as a result of the reduction of AES's ownership interest in the entities we contributed. This is a negative or a loss of $769 million, netting to the net loss of $442 million.

The SEC Division of Corporate Finance contacted us recently to review the technical accounting treatment we applied to this transaction. We are currently in informal discussions with the SEC to assist in their evaluation of our treatment. The transaction is unique in some respects and requires the interpretation of complex technical accounting guidance. We are very comfortable with our accounting for this transaction. Our external auditors support our analysis and our conclusions. But in the spirit of good and full disclosure, we thought it important to share the current situation with you. Our discussions with the SEC have primarily involved the treatment of the currency translation adjustment portion of the net loss we recorded and its placement within the balance sheet or, potentially, the income statement. The SEC is considering our treatment, and we were in discussions with their staff as late as yesterday afternoon.

We think three possible outcomes include, one, no change to the treatment we have recorded -- i.e. the SEC agrees with our position. Two, no write off of the currency translation portion of our investment, which would result in a balance sheet reclass of 769 between the components of shareholders equity account, effectively leaving it in the currency translation balance. Or three, a write off of the currency translation amount to the income statement that will be a gross charge of 769 million to the P&L. It's important to note that our positive net equity balance of $1.737 billion at the end of 2004 would remain the same in all of these cases. No position has been taken by the SEC staff at this stage and we continue to talk through the alternatives with them. In any event, this non-cash accounting charge does not reflect on the current or future operations of the business, and will be decided on the technical merits and interpretations of the current accounting literature.

With that, now please turn to page 12 of the presentation to review the income statement elements of our 2005 financial guidance. We expect 2005 to be a very good year for AES. We see continued revenue growth, further margin expansion, lower net interest expense, higher operating cash flow, as well as free cash flow and significant growth in earnings per share. We expect revenues to increase 4 percent, led principally by tariff increases and contract price escalations. The contributions from new projects will be modest compared to 2004 as most will have been in service for more than a year. We expect good growth in gross margin and margins expanding by approximately 50 basis points from 29.2 percent in 2004, which is consistent with our longer term guidance. This reflects expected gains for performance improvements, a rebound in plant availability and improved recovery of cost inflation through tariff adjustments in some utilities, such as in Venezuela.

We anticipate income before tax and minority interest for the 4 business segments to reach approximately $2 billion in 2005. This excludes corporate costs for parent debt and corporate overhead. Within those 4 overall segments, we expect a significant contribution for the year to include about 43 percent from contract generation, 37 percent from large utilities, 12 percent from competitive supply, and 8 percent from growth distribution.

We also currently anticipate a higher tax rate in 2005, at 36 percent compared to 29 percent in 2004. The 2005 tax rate is expected to increase for 2 main reasons. First, we expect the shift in the business mix toward more earnings from businesses in countries with higher statutory tax rates. Second, we are projecting our U.S. tax expense will increase as a result of the mix of earnings and parent cash distributions from our foreign subsidiaries.

We expect diluted EPS for 2005 of $0.76 per share, a 31 percent increase over 2004. With this estimate, our assumptions related to such transaction losses mark-to-market amounts for FAS 133 and parent debt retirement costs, aggregating a reduction of $0.07 to the diluted EPS number. As a result, our expectation for adjusted EPS, which excludes these items, is therefore $0.83 per share for the year.

With respect to the quarterly distribution of both of our diluted EPS and adjusted EPS, we continue to expect that the third quarter will be our strongest, followed closely by the fourth, and then by the first and the second. Although we would expect year-over-year increases each quarter in diluted EPS in 2005, because of the expected impacts of our higher tax rate in 2005, the first and the second quarters on adjusted EPS may well not show much change year-over-year with the improvements being generated during the stronger third and fourth quarters.

With respect to cash flow in 2005, which is on page 13 of the presentation, we show expected consolidated net cash from operating activities increasing to a range of 1.9 to 2 billion. We expect maintenance capital expenditures to be approximately 700 million. This increase includes the additional air pollution control investments for IPL and a new clean coal project in our New York businesses. Thus we expect free cash flow to be in the $1.2 to $1.3 billion range for 2005.

Our growth investments for the year include our planned acquisitions of SeaWest and construction of our first wind project in Texas, which we will fund on the balance sheet for a portion of the year. In the fourth quarter we expect to close a project financing in conjunction with placing that project in service, which will return a majority of the capital costs to us. This results in an expected net investment in our new wind business in the $150 million range in 2005. In addition we expect to draw down about 200 million in existing credit facilities to support continued construction of our Cartagena project that would be non-recourse facilities related to the Cartagena business in Spain. No additional parent cash contributions are required for this project.

We expect subsidiary distributions, excluding returns of capital, to be approximately 1 billion for 2005. On page 14, we have provided more detailed guidance on the expected contribution of subsidiary distribution by business segment and by region, as we have been reporting. We expect an aggregate of 69 percent of distributions to be from North American large utilities and from our global contract generation businesses, consistent with our long-term view. We think this guidance will be more helpful than the previous approach of listing the 10 highest expected individual businesses.

We continue to target improving credit statistics and believe we can achieve strong double-B metrics this year. We expect to reduce parent debt by 600 million by early 2006. This is a slightly slower pace than we’ve talked about previously and reflects the practical recognition and the good growth opportunities such as SeaWest, are attractive alternatives to incremental parent debt repayment in the short term.

In terms of key sensitivities, we estimate that a 10 percent annual movement in our basket of currencies would change our diluted EPS plus or minus $0.06 relative to our guidance. The other principal sensitivity is to changes in interest rates. We estimate that a 100 basis point increase in the forward curve for short term interest rates on a full year basis would also reduce EPS by approximately $0.03 per share relative to our guidance. Based on 22 percent of our debt being floating, net of interest rate swaps.

We are also in process of completing our internal controls review related to the Sarbanes-Oxley Section 404 efforts. While we have identified areas of improvement and are committed to a continued strengthening of our controls, no material weaknesses have been identified at this time. However we are still in the midst of our review process. That review continues until the filing of the 10-K and our audit -- along with the review of our auditors and final sign off will not occur until our filing.

With, that let me turn the call over to Paul Hanrahan. Paul?

Thank you, Barry, and good morning, everyone.

Looking back to 2004, it was -- for us it was a year of strong financial performance. We achieved our financial commitments and are continuing to strengthen our financial condition to build a foundation for long-term growth. One of the things I would like to highlight is if you take the results for 2004 and our expectations for 2005, it gives us confidence that the 5-year plan that we laid out for the 13 to 19 percent base case EPS growth between 2003 and 2008 is on track.

Looking at the adjusted EPS, from 2003 to 2005, you are looking at a compound annual growth rate of 22 percent. Looking at GAAP EPS compounded annual growth rate from 2003 to 2005, that will be a growth rate of 17 percent.

One of the things we are seeing is the new businesses are bringing in real value. In 2004 as Barry mentioned, we brought 3 new power plants online, dissented more than 500 megawatts of capacity in 3 countries. We were 400-megawatt Ras Laffan combined cycle mode, which is the combined water and power project in Qatar, our bionohydro (ph) project in Panama -- a 24 megawatt hydro project, and a thermal 85 megawatt called Limbe in Cameroon. And the revenues from these new projects totaled $140 million in 2004.

One other thing I would like to comment on is a trend that we noticed in the latter part of 2004, which is worth noting. We saw the interest beginning to return to debt markets from many countries where we have businesses. As a result, we completed restructurings and financings over $4 billion of non-recourse debt. I would just like to highlight a couple of these. One is in Venezuela -- we did a $260 million, 10-year bullet bond financing. This was the first corporate issue done in Venezuela in 7 years. In Colombia, where we have a hydro project called Chivor, we refinanced $253 million which comprised of 2 parts.

The first was a $170 million U.S. dollar-based 10-year debt. And it is the first long-term financing that our Chivor hydro project has achieved since privatization. The second piece was a local peso denominated --- piece of bank debt that was equivalent to $83 million U.S. It's the first local currency financing that Chivor has also been able to achieve since the privatization in 1996. It's an example of where we're going to try to take local debt where we find it attractive to try to mitigate any foreign exchange exposure that we have. I think all of these are reflecting a positive trend in terms of liquidity and the term availability for our businesses in developing countries and it's also going to provide us with additional sources of cash in the future if this trend continues.

We're also next year going to be continuing to focus on running our businesses better, to get the revenue lines to grow faster than the cost lines and to expand our gross margin. This has really become part of our culture and we are now beginning to see the results.

I think that longer term growth, the new businesses -- I think one thing we have seen is there's a lot of new money entering our sector. Nevertheless, we continue to see opportunities where our skills in development, acquisitions, and turnaround capabilities, combined with our wide geographic presence and specific local knowledge, allow us to earn attractive returns.

One area of new interest is wind power. As Barry mentioned, we recently announced an agreement to acquire a company which develops and operates wind farms in the United States called SeaWest. This acquisition brings us 500 megawatts of operating contracts and 1800 megawatts of potential new development opportunities in wind. But more importantly, it provides us with people, with strong operating and development talent, that we feel is critical to grow this business in the United States and other areas of world that will add wind capacity in the future. The combination of these skills with our global footprint will allow to us participate in what we expect to be a high growth area in the power sector going forward.

In closing, it has been a good year. We have delivered on our financial commitments. We continued significant steps to better manage our businesses, and I think we're well positioned to improve our financial strength and flexibility and to grow in a way which capitalizes on the AES skill sets and our strong global presence.

Thanks for joining us today and, at this point, we'd be happy to answer any questions that you might have. Operator, could you please open up the line for questions?

Thank you, sir. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Our first question is coming from Craig Shere of Calyon Securities.

Hi, good quarter.

Hi, Craig.

I have two questions for Barry and one for you, Paul. Let me start off with the ones for Barry, if that's okay. Barry, I still don't quite comprehend what's going on with the U.S. taxes. Is some of this in '05 relating to taxes that will be paid on repatriated cash facilitated by the new tax law change?

No. I mean, effectively, what is happening is that we're taking a higher percentage of our cash to the parent -- the dividend distributions have an effect and so there's some higher cash taxes on those dividends. Also the mix within our businesses is tending to now come from countries with a higher tax rate. For example, Brazil, had shown recovery. Venezuela, over the course of the last 2 years has been recovering. And so those factors have a slightly higher tax rate.

So this is the -- effectively the accrual rate for our P&L. There may be some impacts as we continue to examine the change in tax law that will allow to us take advantage of bringing some cash back, but mostly this is kind of the accrual rate going forward, based on where the earnings primarily are distributed around our portfolio.

Okay. And the second question for you, Barry. The 700 million in maintenance CapEx you mentioned included some environmental spending at Ipalco and on the New York plants. But at Ipalco, you get – you put that into rate base and it becomes accretive. So it's kind of dubious to describe it as maintenance CapEx when it's increasing your earnings. Can you comment on the exact amount of that, that you will be spending in '05 and on how -- whether you think my description is correct?

In terms of your description, you are correct, we do get a rate increase in future periods. It's not really in '05. So it takes us a while to get it implemented. We are seeing the benefits of prior year investments in those types of NOX control activities this year at IPL. So we'll see these other benefits later. So we think it's kind of consistent and conservative to show it as maintenance CapEx. I understand that in the future, it does represent some margin improvement opportunity.

What was that amount that you are spending in that particular area in '05?

It's around 100 million.

Okay. And Paul, a question for you. Kind of two parts. The original base case earnings growth that you referred to -- a 13 and 19 percent.

Right.

If I remember, it was just based on debt reduction, margin improvement, had no accretive investments -- new accretive investments other than that was known at the time factored in. I believe since then, if I'm not mistaken, we have at least added the announcement of the Bulgarian plant and the North American wind farm investments.

So I'm wondering how we should be thinking about the guidance now, and kind of as part B of this question, how should we be thinking about the impact of the growing acceptance of emerging market debt that you alluded to in terms of both the potential to finance new projects and also to resolve cash flow distribution restrictions on legacy operations?

Okay. Those are good questions. The first one -- the guidance with respect to growth would remain weak. We had another 4 percent better to what could be headed for broke. The wind farm investment that we added is not, I would say material. It is not large enough to really move the needle on that; although, it is providing some long-term growth opportunities.

You mentioned the Bulgarian project and that's one that -- generally we try not to announce projects until we get to the point where they are financially closed and we have begun construction. That's one that's still in development. We think it could happen sometime this year, but being conservative, we try not to talk about those too much until we get to the point where they are really in construction.

I think that wind growth opportunities, we do see we can get to the higher end of that range than we talked about before. And so really our guidance remains as it was with respect to the long term piece.

I do think that with what's happening in the emerging market debt securities, this is something that we always look at as an upside for the company. We are beginning to see this trend develop, where there's more money available for emerging market developing countries. And that just gives more liquidity, which allows to us finance -- refinance at the subsidiary levels. In some cases our subsidiaries are under levered, and that just has positive implications for future cash that could come back to AES. In the past years we have had -- as you know, looking at our cash flows being generated by the subsidiaries, in many cases the monies had to go to pay down debt. If this trend continues, we would see less of that that would need to be done going forward.

And in terms of just the ability to -- I mean it's one thing to be able to pull out some equity from businesses that couldn't even issue debt before. I think had you 2 businesses last year you did that with. But what about just the ability to eliminate some of the restrictive covenants that would limit upstreaming of cash flows to the parent?

Well that would go in part with that. That's something we are beginning to see. The other part of it, also, I think is with respect to new growth opportunities, it does open up more opportunities for growth having those debt markets available, and it's in the kinds of markets where we have developed the skills and capabilities to operate well. So I think if this trend continues -- I just want to highlight it since the early indications. I think it's a good sign for the Company.

Great. Thank you.

Thank you. Our next question is coming from Elizabeth Parrella of Merrill Lynch.

Thank you. Could you tell us what the translation impact on earnings per share was for the quarter and the year? I know you talked about it from a revenue and, to some degree, a gross margin standpoint, but what were the EPS impacts?

Yeah, you know, it's a complicated calculation and I'm not sure it's one that derives simply, but we have at least estimated that, Elizabeth, and overall the translation impact, year-over-year is about $0.01 positive for the year and $0.01 negative for the quarter. That's just the translation of, you know expenses and the translation of revenues. That doesn't include the moving back and forth of the currency rates on the dollar debt. So it's about, again, 1 percent positive for the year and 1 percent negative for the quarter.

Right, you are excluding the transaction effects?

Correct.

Okay. On your gross margin improvement program, you mentioned that at the end of the year, you were about a $200 million annualized rate. Can you remind us of maybe what the near term and intermediate term targets are on that program?

Well, frankly, I think we're shifting our focus in the program away from those internal targets. They were based on cost data, frankly, that was 3 years old and an understanding of our business that was 3 years old. And so while we continue to do those kinds of programs, the efforts, the compensation programs, the evaluation, our judgments, our focus is really now turned to the margin. And so those margin targets that we gave are the same margin targets we're shooting for in the operating business.

So frankly those 200 million -- it was an appropriate way to think about this in the early years. So now we're looking more towards the margin targets, as well as the introduction, which you will see on the slides, of return on invested capital as a second metric. So, I think trying to put numbers to those targets that now would be 2.5 or 3 years old would not really reflect the appropriate seriousness of which we're going after improving revenues and reducing costs.

Let me comment on that also, Elizabeth. We basically talked about a number like $450 million. If you look at it, we're about halfway there in terms of where we thought we would be. But the way we're looking at this is we have much more sophisticated in the way we approach it and, as Barry said, it's a focus on gross margin, and it's also a focus on -- with each one of our businesses we went through and identified what are the key performance indicators that drive those businesses. And instead of trying to compare ourselves to an alternate universe from 2002, we really compare the things that matter for each business. How are we doing in improving along those dimensions, which will drive the economics? And we'll see that translated into gross margin improvement. So I think that's the approach we have moved to, but if you think about in the context of what we talked about going back a couple of years, we're probably about halfway there, in terms of where we thought we would be by the end of 2008.

Let me ask the question maybe a little bit differently. I think you mentioned that your still - your objective is to get to 31 percent gross margin as a percentage of sales. Is that still kind of by 2008 time frame?

Yes.

Yes.

Okay. So even if we were just to assume constant revenues, which clearly isn't what's being assumed, you know that's about 600 million or so right there. Isn't --

Yes. It is a significant movement over the course of the years.

Okay. Okay and one last question maybe, just on -- going to -- switching gears over to EDC. You mentioned that you are thinking now the tariff increase will be in the second quarter. I think ordinarily you would also get another tariff increase in January, which is obviously over. How should we be thinking about the kind of the pancaking of tariff needs for EDC? Are they going to be wrapped together or maybe we could get a little bit of an update on that.

Yes, the expectation would be that you really get a tariff increase every 6 months at EDC and when they occur, they tend to catch up with whatever. So if there is a second quarter increase, it should reflect the increase from the beginning of the year also, it's just been deferred. So that's our expectation. I think it's difficult to predict, but that's what we built into our guidance so we think that it's realistic to expect that.

Okay. Thank you.

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

Good morning. Barry. On slide 12, you talked about $650 million of corporate costs that you implied were a combination of interest and overhead. I was wondering if you could give us some idea of what the breakdown of that number was.

Interest is about 430 million of that total.

Okay.

The rest is corporate costs.

Okay. And the second question is -- can we get an update on the situation with Hanair and some background on why you think Argentina chose to cut gas at this point?

John Ruggirello, who is the COO for that group, I will let him respond to that.

When Argentina restricts gas to Hanair, it affects one of our plants in Hanair in Santiago, a gas-fired plant. We don't expect the cuts though to be material to Hanair for a couple of reasons. One is that we have a diversification of technology and also fuel supply in Hanair. We burn coal. We have oil-fired plants, we have biomass, as well as hydroelectric.

And also the curtailments tend to put upward pressure on prices that ends up helping us in Hanair. The other factor for AES Corp is that the portfolio effect of gas curtailment last year, for example, turned out to be neutral or slightly positive for our businesses and, when you combine Argentina and Hanair. So it's something we are paying close attention to, but we don't expect it to be a material impact.

Do you have any time frame on which you expect them to start to export gas again?

They are exporting gas now. They are exporting gas. The impact tends to be during the two peak times -- one smaller peak this time of year, and then a larger peak in their winter, or our summer.

Okay. Thank you.

Thank you. Our next question is coming from David Reynolds of Banc of America.

Thank you. Actually my questions have been asked and answered.

Okay. Thanks, David.

Thanks.

Thank you. Our next question will be coming from Ali Agha of Wells Fargo.

Thank you. Good morning.

Good morning.

Just a couple of things -- one a numbers question. Barry, the $16 million severance cost at Cameroon, was that included in your adjusted EPS numbers for the quarter?

Well, you mean did we adjust it out? No --.

Leave it in or take it out?

It is included as a charge in adjusted earnings per share.

Okay. So that $0.21 includes that $16 million.

Yes, but it reflects -- remember we own half of Sonel, so it's about half of that or about a penny.

Okay. Second question -- on the debt reduction goals going forward, I wanted to just understand the numbers again. When you talk about corporate debt reduction of 600 million by early '06, is that assuming that that is going to happen primarily in '06 or is that happening throughout '05?

Well, I think for -- at this point, given, you know where the bonds are trading and looking forward, we're keeping the timing of that open. It could be early '06. It could be late '05. So, you know, part of it is taking advantage of our opportunities to purchase debt in the market, you know some of our bonds are trading at pretty high premiums at this point. So it will probably be over the course of the year, and into -- potentially into early '06. You know we'll use cash on hand, we have a good, strong POCF as it comes through for the rest of the year. And so it will be dependent on a lot of factors. So I think it's fair to say that probably the earnings assumption assumes it is prior -- it's toward the end of the year, but in terms of real activity, it will really depend on what happens to our bonds and how we see POCF and other items.

Given than fact, Barry, I mean if I take it on a multiyear basis, I mean you have some specific debt reduction programs year-over-year going out to '07 and '08. Have those numbers now changed given where your bonds and debt is trading at in the market?

No. And really for the most part, you know, we're focusing our real efforts on kind of year to year improvements. So I think the number of 600 million over the course of the next year or so is consistent with where we were before. That's the same target. And we still expect more in 2006, but we will really determine that when we get a lot closer to that period of time.

I See. And the project debt, does that come down by a similar amount over this time period? Or how should we think about that?

Yeah. It -- I mean, there are amortizations occurring. Remember, though, we'll be finishing Cartagena. We'll be borrowing about 200 million in Cartagena. We also, by the end of the year, should be having some debt on the wind business. And so, on an absolute basis, it won't decrease as much.

And we'll continue to look for other refinancing opportunities, like we did this year, where we financed a previously unfinanced business at Nigeria. So in some cases, we could see some of the individual projects increase. It's a little harder to predict the absolute balance.

We're continuing to de-lever the businesses, you know particularly in the utility side, as we improve operations. And cash flows from Eletropaulo will go down to pay the debt at BNDES. But there are some businesses where, we can optimize the capital structure and it may increase the debt a little bit better at the subsidiary level.

Yeah. Paul, there's been a fair amount of press on Argentina as well recently and you guys are in discussions there about potential tariff increases. Could you give us an update of what is going on there? And more importantly, just remind us, what is Argentina currently generally contributing to AES and if the tariff discussions work out as you would like them to, what's the upside we could see from that region?

I will ask Joe Brandt to answer that question. He is the COO of the Integrated Utilities Group and then Barry might provide some of the details on what's expected.

Hi, Ali. The Argentine process of opening up what has been a frozen regulatory sector since 2002, when the emergency decrees went into effect, has been ongoing hand in hand with their discussions with the defaulted creditors on the outstanding sovereign debt as with the IMF as well. That process has been interlinked over the course of 2004, and has produced the first set of positive developments related to both the generation sector and the distribution sector.

In generation you saw last year, mid-year, a -- the elimination of the price freeze on natural gas, which has led to overall increases in the wholesale price that's being passed through now to customers. And then at the end of the year, in the fourth quarter, in November actually, our business in Buenos Aires, Edelap, reached a memorandum of understanding with the government related to the concession renegotiation and tariff increases going forward. It was the first agreement reached in the sector. Subsequent to that, there's been an announcement of a second agreement with one of the other distribution companies in B.A. And you will see over the course of the first and the second quarter, the necessary regulatory and administrative steps to turn that memorandum of understanding with the government into the actual tariff increases that you will begin to see in the business.

On an overall basis, Argentina, if you exclude the debt gain that we had in the fourth quarter, the contribution to income before income tax and minority interest is probably effectively about $0.03 to $0.04.

Okay. And so all of this will be virtually doubling that Barry or is it -- how should we think about what’s going on there?

You know, it has the potential to make improvements and that's what we've seen in the business for the long term. That's really the timing of it, but somewhat in question.

Yeah. Thank you.

Thank you. Our final question will be coming from Tim Shaler (ph) of Timco.

Hi, everybody.

Hi.

I have a few questions. First, looking at the 2004 results on page 16 of the presentation, the parent company interest and expenses there add up to 653 million, which is in line with what you suggested for 2005 for parent company expenses. But we know from Terran's question that interest expense is going down about 40 million. Does that imply that the other costs are going up by 40 million?

Well there's a couple of things going on. I mean the interest will go down over the course of the year. That's true. We also now have some longer term incentive plans that when we switch from options to different types of plans are actually cash planned and so some of those costs now will be included as cash coming out at the corporate level. So that there are some changes reflective of that in the overall business.

Okay. The other couple of questions I had were with respect to the 2005 subsidiary distribution outlook on page 14. Just comparing that to the 2004 results. I was hoping maybe you could touch on maybe some of the highlights. Under large utilities, both segments are increasing a lot. I know that North America IPL, you have the CapEx spend, but you have expected dividends going up -- or cash flows going up by 34 million. And then in contract generation, you had North America and Asia going up by fairly substantial amounts. I thought maybe you could touch on that. And then last, if you could touch on, what portion of the competitive supply is contracted for '05 and '06?

Okay. On the cash flow side, we are seeing some increases in the large utility business and in particular in the U.S. The stuff with IPL really does relate to the fact that we now have invested more in that business. Getting higher amounts out of that, returns on those capital improvements that we have talked about, are now in full force for the prior year's investment program. And also some slightly reduced pension contributions. We also have some cash flow expected out of EDC for the course of 2005.

On the other hand, your other question was the contract generation -- we continue to see debt paid down at those businesses and that allows some increases in overall cash distributions from those businesses so I think it's just kind of the normal trend for that segment.

We’ve also added Ras Laffan to the portfolio, which is new and as is generally the approach with contract generation businesses, after they get about 6 months or a year into their operating cycle, they have fulfilled their working capital needs. They have fulfilled their debt service reserves and we start to get cash coming out of those businesses. We do also see some cash coming flow coming out of Deepwater in Texas because we have no debt on that business.

In terms of the contracted portion of the competitive supply business, if you can give me just a second, the -- for 2005, we're at about 85 percent hedge and about 60 percent in 2006.

Thank you. And is Ras Laffan, is that considered Europe Africa, or is that Asia?

It's Europe Africa.

That's interesting. Asia you have going up by 34 million. Is there anything special going on in the Asia portfolio.

Oh, it is in Asia. I'm sorry. (laughter) My geography --. It's in the Middle East, actually. It's in our Asian --. You're right.

And then thank you for that. And the last question -- on the parent debt repayment. Obviously you are finding some good investments to invest in, and that's good. Is there a prospect for issuing equity to maybe take advantage of some of that in the future?

Paul may want to add something to that. But I think as we’ve said in the past, we do want to continue to maintain our progress in terms of improving our credit statistics and that's how we've set our targets. And to the extent that we do find significant growth opportunities in the future, I think we said we would look to raise equity to fund them potentially. You know, at this point, we're not projecting that in the current results.

Okay, well, thank you very much.

Thank you, Tim.

I would like to turn the floor back over to Mr. Cunningham for any closing comments.

Thanks, everyone. Because of the forward-looking guidance discussion, our prepared remarks ran a little bit longer today than it normally does. For those who may have questions that we couldn't get to, (indiscernible) will call back as soon as we can after the call. For those of you that have any follow-up questions from a media standpoint, please feel free to contact Robin Pence, our Vice President of Communications. Thank you very much 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.