愛依斯電力 (AES) 2005 Q1 法說會逐字稿

Good morning, everyone. And welcome to the AES first quarter 2005 earnings conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. I would like to turn the floor over to your host, Mr. Scott Cunningham, Vice President of Investor Relations. Sir, you may begin.

Thanks very much. And good morning, everyone. With me today are two 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'll review today are available on our website at www.aes.com in the "News and Events" section. As described on Page 2 of the presentation, certain statements 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 and circumstances after the date hereof. We urge investors to read our descriptions and discussions of these risks that are contained under the section "Cautionary Statement and Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as well as our other SEC filings.

This morning Barry will review our first quarter results and our reaffirm 2005 financial outlook. Paul will then have some comments on operations and on the organization structure announced this morning. We'll then finish and open up for Q&A. Please turn to Page 3 of the presentation, and I'll turn it over to Barry.

Thanks, Scott. And good morning, everybody. AES today reported strong results for the first quarter of 2005, led by record quarterly revenues and significant improvement in gross margin, net income, diluted earnings per share, cash flow, and return on invested capital. Adjusted EPS were $0.17 per share for the first quarter, and we continue to expect the full year EPS at $0.83 per share. We also reaffirmed our 2005 financial outlook. Revenues for the first quarter increased 17% to 2.6 billion, excluding estimated foreign currency translation effects, revenues were up 14%. These increases reflect both higher electricity prices and increased demand. The contribution from new projects in service less than a year was less significant than in recent quarters, contributing 1% to the overall revenue growth.

Gross margin, which is a key measure of our performance improvements increased 15% to 782 million for the quarter, driven by the strong revenue growth. We saw increases in three of AES's four segments -- Contract Generation, Large Utilities, and Growth Distribution with Competitive Supply remaining stable year-over-year. Gross margin as a percentage of sales was 50 basis points lower than a year ago. This percentage decline was driven by the negative impacts at some of our higher margin Generation businesses including plant out -- some plant outages within North America coupled with the delay in the Venezuela tariff increase. These impacts on the margin percentage were partially offset by improved and higher margin percentage at Electropaulo, our Brazilian large utility.

Income before tax and minority interest increased 74% to 350 million compared to the first quarter of last year. Interest expenses reported fell 26 million. Last year's quarterly results included 22 million in nonrecurring hedge costs related to our financial restructuring at our Chilean business. This cost is excluded in our adjusted earnings per share comparison in '04. Excluding this cost, interest expense declined 4 million year-over-year. This reflects the benefits of our prior period debt reductions and lower interest rate derivative impacts partially offset by the negative currency translation which increases interest expense in some locations. And new debt related to the addition of new businesses. Equity income increased 9 million, largely related to better results from our Contract Generation affiliate in Canada.

The effective tax rate in the quarter was 36%, consistent with our prior guidance. This represents an increase compared to 32% in 2004. This higher tax rate reflects increases in the local taxes imposed on our foreign businesses, as well as improved contributions from those businesses. This change in tax rate had the effect of reducing earnings per share year-over-year by about $0.02 in Q1, 2005 compared to 2004. We continue to expect the full-year tax rate to be at the same 36% level. Minority interest expense, which is reported net of taxes, increased to 91 million from 63 million a year ago. This increase resulted from better operating results for our Brazilian businesses. With our portfolio reinstruction completed last year, we currently have no businesses remaining in discontinued operations. As a result, income from continuing operations and net income were the same at 133 million, or $0.20 per diluted share in 2005. This compares favorably to last year's $0.12 per diluted share from continuing operations and net income of $0.08 per diluted share. The increase reflects the contribution of higher revenues, higher gross margins, together with favorable interest expense and equity income comparisons that were partially offset by the higher tax rate in '05, higher minority interest due to better operations in Brazil and increased weighted average shares outstanding.

Adjusted earnings per share which is a non-GAAP measure that we believe more consistently reflects underlining business performance was $0.17 per share in 2005, consistent with $0.17 per share reported last year. This is also consistent with the expected quarterly trends for 2005 as I covered in our February call. Last year's results were affected by FAS 133 mark-to-market in debt retirement losses, including the Chilean hedge I mentioned earlier. This year's results in comparison had higher levels of currency transaction gains than in last year's results. And these comparisons are showed in detail on Page 4 of our slide presentation.

Return on invested capital, which is a non-GAAP financial measure continued to show improvement, gaining 110 basis points for the rolling comparative 12-month periods. We continue to see improvement in gross margin and as a result return on invested capital as key financial measures. The basis of our calculation of return on invested capital is provided in the Appendix to the presentation. Cash flow also showed significant strengthening in the quarter as shown on Page 5 of the slides. Subsidiary net cash from operating activities, which is a non-GAAP financial measure reflects the operating cash flow generated by the businesses before corporate costs and corporate activity. That measure increased 27% to 674 million in Q1 2005. Net cash from operating activities, which includes corporate activity increased to 29% to 520 million from 402 million in the first quarter of 2004. Both trends reflect the increase in gross margin in net income year-over-year, stable working capital levels at our businesses, and cash received from a favorable hedge termination during the quarter. Free cash flow, which we measure as net cash from operating activities less maintenance capital expenditures increased 41% to 396 million. On a consolidated basis, we also reduced debt by further 160 million during the quarter.

Another positive cash flow-related development has been the significant progress on the receivables issues in the Dominican Republic. During the quarter, the government reached agreement with all generators to remain current on future payments to the distribution companies, which in turn will help provide increased cash flow to the generators, such as AES. In addition, our gross receivables are down to 52 million from 94 million when we first mentioned the Dominican Republic last year on our second quarter call. And net payables to the parties involved are down to 28 million. We continue to expect full payment on this balance in future periods, and with the commitment from the government and the World Bank, we are comfortable with our current position, and we look forward to the economic benefits of the recovering electricity demand over the next couple of years.

Turning to growth capital expenditures, they totalled 150 million for the quarter, largely related to the cash paid for the acquisition of SeaWest, as well as early payments on wind turbines, and initial construction costs for our first wind power project in Texas. Also included is the progress is our Cartagena, Spain power plant construction through drawdowns under an existing loan facility. Distributions from our subsidiaries to the parent were on track this quarter as we received 195 million, consistent with the expected timing of distributions for the year. Two-thirds of the distributions came from our U.S. businesses, and 73% from the aggregate of our U.S. utility and worldwide Contract Generation business. Additional information on subsidiary distribution is included on Page 6 of the presentation and in the Appendix. We still continue to plan for further parent debt reduction of 600 million by early 2006. That's, again, consistent with our prior guidance and our credit quality objectives. We believe this will lead to strong BB/Ba credit statistics through debt reduction and improved interest coverage metrics. This week, for example, we called the remaining 112 million and 8.5% Senior Subordinated Notes as of June 1st. We continue to have adequate call opportunities on our other debt to meet our parent debt reduction goals.

I'd like now to turn to the first quarter operating performance by segment, starting with Large Utilities on Page 7 of the slides. Segment revenues increased 23% to just over 1 billion and increased 18%, excluding foreign currency translation effects. Electropaulo in Brazil led the strong growth reflecting tariff and revenue mix improvements. Part of the tariff improvement reflects the continuing passthrough of the financial impact of the 2001 drought in Brazil, and as most of you know previously, utilities prior to the drought were unable to passthrough the financial impact of power supply curtailments. We expect that such past drought recoveries will be collected within the next two years, and this represents continued encouraging progress on the regulatory front in Brazil for Electropaulo. We were also able to secure new loans from the government to fund advances under these tariff recovery provisions. Demand increased at Electropaulo and at EDC in Venezuela while declining just slightly at IPL, our U.S. utility for the quarter. IPL continued to recover higher fuel costs through the tariff adjustment process while earning a return to the tracker mechanism on recently completed air pollution control investments.

Segment gross margin increased 30% compared to last year, and gross margin as a percentage of sale also increased to 25%, up from 23.7% in 2004. This is due largely to the revenue improvements mentioned earlier. Foreign currency translation effects had a minor benefit with a stronger Brazilian Real partially offset by the Venezuelan Bolivar devaluation during the quarter. EDC largely mitigated the impact of higher energy costs through purchases of fuel at prices below global market levels with the approval of Venezuela Government, as we were able to do last year. However, other sources of cost inflation including higher taxes and labor costs, as well as higher depreciation were not fully offset due to the delay in the next tariff increase in Venezuela. Our guidance assumptions continue to assume a tariff adjustment for EDC by late in the second quarter of 2005. As a result of these overall improvements, income before taxes and minority interest was 153 million, increasing 36 million compared to a year ago. Also, please keep in mind that much of this increase is related to Electropaulo where we have only an effective 34% ownership interest. So a portion of the net increase after income taxes is allocated through minority interest expense farther down in the PNL. Overall, our Large Utilities represented 38% of revenue and 32% of gross margin, both percentages increasing compared to last year's first quarter.

Growth Distribution, our second utility segment also showed good performance, as summarized on Page 8 of our presentation. Revenue increased 14% and 9% excluding foreign currency affects. Tariffs and demand increased in all major businesses with demand growth particularly strong at SONEL in Cameroon and Sul in Brazil. Gross margin increased 16% to 73 million led by the higher revenues and improved hydrology in SONEL which resulted in overall lowering operating costs. Foreign currency translations effects had a minor positive affect on segment results. Margins were also negatively affected by higher purchased electricity costs for Sul and for the Argentina distribution companies. Overall, gross margin and percent of sales improved slightly to 19.5% up from 19.2 last year. This resulted in segment income before tax and minority interest at 45 million, an increase of 14 million compared to last year, driven, again, largely by the improved SONEL results. For the quarter Growth Distribution represented 14% of total revenue and contributed 9% to consolidated gross margin, both again comparable to last year's results.

Turning to our Contract Generation segment on Page 9 of the presentation revenue increased 13% to 985 million, or an 11% increase, excluding foreign currency affects. Contributions from the second phase of the Ras Laffan project completed last year accounted for 2% of this increase. The balance resulted largely from higher prices in Chile and Brazil and higher demand in Chile. Segment gross margin increased 9% and gross margin as a percent of sales declined slightly to 39.9 from 41.4 a year ago. Contract escalation provisions largely matched higher energy costs except for our Generation business in Chile which was also impacted by higher purchased electricity costs. Government actions are being taken in Chile to adjust tariffs which we believe will improve fuel cost inflation recovery later in the year. A scheduled contract price reduction at Shady Point in the U.S. also affected margins compared to last year. Segment income before tax and earning interest was 252 million, increasing 62 million compared to a year ago. Comparisons are affected by FAS 133 mark-to-market and foreign currency translation affects in both years, including the Chilean restructuring costs that I mentioned earlier. Contract Generation represented 37% of total revenue and contributed 50% to the consolidated gross margin in the first quarter of 2005.

Results for the Competitive Supply segment are shown on Page 10. Revenues increased 15% with 2% of the increase coming from favorable foreign currency translation affects. Demand growth was particularly strong in our Argentina and Kazakhstan Generation businesses while prices moved higher in almost all businesses, again, led by Argentina and at AES Eastern Energy in New York. Volume did decline at Eastern Energy due to -- in 2005 due in part to unplanned outages which also impacted gross margin. Gross margin was unchanged compared to a year ago, and gross margin as a percent of sales declined to 22.9 from 26.3% last year. In addition to the impact of the outages I mentioned earlier, gross margins were affected by higher fuel costs relative to realized prices in Argentina and the U.S. Income before taxes and minority interests declined by 2 million to 53 million in the quarter, reflecting the stable gross margin and higher interest expense. For the quarter, Competitive Supply represented 11% of total revenue and contributed 8% to the consolidated growth margin. Again, both similar to last year's results.

It's also important to note that our business teams in Chile, Argentina and Brazil continue to work successfully to mitigate the impacts of the restrictions on natural gas imports into Chile and Brazil. Through creative planning and management, optimization of available natural gas within the distribution systems, as well as dealing with Argentina's restrictive constraints, they were able to reduce the overall impact on AES to much less than $0.01 a share. Last year the restrictions did not begin until the second quarter of 2004. We currently expect gas restrictions to continue at comparable levels for the rest of the year. Regulated prices in Chile increased 5.4%, effective May 1st. In addition, the Chilean Congress this week passed a new electricity law, which when signed into effect would increase prices a further 23.3% beginning 15 days after enactment. Furthermore, Generation sales to distribution companies without PPAs will be at the spot price rather than the node price when this law is enacted. Overall we expect the financial effects from the restrictions in Chile through the second quarter to be largely mitigated in the second half of 2005.

Finally, looking ahead to the balance of the year, we have reaffirmed the 2005 financial guidance we first provided in our year-end earnings call in February. This guidance is summarized in the presentation, Appendix on Pages 12 and 13. Our guidance reflects an expected 33% increase in EPS from continuing operations to $0.76 per share and a 12% increase in adjusted earnings per share to $0.83 per share. We also expect strong growth in operating cash flow and free cash flow for 2005. For the 2005 quarters, our outlook remains unchanged from what I mentioned on our last call. Our strongest quarter seasonally are the third and the fourth followed by the first and then the second. As a result of our increased tax rate and minority interest impacts, we expect to see all of the year-over-year growth in our two strongest quarters in the second half of the year. As a result, we expect second quarter EPS comparisons to be about flat relative to the $0.10 EPS from continuing operations in 2004. We also expect flat or slightly lower adjusted EPS than we reported last year for the second quarter.

This sequential decline from the first quarter reflects seasonal factors and tariff-related mix effects that will result in lower revenue and gross margin combined with the impacts of higher income taxes and higher minority interest when compared to the first quarter of this year. The improvement in the second half of the year continues to reflect recurring seasonal benefits, expected tariff increases in our two largest utilities, as well as in Chile -- as I mentioned earlier -- improved Generation business plan availability, and increased benefits from interest expense savings and performance improvements. With that, I'll turn it over to Paul.

Thanks, Barry. And good morning, everyone. I'd kind of like to mention a couple of performance highlights and then update you on some potential growth opportunities. And then I'd like to discuss our new organization that we announced this morning. With respect to some of the financial highlights, Barry has covered the details, but I'd just like to reinforce a couple of points. First, we remain focussed on running our businesses better. We're seeing the results in two key measures that I highlighted in our recent Annual Report, and those are increasing gross margin and return on capital. We've made good progress on both this quarter with gross margin up 15%, and return on invested capital on a 12-month rolling average basis, up 110 basis points.

For us performance improvement really has become very much a part of our D&A of our businesses around the world. We've got global working groups and local implementation teams incurious, such as global sourcing where after two years of a successful global roll-out that addressed global spend areas, the program will be expanded to also focus on regional opportunities which ties in well with our new organization. A good example, recently was leveraging and combining repair services on six hydroelectric turbines in Brazil and foreign Panama that saved $1.1 million on $13 million worth of spent. We have also focused on reducing losses, and overall our utility businesses reduced losses 15% for this quarter compared to the first quarter of last year. There, we saw some good examples in Electropaulo where we recovered 400,000 megawatt hours, primarily from theft reduction, and also some other losses that were reduced in Sul, another utility in Brazil. The reduced losses through a focused effort to install capacitors along distribution routes that were showing increased rural demand. And this allows for better management during demand peaks which is where you find the highest levels of losses.

With respect to new business, as you know, we announced the acquisition of some wind power assets. And that was completed this past quarter. And the businesses are now led by Ned Hall. Since closing, we have our first new project in construction. It's a 120 megawatt facility at Buffalo Gap in Texas, and that's on schedule for completion by the end of the year. Through SeaWest on the West Coast and two joint ventures on the East Coast, we now have development opportunities totaling 2,750 megawatts in 15 states, and we can expand that globally long-term if we find that the economics continue to be attractive in this segment.

In the past I've talked about two types of opportunities with respect to growth. One being a platform expansions, the other being Greenfield Investment. Platform expansions as a reminder, are building on our critical presence in chosen markets. We can leverage our relationships and local insights to identify and capitalize on new growth opportunities. A good example of that would be Kazakhstan, where we have the potential to add 1500 megawatts of capacity over the next decade at a very low cost by refurbishing our existing Ekibastuz plant. And that would allow us to have additional domestic sales in Kazakhstan along with export sales to Russia. That would give us the potential to have another 200 to $300 million of potential revenue growth over the next 10 years.

With respect to Greenfield Investment, we're emphasizing what we call crossover countries. These are countries where we feel like the fundamentals -- we like the fundamentals of the countries, and we see improving economic and political trends coupled with the establishment of sound legal and regulatory policies as they apply to our industry. The Maritza project in Bulgaria is probably the most advanced example of that. Bulgaria is a country with an investment grade rating, and that rating has improved since we started developing the project several years ago. Now, has economic growth approaching 6%. It will be entering the EU in 2007. This is a Contract Generation plant that would have a 15-year PPA with the national utility which was finalized and amendment signed in February of 2005. And that's all to support the development of a 600 megawatt lignite fired power plant. The next steps for us will be to finalize the project agreements and to arrange non-recourse construction loan for 70% of the project costs with the total cost being roughly 1 billion EUR. We're arranging those with a combination of commercial and multilateral development banks. Revenue potential from this plant went in full service in 2009 would be roughly $350 million.

Now, let me move to the organizational changes that we're making effective today. The changes we're making in terms of how we run our business will insure that we keep the momentum going with respect to improving our business performance and meeting our financial goals. The previous organization structure by business lines served us well during a period of restructuring and rebuilding. It also allowed systems and organizational networks to be built that resulted in our intense focus on business performance. The new organization provides the right structure to take us to the next level of performance improvement and long-term quality growth by organizing our businesses on a regional basis, and also by streamlining some corporate functions. We've talked about the good results we're having with respect to performance improvement, and this continues to be a top priority. The new organization will help us continue to improve our businesses by aligning them on a regional basis and placing senior leaders and resources closer to the markets. That's going to allow us to capture benefits of regional integration among our various businesses. It's also going to place greater accountability at the regional level for performance. And by streamlining our corporate functions, we'll be able to effectively support our businesses around the world much better. New structure positions is well to achieve long-term quality growth and enables us to better implement our corporate strategy. By integrating our operating businesses with our business development organizations, this will help improve the quality of new business by combining what we think will be better market insights with actual operating experience in these markets. And also by building and leveraging our critical presence in these priority markets.

Let me tell you a little bit about what the organization will look like. First the Executive Office, which is really the key Executive Management Decision Making Unit remains in place with the current members. We've also now organized along four regional areas. Let me tell you what those new regions are and the associated leaders. First, North America, which will be led by David Gee. And David used to run our Strategy Group prior to assuming this position. In Latin America, Andres Gluski, will be taking on that responsibility. In the past he's been running EDC. He's also run our Hanair business in Chile, and the Caribbean Group also. In Asia, the third group, it will be run by Haresh Jaisinghani. Haresh is in Singapore, in our Singapore office, and he runs Asia today. And then finally the fourth group will be Europe, Africa and the Middle East to be headed by Shahzad Qasim who comes with many years of experience with AES and in that region.

The other thing we're doing is we're consolidating many of our corporate functions into one group responsible for performance improvement and providing support to our regional businesses. We think this is going to help us achieve a common agenda driven by a proven business performance across various functions, like our performance groups, construction, safety, global sourcing, IT, and human resources. And Jay Kloosterboer who joined us a couple of years ago from Honeywell and General Electric will be leaving his function. The other corporate changes that we're announcing today will have several AES leaders assuming new responsibilities on the leadership team. Bill Luraschi will be leading the Corporate Development and Strategy Group, and Brian Miller will replace Bill as the General Counsel, along with continuing to serve as a Corporate Secretary. In summary, it's a good time to make this change. It's a positive move. It's the right structure. It expands our leadership team to achieve our goals of running our existing businesses better, and it also positions us for long-term quality growth in the future. Thanks for your attention, and I'll now turn the call over to the Operator for Q&A.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Thank you, the first question comes from Elizabeth Parrella from Merrill lynch.

Yes, thank you. A couple of questions. First, could you quantify for us the translation impact of foreign currency on earnings this quarter? And secondly, you did go through kind of a regulatory update in Chile. Could you provide something of an update -- I don't think you did. I may have missed it. But on Argentina in terms of what the distribution companies have been, the progress they've been making, and also in Venezuela in terms of the expectations for the tariff increase? I know you mentioned late in the quarter. But what might be going on there? If you could provide us an update on those two countries. Thank you.

Elizabeth, Barry will talk about the first question, and John Ruggirello will cover the last two points about Argentina and Venezuela.

Okay. For the FX impact, basically excluding the translation, the transaction charges, this is the FX component of EPS, looking at it on the regular kind of GAAP earnings, it had about a slightly less than $0.01 positive affect. And then taking out the effects of the foreign currency transaction gains and losses on non-dollar debt, the net impact was actually a negative $0.02 in the first quarter on adjusted EPS.

The negative $0.02 would be related to the $0.07 number?

Yes.

Okay.

And those are approximate. They're good estimates of that net impact all the way through the PNL.

Okay.

Elizabeth, this is John Ruggirello. In Venezuela, we had mentioned earlier we're still anticipating -- we had projected tariff increases end of Q2. In the meantime, we are still receiving lower cost fuel from the government and also access to low-priced hydro capacity that is helping offset the tariff increase. So we still anticipate -- we're encouraged by the conversations with the regulator there. In Argentina, there is a increase that went into this, goes into -- went into effect in May awaiting confirmations for Edelap. And I believe that should go into effect next month.

Thank you. The next question comes from Craig Shere of Calyon Securities.

Hi. Paul, one question for you, and Barry, a couple for you. Paul, thanks for walking through Some of the growth projects. I know there is a lot more behind what you're mentioning as well. But my question is, as you go to a structure that is more geographic-focused, how can you kind of give us a sense of security going forward that good, solid, controlled growth projects like you're describing is what we'll continue to see?

Because historically before you went to the business line management approach, years ago, we had some problems where regions were kind of running amuck with random investment and maybe expensive investment. And I guess I'm looking for a sense of comfort that you can give the street that this is just a rational management restructuring and that all the controls that have been put in since you came on June of '02 won't be lost.

Okay. Yes, I think that the simplest way to discuss that is to talk about how we do this. The first thing is we've got some really talented people to be out in the regions that I think have the right perspective with respect to growth that were looking for high quality growth. But in addition to that, and the screening they would do, the big function of the group that Bill Luraschi will be running, the Corporate Development and Strategy Group will be to, be doing the independent reviews.

And this is something we didn't put much focus on years ago, partly because we had a lot of projects, we had high growth. But we do an independent scrub of each project and look at it very carefully, and try to make sure that we understand all the potential risks that come with each project. Then the analysis of the Development team, along with the Independent Review team and Bill's people comes to the Executive Office. And we then give it another scrub and make sure we've thought through everything. That all happens before it goes to the Board of Directors for approval.

So I think we're not growing as rapidly as we were in the past. We've added a lot of good people, a lot of talented people. I think in our previous growth phase we probably had grown a bit too fast and didn't have the same control on the quality of the people that were developing businesses. But I think with all those, I feel confident that I will understand all those prior to anything going to the Board of Directors. And the Board of Directors also has the same perspective on these things.

So nothing really changes, then, in terms of authority with new investment? You're just restructuring normal operating management controls?

Yes. We're just putting people in there. We're going to be closer to the markets and I think have a better understanding of the market opportunities. The risks in those markets, and also have the people who do the execution in those markets available to help them make sure that what we're doing makes sense. I think that combination will actually result in better projects as we go forward. And they'll be high-quality projects. We don't have to do hundreds of deals. But the ones we do we want to make sure are good and high quality deals. Because we've got two ways to grow the Company. One is, with our $30 billion worth of assets we can continue to make big improvements in performance, and we can also grow. And I think those two things combine are actually synergistic in that they, they allow us to take advantage of -- what's going on one part of the business to help us work with the other part.

Right. And real quickly, two quick questions for Barry. Barry, kind of picking up on Elizabeth's question, where do we stand with rate relief for figuring out what the rate base is in Brazil, and do you still think that once that's resolved, the markets are still amenable to refinancing the BNDES debt? And finally, why are you leaving GAAP EPS at $0.07 under the adjusted EPS when GAAP EPS exceeded adjusted by $0.03 in the first quarter? Is it all just debt retirement costs?

I need a little clarification on the second question, but let me answer the first one. In Brazil the major -- we did get a tariff increase in April in Sul. And it came out as pretty much as we expected, which is, again, kind of continuing support for encouraging trends and the regulatory front in Brazil. The next major tariff increase is in Electropaulo. And we are expecting that in early July. We still have the belief that the rate base process through NL will result in a fair and appropriate treatment of the rate base. And would hopefully be announced and likely be announced then. So early in this third quarter we would expect to see that. And can you just restate your question for me, Craig, on the second one. I'm not sure I understood it.

Sure. And just to finish off the first one. So after Electropaulo is done in July, do you think the markets are still looking pretty good to possibly refinance the BNDES debt?

They still run fairly strong. And we think the local markets have continued to remain reasonable. But those things can change quickly. But we're hopeful that that is at least a possibility over the next six to 12 months.

Okay. And if I understand it for the full year, your GAAP EPS projection is $0.07 under your adjusted number. But in the quarter, it's the reverse, it's $0.03 above.

Oh, I see.

And you haven't changed that guidance. I'm wondering is all that just because of projected debt retirement costs you expect to incur later in the year?

Well, it's also the anticipation, as we mentioned, of continued devaluation -- along the lines of the Brazilian currency. We've adjusted our forward forecast, but they continue to show devaluation through the rest of the year. And we incurred most of the appreciation in -- or excuse me, gains from the devaluation of the Bolivar in the first quarter in terms of what our expectations were for the year. So most of the losses would be in the second through the fourth quarter and the gains in the first.

Okay, thank you.

Thank you. The next question comes from Ali Agha of Wells Fargo.

Thank you. Good morning.

Good morning.

A couple of questions. Barry, going back to your analysis on the FX impact, the negative $0.02 for adjusted, where is that hit coming from? Is it the Dominican Republic? Because Brazil/Argentina was strong I think year-over-year. So why did you end up with a negative hit on currency?

Most of it coming from Venezuela, Ali, where we had devaluation. So although the functional currency is the dollar and, therefore, we get some gains in our GAAP EPS from the Venezuelan debt, what we experience on an adjusted basis is none of those gains, but effectively the decrease in the margin when translated at the lower Venezuelan rate. So most of it is coming from that devaluation that occurred in the first quarter.

I see. And separate question. In your full year guidance, what share [costs] are you assuming in there, and how should we see the share increase that we see every quarter building up going forward?

I think we're in the neighborhood of around 660 million shares. Which is a weighted average number for the year. 660 to 665, in that range. You know, that number varies in part by quarter because of the variation in the stock price, the Treasury Stock Method and how it applies to diluted earnings per share. So in general, it should build up some throughout the year as we go forward. But it will also vary back and forth depending on the effect of that treasury stock transaction.

Okay. Separate question. Paul, for the last couple of quarters, we've been seeing very strong topline growth coming out of your businesses. And for the most part appears organic volume and price. What should we be thinking about as a sustainable sort of topline growth for this Company going forward?

I think what you're seeing now, we've got a couple of things going on. One is you've got some new businesses that are coming online. And that's a big factor like the Ras Laffan that comes online. The actual number, I'm not sure what that is. It will depend on what that -- what kinds of new businesses we add and where. I think you're seeing a little bit of a surge now, and that's primarily because we're doing things -- when we do performance improvement, things like reducing losses, that has an impact sometimes on the cost line, sometimes on the revenue line. And we just focus on expanding that gross margin. But when you reduce losses, in many cases you're taking customers that are nonpaying and turning them into paying customers. So you see some growth coming from that. I'll have to get back to you about the growth rate that we have going forward. But we think it's basically somewhere in the mid single-digits on a long-term sustainable basis.

That you would define as organic from the portfolio that you own?

Yes, I think that would be the organic growth in the utilities which is inflation and some demand growth.

Okay. And final question also to you, Paul. This restructuring on the management side that you have done, should we assume, or can we assume does that have any impact on the [old] profit improvement, module improvement targets you have laid out? Does this have any direct or indirect impact on changing those targets?

No, no. I think the targets remain as they are. I think what I expect we'll see is whenever you put new people in places and look at things differently, people figure out how to do things better. I think you would probably start to see those kinds of changes maybe some time next year. But it wouldn't affect anything we're doing this year.

Okay. Thank you.

Thank you. The next question comes from Lasan Johong of RBC Capital Market.

Hi, Paul, I have a question for you on go-forward strategy. Obviously to date the Company has been focussed on restructuring and paying down debt. Could you talk quickly about how you balance the needs of perhaps debt repayment versus growth for AES? Number two, what criteria are you using to evaluate your transactions? For example, is there a difference from doing something in Bulgaria versus doing something in Kazakhstan? Three, with at least $400 million of free cash flow coming into AES parent, it looks like debt repayment at the parent level could be fairly high and maybe getting potentially too high at some point. And how do you manage that, and what do you do about your leverage ratios? Maybe that's a question for Barry. I don't know.

Yes, I think Barry likes that last question.

I'll cover the two high debt repayment in just a minute.

Yes. Those are all good questions. But I think the way we think about repaying debt and investing in new projects is really looking at what is the best thing for the Company. Clearly, in the past it was fairly straight forward that there was a need to stabilize the Company, there was a need to improve our balance sheet. That continues to be a need and something we're focused on. With growth opportunities, we also look at what is the risk of the project we're taking on, and what is the potential return to us. How much we'd be in the cost to capital buy. And a lot of that is driven by how good are we at operating our businesses compared to our competitors. In other words, if we can get a high enough return on capital relative to our cost to capital, those are going to be attractive projects for us. So I think that when we look at repaying debt, that's got some impacts in terms of just letting us do more growth down the road. It gives us the flexibility to do it. But it also I think over the past couple of years has done a lot to reduce our weighted average cost to capital. When you go from -- what some people viewed as distress a couple of years ago to where we are today, which the market is treating us like a BB company, that has a big impact in your cost to capital. And that's I think one of the reasons why you see share price increasing.

In terms of growth, as we thought about the opportunities and looking at things like Bulgaria compared to Kazakhstan, we do have different criteria. We look at it both ways, both in terms of -- we have effectively a higher discount rate for riskier countries than we do for countries that are less risky. We also look at when we do the valuations, what is the range of possible outcomes, what are the things that could go wrong. And I think one of the things we've gained from our experiences throughout the years is knowing and having a better sense where the kinds of risks you take on in various projects and regulatory schemes. So I think we have gotten better at identifying those.

For example, if you take Kazakhstan, that's a place that we have people on the ground. We understand it very well. And we're going to be there expanding existing facilities. And it isn't putting a lot of capital at risk. So I think there are going to be places where we can see some good opportunities that don't require large amounts of investment, but will have higher than average returns just because we know the markets better. We have existing assets. We have a lower cost basis effectively for doing the kinds of things that other people could do.

So I think we are -- as I talked about it, we're looking at primarily these crossover countries, not necessarily the ones that are ultra competitive that and have bonded in competitive merchant markets. They may not be the most attractive for us. But they have to reach a certain level of legal and regulatory systems that we're convinced are going to be stable and reliable. And I think we've got some good people that can help ascertain if that's the case. Bulgaria seems to be one of those countries that has really moved in the right direction and is a good place for investment. We're looking like more -- we're looking for more countries like that. And with respect to what are we going to do with all this cash when we don't have any more debt to pay down, I'll let Barry address that one.

Thanks. Well, I think it's nice to address the question, Lasan, so we appreciate it. We do continue to kind of progress towards our credit objectives which is strong BB, kind of low-end BBB because we think that's the best place from a cost of capital perspective as Paul mentioned for the Corporate entity. Most of our capital continues to be sourced at the business or project level. And those are the most important ratings. And we think the flexibility of a strong BB and low BBB territory is right for us. It's not to use the credit for collateral or trading or anything like that, but from a cost to capital perspective it puts us in the right spot.

So we continue to progress towards that. We're not there yet. That's one of the reasons we continue to say 600 million through early '06. But we're getting closer. And we continue to see kind of dependable cash flow generating our ability to reduce that debt. And as Paul mentioned, we will weigh it off against other opportunities. But it's got to meet a pretty strong hurdle to do it.

I see. I've got a couple of follow-up questions for each of you. Paul, I'm kind of curious. I know AES has a lot of projects that they're looking at. But I don't know the scope of the magnitude of the amounts. Would you be able to quantify that for us, number one? Number two, more interestingly, how many projects have you rejected, and what would be those reasons?

And for Barry, when do you think AES will achieve that BB, high BB+, low BBB "sweet spot" in the credit ratings? And how much debt repayment do you think AES will achieve in '06 and '07?

Okay. Well, I think you're right. We look at a lot of projects there are many projects that our people are looking at both in our existing businesses and in our development groups. And I'm not going to quantify that because I tend to be fairly careful about not -- it has to get to a certain level of review and reality before we want to talk talking to the market about it. So I think we'll be looking at many, taking some additional development steps with some. But before we make any firm commitments or disclose what we're thinking of doing, we're going to take it to a certain level of checking to make sure it's a good quality project.

You asked how many have we rejected. We actually looked at that and found that last year we rejected 40 projects. And the reasons we did that were primarily because in some cases, there are a lot of new people in the industry, a lot of money chasing power deals because they see them as being attractive. In some cases, we think people are possibly paying too much for those. So if the returns don't meet a certain level for us, just investing at your cost to capital doesn't really do much to grow the value of the Company. Particularly, in our case when you have the opportunity to pay down debt and lower your cost to capital. So in many ways, what we have been doing is building up our financial strength so that when good opportunities are there, we have the capability to execute those.

But the reasons we reject those are primarily because returns aren't adequate, or that we see some significant risks in those projects that we feel are too much to be taking on prudently for the kinds of investments that have to be made. So it's really too much risk or not enough return that have been the reasons why we've passed the most deals.

On the timing question, Lasan, with respect to ratings and metrics, we are targeting, getting to about 4.5 times basically debt to what our Corporate cash flow, POCF. We think that we'll hit that with this $600 million reduction some time in '06. I wouldn't go ahead and yet project debt reductions in '06, further in '06 or in '07 at this point. It's a little early for that. So I think from a timing perspective, it puts us there from a metric standpoint in '06. And if we can improve our cash flows, continuing over that period of time, maybe we can get there a little sooner. But that's kind of our expectation.

I also have to continue to put the disclaimer out there that metrics and ratings are two different factors. And the ratings will be judged by the rating agencies, and they'll tend to look at historical results. And expectations for the future. And they'll make their determination. So it's our job to show them the historical results and the improvement, and it's their job to make that judgment.

Thank you.

Thank you. The next question comes from Ronald Redfield of Redfield Blonsky.

Hi, good morning. Are all your debt covenants intacted? I imagine they are. I just want a confirmation.

Intacted? At the corporate level, there are -- yes, no defaults or anything else. We do have a couple of subsidiaries, as we've mentioned in our K's in the past that have had default situations. But they're non-recourse. They don't represent significant subsidiaries to the parent. So there's cross default for that. If that's what you meant by intact.

That would be great. Okay. And also is your cash flow guidance from subsidiaries the same as presented a few weeks to a month ago?

Yes. And it's in the presentation, again, just to reiterate it on -- I think it's Page 15.

Okay.

12 and 13 on the presentation.

Okay. The SEC issues and any other regulatory issues, have they been all put behind you? Or are there any others that are ongoing of materiality?

In terms of the issue we discussed before with respect to the reporting of the transaction, the Brazilian restructuring that has been concluded as you'll see in our 10-K as we filed it. And so we're done with that at this point.

Okay. And the last thing. Previously we discussed with your office, I'd say close to a year ago some of the assumptions for the retirement plan. And they looked to us a little bit high on the expected return and especially I think if it was possibly in Brazil. Is that the issues that were audited by the SEC, and have you changed your structure of how you would determine pension and post-retirement benefits going forward? And also, do you have any guidance on what you expect post-retirement benefit payments to be over the next, let's say one to five years? On an annual basis.

It wasn't the issue that we were talking about with the SEC. It was really the treatment of the laws and the foreign currency translation amounts related to the sale of effectively half of our interest in our Brazilian businesses to BNDES, and whether that was treated -- whether those foreign currency amounts stayed in foreign currency or moved through retained earnings. So that was the issue. The payments that we have made under the pension plans in any post-retirement plans at some of our subsidiaries are disclosed in the 10-K.

We don't provide projections on those numbers. It is fair to say that the rate of return expectation in Brazil associated with that plan are higher than they are for us in the U.S. Because in general the rates of return in Brazil on the interest rates are higher there. And they're done with actuaries and everything else to make sure we have reasonable assumptions for that regard. So again, we think they're reasonable. We think they're appropriate for that market. But they're also effectively in local currency also. So we're not translating that rate of return into dollars. We're leaving it in local currency. So those two things will offset each other as it ultimately ends up in the P&L.

Just to confirm I believe the rates of expected return on U.S. assets are in the 7% range, I could be wrong by a percent, and double-digit in Brazil? So that's continuing on your assumptions.

I think that's reasonable. I don't have the K in front of me to remember that percent exactly. But that's pretty close.

And the last thing just for clarification. So understood that everything is on your post-retirement benefits is presented on how much you paid and so forth. Do you see any material change on that that can alter future cash flow in the next five years, based on your current knowledge?

Yes, the future payments are disclosed in the K. And at this point we don't see anything that would change those from what we have disclosed.

Great. Thank you very much.

Thank you. We have time for one more question. And the final question comes from Mitch Wilson of Wachovia Bank.

Hey, guys. Congratulations on a good quarter. I've just got one quick question for you. On Page 14 which is back in the Appendix, in "Parent Sources and Uses," there is an other item down there that shows $140 million use of cash. Can you shed some light on that?

Yes. For the most part that's letters of credit that have been posted over the course of the last quarter, primarily associated with the construction activity for the new wind business at SeaWest, where we're basically putting up a letter of credit to support the construction draws and then that will be financed out later in the year or early next year. And also a little bit of increased credit associated with hedging our businesses in New York associated with those prices, as well as a couple of business development LCs. The change in liquidity overall for the quarter is primarily due to increased LC usage for those items.

Okay, thanks a bunch.

Thank you. We have no further questions at this time.

Thank you, everyone. We appreciate your participation. On [Natasha] and myself will be available in Investor Relations, and Robin Pence in Communications to take any follow-up investor and media questions today. Thanks for participating and have a good day.

Thank you, everyone. This does conclude today's teleconference. You may disconnect all lines at this time and have a wonderful day.