Net cash provided by operating activities increased 35% to $837 million.

This was the result of higher earnings and settlement proceeds offset by higher income tax payment and pension contributions in Brazil, slightly lower working capital balances, and long-term compensation benefit. Depreciation and amortization expense from continuing operations decreased to $179 million versus $233 million in the prior year quarter due to a favorable depreciation adjustment at Eletropaulo.

Free cash flow increased 75% to $664 million to higher net cash from operating activities and lower maintenance capital expenditures.

Maintenance capital expenditures decreased by $66 million to $173 million. This decline is mostly related to the timing of spending and the company expects to continue to see higher trending in maintenance capital expenditure for the remainder of the year.

Growth capital expenditures were $306 million in the quarter.

These expenditures principally relate to projects under construction, including Maritsa East One project in Bulgaria, the Cartagena project in Spain, and the expansion of the Texas wind generation project.

Return on invested capital increased to 190 basis points to 10.6% impacted by the Brasiliana restructuring.

Excluding the restructuring impacts, ROIC for the quarter would have been 13.1%.

Subsidiary cash distributions were on-track for the quarter at $352 million, bringing year-to-date distributions to $661 million, which is inline with the overall target of $1 billion for the year.

Third quarter distributions include the receipted dividends from EDC, the regulated utility in Venezuela that were declared and paid locally in April of this year.

Financial Highlights of Segments

Regulated Utilities Segment

- Regulated Utilities segment revenues increased 13%, or approximately 7% excluding estimated foreign currency translation impacts, primarily driven by higher prices and demand in Latin America.
- Gross margin increased 29%, largely resulting from the increased revenues, while gross margin as a percent of revenue improved to 28% primarily due to lower transmission costs in Latin America and a favorable business tax settlement in Cameroon. Eletropaulo recorded an increase in labor contingencies which was offset by a correction to depreciation expense.
- The company recorded within gross margin an increase in labor claim contingencies at Eletropaulo due to a change in estimation of requirements there, which was offset by a correction to depreciation expense to conform to US GAAP requirements. Reported segment income before income taxes and minority interest includes a $550 million in charges related to the Brasiliana restructuring. Contract generation revenues also increased 20% versus the prior-year period, primarily due to the consolidation of Itabo and higher volume in Pakistan and at the Hydroelectric businesses in Brazil.

Competitive Supply Segment

- Revenues grew 3%, or approximately 4% excluding the estimated impacts of foreign currency translation, primarily reflecting higher prices in Argentina and New York.
- Gross margin fell 20% and gross margin as a percent of revenues declined to 25.4% largely due to outage related costs in North America.

Contract Generation Segment

- Revenues increased 20%. Foreign currency translation was not a significant factor in the quarter. The increase largely relates to consolidation of Itabo, a Dominican Republic business previously carried as an equity investment, and higher demand.
- Gross margin was consistent with the prior quarter as higher emission allowance sales in Europe were offset by higher maintenance costs in Latin America and North America. Gross margin as a percent of revenue fell to 36.1% due to higher fuel costs and maintenance expenses.

The Brasiliana restructuring represents a significant milestone in the Latin American strategy.

It follows a number of other important transactions this year, such as the sale of shares in Gener, the Chilean business, where the company increased the free flows from 1% to 9%, thereby reducing the liquidity discount. The lifting of EDC shares on the Latin exchange in Madrid, the offering of shares to EDC employees, and the debt refinancing of the businesses in Argentina, Brazil, the Dominican Republic and El Salvador. In total, the company has refinanced about $2.6 billion in debt at the Latin American subsidiaries since the end of 2004.

Portfolio Management