愛依斯電力 (AES) 2006 Q4 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the AES 2006 fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to your host, Ahmed Pasha, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Melissa. Good morning and welcome to our 2006 fourth-quarter earnings conference call. Joining me today are our principal speakers, Paul Hanrahan, President and Chief Executive Officer, and Victoria Harker, Executive Vice President and Chief Financial Officer. Victoria will provide an overview of our performance for the fourth quarter and 2006 as a whole, and our 2007 guidance. Paul will provide -- discuss our longer-term financial outlook. Following Paul's remarks, our senior management team will be available to take your questions.

Let me remind you that our comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any comments made herein about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actually results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in the filings and in the investor section of our investor -- of our website, www.aes.com. And now, I would like to turn the call over to Victoria.

Thanks and good morning, everyone. Before I begin, I want to spend a moment to introduce Ahmed Pasha, who has rejoined investor relations after spending the last few years in our treasury group. Ahmed is replacing Scott Cunningham as the head of investor relations. Welcome come back, Ahmed.

As you have seen from our press release this morning, 2006 was a great year for AES, with record revenues, gross margins, and cash flows driven by above-plan operational performance. Full-year 2006 revenues exceeded $12 billion for the first time ever, and our gross margins exceeded $3.6 billion.

During the year, we completed the first phase of our Buffalo Gap wind project in Texas, our Cartagena facility in Spain, and our Los Vientos project in Chile. We also commenced construction of over 1,900 megawatts of new generation facilities, including our 233 megawatt Buffalo Gap 2 wind project, our 670 megawatt Maritza facility in Bulgaria, and a 370 megawatt plant in Jordan which begin construction in April 2007. Our key metrics, EPS and free cash flow, all met or exceeded target throughout the year.

Before I discuss the financial highlights, I would like to thank all of our investors for their patience during our delayed filing process. I would like to briefly touch on the output of that review now.

As you know, in our 2005 10-K, we previously identified and reported material weaknesses related to our system of internal controls over financial reporting. In order to remediate these weaknesses, we undertook a series of work streams to improve the quality of our people, processes, and financial systems around the world. We also implemented a broad restructuring of the finance organization.

Through the course of this work as well as our quarterly and yearly accounting review procedures, we identified additional prior-period reporting errors that made it necessary for us to restate our reporting for the years 2002 through 2005 and for the interim periods of 2006. The adjustments made to those months were not the -- for the interim period 2006 were largely the result of accounting and tax changes in those months, not the result of any new errors that occurred in 2006.

The total impact of the restatement on all prior periods was a reduction in previously-reported net income of $43 million. No errors found in any year were material to prior periods, but they would have misstated 2006 financials had they all been corrected in the fourth quarter. As we anticipated in the 8-Ks we filed earlier this year, the restatement did not affect cash flow in any prior period.

I would also like now to provide you with an update on the EDC transaction. We received $739 million for our shares of EDC on May 16. That sales transaction has been successfully closed at this time. We expect to move EDC to discontinued operations as of the first quarter of 2007.

As you know, on March 16, we also received approximately $99 million in local currency dividends as our pro rata share of dividends from EDC. Under the terms of our agreement with PDVSA, these will be converted to US dollars within 90 days of a dividend payment date. Of note, during 2006 EDC contributed approximately $0.17 per diluted share from continuing operations and $0.16 adjusted earnings per share, which will no longer remain in our results going forward.

Before we move into the financial details of today's call, I would like to remind you that, as previously reported, 2006 results also include an after-tax charge of $512 million or $0.76 per diluted share related to the restructuring accomplished at our Brazil subsidiary in the second half of this year. Of this amount, $12 million or $0.02 per share was recorded in the fourth quarter. Both the fourth-quarter and full-year results also reflect the previously announced sale of Indian Queens in the UK and the decision to sell Eden in Argentina. These businesses are accounted for in discontinued operations in both the fourth quarter and the year.

During the fourth quarter, revenues grew 6% to $3.1 billion. Of this, 2% was related to favorable foreign currency rates, principally appreciation of the Brazilian real and the euro; and 4% was attributable to the consolidation of Itabo in the Dominican Republic as well as higher prices and demand in Latin America, Europe, and Africa.

Sales of excess emission allowances totaled just $9 million, which was only $8 million less than the fourth quarter of 2005. As expected, the majority of our plant emission sales for 2006 took place in the first half of the year, as opposed to 2005, when sales were concentrated in the second and fourth quarters.

Gross margin decreased 8% to $854 million primarily due to planned outages at Eastern Energy in New York and Merida in Mexico, as well as increases in costs, including an advance payment due to a regulatory proceeding and an increase in legal contingencies for our Latin American utilities.

Compared to fourth-quarter 2005, G&A costs increased $44 million to $125 million, primarily due to our continued spending in business development activities. Interest expense net of interest income decreased 14% in the quarter, reflecting the impact of lower debt balances, including the repayment of $568 million in debt principal at our Brasiliana subsidiary.

Fourth-quarter income from continuing operations was $46 million or $0.07 per diluted share. Adjusted earnings per share was $0.06. Our adjusted earnings per share includes charges related to the Brazil restructuring and a refinancing of our Panama subsidiary which was completed in the fourth quarter.

To remind you, our adjusted EPS definition includes significant asset sale impacts and corporate refinancing; but does not include impacts related to subsidiary refinancing. This is done to give a clearer perspective for our ongoing business operations' financial performance.

For the fourth quarter, foreign currency translations also had no material impact on earnings per share.

I will now turn briefly touch on our full-year 2006 results. We achieved record revenues of $12.3 billion, an increase of 12% over 2005. This increase was primarily due to higher power prices, largely driven by the pass-through of higher fuel costs, together with increased demand and favorable foreign currency trends. Year-over-year gross margin increased 14% and improved 50 basis points.

Income from continuing operations was $286 million or $0.43 per diluted share. As I mentioned before, this includes charges totaling $0.76 per share related to the Brazil restructuring. Excluding the impact of this restructuring, income from continuing operations would have increased 39% from full-year 2005. Adjusted earnings per share were $1.14 and include $0.06 favorable nonrecurring impacts from the Brazil restructuring.

For the full year, foreign currency translations had no material impact on earnings per share.

Weighted average shares outstanding were 670 million for the fourth quarter and 672 million for the full year. Our trust preferred securities were not dilutive for the fourth quarter or to full-year 2006 results.

Strong cash flow remained a bellwether of powerful business trends for the quarter and the year. Net cash flow from operating activities was $550 million for the quarter and $2.4 billion for the year. Distributions from our subsidiaries, which reflect cash flow generated by the businesses prior to paying Parent interest expense and G&A, were $311 million for the fourth quarter, bringing full-year distribution to $971 million versus our overall target for 2006 of $1 billion.

Depreciation and amortization expense was $241 million for the quarter and $933 million for the year.

Maintenance CapEx was $292 million for the fourth quarter, with $37 million of that amount invested in environmental projects, primarily at IPL, Greenwich in New York, Deepwater, and Kilroot. Kilroot's contract has a pass-through cost mechanism, while the other projects are expected to generate positive economic return for the Company. Maintenance CapEx was $867 million for the year, with $165 million of that amount invested in environmental projects. This is in line with our 2006 guidance of 800 to $900 million for maintenance CapEx.

Growth capital expenditures were $468 million for the fourth quarter and $1.5 billion for the full year. During the fourth quarter, approximately $247 million of these capital expenditures were related to projects under construction, principally Maritza and Buffalo Gap 2.

Fourth-quarter free cash flow decreased $328 million in comparison with fourth-quarter 2005 to $258 million, driven by lower cash flow from operations and the timing of increased maintenance capital expenditures, primarily in North America. For full-year 2006, free cash flow was $1.5 billion, meeting the midpoint of our guidance range. Parent liquidity remained strong at $1.1 billion.

In 2007, we continue to target coverage ratios in the range of 4.5 to 5 times for recourse debt relative to subsidiary distributions, and 2 to 2.5 times for distributions as a multiple of Parent interest expense, consistent with BB and B/A credit ratings. These ratios for 2006 were 4.9 and 2.3 times, respectively, well within our targets.

We believe we can absorb the loss of EDC's subsidiary distributions in 2008 with growth in distributions elsewhere in our portfolio. We were pleased, for example, earlier this year to see the first dividends declared by our Brazilian holding company. Our share of the declared dividends totaled about $42 million based on current exchange rate, of which we have already received $21 million.

Let's turn now to our segments. You will see in the press release and our 2006 10-K that we are moving to reporting on a regional and line-of-business basis rather than three global business segments, to better align with our regional reporting structure under our new Chief Operating Officer, Andres Gluski. Within each region we will have two segments, one for generation and one for utilities. We believe this new segment reporting better reflects the way we think about our business today and will help provide insight for our investors into the AES businesses as well.

We have included detail on each segment in the slide presentation, starting with slide number 10. But in the interest of time I am going to move straight to our 2000 companywide initiatives and guidance.

First, I would like to update you on our 2000 plan for finalizing our material weakness remediation and improving our financial infrastructure. As you know, during 2006, we enhanced financial performance and accountability for the regional businesses by reorganizing and centralizing the finance management and reporting structure. In addition, we strengthened the accounting, tax, and internal control teams at corporate through additional staffing and training.

Detailed technical training programs designed to deliver specific learnings for US GAAP requirements was also developed and rolled out to the financial teams worldwide. These programs are mandatory and will be continued through 2007. We also launched a series of work streams in order to remediate our specific material weaknesses.

By year's end in 2006, we had made significant progress on our material weakness remediation. As you will see in our 10-K, we did effectively remediate the previously-reported material weaknesses related to income taxes and a lack of US GAAP expertise in our Brazilian businesses. The work required to remediate the material weaknesses related to intercompany loans, derivatives, and our Cameroonian subsidiary are well underway and is targeted for completion by year-end.

In the course of remediating certain of our material weaknesses and as a result of our 2006 year-end review procedures, we also identified five additional areas of weakness that had not been previously reported in our 2005 10-K. Of these, we concluded three had already been effectively remediated within the 2006 reporting efforts due to our work effort, leaving two remaining unremediated material weaknesses. These relate to a lack of detailed tax and accounting records for certain holding companies and a lack of adequate controls in procedures around granting and reporting share-based compensation. These new material weaknesses were detected during 2006 but relate to prior periods and practices from the past.

With our additional resources in focus on process improvement, we feel strongly that we're making good progress on our financial infrastructure development. Throughout 2007, we will continue to work towards our goal of world-class financial reporting, as I have previously committed to you.

To that end, I have spoken in the past about our effort to standardize companywide financial processes and systems under the SAP infrastructure. This is a critical element of our effort to build world-class financial management and reporting systems within AES. To put an additional focus on this important priority, we have made the decision to accelerate the SAP implementation by 18 months to two years. We have already started working to implement SAP at some of our key subsidiaries, and we just recently had a successful rollout at Gener in Chile.

Our goal is to fully roll out the SAP financial enterprise platforms, including plant and inventory management as well as accounting ledger consolidation, across the generation businesses in the next 36 months. The rollout of SAP within the utilities will then follow in subsequent periods.

This rollout will be an essential piece of providing the foundation for the needs of all of AES's internal and external stakeholders, as it will provide efficient, uniform tracking and throughput of transactional data from plant activity to headquarters for financial consolidation.

Now I would like to take a moment to walk you through our guidance for 2007, and then I will turn the call over to Paul, who will comment on our longer-term outlook. We firmly believe 2007 will be a good year to AES, one in which we will continue to pursue projects in our core business lines of generation and distribution, as well as undertake investments in new and adjacent markets, primarily through our alternate energy group.

We expect 2007 diluted earnings per share from continuing operations of $1.04 and adjusted earnings per share of $1.07, with gross margins between $3.5 billion and $3.6 billion, and net cash from operating activities of 2.2 to $2.3 billion. After maintenance capital expenditures of $900 million to $1 billion, which includes 200 to $300 million of environmental capital expenditures, we project free cash flows between 1.2 and $1.4 billion and subsidiary distributions of $1.1 billion, including the $99 million distribution from EDC. Further details on 2007 guidance have been provided on slide 14 in the presentation.

Let me now touch briefly on the most important business drivers of 2007 from a financial perspective. Gross margin is expected to increase, primarily driven by improved performance at our North America Generation and Utility segments, including Eastern Energy in New York and IPL in Indiana, as well as the benefit of the acquisition of the TEG and TEP power plants in Mexico completed earlier this year.

Interest expense is expected to be lower due to our continued focus on deleveraging. This will be partially offset by higher G&A and business development spending, including costs associated with the completion of the restatement, remediations, and the SAP acceleration. We do not anticipate emission sales to be a driver of earnings in 2007, as we have largely brought our portfolio into balance. We expect a full-year 2007 effective tax rate in the range of the low to mid 30s based on the current mix of businesses and their associated tax rates in the portfolio.

Additionally, recently this quarter, a subsidiary of AES purchased 37.5% of a lesser interest in AES Eastern Energy. This transaction will not change the existing lease structure there. It will, however, result in a onetime gain in 2007. However, our current guidance does not include the impact of this gain, as we expect it to be offset near-term by debt refinancing charges at other subsidiaries currently in progress.

I hope that this review of several of our 2000 financial drivers has been informative. Based on where we see the business trends thus far this year, we believe the 2007 forecast to be right on target. Now, I will turn the call over to Paul Hanrahan for his insights into current trends, as well as a look at our five-year projection.

Thank you, Victoria. Clearly from a financial performance perspective, we had a strong year in 2006. We also saw a 39% stock price appreciation over the same period that the Standard & Poor's 500 Index rose 16%. What I would like to cover this morning is our long-term guidance and to give you some insights into the assumptions we have made, based on the strategic direction that we're heading as a Company.

Let's first talk about the sectors where we are dedicating significant business development resources; and you can refer to slide 15 when I talk this through. This slide shows the relative sizes of the growth in those sectors where we currently believe that there are attractive opportunities. The first is our core power business; the other two fall within our Alternative Energy business, which would be the wind generation business and the greenhouse gas offset business.

As you can see, power markets globally are expected to add somewhere between 500 and 700 gigawatts of new greenfield capacity over the next five years. We currently have a development pipeline of 20 gigawatts or 20,000 megawatts, but in our midrange case we only assume that we complete development of 6,500 megawatts, equivalent to about 1% to 2% marketshare. In our high-range case, we assume that we're adding over 10,000 megawatts.

The wind sector is expected to grow by 100,000 megawatts worldwide according to analysts' forecasts. We are expecting to add 2,100 megawatts during that period of time, roughly equal to about 2% market share of that capacity increase.

In the development of a new market to sell greenhouse gas offsets, we see this becoming a market of 2 billion tonnes of CO2 per year, while we expect to reach a production level of 26 million tonnes per year by 2011, capturing a market share of roughly 2%.

Now I would like to briefly review our strategy. If you turn to slide 16, which provides a summary of those sectors where we have been talking about over the past year. First, we will of course continue our focus on the financial performance of our current portfolio of 121 businesses. Our people in those businesses will continue to drive the performance of our operating businesses. This includes capturing significant organic growth from many of our businesses in high-growth economies.

Second, we expect to invest in new core power businesses over the next five years to meet increased world demand growth. As I have previously mentioned, we have a pipeline of potential new power projects of about 20,000 megawatts right now, and our midrange assumes that we invest roughly $2.5 billion of AES capital in power investments over five years. We believe the most attractive projects will be greenfield power projects over the next several years, although we will continue to look for attractive acquisition opportunities.

In terms of where we will be focusing our new business development dollars, we see the more attractive markets during this time as being in, one, Asia, which would include India, China, and Southeast Asia; two, countries in Central and Southern Europe, including Turkey; three, North America, particularly in those regions where capacity constraints are likely to develop; and four, certain Latin American countries such as Chile which continue to need electrical capacity to grow their economy.

We also believe that there will be pockets of opportunity for us in the Middle East. We recently expanded into Jordan and began construction of a 370-megawatt power plant, it was a gas-fired power plant, the country's first independent power project. It is located outside of Amman, and the plant is expected to reach the first phase of commercial operation during 2008.

Today we also announced an acquisition of majority interest in a Turkish company owning a development pipeline of roughly 400 megawatts. Through this partnership, we're also going to look at growing our core power and Alternative Energy business in Turkey.

The third sector, which is our Alternative Energy business, we think is going to continue to be a significant new business line for AES. The major contributors from Alternative Energy in our guidance are wind generation and greenhouse gas offsets. In these two sectors we expect to invest roughly $2.5 billion of AES capital through 2011 to grow this business.

Then finally, we're committed to exploring new business lines where we believe that there may be attractive long-term opportunities that might fit with the AES skill sets. We haven't included any of these new potential businesses in our long-term guidance that we will discuss today, however.

Since Alternative Energy is a new business line for AES, I will spend a few minutes more on it. For wind, we entered the wind business in 2004 and today we operate more than 600 megawatts of wind facilities in the United States, with another 233 megawatts under construction. Last year we expanded our wind operations into Europe and now have more than 1,300 megawatts of projects in active development in that region. We're pursuing new opportunities in Europe, Latin America, and Asia. In total we have over 3,000 megawatts of wind projects at various stages of development worldwide.

With respect to our climate change business, we started our greenhouse gas offset business in 2006. I believe that this will also become a significant business line. Our fundamental belief is that the demand for certified offsets will grow, as more and more countries, very likely including the United States, pass legislation regulating greenhouse gases. As you know, the European Union has already done so.

We're developing a portfolio of ways to produce offsets, not wanting to rely on any one method too much. For example, we're looking at methane capture, which is capturing methane from wastewater treatment plants, landfills, coal mines, and farms; renewable generation; and reforestation. We expect our production of greenhouse gas offsets to rise to 26 million tonnes in 2011.

I should mention that yesterday I was at GE's Ecomagination event at Universal Studios in California where Jeff Immelt and I announced the launch of our new joint venture to develop certified market voluntary greenhouse gas offsets in the United States. Together, we're targeting about 10 million tonnes per year of greenhouse gas offsets by the year 2010.

Let me now walk you through our new long-term guidance, which is summarized on slide 17. Our new guidance has earnings per share from continuing operations, which we call GAAP earnings, growth from a base of $1.04 in 2007 to a range of $1.75 to $2.15 in 2011.

As you know, we also focus on adjusted earnings per share, which tends to remove some of the onetime impacts. With the assumption that our adjusted earnings per share will be the same as EPS from continuing operations, we will be growing from a base of $1.07 per share in 2007, as Victoria mentioned. Our guidance (inaudible) the following growth rates for adjusted EPS.

Looking at the time period 2007 through 2011, that is starting -- that is a four-year period with a base of $1.07; we see a compound annual growth rate of 13% to 19% per year. Looking at the period 2006 through 2011, that is five years with a base of $1.14; we would be looking at a growth rate of 9% to 14%. From 2006 to 2011, if you took out the EDC contributions in 2006, we would have a base of $0.98; we would then be growing from 12% to 17%.

I think as many as you may recall, back in September of 2003 we gave 2003 to 2008 guidance of 13% to 19% per year, working from a base of $0.56 per share with the adjusted EPS in 2003. This slide 17 shows how our historical adjusted EPS has moved and where it's been relative to our guidance range from 2003. We also show our projected adjusted EPS, again with the simplifying assumption that adjusted EPS will equal EPS from continuing operations.

I would just like to make a few observations about our guidance. First, you can see the impacts of the loss of EDC in 2007, combined with investments being made in 2007 and 2008 in plants and new construction, new business development, and, as Victoria mentioned earlier, strengthening our financial organization and systems. We are really going to begin to see the returns of those investments beginning in the period of 2009 through 2011. So thus we expect to see adjusted EPS in 2007 of $1.07 a share; 2008 within a range of $1.12 to $1.20; 2009 $1.25 to $1.45; 2010 $1.55 through $1.85; and 2011 between $1.75 and $2.15 a share.

I think you can see, even with the loss of EDC, our long-term growth rate from 2003 will be in the range of 15% to 18% per year during this period from 2003 to 2011 based on our current guidance. But it's worth noting that the major drivers of growth going forward have shifted from deleveraging to new business development, investing in new businesses with attractive returns.

Because much of our new investments take a few years to generate returns, because many are greenfield power investments, new wind projects, or new CO2 offset production projects, the near-term EPS growth is lower than it would be for straight acquisitions. But we do see relatively more good long-term opportunities for greenfield development than acquisitions in general.

I think it is also worth noting just as a point of reference that we're projecting to expense about $100 million for new business development in 2007.

In slide 18, we provide a breakdown showing how much of the earnings growth is coming from the various types of growth -- how much from organic growth, how much from new construction, and how much from development in our core power business, as well as from Alternative Energy. As you can see from this, we have a pretty nice mix of different growth components.

As you know also, our cash flow is perhaps the strongest part of our growth story, and as you know it is something we place a high degree of focus on. If you now turn to slide 19, you can see the consolidated free cash flow is expected to increase at a rate of 13% per year. That is going from 1.2 to $1.4 billion in 2007; to 2.3 to $3.3 billion in 2011. Going forward we do see significant growth in our consolidated free cash flow, largely driven by some CapEx reductions, which is primarily less environmental CapEx; and cash flow increases from wind, greenhouse gas offsets, and from our core power business.

You also look at our POCF increases by 36% to $2.5 billion; and that gives us a compound average growth rate from 2007 to 2011 of 15%. POCF is going up because of improved cash flow from our businesses as well as historically we have had certain dividend restrictions at subsidiaries, such as Brazil, which now have been removed through the restructuring. But we have also over the years paid down a significant amount of debt at the subsidiaries, which improves our cash flow potential. All of these are going to allow us to then distribute more cash back to the Parent.

So summarizing the past, we have walked you through our strategies in the various regions and in Alternative Energy business. Today we have put numbers to that strategy in terms of what you can expect to see over the next several years. We continue to see good opportunities across the globe in our core power business as well as Alternative Energy. We believe it is those opportunities that will be driving our growth in revenues, cash flows, earnings, and value.

We feel we have delivered on our commitments in the past and we are committed to continuing to do so as we go forward with our shareholders. Thanks for joining us today. Now I would like to open the call to questions. Melissa, could you please open up the lines for questions?

(OPERATOR INSTRUCTIONS) Lasan Johong with RBC Capital Markets.

Good morning. Paul, last we spoke, you had mentioned that you would like to try and keep a balance between the North American business and the rest of the world. You had mentioned countries ranging from India, Pakistan, China, and so on through North America. But I am not quite getting a sense of how you would maintain a stronger presence in North America while you are growing the rest of the international business. Can you kind of address that?

Yes, the Venezuelan government has actually cooperated with us in terms of helping us balance our portfolio a little bit recently.

But we do see in North America some good opportunities. I think it is probably the biggest market for us right now for wind generation. We see a lot of good opportunities in wind. So you're going to be seeing a lot of the Alternative Energy space coming from wind.

I think greenhouse gas offsets, as I mentioned, we have got this joint venture with GE. I think that is only the beginning of something that -- if in fact the US puts some kinds of restrictions or controls over greenhouse gas emissions, we could be seeing more business in that area in the United States. It is something we have actually become a leader in around other parts of the world, just because we have really gotten into it in a big way.

But I also think in North America, we look at many parts of the country that are going to be needing new capacity, peaking capacity, and some cases baseload capacity. In many places they're just not adding it because the markets aren't working potentially as they should. Been a lot of activity in acquisitions, a lot of assets changing hands, but it seems to us that there could be some really good opportunities in the right parts of the country to be siting some plants, getting the permits, and being prepared to put plants online when there is the need for capacity. So I think over that five-year period of time, you would be seeing additional growth in the United States from those different areas.

I think we also see the rest of our portfolio growing pretty rapidly, though, particularly in the areas that I mentioned. So I think it is -- we will be maintaining the balance. The key for us is to really focus on where we are going to have correlated risk of different countries, predominantly currency risk, and where we could have some related economic risk. But we think by looking at all these different areas and adding capacity, we should have a balanced portfolio going forward.

Great. One other question. There has been a lot of discussion and talk about AES potentially making some rather large acquisitions of either companies in bankruptcy or companies that have declared strategic option. Do you want to comment on kind of the acquisition picture in the US and how you view that?

As always, we never comment on or speculate on acquisitions. But I will give you a few thoughts just about the general acquisition market. In my comments, I mentioned that we really see the most value that can be created in terms of net present value in a project is greenfield projects. It is because there is a lot of money, I think, in many markets chasing assets, particularly assets like power plants, other infrastructure projects.

In acquisitions, we're going to tend to focus on things that are slightly more difficult, that play to our strengths, and that would not have a lot of competition. Where you would see a lot of potential competition, where it's not a very difficult asset acquisition, you are probably not going to see us participating in those. Because we just don't see that you can get the kind of returns that we would like to get.

So I would say, the acquisitions are going to be something that are not going to be as prevalent. But we are going to continue to look. But we're going to have to find some things that really do play to our strengths and would allow us to get better returns than you can get in the plain old vanilla acquisition market.

If you look at TEG TEP, that is an acquisition in Mexico that we did, where there was not a lot of competition there because the key to that acquisition was being able to turn around the operations of some coal-fired boilers called CFB boilers, which is something that AES really has become one of the leaders in terms of operating those types of plants. Well, the problems that those plants have are exactly the kinds of things we have faced in many of our power plants in the United States. We have learned how to fix those problems. So that was an example of a situation where we could have an acquisition that played to our strengths.

But if there isn't something like that, I just don't think it will generate the kinds of returns we would like, with as much money as there is out there looking for acquisition opportunities.

That's great. Thank you very much.

Elizabeth Parrella with Merrill Lynch.

Thank you. Paul, if I could ask a couple of questions on the longer-term outlook? You mentioned that this 6,500 megawatts on the power side is your mid-case scenario, and the 2,100 megawatts of wind. Should we assume that the range you have provided on EPS and cash flow is kind of the range between your high-end and low-end scenarios? Is that how we should be thinking about it?

That is exactly right, yes.

Okay. You have got 1,900 megawatts under construction including 200-odd megawatts of wind. So in terms of getting to this 8,600 megawatts by 2011, there is another 6,500-odd megawatts of plants not yet in construction that you're assuming you would either build or acquire by 2011?

Right.

Can you talk about how much of that you think is stuff that is pretty firmly committed to on your end but not yet announced?

Yes, of that, some of that 6,500 megawatts you are probably talking about -- we are assuming maybe 15 to 20% might be acquisition. If you look at our development pipeline of 20,000 megawatts, that is at various stages of firmness of commitment. We prefer not to go out and talk about deals until they are relatively firm.

But it is our view, just with that portfolio of development opportunities, plus ones we are likely going to pick up over the next couple years, that number is a reasonable assumption to put into our forecast. So that is -- as we've talked through, we have said, well, where do we think we're going to end up? It is very difficult to predict which ones will get through. But I think if you look at it on a percentage basis, we have a pretty good view as to where we are likely to end up.

Okay. Than if I could ask a question in a different area, what are your plans for the $739 million of cash that you received last week from Venezuela?

The first step, we're just going to use it to reduce our interest cost in the short term. It will be effectively liquidity that is available for us to grow the Company. It just becomes another source of funds that we can use for whatever purposes we decide to use it, which could be -- in our preferred option we see a lot of growth opportunity. So it is likely going to be used for financing some of our new growth opportunities. But it's just one of the sources of funds we would look at to go do that.

Is there some consideration given to doing something on the Parent debt, like many other companies in the sector have? Taking advantage of the high yield markets? You've got some pretty high coupon debt, restrictive covenants, etc.

Well, I think that would be -- as I said, this is a source of funds. In terms of the use of funds, what we constantly look at is -- what is the best use of any liquidity that we have? Is it going to be investing in new projects? Is it going to be paying down debt? Which debt would you pay down?

So we're going to look at all those different opportunities to -- what is going to be the best use of that money? We do see some opportunities to use those funds, but I think that is one of the things that Chip and his team is working on, is what is the best way to go forward and do that.

If I could ask one final question, when do you think you will have the first-quarter 10-Q filed?

That one I will let Victoria answer.

We are obviously now two days after the 10-K filing into the Q process. We look like we're on target at this point for the second week of June. So we have all the teams back in action again. At this point, we have no significant long poles on the tent; but we look like we're on target for the second week of June.

Thank you.

Brian Russo with Ladenburg Thalmann.

Good morning. Could you talk a little bit more about the financing options you have for the rather large construction program planned over the next several years? In terms of nonrecourse debt, project level debt, that sort of thing.

We are, obviously, looking at a variety of different options, relative to that. I think our preference in the past has been and will continue to be project level nonrecourse debt. But we will continue to look at the opportunities as they exist, including as Paul mentioned, obviously, this new cash inflow relative to the EDC income. So we're looking at a number of them; some are obviously 2007 kinds of investments and some are farther out.

Could you maybe identify some of the subsidiaries where you have projects planned that may have net cash positions that are trapped there that could maybe ease the equity contribution from the Parent?

Specifically, I think we have actually spoken of this in the past, we're looking at Gener, specifically relative to trapped cash position and reuse of funds there.

Okay. Also, I think you mentioned on the call $100 million of incremental development expense in 2007. How should we look at that? Should that be incremental? Is the $305 million of G&A expense for full-year '06; so is that an additional $100 million above that?

Yes, let me clarify. It is not incremental development expense. When you're developing projects, as they get to a certain point where you capitalize, those are not expensed. But in terms of looking at the early-stage development where you do expense, the total number -- it is increased from 2006. But the total number that we budgeted for 2007, we have included, it is roughly $100 million of expensed business development expenses. So it was just to give you an order of magnitude there, about $0.10 is going into essentially investing into growing our business.

Okay. So when looking at the trend in G&A, up about $75 million in '06, will we begin to see that leveling off, say, in 2008 and beyond?

Yes, I think, this year it is about $0.03 to $0.04 increase is what we are anticipating with all that. Next, that is the business development; it is the things we're going to have to do on the financial side to just get much better reporting on a timely basis and accurately, to make sure we don't go through what we have had to go through the past couple of years.

I see us spending a lot in 2007. I see it starting to level out very substantially and maybe even start to come off a little bit in -- I would say 2009, for sure. Maybe 2008, we can start backing it off.

The number-one priority for us now is to make sure we get the systems in place so we can get this done. We will be putting the investment into the growth opportunities, but you will see, at least on the G&A side, the nondevelopment business development side, those numbers should start to fall off in the 2008-2009 time frame.

Okay, my last question is, could you just talk a little bit more about your financial flexibility? Maybe talk about any restrictive bank covenants that maybe restrict you from repurchasing stock or paying a dividend.

I will just respond to that. One of the things I think that we have benefited from, with what we have been through in the past few years, is we really have dramatically improved our financial flexibility. We still have some covenants in some of our bonds. I think the only current restriction I can think of is that is that we can't buy back stock. Beyond that I don't think we have many -- that is the second lien notes?

Right.

Second lien notes preclude us from doing that. But in terms of other restrictions, we really do have the flexibility to -- when we have a need for funds -- to look at all the different options that are out there.

As a result of the strong performance of the businesses over the past few years, we can in fact tap the debt markets, the equity markets. We get a lot of cash flow coming from our businesses. We have also been looking a lot, as you have seen, at portfolio management; and that is another source of funds for us.

So I think we have got all those different things that we can look at. We really look at what is the most optimal way for us to raise money at a given time.

Okay, thank you very much.

Brian Chin with Citigroup.

Got a question on the project pipeline coming up. When we are looking at the two, three-year development times for some of these projects, who takes the risk in case the project has a cost overrun on construction? Is that you guys? Is that the engineering and construction company? Can you give us a little bit of flavor on that?

Yes, this is something that has actually been going through a little bit of change over the past couple years. The traditional model for us has been anytime we get into the project, we will get a fixed-price turnkey contract. All the risk is essentially put onto the EPC contractor. As you know, the EPC market, there are a lot of people building projects. Not just power projects, but all kinds of industrial projects around the world and in the United States. Most EPC contractors are fairly tight in terms of capacity. They have a lot of opportunities. They are turning away business.

What has happened there, not only have you seen prices going up but you have also seen the terms and conditions and the risks that the EPC contractors are willing to wear -- they have reduced that somewhat. It is particularly with respect to commodity prices. When someone is going to be building a plant that is going to have specialty metals in it, for example, they are going to want to pass through some of those risks to the customer. Or they are going to charge a lot of money; because who knows what the price of some specialty nickels or various components is going to do over a three- to four-year period?

So what you will probably see is us taking on certain risk, or having those be passthroughs; and then covering the risks that are more within our control. That is the way you keep your costs down.

One of the things we have done also is we have put a lot more effort into the project management capabilities of our Company. We have got a group that is just focused on building greenfield power plants because we think it's going to be important. We play a much more active role in that front.

So you are going to see a little bit of the risk shifting to owners as opposed to constructors. That will tend, as always, to bounce back and forth over time. But I would say for the next couple of years there will be a little bit more risk being worn by the owners; but it's something we are thinking about very carefully.

We will go about -- and as Victoria mentioned, we are still going to want to do non-recourse project finance types of projects; and that is going to require us to have these risks mitigated in an acceptable way both to us and to the lenders to the project.

That's very helpful. Then one follow-up question on this. For the projects you have got that are signed with the state-owned utilities or the local utilities, like the Vietnam coal plant, for example, or the La Raisa plant in Venezuela, is it fair to say that the construction cost increases have a little bit higher probability of passthrough with regards to your contract back to the state-owned utility? Or is that not -- is there an equal chance of risk on those types of plants for cost overrun back to you, to the same extent that, say, the merchant plant in Jordan might have?

I mean, a good example would be, we are negotiating these power purchase agreements as we speak. We will either in those power purchase agreements agree that we will wear some of that risk and hedge it as best we can to the EPC contractor. We will have to put in enough contingency to cover the potential risk.

But again, it is going to be primarily with commodity prices that might get passed through. But generally, you will see, I think in most power purchase agreements, by the time you finalize it, you will have gone through enough detailed study, put things out for bids, you will have narrowed that risk quite a bit.

But there is probably going to be a little bit more of that, which means we have to build that into the pricing of the power purchase agreements. But to the extent that the [off-tickers] want to reduce that, just like we would, we would find ways to structures so it would be passed through the EPC contractor. We have done things like that with interest rates and whatnot in the past. It really depends on the individual customer and their willingness to take risk or to pay a higher price to mitigate that risk.

Great. Thank you.

Gregg Orrill with Lehman Brothers.

Thanks very much. Good morning. Getting back to the topic of the 2011 earnings guidance, and I guess without asking you whether you think the range is conservative again, could you maybe talk about the sorts of equity return you would be looking on the free cash flows that you target over the years leading up to with?

What sort of--? Maybe review again the sorts of leverage that you would be willing to use around those free cash flow.

Yes, I think the way we look at it, it is going to vary from project to project. We don't -- in other words, we will have different return requirements for different countries. What we will typically do is look at a spread over the theoretical cost of equity, or whatever we determine is the right hurdle rate for a country for its cost of capital and a project that we would be doing. [That] would put a spread above that. We typically look for nothing less than a 2% spread over that.

I think on average we're going to be looking at returns that would be -- they might be anywhere from 2% to 4% above the cost of equity. So we think about it more in terms of what is our spread over the cost of equity given the types of projects we do.

And the implied actual equity return on the cash flows that is implied in getting up to your guidance range in 2011?

Well, if you look at that, if you say they are going to be projects -- we have looked at a portfolio of projects that is probably, I'm guessing, it is somewhere between 13% to 15% -- probably in that range. We would see on average those kinds of returns.

It's going to depend on the country. Some of the US returns will be probably in the lower end of that range. Some places we are seeing returns that are above that. But I would say on average that is about what we get to.

Thanks a lot.

Peter Monaco with Tudor Investment.

Good morning, Paul and Victoria. Thanks for your time. I would like to follow up briefly on Greg's question. Could we put some harder dollar figures on things?

Simplistically speaking, if we look at the projected free cash flow figures, it looks like it will average over the five-year period at the midpoint in the out-years, it will average in the five-year period, about $2 billion per year. How much of that cumulative $10 billion in free cash flow is actually specifically committed to projects you are counting on at this time? Did I hear Victoria say $2.5 billion?

Why don't you go? Roger Naill, who heads our strategy group, has got those numbers. He can walk you through that.

Yes, we have -- the total investment over the period is about $5 billion for the mid-case that we are talking about of new investments. So that is the number to think about.

But is that--? When you say total investment, I take that to mean the combination of your equity ticket in the projects plus the associated debt finance.

No, that is just AES's equity. AES's equity in the power business, the Alternative Energy business, which includes wind and CO2, is about $5 billion over that five years.

Okay, and that $5 billion would be associated with the 6,500 megawatt figure or something higher?

No, that is the 6,500 megawatt figure.

[Plus] 2,100 megawatts wind.

Okay, so the implication is that $5 billion -- again using those rough numbers -- $5 billion of projected free cash flow is at this time uncommitted; and effective deployment of that $5 billion would represent upside, frankly, not only over and above the mid-case but something higher?

Not all of the $10 billion that you are talking about actually is available to the Parent.

Oh, believe me, I understand that. Nevertheless, some use can be found for it.

Exactly.

Such as debt reduction down at the operating levels or what have you.

Right.

So it does sort of beg the question -- what are your plans for that? And related to that, is it possible to have negotiated away the covenant that prevents share repurchase? I mean, given the EPS and free cash flow trajectory you folks are targeting, it would be awfully nice to leverage it somewhat on an EPS basis, wouldn't it?

I think we have spoken in the past relative to the second liens, that they are top of mind, obviously, for us from a refinancing and giving us some additional flexibility. I don't think at this time we want to initially predetermine what we are going to do relative to the next steps. But it does make sense both in terms of the cost to us as well flexibility to go ahead and do that.

You're hitting on an important point, and it is something we are focused on. And that is there is a lot of cash being generated by these businesses; and the more we can free up, like we did in Brazil, the more we are going to try and do that, to free up cash in our various entities. Or find ways to use it productively. So that is a big focus.

But I think that is in terms of sources of cash. Then you get to what are the uses of cash. I think it would be helpful if we had one more option out there for uses of cash that would allow us to buy back stock. It's always good to have more options in terms of what you can do with your cash.

Then if ever gets to the point where we think that is the right decision, it would just be nice to have that flexibility. Right now, it hasn't been critical for us; but it may become so over time, particularly as we have more and more cash available. We would like to have more options to utilize it.

Thanks a lot.

Annie Tsao with AllianceBernstein.

Good morning. I have several questions if I may. First, can you go through a little bit of detail why SEC still has some informal inquiry into your restatements? How long is that going to take?

The second question has to do with the CapEx. Can you just clarify your CapEx? What is your total CapEx? How much is allocated to maintenance CapEx, and how much is allocated to environmental, and also the growth?

My last question has to do with your Electropaulo. Can you just update us on your thoughts what are you going to do next on the Electropaulo?

I'm sorry, could you repeat that last question and speak up a little bit?

In Brazil, Electropaulo?

Yes.

Can you just update us? What is going to be your strategy for that?

Sure. Okay, let me first have Brian Miller talk about the SEC. He can give you and update what is happening there. Brian Miller is our General Counsel.

Good morning. We have been speaking with the SEC for some time now and received a request from the SEC shortly after we disclosed we would have another restatement, asking for documents concerning this restatement.

It is simply at this point focused on gathering information and explanations from us to further explain the material that has been in our 10-Ks and our 10-Qs addressing each of the restatement items. Not particularly focused on any one in particular, but all the restatement items.

As to when the SEC will finish the review, that is unclear. But we have spoken to them recently. We have agreed to continue to cooperate with them. We will be providing them more background and information including accounting memos, etc., concerning the current restatement so they can better understand it.

Okay. Victoria Harker is going to talk about -- to answer your CapEx question.

In terms of the 2007 guidance I mentioned, in total it is 2.3 to $2.5 billion. Of that we anticipate about $900 million to about $1 billion in maintenance. A subset of that is obviously environmental, as I talked to. Then the remainder, the 1.4 to $1.5 billion, is in growth.

Okay, then your final question, which is just an update on Brasiliana, it is actually a good question. Andres Gluski who had been running our Latin American businesses and now has been put as the Chief Operating Officer of the whole power business here at AES. I just might add before he speaks, one of the reasons we did that was we recognized that growth is becoming very important to us. But we can't take our eye off the ball with respect to operating the businesses. We just felt it was important to keep that focus, and that is why we really created the position. But let me have Andres Gluski answer your question about what is happening in Brazil.

As you know, BNDES has stated its intention to sell its share in Brasiliana. We intend to stay in Brazil, and we will follow this process. So we intend to remain in Brazil and remain controlling the two companies, the main two companies that are under Brasiliana, which is Electropaulo in [Chitane]; there is also Uruguaiana. So this process is underway, and we are following it very closely and working with BNDES.

Operator, why don't we just take one more question? Because I know people, it is Memorial Day weekend we won't keep everybody on this call too long. So if we could have one more question, operator?

Clark Orsky with KDP Investment Advisors.

Yes, I just had a question on slide 18, the upside you show in 2011. Most of it is core power. What is driving that? Is that just higher number of megawatts, or what is in that?

We just assume more investment, more megawatts in core power. Just to get a reasonable range for the upside. What you have got going on is we have some projects that are coming online in that time period. Like we have got the Maritza project which I believe comes on line in the 2010 time frame; but fully operational in 2011. So a lot of these things are already in construction but they do not really hit until that time period.

That is really the nature of greenfield projects, is you have this lag. But from our point of view, it doesn't give you any near-term earnings growth with greenfield, but if you look out a few years it really is the kind of thing we want to be doing. Because the NPB impacts are just so much more attractive than some of the plain vanilla acquisitions out there today.

Okay. I guess just lastly, thoughts or what your posture might be as far as funding some of the growth with equity; or is that completely off the table at this point?

I'm always told never to comment on things like that. It's probably a good idea. But the reality is we really have to look at it -- at the time we need the capital, what is the best way to go get it? We have a lot of sources to raise capital. We do have debt capacity. We have got internally generated liquidity. With the market began as hot as it is for acquisitions, there are some assets that we could sell all or part of to raise capital.

The way I think about it, very simply, is you look at the value of the stock, you look at the value of the assets, and you figure out what is the cheapest source of capital for you to go fund your investment. So the reality is, we just don't know until we get there.

Okay, thanks.

Okay, thanks very much.

This is Ahmed Pasha. I want to say thank you very much for everyone for participating today. If you have any follow-up questions, please don't hesitate to contact either Hilary Maxson or myself in investor relations. Thank you very much and have a nice day.

Thank you. This concludes today's AES conference call. You may now disconnect.