AES Second Quarter Earnings Call

Market Update Analysis:

Author: 123jump.com Staff
123jump.com
Last Update: 1:13 AM EDT August 14 2006

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AES, the generator and distributor of electric power, had EPS of 25 cents over 13 cents in Q2 2005. Earnings benefited from good operating price and volume trends, reflecting in cash flow growth. AES is growing its business in wind generation in the U.S. and Europe, and through AES AgriVerde, a venture in the greenhouse gas offset production sector, expecting to capitalize on the market for greenhouse gas emissions reductions. Revenue growth for fiscal 2006 is expected to be 7% to 8% over 2005.

Competitive Supply Segment

Competitive supply segment revenues grew 17% to $333 million from $285 million in the second quarter of 2005.

Revenue grew approximately 18% excluding the estimated impacts of foreign currency translation, primarily reflecting higher prices and volume in New York, higher prices in Argentina and higher volume and prices in Kazakhstan. This was partially offset by lower emission allowance sales of $7 million in New York compared to $27 million in last year''s second quarter.

Gross margin grew 57% to $96 million.

This primarily reflected the higher prices and was partially offset by the lower emission allowance sales. Gross margin as a percent of revenues rose to 28.8% from 21.4% largely due to the improved pricing.

Year-to-date Financial Performance

- Net income for the first half was $520 million, up 149% from the prior year period.
- EPS from continuing operations was 85 cents, up 174% from the year ago period.
- Adjusted EPS was 72 cents, up 148% from the year ago period.
- Revenue for the first half was $6,020 million, up 14% from the year ago period.

- Gross margin was $1,870 million, up 39% from the prior year period.
- Income from continuing operations was $566 million, up 171% from the year ago period.
- Net cash from operating activities was $977 million, up 16% from the prior year period.
- Property additions totaled $593 million in the first half of 2006.

- General and administrative expenses increased 21% to $114 million.
- Interest expense fell 7% to $874 million.
- Interest income rose 13% to $206 million.
- Net other expense was $97 million in the first half of 2006.

- Equity earnings in the 2006 period increased 28% to $59 million.
- Income tax expense increased to $296 million.
- Minority interest was $254 million compared to $125 million in the first half of last year.

Fiscal 2006 Outlook

- The company has raised its guidance for earnings per share from continuing operations to $1.05 from 96 cents previously and for adjusted earnings per share to $1.01 from 97 cents previously.
- Revenue growth for fiscal 2006 is expected in the range of 7% to 8%.
- Gross margin is anticipated in the range of $3.5 million to $3.6 million.

- Business Segment income before tax and minority interest is anticipated in the range of $2.4 billion to $2.5 billion. Regulated utilities is expected to contribute 42% to the total business segment income, contract generation is anticipated to contribute 40%, and competitive supply is expected to contribute 18%.

- Net cash flow from operating activities is anticipated in the range of $2.2 billion to $2.3 billion.
- Maintenance capital expenditure is expected to be in the range of $800 million to $900 million for fiscal 2006.
- Fiscal 2006 effective tax rate is expected in the mid-30% range.
- Free cash flow is expected to be $1.3 billion to $1.5 billion.

- Subsidiary distribution is expected to be $1 billion.
- Parent growth investment is expected to be in the range of $500 million to $600 million.

The factors relevant to the forecast are the timing of emissions sales; increased business development activity; investment of financial infrastructure; shifts in the business mix which impacts both taxes and minority interest; tougher foreign currency comparisons; and portfolio management activities.

Fiscal 2006 guidance does not include the proposed restructuring of Brasiliana Energia in Brazil. If AES proceeds with the restructuring as planned, it could have a dilutive effect on recurring earnings after the restructuring is completed.

Key questions from the second quarter fiscal 2006 earnings call conducted by The AES Corp. on August 7, 2006.

Could you give an update on the status of the proposed restructuring of Eletropaulo ownership and the related defaulted debt?

AES has filed for an application to sell shares of Transgas, the company that owns the shares of Eletropaulo, which is jointly owned by AES and BNDES under the Brasiliana Energia company. AES will repay BNDES debt by selling those shares. Whether or not that transaction goes forward would depend on many things such as whether AES gets the approvals and the final pricing that might result.

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