愛依斯電力 (AES) 2007 Q2 法說會逐字稿

Good morning, my name is [Elsa] and I will be your conference operator today. At this time I would like to welcome everyone to the AES second quarter 2007 financial results 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 you host, Ahmed Pasha. Sir, you may begin your conference.

Thanks, Elsa. Good morning and welcome to our 2007 second quarter earnings conference call. Joining me today are our principal speakers Payne Hanrahan, President and Chief Executive Officer and Victoria Harker, our Executive Vice President and Chief Financial Officer. Victoria will provide an overview of our quarterly performance followed by Paul Hanrahan who will provide an update on business development activity.

Let me remind you that our comments today will include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Any statement made here in about future operation, operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual 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 our filings and in the investor section of our investor web site AES.com. Thank you.

Thanks, Ahmed, and good morning everyone. We're pleased to report continued strong operating results for second quarter 2007 and the achievement of some important milestones in our growth strategy. Before I dive into the details of our second quarter financials, I'd like to touch upon a few of these achievements.

In May, we acquired 186 megawatts of wind generation facilities from GE. This acquisition and the completion of our Buffalo Gap II wind farm in Texas increased our operating wind capacity in the U.S. to over 1,000 megawatts. We also entered into a partnership in China to build a 49.5-megawatt wind farm on a site that has the potential to generate up to 225 megawatts. Through this investment, AES will become the first U.S. based power company with wind generation capabilities in China. These achievements are important milestones in our goal to more than triple our wind generation capacity by 2011.

At the same time, we're also executing on our growth plans for our core power business across all segments. Of particular note this quarter, we started construction on a 370-megawatt gas fire power plant in Jordan and acquired a 51% stake in a 390-megawatt pipeline of hydro project in Turkey.

I would also like now to touch on a few moments of our financial reporting. As you know, we filed an amended Form 10-K A a few days ago, and although we are not required to do so, we plan to file an amended first quarter 10-Q shortly, because we believe it will allow for greater financial transparency. The impact of adjustments to the first quarter for 2007 are already reflected in the year-to-date numbers you're seeing today. As to the amended 10-K filed earlier yesterday this week, it included the reclassification of EDC and Central Valley businesses into discontinued operations. As a result of the sales of those businesses as well as a few non cash adjustments to prior year financial statements.

While these types of restatements are always disappointing, the findings were actually indicative of a financial infrastructure at AES that is more robust than ever before. Specifically, the 10-K A included the reassessment of the accounting treatment for three power purchase agreements held by different businesses in the AES portfolio and the accounting adjustment at our two Brazilian utilities. The reassessment of our historical accounting treatment for the power purchase agreements came to light as part of our remediation project surrounding contract evaluations, which demonstrates that our efforts to strengthen our financial reporting are working real time.

In Brazil the adjustment resulted from an October 2006 regulatory decision upon which there was no industry consensus until after we had filed our 10-K. We do not believe that there is an additional assessment that we could have done that would have led us to a different conclusion on this accounting treatment at the time we filed our 10-K. In addition, we continue to make good progress on the remediation of our other material weaknesses. We are on track with all of of our plans as we move forward toward testing in the fourth quarter. I am confident that these new processes and procedures as well as the acceleration of the SAP platform across our portfolio of businesses are the right steps to take to restore confidence in our financial reporting. And to that end I am pleased to report this morning that we now have four businesses up and operating on SAP.

Let's turn now to an overview of the quarter's financials. Along the way I will also include some year-to-date highlights to give you a sense for how we are progressing against our full year projections.

During the second quarter revenue grew 17%. Specifically, 5% of that growth was attributable to a favorable foreign currency rate in Brazil and in Europe. After adjusting for foreign currency, the remaining 12% increase was primarily due to higher prices and volume across all of our segments, particularly at Gener in Chili and from contributions from our newly acquired TEG and TEP plants in Mexico and the consolidation of Itabo in the Dominican Republic. Year-to-date, revenues have increased 14% with 4% of that increase attributable to foreign -- favorable foreign currency rates. Excluding FX impacts, increases in revenues have been primarily driven by higher prices in volume and contributions from these new businesses.

Compared to second quarter 2006, gross margin increased by $21 million to $888 million. This increase is primarily due to higher prices at our Eastern Energy business in New York and at our businesses in Latin America as well as favorable FX rates. These increases were offset by a cumulative charge of $48 million associated with transmission fees at Tiete in Brazil. Additionally, as expected, sales of emission allowances were $24 million lower when compared to the same quarter last year. Excluding the $48 million charge, gross margin as a percentage of revenue decreased to 28% from 30% in second quarter 2006. This decrease was primarily driven by an increase in prices at our Chilean businesses to compensate for higher fuel cost. The lower emission sales versus the second quarter 2006 also impacted gross margin as a percentage of revenue.

Year-to-date, gross margin decreased by $28 million to $1.7 billion. In addition to the $48 million charge at Tiete gross margin was impacted by lower emission sales of $63 million when compared to last year. Also, as I mentioned last quarter's call, we had a $32 million of cost recoveries in 2006 that did not recur in 2007 at Eletropaulo. Excluding these three items, year-to-date, gross margin would have increased $115 million. Additionally, throughout the first half of this year, increased revenues have been offset by higher electricity and fuel costs, particularly at our generation businesses in Latin America.

As previously forecasted, G&A costs for the quarter increased by $30 million, when compared to last year, to $88 million, primarily due to higher levels of business development activity, higher spending associated with the strengthening of our financial infrastructure and the cost associated with the restatement of our prior period financials in May. Interest expense, net of interest income, decreased by $75 million when compared to second quarter 2006. Largely driven by higher interest income and favorable FX rates in Brazil as well as the benefits of the debt retirements and refinancing accomplished in 2006, particularly in Brazil.

Other income, net of other expense, increased by $245 million from the prior period. This was primarily due to a $137 million gain associated with an acquisition of lessor interest at AES Eastern Energy, a transaction I previously discussed on our first quarter earnings conference call. This transaction does not change the existing lease structure or the underlying economics. However, under the accounting rules, we mark to market the underlying assets which resulted in a gain. We also recognized $93 million in gross receipts tax recoveries at two of our Latin American subsidiaries.

Our effective tax rate for the quarter was 35%, versus 20% last year. The increase of the effective tax rate from second quarter 2006 to 2007 was due primarily to the impact of an appreciating [reale] in certain of our Brazilian subsidiaries which increased our 2007 effective tax rate and a release of evaluation rounds at Eletropaulo in the second quarter of 2006, which in fact reduced the 2006 effective tax rate on a one-time basis. As expected, minority interest expense, net of tax, increased by [$68 -- 6] [sic - see press release] million [to $235] million, primarily driven by our lower ownership in Eletropaulo in Brazil. Weighted average shares outstanding were 692 million for the quarter, versus 669 million the second quarter of 2006. This increase is due to the fact that our Trust 3 securities were dilutive to the second quarter 2007 but were not dilutive last year.

In the presentation, you will also find that we have summarized the drivers of our earnings from a quarter-over-quarter standpoint. Of note, $137 million gain at Eastern Energy and the tax refund in Brazil resulted in a combined $0.15 favorable impact on earnings per diluted share. Excluding this, the largest drivers of quarterly year-over-year results were decreased net interest expense, increases in gross margins and changes in tax and minority interest. Excluding the $0.03 impact of lower emissions sales, gross margin improved by $0.06 versus second quarter last year.

Lower net interest expense also drove results with an impact of $0.11. Both gross margin and net interest expense are presented growth of tax and minority interest. Increases in minority interest and tax expense as well as increases in G&A costs serve to somewhat offset stronger operating results. We reported diluted earnings from continuing operations per share of $0.41 compared to $0.29 in the second quarter of 2006. Adjusted earnings per share were $0.41 for second quarter 2007 and $0.28 for second quarter 2006.

Here are some additional financial highlights for the second quarter. Net cash from operating activities increased by 19% to $526 million, primarily due to decreases in networking capital and contributions from the new businesses. Depreciation and amortization expense from continuing operations was $220 million for the quarter. Total capital expenditures were $718 million, with 412 million of this spent on gross capital expenditures, principally in Maritza, Buffalo Gap II and the GE wind acquisition.

Maintenance CapEx was 306 million for the second quarter with 76 million of that related to environmental projects, primarily at IPL and Kilroot. Free cash flow decreased by 43 million to $220 million, driven by an increase in maintenance CapEx, partly due to several environmental projects. Year-to-date, cash flow from operations has increased by $156 million to $1.1 billion, primarily due to a decrease in networking capital, decreased pension contributions at Eletropaulo and contributions from new businesses. Maintenance CapEx was 510 million, with $115 million of that related to environmental projects primarily at IPL and Kilroot.

As a reminder, we receive a positive economic return on environmental projects at IPL and the cost at Kilroot are on a pass through basis. Free cash flow has also increased year-to-date by $25 million to $597 million, driven by the increase in cash flow from operations. Subsidiary cash distributions to the parent were also on track at $259 million for the quarter and $395 million year-to-date. This includes the receipt of $97 million from EDC.

Parent liquidity remains strong at $1.4 billion and we believe that our current liquidity is more than sufficient to fund our growth investment plan as presented to you a few months ago. For example, the wind investment that I previously mentioned today have already been funded in the second quarter. In addition, if we are fortunate enough to have investment opportunities in excess of expectations in the near term, this liquidity can be supplemented through the sale of non strategic assets and potential refinancing at the project level.

Let's now turn to some of the second quarter segment highlights. In our Latin American generation businesses, the biggest contributor to the $203 million increase in revenues was higher spot prices at Gener in Chile. As I discussed previously, this increase in prices was offset by increasing fuel costs that did not translate to an increase in gross margin. Gross margin decreased by $55 million in comparison to first quarter 2006, primarily driven by the previously discussed charge of $48 million in Brazil and increased prices for purchase energy and fuel at our Uruguaiana plant in Brazil. In our Latin American utilities, revenues increased by $151 million primarily due to favorable FX rates in Brazil and higher volumes at Eletropaulo. Gross margins increased by $22 million, principally due to favorable FX rates.

In our North America segment, generation revenues increased by $87 million primarily due to contributions from TEG and TEP in Mexico and higher spot prices at Eastern Energy in New York. Gross margin increased by $48 million, mainly driven by New York's higher spot prices and the contribution of the new businesses. These gains were partially offset by lower emission sales of $7 million in New York. At IPL, our North America utility, revenues increased by $8 million due to higher sales volumes which contributed to an increase in gross margin of $19 million. Gross margin also benefited from lower maintenance costs compared to second quarter of 2006.

In our Europe and Africa segment, generation revenues increased by $28 million, primarily due to higher volumes in Hungary and Kazakhstan and favorable FX rates. Gross margin decreased by 12 million, primarily driven by lower emission sales of $17 million in Hungary and the Czech Republic. These declines were partially offset by improved gross margin in Kazakhstan due to favorable tariffs and higher volume. Europe and Africa utility revenues increased by $23 million mainly as a result of higher volume and tariff rates in Ukraine. Gross margin decreased by $5 million, primarily due to higher staffing levels at SONEL.

In our Asia segment, which includes the Middle East, higher volumes in Pakistan and Sri Lanka drove an $11 million increase in revenue. Gross margins also increased by $4 million primarily due to the increased volumes in Pakistan. In conclusion, our businesses continue to perform in line with our financial expectations and we are very pleased to report these results to you today.

I'd like now to turn the call over the Paul, who will give an update on our business development pipeline.

Thanks, Victoria. Good morning, everyone. We had had a good quarter in terms of both financial results and business development. This morning I'd like to spend a few minutes to give you an update on our overall development activities. In May we laid out our growth strategy with the plan to add 6500 megawatts to our core generation power fleet to trip our wind generation by adding 2100 megawatts of wind generation capacity ,and to add 26 million tons of production capacity with carbon offsets, and to do all of this by the end of 2011. During the past quarter we've made some good progress in moving forward with these plans. I'd now like to give you an update in how we are progressing in these areas.

Let me start with a review of where we are in developing business in our core power business. We currently have over 15,000 megawatts in medium to advanced stages of development in 19 countries. Let me give you a geographic breakdown of these new developments and that's as follows. In Asia, we're in 7 countries. We have 8,000 megawatts and that represents 47% of our development pipeline. In Europe and the CIS we're in 6 countries. We have 3,215 megawatts representing 23% of the pipeline. In Latin America, 4 countries, we have 3,516 megawatts, representing 25% of the pipeline. And in North America ,and we're including Trinidad in that calculation, within 2 countries, 755 megawatts representing 5% of that pipeline.

I would now like to cover a few highlights with these developments I'll start with Asia where we were just recently declared the winning bidder of the 660-megawatt Masinloc power plant in the Philippines. The Philippines is one of the faster growing in southeast Asia and has adopted one of the most progressive approaches to the electricity sector. This is an important investment strategically for us, in that it gives us immediate entry into this market through a low cost facility in a good location that has significant potential for further expansion. We're confident about the future prospects for the Philippine market. Its need for long-term capacity and the direct access with retail customers. Let me give you some specific details about this business.

The plant consists of [2 by 330-megawatt] on a gross basis pulverized coal, imported coal plant. It was constructed by Mitsubishi heavy industries in 1998. The bid price was $930 million U.S. And our closing is expected by December of 2007. Our plan for the business is to improve the performance. It has a potential to increase the gross output from the current 500 megawatts to 660 megawatts, which is similar to our achievements in India, Kazakhstan and Mexico. As a first privatized base load plant, our plan is to use our early mover advantage to build an integrated supply business where we will sell power to distribution companies and to end use industrial and commercial customers. Our experience of using similar turbines, the image high turbines in Pakistan and plants in the United States, we think gives us an advantage there.

It's also worth noting that the existing infrastructure supports an expansion potential of up to an additional 600 megawatts. What that means is that there's already transmission, coal end loading, coastal [urgent] [acts] disposal facilities that are already in place for an expansion of the facility. It's also the lowest cost thermal fire plant in the system. I'm reemphasizing my earlier point, the Philippines is one of the most open and progressive countries with respect to its electrical sector. The country has unbundled its electrical utility and implemented a sophisticated wholesale energy pool -- electricity energy pool market, similar to the success in markets in Australia and New Zealand. Coal for the plant will be procured from Indonesia or Australia and a [coraday] procurement plant with Parana, our Chilean generation company, which also buys coal from these countries.

Masinloc is predominantly a merchant plant with some short to medium term power supply contracts, anywhere from one to three years. Which initially represent approximately 40% of the plant capacity. The plant can dispatch its uncontracted capacity to the wholesale power pool. We expect to be increasing these contracts over time. While recourse debt financing is expected to be raised from a combination of multi-lateral and local lenders. But it's also worth noting here that the government is offering acquisition debt for up to 60% of the purchase price for seven years. So we've already insured a source of financing for this business, and we also see interest from local, international multi-lateral banks who are willing to provide debt which provides us for an option to have a more attractive take out in the future. We also intend to explore the possibility of teaming up with partners who have expressed interest in joining us as equity partners in this business.

Let me turn now to Europe and Africa. First, in Turkey, we're actively pursuing the development of 390 megawatts of small to medium sized hydro projects through our 51% owned joint venture. These projects are expected to begin coming on line during the 2010, 2012 time frame. The construction of a 89-megawatt hydro plant is expected to commence by the end of this year and the remaining by the end of 2008. In northern Ireland, we're [pursuing] a development of a 430-megawatt combined cycle gas turbine plant at our existing site at Kilroot. The planning process and environmental impact assessment are under way. We're targeting a commercial operation date there of 2010 if we're successful with this development. And also in South Africa we're one of the two remaining bidders for the construction of a 1,000-megawatt peaking capacity plant. The answer to the selected bidder is expected by the end of August, and this plant, if we're successful, would have a commercial operation date of 2009.

Moving on to Latin America, in Chile, in addition to our two plants which are already in construction, with he have three potential additional projects totaling 1170 megawatts which are in the pipeline with expected commercial operation dates in the 2011 to 2012 timeframe. One of these is a 400-megawatt [Angamos] coal fired plant, which will be supplying the northern grid of Chile. The plan here would be to start construction in 2008 with a commercial operation date in 2011. The environmental impact assessment has been submitted. EPC offers have been obtained. We're currently working on financing EPC and power purchase agreement negotiations. We're also pursuing a development of a 242-megawatt Ventanas [poured] power plant. This is coal fired and its an extension of our existing Ventanas plant. Here, we have -- we would expect to start construction in 2008 also, with commercial operation date of 2011. For this one the EIA has been submitted. We're also work on the financing EPC and PPA negotiations. Finally, in Chile, we have a 528-megawatt hydro plant development called [Haltamitho] Here construction would start by 2008 with commercial operation date in the 2012 timeframe and the environmental impact statement for this has also been submitted.

Turning to Brazil, as you know, Brazil is one of our target markets where we have a continued interest. Our AES businesses there have strengthened over the last few years and we have restructured most of our businesses in Brazil. This year we received our first dividend since 2002, received to date, $40 million from Brasiliana which is our subsidiary there. We're forecasting in 2007 to receive a total of $100 million.

As you know, our Brazilian partner in Brasiliana, [BNDS] has announced its intention to sell its share in the Brasiliana entity, which is a legal entity which owns the bulk of our businesses in Brazil. Given our contractual right of first refusal, we've been approached by many potential partners and it is likely that we will team up with one or more of these entities, in order to have an enhanced ability to exercise our right. Given that this process is now underway, it would not be appropriate for us to discuss our strategy in much greater detail.

Now I'd like to talk a little bit about the developments in our alternative energy business. Let me start with the wind. Victoria mentioned this already but just to highlight some additional things, we are attracting to our target to add 2100 megawatts of wind generation by 2011. We've already achieved 427 megawatts of that target. Our Buffalo Gap II project in Texas, of 232 megawatts, was completed construction in the second quarter, and we also completed 186 megawatts acquisition in the U.S., the Lake Benton I and Stone Lake II projects in the U.S.A. to expand our presence into hydro U.S. markets in Iowa and Minnesota. We continue to progress and grow our development pipeline and now have 4,000 megawatts of wind capacity in development. We have expanded our development efforts into new and promising markets such as China, Greece and Turkey. And given our presence in 28 countries, I expect to enter many more attractive markets over time.

Now let me move on to the carbon offset business. We signed up an aggregation contracts in Europe, China, Malaysia, Indonesia and South America, totaling and estimated 5.17 millions tons of annual carbon offset production. That's an increase of 50% since our last call. These are in the areas of landfill, palm oil and the animal waste sectors. We expect to see a substantial wrapup in our construction efforts in 2008 to meet these production targets.

As I mentioned in our last call, in May, AES and General Electric formed a joint venture to reduce greenhouse gas emissions. The partnership seeks to create an annual production volume of 10 million tons, and that's metric tons, of greenhouse gas offsets by 2010. The partnership will develop projects to stop greenhouse gases from escaping into the atmosphere through the reduction of emissions at places like landfills, waste water treatment plants, as well as cattle, hog and poultry farms. In additions to these methane based projects, the partnership may also pursue development of offsets through energy efficiency projects, electricity generation from renewable sources.

For each metric ton of greenhouse gas offset a credit will be created which the partnership will market to commercial and industrial customers in the U.S. who want to offset voluntarily the environmental impact of their operations in order to provide green products to their customers. In July we published our standard and criteria for measuring, monitoring, verification eligibility of emission credits, and GE money launched Earth Rewards which is a credit card which provides rewards in the form of carbon offsets. The benefit of our approach is that AES and GE have created standards in the U.S. which will ensure that our customers can trust in the credits they purchase from us.

I would like to make just one comment about the financial markets and how recent events might impact us. In terms of recourse debt, at corporate we have roughly $400 million per annum of debt maturing in the next two years. Given the low levels of maturities, we can still pay our near term maturities through our free cash flow. It's also worth noting that we just closed a $1 billion refinancing at AES Cartagena in Spain and this closed on August 1st. The new facilities was one of the biggest deals in the European debt markets. It increased the size of the facility, matched the tenor to the PPA and improves margins. It also allows money to be sent back to AES Corp. in a special shareholder distribution.

We're watching these markets carefully but want to emphasize that the public markets are just one means of raising financing for us. In addition to our substantial internally generated cash flow, we also continue to believe that partial selldowns of assets or sales of non strategic assets represent an attractive source of funds for us. The bottom line is that we are not dependent on access to the public markets in the near term.

All in all, we're pleased with the progress in the second quarter. Obviously, we don't expect all the businesses above to reach financial closure as we will be pruning the less attractive opportunities over time. But we are developing a solid pipeline of growth opportunities at a controlled pace. I'm confident that we are on the right track to achieve our long term goals and deliver value to the owners of our stock. We look forward to keeping you posted on our progress in future calls.

I'd like to open the call up for questions. Elsa, could you please open up the lines for questions?

Certainly. The floor is now open for questions. (OPERATOR INSTRUCTIONS) Our first question is coming from Gregg Orrill of Lehman Brothers. Please go ahead.

Thanks very much. Congratulations on the quarter.

Thanks.

Paul, you touched on the refinancing of Cartagena and some of the discussions you've had with potential partners. Can you talk about, with regard to the various growth opportunities you have, your thoughts on using non recourse financing and any color on the partners you've had had conversations with?

I think just generically, the non recourse markets, most of the term loan that we've seen recently is in the high yield markets. Most of our non recourse project financing don't rely on the high yield markets. So we think those are still going to continue to be providing funds. We also deal in many cases with multi lateral agencies, which are not really impacted by this, but, we are watching to make sure we don't get too far out over our skis.

On the partner side, I think we see a lot of options for bringing in partners to, I'd say some our existing businesses, and probably more importantly in some of the new opportunities that are out there. There just is a lot of money today that's looking for places to invest. In the past, we have had more cash than we've had good opportunities. So we haven't had to rely on partners. But I do think in many cases we're seeing partners that can add a lot of value, both in terms of bringing some additional discipline to how to think about these projects. In many cases local partners who can bring particularly benefits with respect to understanding those markets. So I think you'll see us be taking advantage of the ability to use partners as we have more projects and more investment opportunities.

Also, with respect to the non recourse financings, because of the way we structure these things and the way we always have, we tend to really focus on well-structured projects which will allow us to raise non recourse financing. And again, these to date have not been impacted by the term on the high yield markets. But it is an area we will continue to look at as we go forward.

Thanks. Could you also touch on the restatements and the -- your confidence in the controls and the likelihood of future restatements?

Sure. That's a good question. I think it's been frustrating for us. I know it has been for all of you to have these restatements. But it is part of our going through the process of putting in place good controls and good systems. We brought on a lot of people. Our auditors have been doing the same to help us overcome these difficulties. There's been a lot of scouring the books, looking for anything that might not be consistent with current -- the current accounting thinking. So I think we are -- as we turn over rocks we find things. That's what we're trying to do as part of remediating the material weaknesses that we've identified. I think that's actually a good thing. These are not items that are affecting, in my mind, the cash impacts -- or really the ultimate valuation of the Company. But it's something we're committed to continue to do to remediate material weaknesses.

I think you can be confident that we are getting through these. With the kinds of things you're seeing in terms of restatements, I don't think there are in a meaningful way impacting the valuation of the Company. But it's something we're committed to clean up and to get right so that going forward we can have accurate financial statements. The question being, are we going to find anything else? I really don't know. I can tell you there's been so much work done to find these things to remediate the material weaknesses, that that number should be going down in terms of things that we find. So I have a lot of confidence that there shouldn't be anything that's going to be surprising to any of you as we go forward. But, I can tell you that the amount of work that's going on both on or side and our auditors has been impressive. And as Victoria mentioned, there's been a lot of money spent in that area which the down side of that is that's increased our G&A. but that is something that we think is a worthwhile investment to get this right.

If I could just add to that. This is Victoria. I mentioned this or alluded to it in my comments. Just to away any concerns, we're not re-auditting prior period financials. We're done with that. That was the 10-K that we filed in May. But as I pointed out, we are remediating material weaknesses that were identified in prior years. And the process of putting those remediation plans in place, from our 404 perspective, is that there are specific testing procedures that need to happen. We're, in fact, heading toward our fourth quarter set of tests with a number of them and hopefully we'll have them remediated by end of year.

The process of doing that by definition in the contract area required us to put together a catalog and reassessment of known contracts of certain types. So that is in fact what generated the relook at some of these contracts that we had some of the non cash adjustments to. But it is part of a normal process that happens relative to [SDR]. We are taking it obviously very seriously because we need and want to remediate the material weaknesses and are spending a lot of time and effort on getting there.

Thanks very much.

Thank you. Our next question is coming from Brian Russo of Landenburg Thalmann. Please go ahead.

Good morning.

Good morning.

Could you just talk a little bit more about the engineering and construction contracts that you might have in place or might be pursuing for the large pipeline of development projects? We've seen equipment and labor prices escalation, and I'm just curious what are your thoughts on that?

We have seen the same thing. I think it's been over the past couple of years we've been seeing this. The impact has been, I think, with the EPC contractors, they're fairly busy right now. Not as eager to take on new business. So, they, justifiably, are finding that they have to price their services higher. They also have to do it with respect to the risks they're taking on because they've seen in the past commodity prices go up. They've seen the price of labor go up. As a result of bringing new labor into the market you see productivity go down. So, as a result of that, you're facing a situation where the contractors are either going to look to price in a lot of risk for that or pass on some of that to the customers. Which means that as a customer you need to be much more involved in the process of understanding how these estimates are put together, what risks you're taking on and in terms of managing the risk, much more so than you have in the past.

We have a group that's been focused on that here in Arlington and with people around the globe that are assisting the centralized group in terms of providing those services to our businesses, but as a result you're seeing prices come up. And I think the main impact of that is to make sure that when you submit a bid for a new business that you've taken all that into consideration and you have very recent and market estimates of what's going on. I think some people have been caught by that by surprise. I think we're feeling pretty comfortable about our understanding of those markets.

Do you often times sign firm commitments which doesn't allow the contractors to pass costs through?

That's been our model in the past and wherever we can we do that. But we're taking on, now I think going forward, there will be selective items that we and the contractors will agree that will take on certain risks. It might be with respect to steel prices, could be potentially labor rates. Each one is being negotiated on its own. But I think where we feel that the pricing that's being put in -- at the contract level, if it's excessive it's something we would probably rather put in the project budget but not give it all to the contractor. So, in certain cases we will take on some of that risk, but make sure at the project level we'll have enough contingency to cover that. But effectively we look at that as being upside, if in fact the numbers don't turn out to be as high as people might expect they would be given the volatilities we've had in the past.

Could you also talk about any refinancing opportunities at the parent level to maybe alleviate some of the restrictive covenants in place that hamper your financial flexibility?

We had talked a little bit about that last quarter. I think at this point we're sort of in a wait and see standpoint relative to the markets. We're certainly trying to move forward on that if the market conditions allow for it. But at the moment, we're not severely impacted by those covenants day-to-day and we're just going to wait to see what happens with the market.

Can you just remind us what debt issues have those covenants?

The second lien. The second lien and bank note.

Okay. And then just lastly, how much dilution did the Trust 3s contribute?

We can get back to you on that, Brian.

Okay.

We'll probably find it, we'll mention it on this call if we can get that before we end the call.

Thank you very much.

You're welcome.

Thank you. Our next question is coming from from Lasan Johong of RBC Capital Markets. Please, go ahead.

Good morning. Great quarter. Couple questions. First of all, on the Philippines project, you mentioned it was [coal], Paul. Sounds like it was already built. Does this have environmental controls? And if not, are you planning to make remediation?

This is the master log budget in the Philippines. This 660-megawatt plant it was privateized. We've won the bid. It does have environmental controls in place and we will improve the overall operations of the plant. We feel we have a lot of experience and this is a project which is quite similar to, TEG TEP, which I think those parts have been very successful in Mexico. So, we think all the elements of the project go to our strengths.

Okay. On the -- there was a technical default due the delay of your quarterly filings and your 10-K. Has that now been remediated with the filing of the 10-Q or will it be soon remediated?

There's a waiver.

We have about 90%. We have actually got waiver discussions going with relationship banks and we are about 90% of the way there toward getting that completed. We don't expect any problems relative to the remaining waivers.

That ought to be relatively cured quickly, or what's the trigger that gets it off the books, so-to-speak? What do have you to do?

The filing itself. We also needed to get agreements from the relationship banks. That's currently (multiple speakers). Right.

We still need a waiver.

Okay. Understood. And then the last time we chatted there was an informal investigation from the SEC. Is there any update on that?

Primarily our general counsel has been dealing with that. Brian can comment on that.

Not much to update. Since the last call we have continued to discuss some of the pass-through statement issues with the SEC, answering their questions and providing some documentation to clarify some of the issues. I will note, it does remain an informal inquiry at this time. And we will continue to cooperate. But we don't have a time line for when the SEC expects to conclude.

Would that come after the complete auditing and restatement is finalized?

It will be up to the SEC. They haven't put a timeline on it. The way it works is they send us questions and we respond and we have meetings, et cetera but there's no definitive end to it.

And, Lasan, this is Victoria. Just to be clear, we do, every time we've had one of the reassessments of the prior period financials, Brian and I do talk to the SEC and walk them through what was found in the calculations relative to that. So it's not a particular initial set of questions. It's more of an update relative to what we are currently seeing.

There hasn't been any push back so far, right?

No. And I think that they are generally -- let Brian certainly give color. But I think that they've generally understood the complexity relative to some of the issues that were discovered historically, and what we have gone through to make it -- to correct it and ensure that we get the proper accounting treatment lined up today.

That's great. But let me follow up on what Victoria, the comments you made earlier. You said there was a testing period that was due in the fourth quarter and I'm assuming that's to make sure that future transactions are booked properly and is handled correctly in the system. Is that what you're doing?

No, just to be clear, from a [survey], it's actually a 404 process standpoint, once the material weakness is identified, you move into a remediation period of time. And there is a requirement after you go through all the steps of remediating, either for process or for procedure, or, in fact, in some cases just from correcting the erroneous entry as we did this past quarter, there is subsequently a period in which you do internal testing, and then when you're satisfied internally, you hand off to the auditors. Particularly there want to see externally three months of transactions to ensure that what you have booked in fact, what you have done from a remediation standpoint is flowing through into the actual operations of the business and the financials. So we are moving toward fourth quarter testing for a number of those remediation plans that we put in place around the material weaknesses that were previously identified.

Which means, in translation, that a lot of the work that we have done internally is now beginning to pass our internal controls and we're ready to hand off to Deloitte to corroborate what we're finding, and hopefully pass through testing to lift those material weaknesses as we go into 2008.

Sounds like if you're done with the testing by the end of this year, that there's a three month kind of transition period in which the external auditors have to kind of say, yes, this is all good.

And they essentially just -- they will observe the process of producing our financials to ensure that what we have told them and what we have seen with our internal testing they can corroborate.

If all else holds true, then, and it is obviously a very big hypothetical, then it sounds like this whole process will end by early second quarter of '08, or late -- first quarter of '08 or early part of the second quarter of '08?

The material weaknesses that we move into testing on, I can't sit here today and predict the outcome of --

Of course.

But that's true in general.

Okay.

And just to conclude (audio difficulties) It was Brian's question relative to the Trust 3 shares, the impact on EPS was less than $0.01, it was about 15 million shares.

Great. Thank you very much.

Our next question is coming from Brian Chin of Citigroup. Please go ahead.

Hi. Asked and answered. Thank you very much.

Thank you. Our next question is coming from Clark Orsky of KDP Investment Advisors. Please go ahead.

I just had a question on the distributions from [funds], it looked like they were running ahead of last year. Is that just a function of the timing of the EDC dividend?

Yes.

Okay. And I guess on a related question, did you guys say you're going -- you think you'll get $100 millions out of Brazil this year? Is that increased from what you talked about before?

No, that's what we had expected.

At that level?

Yes.

Okay. And can you say how much proceeds you expect to get out of the Cartagena refinancing?

I just don't know what that number is.

About 60 million.

Okay.

That does not include distribution.

Great. Thank you.

Thank you. Our next question is coming from Keith Stanley of Merrill Lynch. These go ahead.

Yes, actually its Elizabeth Parrella, and I apologize because I've missed most of the call. If you already addressed this, feel free to say that. I didn't see any comments in the press release or the sides on the 2007 outlook of adjusted EPS of $1.07 and the longer term outlook. Considering the accounting restatement, a little bit of a drag on an ongoing basis. Can you address your views on guidance right now?

Yes, (inaudible) we have not talked about that. But we're not changing our guidance. Everything seems to be going pretty much as we expected for '07, and longer term, we don't see any significant changes that will cause us to change our outlook. If it does change, we will clearly come out and let people know. But right now, we don't see any changes there.

And if I could just follow up. I think that implies a pretty strong second half comparison when you look at the adjusted EPS from the second half of last year. Can you talk about what you see as being the bigger drivers in the second half, given the first half was down a bit on an adjusted EPS basis?

Yes, I think on an adjusted EPS basis, we -- if you look at the -- if I've got the numbers right in my head, we probably see second half being slightly lower than last year, if I've got that right.

Higher.

Slightly higher?

Yes.

I think in the last year we -- this is Ahmed, we had some one time items in our adjusted EPS numbers. That's why our adjusted EPS is much lower. I think it was about $0.27 for the second half in 2006. And this year, we are projecting roughly $0.56, I guess. This is only because of the one-time items that we had. We did not take out in our 2006 adjusted EPS. That's why you see they're much lower than last year.

Did you say in the second half, 56? I think it's, is it in the (inaudible), it should be 66, right? In the second half of this -- I'm sorry, no, you're at 56.

23 in Q1, 28 this year, is 51 and 107 is the guidance that we gave in our Q1 call.

Okay. All right. Thank you.

You're welcome.

Thank you. Our next question is coming from of Wei Romualdo of Stone Harbor. Please go ahead.

I need a clarification on the latest 8-K that was filed that triggered the restatement, the special regulatory obligation in Brazil. There was a sentence there in the K about cash flow, about what the impact would -- would that impact the distribution that you expect for this year or just on a going forward basis?

No.

Okay. I mean, in what way, in what sense does that mean? Cash flow will be impacted? Is that a contribution you have to provide?

It's basically what it means is that the tariffs, we had to book a liability that had not existed before and the combination of tariffs, there would be, I think, going forward some small decrease.

$6 million approximately lower operating cash flow. But it has no effect on our gross margin or earnings as such.

Okay. So 6 million you estimate in reduction in tariff?

Yes.

All right.

That's compared to our $2.2 billion operating cash flow in [stock] material if you thing about it.

Right. Right. Okay. Second question I have is, can you give some color, or I don't know if there's guidance ever given on sort of your parent level CapEx, if you will, investment into your subsidiaries. Right now this first half you're running already 461 million. Do you have any guidance for the rest of the year?

I'm not sure what you mean by Corporate CapEx.

Are you talking about maintenance CapEx?

Just at the parent level investment into subsidiary. I assume these are equity requirement going into your subsidiary project or subsidiaries.

In terms of what we typically use, we give, we give really two components of that, it's [pro] CapEx, it's maintenance CapEx. In terms of the funding of those, we don't give guidance as to how much is coming from non recourse debt for example, how much is coming from the subsidiaries themselves and how much is coming from AES Corporate. We try to optimize that with a general view of first using the money, non recourse project financing, where it's attractive, then using subsidiary financings, again, at that level. Cash that might be available there. And then we also look to other sources of capital, which could be third parties come in as partners, and then finally we look at AES Corporate as another source. We don't give guidance to that. Quite frankly, we're just not -- that will change over time as the different financing sources present themselves.

Put the questioning a little different way then, would you ever, or what's the strategy, if you find an investment you wouldn't mind going into borrowing, in other words, in terms of investment that you have to put in, into these projects from the parent level that would exceed free cash flow at the parent level so that you would increase the leverage of the parent level, would that be you Cap?

Well, the way we thing about it is to the extent we're going to be putting money in from the parent level, we look at all the sources we have. I think as I try to highlight in my comments, the one source we thing is very attractive right now would be asset sales of some of our existing assets, either partial minority interest, if people have an interest in that, or in some cases where it's not strategic we might sell the entire asset.

We'd also note that the equity markets we look at the debt markets and try and figure out where is the most attractive source of capital. Some cases there's strategic benefits of linking up with people who might [bring numerous] partners. We look at all those different things. It's hard to predict that in each project as to where we're going to come out. But to your point, we are focused on leverage and not taking on excessive amounts of debt. We have worked pretty hard to get ourselves into a good position with respect to our leverage and it's something we like to maintain.

This is Victoria. I had not mentioned on this call but I typically do, we monitor pretty carefully our interest coverage ratios and we really target to stay within about 4.5 to 5 times. That's an ongoing set of metrics we look at, in addition to the financing opportunities that we have, but we keep a careful eye on that relative to the parent level.

The asset sale proceeds from EDS, do you have to use that? Are you required to use that to pay down the second liens and the term loan? Which, (multiple speakers)

we're not required --

the term loan is due any time, right?

We're not required to. That's one of the -- we talked about this a little bit last quarter on the call. One of the -- our funding sources that we are looking at relative to opportunities. But to the extent that we have growth investment opportunities, obviously those are important to us to fund.

Okay. Lastly, can you give a DNA number for the six months or for the quarter?

Sure. It was $220 million depreciation.

Thank you.

Just to be sensitive to people's time, we'll just take one more question, and if there are any other questions beyond that you can, obviously, call up with Ahmed or Hilary after the call. Operator, why don't we take one more question.

Our last question is coming from Keith Stanley of Merrill Lynch. Please, go ahead.

It's Elizabeth Parrella, again. Just wanted to follow up, not wanting to harp on this but it's been an issue and a very slim misunderstanding, at least in my mind. The first half adjusted EPS this year are $0.64, correct?

For this year?

Right. Six months June 2007. The press release indicates $0.64 of adjusted EPS.

Yes.

Yes.

We're fine. So the second half outlook, consistent with $1.07 would be about $0.43?

I think that math works.

Yes.

I guess I misunderstood the answer that was given previously. I wanted to clarify that.

I think he was talking to 2006 in the previous set of numbers.

All right. Okay. All right. And that compares on the second half 2006 numbers was $0.26 or $0.27 on an adjusted EPS basis for the second half of last year so you have an increase?

Yes.

Okay. Wanted to clarify. Thank you.

Thanks.

Thank you. At this time I'll turn the floor back over to you if there are any further closing remarks.

Okay. 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. Any media inquiries should be directed to Robin Pence. Thank you very much and have a nice day.

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