愛依斯電力 (AES) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the first-quarter 2006 earnings AES conference call. All lines have in 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 your conference.

Good morning, everyone. Joining me today are principal speakers Paul Hanrahan, President and Chief Executive Officer, and Victoria Harker, Executive Vice President and Chief Financial Officer. The press release and the presentation we will refer to today is available on our website at aes.com. Our first-quarter 10-Q is also available this morning.

Included in the presentation is our usual quarterly financial review, and the appendix includes our current 2006 and longer-term 2008 financial guidance and other supporting information. Certain statements regarding our business operations and strategies may constitute forward-looking statements as defined by the SEC. Such statements are not historical facts but are predictions about the future which inherently involve risks and uncertainties. These risks and uncertainties could cause our actual results to differ from those contained in the forward-looking statements.

In addition, AES disclaims any obligation to update any forward-looking statement to reflect events or circumstances after the date hereof. We urge investors to read our descriptions and discussions of these risks that are contained under Item I-A, risk factors, in our 2005 Form 10-K as well as our other SEC filings.

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

This morning, Victoria will review our first-quarter performance and updated financial guidance. Paul will then have some comments on the state of the business. Victoria?

Thanks, Scott, and good morning, everyone. We're pleased to report a solid first quarter with financial performance strong across the board and earnings double those reported last year. I'm going to touch upon some important highlights in these results, but we will leave it to the press release and the financial review slides to cover a number of the details. The focus of my remarks today is on the significant drivers of financial trends in our business.

As was the case last quarter, we saw the continued benefits of favorable currency and pricing trends again this period across many of our most significant international operations. Domestically, we continued to benefit from our emission control investment in New York, which has led to significant excess credit allowance inventory. We continued to liquidate this inventory this quarter, as we outlined in our 2006 guidance.

Although less significant we also secured good pricing on $7 million of our excess CO2 allowances in Europe ahead of the recent price decline. Total allowance sales were $47 million in the quarter compared to $1 million in last year's first quarter.

Our revenue growth of 13% this quarter is especially impressive following our 18% growth in the first quarter of 2005. Favorable currency impact continued to be an important revenue driver for our international businesses, adding approximately 6% to revenues, primarily in Latin America. Pricing and volume gains contributed 5% to revenue growth, while the allowance sales added 2% to revenue.

Gross margin increased 16% and improved 80 basis points to 31.7%, helped by the allowance sales. We continue to offset increased fuel cost with fuel cost escalation provisions in our contracts in the Contract Generation businesses. Our Competitive Supply businesses are largely coal and hydroelectric based, not gas-fired capacity, and fared well in the global commodity pricing market. The tariff process in Regulated Utilities continued to flow through higher prices for fuel through resale price increases.

The press release highlights most of the more important details below gross margin, so I will not repeat them here. There are, however, a few trends that I do think are important to discuss. G&A cost did increase this quarter, although as a percentage of revenues it was flat at 2%. The increase was driven by modest acceleration in business development activities, as well as finance, departmental, and control remediation expense. The overall cost increases in the first quarter were not significant relative to the $0.08 increase we estimated in our guidance for the full year.

In line with our capital spending projections, depreciation and amortization was $234 million in the quarter compared to $223 million in the first quarter of 2005. This is not part of our current quarterly financial presentation but it is a helpful parameter for evaluating our construction and development spending.

Our tax rate was 31%, or 36% excluding the Kingston sale. The underlying 36% is consistent with our mid 30s guidance assumptions. The impact of tax and minority interest expense year-over-year is driven by the mix of pretax earnings relative to our ownership of each business across the portfolio. This quarter, the minority interest expense has a higher embedded tax rate than the underlying 36% consolidated income tax rate when adjusted for Kingston.

The higher embedded minority rate, mainly in Brazil, resulted from additional tax expense on the strengthening real in relation to the U.S. dollar's functional currency business there. This drove up the effective Brazil tax rate, which in turn increased our minority shareholders' portion of that expense. As you can see, our total minority interest expense declined year-over-year. Keep in mind this tax rate dynamic is in fact a partial offset to the favorable translation effect on operating earnings.

In terms of significant financial ratios, the quarter reflected favorable trends. Return on invested capital at 12.2% largely reflected the higher after-tax operating result, partially offset by higher stockholders equity and minority interest.

Year-over-year comparisons were impacted by a number of nonrecurring items with an overall positive impact. This is not surprising as it reflects our ongoing efforts to improve the strength of our business portfolio as well as the consolidated Company's capital structure. Several of these items were already disclosed during the quarter and were factored into our 2006 financial guidance, including the sale of our Kingston business in Canada, prepayment of our Senior Subordinated Notes, and debt restructuring in El Salvador.

In the presentation we summarize a high-level view of the drivers of earnings quarter-over-quarter, following a similar format to that used in our 2006 financial guidance. On a pretax basis we saw gains of about $0.20 per share from gross margin, as I discussed earlier, with about $0.13 per share of this coming largely from a combination of currency and price, and the rest from allowance sales. We had an additional pretax contribution of $0.19 per share between gross margin and income before taxes and minority interest. The majority of this contribution related to significant nonrecurring items, which are described in the financial highlights section of the press release. The balance related primarily to lower net interest expense as well as lower currency transaction losses.

Higher weighted average shares outstanding due to our trust preferred securities being dilutive in the first quarter of 2006 reduced EPS by a penny. This brought us to the GAAP earnings of $0.52 per diluted share. Adjusted EPS was $0.42 per share, which is net of the Kingston sale gain and the cost associated with our corporate debt retirement.

Net cash from operating activities increased 5% to $544 million. The same business mix shift which favorably impacted earnings had a negative impact on cash flow. This is the result of higher taxable earnings in Brazil, where we are current taxpayers and therefore pay higher taxes. Also, net cash from operating activities does not include $44 million from the allowance sales. Although we consider this an important lever in managing business performance, it is reported outside of net cash from operating activity metrics.

Free cash flow remained strong at $369 million, but fell compared to last year due to the increase in maintenance capital expenditures. For these expenditures, about $45 million or 26% relates to major environmental projects at IPL and Greenwich in New York, both of which will have a positive economic return for the Company as well. The rest of this major environmental spend is for our Kilroot retrofit project in Northern Ireland, which be a cost pass-through only. Spending on these environmental products was about $16 million last year.

We continue to expect good growth in net cash from operating activities this year, with our guidance calling for free cash flow of 1.3 to $1.5 billion. All of this is generated initially at the subsidiary levels, with a portion transferred to the Corporation through subsidiary distribution. Roughly two-thirds of expected free cash flow is expected to remain at the subsidiary level for debt repayment or reinvestment in the businesses. On a consolidated basis, debt was reduced by $127 million during the quarter and by $770 million over the last 12 months.

Overall, growth investment CapEx was $57 million in the quarter, largely related to development cost for our Maritza East 1 project in Bulgaria and construction of our Cartagena project in Spain. We expect growth spending to increase beginning in the second quarter as we ramp up investment in the Maritza East 1 project. In addition, we will be funding the previously disclosed purchase of a 9.9% interest in AgCert. We also recently announced a wind asset acquisition in California and some other opportunities that are all part of our broader alternative energy strategy.

Distributions from subsidiaries to the parent were on track in the quarter, as we received $132 million consistent with the expected timing of distributions and our overall target of $1 billion for the year.

This quarter, we also continued to make good progress on our ongoing efforts to improve credit metrics at both the parent and the subsidiary level, as demonstrated by the early redemption of our $115 million Senior Subordinated Notes. Our goals and metrics on this front remain clear. Our corporate goal remains strong double-BB and B/A ratings, complemented by targeted investment-grade ratings at specific subsidiaries where that flexibility optimizes their capital structure and cost of capital.

We were especially pleased with S&P's announcement of a recent upgrade of the corporate parent in March as well as the recent upgrade of AES Gener to investment-grade. These actions follow similar investment-grade rating awarded to El Salvador early in the year.

Our Corporate credit targets remain clear as well, as we continue to target ratios of 4.5 to 5.0 times for recourse debt relative to subsidiary distribution, and ratios of 2 to 2.5 times subsidiary distributions as a multiple of parent interest expense. These ratios for the last 12 months were 5.19 times and 2.18 times, respectively. The $132 million distributions in the first quarter distort the quarterly comparisons; but we do, however, expect to be on target relative to our 2006 guidance.

Let's turn now to first-quarter operating performance by business segment, starting with the Regulated Utilities. Revenue trends reflected continued benefits from strong currencies in Latin America, especially in Brazil, and favorable pricing trends. Comparisons in Latin America were negatively impacted by the effect of a retroactive revenue adjustment for Eletropaulo as a result of the last tariff adjustment, which was reported in the first quarter of 2005.

Gross margin increased modestly, led by a 10% gain in Latin America. This was largely driven by the strong real in Brazil, although last year's retroactive tariff adjustment hurts comparisons year-over-year.

I would also like to highlight today one of our important utilities, Electricidad de Caracas in Venezuela. EDC remains one of the leading local Venezuelan companies on the Caracas Stock Exchange. A continuous improvement there has allowed them to control cost, and they continue to benefit from favorable energy and local fuel prices. Together with forecasted demand growth of 5%, these will be major drivers of financial performance in 2006 for EDC. All of these actions have protected our distribution value-added and allowed us to maintain high levels of service and support for growing demand.

In our Contract Generation segment, revenue growth was led by a 30% increase in Latin America. This in part reflects the favorable dynamics in Brazil that I mentioned earlier, as well as better pricing in Chile under the new generation of tariffs instituted in the second quarter of 2005, [a] result of better performance in the Dominican Republic overall. Revenue increases in the other regions largely reflected fuel cost pass-through as well as higher dispatch in Pakistan and Sri Lanka.

Contract Generation segment gross margin increased 11%, again led by a strong 43% gain in Latin America, reflecting the favorable pricing and demand in Brazil, the Dominican Republic, and Chile. Gross margin for North American fell 17% due to outages in the first quarter at two of our U.S. plants in Hawaii and Maryland, while EMEA gross margin was hurt by a strong dollar and lower capacity payments in Nigeria.

Of particular note this quarter is the significant improvement in Dominican Republic, where we have two gas-fired generation plants, our first LNG terminal, and minority interest in a coal-fired power plant. The Itabo coal-fired plant has been extremely competitive on the island, given coal's cost and margin advantage compared to gas-fired capacity. We're beginning to see a recovery in dispatch as well as (technical difficulty) pricing there. Liquidity has also improved following a well-negotiated settlement of receivables with the government.

On the Competitive Supply side, revenues increased 32%, with gains in the Americas and in Asia. North America was particularly strong, with $37 million in allowance sales compared to only $1 million in the first quarter last year, as well as favorable pricing trends. Pricing was a favorable contributor in several businesses in our other regions, including hydroelectric businesses in Argentina, Panama, and the coal-fired business in Kazakhstan. These pricing benefits were also reflected in good gross margin gains, although the largest driver was New York. Overall, segment gross margin increased $85 million or 131% and was up in all regions.

Within the Competitive Supply business, I want to highlight the very effective strategic approach the business and the risk management teams there are taking to manage market pricing trends from hedging, thereby locking in attractive dark spreads over a longer period. This year we have formally integrated our New York risk management group into the business operations to better align this important lever for optimizing business results. Our second investor conference series meeting tomorrow in New York City will feature a discussion of these strategies.

Finally, I would like to walk you through our updated 2006 outlook. In addition to higher gas and adjusted EPS guidance, we have reaffirmed our other 2006 and longer-term guidance elements, as you will see in the presentation. This includes narrowing our 2008 EPS target to the upper half of the previous range as we discussed on our last earnings call.

We firmly believe this will be a good year. In saying so, we urge investors to look at the business the way we do, as a long-term business which has quarterly fluctuations. The profile of our quarterly results is changing somewhat this year for several reasons. Let me touch on the most important factors influencing the shift in the quarterly earnings profile.

The first is the timing of emission sales in the quarter. We secured the majority of our planned U.S. excess allowance sales in the first quarter, as our forecast predicted weakening near-term price trends to come. By contrast, most of our significant sales were in the second and fourth quarters last year. Given recent trends we do think it prudent to assume weaker prices on remaining sales this year. Also given current CO2 allowance prices in Europe, we may not see further sales at current prices this year.

Second is the trajectory of our business development spending. Our guidance still anticipates higher business development costs over the next three quarters. We continue to see it as the right choice to invest in long-term growth.

A third item that should not be overlooked is our investment in improving our financial infrastructure, staffing, and reporting, as well as accounting control remediation efforts, which will ramp up during each quarter of this year.

Fourth, is our evolving business mix, which effects both tax and minority interest and which is which shifting some of the traditional peak earnings in the third quarter to other quarters.

Fifth is tougher foreign currency comparisons. While year to date we've enjoyed good benefits from a weak dollar versus many of our important operating currencies, we don't expect the same magnitude of absolute EPS benefit in the remaining quarters of the year.

Finally, there is a renewed focus on effective portfolio management to maximize shareholder returns. We see a number of important opportunities to unlock value for AES shareholders as high market asset valuations may allow us to make some gains. In addition, our growing credit strength may provide some opportunities to refinance debt at both the parent and business level.

So to recap, the factors which we believe will drive the remainder of this year's financial results are a unique platform based in the U.S. but with global reach in one of the world's largest energy markets; strong double-digit earnings growth outlook for 2008, with a development team hard at work to continue that past 2008, with many new opportunities in the pipeline; strong operating performance evidenced by good free cash flow; improving return on invested capital; and a management team dedicated to financial stability and creation of long-term shareholder value. Now, I will turn the call over to Paul Hanrahan.

All right. Thanks, Victoria, and good morning, everyone. I just have a few comments on two topics this morning, both of which Victoria mentioned briefly, but I would like to go into a little bit more detail, the first being portfolio management and the second one being growth developments.

Turning first to portfolio management, we had two asset sales recently, and these are reflective of how we're thinking about managing our portfolio. They also bring more visibility to the underlying value of our portfolio, which we think is beneficial.

The first transaction, we recently completed a secondary offering for a portion of our Gener business in Chile. The 8% slice we sold yielded proceeds of $123 million. As a result of this process, the local stock market better recognizes the value of our Gener business. The price was up almost 60% in April. Today Gener has a market cap of roughly $1.7 billion, with AES continuing to hold 91% of the stock. This transaction will give us future flexibility to locally fund some of the new coal-fired growth investments Gener is developing.

A second example of how we're thinking about portfolio management was the sale of our interest in Kingston in Canada. We like this business but strategically it was not a critical part of our portfolio as we looked at future growth opportunities. Our existing platform in North America was more than adequate to allow us to continue to grow in Canada; and as a result we had the flexibility and did sell into an attractive market for secondary asset sales.

We will continue to look at other opportunities along these lines when we see some clear value propositions by selling and buying opportunistically; but also in the context of maintaining a critical presence in key markets. But even in those markets such as Chile, there are opportunities to maintain this presence and capitalize on favorable market conditions.

Let me turn now to the growth projects and really the uses of funds that come from portfolio management. Today we announced the start of construction of Maritza East 1. We satisfied all the conditions for funding the EUR790 million credit facility that we closed last year. Just to remind you, this is a 670-megawatts gross capacity lignite-fired power plant with $1.4 billion project cost. It's a good example of our traditional Contract Generation model. It has a 15-year contract with the national utility. The project is expected to have a 40-year life and to be competitive as a merchant player post 2025. We have also matched the 15-year lignite supply agreement with nearby coal mines, and these match the contract terms and minimize supply risks.

From this project we expect over $300 million in new revenues by 2010, because the start is really in two stages, the first in 2009 and the second stage in 2010. This really is a classic structure for AES -- a long-term contract, prices for electricity and fuel hedged, and nonrecourse financing.

The second example of growth here is in last month we announced that we were acquiring 54 megawatts of wind generation assets with repowering potential. This follows investments of $265 million in the wind sector. We continue to see a great deal of potential in renewables and other alternative energy sectors that we believe will provide attractive investment opportunities going forward.

I think this combination of transactions is a good model for us. As we look around the globe for new business, we will continue to look for economically attractive opportunities that benefit from our critical presence in key markets. But given the current market conditions we need to be very selective to be sure we earn substantially better than our cost capital for each product project, but at the same time we're able to take advantage of these very same market conditions to sell some of our assets without sacrificing the critical presence in those areas that we believe offer the best strategic positions for the Company as we look into the future.

We think this model is a sound way to increase the value of AES in the long term. Thank you, and now I will turn the call over to the operator for the question-and-answer portion of the call. Why don't you open up the call for questions?

(OPERATOR INSTRUCTIONS) Elizabeth Parrella of Merrill Lynch.

Could you quantify the foreign currency translation impact on EPS in the quarter?

We had estimated that to be about $0.05.

About $0.05 positive?

Yes.

Okay. My second question is regarding the guidance. You had a very strong first quarter, clearly; and if only $0.05 of the improvement was coming from foreign currency translation impacts, even holding aside the onetime items, it seemed like there was a very strong organic growth component. Yet when you look at the remaining nine months of the year, if I did the math correctly, I think that the earnings guidance implies about a $0.19 year-over-year decline.

I realize you have highlighted these factors like the volatility around the tax rate and minority interest, the growth-related spending, et cetera, and the timing of emission of credit sales, although I think that last year you only had $0.04 from sales in the last nine months anyhow. But are there some other factors going on? Because it just seems like that is a fairly big decline expected in the last nine months of the year, given the pattern of growth in Q1.

You raise a good point. The big factors are, one, that we frontloaded some of the emission sales because we saw good pricing and we didn't they would last. We actually called that one right. So we really took some things and put it into the first quarter.

The tax rate is another onetime effect that we think is going to levelize itself out over the quarter. But the other factor that is out there is just prices in New York. Whereas the first quarter we did not see much of a degradation in prices until towards the end, the forward curves had the prices being lower because of excess supplies. You're seeing a little bit of that impact.

When we look out to 2008, 2009, forward curves are coming back up to the right levels. But I think it is those factors predominantly, in addition to looking at the forward curves for the currencies, that are causing us to say that is about the right level of increase at this point.

Paul, just to clarify, when (inaudible) [New York] prices you are referring to power prices, right, not the initial emissions credits prices?

Yes, emission credit prices have dropped also; but it's really the power prices, driven by gas prices predominantly.

But you are pretty well hedged already for this year. My recollection from your last call was that margins in '06 were going to be, in terms of what you hedged, maybe a little bit better, I thought, than what you had in '05. Is that not the case?

That is the case. But looking for the part that we have not hedged, which is roughly 23% for '06 that is not hedged, we are seeing lower prices for those. So taking those forward curves into account and looking what that does to the rest of the year, in addition to the tax rate. Because we are seeing an abnormally low tax rate, but we think on balance it is going to get us back to the range -- something in the mid 30s range.

Okay, thank you.

Lasan Johong of RBC Capital Markets.

Nice quarter. I'm still not completely convinced, because New York 26% unhedged isn't going to be a huge impact, on a base of $3 billion revenue. Are you guys considering maybe impact from oil prices? Help me understand economically why the market is going to have such a decline going forward? Global market, that is.

This is Dave Gee. I can talk to New York. There the price sensitivity, I think the rule of thumb is there is about a $7 million swing for every dollar in gas prices. And we have seen gas prices come up quite a bit. That is only on the unhedged portion that has that sensitivity.

That would be $21 million pretax, from about $10 to about mid 6s?

Yes, a little more than that, but in that range.

Yes, I'm still not sure.

(indiscernible) it would be -- the issue here is just what's going to happen for the rest of the year. I think we are being prudent in terms of thinking through what could happen with currencies. We have a number of factors out there. I think many of you who have experience with AES, I think we're just being prudent in terms of giving guidance at this point.

I think as we get closer to the middle of the year, a lot will depend on currencies and where currencies end up. If currencies remain stronger, that would obviously have a positive impact. But at this point, we are trying to take into account the forward curves, where we think things are going to end up with the rest of the year, and taking into account those onetime effects we saw in the first quarter.

I see. But traditionally it is true that around 20% to 25% of AES earnings comes from the first quarter, correct?

Yes, and Victoria talked through why that has shifted a little bit this year. But I think when [Barry] talked -- particularly with respect to the tax rate -- talked about the fact that, particularly with Brazil, the tax rate will become more volatile quarter-to-quarter. We think it is more reliable and more predictable year to year, but clearly we are seeing a much more volatile tax rate from quarter-to-quarter.

Understood. Can you give us an update on what is going on in Ocean Cay? I understand the Bahamian government has now come around to embracing LNG.

Yes, let me -- Bill Luraschi, who heads up the corporate development group, covers that. Let me ask him to respond to that.

Thanks, Paul. As far as what has been formally announced, really there has been no change from our previous status, which is we have got all of our permits, [environmental] approval from the Bahamian government. What has been in the newspapers, in the Bahamian papers, recently is that the government has adopted an LNG policy which sets the guidelines more clearly for what projects it will allow to go forward.

They have not published that formally, but our understanding is that our project fits all of that. So we continue to be in the position of waiting for the formal go-ahead. We are anxious to start that, but to date we have not received any formal word.

So can we expect construction to begin this year, or no?

I think it is premature to speculate until we get the formal go-ahead.

Okay, thank you.

Leslie Rich of Columbia Management.

Could you review again the share count and the impact of the trust preferreds?

This is Scott; we can walk through and you will see the detail in our 10-Q filing in, I think, it is note 4. We had about 663 million shares outstanding in the period last year. Based on the sizable net income this quarter, the diluted EPS calculation brings the trust preferreds as being dilutive, based on the calculation that is embedded. So that brought up the shares by -- I want to say about 20 million or so in this year's period. So that ends up to be roughly a penny a share overall impact in the quarter. (multiple speakers) if you will.

So that would be likely to continue throughout the year?

Probably not necessarily, because again it is influenced by the amount of net income in the quarter. Last year we had the same effect in the third quarter because of the seasonal peek. I would not necessarily assume that is going to be the case in the remaining three quarters of the year, based on our current guidance.

Thank you.

Brian Russo of Broadwall Capital.

Could you comment a little bit more on the wind generation initiatives? In a recent press release you mentioned that you had plans to triple your investment there over the next several years. I believe you have roughly 2,000 megawatts of development opportunities. I'm just wondering -- are there any incremental capacity expected or projects to be announced over the next, say, 12 to 18 months?

Bill Luraschi will cover that comment.

Thanks, Paul. Yes, we continue to be excited about our wind business. Our current focus in wind is really North America and predominately the United States and Europe. So I think we will see over the next 18 to 24 months announced additions to our portfolio.

As Paul mentioned, we recently acquired about a 50-megawatt plant in California, or reached an agreement to acquire a plant which both has existing operations but also gives us the chance for some repowering opportunities. I think Texas continues to look like an attractive market for us, as well as most people pursuing wind generation in the United States right now.

Then I think longer-term, we see growing our wind business through other parts of the world, particularly in conjunction with our climate change business, which will allow us in those cases not only to generate wind revenues but also gain CER, or emission reduction credit, pricing support as well.

Okay, thank you.

Clark Orsky of KDP Investment Advisers.

Could you just review some of the shifting in the distributions from '05 to '06 from subsidiaries?

Clark, this is Scott. Let me kind of walk through that. I think the key difference you will see in the presentation is the timing of the first dividend of the year from our North American Regulated Utilities, which of course is a [pelco]. We expect that dividend, I believe, to come in the second quarter; so it is primarily just a timing issue. With respect to the rest of the North American businesses, I think the trend line is fairly normalized.

Okay, thank you.

Brian Chin of Citigroup.

This is actually [Umberto Marina]. Could you provide a detailed outlook for the second quarter of '06? What should we expect in terms of effective tax rate, emission sales? Thank you.

We tried, because of the volatility we have seen in quarter-by-quarter numbers, not to provide the detailed quarterly guidance. But I think the only I could comment on is that the emission sales, because we have taken them into the first quarter, you are not likely to see much if any in the way of emission sales in the next quarter.

On tax rate, we would expect, because it has been high this quarter, over the next three quarters -- I'm sorry; because it was low, we would expect it to be higher in the next three quarters, but don't know exactly how that is going to pan out quarter by quarter.

Thank you.

Gregg Orrill from Lehman Brothers.

I was wondering if you could provide a bit more detail on kind of the hurdles to taking the guidance (inaudible) from the government in the Bahamas to an actual LNG transaction. Then also if you could touch on the impact of derivatives in the quarter.

With respect to the Bahamas, I think the government there is being cautious and very careful in terms of the process they're going through to add an LNG facility to the islands. Because it is a very heavily dependent on tourism, I think the government wants to be sure that they have taken all the steps that are necessary to be sure that it is going to be safe and it's being put in the right location.

They actually had three projects going on initially, and they have determined that two of them or at least one of them did not make sense. It looks like the second one was probably not located in a perfect location, otherwise in terms of its impacts on -- potential impacts on tourism and safety.

I think ours passes muster in all those levels. But it is something -- it is a process the government is going through, and we are supportive of them going through and doing the right thing. So I think it is a matter of time, as Bill mentioned.

They're supportive of LNG in the islands; they think it is a good thing. But we will just have to go along with their timing and process is they take it through. So it really is just down to the government becoming comfortable with what we have proposed. When and if they get to that point, we would expect to get approval. But I think Bill is right; it is difficult to predict when exactly that might occur.

Victoria, you want to comment on derivatives?

In terms of derivatives, I guess the major point to make is that is an insignificant expense for the quarter. The majority of swaps that are floating to fixed, it was limited interest income expense exposure, but it was less than half a penny.

Okay. Are you changing at all your FX forecast of earnings guidance?

No, no at this point. I think as Paul mentioned we are going to continue to monitor them, especially as we near the half year point. But we're looking at it particularly for the top five, and we're keeping them consistent at this point.

Okay, thanks.

Craig Shere of Calyon Securities.

It's actually [Lance Ettis]. Just want to go over your maintenance CapEx. You are saying it's roughly 500, $600 million a year last quarter. Or (indiscernible) last quarter. I was just wondering if you could comment how much of this cost relates to portions that you don't own, your minority interest; and also the relationship between maintenance CapEx and depreciation for your businesses with minority interests.

I don't think there is anything that significant in terms of minority interest. Certainly all of the businesses where we have significant minority interests, such as Eletropaulo in Brazil, as any utility you have an ongoing maintenance CapEx program. They have already disclosed publicly in Brazil that I think something on the order of $200 million of maintenance CapEx a year is expected in the Brazil portfolio in total. So obviously a piece of that is, if you will, part of the minority. But on a cash-flow basis, we report that on a consolidated basis, so I think it's better to think about it on a consolidated.

As Victoria mentioned in her remarks, the free cash flow was impacted primarily by the pickup in three environmental CapEx projects -- Kilroot in Northern Ireland which is pass-through for an FGD retrofit; the Greenwich project; and the IPL projects that have been continuing. The latter two obviously will have some economic earnings benefit when they are completed. So that is really the headwind.

As we talked, I think, last quarter -- I remember Craig raised the point about looking at the free cash flow and the like, we stated the consistent definition of free cash flow. But the underlying projects in this case will have some benefit. Does that help?

Yes. I just wanted to know also, as far as with you're generating a tremendous free cash flow here or you're expected to; and you obviously (indiscernible) buying back debt or share buyback; and you have some growth projects. Just wondering if you're going to continue to [host] minority impact for the interest in those growth projects, or whether you are more likely to take it all on yourself?

I think whether it's minority or not, I think there's two points. We will look for growth opportunities where in the world, if they happen to be in businesses that have minority partners, then obviously we would look to those minority partners to share.

Most of the projects that we start off with, we're developing 100% ourselves. We always look at whether or not it might make sense for a partner in a projects. But in most cases, I think it is fair, Paul, we would probably start off developing ourselves and then choose whether that is an option or not expect.

Yes, I think we really look at -- I think particularly in today's environment -- where it makes sense to bring in partners because of there is a lot of capital out there looking to participate in projects like this. Where it makes sense, we can do that. It is not a problem.

But generally we will tend to do these things at least initially starting off from being 100% AES. Then if it makes sense down the road, when a lot of the value has been added, we might consider selling down some portion of those.

I think the other comment to make about maintenance CapEx is that this year what you're seeing is a little bit of a bump up not just for the reasons Scott mentioned; but as we have really been focused on how to improve the performance of the businesses there, particularly in generation, having availability, high availability, is critically important to the long-term financial success of these business, and their ability to get more out. There's really some really good investments in terms of reliability programs.

One of the things that our businesses around the globe have been doing has been focusing on how to improve the reliability. These are fairly small investments, but what we noticed was there was a bump up in capital and maintenance CapEx this year, which looking out in future years starts to come back down again. But it was really related to just making sure that all of our units would run reliably and have low outage factors, which in itself will give us some good returns in terms of overall performance improvements.

So I think it is all those combination of factors that really do, really have caused the maintenance CapEx to come up a little bit this year.

My last question is on the emission credits. I know you already commented on the other emission credits. But in the U.S., with emission credits falling in price so much, is this going to -- I know that you said that you have sold a lot this quarter; but is this going to hurt your ability to capitalize on them going forward? Besides the fact that you sold out a lot this quarter, but on the remaining emission credits.

Dave Gee will cover that question.

Yes, we have described our strategy as trying to sell to the hedges so we retain enough allowances to coincide with the amount of power that we have sold forward and procured the coal forward. So we have the coal, the power, and the emission allowances all as a package, as a hedge.

Anything in excess to that, we sell. As we have mentioned earlier, we have sold the majority of what was the excess early in the first quarter. So that we, I think, got most of those off before the market totally declined. At this point in time, we will continually revisit the amount that is excess and sell those on an opportunistic basis, looking at what our current perspective is around the price. (indiscernible) the price is a lot lower than it was a couple months ago.

Okay, thank you.

Lasan Johong of RBC Capital Markets.

There was an article today in the Wall Street Journal talking about Ukraine and how they are going through some changes in energy procurement policies and also trying to get more energy efficient. Is this having any kind of impact? Or are you guys participating in this endeavor in Ukraine?

I don't know the details of that. It should not have any impact on us, because the way our tariffs are set up, really, the energy costs are effectively a pass-through, as we're not generating any electricity. So we really are -- what really affects us is the tariff setting methodology. It sounds like, from what you have described, it should not be affecting that.

We have been looking at other opportunities in Ukraine, including generation. So I think from that perspective, I know our people have been looking at the various opportunities, and we think there may be some other things we could be doing, either in distribution or possibly in generation in Ukraine. But we're not far enough advanced to really discuss any of those opportunities just yet.

The government isn't making any demands or requests or capital spending allocations or anything like that?

What the process there is, that there really is an intention to upgrade -- this has been going on for several years -- to upgrade the quality of service and to reduce losses. So we have been working with the regulators there in terms of -- what are the most sensible investments, how to make those investments, because they do in fact factor into the rate base.

But there is nothing new in that regard, where there has been any undue pressure to do anything other than what has been required under the contracts. Quite frankly, our experience in Ukraine has been very positive. In terms of places we have gone and done business, it has worked quite well.

Thank you.

[Michael Hussay] of Mid-Continent.

Sorry to beat this guidance thing into the ground, but I just want to make sure I understand. The $46 million in sales of excess environmental emissions allowances, what had you been assuming for the full year in giving your $0.95 guidance?

We have not given any specific estimates; and for market reasons we would not want to do that. The best we can tell you is we have (inaudible) have sold the majority of our planned New York assumption in the first quarter. So that is as far as we would like to go, for market reasons.

I will tell you a little bit more. I know Scott doesn't want me to this. But when we set the budget and the targets, the emission prices were a little bit higher. So we had probably been expecting to sell at somewhat higher prices than what we actually sold for. We still think we sold at pretty attractive prices, particularly relative to where they are today.

But the other factor is we had a very strong quarter, and I think we're looking to have a good year. That is why we have increased the guidance to $0.97. One of the things Victoria mentioned in our comments was, in addition to onetime factors, we're seeing a step-up in our growth development spending. We think that is prudent, particularly in the alternative energy area. We are going to see more of that coming into play in the last three quarters.

It really is a combination of all those factors, plus some uncertainty still with respect to exchange rates and where they will be. Are they going to continue to strengthen? We just don't know.

I think that is why we thought it was prudent to increase guidance to $0.97; but going beyond that at this point really doesn't make sense for us to do. So that is why we have gone in that direction.

I understand. I just have two quick follow-ups on that, though. The gain on the sale of Kingston, the $87 million, and the $17 million realization on the settlement in the Dominican Republic, had have those been included in your previous guidance?

The Kingston sale had been included; at the time we actually assumed that it would be a taxable gain. We had not had the final, final tax signoff. The final resolution was it was not taxable. That is part of the reason why the GAAP guidance was increased, to reflect that differential.

The only other two items that were included in the guidance at the time that were in the first quarter, as we talked earlier, was the corporate debt reduction and the El Salvador. Those are the factors that were included in the original guidance.

Okay, thank you very much.

Thank you very much, everyone, for participating in the call today. Our investor relations team of course will be around for any follow-up questions. Robin Pence, head of corporate communications, is available for any follow-up media inquiries. Thanks very much for participating today. Goodbye.

Thank you. This concludes today's first-quarter 2006 earnings AES conference call. You may now disconnect your lines.