<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19281
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 54-1163725
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209
(Address of Principal Executive Offices) (Zip Code)
</Table>
(703) 522-1315
(Registrant's Telephone Number, Including Area Code)
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
-----------
The number of shares outstanding of Registrant's Common Stock, par
value $0.01 per share, at August 1, 2001, was 532,324,037.
<Page>
THE AES CORPORATION
INDEX
<Table>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements:
Consolidated Statements of Operations.......................................................................1
Consolidated Balance Sheets.................................................................................2
Consolidated Statements of Cash Flows.......................................................................4
Notes to Consolidated Financial Statements..................................................................5
Item 2. Discussion and Analysis of Financial Condition and Results of Operations...................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................................21
Item 2. Changes in Securities and Use of Proceeds..................................................................21
Item 3. Defaults Upon Senior Securities............................................................................21
Item 4. Submission of Matters to a Vote of Security Holders........................................................22
Item 5. Other Information..........................................................................................22
Item 6. Exhibits and Reports on Form 8-K...........................................................................22
Signatures...........................................................................................................24
</Table>
<Page>
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues.............................................. $2,215 $1,751 $4,760 $3,447
Cost of sales......................................... (1,754) (1,358) (3,675) (2,578)
Selling, general and administrative expenses.......... (46) (19) (68) (48)
Interest expense, net................................. (324) (261) (674) (525)
Other income.......................................... 41 5 28 17
Equity in earnings before income tax.................. 99 99 149 217
Gain on sale of investment............................ -- -- -- 112
Severance and transaction costs....................... -- -- (94) --
Loss on sale of Power Direct.......................... (31) -- (31) --
------------------- ----------------- ---------------- --------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST...... 200 217 395 642
Income tax provision............................... 61 60 118 193
Minority interest.................................. 27 17 59 35
------------------- ----------------- ---------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM...................... 112 140 218 414
Extraordinary item, net of tax-early
extinguishment of debt............................ -- -- -- (7)
------------------- ----------------- ---------------- --------------
NET INCOME............................................ $ 112 $ 140 $ 218 $ 407
=================== ================= ================ ==============
BASIC EARNINGS PER SHARE:
Before extraordinary item.......................... $0.21 $0.30 $0.41 $0.89
Extraordinary item................................. -- -- -- (0.01)
------------------- ----------------- ---------------- --------------
Total........................................... $0.21 $0.30 $0.41 $0.88
=================== ================= ================ ==============
DILUTED EARNINGS PER SHARE:
Before extraordinary item.......................... $0.21 $0.28 $0.41 $0.85
Extraordinary item................................. -- -- -- (0.01)
------------------- ----------------- ---------------- --------------
Total........................................... $0.21 $0.28 $0.41 $0.84
=================== ================= ================ ==============
</Table>
See Notes to Consolidated Financial Statements.
1
<Page>
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 1,190 $ 950
Short-term investments.......................................................... 427 1,297
Accounts receivable, net of reserves of $229 and $203, respectively............. 1,569 1,564
Inventory....................................................................... 542 571
Receivable from affiliates...................................................... 18 27
Prepaid expenses and other current assets....................................... 679 1,375
------------- --------------
Total current assets......................................................... 4,425 5,784
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................................ 594 657
Electric generation and distribution assets..................................... 20,074 18,627
Accumulated depreciation and amortization....................................... (2,990) (2,651)
Construction in progress........................................................ 3,942 2,874
------------- --------------
Property, plant and equipment, net........................................... 21,620 19,507
OTHER ASSETS:
Deferred financing costs, net................................................... 446 381
Project development costs....................................................... 106 114
Investments in and advances to affiliates....................................... 3,337 3,122
Debt service reserves and other deposits........................................ 441 517
Excess of cost over net assets acquired, net.................................... 2,920 2,307
Other assets.................................................................... 2,234 1,306
------------- --------------
Total other assets........................................................... 9,484 7,747
------------- --------------
TOTAL ASSETS.............................................................. $35,529 $33,038
============= ==============
</Table>
See Notes to Consolidated Financial Statements.
2
<Page>
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
<Table>
<Caption>
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
($ in millions)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................... $ 769 $ 833
Accrued interest......................................................... 517 417
Accrued and other liabilities............................................ 1,483 1,318
Non-recourse debt--current portion....................................... 2,800 2,471
---------- ---------
Total current liabilities............................................. 5,569 5,039
LONG-TERM LIABILITIES:
Non-recourse debt........................................................ 13,062 12,863
Recourse debt............................................................ 4,836 3,458
Deferred income taxes.................................................... 2,061 1,863
Other long-term liabilities.............................................. 1,701 1,603
---------- ---------
Total long-term liabilities........................................... 21,660 19,787
MINORITY INTEREST........................................................... 1,413 1,442
COMPANY-OBLIGATED CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF AES........................................................ 1,228 1,228
STOCKHOLDERS' EQUITY:
Common stock............................................................. 5 5
Additional paid-in capital............................................... 5,201 5,172
Retained earnings........................................................ 2,754 2,551
Accumulated other comprehensive loss..................................... (2,301) (1,679)
Treasury stock, at cost.................................................. -- (507)
---------- ---------
Total stockholders' equity............................................ 5,659 5,542
---------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY....................... $35,529 $33,038
=========== =========
</Table>
See Notes to Consolidated Financial Statements.
3
<Page>
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
<Table>
<Caption>
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
($ in millions)
OPERATING ACTIVITIES:
Net cash provided by operating activities........................................ $1,113 $ 634
INVESTING ACTIVITIES:
Property additions............................................................ (1,165) (931)
Acquisitions, net of cash acquired............................................ (1,318) (1,517)
(Purchase) sale of short-term investments, net................................ (43) 21
Proceeds from sale of available-for-sale securities........................... -- 112
Affiliate advances and equity investments..................................... (115) (284)
Project development costs..................................................... (58) (52)
Debt service reserves and other assets........................................ 996 (89)
------- ------
Net cash used in investing activities............................................ (1,703) (2,740)
FINANCING ACTIVITIES:
Borrowings (repayments) under the revolver, net............................... (17) 115
Issuance of long-term debt and other coupon bearing securities................ 2,514 2,390
Repayments of long-term debt and other coupon bearing securities.............. (1,568) (671)
Payments for deferred financing costs......................................... (113) (86)
Proceeds from sale of common stock............................................ 25 916
Dividends paid................................................................ (15) (27)
Distributions to minority interests........................................... (12) (25)
Contributions by minority interests........................................... 16 22
------- ------
Net cash provided by financing activities........................................ 830 2,634
Increase in cash and cash equivalents............................................ 240 528
Cash and cash equivalents, beginning of period................................... 950 693
------- ------
Cash and cash equivalents, end of period......................................... $1,190 $1,221
======= ======
SUPPLEMENTAL INTEREST AND INCOME TAXES DISCLOSURES:
Cash payments for interest, net of amounts capitalized........................... $ 699 $ 549
======= ======
Cash payments for income taxes, net of refunds................................... $ 120 $ 76
======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Liabilities assumed in purchase transactions..................................... $ 820 $2,304
======= ======
Common stock issued for acquisition.............................................. $ 511 $ 8
======= ======
</Table>
See Notes to Consolidated Financial Statements.
4
<Page>
THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The AES
Corporation, its subsidiaries and controlled affiliates (the "Company" or
"AES"). Intercompany transactions and balances have been eliminated. Investments
in 50% or less owned affiliates over which the Company has the ability to
exercise significant influence, but not control, are accounted for using the
equity method.
As more fully discussed in Note 5, during March 2001, the Company
entered into a business combination with IPALCO Enterprises, Inc. ("IPALCO").
The business combination has been accounted for as pooling of interests, and the
historical consolidated financial statements of the Company for all periods
presented have been restated in the accompanying consolidated financial
statements to include the financial position, results of operations and cash
flows of IPALCO.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the six months ended
June 30, 2001 and 2000, respectively, are included. All such adjustments are
accruals of a normal and recurring nature. The results of operations for the
six months ended June 30, 2001 are not necessarily indicative of the results
of operations to be expected for the full year. The accompanying financial
statements are unaudited and should be read in conjunction with the financial
statements, which are incorporated herein by reference to the Company's
financial statements for the year ended December 31, 2000 included in Form 8-K
filed June 5, 2001.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, " BUSINESS
COMBINATIONS." This statement applies to all business combinations initiated
after June 30, 2001. This statement also applies to all business combinations
accounted for using the purchase accounting method for which the date of
acquisition is July 1, 2001 or later. SFAS No. 141 addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "BUSINESS COMBINATIONS", and FASB Statement No. 38, "ACCOUNTING FOR
PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES." Under SFAS No. 141 all
business combinations within the scope of the statement are to be accounted for
using the purchase accounting method.
In June 2001, the FASB issued SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS." The provisions of this statement are required to be applied starting
with fiscal years beginning after December 15, 2001. This statement is required
to be applied at the beginning of an entity's fiscal year and to be applied to
all goodwill and other intangible assets recognized in its financial statements
at that date. SFAS No. 142 addresses how intangible assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The statement requires that
goodwill and certain other intangibles with an indefinite life, as defined in
the standard, no longer be amortized. However, goodwill and intangibles
5
<Page>
would have to be assessed each year to determine whether an impairment loss has
occurred. Any impairments recognized upon adoption would be recorded as a change
in accounting principle. Future impairments would be recorded in income from
continuing operations. The statement provides specific guidance for testing
goodwill for impairment. The Company had $2.9 billion of goodwill at June 30,
2001. Goodwill amortization was $27 million and $49 million for the three
and six months ended June 30, 2001, respectively. The Company has not yet
determined the impact that SFAS No. 142 will have on its financial position or
results of operations.
3. FOREIGN CURRENCY DEVALUATION
During the six months ended June 30, 2001, the Brazilian Real
experienced a significant devaluation relative to the U.S. Dollar, declining
from 1.96 at December 31, 2000 to 2.31 at June 30, 2001. This devaluation
resulted in significant foreign currency translation and transaction losses
during the first and second quarter of 2001. The Company recorded non-cash
foreign currency transaction losses after income taxes at its Brazilian
affiliates of approximately $59 million, or $0.11 per share, and $47 million, or
$0.09 per share, for the first and second quarter of 2001, respectively. The
Company also incurred $556 million in foreign currency translation losses during
the six months ended June 30, 2001 which are included in "Accumulated other
comprehensive loss" in the accompanying consolidated balance sheet.
4. EARNINGS PER SHARE
Basic and diluted earnings per share computations are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits. Potential
common stock, for purposes of determining diluted earnings per share, includes
the dilutive effects of stock options, warrants, deferred compensation
arrangements and convertible securities. The effect of such potential common
stock is computed using the treasury stock method or the if-converted method, in
accordance with SFAS No. 128, "EARNINGS PER SHARE".
<Table>
<Caption>
QUARTER ENDED JUNE 30, 2001 2000
-----------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) WEIGHTED WEIGHTED
NET AVERAGE NET AVERAGE
INCOME SHARES EPS INCOME SHARES EPS
-----------------------------------------------------------------------
Basic earnings per share:
Income before extraordinary item...................... $112 531 $0.21 $140 473 $0.30
Effect of assumed conversion of dilutive securities
Options............................................ -- 7 -- -- 8 (0.01)
Warrants........................................... -- -- -- -- 2 --
Deferred Compensation Plan......................... -- -- -- -- 1 --
Debt Securities.................................... -- -- -- -- 14 (0.01)
Interest savings from conversion of Debt Securities... -- -- -- 1 -- --
-----------------------------------------------------------------------
Dilutive earnings per share:.......................... $112 538 $0.21 $141 498 $0.28
=======================================================================
</Table>
6
<Page>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2001 2000
- ---------------------------- ----------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) WEIGHTED WEIGHTED
NET AVERAGE NET AVERAGE
INCOME SHARES EPS INCOME SHARES EPS
-----------------------------------------------------------------------
Basic earnings per share:
Income before extraordinary item........................ $218 531 $0.41 $414 463 $0.89
Effect of assumed conversion of dilutive securities
Options.............................................. -- 7 -- -- 8 (0.01)
Warrants............................................. -- -- -- -- 2 --
Deferred Compensation Plan........................... -- -- -- -- 1 --
Debt Securities...................................... -- -- -- -- 28 (0.05)
Interest savings from conversion of Debt Securities..... -- -- -- 11 -- 0.02
----------------------------------------------------------------------
Dilutive earnings per share:............................ $218 538 $0.41 $425 502 $0.85
======================================================================
</Table>
5. BUSINESS COMBINATIONS
The only significant business combination completed during the six
month period ended June 30, 2001 was IPALCO. There have been other acquisitions
completed by the Company, including Gener S.A. and ThermoEcotek, which are not
individually or in the aggregate considered significant.
POOLING OF INTERESTS
On March 27, 2001, AES completed its merger with IPALCO through a share
exchange transaction in accordance with the Agreement and Plan of Share Exchange
dated July 15, 2000, between AES and IPALCO, and IPALCO became a wholly-owned
subsidiary of AES. The Company accounted for the combination as a pooling of
interests. Each of the outstanding shares of IPALCO common stock was converted
into the right to receive 0.463 shares of AES common stock. The Company issued
approximately 41.5 million shares of AES common stock. The consideration
consisted of newly issued shares of AES common stock. IPALCO is an
Indianapolis-based utility with 3,000 MW of generation and 433,000 customers in
and around Indianapolis.
The Company issued approximately 346,000 options for the purchase of
AES common stock in exchange for IPALCO outstanding options using the exchange
ratio. All unvested IPALCO options became vested pursuant to the existing stock
option plan upon the change in control.
In connection with the merger with IPALCO, the Company incurred
contractual liabilities associated with existing termination benefit
agreements and other merger related costs for investment banking, legal and
other fees. These costs, which were $94 million, are shown separately in the
accompanying statement of operations.
7
<Page>
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
($ in millions)
Revenues:
AES.................... $2,008 $1,538 $4,338 $3,014
IPALCO................. 207 213 422 433
------ ------ ------ ------
$2,215 $1,751 $4,760 $3,447
====== ====== ====== ======
Extraordinary Item:
AES.................... -- -- -- $ (7)
IPALCO................. -- -- -- --
------ ------ ------ ------
-- -- -- $ (7)
====== ====== ====== ======
Net Income:
AES.................... $ 75 $ 111 $ 199 $ 285
IPALCO................. 37 29 19 122
------ ------ ------ ------
$ 112 $ 140 $ 218 $ 407
====== ====== ====== ======
</Table>
There have been no changes to the significant accounting policies of
AES or IPALCO due to the merger. Both AES and IPALCO have the same fiscal years.
There were no intercompany transactions between the two companies.
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company is a party to joint ventures/consortium agreements through
which the Company has equity investments in Companhia Energetica de Minas Gerais
("CEMIG"), Light-Servicos de Eletricidade S.A. ("Light") and Eletropaulo
Metropolitana Electricidade de Sao Paulo S.A. ("Eletropaulo"). The joint
venture/consortium parties generally share operational control of the investee.
The agreements prescribe ownership and voting percentages as well as other
matters. The Company records its share of earnings from its equity investees on
a pre-tax basis. The Company's share of the investee's income taxes is recorded
in income tax expense.
In December 2000, a subsidiary of the Company entered into an agreement
with EDF International S.A. ("EDF") to jointly acquire an additional 9.2%
interest in Light, which is held by a subsidiary of Companhia Siderurgica
Nacional ("CSN"). In January 2001, pursuant to this transaction, the Company
acquired an additional 2.75% interest in Light for $114.6 million. At June 30,
2001, the Company owns approximately 23.89% of Light.
Following the purchase of the Light shares previously owned by CSN, AES
and EDF are the controlling shareholders of Light and Eletropaulo. AES and EDF
have agreed that AES will eventually take operational control of Eletropaulo and
the telecom businesses of Light and Eletropaulo, while EDF will eventually take
operational control of Light and Eletropaulo's electric workshop business. AES
and EDF intend to continue to pursue a further rationalization of their
ownership stakes in Light and Eletropaulo, the result of which AES would become
the sole controlling shareholder of Eletropaulo and EDF would become the sole
controlling shareholder of Light. Upon consummation of the transaction, AES will
begin consolidating Eletropaulo's operating results. The structure and process
by which this rationalization may be effected, are subject to approval by
various Brazilian regulatory authorities and other third parties. As a
8
<Page>
result, there can be no assurance that this rationalization will take place.
The following table presents summarized financial information (in
millions) for the Company's investments in 50% or less owned investments
accounted for using the equity method:
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----
Revenues............................................................................. $3,478 $2,010
Operating Income..................................................................... 907 631
Net Income........................................................................... 364 395
</Table>
Equity ownership percentages for these investments are presented below:
<Table>
<Caption>
AFFILIATE COUNTRY JUNE 30, 2001 DECEMBER 31, 2000
- --------- ------- ------------- -----------------
Cemig Brazil 21.62% 21.62%
Elsta Netherlands 50.00 50.00
Kingston Canada 50.00 50.00
Light Brazil 23.89 21.14
Eletropaulo Brazil 49.60 49.60
Medway Power, Ltd. United Kingdom 25.00 25.00
OPGC India 49.00 49.00
Chigen affiliates China 30.00 30.00
Songas Limited Tanzania 49.00 49.00
</Table>
7. LITIGATION
In September 1999, an appellate judge in the Minas Gerais, Brazil state
court system granted a temporary injunction that suspended the effectiveness of
a shareholders' agreement for CEMIG. This appellate ruling suspends the
shareholders' agreement while the action to determine the validity of the
shareholders' agreement is litigated in the lower court. In early November 1999,
the same appellate court judge reversed this decision and reinstated the
effectiveness of the shareholders' agreement, but did not restore the super
majority voting rights that benefited the Company. In March 2000, a state court
in Minas Gerais again ruled that the shareholders' agreement was invalid. The
Company has appealed this decision and on August 7, 2001, the state appellate
court upheld the invalidity of the shareholders' agreement. AES intends to
appeal this decision before the Brazilian federal court. The Company intends to
vigorously pursue its legal rights in this matter and to restore all of its
rights regarding CEMIG. Failure to prevail in this matter would limit the
Company's influence on the daily operations of CEMIG. However, the Company would
still own approximately 21.6% of the voting common stock of CEMIG.
The crisis in the California wholesale power market has directly or
indirectly resulted in several administrative and legal (civil or criminal)
actions involving the Company's businesses in California. Each of the
Company's businesses in California (AES Southland, AES Placerita and AES New
Energy) is subject to
9
<Page>
overlapping federal and state investigations by the Department of Justice,
Federal Energy Regulatory Commission, California Attorney General's Office,
the Market Oversight and Monitoring Committee of the California Independent
System Operator ("ISO"), and the California Public Utility Commission. Each
of these investigations is currently in the information gathering stage, and
these businesses have responded to multiple requests for information about
operations, maintenance, and bidding behavior of the plants.
In May 2001, the Department of Justice commenced an antitrust
investigation pursuant to Section 1 of the Sherman Act relating to an agreement
between AES Southland LLC and Williams Energy Services Company, which the
Department of Justice alleges, limits the expansion of electric generating
capacity at or near certain plants owned by AES Southland LLC. In connection
therewith, the Department of Justice sent a Civil Investigative Demand ("CID")
to AES Southland LLC requesting the answer to certain interrogatories and the
production of documents. AES Southland LLC is cooperating with the terms of the
CID.
The Company is also involved in certain legal proceedings in the normal
course of business.
8. DERIVATIVE INSTRUMENTS
Effective January 1, 2001, AES adopted SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. The adoption of SFAS No. 133 on January 1, 2001, resulted in a
cumulative reduction to income of less than $1 million, net of deferred income
tax effects, and a cumulative reduction of other comprehensive income in
stockholders' equity of $93 million, net of deferred income tax effects.
For the three and six months ended June 30, 2001, the impact of changes
in derivative fair value related to the ineffective portion of derivatives
qualifying as cash flow hedges was not significant to AES's results of
operations. There was no net effect on results of operations for the three and
six months ended June 30, 2001, of derivatives qualifying as fair value hedges.
Additionally, there was no net effect on results of operations for the three and
six months ended June 30, 2001, of derivative and non-derivative instruments
that have been designated and qualified as hedging net investments in foreign
operations. Approximately $13 million of other comprehensive income related to
derivative instruments as of June 30, 2001, is expected to be recognized as a
reduction to earnings over the next twelve months. A portion of this amount is
expected to be offset by the effects of hedge accounting. The accumulated
balance in other comprehensive income related to derivative transactions will be
reclassified into earnings as interest expense is recognized for hedges of
interest rate risk, as foreign currency transaction and translation gains and
losses are recognized for hedges of foreign currency exposure and as electric
and gas sales and purchases are recognized for hedges of forecasted electric and
gas transactions.
AES utilizes derivative financial instruments to hedge interest rate
risk, foreign exchange risk and commodity price risk. The Company utilizes
interest rate swap, cap and floor agreements to hedge interest rate risk on
floating rate debt. The majority of AES's interest rate derivatives are
designated and qualify as cash flow hedges. Currency forward and swap agreements
are utilized to hedge foreign exchange risk which is a result of AES or one of
its subsidiaries entering into monetary obligations in currencies other than its
own functional currency. The majority of AES's foreign currency derivatives are
designated and qualify as either fair value hedges or cash flow hedges. Certain
derivative instruments and other non-derivative instruments are designated and
qualify as hedges of the foreign currency exposure of a net investment in a
10
<Page>
foreign operation. The Company utilizes electric and gas derivative instruments,
including swaps, options, forwards and futures, to hedge the risk related to
electricity and gas sales and purchases. The majority of AES's electric and gas
derivatives are designated and qualify as cash flow hedges. The maximum length
of time over which AES is hedging its exposure to variability in future cash
flows for forecasted transactions, excluding forecasted transactions related to
the payment of variable interest, is four years. For the three and six months
ended June 30, 2001, no fair value or cash flow hedges were de-recognized or
discontinued.
The FASB reached a conclusion in June 2001 that contracts for the
purchase or sale of electricity, both forward and option contracts, including
capacity contracts, may qualify for the normal purchases and sales exemption
and are not required to be accounted for as derivatives under SFAS No. 133.
In order for contracts to qualify for this exemption, they must meet certain
criteria, which include the requirement for physical delivery of the
electricity to be purchased or sold under the contract only in the normal
course of business. Substantially all of AES's power sales contracts either
meet these criteria and will qualify for the normal purchases and sales
exemption or do not meet the definition of a derivative.
9. COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income for the three and six
months ended June 30, 2001 and 2000 are as follows (in millions):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Net income................................................ $ 112 $ 140 $ 218 $ 407
Foreign currency translation adjustment................... (319) (137) (556) (100)
Change in derivative fair value........................... 78 -- (65) --
Realized gain on investment sale.......................... -- -- -- (68)
Unrealized loss on securities............................. -- (1) (2) (38)
-----------------------------------------------------------------
Comprehensive (loss) income............................... $(129) $ 2 $(405) $ 201
=================================================================
</Table>
10. SEGMENTS
Information about the Company's operations by segment are as follows
(in millions):
<Table>
<Caption>
EQUITY
REVENUE (1) GROSS MARGIN EARNINGS
----------- ------------ --------
Quarter Ended June 30, 2001
Generation.................................................... $1,052 $246 $15
Distribution.................................................. 1,163 215 84
--------------------------------------------------
Total...................................................... $2,215 $461 $99
==================================================
Quarter Ended June 30, 2000
Generation.................................................... $ 838 $315 $ 9
Distribution.................................................. 913 78 90
--------------------------------------------------
Total...................................................... $1,751 $393 $99
==================================================
</Table>
11
<Page>
<Table>
<Caption>
EQUITY
REVENUE (1) GROSS MARGIN EARNINGS
----------- ------------ --------
Six Months Ended June 30, 2001
Generation................................................... $2,261 $ 614 $ 32
Distribution................................................. 2,499 471 117
--------------------------------------------------
Total.................................................... $4,760 $1,085 $149
==================================================
Six Months Ended June 30, 2000
Generation................................................... $1,708 $ 662 $ 34
Distribution................................................. 1,739 207 183
--------------------------------------------------
Total.................................................... $3,447 $ 869 $217
==================================================
</Table>
(1) Intersegment revenues for the quarters ended June 30, 2001 and 2000
were $15 million and $14 million, respectively and for the six months
ended June 30, 2001 and 2000 were $52 million and $37 million,
respectively.
There have been no changes in the basis of segmentation since
December 31, 2000.
12
<Page>
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The AES Corporation (including its subsidiaries and affiliates are
collectively referred to as "AES" or the "Company") is a global power company
committed to serving the world's needs for electricity and other services in a
socially responsible way. AES participates primarily in two related lines of
businesses: electricity generation and distribution. AES's electricity
generation business is characterized by sales from our power plants to
nonaffiliated wholesale customers (generally electric utilities, regional
electric companies, electricity marketers or wholesale commodity markets known
as "power pools") for further resale to end-users. AES's distribution business
is characterized by sales of electricity directly to end users such as
commercial, industrial, governmental and residential customers through its
"distribution" business.
AES's generation business represented 48% of total revenues for the six
months ended June 30, 2001 compared to 50% for the six months ended June 30,
2000. Sales within the generation business are made under long-term contracts
from power plants owned by the Company's subsidiaries and affiliates, as well as
directly into power pools. The Company owns new plants constructed for such
purposes ("greenfield" plants) as well as older power plants acquired through
competitively bid privatization initiatives or negotiated acquisitions.
AES's distribution business represented 52% of total revenues for the
six months ended June 30, 2001 compared to 50% for the six months ended June 30,
2000. Electricity sales by AES's distribution businesses, including affiliates,
are generally made pursuant to the provisions of long-term electricity sale
concessions granted by the appropriate governmental authorities. In certain
cases, these distribution companies are "integrated", in that they also own
electric power plants for the purpose of generating a portion of the electricity
they sell.
Certain subsidiaries and affiliates of the Company (domestic and
non-U.S.) have signed long-term contracts or made similar arrangements for the
sale of electricity and are in various stages of developing the related
greenfield power plants. Successful completion depends upon overcoming
substantial risks, including, but not limited to, risks relating to failures of
siting, financing, construction, permitting, governmental approvals or the
potential for termination of the power sales contract as a result of a failure
to meet certain milestones. At June 30, 2001, capitalized costs for projects
under development and in early stage construction were approximately $106
million. The Company believes that these costs are recoverable; however, no
assurance can be given that individual projects will be completed and reach
commercial operation.
AES is also pursuing potential greenfield development projects and
acquisitions in many countries. Several of these, if consummated, would require
the Company to obtain substantial additional financing, including both debt and
equity financing.
The Company has been actively involved in the acquisition and operation
of electricity assets in countries that are restructuring and deregulating the
electricity industry. Some of these acquisitions have been made from other
electricity companies that have chosen to exit the electricity generation
business. In these types of situations, sellers generally seek to initiate and
complete competitive solicitations in less than one year, which is much faster
than the time incurred to complete greenfield developments, and require
13
<Page>
payment in full on transfer. AES believes that its experience in competitive
markets and its worldwide integrated group structure (with its significant
geographic coverage and presence) enable it to react quickly and creatively in
such situations.
The Company strives for operating excellence as a key element of its
strategy, which it believes it accomplishes by minimizing organizational
layers and maximizing company-wide participation in decision-making. In
meeting these goals, the Company may from time to time implement
restructuring and severance plans, which may have a material impact on
results of operations in the period in which the plan is implemented. The
Company also believes that effective control of its businesses is an
important requirement for implementing the Company's philosophy and business
strategy, and it will actively seek to acquire control or divest of its
interest in those businesses it does not currently control. In addition, the
Company regularly evaluates each of its businesses to determine whether
conditions or events have significantly changed the economics of the
respective business. The Company is currently evaluating certain of its
distribution businesses in South America and Asia as well as certain of its
generation businesses in Asia. To the extent the Company decides to divest
its interest in these or other businesses, such transactions may result in a
gain or loss.
The financing for such acquisitions, in contrast to that for greenfield
development, often must be arranged quickly and therefore may preclude the
Company from arranging non-recourse project financing (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000). Moreover, acquisitions that are
large, that occur simultaneously with one another or those occurring
simultaneously with commencing construction on several greenfield developments
would potentially require the Company to obtain substantial additional
financing, including both debt and equity. As a result, and in order to enhance
its financial capabilities to respond to these more accelerated opportunities
the Company maintains an $850 million credit agreement and has approximately $6
billion of capacity under its current Shelf Registrations.
In the United States, the Company is currently operating or
constructing 8 generation plants representing approximately 7,000 MWs that use
natural gas to make electricity. Five of these plants representing approximately
5,500 MWs have entered into tolling agreements wherein the Company converts the
natural gas supplied by a third party into electricity for their use in return
for a fixed payment. Therefore, the Company's results of operations from these
plants should not be materially adversely impacted due to change in the natural
gas prices.
In Brazil, the combined effects of growth in demand, decreased rainfall
on the country's heavily hydro-electric dependent generating capacity and delays
by the Brazilian energy regulatory authorities in developing an attractive
regulatory structure necessary to encourage new non-hydro electric generation in
the country have led to projected shortages of electricity to meet expected
demand in certain regions of Brazil. As a result, electricity rationing has been
implemented by the Brazilian government. As a result of such conditions during
the second quarter of 2001, the Company, through its subsidiaries and affiliates
that are impacted, is recording its consolidated financial results in accordance
with the relevant terms of the contractual provisions (in particular, Annex V)
included in the initial contracts between most electricity distribution and
hydro-electric generation companies in Brazil. Annex V is a set of contractual
provisions that contain a mathematical formula which was designed in the initial
contract to reduce the impact on generators during times (such as rationing
periods) when reservoir levels are low and spot electricity prices are high.
Under their initial contracts, generators are required to provide a fixed volume
of electricity to
14
<Page>
distribution companies. In rationing situations, Annex V decreases the
generators' contractual fixed volume obligations to correspond to the
hydrological levels and spot electricity prices, however, that contractual
reduction is generally not sufficient to cover the full extent of the actual
reductions in energy available resulting from the water shortage conditions. As
such, the generators are required to fulfill the remaining portion of their
reduced contractual obligations to the distributors with a calculated and
financially settled payment under the terms of Annex V. Such calculated payment
effectively provides compensation to the distributors for the shortfall in
actual electricity delivered by the generators and serves to partially offset
the reductions in operating income experienced by the distributors resulting
from the implications of lower electricity demand under imposed rationing
conditions. During the quarter ended June 30, 2001, the Company recorded a net
contribution of approximately $38 million, before income taxes, related to the
existing contractual provisions of Annex V. Annex V also provides that the
Brazilian government can, by decree, amend the payments required by Annex V.
Numerous Brazilian officials have verbally indicated that they do not intend to
make any such amendments. There can be no assurances that such current pledge
will continue to be honored, or that the current contractual provisions of Annex
V will be honored by any or all of the generators required to make payments
thereunder. Any such governmental amendment in the future or extended or
significant non-payment by the generators subject to Annex V may have a material
adverse effect on the Company's results of operations or financial condition.
Additionally, during the six months ended June 30, 2001, the Brazilian
Real experienced a significant devaluation relative to the U.S. Dollar,
declining from 1.96 at December 31, 2000 to 2.31 at June 30, 2001. This
devaluation resulted in significant foreign currency translation and transaction
losses during the first and second quarter of 2001. The Company recorded
non-cash foreign currency transaction losses after income taxes at its Brazilian
affiliates of approximately $59 million, or $0.11 per share, and $47 million, or
$0.09 per share, for the first quarter and second quarter of 2001, respectively.
The Company also incurred $556 million in foreign currency translation losses
during the six months ended June 30, 2001 which are included in "Accumulated
other comprehensive loss" in the accompanying consolidated balance sheet.
Further devaluation of the Brazilian Real would continue to have a negative
impact on the Company's results of operations.
During March 2001, the Company entered into a business combination with
IPALCO Enterprises, Inc. ("IPALCO"). The business combination has been accounted
for as pooling of interests, and the historical consolidated financial
information of the Company for all periods presented have been restated in the
discussion of operations below to include the financial position, results of
operations and cash flows of IPALCO.
RESULTS OF OPERATIONS
REVENUES. Revenues increased $470 million, or 27%, to $2.22 billion
for the three months ended June 30, 2001 from $1.75 billion for the three months
ended June 30, 2000. Revenues increased $1.31 billion, or 38%, to $4.76 billion
for the six months ended June 30, 2001 from $3.45 billion for the six months
ended June 30, 2000. The increase in revenues for both the three and six month
periods ended June 30, 2001 is due primarily to the acquisition of new
generation and distribution businesses, as well as from existing operations and
new operations of greenfield projects.
Generation revenues increased $212 million, or 25%, to $1.05 billion
for the three months ended June 30, 2001, from $838 million for the three months
ended June 30, 2000. Revenues increased $550
15
<Page>
million, or 32%, to $2.26 billion for the six months ended June 30, 2001 from
$1.71 billion for the six months ended June 30, 2000. The increase in generation
revenues for the three and six months ended June 30, 2001 is due to the
acquisition of Gener, as well as the start of commercial operations at Merida
III and Uruguaiana, and the acquisition of a controlling interest in NIGEN.
These increases were slightly offset by lower revenues from Thames due to the
contract buyout, lower market prices received by the United Kingdom businesses
and the reduced revenues recorded at Tiete due to electricity rationing.
Distribution revenues increased $247 million, or 27%, to $1.16 billion
for the three months ended June 30, 2001, from $913 million for the three months
ended June 30, 2000. Revenues increased $760 million, or 44%, to $2.50 billion
for the six months ended June 30, 2001, from $1.74 billion for the six months
ended June 30, 2000. The increase in distribution revenues for the three and six
months ended June 30, 2001 is due primarily to the acquisition of EDC and CAESS
as well as increased revenues from EDE Este.
GROSS MARGIN. Gross margin, which represents total revenues reduced by
cost of sales, increased $68 million, or 17%, to $461 million for the three
months ended June 30, 2001, from $393 million for the three months ended June
30, 2000. Gross margin as a percentage of revenues decreased to 21% for the
three months ended June 30, 2001 from 23% for the three months ended June 30,
2000. Gross margin increased $221 million, or 25%, to $1.09 billion for the six
months ended June 30, 2001, from $869 million for the six months ended June 30,
2000. Gross margin as a percentage of revenues decreased to 23% for the six
months ended June 30, 2001, from 25% for the six months ended June 30, 2000. The
increase in gross margin for both the three and six months ended June 30, 2001
is due to the acquisition of new businesses and the increase in existing
businesses offset by declines at certain other existing businesses. The decrease
in gross margin as a percentage of revenues is due to a higher percentage of the
Company's operations being derived from distribution businesses in 2001 than in
the same period of 2000. The distribution businesses generally experience lower
gross margin percentages because of the retail nature of the business.
The generation gross margin decreased $69 million, or 22%, to $246
million for the three months ended June 30, 2001, from $315 million for the
three months ended June 30, 2000. The generation gross margin as a percentage
of revenues decreased to 23% for the three months ended June 30, 2001, from
38% for the three months ended June 30, 2000. The generation gross margin
decreased $48 million, or 7%, to $614 million for the six months ended June
30, 2001, from $662 million for the six months ended June 30, 2000. The
generation gross margin as a percentage of revenue decreased to 27% for the
six months ended June 30, 2001 from 39% for the six months ended June 30,
2000. The decrease in gross margin for the three and six months ended June
30, 2001 is primarily due to declines at Tiete due to electricity rationing
including costs associated with the contractual provisions of Annex V as
discussed above, the United Kingdom businesses due to lower market prices,
Thames due to the contract buyout and lower margins at CHIGEN. These declines
are offset slightly by the acquisition of Gener. The generation gross margin
as a percentage of revenues decreased due to the acquisition of generation
businesses with overall gross margin percentages, which are lower than the
overall portfolio of generation businesses and also due to the lower
contribution made by the United Kingdom businesses because of the lower
market prices.
The distribution gross margin increased $137 million, or 176%, to $215
million for the three months ended June 30, 2001, from $78 million for the three
months ended June 30, 2000. The distribution gross margin as a percentage of
revenues increased to 18% for the three months ended June 30, 2001, from 9% for
the three months ended June 30, 2000. The increase in gross margin for the three
months ended June 30, 2001 is due to the acquisition of EDC and increases at EDE
Este and NewEnergy. Distribution gross
16
<Page>
margin increased $264 million, or 128%, for the six months ended June 30, 2001,
from $207 million for the six months ended June 30, 2000. The distribution gross
margin as a percentage of revenue increased to 19% for the six months ended June
30, 2001, from 12% for the six months ended June 30, 2000. The increase in gross
margin for the six months ended June 30, 2001 is due to the acquisition of EDC
and CAESS, along with increases at NewEnergy and IPALCO. These increases were
slightly offset by decreases at Telasi. The distribution margin as a percentage
of revenues increased slightly due to higher gross margins from newly acquired
companies offset slightly by a lower gross margin at Telasi.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $27 million, or 142%, to $46 million for the
three months ended June 30, 2001, from $19 million for the three months ended
June 30, 2000. Selling, general and administrative expenses as a percentage of
revenues were 2% for the three months ended June 30, 2001 and 1% for the three
months ended June 30, 2000. Selling, general and administrative expenses
increased $20 million, or 42%, to $68 million for the six months ended June 30,
2001, from $48 million for the six months ended June 30, 2000. Selling, general
and administrative expenses as a percentage of revenue were 1% for both the six
months ended June 30, 2001 and 2000. The overall increase in selling, general
and administrative expenses during both the three and six months ended June 30,
2001 is due to increased development activities.
INTEREST EXPENSE, NET. Interest expense, net consists of interest
expense offset by interest income. Interest expense increased $66 million, or
20%, to $394 million for the three months ended June 30, 2001, from $328 million
for the six months ended June 30, 2000. Interest expense as a percentage of
revenue was 18% for the three months ended June 30, 2001 and 19% for the three
months ended June 30, 2000. Interest expense increased $203 million, or 33%, to
$815 million for the six months ended June 30, 2001 from $612 for the six months
ended June 30, 2000. Interest expense as a percentage of revenue was 17% for the
six months ended June 30, 2001 and 18% for the six months ended June 30, 2000.
Interest expense increased overall primarily due to the interest expense at new
businesses, as well as additional corporate interest costs arising from the
senior debt and convertible securities issued within the past twelve months to
finance new investments. Interest income increased $3 million, or 4%, to $70
million from $67 million for the three months ended June 30, 2000. Interest
income as a percentage of revenue was 3% for the three months ended June 30,
2001 and 4% for the three months ended June 30, 2000. Interest income increased
$53 million, or 61% to $140 million for the six months ended June 30, 20001 from
$87 million for the six months ended June 30, 2000. Interest income as a
percentage of revenue remained constant at 3% for both the six months ended June
30, 2001 and 2000. The increase in interest income for the six months ended June
30, 2001 is due primarily to the additional interest income gained from the
acquisition of new businesses.
OTHER INCOME. The Company reported $41 million of other income for the
three months ended June 30, 2001, as compared to $5 million for the three months
ended June 30, 2000. Other income was $28 million for the six months ended June
30, 2001 as compared to $17 million for the six months ended June 30, 2000.
Other income includes sales of assets or investments, foreign currency changes
from consolidated subsidiaries and mark-to-market adjustments on derivative
financial instruments and other investments. The overall change in other income
is due primarily to mark-to-market adjustments on certain derivative financial
instruments and other investments slightly offset by declines in the British
Pound.
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates was
$99 million for both the three months ended June 30, 2001 and 2000. Equity in
earnings of affiliates for the three months ended June 30, 2001 remained
constant with increases in equity in earnings of generation affiliates offset by
declines in
17
<Page>
equity in earnings of distribution affiliates. Equity in earnings of affiliates
decreased $68 million, or 31%, to $149 million for the six months ended June 30,
2001 from $217 million for the six months ended June 30, 2000. The overall
decrease in equity in earnings for the six months ended June 30, 2001 is due
primarily to declines in equity in earnings of distribution affiliates.
Equity in earnings of generation affiliates increased $6 million, or
67%, to $15 million for the three months ended June 30, 2001, from $9 million
for the three months ended June 30, 2000. The increase in equity in earnings of
generation affiliates for the three months ended June 30, 2001 is due primarily
to contributions from Gener and OPGC. Equity in earnings of generation
affiliates decreased $2 million, or 6%, to $32 million for the six months ended
June 30, 2001, from $34 million for the six months ended June 30, 2000. The
decrease is primarily due to the purchase of an additional interest in NIGEN
thereby making it a consolidated subsidiary.
Equity in earnings of distribution affiliates decreased $6 million,
or 7%, to $84 million for the three months ended June 30, 2001, from $90
million for the three months ended June 30, 2000. Equity in earnings of
distribution affiliates decreased $66 million, or 36%, to $117 million for
the six months ended June 30, 2001, from $183 million for the six months
ended June 30, 2000. The decrease is due primarily to the devaluation of the
Brazilian Real. Equity in earnings of distribution affiliates included
foreign currency transaction losses on a pretax basis of $72 million and $162
million for the three and six months ended June 30, 2001, respectively. Our
distribution concession contracts in Brazil provide for annual tariff
adjustments based upon changes in the local inflation rates, and generally
significant devaluations are followed by increased local currency inflation.
However, because of the lack of direct adjustment to the current exchange
rate, the in arrears nature of the respective adjustment to the tariff or the
potential delays or magnitude of the resulting local currency inflation of
the tariff, the future results of operations of AES's distribution companies
in Brazil could be adversely affected by the continued devaluation of the
Brazilian Real. These losses were offset by increases from operations at
Eletropaulo due to an increased ownership percentage and the increased
contribution from selling excess capacity under the provisions of Annex V.
INCOME TAXES. Income taxes (including income taxes on equity in
earnings) increased $1 million to $61 million for the three months ended June
30, 2001, from $60 million for the three months ended June 30, 2000. The
company's effective tax rate was 35% and 30% for the second quarter of 2001 and
2000, respectively. Income taxes (including income taxes on equity in earnings)
decreased $75 million, to $118 million for the six months ended June 30, 2001,
from $193 million for the six months ended June 30, 2000. The Company's
effective tax rate was 35% and 32% for the six months ended June 30, 2001 and
2000, respectively. The increase in the effective income tax rate is due to
increased dividends from foreign businesses.
MINORITY INTEREST. Minority interest increased $10 million, or 59%, to
$27 million for the three months ended June 30, 2001, from $17 million for the
three months ended June 30, 2000. Minority interest increased $24 million, or
69%, to $59 million for the six months ended June 30, 2001, from $35 million for
the six months ended June 30, 2000. Distribution minority interest increases
were slightly offset by decreases in generation minority interest.
Generation minority interest decreased $9 million, or 82%, to $2
million for the three months ended June 30, 2001, from $11 million for the three
months ended June 30, 2000. Generation minority interest
18
<Page>
decreased $6 million, or 25%, to $19 million for the six months ended June 30,
2001, from $25 million for the six months ended June 30, 2000. The decrease in
generation minority interest for both the three and six months ended June 30,
2001 is due primarily to lower contributions from Tiete, Panama, CTSN and CHIGEN
slightly offset by increased contributions from Gener and Columbia I.
Distribution minority interest increased $19 million, or 326%, to $25
million for the three months ended June 30, 2001, from $6 million for the three
months ended June 30, 2000. During the three months ended June 30, 2001
increases in distribution minority interest at EDE Este, EDC and CAESS were
slightly offset by declines at CEMIG. Distribution minority interest increased
$30 million, or 300%, to $40 million for the six months ended June 30, 2001,
from $10 million for the six months ended June 30, 2000. During the six months
ended June 30, 2001 increases at EDC and CAESS were slightly offset by declines
at CEMIG.
GAIN ON SALE OF INVESTMENT. During the first quarter of 2000, a
subsidiary of the Company sold approximately one million shares of Internet
Capital Group, Inc.
SEVERANCE AND TRANSACTION COSTS. During the first quarter of 2001, the
Company incurred approximately $94 million of transaction and contractual
severance costs related to the acquisition of IPALCO. Typically the Company
accounts for business combinations as purchases, which allows such costs to be
capitalized. Since the IPALCO acquisition was accounted for as a pooling of
interests, these costs are required to be expensed.
LOSS ON SALE OF POWER DIRECT. During the three months ended June 30,
2001, the Company sold the customers and related assets of AES Power Direct
as a result of a decision to exit the distribution of electricity to
residential customers through direct marketing. The Company reported a loss
on the sale of $31 million.
EXTRAORDINARY ITEM. On March 31, 2000, the Company renegotiated the
corporate revolving bank loan to incorporate the letter of credit facility.
Since the corporate revolving bank loan was not due until December 2000, the
Company wrote-off the related deferred financing costs resulting in an
extraordinary item for the early extinguishment of debt of $7 million, net of
tax.
NET INCOME. Net income decreased $28 million, or 20%, to $112
million for the three months ended June 30, 2001 from $140 for the three
months ended June 30, 2000. The decrease in net income during the three
months ended June 30, 2001 is primarily due to increases in corporate
interest and the loss on the sale of Power Direct offset by increase in
income from distribution businesses. Additionally the Company recorded $47
million, after income taxes, of foreign currency transaction losses during
the three months ended June 30, 2001. Net income decreased $189 million, or
46%, to $218 million for the six months ended June 30, 2001 from $407 million
for the six months ended June 30, 2000. The decrease in net income during the
six months ended June 30, 2001 is primarily due to a decrease in equity in
earnings of distribution affiliates caused by declines in the Brazilian Real
exchange rate, increases in corporate interest expense, the loss on the sale
of Power Direct and nonrecurring severance and transaction costs offset by
increases in income from distribution businesses. The Company recorded $106
million, after income taxes, of foreign currency transaction losses during
the six months ended June 30, 2001.
FINANCIAL POSITION, CASH FLOWS AND FOREIGN CURRENCY EXCHANGE RATES
At June 30, 2001, cash and cash equivalents totaled approximately $1.2
billion compared to $950
19
<Page>
million at December 31, 2000. The $240 million increase resulted from $1.1
billion of cash provided from operating activities and $830 million of cash
provided by financing activities offset by a use of $1.7 billion for investing
activities. The Company's operating activities includes a payment of $532
million for the Thames contract receivable. Significant investing activity
includes additions to property, plant and equipment as well as continued
construction activities at various projects and the acquisition of Gener, which
included $551 million in goodwill. The net source of cash from financing
activities was primarily the result of project finance borrowings of $2.5
billion offset, in part by repayments of project finance borrowings of $1.6
billion.
Through its equity investments in foreign affiliates and subsidiaries,
AES operates in jurisdictions with currencies other than the Company's
functional currency, the U.S. dollar. Such investments and advances were made to
fund equity requirements and to provide collateral for contingent obligations.
Due primarily to the long-term nature of the investments and advances, the
Company accounts for any adjustments resulting from translation of the financial
statements of its foreign investments as a charge or credit directly to a
separate component of stockholders' equity until such time as the Company
realizes such charge or credit. At that time, any differences would be
recognized in the statement of operations as gains or losses.
In addition, certain of the Company's foreign subsidiaries have entered
into obligations in currencies other than their own functional currencies or the
U.S. dollar. These subsidiaries have attempted to limit potential foreign
exchange exposure by entering into revenue contracts that adjust to changes in
the foreign exchange rates. Certain foreign affiliates and subsidiaries operate
in countries where the local inflation rates are greater than U.S. inflation
rates. In such cases the foreign currency tends to devalue relative to the U.S.
dollar over time. The Company's subsidiaries and affiliates have entered into
revenue contracts which attempt to adjust for these differences, however, there
can be no assurance that such adjustments will compensate for the full effect of
currency devaluation, if any. The Company had approximately $2.2 billion in
cumulative foreign currency translation adjustment losses at June 30, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that there have been no material changes in
exposure to market risks during the second quarter of 2001 compared with
exposure set forth in the Company's Annual Report filed with the Commission on
Form 10-K for the year ended December 31, 2000.
20
<Page>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 1999, an appellate judge in the Minas Gerais, Brazil state
court system granted a temporary injunction that suspended the effectiveness of
a shareholders' agreement for CEMIG. This appellate ruling suspends the
shareholders' agreement while the action to determine the validity of the
shareholders' agreement is litigated in the lower court. In early November 1999,
the same appellate court judge reversed this decision and reinstated the
effectiveness of the shareholders' agreement, but did not restore the super
majority voting rights that benefited the Company. In March 2000, a state court
in Minas Gerais again ruled that the shareholders' agreement was invalid. The
Company has appealed this decision and on August 7, 2001, the state appellate
court upheld the invalidity of the shareholders' agreement. AES intends to
appeal this decision before the Brazilian federal court. The Company intends to
vigorously pursue its legal rights in this matter and to restore all of its
rights regarding CEMIG. Failure to prevail in this matter would limit the
Company's influence on the daily operations of CEMIG. However, the Company would
still own approximately 21.6% of the voting common stock of CEMIG.
The crisis in the California wholesale power market has directly or
indirectly resulted in several administrative and legal (civil or criminal)
actions involving the Company's businesses in California. Each of the
Company's businesses in California (AES Southland, AES Placerita and AES New
Energy) is subject to overlapping federal and state investigations by the
Department of Justice, Federal Energy Regulatory Commission, California
Attorney General's Office, the Market Oversight and Monitoring Committee of
the California Independent System Operator ("ISO"), and the California Public
Utility Commission. Each of these investigations is currently in the
information gathering stage, and these businesses have responded to multiple
requests for information about operations, maintenance and bidding behavior
of the plants.
In May 2001, the Department of Justice commenced an antitrust
investigation pursuant to Section 1 of the Sherman Act relating to an agreement
between AES Southland LLC and Williams Energy Services Company, which the
Department of Justice alleges, limits the expansion of electric generating
capacity at or near certain plants owned by AES Southland LLC. In connection
therewith, the Department of Justice sent a Civil Investigative Demand ("CID")
to AES Southland LLC requesting the answer to certain interrogatories and the
production of documents. AES Southland LLC is cooperating with the terms of the
CID.
The Company is also involved in certain legal proceedings in the normal
course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
21
<Page>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on April
19, 2001. The following matters were decided by a vote of the
stockholders.
ELECTION OF DIRECTORS
<Table>
<Caption>
NOMINEE FOR AGAINST/ABSTAIN
------- --- ---------------
Roger W. Sant 418,098,710 4,830,114
Dennis W. Bakke 381,296,627 41,632,197
Alice F. Emerson 419,871,303 3,057,521
Robert F. Hemphill, Jr. 350,792,433 72,136,391
Frank Jungers 419,830,307 3,098,517
John H. McArthur 419,789,074 3,139,750
Hazel R. O'Leary 419,726,281 3,202,543
Thomas I. Unterberg 417,027,293 5,901,531
Robert H. Waterman, Jr. 420,118,856 2,809,968
Philip Lader 403,007,324 19,921,500
</Table>
PROPOSAL TO APPROVE THE AES CORPORATION 2001 STOCK OPTION PLAN
<Table>
<Caption>
FOR AGAINST ABSTAIN
--- ------- -------
320,062,203 101,292,346 1,574,275
</Table>
PROPOSAL TO APPROVE THE AES CORPORATION 2001 STOCK OPTION PLAN FOR
OUTSIDE DIRECTORS
<Table>
<Caption>
FOR AGAINST ABSTAIN
--- ------- -------
371,759,184 49,538,706 1,630,934
</Table>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
4.1 There are numerous instruments defining the rights of holders of
long-term indebtedness of the Registrant and its consolidated
subsidiaries, none of which exceeds ten percent of the total assets of
the Registrant and its subsidiaries on a consolidated basis. The
Registrant hereby agrees to furnish a copy of any of such agreements to
the Commission upon request.
(b) REPORTS ON FORM 8-K.
Registrant filed a Current Report on Form 8-K dated April 10, 2001
relating to the acquisition of
22
<Page>
IPALCO Enterprises Inc. ("IPALCO") through a share exchange
transaction.
Registrant filed a Current Report on Form 8-K dated April 27, 2001,
relating to the results of operation for the quarter ended March 31,
2001.
Registrant filed a Current Report on Form 8-K dated June 5, 2001
relating to the filing of the Form of Seventh and Eight Supplemental
Indentures between The AES Corporation and Bank One, National
Association and the Form of Remarketing Agreement between The AES
Corporation and Banc of America Securities LLC.
Registrant filed a Current Report on Form 8-K dated June 5, 2001 to
retroactively restate the financial position, results of operations and
cash flows of The AES Corporation for the acquisition of IPALCO.
Registrant filed a Current Report on Form 8-K/A dated June 8, 2001,
which is an amendment to Form 8-K dated April 10, 2001 to provide
separate financial statements of IPALCO and required pro forma
financial information.
Registrant filed a Current Report on Form 8-K/A dated June 18, 2001, to
provide certain interim financial information of The AES Corporation,
on a consolidated basis, including IPALCO.
23
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE AES CORPORATION
(Registrant)
Date: August 14, 2001 By: /s/ BARRY J. SHARP
-------------------
Name: Barry J. Sharp
Title: Executive Vice President and
Chief Financial Officer
24