愛依斯電力 (AES) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to your fourth-quarter 2005 earnings AES conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to your host, Mr. Scott Cunningham. Sir, you may begin.

Good morning, everyone. Welcome to our financial review. Joining me today are principal speakers Paul Hanrahan, President and CEO; and Victoria Harker, Executive Vice President and Chief Financial Officer.

The financial statements and press release we will refer to, as well as the presentation materials, are available on our website at aes.com. These include both the financial review presentation and an updated investor presentation, which highlights our operating model and growth strategies. Our comments today will refer to pages in the financial review presentation.

As described on page 2 of the presentation, certain statements regarding AES business operations and financial and growth strategies may constitute forward-looking statements as defined by the SEC. Such statements aren't 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 statements to reflect events or circumstances after that date. We urge investors to read our descriptions and discussions of these risks that are contained under item 1-A, Risk Factors, in our 2005 Form 10-K, as well as our other SEC filings.

Also, please note that definitions and reconciliations for all of the non-GAAP measures we will refer to today, including adjusted EPS, free cash flow, subsidiary distributions, parent liquidity, and return on invested capital, are included in the presentation.

This morning, Victoria will provide our regular financial review. Paul then has some comments on the state of the business. Please turn to page 3 for the presentation and I will turn it over to Victoria.

Thanks, Scott, and good morning, everyone. I'm very pleased to be here today and look forward to meeting many of you in the coming months and seeing some of the investors I knew from my prior life.

As you have seen, we ended 2005 on a strong note, with record full-year revenues, operating cash flow, and free cash flow. Full-year revenues exceeded $11 billion for the first time ever, with 18% revenue growth in the fourth quarter and 17% for all of 2005. We continue to benefit from favorable tax rate comparisons, foreign currency effects, as well as strong underlying operating performance.

We have again reaffirmed our long-term guidance through 2008 as we did in January, including earnings per share, gross margin, and return on invested capital targets. In addition, we've also reintroduced longer-term operating cash flow guidance with 2008 targets of 2.6 to $2.9 billion. From a 2003 base of $1.6 billion this represents double-digit growth during the period. Free cash flow should also show good growth rates going forward.

Please turn to page 4 of the financial review presentation, and I will talk through our 2006 earnings bridge from 2005 to 2006. Consolidated operating results, measured as income before tax and minority interest, are expected to generate good growth as you can see on the slide. This reflects expected demand growth in many of our regulated utilities, as well as demand and margin leverage in our coal-fired Competitive Supply businesses.

This operating scenario reflects a modest distribution value-added tariff increase in Venezuela, with greater input from lower fuel and energy costs, as well as cost management.

The earnings bridge also shows the effect from higher income taxes relative to our 32% effective tax rate in 2005, along with higher minority interest. Some of the operating income gains will be in countries like Brazil, where we have significant minority interest, reducing the contribution to our earnings. You can see that the underlying earnings would be around $0.99 a share.

We also expect some largely offsetting costs related to debt retirement and portfolio management, some of which has already been completed in the first quarter. This includes the Kingston sale and prepayment of our senior subordinated debentures, both of which will be excluded in adjusted EPS along with the El Salvador debt restructuring we completed for about $0.02 that will not be excluded in our adjusted EPS definition.

We have assumed some other debt and business restructuring costs that would bring the full-year EPS effect to a penny negative.

Second, we are also stepping up our business development efforts, which will result in additional overhead costs both here in Arlington and in the business as a group across the globe.

In addition, based on our full-year growth CapEx assumptions, which include some projects that we have not yet announced, we think it prudent to assume a lesser level of parent interest expense reduction compared to 2005, as we redeploy more of our parent free cash flow to new investments.

We also have costs associated with our new four-year $600 million unsecured credit facility, which we use principally to support growth. The overall impact is about $0.08 a year. This is not necessarily a recurring increase each year, and we believe we can manage this additional cost within our five-year earnings and cash flow guidance range.

This higher expense will help us secure attractive and [PP] positive projects that will help deliver above-average growth past 2008, something we expect to talk more about later in the year. This gets us to about $0.90 EPS continuing operations guidance.

The right side of the graph shows the overall $0.05 difference expected between GAAP and adjusted EPS in 2006, getting us to $0.95 per share on an adjusted basis.

Pages 5 and 6 provide the overall guidance elements and sensitivities following the same format we provided last year. We expect good growth in operating cash flow and free cash flow, which are key financial measures to us, through 2008.

We continue to target strong double-B credit quality; and starting this year we are refocusing our guidance away from the absolute parent debt reduction targets to credit ratio targets, although we have already paid down $115 million in parent debt so far this year. We do expect to be able to afford additional parent debt within our credit quality targets as we look to grow subsidiary distributions beyond 2006, as well as looking at portfolio management and other sources of funding.

Our two primary indicators of credit quality at the parent remain recourse debt as a multiple of distributions from subsidiaries, and distribution from subsidiaries as a multiple of parent interest. We have been and we will continue to target levels for these ratios in the ranges of 4.5 to 5 times and 2 to 2.5 times, respectively. We ended the year at a run rate debt to subsidiary distribution ratio of 4.9 times, and subsidiary distributions to parent interest ratio of 2.3 times.

We see subsidiary distribution stable at about $1 billion this year. As you can see on page 7, 54% of those distributions are expected to be from IPL, our domestic North American utility, and from our global Contract Generation portfolio.

Page 12 shows fourth-quarter highlights starting with 18% revenue growth, which is 11% excluding estimated impacts of foreign currency translation. With strong improvement in gross margin driven by favorable currency effects and tariff increases, we also more than doubled income before tax and minority interest. Together with favorable tax rate comparisons, this led to earnings of $0.27 earnings per diluted share from continuing operations compared to $0.03 last year. Please do keep in mind that fourth quarter and full year 2004 are on a restated basis.

We saw significantly higher tariffs and excess allowance sales from our utilities and favorable pricing and margins in our competitive supply businesses. This is reflected in the 11% revenue growth year-over-year calculations excluding FX translation effects. We received tariff increases or price escalations in most of our utilities in 2005 as well as in our Chilean generation business. In addition, we continue to receive subsidized fuel and excess hydroelectric power in Venezuela which, together with good cost management, has offset much of the impact of their delayed tariff increase.

Gross margin and gross margin as a percentage of sales comparisons were both favorable in the fourth quarter and benefited in particular from the tariff increases. We delivered strong gains in margin, up 320 basis points, 31.2% in the fourth quarter, though for the full year gross margin as a percent of sales fell 70 basis points to 28.7%.

Please keep in mind full-year gross margin comparisons are negatively impacted by the onetime $192 million Brazil receivables write-off in 2005. They are, however, also favorably impacted by the first-quarter retroactive tariff increase in Eletropaulo in Brazil, and by excess emission allowance sales in the U.S.

Interest expense increased $11 million in the fourth quarter due primarily to higher short-term rates and the negative impacts of foreign currency translation, partially offset by debt reduction and less derivative hedge expense. Interest income increased $20 million due to higher short-term interest rates and cash balances.

Fee income tax rate in the quarter was 23% compared to an above-trend rate of 73% in last year's fourth quarter. The rate in the fourth quarter of 2005 was positively impacted by lower foreign subsidiary-related taxes; impacts related to prior-year tax returns; and a favorable shift in the mix of income relative to tax rate. Last year's tax rate was high, in part due to taxes on foreign subsidiary distributions and the taxation of unrealized foreign exchange gains on dollar-denominated debt in certain Latin American countries.

As you can see on page 9, fourth-quarter adjusted EPS was $0.28 compared to $0.10 a share last year. The minor difference between fourth-quarter adjusted EPS and GAAP EPS was primarily attributable to foreign currency transaction losses in Brazil. Full-year adjusted EPS was $0.91, $0.04 below GAAP EPS due largely to favorable foreign currency impacts in Venezuela and Brazil.

Strong operating cash flow was a hallmark for both the quarter and the year. Page 10 shows the trends very clearly. Subsidiary cash flow, which reflects cash flow generated by the subsidiaries prior to paying parent interest expense and overhead costs, was $840 million, up 36% in the fourth quarter and over $2.7 million for the year, up 27% overall.

Fourth-quarter net cash from operating activities, which is a GAAP cash flow measure that is net of parent cost, increased 54% to $699 million; while full-year cash flow from 38% to almost $2.2 billion.

Free cash flow increased 86% in the fourth quarter and increased 44% for the full year to over $1.5 billion. Parent liquidity remained strong at $624 million at year-end, well in excess of our operating requirements.

As I mentioned earlier, on March 31 we closed on a new four-year $600 million unsecured credit facility as part of our support for growth. This unsecured facility will provide financial flexibility at good pricing and terms comparable to existing senior borrowings. Although available for general corporate purposes, we will target the facility to support our letter of credit obligations for the equity investment in Maritza. It will also be used to fund [stage] equity investment in the project as we draw down from the nonrecourse credit facility for project debt.

Full-year subsidiary distributions were consistent with our January updated guidance at $993 million. We had an additional $57 million in net returns of capital to the parent in the year.

Page 11 shows fourth-quarter and full-year subsidiary distributions on a segment and regional basis. Portfolio diversification remains an important positive element for our fixed-income securities, and we see opportunities for improving subsidiary distributions beyond this year as we grow the business and remove barriers to distributions in businesses such as those in Brazil.

Keep in mind that, as was true in 2005, the majority of our 2006 free cash flow will remain at the subsidiary level and be used for debt reduction or for reinvestment in the businesses.

With that, I would like to review fourth-quarter performance highlights for each of our segments, again starting with the regulated utilities. Please turn to page 12. Revenues increased 13% in the regulated utilities segment. The increase is almost entirely related to estimated foreign currency translation impacts, largely in Brazil, and higher tariffs in both Brazil and Argentina.

Keep in mind that we had significant minority interest associated with most of our Brazil businesses; so the currency impacts at the net income level are much less than at the revenue or operating income level.

Segment gross margin increased 51% to $416 million due largely to the strong revenue gains, favorable currency translation impact, higher prices, and lower purchased energy costs. Gross margin as a percent of sales improved to 27.1% compared to 20.3% last year. This is influenced largely by the tariff increases and by lower energy costs.

Now please turn to page 13 of the presentation. Contract generation segment revenues increased 24%. This was largely due to the pass-through of higher energy costs and contract price increases and the second-quarter's Chilean generation tariff increase, as well as higher dispatch in several businesses including the DR, China, and Pakistan. Estimated impacts of foreign currency translation added 1% to revenues. The scheduled contract price reduction at Shady Point and an outage at our Thames plant in the U.S. partially offset these gains.

Segment gross margin increased 8%, due primarily to higher pricing in Brazil and Chile, partially offset by the Shady Point contract price adjustment. Gross margin as a percent of sales fell to 36.2% from 41.3% due largely to the pass-through of higher energy costs and price with no incremental margin dollars.

As shown on page 14, competitive supply segment revenues increased 20%, and 23% excluding estimated impacts of favorable foreign currency translation. This largely reflected higher prices in New York, Argentina, and Panama.

Our New York business also had higher dispatch and sold excess emission allowances consistent with our risk management strategy. Dave Gee is available on the call to further discuss our allowance strategy in the Q&A.

Gross margin increased 89% due primarily to higher allowance sales and higher average pricing. This was partially offset by higher fuel costs in New York. Gross margin as a percent of sales increased sharply to 34% from 21.6% in the prior-year quarter largely due to better dark spreads.

At this point, I also want to talk briefly about the fact that we had to restate our 2003 and 2004 financial results. Late in the 2005 audit closing process, our year-end review identified some accounting errors that were sufficiently large between the quarters to require restatement for those years and the interim quarters for 2004.

The adjustments primarily include the following items. An increased income tax expense related to withholding tax liability at one of our foreign subsidiaries. A reduction of 2004 income tax expense related to adjustments derived from 2004 income tax returns filed in 2005. A minority interest error related to allocating income tax expense to minority shareholders in one of our Brazil businesses, as well as the correction of minority interest related to reconciliation of prior-year statutory financial records to U.S. GAAP financial statements. And an error related to the evaluation of hedge effectiveness testing for three hedges, which required us to subsequently record market value adjustment through the income statement for 2004.

This mark-to-market treatment will cause some variability in our quarterly 2004 results from a penny to $0.06 a share. There will be no impact on adjusted earnings per share for the quarters.

The net impact of all of these adjustments require us to reduce stockholders equity by $12 million as of January 1, 2003, to reduce previously reported net income by $17 million for the year ending 2003, and to increase net income by $6 million for the year ending 2004. There were no cash flow impacts from these restatement items. The earnings press release contains restatement summaries with the overall impact.

We aren't proud of having to restate our financial picture, but I would like to touch briefly on the underlying challenge and the important steps we're taking to strengthen our financial controls, our infrastructure, and our processes around the world.

This is one of my top priorities for the year, as it is for the business presidents, as it must be for every U.S. corporation. You have my personal commitment to get it done and to get it done right.

To that end, we have a number of steps under way to strengthen financial controls. We are adding resources and strengthening tax and accounting functions here in Arlington and in our key businesses worldwide. We are strengthening our organizational linkages to the businesses as it relates to financial reporting, with a much tighter accountability under Cathy Freeman, our Controller and Chief Accounting Officer.

We are increasing training and development within the financial function across the globe. And we're making sure we have actions and resources in place to cure all of these material weaknesses identified as soon as possible.

I am very proud of the work the finance team has done in quickly resolving the last-minute issues that arose during the 2005 audit period and getting the 10-K finalized this week. We still do have to restate the quarterly results for the first three quarters of 2005, and we expect to get that done very shortly.

As a newcomer to AES I'm impressed with our 2005 performance and the opportunities to deliver above-average shareholder value creation. From a value-creation perspective, the Board of Directors again this year approved our long-term incentive programs, which will continue to be tied to stock performance, improving free cash flow, and outperforming the S&P 500 on a rolling three-year basis. I believe this is a very good formula to encourage above-average financial and stock price performance. With that, I will turn it over to Paul Hanrahan.

All right; thanks, Victoria. What I would like to do is -- let me talk about two things. One will be the takeaways, my takeaways, from the 2005 results; and then I will also talk a little bit about our thoughts about the future, including the guidance for 2006.

For the 2005 results as a whole, I think it shows strong performance, as Victoria discussed. What I really look at is the gross margin, which I think is the best indicator of how we're doing in performance improvement. I think as many of you know, this has been an area of focus for us over the past few years. There we saw gross margin grow 14% to $3.2 billion.

The other metric that I think is important, I follow pretty closely, because I think it is one of the key elements of value, is the free cash flow. As Victoria mentioned that grew last year, between 2004 and 2005, 44% to 1.5 billion.

Then our adjusted EPS which grew 54% to $0.91 a share showed significant growth, but we recognize that some of that was due to a lower tax rate than we expected; and Victoria discussed that.

The next point I would like to talk about is credit. We have made good progress in terms of getting to the double-B range. The focus going forward is really going to be to maintain that strong double-B credit and those metrics associated with it, really shifting from just paying down debt to building a strong credit profile that supports quality growth.

There are multiple ways to achieve this, including paying debt as one option. So we're going to look at debt now as just another one of the options we have in our allocation of capital going forward.

Let me just talk a little bit about thoughts about the future, including our guidance for 2006. The free cash flow, we're forecasting that to be in a range of 1.3 to $1.5 billion. This really reflects higher maintenance CapEx than we have had in the past. What is going on there is we're putting a lot more money into improving the reliability of our plant and equipment. We are making some investments in excess of $200 million which are also going to be resulting in growth. These are environmental expenditures that are not only going to improve the environment but also generate attractive returns. We think beyond that we should see our maintenance CapEx drop back to more typical levels.

In terms of our EPS forecast for next year, the adjusted EPS of $0.95 a share and GAAP EPS of $0.90 a share, both are assuming what we believe is going to become a more typical tax rate for us. If we go back to the September '03 guidance that we gave, we stated that we felt we could grow our GAAP EPS from a base of $0.56 a share by 13% to 19% through 2008. If you look at the GAAP earnings of $0.90 per share, that is showing roughly a 17% growth rate; and that is in the upper half of the band that we gave in the 16% to 19% range. That seems to be a reasonable trajectory within that upper band.

Also, in 2006, we are going to be devoting more resources to growth, increasing our development spending on growth investment, with the net impact of about $0.08 a share. I believe this is critical for us to continue to grow the value per share of our Company at a rate that's going to continue to be attractive to investors in the future.

Let me just talk briefly about the growth prospects as we see them today. We have always put our growth prospects into four categories, the platform extensions, the greenfield investment, privatization, and mergers and acquisitions.

In platform extensions, we continue to see these as very attractive economic investments. Let me give you some examples. We have a New York coal plant, one of our Greenwich plants, 161 megawatts, where we're putting on environmental controls to extend the life of the project. That construction is in progress and has attractive returns and positive NPV. We're looking at another similar project in New York.

In IPL, our Indiana utility, we are conducting some environmental CapEx which is required; but also, in addition to having a positive impact on the environment, it is going to earn a return on those investments.

At our deepwater project, Texas petroleum coke fired project, we are conducting a life extension and adding nitrogen oxide controls on our 160 megawatt plant there. This is one where we have a solid fuel plant in a gas market that we had really expected to be retiring, that will continue operating. So again, a very attractive investment there.

In Chile, we are constructing now a peaking plant called Los Vientos. It is 120 megawatts; adds critical capacity to that system; that is currently in construction. We have two additional coal plants which would be extensions of existing plants in Chile. One is a 200 megawatt plant; another a 250 megawatt plant. We are in the process of winding up contracts and we feel pretty good about these, because we're really adding coal capacity to already permitted and existing sites in a gas constrained market where coal is going to be very attractive on a going forward basis.

In Panama, where we have a number of hydro plants, we going to be building another one. We just recently won a bid for a 150 megawatt new plant. It is called Changuinola, which is currently in the permitting and development phase.

In El Salvador, where you have got a system that is heavily reliant on oil, we are going to be adding a 250 megawatt coal-fired plant in a country where we also in the distribution have seen a lot of value in low-cost coal opportunities. That would be a 250 megawatt plant.

In India, as many of you know, we have a 500 megawatt business there called OPGC, where we share the ownership with the state electricity generation company. We are going to be expanding that plant. It has been very successful. It is a low-cost coal plant in a market that is desperate, desperately needs electricity. That is the early development phases, but we think that is one within a couple years could begin construction.

In terms of the greenfield activities, this is an area where I think, because of the general attractiveness throughout the world of coal-fired solid fuel fired capacity, it is an area where we have got some strengths in terms of how we develop and permit those. It is a lot more challenging and it really does play to the strengths of AES and our development capabilities that we have historically had.

One that you're familiar with it is in Bulgaria, a coal-fired project called Maritza, 670 megawatts. That is in the final stages of development, and we expect to be able to start construction of that in the middle of 2006. Texas, we have a wind project, a greenfield plant there, Buffalo Gap 1. It is a 121 megawatt plant that just commenced operations.

In Vietnam we just recently signed up a memorandum of understanding for exclusive negotiations for a 1000 megawatt coal-fired plant teamed up with the state coal company.

In India, we also just signed a memorandum of understanding to develop a 1,000 megawatt coal plant in a state called Chattisgarh. But it is essentially a mine-mouth type plant which will be providing coal-fired electricity to India. Again that seems to be one of the most competitive ways to generate electricity in India, which is just desperate for capacity. With our experience in Maritza, we think it is an area that we could add a lot of value.

Let me turn now to the mergers and acquisitions and privatization. I would say here generally we have seen less attractive opportunities. We see a lot of money chasing deals. We also feel that the risks inherent in some of these power projects are being mispriced by the markets.

We did have one success in 2005; this was the acquisition of a major U.S. wind company called SeaWest. But on top of that we have an expanding pipeline of developments, wind projects in the U.S., and also now developing in Europe.

My general feeling is that the market for acquisitions is very cyclical. Today may be a better time to be selling than buying. We will continue to look for opportunities selectively; but we are going to maintain our discipline and only do what we believe would be value accretive deals.

I think the high prices in the market are also leading us to rethinking about how we should capitalize on the situation; I will talk about that in a second.

Just generally thinking about the future, how we're going to approach it, we are going to continue to capitalize on the attractive platforms extensions and greenfield opportunities that we see in the market. We will be very selective about acquisitions. We are more likely, I think, to be buying and acquiring things when the cycle reverses. One thing we're seeing is that many of the new owners of power assets are not long-term holders; and that may create some opportunities for us a few years down the road.

We are going to be devoting more effort to portfolio management, selling assets that are attractively valued by the market, such as we did with our Kingston plant in Canada. We are going to be especially interested in this where we can maintain majority control and a management and operating role. Because we think maintaining the footprint of AES is important for our future growth.

We are also going to be looking for unique opportunities where we can be investing in attractive parts of the energy value chain, where large amounts of capital have not begun to flow, and where we have the skills or we can rapidly acquire those skills, and redeploy capital to areas with higher returns.

Let me give you one example; it is an area that we call alternative energy. This area deals with emerging constraints and volatile fuel prices. As the world is going to see energy demand increase by 50% by the year 2030, this area is intriguing to us and one that Bill Luraschi and his corporate development team are very focused on in terms of developing new opportunities.

Wind and LNG re-gas terminals, which you have heard us talk about in the past, are two examples. But we also see opportunities related to climate change spurred by the Kyoto Protocol. We're looking to participate in the commercial development of projects and technologies that directly reduce greenhouse gas emissions or create emission offsets under the Clean Development Mechanism of the CDM of the Kyoto Protocol.

Yesterday AgCert, a UK-based company, announced our agreement in principle to take a 9.9% stake in the company for roughly EUR40 million, subject to our due diligence. AgCert is involved in creating these offsets from agriculture and then selling them to industrial emitters, governments, and funds to enable them to satisfy their requirements under the EU emissions trading scheme.

We've also reached agreement with them to purchase up to EUR60 million in CO2 emission reduction credits they are developing, which will be available for our European businesses subject to the protocols. We also see other opportunities to venture with AgCert, and one of the attractive synergies is the location of a number of their projects in a number of countries where we operate, such as Brazil and Mexico.

We think there are going to be other opportunities to participate in this market; and look to hear more from us on this in the coming months. At this point I would like to turn it over to the operator for questions.

(OPERATOR INSTRUCTIONS) Lasan Johong of RBC.

Nice fourth-quarter results. I wanted to ask you a couple questions about the guidance. The $0.29 reduction between tax rates and minority interests, can you give us a split between tax rate and increase in minority interest? It looks like it's about 50-50, but I'm not quite sure.

Yes, the split is a little bit higher than that in terms of the tax rate, closer to about 60, 55 to 60%.

Okay. In terms of project growth, $0.33 -- or I'm sorry, operating growth of $0.33, how is that split out between, say, for example, North America and the rest of the world? How much of it is contract generation, competitive supply, and utilities?

At this point, we're still looking at a number of different opportunities in terms of the global pipeline. We don't have it split at this point in terms of looking at it project by project and region by region.

I see. On this AgCert acquisition, can AES use these CO2 credits anywhere in the world, or is it just restricted to Europe?

I will have Bill Luraschi, who leads our corporate development group, respond to that one because he has been closest to it.

Okay.

Under the Kyoto Protocol, beginning in 2008 we can sell them in any of the countries that are capped in emissions. So that is that EU, but it also then involves Japan, Canada, and other developed world countries that have signed on to Kyoto.

But not in the U.S.?

Not in the U.S., that's right.

I see. And how much emission credits is AES looking to sell out of New York Eastern Energy or (indiscernible)? Or [primary] SOx, I suppose?

David Gee, who is on the phone, he is actually out visiting our Hawaii plant, can respond to that. Although I think it is probably close to 5:00 in the morning for him. David?

Yes, I think the disclosure we had last year was 40 or 41 million of allowances that we sold in New York. We have recently gone through and looked at our policy of -- and again you are right -- predominately federal SOx allowances.

What we're doing now is what we call selling to the hedges. We look at how much of the margin we have got locked in, in existing hedges. When we do that, we view it as a bundle of selling the power, buying the coal, and having enough emission allowances on hand. Those three things together are the bundle that we look at when we say we have hedged.

So we have looked at what we have hedged and have identified what is excess to that. We will be selling those opportunistically. We don't mention -- we don't want to talk about the numbers right now. We will disclose them as we sell them, because of not wanting to telegraph the market before we sell them.

We have increased the amount of hedging in New York, I think subsequent to year end. Looking forward, we are now I think a little over 70% hedged for '06, '07 and '08, and just a tad under 50% hedged for '09.

Okay. The $0.08 development spending, did I hear correct that the impact of that development spending won't felt until '08?

It's depends. The immediate impacts are that we expense a lot of our development spending. You get to a certain point in a project you can actually start capitalizing the costs associated with that. For example our Maritza project, we have been capitalizing those costs for a few years.

It will depend on where we -- what we're successful in doing. Acquisitions would tend to have a much quicker profile for adding earnings. The greenfield investments would be coming online anywhere from three to four years down the road. So to the extent you're involved in greenfield, you would see it take a little bit longer.

Some of the things, for example, like the investments in AgCert will probably have a quicker return profile. But it will depend on what we do. What we will do is, as we are successful, we will let the market know what we have done; and what the kind of earnings impacts would be for those investments; and when you would expect to see them.

Great, thank you.

Elizabeth Parrella of Merrill Lynch.

A follow-up question for David on the New York hedging strategy. Can you talk a little bit about how, say, the dark spread would look on these hedges in '06 relative to, say, '05? Obviously we have seen a big decrease in gas prices. You mentioned that you have done more of this hedging since the end of the year.

So it would be helpful to get some feel for the kind of relative dark spread in '06 to '05; and then how it might change in the out-years in terms of what you have already hedged.

Rather than disclose some of the specific dark spread, if we look at the total gross margin going forward, '06 is up slightly, I think, from '05. Then the '06, '07, and '08 are relatively flat using the current -- if you looked at the current gas curves.

Then of course, even on the unhedged portion we have the sensitivity. About $1 a million BTU is about a $10 million swing in gross margin. So even on the unhedged portion there's a little bit of volatility.

We don't like to hedge more than 75% because of the incremental operating risk that that would create. So we tend to keep it at that level.

Okay. Then another question I think for Victoria. You mentioned the impact of foreign currency on the revenue growth for the various segments. Wondering if you could talk about the translation impact on EPS for the quarter and the year?

We're not at a point right now, having just finished the restatements, to be able to do that. We are following up, and we hope to have that number in the next couple of days.

Okay, thank you.

Craig Shere of Calyon Securities.

Victoria or Paul, the 2.6, the $2.9 billion '08 operating cash flow guidance, when was this last updated, before now?

I think we can -- when did we last confirm our guidance, Scott?

This is Scott. Craig, we had introduced into the 2003 meeting and introduced at that time an operating cash flow target of 2.1 to $2.2 billion for '08. Of course we met that in '05.

We really had not been updating that recently. That is why since we talked on the call we thought it was appropriate to reintroduce that now, because it is important, as Paul pointed out, as a key driver, particularly looking at free cash flow.

So we really had gone already passed the old '08 target. We thought it made more sense to acknowledge that we saw much higher operating cash flow in '08.

What we're going to do is sometime this fall we are going to really update that '08 guidance and go beyond that. What we're waiting to do is we go through a process where we updating the models of each of our businesses and the strategies. We will have that completed this summer.

So in the fall, in one of the speaker series that Scott has arranged, we will go through with people and explain how the outer years look, taking into account that now that we're spending money in development, what do we expect to come out of that? And how would that affect the projections going out five years or so?

Because we really haven't kept that updated in terms of what does it look five years out. I think we will be ready to do that in the Fall time frame.

That's great. I thought it was a couple of years old, this guidance; and now it's nice to see the 20% to 30% higher than original.

A couple more questions. Victoria, can you help us break down the $0.08 a little bit in growth initiative cost? You had said that not all of this was repeating; and you referred to some cost related to multiyear Merrill Lynch credit line. Maybe you could kind of break this down a little bit, so we have a sense for what is repeating and what is not.

About half of the $0.08 is related to specifically to BD investments and in the business. About the remaining 50% is split between the interest expense savings that we previously would have projected from debt paydown; and then about $0.02 in terms of the Merrill Lynch fees.

Great. You are still including $0.02 in charges from refinancing costs at El Salvador? You're not taking those out?

Correct.

Okay. Paul, you were talking about the maintenance CapEx. I think you had mentioned, if I remember in your talk, $200 million or more for environmental. Maybe there's some other kind of quasi-growth CapEx expenditures at Cameroon and Venezuela for your utilities there.

Could you kind of, A, comment about what all the potential CapEx is that is in maintenance that you really do earn some returns on? Is it closer to $300 million?

And B, kind of comment on -- are we just getting a little too conservative in describing all this as maintenance?

I think what it really boils down to is we have gotten into really focusing on how to improve performance. We have talked about the various things we look at.

Availability of the plant is probably one of our biggest drivers, heat rate. As people have really focused on this, and gone throughout the Company, and looked at how others are doing things, they are seeing opportunities to invest capital. The capital does have good returns. It results in improved gross margin, effectively.

That is why as we went through we said, look, we would typically spend on the order of 500 to $600 million in terms of plain old maintenance CapEx to keep the plants operating as is.

So if you look at that and say where we are, which is the 800 to $900 million, that increment is really about a little over $200 million from environmental CapEx; and then the delta would be what we would consider to be other things we are doing to improve the plant performance.

So it should all results in more returns and growth. So really looking at it, it's somewhere between say 3 to $400 million in total that would give returns.

In terms of whether we are being conservative to describe it that way, I think our basic view is if we start segregating every investment we make, as to whether it is good for the plant or not, has a positive economic benefit, we get on a slippery slope of -- and we could very quickly say we don't have much maintenance CapEx at all; it is all growth.

So we have tried to maintain a very strict definition internally, to say if it is investment in an existing plant, we are going to call that maintenance CapEx. Because you're going to have to do it or you should do it.

So it is effectively somewhat conservative, but I think it's the right wait to do it, for us to keep our eye on the ball and make sure we don't let our CapEx get out of control.

Fair enough. Last question, Victoria, on the federal and foreign NOLs, is it reasonable to think that you might be able to consume all those over the next, say, five to 10 years?

I think from a projection standpoint, five to 10 years is obviously a pretty long time frame. But I think within the U.S., that is a reasonable projection.

You have some substantial foreign NOLs. Do you have any sense for -- I mean, because this is a significant amount of value in the share price today if we do an NPV on these NOLs over anything that time frame or shorter. So can you give any guidance for the foreign stuff?

You're absolutely right; there is a lot of value there that we have yet to unlock. I think our tax people have been a little bit busy lately going through restatement, but as soon as we get them freed up -- and they are doing a number of things.

But that is a big focus for us, trying to figure out how to capitalize and bring forward that value. We think that is something we can do because there is a lot of value there.

So right now it has just been focused on getting the restatement done, getting the numbers done right, getting the processes in place. But as soon as we get that cleared up, Prabu Natarajan is going to spend all of his time thinking about that.

Great. So we could talk about this on future calls?

Yes, probably in the future. Prabu is sort of shaking his head and wondering how soon. But I do think it's an area that has a lot of value that we just haven't put enough attention on, and we will going forward.

Thanks, Paul, and congratulations on a good year.

Brian Russo of BroadWall Capital.

Could you talk about the portion of capital expenditures allocated towards certain growth projects not yet awarded? Is there any sort of breakdown there, or any portion of that that is involved with projects that are currently under construction?

I am not sure I completely understand the question. You're talking about of the, say, 250 to $350 million of growth CapEx that we have outlined?

I see footnote 2 in the slide presentation, total '06 capital expenditures estimated at 1.7 to $1.8 billion, including certain growth projects not yet awarded. How should we look at that, in terms of incorporating that into the analysis?

I think about two-thirds is committed at this point or reasonably certain. (multiple speakers) I think part of it is Maritza, the completion of the Cartagena facility. So some of that -- so I am guessing clearly more than half, maybe two-thirds, is fairly certain; and the rest is a high probability we think.

We did this. We looked at all of the various opportunities that we have out there and then did a probability assessment as to what is likely to happen. so we think that is a reasonable number in terms of how much we are likely to spend.

We could go a little bit higher than that; it might be a little bit less. But I think it is a good number. Again, two-thirds is almost locked in for certain at this point.

Is that a reasonable run rate for years post 2006 as well?

I think I mentioned that the markets tend to be cyclical; so I hesitate to say what that is going to be. The way I think about it is, if we see a good opportunity that's value enhancing, we will take the steps to do it.

So I think you'll see it fluctuate around. I think next year would probably be reasonable number. I don't see it getting dramatically higher than that. But in some years it probably will, and in some years if we don't see good opportunities, we would not be spending money, we might use money to pay down debt.

We will really look at what the market opportunities are there, what we think we can do. So I would say that is a reasonable -- if you wanted to pick a number and say, what would you project going forward? I would say it is probably -- between 1.5 to $2 billion is probably a reasonable number to think about.

Okay, my last question is concerning subsidiary distributions. Can you just kind of discuss in more detail any initiatives in place, or the regions or subsidiaries that you feel can contribute incremental cash distributions to the parent over the next few years?

I think what we do is we have got a group in the corporate development group called portfolio management. They're looking not only at where can we sell assets or minority interest in businesses, but where can we take out capital by refinancing businesses?

I don't want to comment on any of the specific ones, because we have got a couple in mind, but we have not disclosed them yet and we don't want to, where we can actually do some refinancings at the subsidiary level which would free up some cash.

That is a big focus on our part, because as you know we have been delevering many of these subsidiaries because of the lack of access to the capital markets. One I think you're familiar with is Brazil where we have not been able to take any capital out because of the debt structures that are in place. That is one that we are putting a lot of focus on in terms of how can we get that one fixed, so we can start sending some capital up to the parent.

We will look at some other ones where we could do some things like that too. So we just don't continue to delever the subsidiaries; we would much rather be putting the leverage on the subsidiaries and delevering the parent; or taking that money and recapitalizing or using that capital to other places where we could better use it.

Okay, thank you.

Clark Orsky of KDP Investment.

I just wanted to follow up on the previous question. Any targets for credit metrics at the parent? You're just talking about maybe paying down some debt at the parent over time?

We just have obviously got an upgrade very recently, but we're still targeting moving up to a double-B rating. I think at this point we are less focused on the absolute dollar debt reduction at the parent level as much as we are focused on getting to the right [interest] coverage ratios relative to how we manage the business. We may do that through a variety of different methods, some of which may be debt reduction; some of which may be equity; some of which may be portfolio management. But we are less focused on the absolute dollars of the debt reduction right now.

Right. Can you put a metric out there that maybe you would like to be at for coverage and recourse leverage?

I think I mentioned earlier in terms of the comments, we are targeting levels for the ratios in the ranges of 4.5 to 5 times; and 2 to 2.5 times in terms of the ratios of the parent recourse debt as a multiple distribution from the subs; and also from the subs as a multiple of the parent interest.

So those are the key metrics for us in terms of focusing on cash flow and how we are unlocking cash flow from the subsidiaries to the parent, and how we are managing that with relation to debt and our interest level.

Okay. I guess last question, with a turn toward growth, Paul, just wondering; do you feel like you've got the risk controls in place to make sure that these investments sort of pan out as you foresee them?

Yes, I think we do. Having gone through the problems we had, going back to the '90s where I think we didn't do that as carefully, we learned a lot. That is probably hurting us in terms of looking at some of the new business and bids we make. Because as we go into, say, look at a privatization, we understand the kinds of things that might go wrong; we understand some of the regulatory issues that can arise if you don't have the right kind of regulatory structure in place.

As a result, it is proving that we're not as competitive as others. So I think we understand the risks probably better than most. So I think when we go forward we have looked at all the different kinds of things that can go wrong.

In terms of process, what we have done is whenever there is an investment, the first thing that has to happen is, before it comes to the executive office which will have to approve it before it goes to the Board, it actually goes through an independent review team. There we have taken some of our best developers. It is led by a person by the name of Didier Rotsaert, who is a very strong developer. He will take people and put them on a team to go in and really scrub the investment opportunity and find all the flaws, what might go wrong, identify the risks that the team might not have identified.

So really taking some of our best people and putting them on this review team to make sure that we have thought about everything; we understand the risks; and that we have mitigated them properly. It adds a little bit of time in terms of how we do things. But I think by the time it comes to the executive office and goes to the Board, it's been scrubbed pretty thoroughly so we understand that better.

I think just generally we are cautious. Because I talked about capital allocation, I still look at paying down debt as a viable option for us and we know that there's some benefits in doing that. So anything we do has got to prove to us that it is a much better opportunity than paying down debt. It is going to increase the value of the Company.

So I think we do have a good handle on the kinds of risks we're dealing with, and we're being cautious and thoughtful about any of these opportunities we pursue. So I feel much better about it than I have in the past.

And we are passing on a number of things that would otherwise -- might look attractive on the surface; we're just digging in and finding that they are some potential issues there. Like I said, I think if you look at the market today in terms of acquisitions, the risk is being mispriced. But I think we can understand it and realize the kinds of things that might go wrong.

I think, quite frankly, with the kinds of leverage people will put on deals, it may create opportunities for us down the road, as some of those may not do as well as people expect. There may be some opportunities to pick those up and be the second buyer of those assets.

Okay, appreciate that color.

Mitchell Spiegel of Credit Suisse.

Just two questions. First, on your guidance for parent investments in CapEx of 250 to 350, is all of that coming out of the parent operating cash flow? Or will some of that money be financed off of your new Merrill revolver?

That would be both.

Can you -- is it 50-50? Two-thirds/one-third?

Well, I think -- let me just -- in terms of -- we look at capital allocation where we put the money and put it in the best places where we think it makes the most sense.

In terms of sources, I really look at we have got three different sources or four differences sources of capital. We have got our operating cash flow. We have asset sales, any proceeds from asset sales. We have got equity issues and debt issuances.

And what we're really going to do is optimize that as we go forward, keeping in mind that we have this objective to have strong credit metrics, and just looking for the best sources of capital at any point in time.

So it's the kind of thing that, as we see the need for capital, we will go forward that way. With the Maritza investment and a $600 million facility, it was really just to make sure we had adequate capital available to make that investment. Because we think it is a good investment. It's got the right type of risk profile for us, and we thought that was the best way to ensure that we have it.

At some point we may elect to take that facility out and replace it with some funds from one of these other sources. But we will just keep looking at that and make that call on a case-by-case basis.

Okay, my other question was -- of the 41 million in emission sale proceeds, that appears in the contract generation segment for distributions?

This is Scott. No, competitive supply.

Right, competitive supply. You have not commented as to whether you expect the range this year to be comparable?

Correct.

Thank you.

Peter Monaco of Tudor Investment Corp.

A couple of quick ones if I may. Refocusing back on the forecasted operating cash flow for '08, in light, Paul, of what you said about maintenance CapEx, broadly defined, normalizing somewhat below the '06 level in the years beyond '06, the implication is that free cash flow before growth CapEx in '08 could exceed $2 billion. Am I thinking about that the right way?

You are; and that is how we think about it, too. That is why we are focused on maintaining our maintenance CapEx, keeping that to reasonable levels. But you're right, as I think about the value proposition, that really is I think something people need to focus on.

If you get that kind of free cash flow, you have got the issue of, well, you've got some at the subsidiaries; how do you get it back to the parent? But that is the right way to think about it, that you have got that level of free cash flow in excess of $2 billion potentially. And then how would you back into a valuation from that? That is something you can all think about.

Thanks for that. Separately, or in addition, with respect to the roughly $900 million CapEx in '07, which constitutes the sort of pure, I will call, it new growth opportunity CapEx, as opposed to the will earn a return on the maintenance CapEx type spend. Excuse my ignorance, but is that 900-ish number your equity commitment? Or is that the total, of which 50, 60, whatever the number is would be debt financed?

Yes, that would be the total and of course that would be debt financed. Call it 50%, 60%.

Okay. Then finally, could I ask Victoria just to take another crack at her answer to Lasan's question in regards page 4, item 2, higher operating results and lower interest expense, plus $0.33 contribution?

I understand we need not get into a whole lot of specifics here today. But I infer that what is meant there is that, by and large, it is better operations which drives that $0.33. Are we referring to availability? Are we referring to expected tariff increases? If I am interpreting it all wrong, please correct me.

No, I think it is both. Operations, it is cost management that we have put in place in a number of the businesses; and it's also, frankly, change in the mix of the portfolio of businesses that we had, the higher margin producing businesses as a greater percentage of the portfolio (multiple speakers) drove it.

Okay. Respectfully, your answer to the question early in the call suggested or implied you did not have a lot of clarity or visibility. Your answer to me just now suggested of course the opposite, that you do have clarity or visibility. Can I assume it is the latter?

This is Paul. I think we have clarity and visibility; we just don't have it directly in front of us right now terms of what the makeup of that is.

I think the bulk of it is coming from the continued performance improvements and tariff increases. We look at -- the two sort of go hand-in-hand. At our utilities one of the most important things they do is working with the regulators to demonstrate that we are performing so that we get the tariff increases that we expect to get.

But it is tariff increases on the revenue side; it is the availability that helps the revenue side; plus the loss reduction, which helps both the revenue side and the cost side. Heat rate reduction. Those are the big things that play into this as we basically increase our gross margin.

Thank you all very much.

This is Scott Cunningham. I want to say thank you very, very much for everyone participating today. If you do have any follow-up questions, please don't hesitate to contact either Kelly Huntington or myself in investor relations. Any media inquiries should be directed to Robin Pence, Vice President Corporate Communications. Thanks very much and have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.