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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-19281
THE AES CORPORATION
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(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code: (703) 522-1315
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTER
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Common Stock, par value $0.01 per share New York Stock Exchange
$2.6875 Term Convertible Securities, Series A New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Warrants to Purchase Common Stock,
par value $.01 per share NASDAQ
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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 _
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at February 1, 1998, was $5,415,482,847. The
number of shares outstanding of Registrant's Common Stock, par value $0.01 per
share, at February 1, 1998, was 175,065,659.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 21, 1998. Certain information therein is
incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
(a) General development of business.
OVERVIEW
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are helping to meet the world's needs by providing
electricity to customers in many countries in a socially responsible way.
Until recently, the Company's sales of electricity were almost
exclusively made to customers (generally electric utilities or regional electric
companies) on a wholesale basis for further resale to end users. This is often
referred to as the electricity "generating" business. Sales by these generating
companies are usually made under long-term contracts from power plants owned by
the Company's subsidiaries and affiliates. The Company's ownership portfolio of
power facilities includes new plants constructed for such purposes ("greenfield"
plants) as well as existing power plants acquired through competitively bid
privatization initiatives and negotiated acquisitions.
AES now operates and owns (entirely or in part) a diverse portfolio of
electric power plants (including those within the integrated distribution
companies discussed below) with a total capacity of 17,636 megawatts (MW). Of
that total, 43% are fueled by coal or petroleum coke, 6% are fueled by natural
gas, 34% are hydroelectric facilities, 6 % are fueled by oil, and the remaining
11% are capable of using multiple fossil fuels. Of the total MW, 1,069 (six
plants) are located in the United States, 1,588 (four plants) are in China,
1,281 (three pants) are in Hungary, 5,856 (thirty-nine plants) are in Brazil,
5,384 (seven plants) are in Kazakhstan (including 4,000 MW attributable to
Ekibastuz which currently has a capacity factor of approximately 20%), 210 (one
plant) is in the Dominican Republic, 110 (one plant) is in Canada, and 695 (two
plants) are in Pakistan.
AES is also currently in the process of adding approximately 5,331 MW
to its operating portfolio by constructing several new plants. These include a
180 MW coal-fired plant in the United States, four coal-fired plants in China
totaling 2,314 MW, a 230 MW natural gas-fired plant in the UK, a 405 MW natural
gas-fired plant in the Netherlands, a 288 MW kerosene-fired plant in Australia,
an 830 MW natural gas-fired plant in Argentina, a 484 MW natural gas-fired plant
in Mexico and a 600 MW natural gas-fired plant in Brazil.
As a result, AES's total MW of 84 power plants in operation and under
construction is approximately 22,967 and net equity ownership (total MW adjusted
for the Company's ownership percentage) represents approximately 12,247 MW.
Beginning in 1996 and continuing through 1997, AES has also acquired
interests (both majority and minority) in companies that sell electricity
directly to commercial, industrial, governmental and residential customers. This
is often referred to as the electricity "distribution" business. Electricity
sales by AES's distribution businesses are generally made pursuant to the
provisions of long-term electricity sale concessions granted by the appropriate
governmental authority as part of the original privatization of each
distribution company. 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. Each distribution company
also purchases, in varying proportions, electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.
AES has majority ownership in two distribution companies in Argentina,
one in Brazil and one in El Salvador (purchased in 1998), and less than majority
ownership in two additional distribution companies in Brazil. These six
companies serve a total of approximately 8 million customers with gigawatt hour
sales exceeding 63,000. On a net equity basis, AES's ownership represents
approximately 2 million customers and gigawatt hour sales exceeding 15,000.
AES has been successful in growing its business and serving additional
customers by participating in competitive bidding under privatization
initiatives and has been particularly interested in acquiring existing
businesses or assets in electricity markets that are promoting competition and
eliminating rate of return regulation. In such privatizations, sellers generally
seek to complete competitive solicitations in less than one year, much quicker
than the time periods associated with greenfield development, and usually
require 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.
Because of this relatively quick process or other considerations, it
may not always be possible to arrange "project financing" (the Company's
historically preferred financing method, which is discussed further under Item
7, "Discussion and Analysis of Financial Condition and Results of Operations"
herein) for specific potential acquisitions. Additionally, as in the past,
certain acquisitions or the commencement of construction in several greenfield
developments would potentially require the Company to obtain substantial
additional financing including both debt and equity.
OUTLOOK
All over the world, electricity markets continue to be restructured and
there is a trend away from government-owned and government-regulated electricity
systems toward deregulated, competitive market structures. Many countries have
rewritten their laws and regulations to allow foreign investment and private
ownership of electricity generation, transmission or distribution companies.
Some countries (for example the UK, Brazil and some of those of the former
Soviet Union, among others) have or are in the process of "privatizing" their
electricity systems by selling all or part of such systems to private investors.
This global trend of electricity market restructuring provides significant new
business opportunities for companies like AES.
Several states in the United States are also beginning to follow this
trend. In particular, some regulated public utilities have begun to sell or
auction their generation capacity. Substantially all of the transmission and
distribution services in the United States continue, however, to be regulated
under a state and Federal regulatory framework. In addition, many states have
passed or are considering new legislation that would permit utility customers to
choose their electricity supplier in a competitive electricity market (so-called
"retail access" or "customer choice" laws). While each state's plan differs in
details, there are certain consistent elements, including allowing customers to
choose their electricity suppliers by a certain date (the dates in the existing
or proposed legislation vary between 1998 and 2003), allowing utilities to
recover "stranded assets" (the remaining costs of uneconomic generating or
regulatory assets) and a reaffirmation of the validity of contracts like the
Company's U.S. contracts.
AES's investments and involvement in the development of new projects
and the acquisition of existing power plants and distribution companies in
locations outside the United States is increasing. The financing, development
and operation of such businesses may entail significant political and financial
uncertainties and other structuring issues (including uncertainties associated
with the legal environments, with first-time privatization efforts in the
countries involved, currency exchange rate fluctuations, currency repatriation
restrictions, currency inconvertibility, political instability, civil unrest,
and in severe cases possible expropriation). Although AES attempts to minimize
these risks, these issues have the potential to cause substantial delays or
material impairment to the value of the project being developed or business
being operated.
The Company, a corporation organized under the laws of Delaware, was
formed in 1981. AES has its principal offices located at 1001 North 19th Street,
Suite 2000, Arlington, Virginia 22209, and its telephone number is (703)
522-1315.
CAUTIONARY STATEMENTS AND RISK FACTORS
The Company wishes to caution readers that the following important
factors, among others, indicate areas affecting the Company which involve risk
and uncertainty. These factors should be
considered when reviewing the Company's business, and are relied upon by AES in
issuing any forward-looking statements. Such factors could affect AES's actual
results and cause such results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, AES. Some or all of these
factors may apply to the Company's businesses as currently maintained or to be
maintained.
o Changes in company-wide operation and availability (including wholly-
and partially-owned facilities) compared to the Company's historical
performance; changes in the Company's historical operating cost
structure, including but not limited to those costs associated with
fuel, operations, supplies, raw materials, maintenance and repair,
people, transmission of electricity and insurance.
o In certain non-U.S. countries where the Company is or is seeking to
conduct business: unexpected changes in electricity tariff rates or
tariff adjustments for increased expenses; the ability or inability of
AES to obtain, or hedge against, foreign currency; foreign exchange
rates and fluctuations in those rates; the economic, political and
military conditions affecting property damage, interruption of business
and expropriation risks; changes in trade, monetary and fiscal
policies, laws and regulations; other activities of governments,
agencies and similar organizations; social and economic conditions;
local inflation and monetary fluctuations; import and other charges or
taxes; conditions or restrictions impairing repatriation of earnings or
other cash flow; nationalizations and unstable governments and legal
systems, and intergovernmental disputes.
o Changes in the amount of and rate of growth in, AES's selling, general
and administrative expenses; the impact of AES's ongoing evaluation of
its development costs, business strategies and asset valuations,
including, but not limited to, the effect of a failure to successfully
complete certain development projects.
o Legislation intended to promote competition in U.S. and non-U.S.
electricity markets, such as those currently receiving serious
consideration in the United States Congress to repeal (i) the Public
Utility Regulatory Policies Act of 1978, as amended, or at least to
repeal the obligation of utilities to purchase electricity from
qualifying facilities, and (ii) the Public Utility Holding Company Act
of 1935, as amended; changes in regulatory rule-making by the Federal
Energy Regulatory Commission or other regulatory bodies; changes in
energy taxes; or new legislative or regulatory initiatives in non-U.S.
countries; changes in national, state or local environmental, safety,
tax and other laws and regulations applicable to the Company or its
operations.
o The prolonged failure by any customer of the Company or any of its
subsidiaries to fulfill its contractual payment obligations presently
or in the future, either because such customer is financially unable to
fulfill such contractual obligation or otherwise refuses to do so.
o Successful and timely completion of (i) the respective construction for
each of the Company's electric generating projects now under
construction and those projects yet-to-begin construction or (ii)
capital improvements to its existing facilities.
o Changes in inflation, fuel, electricity and other commodity prices in
U.S. and non-U.S. markets; conditions in financial markets, including
fluctuations in interest rates and the availability of capital; and
changes in the economic and electricity consumption growth rates in
U.S. and non-U.S. countries.
o Unusual weather conditions and the specific needs of each plant to
perform unanticipated facility maintenance or outages (including annual
or multi-year).
o The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims, and changes in
those items, developments or assertions by or against AES; the effect
of new, or changes in, accounting policies and practices and the
application of such policies and practices.
o Changes or increases in taxes on property, plant, equipment, emissions,
gross receipts, income or other aspects of the Company's business or
operations.
(b) Financial information about industry segments.
The Company operates in only one industry segment: electric power
supply.
(c) Narrative description of business.
The Company attempts to participate in competitive power markets as
they develop either by greenfield development or by acquiring and operating
existing facilities or systems in these markets. The Company generally operates
electric generating facilities that utilize natural gas, coal, oil, hydro power,
or combinations thereof. In addition, the Company participates in electricity
distribution and retail supply businesses in certain limited instances, and will
continue to review opportunities in such markets in the future. Other elements
of the Company's strategy include:
o Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
o Constructing or acquiring projects of a relatively large size
(generally larger than 100 megawatts);
o When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
o Where possible, participating in distribution and retail supply markets
that grant concessions with long-term pricing arrangements.
The Company also 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. AES has
attempted to create an operating environment that results in safe, clean and
reliable electricity generation and distribution. Because of this emphasis, the
Company prefers to operate all facilities which it develops or acquires;
however, there can be no assurance that the Company will have operating control
of all of its facilities.
The Company's historical and significant focus has been and continues
to be the wholesale generation and supply of electricity. More recently AES has
acquired four electricity distribution businesses and has invested in two
integrated utilities in Central and South America. Asset composition, operating
margins and a variety of other business characteristics differ significantly
from one type of business to another. References to power sales agreements, fuel
supply agreements and plants generally mean those related to the generation
business. Concession (or service) contracts, supply contracts, and networks are
generally associated with the distribution businesses. Integrated utilities have
characteristics of both businesses. In addition, integrated utilities may
generate more or less of their own electricity. For example, Light generates a
comparatively low percentage of its own electricity (approximately 16 percent)
while CEMIG generates almost all of its own electricity needs.
Most of AES's electric generation plants sell electricity under
long-term power sales contracts. The Company attempts, whenever possible, to
structure the revenue provisions of its plants' power sales contracts such that
changes in the revenue components of these contracts correspond, as closely as
possible, to fluctuations in the cost components of the plant (primarily fuel
costs). A plant's revenues from a power sales contract usually consists of two
components, energy payments and capacity payments. Energy payments are based on
a plant's net electrical output, with payment rates usually indexed to the fuel
costs of the contracting utility or to general inflation indices. Capacity
payments are based on either a plant's net electrical output (the amount of
electricity delivered on a kilowatt-hour basis) or its available capacity (the
ratio of kilowatt hours the plant delivers to the total kilowatt hours requested
by the customer). Capacity payment rates vary over the term of a power sales
contract according to various schedules.
To the extent possible, the Company attempts to structure an electric
generation plant's fuel supply contract so that fuel costs are indexed in a
manner similar to the energy payments a project receives under the power sales
contract. In this way, project revenues are partially hedged against
fluctuations in fuel costs.
As with fuel prices, AES has hedged a substantial portion of its
projects against the risk of fluctuations in interest rates. In each project
with fixed capacity payments, AES has attempted to hedge all or a significant
portion of its risk of interest rate fluctuations by arranging for fixed-rate
financing or variable-rate financing with interest rate swaps or other hedging
mechanisms. Those projects with fluctuating capacity payments are hedged by
arranging for floating rate financing.
The Company attempts to finance each domestic and foreign project
primarily under loan agreements and related documents which, except as noted
below, require the loans to be repaid solely from the project's revenues and
provide that the repayment of the loans (and interest thereon) is secured solely
by the capital stock, physical assets, contracts and cash flow of that project
subsidiary or affiliate. This type of financing is usually referred to as
"project financing." The lenders under these project financing structures
generally cannot look to AES or its other projects for repayment, unless such
entity explicitly agrees to undertake liability. AES has explicitly agreed to
undertake certain limited obligations and contingent liabilities, most of which
by their terms will only be effective or will be terminated upon the occurrence
of future events. These obligations and liabilities take the form of guarantees,
letter of credit reimbursement agreements, and agreements to pay, in certain
circumstances, to project lenders or other parties amounts up to the amounts of
distributions previously made by the applicable subsidiary or affiliate to AES.
To the extent AES becomes liable under guarantees and letter of credit
reimbursement agreements, distributions received by AES from other projects are
subject to the possibility of being utilized by AES to satisfy these
obligations. To the extent of these obligations, the lenders to a project
effectively have recourse to AES and to the distributions to AES from other
projects. The aggregate contractual liability of AES is, in each case, usually a
small portion of the aggregate project debt, and thus the project financing
structures are generally described herein as being "substantially non-recourse"
to AES and its other projects.
Year 2000. The Company is reviewing and assessing the anticipated
costs, problems and uncertainties associated with the so-called Year 2000 issues
in accordance with Securities and Exchange Commission Staff Legal Bulletin No.
5, dated October 8, 1997. In connection therewith, and with its ongoing
evaluation of technological developments and information systems' needs, the
Company's facilities have begun implementation of a Year 2000 review whereby
each facility is in the process of identifying systems requiring modification or
conversion. Within the context of risks identified in the SEC Bulletin noted
above and the ongoing review the Company is conducting, the Registrant believes
that Year 2000 issues will not materially affect its facilities, services, or
competitive conditions, and that the costs of addressing the Year 2000 issues
will not materially impact future consolidated operating results, financial
condition or cash flows.
PRINCIPLES AND PRACTICES
A core part of AES's corporate culture is a commitment to "shared
principles." These principles describe how AES people endeavor to behave,
recognizing that they don't always live up to these standards. The principles
are:
Integrity - AES strives to act with integrity, or "wholeness." The
Company seeks to honor its commitments. The goal is that the things AES
people say and do in all parts of the Company should fit together with
truth and consistency.
Fairness - AES wants to treat fairly its people, its customers, its
suppliers, its stockholders, governments and the communities in which
it operates. Defining what is fair is often difficult, but the Company
believes it is helpful to routinely question the relative fairness of
alternative courses of action.
Fun - AES desires that people employed by the Company and those people
with whom the Company interacts have fun in their work. AES's goal has
been to create and maintain an environment in which each person can
flourish in the use of his or her gifts and skills and thereby enjoy
the time spent at AES.
Social Responsibility - The Company believes that it has a
responsibility to be involved in projects that provide social benefits,
such as lower costs to customers, a high degree of safety and
reliability, increased employment and a cleaner environment.
AES recognizes that most companies have standards and ethics by which
they operate and that business decisions are based, at least in part, on such
principles. The Company believes that an explicit commitment to a particular set
of standards is a useful way to encourage ownership of those values among its
people. While the people at AES acknowledge that they won't always live up to
these standards, they believe that being held accountable to these shared values
will help them behave more consistently with such principles.
AES makes an effort to support these principles in ways that
acknowledge a strong corporate commitment and encourage people to act
accordingly. For example, AES conducts annual surveys, both company-wide and at
each location, designed to measure how well its people are doing in supporting
these principles -- through interactions within the Company and with people
outside the Company. These surveys are perhaps most useful in revealing
failures, and helping to deal with those failures. AES's principles are relevant
because they help explain how AES people approach the Company's business. The
Company seeks to adhere to these principles, not as a means to achieve economic
success but because adherence is a worthwhile goal in and of itself.
In order to create a fun working environment for its people and
implement its strategy of operational excellence, AES has adopted decentralized
organizational principles and practices. For example, AES works to minimize the
number of supervisory layers in its organization. Most of the Company's plants
operate without shift supervisors. The project subsidiaries are responsible for
all major facility-specific business functions, including financing and capital
expenditures. Criteria for hiring new AES people include a person's willingness
to accept responsibility and AES's principles as well as a person's experience
and expertise. The Company has generally organized itself into multi-skilled
teams to develop projects, rather than forming "staff" groups (such as a human
resources department or an engineering staff) to carry out specialized
functions.
FACILITIES
The following tables set forth relevant information regarding the
Company's generation facilities that are currently in operation by geographic
region or currently under construction and the distribution companies in which
AES has an ownership interest. For a description of risk factors and additional
factors that may apply to the Company's businesses, see also the information
contained under the caption "Cautionary Statements and Risk Factors" in Item 1
above, and Item 7, "Discussion and Analysis of Financial Condition and Results
of Operations" herein.
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YEAR OF
ACQUISITION OR APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
FACILITIES IN OPERATION FUEL OPERATIONS (MWS) LOCATION (PERCENT)
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North America
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Deepwater Pet coke 1986(1) 143 Texas 100
Beaver Valley Coal 1987 125 Pennsylvania 80
Placerita Gas 1989 120 California 100
Thames Coal 1990 181 Connecticut 100
Shady Point Coal 1991 320 Oklahoma 100
Hawaii (Barbers Point) Coal 1992 180 Hawaii 100
Kingston Gas 1997 110 Canada 50
Latin America
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San Nicolas Multiple 1993 650 Argentina 69
Rio Juramento (2 plants) Hydro 1995 112 Argentina 98
San Juan (2 plants) Hydro/Gas 1996 78 Argentina 98
Light (4 plants) Hydro 1996 788 Brazil 14
CEMIG (35 plants) Hydro(3) 1997 5,068 Brazil 9
Los Mina Oil 1997 210 Dominican Republic 100
Asia and the Pacific
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Cili Misty Mountain Hydro 1994 26 China 51
Yangchun Sun Spring Oil 1995 15 China 25
Wuxi Tin Hill Oil 1996 63 China 55
Wuhu Grassy Lake Coal 1996 250 China 25
Ekibastuz Coal 1996 4,000(2) Kazakhstan 70
Chengdu Lotus City Gas 1997 48 China 35
Tau Power (6 plants) Coal/Hydro 1997 1,384 Kazakhstan 85
Hefei Prosperity Lake Oil 1997 76(4) China 70
Jiaozuo Aluminum Power Coal 1997 125(4) China 70
Lal Pir Oil 1997 344 Pakistan 90
Pak Gen Oil 1998 351 Pakistan 90
Europe
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Kilroot (NIGEN) Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN) Coal 1992 240 United Kingdom 47
Medway Gas 1995 688 United Kingdom 25
Borsod (Tiszai) Coal 1996 171 Hungary 63
Tisza II (Tiszai) Oil/Gas 1996 860 Hungary 96
Tiszapalkonya (Tiszai) Coal 1996 250 Hungary 96
Indian Queens Gas 1997 140 United Kingdom 100
- ------------- ---
TOTAL IN OPERATION 17,636
(1) Plant operations commenced in 1986, but control was acquired in 1995.
(2) Due to poor historical maintenance over the ten years prior to the Company's
purchase, the facility's capacity factor is approximately 20%.
(3) Total capacity of CEMIG includes 125 MW of thermal generation. Six hydro
plants represent approximately 90% of CEMIG's total generation capacity.
(4) Seventy-six and 125 MW of Hefei Prosperity Lake and Jiaozuo Aluminum Power,
respectively, are currently in operation. The remaining portions are under
construction.
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YEAR OF
ACQUISITION OR APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
FACILITIES UNDER CONSTRUCTION FUEL OPERATIONS(1) (MWS) LOCATION (PERCENT)
- --------------------------------------------------------------------------------------------------------------------
Elsta Gas 1998 405 Netherlands 50
Jiaozuo Aluminum Power Coal 1998 125(3) China 70
Aixi Heart River Coal 1998 50 China 70
Hefei Prosperity Lake Oil 1998 39(3) China 70
Barry Gas 1998 230 United Kingdom 100
Warrior Run Coal 1999 180 Maryland 100
Mt. Stuart Oil 1999 288 Australia 100
Parana Gas 2000 830 Argentina 67
Yangcheng Sun City Coal 2000(2) 2,100 China 25
Uruguaiana Gas 2000 600 Brazil 100
Merida III Gas 2000 484 Mexico 55
- ---------- ---
TOTAL UNDER CONSTRUCTION 5,331
TOTAL IN OPERATION AND UNDER CONSTRUCTION 22,967
(1) Dates for commencement of commercial operation of facilities under
construction are projections only and may be subject to change.
(2) Yangcheng Sun City is being constructed over a sixty-month period that began
in 1997. The first of the six 350 MW units is estimated to be completed in
2000.
(3) Seventy-six and 125 MW of Hefei Prosperity Lake and Jiaozuo Aluminum Power,
respectively, are currently in operation. The remaining portions are under
construction.
The table below sets forth information regarding the Company's
distribution facilities.
- -----------------------------------------------------------------------------------------------------
APPROXIMATE NUMBER AES EQUITY
DISTRIBUTION OF CUSTOMERS APPROXIMATE GEOGRAPHIC INTEREST
FACILITIES SERVED GIGAWATT HOURS LOCATION (PERCENT)
- -----------------------------------------------------------------------------------------------------
Light 2,700,000 19,981 Rio de Janeiro, Brazil 14
EDEN 270,000 3,572 Buenos Aires, Argentina 60
EDES 129,000 1,182 Buenos Aires, Argentina 60
CEMIG 4,143,000 32,179 Minas Gerais, Brazil 9
Sul 804,000 5,772 Rio Grande do Sul, Brazil 91
CLESA 188,000 561 Santa Ana, El Salvador 64
- ----- ------- ---
TOTALS FOR DISTRIBUTION FACILITIES 8,234,000 63,247
- ---------------------------------- --------- ------
NORTH AMERICA
AES currently owns and operates, through subsidiaries and affiliates,
seven generation facilities in the United States and Canada representing
approximately 1,179 MW.
Deepwater is a 143 MW petroleum coke-fired cogeneration facility
located near Houston, Texas. The facility sells electricity to Houston Lighting
and Power Company under a power sales contract which expires in 1998. Deepwater,
under a contract which also expires in 1998, produces and delivers process steam
to an ARCO Petroleum Products Company refinery adjacent to the cogeneration
facility. Deepwater currently is in negotiations with various parties to provide
for the continued sale of its electricity and steam generation upon the
expiration of the two mentioned contracts.
Beaver Valley is a 125 MW pulverized coal-fired cogeneration facility
located in Monaca, Pennsylvania. AES is the managing partner and operator of
Beaver Valley. West Penn Power Company purchases electricity produced by the
plant under a power sales contract with a remaining term of approximately 19
years. The facility sells steam to NOVA Chemicals Inc. for use in its chemical
processing activities under a requirements contract with a remaining term of
approximately four years.
Placerita is a 120 MW natural gas-fired, combined-cycle cogeneration
facility near Los Angeles, California. The plant sells electricity to Southern
California Edison Company under a contract with a remaining term of
approximately 16 years. Placerita sells steam to Hillside Oil Partners, which is
engaged in oil recovery operations, and ARCO Oil and Gas Company.
Thames is a 181 MW coal-fired, circulating fluidized bed ("CFB")
cogeneration plant located in Montville, Connecticut. Power generated by Thames
is sold to Connecticut Light and Power Company ("CL&P") under a contract with a
remaining term of approximately 17 years. Thames also sells steam to Stone
Container Paperboard Corporation for use in its recycled paperboard plant
located adjacent to the plant. Moody's Investor Service Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") have recently downgraded CL&P's senior
secured long-term debt from Baa3/BBB- to Ba2/BB, and S&P has placed CL&P on
watch for possible downgrade. As a result of regulatory action by the Public
Service Commission of New Hampshire, Moody's and S&P recently downgraded the
senior unsecured debt of Northeast Utilities, the parent of CL&P, from Ba2/BB to
B1/B+ and S&P has placed Northeast Utilities on watch for possible downgrade.
Shady Point is a 320 MW coal-fired, CFB cogeneration plant in LeFlore
County, Oklahoma. The Shady Point facility includes a 240-ton per day food
grade, liquid CO2 plant, which utilizes in its CO2 production processes
approximately 65,000 pounds per hour of process steam produced by the plant.
Shady Point sells electricity to Oklahoma Gas and Electric Company under a
contract with a remaining term of approximately 10 years.
Hawaii is a 180 MW coal-fired, CFB cogeneration plant located in
Kapolei, Oahu, Hawaii. Hawaii sells electricity to Hawaiian Electric Company,
Inc. under a contract with a remaining term of 25 years. Steam generated by the
plant is sold to Chevron USA Inc. for use in its oil refining operations under a
steam sales agreement with a remaining term of 15 years.
Kingston is a 110 MW gas-fired, combined-cycle cogeneration facility
located in Ernestown Township, Ontario. Kingston is owned by a partnership
comprised of AES and two partners, each owning 25 percent. AES acquired its
interest in Kingston in June 1997 upon completion of its acquisition of the
international assets of Destec Energy, Inc. The plant began commercial
operations in February 1997 and is expected to operate as a baseload facility.
The Company operates the business through an operation and maintenance agreement
entered at the time of its acquisition of its interest in the facility.
LATIN AMERICA
AES currently owns and operates, through subsidiaries and affiliates,
forty-five operating plants in Latin America representing approximately 6,906
MW. In addition, AES has majority ownership in two distribution companies in
Argentina, one in Brazil and one in El Salvador (purchased in 1998), and less
than majority ownership in two additional integrated distribution companies in
Brazil. These six facilities serve a total of approximately 8 million customers
with gigawatt hour sales exceeding 63,000.
San Nicolas is a 650 MW power plant in San Nicolas, Argentina. San
Nicolas sells a total of 345 MW of electricity (approximately 53 percent of the
plant's output capability) under two power sales contracts, each with a
remaining term of three years. Under one of the contracts that runs through
2001, the three recently privatized distribution companies of Empresa Social de
Energia de Buenos Aires S.A. ("ESEBA"), two of which are controlled by AES
through its ownership interest in Empresa Distribuidora de Energia Norte S.A.
("EDEN") and Empresa Distribuidora de Energia Sur S.A. ("EDES") (described
below), purchase 285 MW (except during the month of April of each year, when the
amount purchased is 57 MW). Under the other contract, EDELAP, S.A., a privatized
Argentine distribution company, purchases 60 MW of electricity. The plant sells
additional electricity, when it is profitable to do so, into the Argentine spot
market.
Rio Juramento is a 112 MW hydroelectric station in the province of
Salta, Argentina. The station consists of a 102 MW facility with a large storage
reservoir capable of inter-year storage, and a 10 MW facility capable of
inter-seasonal storage. Rio Juramento has exclusive rights to operate the
facility under a 30-year concession agreement, and sells electricity in the
Argentine spot market.
Hidrotermica San Juan, S.A. ("San Juan") is the owner and operator of
two power generating facilities totaling 78 MW in the province of San Juan,
Argentina. The facility includes a 45 MW hydroelectric power plant and a 33 MW
gas combustion power plant.
Los Mina is an oil-fired, simple-cycle power plant located in Santo
Domingo, Dominican Republic that AES acquired through its purchase of the
international assets of Destec in June 1997. The 210 MW plant operates two
simple-cycle combustion turbine generators on land adjacent to a government
owned electricity substation. Los Mina is the second largest generator on the
island and supplies power to the capital city of Santo Domingo. The facility
burns fuel oil that is piped to the plant from a nearby barge dock. The facility
began operations in May 1996. Due to recurring turbine blade failure, Los Mina
has been out of service and unable to provide electricity in several instances
during the period prior to and after the date of AES's acquisition of the
facility. Los Mina is reviewing steps with the facility's equipment supplier to
increase the reliability of the plant's output and has begun processing claims
to recover costs of the repairs and outages against the contractor and with its
insurer. Although no assurance can be given that Los Mina will be able to
collect on any of these claims, the Company believes that the outcome of this
matter will not have a material adverse effect on its consolidated financial
position, results of operation or cash flows.
DISTRIBUTION FACILITIES IN LATIN AMERICA
Light Servicos de Electricidade, S.A. ("Light") is a Brazilian electric
power generation, transmission and distribution system serving 28 municipalities
in the state of Rio de Janeiro, Brazil that is controlled by a consortium
comprised of AES, Electricite de France, Houston Industries, Companhia
Siderurgica Nacional and Banco Nacional de Desenvolvimento Economico E Social
(the
"Light Consortium"). In connection with the purchase of the controlling interest
by the Light Consortium in 1996, the Ministry of Mines and Energy of Brazil
granted a 30-year concession to Light pursuant to the terms of a concession
agreement which obligates Light to provide electric services to all customers
within its concession. Light generates about 16 percent of the total electricity
it distributes through four hydroelectric complexes having an aggregate
installed generating capacity of approximately 788 MW. Of the remaining
electricity distributed by Light (approximately 84 percent of the total), 53
percent is purchased from Furnas Centrais Electricas S.A., a power generation
and transmission company owned by Eletrobras, and the remaining 31 percent is
purchased from Itaipu Binacional, a power generation company owned by the
Republic of Brazil and the Republic of Paraguay ("Itaipu"). AES has principal
responsibility for all matters relating to generation and purchasing of
electricity by Light through its participation in the Light Consortium.
Companhia Energetica de Minas Gerais ("CEMIG") is an integrated
electric utility serving the State of Minas Gerais in Brazil. Through a
consortium consisting of AES and two partners (the "CEMIG Consortium"), AES has
significant operating influence over CEMIG, including the right to appoint its
chief operating officer, and otherwise shares control of CEMIG with the State of
Minas Gerais. As it did with Light, the Ministry of Mines and Energy of Brazil
granted concessions to CEMIG pursuant to the terms of six concession agreements
which obligate CEMIG to provide electric services to all customers within its
concession, and authorizes CEMIG to charge its customers a tariff for electric
services. CEMIG transmits and distributes electricity, generated or purchased by
it, to substantially all areas in Minas Gerais. In addition to the approximately
5,068 MW of electricity it generates, CEMIG purchases approximately 33 percent
of its electricity sales from Itaipu.
EDEN and EDES are two of the three privatized former distribution
companies of ESEBA and are controlled by AES through the purchase of its
ownership interest in 1997. EDEN and EDES have 95-year territorial exclusive
franchise concessions and serve approximately 400,000 customers in the northern
and southern portions of the Argentine Province of Buenos Aires. EDEN and EDES
source their electric power requirements using both spot market purchases in the
wholesale electricity market and contract purchases from San Nicolas, which is
also controlled by AES. The contract, which was signed in May 1993 for a term of
8 years, provides for purchases of approximately 2,332 gigawatt hours of
electricity per year.
Companhia Centro-Oeste de Distibuicao de Energia Eletrica ("Sul") is a
distribution company recently privatized by Companhia Estadual de Energia
Eletrica ("CEEE"). AES purchased Sul in October 1997. Prior to privatization
CEEE was a vertically-integrated electric utility that provided approximately 98
percent of the electricity in the Brazilian State of Rio Grande do Sul. Sul
serves the central and western portion of the state. Sul has a 30 year exclusive
concession to distribute electricity in the territory it currently serves. Sul's
location in the State of Rio Grande do Sul borders Argentina which may allow AES
to integrate its Brazilian and Argentine operations. Sul, along with the other
two distribution companies formerly part of CEEE, will be AES Uruguaiana's
customers (described below in "Projects under Construction").
Compania de Luz Electrica de Santa Ana ("CLESA") is an electricity
distribution company serving the city and surrounding areas of Santa Ana, El
Salvador. AES acquired control of CLESA in February 1998, through its payment of
$109 million for 79.78% of the outstanding shares of CLESA. Comision Ejecutiva
Hidroelectrica del Rio Lempa ("CEL"), the El Salvador government-owned utility,
sold CLESA, along with three other Salvadoran distribution companies, in an
auction held in January 1998. Energia Global International, Ltd., a Bermuda
company with activities in Central America, has the right to purchase up to 20%
of AES's interest in CLESA. CLESA's service area borders Guatemala and Honduras
to the north, with access to the Pacific Ocean. CLESA purchases its electricity
in the local spot market and from CEL under an annual contract.
For a further description of the tariff rate structures, the tariff
rate adjustment escalators and the currency exchange rate adjustments that may
affect the tariff structures in future years for AES's distribution facilities,
please see the information contained in Item 7, "Discussion and Analysis of
Financial Condition and Results of Operations" herein.
ASIA AND THE PACIFIC
In Asia and the Pacific, AES currently operates and owns (entirely or
in part), through subsidiaries and affiliates, interests in nineteen generation
facilities representing approximately 6,682 MW of generating capacity.
The Company founded AES China Generating Co. Ltd. ("AES Chigen") in
December 1993 to develop, acquire, finance, construct, own and operate electric
power generation facilities in the People's Republic of China (the "PRC").
Initially a public company in its own right, AES now owns all of the outstanding
shares of AES Chigen through the completion of its amalgamation with AES Chigen
in May 1997 wherein AES issued approximately 2.4 million shares of AES Common
Stock, par value $.01 per share, in exchange for all of the issued and
outstanding shares of the publicly held, Class A Common Stock of AES Chigen. The
total purchase price was valued at approximately $157 million. AES Chigen has
developed nine power projects which are currently in operation or under
construction in the PRC.
Cili Misty Mountain, located in Cili County, Hunan Province, PRC,
consists of three hydroelectric generating units amounting to 26 MW, the third
unit of which commenced commercial operation in 1997. Cili Misty Mountain is
owned by Xiangci-AES, a 25-year joint venture formed by Hunan Cili Electric
Power Company and AES Chigen. Power is purchased by Hunan Cili Electric Power
Company.
Yangchun Sun Spring, located in Yangchun, Guangdong Province, consists
of one existing 8.6 MW diesel engine generating facility which was constructed
prior to the Company's involvement, and another 6.5 MW diesel engine generating
facility which commenced commercial operation in April 1996. The facility is
owned by Yangchun Fuyang, a 12.5-year cooperative joint venture formed by
Yangchun Municipal Power Supply, Shenzhen Futian Gas Turbine Power Co., Ltd. and
a wholly-owned subsidiary of AES Chigen. Yangchun Municipal Power Supply Bureau
purchases the plant's electricity and Yangchun Municipal Power Supply provides
fuel, both in accordance with 12.5-year agreements.
Wuxi Tin Hill is an oil-fired, combined cycle power plant which
consists of a 48 MW gas turbine generating facility and a 15 MW heat recovery
steam turbine generating facility located in Xishan (previously known as Wuxi
County), Jiangsu Province, PRC. The gas turbine generating plant commenced
commercial operation in March 1996. The heat recovery steam turbine generating
plant commenced commercial operation in the first quarter of 1997. Wuxi Tin Hill
is owned by Wuxi-AES-CAREC and Wuxi-AES-Zhonghang, two 16-year cooperative joint
ventures formed among AES Chigen and China National Aero-Engine Corporation
("CAREC") and Wuxi Power Industry Company ("Wuxi Power"). Xishan Electricity
Management Office purchases the power and steam generated by the plant in
accordance with a 16-year purchase contract. Fuel to the plant is supplied via
two local State-owned oil companies under 16-year contracts.
Wuhu Grassy Lake is a 250 MW coal-fired power plant located near Wuhu,
Anhui Province, PRC. It is the phase IV expansion of an existing 325 MW
coal-fired power station. Both units of the power plant have now commenced
commercial operations. Wuhu Grassy Lake is owned by Wuhu Shaoda, a 20-year
equity joint venture owned by an AES Chigen subsidiary, China Power
International Holdings Limited, Anhui Liyuan Electric Power Development Company
Limited, and Wuhu Energy Development Company Limited. Power is purchased
pursuant to a 20-year operation and off-take contract with Anhui Provincial
Electric Power Corporation.
Chengdu Lotus City is a 48 MW natural gas-fired power plant located in
Chengdu, Sichuan Province, PRC. Construction of the power plant commenced in
September 1996 and commenced commercial operation during 1997. Chengdu Lotus
City is owned by Chengdu AES-Kaihua, a 16-year cooperative joint venture formed
by AES Chigen, Huaxi Electric Power Shareholding Company Ltd. ("Huaxi"),
Huachuan Petroleum & Natural Gas Exploration ("Huachuan") and Development
Company and CAREC. Huaxi purchases the facility's generated power and Huachuan
provides fuel, both pursuant to separate 15-year agreements.
Hefei Prosperity Lake is an oil-fired combined cycle power plant
consisting of two 38 MW gas turbines generating units ("gas turbine unit") and
one 39 MW heat recovery steam turbine generating unit ("steam turbine unit"). It
is located within the boundaries of an existing 325 MW coal fired power plant in
Hefei, Anhui Province, PRC. Construction of the power plant commenced in
November 1996. The gas turbine unit commenced commercial operation in the third
quarter of 1997 and the steam turbine unit is scheduled to commence commercial
operation in the third quarter of 1998. Hefei Prosperity Lake is owned by
Liyuan-AES and Zhongli Energy, two 16-year cooperative joint ventures formed
among a subsidiary of AES Chigen, Hefei Municipal Construction and Investment
Company and by Anhui Liyuan Electric Power Development Company Limited. Anhui
Provincial Electric Power Corporation purchases power from the plant pursuant to
a 16-year operation and off-take contract.
Jiaozuo Aluminum Power is a 250 MW coal-fired power plant located
adjacent to the Jiaozuo Aluminum Mill ("Jiaozuo Mill") in Jiaozuo, Henan
Province, PRC. Construction of the power plant commenced in the first quarter of
1995. The first unit of the power plant commenced commercial operation in the
third quarter of 1997. The second unit is expected to commence commercial
operation in the second quarter of 1998. Jiaozuo Aluminum Power is owned by
Jiaozuo Wan Fang, a 23-year cooperative joint venture owned 70 percent by an AES
Chigen wholly-owned subsidiary and 30 percent by Jiaozuo Mill. Power is
purchased under 23-year contracts by Jiaozuo Mill and by the Henan Electric
Power Corporation. Jiaozuo Aluminum Power purchases fuel under one-year
negotiated contracts from the local area.
Ekibastuz is a 4,000 MW (design capacity) mine-mouth, coal-fired power
facility in eastern Kazakhstan. Due to economic difficulties over the ten years
prior to the Company's purchase, the facility has experienced a reduction in
performance and has operated at a capacity factor of up to approximately 20
percent. In its 1996 acquisition of the facility, AES agreed to increase the
capacity to 63 percent over a five-year period (contingent on the purchaser's
performance of its obligations under the power sales contract). For a further
description of Ekibastuz, see the information contained in the section entitled
"Results of Operations" contained in Item 7, "Discussion and Analysis of
Financial Condition and Results of Operations" hereof.
Lal Pir and Pak Gen are adjacent 344 and 351 MW, respectively,
oil-fired facilities in Punjab Province, Pakistan. Lal Pir commenced commercial
operation during the fourth quarter of 1997 and Pak Gen commenced commercial
operation in the first quarter of 1998. The Pakistan Water and Power Development
Authority ("WAPDA") purchases the electrical capacity and electrical output of
the facilities through two separate 30-year power sales agreements. The Pakistan
State Oil Company Limited ("PSO"), the state-owned petroleum company, supplies
fuel under 30-year agreements. Certain of the obligations of WAPDA under the
power sales agreements and of PSO under the fuel supply agreements are
guaranteed by the Government of Pakistan.
Tau Power, also known as Altai, is a joint venture that is owned by AES
and Israel-based Suntree Power. In October 1997, Tau Power completed its
acquisition and takeover of two hydro-electric stations and four combined heat
and power stations in the province of East Kazakhstan. The total electric
capacity of the stations included in the agreement is 1,384 MW, with additional
thermal capacity of over 1,000 MW electric equivalent. The power stations
included in the agreement signed are: the 332 MW Ust-Kamenogorsk GES, the 702 MW
Shulbinsk GES, the 240 MW Ust-Kamenogorsk TETS, the 50 MW Leninogorsk TETS, the
50 MW Sogrinsk TETS and the 10 MW Semipalatinsk TETS. Included in the
transaction, AES obtained ownership and control of the retail sales department
of the former utility and will assume the existing power supply contracts with
the 50 largest customers in East Kazakhstan, including the distribution
companies.
EUROPE
AES currently owns and operates, through subsidiaries and affiliates,
seven plants in Europe representing approximately 2,869 MW.
NIGEN is a joint venture between AES and a Belgian utility that
consists of two power plants in Northern Ireland: Kilroot, a 520 MW dual-fired
(coal and oil) power plant, and Belfast West, a 240
MW coal-fired power plant. The Kilroot and Belfast West plants have entered into
power sales contracts, subject to cancellation in 13 years and three years,
respectively, with Northern Ireland Electricity, plc, a transmission and
distribution company.
Medway Power Limited is a 688 MW combined cycle gas-fired power plant
in Southeast England on the Isle of Grain. Medway is owned by a joint venture
among an AES subsidiary and subsidiaries of Southern Electric plc ("Southern")
and SEEBOARD plc ("SEEBOARD"). The plant began operations in November 1995. AES,
through a subsidiary, operates and maintains the plant. Medway Power sells its
entire output through national electricity pool trading arrangements (the
"Pool") at prices based on the supply of, and demand for, electricity available
in the Pool. In addition, Medway Power has entered into a contract with each of
Southern and SEEBOARD, under which Southern and SEEBOARD will pay Medway Power
capacity payments based on the plant's available capacity, and energy cost
payments, based on the plant's actual sales of electricity to the Pool, that
reflect fuel costs and variable transmission charges incurred (each a "Contract
for Differences"). The basis of the contracts is 660 MW. Sales of electrical
output in excess of 660 MW are sold into the Pool, and are not subject to the
Contract for Differences.
Tiszai Eromu Rt. owns and operates three power plants totaling 1,281 MW
of gross capacity and a coal mine in Hungary. The plants consist of (i) the
Tisza II facility, an 860 MW oil and natural gas-fired facility that sells
electricity under a contract ending in 2010, (ii) the Tiszapalkonya facility, a
250 MW coal-fired facility that sells electricity under a contract ending in
2001, and (iii) the Borsod facility, a 171 MW coal-fired facility that sells
electricity under a contract ending in 2001. Each plant sells electricity to
Magyar Villamos Muvek Rt., a Hungarian, state-owned integrated utility.
Indian Queens is a 140 MW oil-fired, simple cycle plant located in
Cornwall County, England. AES acquired Indian Queens through its purchase of the
international assets of Destec Energy, Inc. in June, 1997. The plant began
commercial operation in October, 1996. Power generated by Indian Queens is sold
into the national electricity pool in the UK. Indian Queens, because of its
design, also sells ancillary services to the National Grid Company, the operator
of the UK's high voltage transmission system.
PROJECTS UNDER CONSTRUCTION
Aixi Heart River is a 50 MW coal-fired CFB power plant located in
Nanchuan, Sichuan Province, PRC. Construction of the power plant commenced in
February 1996, and is expected to be completed in 1998. Aixi Heart River is
owned by Fuling Aixi, a 25-year cooperative joint venture formed by Sichuan
Fuling Banxi Colliery and a wholly owned subsidiary of AES Chigen. The minority
partner will provide fuel to the plant and Sichuan Fuling Power Company will
purchase the power generated by the facility, both pursuant to separate 25-year
agreements.
The steam turbine unit of Hefei Prosperity Lake is currently under
construction and scheduled to commence commercial operation in the third quarter
of 1998. Likewise, the second unit of the 250 MW coal-fired Jiaozou Aluminum
Power facility remains under construction and is expected to commence commercial
operation in the second quarter of 1998. For a further description of these
facilities see the caption entitled "Asia and the Pacific" above.
Elsta is a 405 MW gas-fired, combined-cycle cogeneration plant
currently under construction at the chemical manufacturing facilities of Dow
Benelux N.V. in the Zeeland Province of the Netherlands. AES acquired its
interest in Elsta through the Company's acquisition of the international assets
of Destec Energy, Inc. in June, 1997. The remaining interest in Elsta is held
equally by two Dutch utilities: N.V. Delta Nutsbedrijven ("Deltan") and N.V.
Provinciale Noordbrabantse Energie-Maatschappij ("PNEM"). Elsta is the first
major private power project in the Netherlands. Pursuant to a 20-year power
sales agreement, Dow Benelux will purchase between 85 and 125 MW of electrical
capacity. Dow Benelux also expects to purchase an average of 500 MT/hr of
multi-pressure process steam energy and will have dispatch rights on steam
energy subject to minimum and maximum purchase obligations. The project's
minority partners, Deltan and
PNEM, have agreed to purchase electrical capacity from the plant not purchased
by Dow (280-320 MW) for an initial contract period of 20 years following the
commercial operation date.
As part of the Company's acquisition of its interest in Elsta, AES
assumed responsibility under a guaranteed lump-sum turn-key contract for the
engineering, procurement and construction of the plant. Due to deficient
engineering and construction performance prior to AES's acquisition, the plant
was unable to meet its originally scheduled commercial operation date of
September 30, 1997. AES now expects that Elsta will achieve commercial operation
in June 1998. No assurance can be given, however, that Elsta will attain
commercial operation by that date. Substantial risks to the successful
completion of the plant continue to exist, including those relating to
undetected design flaws, government permitting difficulties and unknown
construction defects.
In September 1995, AES successfully completed the financing and began
construction of Warrior Run, a 180 MW coal-fired thermal cogeneration facility
near the city of Cumberland in Allegheny County, Maryland. Engineering,
procurement and construction of the project under a turn-key contract with
Raytheon Engineers & Contractors, Inc. and ABB/Combustion Engineering is
expected to be completed in 1999. Potomac Edison, a subsidiary of Allegheny
Power System, Inc. will purchase electricity under a 30 year agreement, which
has been approved by the Maryland Public Service Commission.
Barry is a 230 MW gas-fired combined cycle facility currently under
construction in Barry, South Wales, United Kingdom. Construction began in
October, 1996 and the facility is expected to commence operations by the second
quarter of 1998. Construction services are being supplied by TBV Power Limited
under a lump sum, turnkey construction contract. The Barry facility will sell
electricity into the national electricity spot market in the United Kingdom. In
February 1997, Barry raised (pound)112 million of non-recourse project
financing, underwritten solely by The Industrial Bank of Japan, Limited.
Mt. Stuart is a 288 MW power station located at Townsville, North
Queensland, Australia that is currently under construction. The facility will
consist of two 144 MW open-cycle gas turbines. AES has entered into various
agreements to develop, own, and operate the facility. The plant will burn
liquefied petroleum gas and will sell electricity to the Queensland Transmission
and Supply Corporation under a 10-year power purchase agreement. The facility
will operate as a peaking station and, therefore, it is estimated that the
facility will operate for only 3 percent to 5 percent of the year. In September
1997, AES raised A$103.5 million to finance the plant's construction.
The Company began construction on its Parana project in September 1997.
Parana is an 830 MW gas-fired, combined cycle power plant. Parana will be
located in San Nicolas, Argentina, adjacent to San Nicolas, in which AES owns a
controlling interest. Parana is in the process of arranging for project
financing for the facility. Parana has entered into a lump sum, turnkey
construction contract with Nichimen Corporation and Mitsubishi Heavy Industries
for the plant. Project output will be sold into the Argentine electric market.
Total capital cost is estimated at $440 million, and the project is expected to
commence commercial operation in 2000.
Yangcheng Sun City, currently under construction, is a 2,100 MW
coal-fired mine-mouth power plant located in Yangcheng, Shanxi Province, PRC.
Construction of the power plant commenced in the second quarter of 1997 and AES
made its initial equity investment in the third quarter of 1997. AES Chigen,
through a wholly-owned subsidiary, will be responsible for overseeing the
management of construction and operations of the plant. AES Chigen is committed
to invest $98 million of equity in the project and will own twenty-five percent
of the 20-year joint venture with five other partners owning the remaining 75
percent. The project will be funded with $1.21 billion of debt provided by the
China Construction Bank, China State Development Bank, U.S. Export-Import Bank,
and Kreditanstalt fur Wiederaufbau (KfW) and $393 million of equity.
Yangcheng Sun City is one of the first "coal-by-wire" power projects in
China. The power will be produced in Shanxi Province and shipped via a 755
kilometer transmission line to Jiangsu Province, a coastal province. The project
is being constructed over a 60-month period by the Shanxi
Provincial Power Company under a fixed-price, fixed-schedule turnkey contract.
The first unit is scheduled to come on line within 35 months. Low sulfur coal
will be supplied by the Shanxi Provincial Coal Transportation and Sales Company.
In January 1997, the Comision de Electricidad, a decentralized public
agency of the Federal Government of the United Mexican States selected a
consortium led by AES to develop, design, engineer, construct, equip,
commission, start-up, operate and maintain a 484 MW combined-cycle, gas fired
power generation facility ("Merida III"). The Project will be located in the
city of Merida, Yucatan, Mexico. The Project will consist of two gas-fired
turbines, two heat recovery steam generators, a single steam turbine, and
certain other common facilities. Engineering, procurement and construction of
the project is under a turn-key contract with Westinghouse and construction is
expected to be completed in 2000.
In April 1997, CEEE, the electric distribution company for the state of
Rio Grande do Sul, Brazil, selected AES to build, own, and operate a 600 MW
gas-fired combined cycle power plant to be built at the border city of
Uruguaiana, in the State of Rio Grande do Sul, Brazil ("AES Uruguaiana"). CEEE
will purchase the electricity of AES Uruguaiana under a 20 year power purchase
agreement. The Project will consist of two gas-fired turbines, two heat recovery
steam generators and a single steam turbine, and certain other common
facilities. Engineering, procurement and construction of the project is under a
turn-key contract with Westinghouse and construction is expected to be completed
in 2000.
PROJECTS IN ADVANCED STAGES OF DEVELOPMENT
The Company currently is pursuing over 100 new business opportunities
in various stages of development. Each of these projects are subject to numerous
risks as discussed elsewhere in this Annual Report on Form 10-K, and no
assurance can be given that any of the projects or businesses will be completed
or acquired. Listed below are development projects that have achieved certain
milestone objectives the Company deems significant.
In January 1998, the Company was selected by the Government of
Bangladesh Ministry of Energy and Mineral Resources as the winning bidder to
build, own and operate a 360 MW (net) gas-fired, combined cycle power plant at a
site near Dhaka, Bangladesh ("Haripur"). Haripur is expected to commence
commercial operations in 2000, and electricity will be sold to the Bangladesh
Power Development Board.
In November 1997, AES won a bid to acquire three natural gas-fired,
electric generating stations from Southern California Edison ("Edison") for
approximately $781 million. The three plants, all located on the southern
California coast, are Alamitos (2083 MW), Redondo Beach (1310 MW) and Huntington
Beach (563 MW). Each of the plants has been designated a "must-run facility" and
initially will operate in part under agreements with California's Independent
System Operator being established through electricity restructuring. Pursuant to
California's electricity restructuring law, Edison will remain under contract to
operate and maintain the facilities for two years. Completion of the acquisition
is subject to a number of conditions, including the receipt of California Public
Utilities Commission approval, federal regulatory and anti-trust approvals and
successful implementation of the new California electric spot market, called the
Power Exchange.
The AES Ironwood project is in the advanced stages of development and
will be a natural gas-fired combined cycle facility currently in southeastern
Pennsylvania. Total plant capacity is anticipated to be approximately 720 MW.
The plant is anticipated to achieve commercial operation by the end of 2000.
Power generated by Ironwood will be purchased by General Public Utility under
the terms of a power purchase agreement finalized in February 1997.
An affiliate of the Company, San Francisco Energy Company, LP ("SFEC"),
which is a joint venture between AES Pacific, an indirectly wholly owned
subsidiary of AES and a general partner in SFEC, and Sonat Inc., is developing a
240 MW natural gas-fired facility in San Francisco, California. SFEC signed a
Standard Offer contract in 1994 with Pacific Gas & Electric ("PG&E") as the
winner of the San Francisco portion of the California Public Utilities
Commission's Biennial Resource Plan Update. The contract calls for the full
capacity of the plant to be purchased by Pacific Gas & Electric for 30 years,
with an option to terminate after 17 years. However, a ruling by the Federal
Energy Regulatory Commission ("FERC") has questioned the validity of the
California Biennial Resource Plan update ("BRPU"), pursuant to which SFEC was
awarded its contract. The Company believes that its contract with PG&E is valid,
but the Company is currently involved in litigation with PG&E over the validity
of the contract. The Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the Company. Substantial
risks to the successful completion of this project exist, including those
relating to the contract litigation, FERC decision, siting, financing,
construction and permitting.
AES has been developing AES Puerto Rico which is to be a 454 MW
coal-fired cogeneration facility in Guayama, Puerto Rico. The Puerto Rico
Electricity Power Authority has agreed to purchase the electrical output of the
facility pursuant to a 25-year power sales agreement. The project received
approval of its environmental impact statement from the Puerto Rico
Environmental Quality Board, but such approval has been challenged. This issue
is currently on appeal to the Supreme Court of Puerto Rico, which has not yet
rendered a decision. Development of the project is stayed during determination
of the appeal.
AES has also been developing a 420 MW coal-fired facility in the State
of Orissa, India ("AES Ib Valley"). Under the terms of an executed power sales
agreement, the Orissa State Electricity Board ("OSEB") agreed to purchase at
least 85 percent of the electrical capacity of the facility pursuant to a
30-year contract. Certain of OSEB's obligations are guaranteed by the Government
of Orissa ("GOO"). In addition, the Government of India ("GOI") agreed to
guarantee a portion of GOO's obligations. In July 1995, a newly elected state
government initiated a review of the terms and conditions of AES Ib Valley's
agreements with OSEB and GOO. This review has led OSEB and GOO to seek
significant modifications to the terms of the power sales agreement. In light of
this review AES has been unable to reach financial closing on this project and
has been forced to terminate certain financing and contractual commitments
relating to the project. AES Ib Valley is currently in negotiation with GOO and
OSEB and may agree to changes, including those relating to the plant's technical
configuration, capital cost, size and the price paid for electricity.
Notwithstanding the Company's willingness to discuss modifications to the
project, the Company believes that its current agreements with GOO, OSEB and GOI
are valid, and if agreements cannot be restructured on terms acceptable to AES,
the Company intends to pursue its rights with respect to enforcement of the
existing contracts. No assurance can be given that either (i) the terms of a new
contract will be agreed to or (ii) if AES pursues its legal claims, that it will
be able to compel specific performance or recover significant damages.
REGULATORY MATTERS
Despite the recent movement toward electricity restructuring,
electricity markets in the United States are still heavily regulated. United
States laws and regulations still govern to some extent wholesale electricity
transactions, the type of fuel utilized, the type of energy produced, and power
plant ownership. State regulatory commissions have jurisdiction over retail
electricity transactions. United States power projects also are subject to laws
and regulations controlling emissions and other substances produced by a plant
and the siting of plants. These laws and regulations generally require that a
wide variety of permits and other approvals be obtained before the construction
or operation of a power plant commences, and that the facility operate in
compliance with these permits thereafter. FERC must also approve rates charged
by certain power marketers such as those of the Company's subsidiary, AES Power.
In the United States, so-called Qualifying Facilities ("QFs") are
relieved of compliance with extensive federal, state and local regulations by
the provisions of the Public Utility Regulatory Policies Act, as amended
("PURPA"). Each of AES's current domestic plants is a QF. Loss of QF
status, if not prevented, would subject these plants to more extensive
regulations. The Company believes, however, that it will usually be able to
react in a manner that would avoid the loss of QF status.
State public utility commissions ("PUCs") regulate both the retail
rates and financial performance of electric utilities. Since a wholesale power
sales contract is generally reflected in a utility's retail rates, power sales
contracts from QFs are indirectly under the regulatory purview of PUCs. PUCs
often will pre-approve contracts with prices that do not exceed so-called
"avoided costs" because such contracts often have been acquired through a
competitive or market-based process. Recognizing the competitive nature of most
acquisition processes, most PUCs will permit utilities to "pass through"
expenses associated with an independent power contract to the utility's retail
customers, although no assurance can be given that a PUC will not attempt to
deny the "pass through" of these expenses in the future. The Company believes
that any such attempt by a PUC would, among other things, be pre-empted by
federal law.
AES must obtain exemptions from, or become subject to regulation by,
the Securities and Exchange Commission under the Public Utility Holding Company
Act ("PUHCA") in regard to both its domestic and foreign utility company
holdings. There are a number of exemptions from PUHCA that are available for
both domestic and foreign utility company owners, including those for QFs,
Exempt Wholesale Generators and Foreign Utility Companies. AES has obtained, and
believes that it will be able to obtain and maintain in the future, appropriate
PUHCA exemptions for its utility acquisitions.
In addition, as one of the Company's major non-U.S. markets, changes in
Brazilian regulatory structures will have an impact on the Company. The
electricity industry in Brazil is regulated by the Brazilian federal government,
acting through the Ministry of Mines and Energy, which has exclusive authority
over the electricity sector through regulatory powers assigned to it. This
sector is currently in a state of rapid change in Brazil. For example, pursuant
to a federal law enacted in 1996, regulatory policy for the sector, which was
implemented by the Departmento Nacional de Aguas e Energia Eletrica ("DNAEE"),
is now implemented by a new autonomous national electric energy agency (Agencia
Nacional de Energia Eletrica or "ANEEL"). ANEEL is expected to be an independent
regulatory agency and to delegate certain functions to agencies based in certain
states of Brazil. However, ANEEL cannot delegate any authority regarding tariffs
to state agencies. There is uncertainty regarding the status of current
regulations and the possibility of new regulations which may apply to the
electricity sector in Brazil.
ANEEL is responsible for (i) granting and supervising concessions for
electricity generation, transmission and distribution, including approval of
applications for the setting of electricity tariffs; (ii) supervising and
performing financial examinations of the concessionary companies; (iii) issuing
regulations for the electricity sector; and (iv) planning, coordinating and
executing water resource studies and granting and supervising concessions for
the use of water resources. Due to electricity tariffs' significant weight in
the measurement of national inflation, tariff increases have been controlled by
the Ministry of Finance, although it is not its official responsibility.
In addition to the powers currently granted to DNAEE, ANEEL has the
following responsibilities: (i) to implement and regulate the exploitation of
electric energy and the use of hydroelectric power pursuant to the Power Sector
Law; (ii) to promote the bidding process for the granting of new concessions;
(iii) to solve administrative disputes among utilities, IPP companies,
self-producers and customers; and (iv) to determine the criteria for the
establishment of the cost of the transmission of energy pursuant to the Power
Sector Law. Nevertheless, until regulations regarding the implementation of
ANEEL are promulgated, DNAEE will continue to monitor and regulate the Brazilian
electricity sector.
UNITED STATES ENVIRONMENTAL REGULATIONS
The construction and operation of power projects are subject to
extensive environmental and land use regulation. In the United States those
regulations applicable to AES primarily involve the discharge of effluents into
the water, emissions into the air and the use of water, but can also include
wetlands preservation, endangered species, waste disposal and noise regulation.
These laws and regulations often require a lengthy and complex process of
obtaining licenses, permits and approvals from federal, state and local
agencies. If such laws and regulations are changed and AES's facilities are not
"grandfathered" (that is, made exempt by the fact that the facility pre-existed
the law) or otherwise are not excluded, extensive modifications to a project's
technologies and facilities could be required. If environmental laws or
regulations were to change in the future, there can be no assurance that AES
would be able to recover all or any increased costs from its customers or that
its business and financial condition would not be materially and adversely
affected. In addition, the Company may be required to make significant capital
or other expenditures in connection with such changes in environmental laws or
regulations. While AES expects that environmental and land use regulations in
the United States will continue to become more stringent over time, the Company
is not aware of any currently planned changes in law that would result in a
material adverse effect on its consolidated financial position.
Clean Air Act. The original Clean Air Act of 1970 set guidelines for
emissions standards for major pollutants (e.g., SO2 and NOx) from newly-built
sources. In late 1990, Congress passed a set of amendments to the Clean Air Act
(the "1990 Amendments"). All of AES's domestic operating plants perform at
levels better than federal emission standards mandated for such plants under the
Clean Air Act (as amended). The 1990 Amendments attempt to reduce acid rain
precursor emissions (SO2 and NOX) from existing sources -- particularly large,
older power plants that were exempted from certain regulations under the
original Clean Air Act. Because AES's facilities are relatively new cogeneration
units with low air emissions that qualify as "existing sources" under the 1990
Amendments, they have been "grandfathered" from certain acid rain compliance
provisions of the 1990 Amendments. Other provisions of the Clean Air Act related
to the reduction of ozone precursor emissions (VOC and NOx) have triggered
"reasonably available control technology" ("RACT") requirements by various
states to reduce such emissions.
The hazardous air pollutant provisions of the 1990 Amendments presently
exclude electric steam generating facilities such as AES's domestic plants;
however, the 1990 Amendments directed that the Environmental Protection Agency
("EPA" or the "Agency") prepare a study on hazardous air pollutant ("HAP")
emissions from power plants. In the fall of 1996, EPA released an interim report
on HAP emissions from power plants that tentatively concluded that the risk of
contracting cancer from exposure to HAPs (except mercury) from most plants was
very low (less than one in 1 million). EPA is developing a separate study on
mercury emissions from power plants. The draft mercury study report is currently
being reviewed by the federal Scientific Advisory Board and it is not certain
when a final report will be released. A final comprehensive HAP report with
recommendations is expected to be issued after EPA's review of mercury emissions
from power plants is complete. If it is determined that mercury from power
plants should be regulated, the use of "maximum available control technology"
("MACT") for mercury (which is now not subject to regulation) could be required.
In 1997, EPA published new rules that tighten ambient air quality
standards for ozone and small particulate matter (so-called PM 2.5). These new
standards increase the number of so-called "nonattainment regions" for ozone and
particulates. If new ozone and particulate matter nonattainment areas are
created, AES's plants may be faced with further emission reduction requirements
that could necessitate the installation of additional control technology.
In order to make further improvements in air quality in the eastern
United States, EPA in 1997 issued a call for states to revise their "state
implementation plans" (SIPs) for ozone precursors--primarily NOX. EPA
recommended further reductions of up to 65% for some states, depending on local
conditions. As a result, AES will be required to make further reductions in NOX
emissions at its Beaver Valley plant in Pennsylvania (AES's other plants have
emission levels well below baseline levels).
The Company does not believe that any of the potential additional
requirements discussed above will have a material adverse effect on its results
of operations and consolidated financial position.
Hazardous Waste Regulation. Based on a 1988 study, EPA has decided not
to regulate most coal combustion ash as a hazardous waste; however, EPA reserved
making a decision with respect to coal ash from fluidized bed combustion (the
burning of coal in the presence of limestone), which is still being evaluated by
the Agency. AES, along with other CFB owners and manufacturers, is currently
participating in a study to evaluate whether or not CFB ash should be classified
as hazardous. EPA is required to make a determination on whether to regulate CFB
ash in 1998. If EPA decides to regulate fluidized bed coal ash as a hazardous or
special waste, AES could incur additional ash disposal costs to dispose of ash
from its plants that utilize fluidized bed boilers.
FOREIGN ENVIRONMENTAL REGULATIONS
AES now has ownership interests in operating power plants in many
countries outside the United States. Each of these countries and the localities
therein have separate laws and regulations governing the siting, permitting,
ownership and power sales from AES's plants. These laws and regulations are
often quite different than those in effect in the United States--and AES's
non-U.S. businesses have been in substantial compliance with these different
laws and regulations. In addition, projects funded by the World Bank are subject
to World Bank environmental standards, which may be more stringent than local
country standards but are typically not as strict as U.S. standards. Whenever
feasible, AES attempts to use advanced environmental technologies (such as CFB
coal technology or advanced gas turbines) in order to minimize environmental
impacts.
Based on current trends, AES expects that environmental and land use
regulations affecting its plants located outside the United States will likely
become more stringent over time. This appears to be due in part to a greater
participation by local citizenry in the monitoring and enforcement of
environmental laws, better enforcement of applicable environmental laws by the
regulatory agencies, and the adoption of more sophisticated environmental
requirements. If foreign environmental and land use regulations were to change
in the future, the Company may be required to make significant capital or other
expenditures in order to comply. There can be no assurance that AES would be
able to recover all or any increased costs from its customers or that its
business, financial condition or results of operations would not be materially
and adversely affected by future changes in foreign environmental and land use
regulations.
NEW UNITED STATES LEGISLATION
In the United States, some states (for example, California, Illinois,
Michigan, Massachusetts and Pennsylvania) have passed or are considering new
legislation that permits utility customers to choose their electricity supplier
in a competitive electricity market (so-called "retail access" or "customer
choice" laws). While such "customer choice" plans differ in details, they
usually share some important elements: (1) they allow customers to choose their
electricity suppliers by a certain date (the dates in the existing or proposed
legislation vary between 1998 and 2003); (2) they allow utilities to recover
so-called "stranded assets"--the remaining costs of uneconomic generating or
regulatory assets; and (3) they reaffirm the validity of existing QF contracts,
and make provisions to assure payment over the contract life.
In order to guarantee payment of utilities' costs and the costs of QF
contracts, some states have used or are proposing to use financial methods to
"securitize" these payments. The "securitization" process might involve the
following steps: first, the financial obligations to be "securitized" would be
legally affirmed through legislation. This legal obligation then is used to
borrow money in public debt markets to pay off the obligation. The legal
obligation allows the borrower to obtain a good credit rating and therefore a
lower interest rate. In some cases, the benefits of the lower interest rate are
passed on to retail electric customers (perhaps in the form of a rate decrease).
"Securitization" of QF contract obligations, if applied to AES contracts in the
future,
would significantly reduce the risk to AES that its power sales contracts would
not be honored due to potential financial difficulties of the utility purchaser.
In addition to state restructuring legislation, members of Congress
have proposed new federal legislation to encourage customer choice and recovery
of stranded assets. Some argue that federal legislation is needed to avoid the
"patchwork" effect of each state acting separately to pass restructuring
legislation; others argue that each state should decide whether to allow retail
choice. In 1997 several bills were (and others are expected to be) submitted to
Congress on electricity restructuring. While it is uncertain whether or when
federal legislation dealing with electricity restructuring might be passed, it
is the opinion of the Company that such legislation would not have a materially
adverse effect on the Company's U.S. business.
In addition to the federal restructuring legislation proposals, a
number of bills have been proposed by members of Congress to repeal all or
portions of PURPA and/or PUHCA--as separate legislation if a comprehensive
restructuring bill fails to pass. The Company believes that the repeal of PURPA
and/or PUHCA is unlikely (and inappropriate) unless it is a part of a
comprehensive restructuring bill.
In anticipation of restructuring legislation, many U.S. utilities are
seeking ways to lower their costs in order to become more competitive. These
include the costs that utilities are required to pay under QF contracts, which
the utilities may view as excessive when compared to current market prices. Many
utilities are therefore seeking ways to lower these contract prices by
renegotiating the contracts, or in some cases by litigation. While the Company
is generally open to renegotiation of existing contracts, it believes that the
aforementioned electricity market restructuring legislation will likely reduce
both the pressure to renegotiate and the need for such contract renegotiations.
EMPLOYEES
At December 31, 1997, AES and its subsidiaries employed approximately
10,000 people. The total number of people employed in facilities which AES
operates or has an equity interest in is approximately 30,000.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following is certain information concerning the present executive officers
and significant employees of the Registrant set out in alphabetical order.
Dennis W. Bakke, 52 years old, co-founded the Registrant with Roger
Sant in 1981 and has been a director of the Registrant since 1986. He has been
President of the Registrant since 1987 and Chief Executive Officer since January
1994. From 1987 to 1993, he served as Chief Operating Officer of the Registrant;
from 1982 to 1986, he served as Executive Vice President of the Registrant; and
from 1985 to 1986 he also served as Treasurer of the Registrant. He served with
Mr. Sant as Deputy Assistant Administrator of the Federal Energy Agency ("FEA")
from 1974 to 1976 and as Deputy Director of the Energy Productivity Center, an
energy research organization affiliated with The Mellon Institute at
Carnegie-Mellon University, from 1978 to 1981. He is a trustee of Rivendell
School and a member of the Board of Directors of MacroSonix Corporation in
Richmond, Virginia.
Mark S. Fitzpatrick, 47 years old, has served as a Senior Vice
President of the Registrant since January 1998, and was appointed Vice President
of the Registrant in 1987. Mr. Fitzpatrick became Managing Director of Applied
Energy Services Electric Limited for the United Kingdom and Western Europe
operations in 1990. From 1984 to 1987, he served as a project director of the
AES Beaver Valley and AES Thames projects.
Paul T. Hanrahan, 40 years old, was appointed Vice President of the
Registrant effective January 1994. He currently is President of AES Chigen,
where he served as Executive Vice President, Chief Operating Officer and
Secretary from December 1993 until February 1995. He was General Manager of AES
Transpower, Inc., a subsidiary of the Registrant, from 1990 to 1993.
William R. Luraschi, 34 years old, has been Vice President of the
Registrant since January 1998, Secretary since February 1996 and General Counsel
of the Registrant since January 1994. Prior to that, Mr. Luraschi was an
attorney with the law firm of Chadbourne & Parke L.L.P.
David G. McMillen, 59 years old, was named Vice President of the
Company in December 1991. He was appointed President of AES Shady Point in 1995
and is currently plant manager of the AES Shady Point facility. He was President
of AES Thames from 1989 to 1995. From 1985 to 1988, he served as plant manager
of the AES Beaver Valley plant and from 1986 to 1988 he served as President of
AES Beaver Valley.
Dr. Roger F. Naill, 50 years old, has been Vice President for Planning
at AES since 1981. Prior to joining the Registrant, Dr. Naill was Director of
the Office of Analytical Services at the U.S. Department of Energy.
Oscar Prieto, 45 years old, was appointed Vice President of the
Registrant effective January 1998 and has been General Executive Director of
Light Servicos de Electricidade, S.A. since June 1996. Mr. Prieto served as
General Manager of San Nicolas from 1994, when he joined AES, until he was
appointed to the position at Light in 1996. Before coming to AES, Mr. Prieto
worked in various positions with the Dow Chemical Company from 1980 to 1994.
John Ruggirello, 47 years old, was appointed Vice President of the
Registrant effective January 1997, and heads an AES group responsible for
project development, construction and plant operations in much of the United
States and Canada. He served as President of AES Beaver Valley from 1990 to
1996.
J. Stuart Ryan, 39 years old, was appointed Senior Vice President of
the Registrant effective January 1998, and heads the AES Transpower group which
is responsible for the Company's business in Asia (excluding China). From 1994
through 1997, he served as Vice President of the Registrant. Prior to 1994, Mr.
Ryan served as general manager of a group within AES.
Roger W. Sant, 66 years old, co-founded the Company with Dennis Bakke
in 1981. He has been Chairman of the Board and a director of the Registrant
since its inception, and he held the office of Chief Executive Officer through
December 31, 1993. He currently is Chairman of the Boards of Directors of The
Summit Foundation and The World Wildlife Fund U.S., and serves on the Boards of
Directors of The World Resources Institute, the World Wide Fund for Nature and
Marriott International, Inc. He was Assistant Administrator for Energy
Conservation and the Environment of the Federal Energy Agency ("FEA") from 1974
to 1976 and the Director of the Energy Productivity Center, an energy research
organization affiliated with The Mellon Institute at Carnegie-Mellon University,
from 1977 to 1981.
Barry J. Sharp, 38 years old, was appointed Senior Vice President and
Chief Financial Officer effective January 1998 and had been Vice President and
Chief Financial Officer since 1987. He also served as Secretary of the
Registrant until February 1996. From 1986 to 1987, he served as the Company's
Director of Finance and Administration. Mr. Sharp is a certified public
accountant.
Sarah Slusser, 35 years old, was appointed President of AES Aurora,
Inc., effective April 1997. AES Aurora is a wholly owned subsidiary of the
Company responsible for business development, construction and operations of
facilities and projects in Mexico, Central America, the Caribbean and Texas.
Prior to that, Ms. Slusser served as Project Director for various AES projects
in the same region from 1993 to 1997.
Paul D. Stinson, 41 years old, was appointed Vice President of the
Registrant effective January 1998. Since April 1997 Mr. Stinson has been
Managing Director of AES Silk Road, Ltd., a wholly owned subsidiary of the
Company responsible for business development, construction and operations of
facilities and projects in Russia, Kazakhstan, Pakistan and other parts of Asia.
Mr. Stinson served as Managing Director of Medway Power Ltd. from 1994 until
1997 and was Plant Manager of the Medway Power Station owned by Medway Power
Ltd. from 1992 to 1997.
Thomas A. Tribone, 45 years old, has been Senior Vice President of the
Registrant since 1990, and leads an AES group responsible for power marketing,
project development, construction and plant operations in South America. From
1987 to 1990 he served as Vice President for project development and from 1985
to 1987 he served as project director of the AES Shady Point plant.
Kenneth R. Woodcock, 54 years old, has been Senior Vice President of
the Registrant since 1987 and now handles AES relationships with the investment
community as well as support for AES business development activities worldwide.
From 1984 to 1987, he served as a Vice President for Business Development. Prior
to the founding of AES he served in the United States federal government in
energy and environment departments.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales.
See the information contained under the caption "Geographic Segments"
in Note 13 to the Consolidated Financial Statements contained in Item 8 hereof.
ITEM 2. PROPERTIES
Offices are maintained by the Registrant in many places around the
world which are generally occupied pursuant to the provisions of long- and
short-term leases, none of which is material to the Company. With a few
exceptions, the Registrant's facilities which are described in Item 1 hereof are
subject to mortgages or other liens or encumbrances as part of the project's
related finance facility. The land interest held by the majority of the
facilities is that of a lessor or, in the case of the facilities located in the
People's Republic of China, a land use right that is leased or owned by the
related joint venture that owns the project. However, in a few instances there
exists no accompanying project financing for the facility and in a few of these
cases the land interest may not be subject to any encumbrance and is owned by
the subsidiary or affiliate owning the facility outright.
ITEM 3. LITIGATION.
The Company is involved in certain legal proceedings in the normal
course of business. It is the opinion of the Company that none of the pending
litigation is expected to have a material adverse effect on its results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information.
The common stock of the Company is currently traded on the NYSE stock
market under the symbol "AES." All stock prices from January 1, 1996 to and
including October 15, 1996 were quoted on the NASDAQ stock market under the
symbol "AESC." The following table sets forth the high and low sale prices for
the common stock as reported by NASDAQ or the NYSE for the periods indicated.
-------------------------------- -------------------- -----------
1996 HIGH LOW
-------------------------------- -------------------- -----------
First Quarter $ 12-5/8 $ 10-1/2
Second Quarter 14-13/16 11-1/8
Third Quarter 20-1/4 13-5/16
Fourth Quarter 25-1/16 19-5/8
-------------------------------- -------------------- -----------
1997 HIGH LOW
-------------------------------- -------------------- -----------
First Quarter $ 34-1/8 $ 22-3/8
Second Quarter 37-3/4 27-1/2
Third Quarter 45-1/4 34-5/8
Fourth Quarter 49-5/8 35
(b) Holders.
As of February 2, 1998, there were 955 record holders of the
Registrant's Common Stock, par value $0.01 per share.
(c) Dividends.
Under the terms of a corporate revolving loan and letters of credit
facility of $600 million entered into with a commercial bank syndicate, the
Company is currently prohibited from paying cash dividends. In addition, the
Registrant is precluded from paying cash dividends on its Common Stock under the
terms of a guaranty to the utility customer in connection with the AES Thames
project in the event certain net worth and liquidity tests of the Registrant are
not met. The Registrant has met these tests at all times since making the
guaranty.
The ability of the Registrant's project subsidiaries to declare and pay
cash dividends to the Registrant is subject to certain limitations in the
project loans and other agreements entered into by such project subsidiaries.
Such limitations permit the payment of cash dividends out of current cash flow
for quarterly, semiannual or annual periods only at the end of such periods and
only after payment of principal and interest on project loans due at the end of
such periods, and in certain cases after providing for debt service reserves.
ITEM 6. SELECTED FINANCIAL DATA.
(IN MILLIONS, EXCEPT PER SHARE DATA)
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
Statement of Operations Data
Revenues $1,411 $ 835 $ 679 $ 533 $ 519
Operating costs and expenses 1,043 557 426 297 323
Operating income 368 278 253 236 196
Income before income taxes, minority
interest and extraordinary item 263 193 167 145 89
Extraordinary item (3) -- -- 2 --
Net income 185 125 107 100 71
Basic earnings per share:
Before extraordinary item $ 1.13 $ 0.83 $ 0.71 $ 0.67 $ 0.50
Extraordinary item (0.02) -- -- 0.01 --
Basic earnings per share $ 1.11 $ 0.83 $ 0.71 $ 0.68 $ 0.50
Diluted earnings per share:
Before extraordinary item $ 1.11 $ 0.80 $ 0.70 $ 0.66 $ 0.49
Extraordinary item (0.02) -- -- 0.01 --
Diluted earnings per share $ 1.09 $ 0.80 $ 0.70 $ 0.67 $ 0.49
Dividends per share - common stock -- -- -- -- $ 0.29
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
AS OF DECEMBER 31 1997 1996 1995 1994 1993
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
Total assets $8,909 $3,622 $2,341 $1,915 $1,687
Revolving bank loan (current) -- 88 50 -- --
Project financing debt (long-term) 3,489 1,558 1,098 1,019 1,075
Other notes payable (long-term) 1,096 450 125 125 125
Stockholders' equity 1,481 721 549 401 309
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are helping to meet the world's needs by providing
electricity to customers in many countries. Electricity sales accounted for 95%
of total revenues during 1997 and 97% during 1996. Other sales arise from the
sale of steam and other commodities related to the Company's cogeneration
operations. Service revenues represent fees earned in connection with wholesale
power services, and operating and construction services provided by AES to its
affiliates.
Until recently, the Company's sales of electricity were almost
exclusively made to customers (generally electric utilities or regional electric
companies) on a wholesale basis for further resale to end users. This is often
referred to as the electricity "generating" business. Sales by these generating
companies are usually made under long-term contracts from power plants owned by
the Company's subsidiaries and affiliates. The Company's ownership portfolio of
power facilities includes new plants constructed for such purposes ("greenfield"
plants) as well as existing power plants acquired through competitively bid
privatization initiatives and negotiated acquisitions.
AES now operates and owns (entirely, or in part) a diverse portfolio of
electric power plants (including those within the integrated distribution
companies discussed below) with a total capacity of 17,636 megawatts (MW). Of
that total, 43% are fueled by coal or petroleum coke, 6% are fueled by natural
gas, 34% are hydroelectric facilities, 6% are fueled by oil, and the remaining
11% are capable of using multiple fossil fuels. Of the total MW, 1,069 (six
plants) are located in the U.S., 1,588 (four plants) are in the UK, 840 (five
plants) are in Argentina, 603 (seven plants) are in China, 1,281 (three plants)
are in Hungary, 5,856 (thirty nine) are in Brazil, 5,384 (seven plants) are in
Kazakhstan, 210 (one plant) is in the Dominican Republic, 110 (one plant) is in
Canada, and 695 (two plants) are in Pakistan.
AES is also currently in the process of adding approximately 5,331 MW
to its operating portfolio by constructing several new plants. These include a
180 MW coal-fired plant in the U.S., four coal-fired plants in China totaling
2,314 MW, a 230 MW natural gas-fired plant in the UK, a 405 MW natural gas-fired
plant in the Netherlands, a 288 MW kerosene-fired plant in Australia, an 830 MW
natural gas-fired plant in Argentina, a 484 MW natural gas-fired plant in Mexico
and a 600 MW natural gas-fired plant in Brazil.
As a result, AES's total MW of 84 power plants in operation and under
construction is approximately 22,967 and net equity ownership (total MW adjusted
for the Company's ownership percentage) represents approximately 12,247 MW.
Because of the significant magnitude and complexity of building new
electric generating plants, construction periods often range from two to five
years, depending on the technology and location. AES currently expects that
projects now under construction will reach commercial operation and begin to
sell electricity at various dates through the year 2002. The completion of each
plant in a timely manner is generally supported by a guarantee from the plant's
construction contractor, although in certain cases, AES has assumed the risk of
satisfactory construction completion. However, it remains possible, due to
changes in the economic, political, technological, regulatory or logistical
circumstances involving each individual plant, that commercial operations may be
delayed in certain cases.
Beginning in 1996 and continuing through 1997, AES has also purchased
interests (both majority and minority) in companies that sell electricity
directly to commercial, industrial, governmental and residential customers. This
is often referred to as the electricity "distribution" business. Electricity
sales by AES's distribution businesses are generally made pursuant to the
provisions of long-term electricity sale concessions granted by the appropriate
governmental authority as part of the original privatization of each
distribution company. 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. Each distribution company
also purchases, in varying proportions, electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.
AES has majority ownership in two distribution companies in Argentina,
one in Brazil and one in El Salvador (purchased in 1998), and less than majority
ownership in two additional distribution companies in Brazil. These six
companies serve a total of approximately 8 million customers with gigawatt hour
sales exceeding 63,000. On a net equity basis, AES's ownership represents
approximately 2 million customers and gigawatt hour sales exceeding 15,000.
AES continues to believe that there is significant demand for more
efficiently operated electricity generation and distribution businesses. Guided
by its commitment to serve the world's needs for electricity, AES is pursuing
additional greenfield developments 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.
Certain subsidiaries and affiliates of the Company (domestic and
non-U.S.) have signed long-term contracts or similar arrangements for the sale
of electricity and are in various stages of developing the related greenfield
power plants. There exist sub-
stantial risks to their successful completion, including, but not limited to,
those relating to failures of siting, financing, construction, permitting,
governmental approvals or termination of the power sales contract as a result of
a failure to meet milestones. As of December 31, 1997, capitalized costs for
projects under development were approximately $87 million. The Company believes
that these costs are recoverable; however, no assurance can be given that
changes in circumstances related to individual development projects will not
occur or that any of these projects will be completed and reach commercial
operation.
AES has been successful in growing its business and serving additional
customers by participating in competitive bidding under privatization
initiatives and has been particularly interested in acquiring existing
businesses or assets in electricity markets that are promoting competition and
eliminating rate of return regulation. In such privatizations, sellers generally
seek to complete competitive solicitations in less than one year, much quicker
than the time periods associated with greenfield development, and require
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.
Because of this relatively quick process or other considerations, it may
not always be possible to arrange "project financing" (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk") for specific potential
acquisitions. Additionally, as in the past, certain acquisitions or the
commencement of construction on several greenfield developments would
potentially require the Company to obtain substantial additional financing
including both debt and equity. As a result, during 1997, the Company enhanced
its financial capabilities to respond to these more accelerated opportunities by
expanding its revolving line and letter of credit facility (the "Revolver") to
$600 million from $425 million. AES also currently maintains a $1.5 billion
"universal shelf" registration statement that allows for the issuance of various
additional debt and preferred or common equity securities either individually or
in combination.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased $576 million (69%) to $1,411 million from
1996 to 1997 after increasing $156 million (23%) to $835 million from 1995 to
1996. The increase in 1997 primarily reflects the acquisitions of controlling
interests in the distribution companies Eden, Edes and Sul and electricity
generating plants at Los Mina and Altai, a full year of operations at Tisza and
Ekibastuz, service revenue associated with construction at Elsta, and the start
of commercial operations at Lal Pir. The increase in 1996 primarily reflects the
acquisition of controlling interests in Tisza and Ekibastuz during the year.
The nature of most of the Company's generating businesses is such that
each power plant generally relies on one power sales contract with a single
electric customer for the majority, if not all, of its revenues. During 1997,
the Company's three largest customers accounted for 36% of total revenues. As a
result, the prolonged failure of any one of those customers to fulfill its
contractual payment obligations in the future could have a substantial negative
impact on AES's results of operations. Where possible, the Company has sought to
reduce this risk, in part, by entering into power sales contracts with customers
that have their debt or preferred stock rated "investment grade" by nationally
recognized rating agencies and by locating its plants in different geographic
areas in order to mitigate the effects of regional economic downturns.
However, AES does not limit its business solely to the most developed
countries or economies, or only to those countries with investment grade
sovereign credit ratings. In certain locations, particularly developing
countries or countries that are in a transition from centrally planned to market
oriented economies, the electricity purchasers, both wholesale and retail, may
experience difficulty in meeting contractual payment obligations.
Beginning in August 1996 and continuing through 1997, AES has recorded a
provision of $28 million associated with aggregate outstanding receivables
(excluding VAT) of $54 million at December 31, 1997 related to the operations of
the Ekibastuz power plant in Kazakhstan. Approximately $35 million of the
aggregate balance (excluding VAT), before considering the provision, is due from
a government-owned distribution company. There can be no assurance of the
ultimate collectibility of these amounts owed to Ekibastuz, or as a result, the
recoverability of the related net assets (totaling $57 million at December 31,
1997) or additional amounts the Company may invest.
A portion of the electricity sales from certain plants is not subject to
a contract and is available for sale, when economically advantageous, in the
relevant spot electricity market. The prices paid for electricity in the spot
markets may be volatile and are dependent on the behavior of the relevant
economies, including the demand for and retail price of electricity and the
competitive price and availability of power from other suppliers.
Electricity sales by AES's distribution businesses are made pursuant to
provisions of long-term electricity sales concession agreements ranging in
remaining length from 19 to 94 years. Each business is generally authorized to
charge its customers a tariff for electric services which consists of two
components: an energy expense pass-through component and an inflation or
similarly adjusted operating cost component. Both components are established as
part of the original grant of the concession for certain initial periods
(ranging from six to ten years remaining). Beginning subsequent to the initial
periods and at regular intervals (such as every five years thereafter) the
concession grantor has the authority to review the costs of the relevant
business to determine the inflation or similar adjustment factor, if any, to the
operation cost component (the "Adjustment Escalator") for the subsequent regular
interval. This review can result in an Adjustment Escalator that has a positive,
zero or negative value. To date, the Company has not reached the end of the
initial tariff periods in any of its distribution businesses. As a result, there
can be no assurance as to the effects, if any, on its future results of
operations of potential changes to the Adjustment Escalator.
Additionally, the electricity sales concessions generally include either
a direct (via the specific pricing provisions of the concession) or indirect
(via the Adjustment Escalator) adjustment to a portion of the tariff that
reflects changes, either entirely or in part, in the exchange rates between the
local currency and the U.S. dollar. Such adjustments are made in arrears at
various regular intervals and in certain cases, requests for interim adjustments
are permitted. As such, the results of operations of AES's non-U.S. distribution
businesses should be partially or entirely protected against fluctuations in
such currency exchange rates, such as the Argentine peso and the Brazilian real.
However, if either or both of these currencies were to experience a sudden or
severe devaluation relative to the U.S. dollar, because of the in arrears nature
of the respective adjustment in the tariff or because of the significant
resulting local currency inflation of the tariff, the future results of
operations of AES's distribution companies in that country or countries could be
adversely affected. Depending on the duration or severity of such devaluation,
the future results of operations of AES may also be adversely affected.
COSTS OF SALES AND SERVICES. Total costs of sales and services increased $479
million (95%) to $981 million in 1997 after increasing $108 million (27%) to
$502 million in 1996. The increase in 1997 was caused primarily by the costs of
electricity sales associated with the acquisition of controlling interests in
Eden, Edes, Sul, Los Mina and Altai, a full year of operations at Tisza and
Ekibastuz, construction costs at Elsta, and the start of commercial operations
at Lal Pir, offset in part, by lower costs at San Nicolas due to lower fuel
prices. The increase in 1996 was caused primarily by the costs of electricity
sales associated with the acquisition of controlling interests in Tisza and
Ekibastuz in that year.
GROSS MARGIN. Gross margin (revenues less costs of sales and services) increased
$97 million (29%) to $430 million from 1996 to 1997 after increasing $48 million
(17%) to $333 million from 1995 to 1996. The improvement in 1997 primarily
reflects the additional gross margin contributed by the operations of Eden,
Edes, Sul, Los Mina, Altai, Tisza and Lal Pir, and improved operations at San
Nicolas and Thames. The improvement in 1996 primarily reflects the additional
gross margin contributed by the operations of Tisza and Ekibastuz, improved
operations at San Nicolas and Thames and higher electricity prices under the
Deepwater sales contract due to higher natural gas prices. Gross margin as a
percentage of total revenues (net of the provision to reduce contract
receivables) decreased from 37% in 1996 to 29% in 1997, primarily due to lower
relative gross margin percentages of recently acquired businesses including
Tisza, Ekibastuz, Eden, Edes, Los Mina, Sul and Altai, offset in part, by an
improved gross margin percentage at San Nicolas. Gross margin as a percentage of
total revenues (net of the provision to reduce contract receivables) decreased
from 42% in 1995 to 37% in 1996, primarily due to lower relative gross margin
percentages at Tisza and Ekibastuz, offset in part, by an improved gross margin
percentage at Deepwater.
The Company's operations are located in several different geographical
areas. Seasonal variations or unusual weather conditions in certain regions,
including in particular, Argentina and Brazil, or the specific needs of
individual power plants to perform routine or unanticipated maintenance that may
require an outage, could significantly affect comparable quarterly financial
results. In addition, some power sales contracts permit the customer to dispatch
the related plant (i.e., direct the plant to deliver a reduced amount of
electrical output) within certain specified parameters. Such dispatching,
however, does not have a material impact on the results of operations of the
related subsidiary because, even when dispatched, the plant's capacity payments
generally are not reduced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $10 million (29%) to $45 million from 1996 to
1997 after increasing less than $3 million (9%) to $35 million from 1995 to
1996. The 1997 increase is attributable to increases in administrative costs.
The 1996 increase is attributable to increases in administrative costs and
expenses associated with the development of new business opportunities. As a
percentage of total revenue, selling, general and administrative expenses
decreased to 3% in 1997, down from 4% in 1996 and 5% in 1995. The Company's
general and administrative costs do not necessarily vary with changes in
revenue.
OPERATING INCOME. Operating income improved $90 million (32%) to $368 million
from 1996 to 1997 after increasing $25 million (10%) to $278 million from 1995
to 1996. The increases result from the factors discussed in the preceding
paragraphs.
OTHER INCOME AND EXPENSE. Other income and expense, on a net basis, increased
$20 million (24%) to $105 million from 1996 to 1997 after decreasing $1 million
(1%) to $85 million from 1995 to 1996. Interest expense increased 69% in 1997
and increased 13% in 1996. The increase in 1997 reflects a full year of interest
expense associated with the senior subordinated notes issued in 1996, project
financing debt relating to the 1996 acquisitions, interest expense associated
with the senior subordinated notes and Tecons issued in 1997 and project
financing debt relating to the acquisitions in 1997, offset in part, by lower
interest expense resulting from declining balances related to other project
financing debt. The increase in 1996 reflects additional interest associated
with increased borrowings under the Revolver, the 10.25% Notes and project
financing debt associated with the acquisition of the Company's equity
investment in Light and additional project financing debt associated with the
acquisition of Tisza, offset, in part, by declining balances related to other
project financing debt.
Interest income increased 71% in 1997 and decreased 11% in 1996. The 1997
increase results primarily from higher cash balances as a result of the debt,
common stock and Tecons issued during the year, higher cash balances at Chigen
due to the issuance of the $180 million notes in December 1996, interest income
at Eden and Edes associated with the late payments on customer accounts and
interest on debt service reserves at Indian Queens and Coral Reef (Light). The
1996 decrease results primarily from lower invested funds at Chigen, offset, in
part, by interest income earned on receivables at Tisza.
Equity in earnings of affiliates (after income taxes) increased 200% in
1997 and 150% in 1996. The increase in 1997 results primarily from the
acquisition of a 13.06% equity interest in Cemig (of which approximately 3.6%
was sold to a partner in January 1998), and a full year of equity in earnings
from a 2.4% increase in the Company's ownership percentage (to an aggregate of
13.75%) of Light. The increase in 1996 results almost entirely from the
Company's acquisition of its original 11.35% interest in Light in June 1996,
offset slightly by a decrease in equity in earnings from NIGEN due to a planned
outage.
INCOME TAXES. The Company's effective tax rate was 40% for both 1997 and 1996 as
compared to 38% in 1995. The increase from 1995 to 1996 was due primarily to
non-U.S. withholding and income taxes.
EXTRAORDINARY ITEM. During 1997, the Company redeemed its $75 million 9.75%
Senior Subordinated Notes due 2000 resulting in an extraordinary loss of $3
million, net of taxes.
OUTLOOK
All over the world, electricity markets continue to be restructured and
there is a trend away from government-owned and government-regulated electricity
systems toward deregulated, competive market structures. Many countries have
rewritten their laws and regulations to allow foreign investment and private
ownership of electricity generation, transmission or distribution companies.
Some countries (for example the UK, Brazil and some of those of the former
Soviet Union, among others) have or are in the process of "privatizing" their
electricity systems by selling all or part of such to private investors. This
global trend of electricity market restructuring provides significant new
business opportunities for companies like AES.
Several states in the U.S. are also beginning to follow this trend. In
particular, some regulated public utilities have begun to sell or auction their
generation capacity. Substantially all of the transmission and distribution
services in the U.S. continue however to be regulated under a state and Federal
regulatory framework. In addition, many states have passed or are considering
new legislation that would permit utility customers to choose their electricity
supplier in a competitive electricity market (so-called "retail access" or
"customer choice" laws). While each state's plan differs in details, there are
certain consistent elements, including allowing customers to choose their
electricity suppliers by a certain date (the dates in the existing or proposed
legislation vary between 1998 and 2003), allowing utilities to recover "stranded
assets" (the remaining costs of uneconomic generating or regulatory assets) and
a reaffirmation of the validity of contracts like the Company's U.S. contracts.
In addition to the potential for state restructuring legislation, the
U.S. Congress has proposed new Federal legislation to encourage customer choice
and recovery of stranded assets. Federal legislation might be needed to avoid
the patchwork quilt effect of each state acting separately to pass restructuring
legislation (with the likely result of uneven market structures in neighboring
states). While it is uncertain whether or when Federal legislation dealing with
electricity restructuring might be passed, the Company believes that such
legislation would not likely have a negative effect on the Company's U.S.
business and may create opportunities.
There is also legislation currently before the U.S. Congress to repeal
part or all of the current provisions of the Public Utility Regulatory Policies
Act of 1978 ("PURPA") and of the Public Utility Holding Company Act of 1935
("PUHCA"). The Company believes that if such legislation is adopted, competition
in the U.S. for new generation capacity from vertically integrated utilities
would increase. However, independents like AES would also be free to acquire
retail utilities.
As consumers, regulators and suppliers continue the debate about how to
further decrease the regulatory aspects of providing electricity services, the
Company believes in and is encouraging the continued orderly transition to a
more competitive electricity market. Inherent in any significant transition to
competitive markets are risks associated with the competitiveness of existing
regulated enterprises, and as a result, their ability to perform under long-term
contracts such as the Company's electricity sale contracts. Although AES
strongly believes that its contracts will be honored, there can be no assurance
that each of its customers, in a restructured and competitive environment, will
be capable in all circumstances of fulfilling their financial and legal
obligations.
AES's investments and involvement in the development of new projects and
the acquisition of existing power plants and distribution companies in locations
outside the U.S. is increasing. The financing, development and operation of such
businesses may entail significant political and financial uncertainties and
other structuring issues (including uncertainties associated with the legal
environments, with first-time privatization efforts in the countries involved,
currency exchange rate fluctuations, currency repatriation restrictions,
currency inconvertibility, political instability, civil unrest, and in severe
cases possible expropriation). Although AES attempts to minimize these risks,
these issues have the potential to cause substantial delays or material
impairment to the value of the project being developed or business being
operated.
It is also possible that as more of the world's markets for electricity
move toward competition, an increasing proportion of the Company's revenues may
be dependent on prices determined in spot markets. In order to capture a portion
of the market share in competitive generation markets, AES is considering and
may elect to invest in and construct low-cost "merchant" plants (plants without
long-term electricity sale contracts) in those markets. Such an investment may
require the Company (as well as its competitors) to make larger equity
contributions (as a percentage of the total capital cost) than the more
"traditional" contract-based investments.
Because of the nature of AES's operations, its activities are subject to
stringent environmental regulation by relevant authorities at each location. If
environmental laws or regulations were to change in the future, there can be no
assurance that AES would be able to recover all or any increased costs from its
customers or that its business and financial condition would not be materially
and adversely affected. In addition, the Company or its subsidiaries and
affiliates may be required to make significant capital expenditures in
connection with environmental matters. AES is committed to operating its
businesses cleanly, safely and reliably and strives to comply with all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times has been in non-compliance, although no such instance has resulted in
revocation of any permit or license.
FINANCIAL POSITION AND CASH FLOWS
At December 31, 1997, AES had net negative consolidated working capital of
$14 million as compared to $120 million at the end of 1996. The decrease in
working capital is primarily due to an increase in the current portion of
project financing debt, accrued interest on debt issued in 1997, and accounts
payable of newly acquired companies, offset in part, by increases in cash and
cash equivalents, short-term investments, accounts receivable associated with
newly acquired companies and the Hazelwood asset classified as held for sale.
Property, plant and equipment, net of accumulated depreciation, was
$4,149 million at December 31, 1997, up from $2,220 million at the end of 1996.
The net increase of $1,929 million (87%) is primarily attributable to the
acquisitions during 1997 of Eden, Edes, Los Mina, Indian Queens, Sul and Altai,
the continuation of construction activities at Lal Pir, Pak Gen, Warrior Run,
Jiaozou and Barry, and the commencement of construction at Mt. Stuart and
Uruguaiana.
Other assets increased $2,670 million (297%) to $3,570 million primarily
due to the Company's purchase of, and undistributed earnings from a 13.06%
interest in Cemig, the purchase of a 50% interest in Kingston and a 50% interest
in Elsta, deposits to debt service reserves, payments for deferred financing
costs associated with debt issued during the year, payments associated with
projects in development, and the acquisition of electricity sales concessions
and contracts acquired through the purchase of Eden, Edes, Indian Queens, and
Sul.
Project financing debt, net of repayments, increased as a result of
additional borrowings associated with the acquisitions of Eden, Edes, Indian
Queens and Sul, and additional construction borrowings associated with Lal Pir,
Pak Gen, Warrior Run, Jiaozou, Barry, Mt. Stuart and Uruguaiana. A significant
portion of the Lal Pir and Pak Gen loans, associated with equipment purchases,
will be repaid in Japanese yen. The anticipated electricity prices under the
related power sales contracts (to be received beginning with commercial
operation of those plants) also includes a yen component designed to correlate
with the yen-based financing.
Other notes payable (non-current) increased $646 million (144%) to $1,096
million as a result of the issuances of senior subordinated debt, offset in part
by the redemption of the Company's $75 million 9.75% Notes.
OPERATING ACTIVITIES. Cash flows provided by operating activities totaled $193
million during 1997 as compared to $195 million during 1996 and $200 million
during 1995. The decrease in 1997 was primarily due to a larger portion of net
income being derived from undistributed earnings from affiliates and increased
net working capital (excluding project financing debt) necessary to support
retail electricity sales. The moderate change in 1996 was primarily due to
undistributed earnings from affiliates and larger cash payments for income
taxes. These factors offset a significant increase in net income before
depreciation as compared with 1995. The increase in 1995 was primarily due to
increased pre-tax income. Unrestricted net cash flow to the parent company after
cash paid for general and administrative costs, and project development expenses
but before investments and debt service amounted to approximately $259 million,
$165 million and $116 million for the years ended December 31, 1997, 1996 and
1995, respectively.
INVESTING ACTIVITIES. Net cash used in investing activities totaled $3,799
million during 1997 as compared to $1,135 million during 1996 and $343 million
during 1995. The 1997 amount primarily reflects construction activity at Barry,
Lal Pir, Pak Gen, Warrior Run, and Mt. Stuart; an additional purchase of Light
shares (2.4%); acquisition of a 60% interest in each of Eden and Edes; the
acquisition of a 13.06% interest in Cemig; acquiring Destec's international
assets; the acquisition of 90% of Sul; acquisition of an 85% interest in Altai;
and the funding of debt service reserves related to Chigen. The 1996 amount
primarily reflects the acquisitions of San Juan, Tisza and Ekibastuz, the Light
investment; construction progress at Lal Pir, Pak Gen, Warrior Run and Barry;
Chigen's investments in various projects; reimbursable payments for contracts
related to a project in development; and the funding of debt service reserves
for the project financing of the Light investment. The 1995 amount primarily
reflects the Company's investments in the outstanding debt of Deepwater,
additional ownership in San Nicolas, the acquisition of Rio Juramento, and
construction efforts at Lal Pir, Pak Gen and Warrior Run, and Chigen's
investments in the Wuxi and Yangchun Fuyang projects.
FINANCING ACTIVITIES. Net cash provided by financing activities aggregated
$3,723 million during 1997 as compared to $886 million during 1996 and $127
million during 1995. The 1997 increase was primarily due to the issuance of
project financing debt drawn under construction financing commitments or
associated with acquisition financings; the issuance of senior subordinated
notes; the issuance of Tecons and common stock; and contributions from minority
partners. These financing inflows were offset by project financing debt
amortization payments and refinancing and repayments under the Company's
revolving line of credit. The significant cash financing inflows in 1996 were
caused by construction loan draws for Lal Pir, Pak Gen and Warrior Run; project
acquisition financing of the Light investment; issuance of $250 million of
10.25% Notes; initial project financing at San Nicolas; and net borrowings under
the Company's revolving line of credit. Significant cash financing outflows were
due to scheduled debt amortization of the project financings. During 1995 the
Company drew on its project financing loan commitments associated with the
construction of Lal Pir and Warrior Run and borrowed under its revolving credit
facility. Repayments of project finance loans during the year were made in
accordance with amortization schedules.
CAPITAL RESOURCES AND LIQUIDITY
AES's business is capital intensive and requires significant
investments to develop or acquire new operations. Occasionally, AES will also
seek to refinance certain outstanding project financing loans or other notes
payable. Continued access to capital on competitive and acceptable terms is
therefore a significant factor in the Company's ability to further expand. AES
has primarily utilized project financing loans to fund the capital expenditures
associated with investment in constructing and acquiring its electric power
plants, distribution companies and related assets. Project financing borrowings
are substantially non-recourse to other subsidiaries and affiliates and to AES
as the parent company and are generally secured by the capital stock, physical
assets, contracts and cash flow of the related subsidiary or affiliate. The
Company intends to continue to seek, where possible, such non-recourse project
financing in connection with the assets which the Company or its affiliates may
develop, construct or acquire. However, depending on market conditions and the
unique characteristics of individual businesses, the Company's traditional
providers of project financing, particularly multinational commercial banks, may
seek higher borrowing spreads and increased equity contributions.
Furthermore, because of the reluctance of commercial lending institutions
to provide non-recourse project financing (including financial guarantees) for
businesses in certain less developed economies, the Company, in such locations,
has and will continue to seek direct or indirect (through credit support or
guarantees) project financing from a limited number of government sponsored,
multilateral or bilateral international financial institutions or agencies. As a
precondition to making such project financing available, these institutions may
also require governmental guarantees of certain project and sovereign related
risks. Depending on the policies of specific governments, such guarantees may
not be offered and as a result, AES may determine that sufficient financing will
ultimately not be available to fund the related business, and may cease
development or acquisition of such business.
In addition to the project financing loans, if available, AES as the
parent company provides a portion, or in certain instances all, of the remaining
long-term financing required to fund development, construction or acquisition.
These investments have generally taken the form of equity investments or loans,
which are subordinated to the project financing loans. The funds for these
investments have been provided by cash flows from operations and by the proceeds
from issuances of debt, common stock and other securities issued by the Company.
Interim needs for shorter-term and working capital financing at the
parent company have been met with borrowings under AES's Revolver. Over the past
several years, the Company has continued to increase the amount of available
financing under the Revolver. In the fourth quarter of 1997, AES increased the
amount committed under the Revolver to $600 million. Under the terms of the
Revolver, the Company will be required to reduce its direct borrowings to $225
million for 30 consecutive days during each twelve month period. The Revolver
also includes financial covenants related to net worth, cash flow, investments,
financial leverage and certain other obligations and limitations on cash
dividends. At December 31, 1997, cash borrowings and letters of credit
outstanding under the Revolver amounted to $27 million and $180 million,
respectively, compared with $213 million and $123 million in 1996. The Company
may also from time to time seek to meet some of its short-term and interim
funding needs with additional commitments from banks and other financial
institutions at the parent or subsidiary level.
The ability of AES's subsidiaries and affiliates to declare and to pay
dividends to AES is restricted under the terms of existing project financing
debt agreements. See Note 5 to the consolidated financial statements for
additional information. In connection with its project financings and related
contracts, AES has expressly undertaken certain limited obligations and
contingent liabilities, most of which will only be effective or will be
terminated upon the occurrence of future events. AES's obligations and
contingent liabilities in certain cases take the form of, or are supported by,
letters of credit. These obligations and contingent liabilities, excluding
future commitments to invest and those collateralized with letter of credit
obligations under the Revolver, were limited by their terms as of December 31,
1997 to an aggregate of approximately $149 million. The Company is obligated
under other contingent liabilities which are limited to amounts, or percentages
of amounts, received by AES as distributions from its project subsidiaries.
These contingent liabilities aggregated $33 million as of December 31, 1997. In
addition, AES has expressly undertaken certain other contingent obligations
which the Company does not expect to have a material adverse effect on its
results of operations or financial position, but which by their terms are not
capped at a dollar amount. Because each of the Company's businesses are distinct
entities and geographically diverse and because the obligations related to a
single business are based on contingencies of varying types, the Company
believes it is unlikely that it will be called upon to perform under several of
such obligations at any one time.
At December 31, 1997, the Company had future commitments to fund
investments in its projects under construction and in development of $114
million. Of this amount, letters of credit in the amount of $42 million under
the Revolver have been issued to support a portion of these obligations. In
addition, certain of the Company's subsidiaries have obligations to fund equity
and loans in their projects. At December 31, 1997 such commitments to invest
amount to approximately $129 million. These future capital commitments are
expected to be funded by internally-generated cash flows and by external
financings as may be necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company attempts, whenever possible, to hedge certain aspects of its
projects against the effects of fluctuations in inflation, interest rates,
exchange rates and energy prices. Because of the complexity of hedging
strategies and the diverse nature of AES's operations, its portfolio's results,
although significantly hedged, will likely be somewhat affected by fluctuations
in these variables and such fluctuations may result in improvement or
deterioration of operating results. Results of operations would generally
improve with higher oil and natural gas prices and with lower interest rates.
Operating results are also sensitive to the difference between inflation and
interest rates, and would generally improve when increases in inflation are
higher than increases in interest rates.
AES has generally structured the energy payments in its power sales
contracts to adjust with similar price indices as do its contracts with the fuel
suppliers for the corresponding power plants. In some cases a portion of
revenues is associated with operations and maintenance costs, and as such is
usually indexed to adjust with inflation.
AES primarily consists of businesses with long-term contracts or retail
sales concessions. While this contract-based portfolio is expected to be an
effective hedge against future energy and electricity market price risks, it is
worth noting that a portion of AES's current and expected future revenues
(particularly those related to certain portions of businesses in Kazakhstan, the
UK, Argentina, Hungary and beginning in 1998, Texas) are derived from businesses
without significant long-term revenue contracts. In some of these businesses,
AES has taken additional steps to improve their predictability, in the Company's
opinion, by using other contractual hedging provisions such as entering into
fuel supply contracts that absorb a significant portion of the variability in
electricity sales prices. Despite these mitigating factors, increasing reliance
on non-contract ("merchant") businesses in AES's portfolio does subject the
Company to potentially increasing electricity market price risk.
The hedging approaches and methodologies utilized by the Company are
implemented through contractual provisions with fuel suppliers, international
financial institutions and several of the Company's customers. As a result,
their effectiveness is dependent, in part, on each counterparty's ability to
perform in accordance with the provisions of the relevant contract. The Company
has sought to reduce this credit risk in part by entering into contracts, where
possible, with creditworthy organizations. In certain instances, where the
Company determines that additional credit support is necessary, AES will seek to
execute (either concurrently or subsequently) standby, guarantee or option
agreements with creditworthy third parties. In particular, AES has executed and
is the beneficiary of fuel purchase option agreements, corporate and
governmental guarantees to support the obligations of local fuel suppliers in
several locations and sovereign governmental guarantees supporting the
electricity purchase obligation of government-owned power authorities, such as
in the Dominican Republic and Pakistan.
AES has also used a hedging strategy in an attempt to insulate each
plant's financial performance, where appropriate, against the risk of
fluctuations in interest rates. Depending on whether capacity payments are fixed
or vary with inflation, the Company generally attempts to hedge against interest
rate fluctuations by arranging fixed-rate or variable rate financing,
respectively. In certain cases, the Company executes interest rate swap and
interest rate cap agreements to effectively fix or limit the interest rate on
the underlying variable rate financing. At December 31, 1997 the Company and its
subsidiaries had approximately $2.1 billion of fixed rate debt obligations. In
addition the Company had entered into interest rate swap agreements and forward
interest rate swap agreements aggregating approximately $1 billion at December
31, 1997 which the Company used to hedge its interest rate exposure on variable
rate debt.
Through its equity investments in foreign subsidiaries and affiliates,
AES operates in jurisdictions dealing in currencies other than the Company's
consolidated reporting currency, the U.S. dollar. Such investments and advances
were made to fund capital investment or acquisition requirements, to provide
working capital, or to provide collateral for contingent obligations. Due
primarily to the long-term nature of certain investments and advances, the
Company accounts for any adjustments resulting from translation 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 differences may be
recognized in the statement of operations as gains or losses. See the discussion
under the heading Results of Operations.
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. Whenever possible, these subsidiaries have attempted to limit
potential foreign exchange exposure by entering into revenue contracts which
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. At December 31,
1997 the Company and its subsidiaries had approximately $450 million in
outstanding debt that was denominated in currencies other than the U.S. dollar.
The table below provides information about the Company's financial
instruments and derivative financial instruments that are sensitive to changes
in interest rates, in particular debt obligations, Tecons, and interest rate
swaps. AES does not trade in these financial instruments and derivatives and
therefore has classified them as other than trading. For debt obligations and
Tecons the table presents principal cash flows and related weighted average
interest rates by expected maturity dates over the next five years and
thereafter. For interest rate swaps, the table presents aggregate contractual
notional amounts and weighted average interest rates over the next five years.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average variable rates are based on implied forward
rates in the yield curve at December 31, 1997. The information is presented in
U.S. dollar equivalents, which is the Company's reporting currency. The
instruments' actual cash flows are denominated in U.S. dollars (USD), Japanese
yen (JPY), Australian dollars (AUD), Chinese renminbi yuan (CHY) and UK pounds
sterling (GBP) as indicated in parentheses as of December 31, 1997.
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS THERE- FAIR
By expected maturity date 1998 1999 2000 2001 2002 AFTER TOTAL VALUE
- -----------------------------------------------------------------------------------------------------------------
Liabilities (USD Equivalents in millions)
Long-term Debt:
Fixed rate (USD) 42 31 41 51 24 1,888 2,077 2,111
Average interest rate 10.72% 11.17% 10.83% 10.45% 10.94% 9.29%
Variable rate (USD) 540 986 200 158 163 469 2,516 2,516
Average interest rate 8.39% 7.73% 7.85% 7.93% 7.92% 7.46%
Fixed rate (JPY) 3 6 6 6 6 27 54 51
Average interest rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Variable rate (JPY) 3 25 25 25 25 110 213 213
Average interest rate 3.51% 3.93% 4.08% 4.31% 4.50% 5.22%
Variable rate (GBP) 0 4 8 8 12 144 176 176
Average interest rate -- 8.75% 8.64% 8.58% 8.47% 8.25%
Fixed rate (AUD) 0 0 0 0 0 5 5 2
Average interest rate -- -- -- -- -- 7.65% --
Fixed rate (CHY) 2 0 0 0 0 0 2 2
Average interest rate 11.09% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
TOTAL 590 1,052 280 248 230 2,643 5,043 5,071
TECONS
Fixed rate (USD) 0 0 0 0 0 550 550 661
Average interest rate -- -- -- -- -- 5.44%
- -----------------------------------------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS FAIR
By aggregate notional amounts outstanding 1997 1998 1999 2000 2001 2002 VALUE
- -----------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAPS (USD Equivalents in millions)
Variable to fixed (USD) 645 746 487 459 415 368 79
Average pay rate 8.81% 8.38% 8.30% 8.31% 8.30% 8.32%
Average receive rate 5.84% 5.84% 6.00% 6.02% 6.04% 6.06%
Variable to fixed (GPB) 142 0 0 0 0 0 0
Average pay rate 6.90% -- -- -- -- --
Average receive rate 7.69% -- -- -- -- --
Variable to fixed (AUD) 0 58 55 51 38 34 2
Average pay rate -- 7.38% 7.38% 7.38% 7.38% 7.38%
Average receive rate -- 5.38% 5.79% 6.10% 6.22% 6.31%
- -----------------------------------------------------------------------------------------------------------------
Total 787 804 542 510 453 402 81
The table below also provides information about the Company's financial
instruments by functional currency and presents such information in U.S. dollar
equivalents. The table summarizes information on instruments that are sensitive
to foreign currency exchange rates. These instruments are debt obligations of
the Company's subsidiaries which are denominated in currencies other than that
subsidiary's functional currency. AES does not trade in these financial
instruments and therefore has classified them as other than trading. Such
functional currencies include the Argentine peso (ARS), the Pakistan rupee
(PKR), the Japanese yen (JPY), the Chinese renminbi yuan (CHY) and the U.S.
dollar (USD). For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates for the next
five years and thereafter.
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS THERE-
By expected maturity date 1998 1999 2000 2001 2002 AFTER TOTAL
- -----------------------------------------------------------------------------------------------------------------
Liabilities (USD Equivalents in millions)
Long-term Debt:
ARS Functional Currency:
Fixed Rate (USD) 29 17 17 4 0 0 67
Average interest rate 9.65% 10.88% 10.72% 10.88% -- --
Variable Rate (USD) 2 2 3 2 0 0 9
Average interest rate 10.64% 10.80% 10.82% 10.84% -- --
PKR Functional Currency:
Fixed rate (USD) 2 8 8 8 8 44 78
Average interest rate 9.03% 9.03% 9.03% 9.03% 9.03% 9.31%
Variable rate (USD) 3 7 7 7 7 25 56
Average interest rate 8.70% 8.86% 8.89% 8.92% 8.95% 9.17%
Fixed rate (JPY) 3 6 6 6 6 27 54
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Variable rate (JPY) 3 25 25 25 25 110 213
Average interest rate 3.51% 3.93% 4.08% 4.31% 4.50% 5.22%
USD Functional Currency:
Fixed rate (CHY) 2 0 0 0 0 0 2
Average interest rate 11.09% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total 44 65 66 52 46 206 479
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of The AES Corporation:
We have audited the accompanying consolidated balance sheets of The AES
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedules listed in the index on page S-1. These consolidated
financial statements and financial statement schedules are the responsibility of
The AES Corporation's management. Our responsibility is to express an opinion on
the consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The AES Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Washington, DC
January 28, 1998, except for Note 16, as to which date is February 10, 1998
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
REVENUES:
Sales $1,361 $ 824 $ 672
Services 50 11 7
- --------------------------------------------------------------------------------------------------------
Total revenues 1,411 835 679
OPERATING COSTS AND EXPENSES:
Cost of sales 940 495 388
Cost of services 41 7 6
Selling, general and administrative expenses 45 35 32
Provision to reduce contract receivables 17 20 --
- --------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,043 557 426
- --------------------------------------------------------------------------------------------------------
OPERATING INCOME 368 278 253
OTHER INCOME AND (EXPENSE):
Interest expense (244) (144) (127)
Interest income 41 24 27
Foreign currency exchange loss (7) -- --
Equity in earnings of affiliates (net of income taxes) 105 35 14
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST, AND EXTRAORDINARY ITEM 263 193 167
INCOME TAXES 56 60 57
MINORITY INTEREST 19 8 3
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 188 125 107
Extraordinary item-net loss on extinguishment of
debt (less applicable income taxes of $2) (3) -- --
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 185 $ 125 $ 107
- --------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 1.13 $ 0.83 $ 0.71
EXTRAORDINARY ITEM (0.02) -- --
- --------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.11 $ 0.83 $ 0.71
- --------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 1.11 $ 0.80 $ 0.70
EXTRAORDINARY ITEM (0.02) -- --
- --------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.09 $ 0.80 $ 0.70
- --------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in millions)
- --------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 302 $ 185
Short-term investments 127 20
Accounts receivable, net 323 95
Inventory 95 81
Asset held for sale 139 --
Receivable from affiliates 23 9
Deferred income taxes 47 65
Prepaid expenses and other current assets 134 47
- --------------------------------------------------------------------------------------
Total current assets 1,190 502
PROPERTY, PLANT AND EQUIPMENT:
Land 29 30
Electric generation and distribution assets 3,809 1,898
Accumulated depreciation and amortization (373) (282)
Construction in progress 684 574
- --------------------------------------------------------------------------------------
Property, plant and equipment, net 4,149 2,220
OTHER ASSETS:
Deferred financing costs, net 122 47
Project development costs 87 53
Investments in and advances to affiliates 1,863 491
Debt service reserves and other deposits 236 175
Electricity sales concessions and contracts 1,179 30
Goodwill 23 22
Other assets 60 82
- --------------------------------------------------------------------------------------
Total other assets 3,570 900
- --------------------------------------------------------------------------------------
TOTAL $ 8,909 $ 3,622
- --------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in millions, except par values)
- --------------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 205 $ 64
Accrued interest 68 25
Accrued and other liabilities 335 95
Other notes payable - current portion -- 88
Project financing debt - current portion 596 110
- --------------------------------------------------------------------------------------
Total current liabilities 1,204 382
LONG-TERM LIABILITIES:
Project financing debt 3,489 1,558
Other notes payable 1,096 450
Deferred income taxes 273 243
Other long-term liabilities 291 55
- --------------------------------------------------------------------------------------
Total long-term liabilities 5,149 2,306
MINORITY INTEREST 525 213
COMMITMENTS AND CONTINGENCIES -- --
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES 550 --
STOCKHOLDERS' EQUITY:
Preferred stock (no par value; 2 million shares
authorized; none issued) -- --
Common stock ($.01 par value; 500 million
shares authorized; shares issued and outstanding:
1997 - 175.0 million; 1996 - 154.8 million) 2 2
Additional paid-in capital 1,030 359
Retained earnings 581 396
Cumulative foreign currency translation adjustment (131) (33)
Less treasury stock at cost (1997 - .2 million shares;
1996 - .6 million shares) (1) (3)
- --------------------------------------------------------------------------------------
Total stockholders' equity 1,481 721
- --------------------------------------------------------------------------------------
TOTAL $ 8,909 $ 3,622
======================================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
For the Years Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $185 $125 $107
Adjustments to net income:
Depreciation and amortization 114 65 55
Deferred taxes 20 26 48
Undistributed earnings of affiliates (57) (20) 3
Other 22 6 4
Changes in consolidated working capital (91) (7) (17)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 193 195 200
INVESTING ACTIVITIES:
Property additions (511) (506) (171)
Acquisitions, net of cash acquired (2,454) (148) (121)
Sale of short-term investments 77 103 254
Purchase of short-term investments (184) (66) (218)
Affiliate advances and equity investments (649) (430) (10)
Project development costs (34) (16) (22)
Debt service reserves and other assets (44) (72) (55)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,799) (1,135) (343)
FINANCING ACTIVITIES:
Borrowings (repayments) under the revolver (186) 163 50
Issuance of project financing debt
and other coupon bearing securities 3,926 802 133
Repayments of project financing debt
and other coupon bearing securities (749) (75) (63)
Payments for deferred financing costs (34) (13) (3)
Other liabilities (6) (3) 8
Contributions by minority interests 269 10 7
Sale (repurchase) of common stock 503 2 (5)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,723 886 127
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 117 (54) (16)
CASH AND CASH EQUIVALENTS, BEGINNING 185 239 255
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ENDING $302 $185 $239
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest $201 $134 $120
Cash payments for income taxes, net of refunds 31 32 6
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Deferred purchase price of Cemig shares $528 $ -- $ --
Common stock issued for amalgamation of AES Chigen 157 -- --
Conversion of subordinated debentures to common stock -- 50 --
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The AES Corporation and its subsidiaries and affiliates, (collectively
"AES" or the "Company") is a global power company primarily engaged in owning
and operating electric power generation and distribution businesses in many
countries around the world.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of
the Company include the accounts of AES, its subsidiaries and controlled
affiliates. 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. The accounts of AES China Generating Co.
Ltd. ("Chigen") are consolidated based on its fiscal year ended November 30.
Intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS -- The Company considers cash on hand, deposits
in banks, certificates of deposit and short-term marketable securities with an
original maturity of three months or less as cash and cash equivalents.
INVESTMENTS -- Securities that the Company has both the positive intent
and ability to hold to maturity are classified as held- to-maturity and are
carried at historical cost. Other investments that the Company does not intend
to hold to maturity are classified as available-for-sale, and any significant
unrealized gains or losses are recorded as a separate component of stockholders'
equity. Interest and dividends on investments are reported in interest income.
Gains and losses on sales of investments are recorded using the specific
identification method. Short-term investments consist of investments with
original maturities in excess of three months but less than one year. Debt
service reserves and other deposits, which might otherwise be considered cash
and cash equivalents, are treated as noncurrent assets (see Note 3).
INVENTORY -- Inventory, valued at the lower of cost or market (first in,
first out method), consists of coal, raw materials, spare parts, and supplies.
Inventory consists of the following (in millions):
- --------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------
Coal and other raw materials $58 $57
Spare parts, materials and supplies 37 24
- --------------------------------------------------------------------------------
TOTAL $95 $81
================================================================================
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, including
improvements, is stated at cost. Depreciation, after consideration of salvage
value, is computed using the straight-line method over the estimated composite
lives of the assets, which range from 3 to 40 years. Maintenance and repairs are
charged to expense as incurred. Emergency and rotable spare parts inventories
are included in electric generation and distribution assets and are depreciated
over the useful life of the related components.
INTANGIBLE ASSETS -- Goodwill and electricity sales concessions and
contracts are amortized on a straight-line basis over their estimated periods of
benefit, which range from 16 to 40 years. Intangible assets at December 31, 1997
and 1996 are shown net of accumulated amortization of $13 million and $3
million, respectively. The Company reviews its goodwill and electricity sales
concessions and contracts for impairment whenever events or changes in
circumstances indicate that the carrying amount of such asset may not be
recoverable.
CONSTRUCTION IN PROGRESS -- Construction progress payments, engineering
costs, insurance costs, wages, interest and other costs relating to construction
in progress are capitalized. Construction in progress balances are transferred
to electric generation and distribution assets when the assets are ready for
their intended use. Interest capitalized during development and construction
totaled $67 million, $27 million and $8 million in 1997, 1996 and 1995,
respectively.
DEFERRED FINANCING COSTS -- Financing costs are deferred and amortized
using the straight-line method over the related financing period, which does not
differ materially from the effective interest method of amortization. Deferred
financing costs are shown net of accumulated amortization of $52 million and $36
million as of December 31, 1997 and 1996, respectively.
PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of
developing new projects. These costs represent amounts incurred for professional
services, salaries, permits, options, capitalized interest and other related
direct costs. These costs are included in investments in affiliates or property
when financing is obtained, or expensed at the time the Company determines that
a particular project will no longer be developed. The continued capitalization
is subject to on-going risks related to successful completion, including those
related to political, siting, financing, construction, permitting and contract
compliance. Certain reimbursable costs related to one of the projects have been
classified as other assets.
FOREIGN CURRENCY TRANSLATION -- Foreign subsidiaries and affiliates
translate their assets and liabilities into U.S. dollars at the current exchange
rates in effect at the end of the fiscal period. The gains or losses that result
from this process, and gains and losses on
intercompany transactions which are long-term in nature, and which the Company
does not intend to repatriate, are shown in the cumulative foreign currency
translation adjustment balance in the stockholders' equity section of the
balance sheet. For subsidiaries operating in highly inflationary countries, the
U.S. dollar is considered to be the functional currency, and transaction gains
and losses are included in determining net income. Gains and losses that arise
from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency, except those that are hedged, are included in
determining net income. The revenue and expense accounts of foreign subsidiaries
and affiliates are translated into U.S. dollars at the average exchange rates
that prevailed during the period.
REVENUE RECOGNITION AND CONCENTRATION -- Revenues from the sale of
electricity and steam are recorded based upon output delivered and capacity
provided at rates as specified under contract terms. Electricity distribution
revenues are recognized when billed. Most of the Company's power plants rely
primarily on one power sales contract with a single customer for the majority of
revenues. Three customers accounted for 14%, 12%, and 10% of revenues in 1997,
five customers accounted for 20%, 16%, 16%, 11% and 10% of revenues in 1996, and
four customers accounted for 24%, 18%, 18% and 13% of revenues in 1995. The
prolonged failure of any of these customers to fulfill contractual obligations
could have a substantial negative impact on AES's revenues and profits. However,
the Company does not anticipate non-performance by the customers under these
contracts.
HEDGING ARRANGEMENTS -- The Company enters into various derivative
transactions in order to hedge its exposure to certain market risks. The Company
currently has outstanding interest rate swap and cap agreements which hedge
against interest rate exposure on floating rate project financing debt. The
transactions, which are classified as other than trading are accounted for as a
hedge, and interest is expensed or capitalized, as appropriate, using effective
interest rates. Any fees or swap payments are amortized as yield adjustments.
NET INCOME PER SHARE -- During 1997, the company adopted Statement of
Financial Accounting Standard (SFAS) No. 128, Earnings Per Share and computed
basic and diluted net income per share 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 (see Note 9). Potential common stock, for
purposes of determining diluted earnings per share, includes the effects of
dilutive 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, as applicable.
Comparative earnings per share data have been restated for prior periods.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior
period amounts to conform with the 1997 presentation.
2. ACQUISITIONS
In January 1997, the Company acquired an additional 2.4% interest in
Light-Servicos de Electricidade S.A. ("Light"), a publicly-held Brazilian
corporation that operates as the concessionaire of an integrated electric power
generation, transmission and distribution system which serves Rio de Janeiro,
Brazil. In June 1996, AES and three other partners participated in a consortium
which acquired a 50.44% controlling interest. The additional investment in 1997
of approximately $82 million, increased AES's holdings in Light to 13.75%. The
Company has the ability to exercise significant influence over the operation of
Light and records the investment using the equity method.
In May 1997, AES completed its amalgamation with Chigen. As a result of
the amalgamation, the Company issued approximately 5 million shares of AES
Common Stock in exchange for all of the outstanding Chigen Class A Common Stock.
A portion of the transaction cost of approximately $29 million represents values
assigned to power purchase contracts which are being amortized over the life of
the related power purchase contracts, which range from 16 to 25 years.
Also in May 1997, a subsidiary of the Company acquired 60% of two
electric distribution companies sold as part of the Argentine government
privatization program. The companies purchased were Empresa Distribudora
Electrica Norte (Eden), which serves the northern part of the Buenos Aires
province, and Empresa Distribudora Electrica Sur (Edes), which serves the
southern part of the province. The Company, together with its partner, invested
approximately $565 million to acquire a 90% ownership in each company. A portion
of the acquisition costs, approximately $204 million, represents the value of
the 95 year electricity sales concessions granted to Eden and Edes, and is being
amortized over 40 years.
In June 1997, AES, through a consortium, acquired, for approximately $1
billion, a 14.41% interest (of which AES's direct ownership during 1997 was
13.06%) in Companhia Energetica de Minas Gerais ("Cemig"), an integrated
electric utility serving the State of Minas Gerais in Brazil. Cemig owns
approximately 5,000 MW of generating capacity and serves approximately 4 million
customers. This investment also represents approximately 33% of the voting
interest in Cemig. The Company has the ability to exercise significant influence
over the operation of Cemig and records the investment using the equity method.
In June 1997, AES acquired the international assets of Destec Energy,
Inc. for approximately $439 million. The purchase included five electric
generating plants in construction or operation and a number of power projects in
development. The plants acquired by AES (with ownership percentages in
parenthesis) include a 110 MW gas-fired combined cycle plant in Kingston, Canada
("Kingston") (50%); a 405 MW gas-fired combined cycle plant under construction
in Terneuzen, Netherlands ("Elsta") (50%); a 140 MW gas-fired simple cycle plant
in Cornwall, England ("Indian Queens") (100%); a 235 MW oil-fired simple cycle
plant in Santo Domingo, Dominican Republic ("Los Mina") (100%); and a 1600 MW
coal-fired plant in Victoria, Australia ("Hazelwood") (20%). A portion of the
acquisition cost, approximately $172 million, represents the value of various
contracts which are being amortized over the respective lives of 20 years, and a
$67 million liability related to the completion of construction at Elsta.
The Hazelwood investment was classified as held for sale at December 31,
1997, and subsequently sold in February 1998. The Company recognized a foreign
currency transaction loss of $5 million in 1997.
In October 1997, a subsidiary of the Company acquired an 85% interest in
two hydro-electric stations (GES) and four combined heat and power stations
(TETS) in East Kazakhstan ("Altai"). Altai has a total electric capacity of
1,384 MW with an additional equivalent thermal capacity of approximately 1,000
MW. The purchase price was approximately $24 million for the 20 year GES
concession and the TETS shares.
Also in October 1997, AES acquired 90% of Companhia Centro-Oeste de
Distribuicao de Energia Electrica, ("Sul") an electric distribution company in
the state of Rio Grande do Sul, Brazil. The purchase price for this acquisition
was approximately $1.4 billion. A portion of the acquisition cost, approximately
$884 million, represents the value of the electricity sales concession granted
to Sul, which is being amortized over the 30 year period of the concession. Sul
is in the process of finalizing its severance plan, and has recorded a $34
million liability for severance costs at December 31, 1997.
In March 1996, a subsidiary of the Company acquired a 98% interest in
Hidrotermica San Juan, S.A., ("San Juan"), which is the owner and operator of a
78 MW power generation facility in the province of San Juan, Argentina. The
facility, which sells electricity into the Argentine spot market, includes a 45
MW hydroelectric power plant and a 33 MW gas combustion plant. As a result of
this acquisition, the Company acquired a hydroelectric concession valued at $17
million which is being amortized over the life of the concession of 30 years.
During 1996, the Company, through a subsidiary, acquired a controlling
interest in three power plants totaling 1,281 MW and a coal mine through the
purchase of a 94% share of Tisza Eromu Rt. ("Tisza"), an electricity generation
company in Hungary, for a total purchase price of $127 million.
In August 1996, a subsidiary of the Company acquired a majority
controlling interest in a 4,000 MW coal-fired facility in Kazakhstan
("Ekibastuz"), for approximately $3 million. Beginning in August 1996 and
continuing through 1997, AES has recorded a provision of $28 million associated
with aggregate outstanding receivables (excluding VAT) of $54 million at
December 31, 1997 related to the operations of Ekibastuz. Approximately $35
million of the aggregate balance (excluding VAT), before considering the
provision, is due from a government-owned distribution company. There can be no
assurance of the ultimate collectibility of these amounts owed to Ekibastuz, or
as a result, the recoverability of the related net assets (totaling $57 million
at December 31, 1997) or additional amounts the Company may invest.
These acquisitions were accounted for as purchases. The purchase price
allocations for Eden, Edes, Cemig, Los Mina, Indian Queens, Elsta, Kingston,
Altai and Sul have been completed on a preliminary basis, subject to adjustments
resulting from new or additional facts that may come to light when the
engineering, environmental, and legal analyses are completed during the
respective allocation periods. The accompanying financial statements include the
operating results of Eden and Edes from May 1997, equity in earnings of Cemig
from June 1997, the operating results of Los Mina and Indian Queens from June
1997, equity in earnings of Kingston from June 1997, the operating results of
Sul and Altai from October 1997, the operating results of Tisza and Ekibastuz
from August 1996, and equity in earnings of Light from June 1996. The following
table presents supplemental unaudited proforma operating results as if all of
the acquisitions had occurred at the beginning of 1996 (in millions, except per
share amounts):
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996
- --------------------------------------------------------------------------------
Revenues $ 1,918 $2,195
Net income before extraordinary item 136 50
Net income after extraordinary item 133 50
Basic earnings per share $ 0.76 $ 0.29
Diluted earnings per share $ 0.75 $ 0.28
- --------------------------------------------------------------------------------
The proforma results are based upon assumptions and estimates which the Company
believes are reasonable. The proforma results do not purport to be indicative of
the results that actually would have been obtained had the acquisitions occurred
on January 1, 1996, nor are they intended to be a projection of future results.
3. INVESTMENTS
At December 31, 1997 and 1996, the Company's investments were classified as
either held-to-maturity or available-for-sale. The amortized cost and estimated
fair value of the investments at December 31, 1997 and 1996 classified as
held-to-maturity and available-for-sale were approximately the same.
The short-term investments and debt service reserves and other deposits were
invested as follows (in millions):
- --------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------
RESTRICTED CASH AND CASH EQUIVALENTS(1) $ 130 $ 104
- --------------------------------------------------------------------------------
HELD-TO-MATURITY
U.S. treasury and government agency securities 37 1
Foreign certificates of deposit 95 --
Commercial paper 66 39
- --------------------------------------------------------------------------------
Subtotal 198 40
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. treasury and government agency securities 15 43
Certificates of deposit 2 3
Commercial paper 15 5
Floating rate notes 3 --
- --------------------------------------------------------------------------------
Subtotal 35 51
- --------------------------------------------------------------------------------
TOTAL $ 363 $ 195
================================================================================
(1) amounts required to be maintained in cash in accordance with certain
covenants of various project financing agreements.
Short-term investments classified as held-to-maturity and available-for-sale
were $111 and $16 million, respectively, at December 31, 1997 and $9 million and
$11 million, respectively at December 31, 1996.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The following table presents summarized financial information (in millions) for
equity method affiliates on a combined 100% basis. Amounts presented for 1997
include the accounts of NIGEN, Ltd. ("NIGEN") (47% owned UK affiliate), Medway
Power Ltd. ("Medway") (25% owned UK affiliate), Light (13.75% owned Brazilian
affiliate), Chigen's affiliates, Kingston (50% owned Canadian affiliate), Elsta
(50% owned Netherlands affiliate), and Cemig (13.06% owned Brazilian affiliate).
Amounts presented for 1996 include the accounts of NIGEN, Medway, Light, and
Chigen's affiliates, and amounts presented for 1995 include the accounts of
NIGEN and Medway.
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Sales $ 3,991 $ 1,959 $ 276
Operating income 984 497 86
Net income 670 383 49
Current assets 1,698 889 171
Noncurrent assets 14,800 4,914 949
Current liabilities 1,809 863 70
Noncurrent liabilities 4,752 2,108 973
Stockholders' equity 9,937 2,832 77
- --------------------------------------------------------------------------------
The Company's share of undistributed earnings of affiliates included in
consolidated retained earnings was $89 million and $33 million at December 31,
1997 and 1996, respectively. The Company charged and recognized construction
revenues, management fees and interest on advances to its affiliates which
aggregated $42 million, $9 million and $8 million for each of the years ended
December 31, 1997, 1996 and 1995, respectively.
5. DEBT
PROJECT FINANCING DEBT -- Project financing debt at December 31, 1997 and 1996
consisted of the following (in millions):
- ---------------------------------------------------------------------------------------
Interest Final
Rate(1) Maturity 1997 1996
- ---------------------------------------------------------------------------------------
SENIOR DEBT - VARIABLE RATE
Notes payable to banks 7.9% 2013 1,830 $ 230
Commercial paper (see below) 7.2% 2007 598 631
Debt to (or guaranteed by) multilateral
or export credit agencies 6.4% 2010 429 368
SENIOR DEBT - FIXED RATE
Notes payable to banks 10.0% 2009 623 84
Capital leases 8.1% 2016 143 105
Tax-exempt bonds 7.4% 2019 74 74
Chigen bonds 10.1% 2006 180 --
Debt to (or guaranteed by) multilateral
& export credit agencies 6.5% 2008 133 110
SUBORDINATED DEBT - VARIABLE AND FIXED RATE 13.0% 2010 75 66
- ---------------------------------------------------------------------------------------
SUBTOTAL 4,085 1,668
Less current maturities (596) (110)
- ---------------------------------------------------------------------------------------
TOTAL $3,489 $ 1,558
=======================================================================================
(1) weighted average interest rate at December 31, 1997
Project financing debt borrowings are primarily collateralized by the capital
stock of the relevant subsidiary and in certain cases, the physical assets of
and all significant agreements associated with such business.
The Company has interest rate swap and forward interest rate swap
agreements in an aggregate notional principal amount of $1,031 million at
December 31, 1997. The swap agreements effectively change the interest rate on
the portion of the debt covered by the notional amounts to a weighted average
fixed rate ranging from approximately 7.4% to 12.1%. The agreements expire at
various dates from 1999 through 2014. In the event of nonperformance by the
counterparties, the subsidiaries may be exposed to increased interest rates;
however, the Company does not anticipate nonperformance by the counterparties,
which are multinational financial institutions. At December 31, 1997,
subsidiaries of the Company have interest rate cap and forward interest rate cap
agreements at various rates with remaining terms ranging from two to six years
in an aggregate notional amount of $418 million.
Shady Point and Hawaii have issued commercial paper supported by
irrevocable letters of credit issued by multinational financial institutions. In
the event of nonperformance or credit deterioration of these institutions, the
Company may be exposed to the risk of higher effective interest rates. The
Company does not believe that such nonperformance or credit deterioration is
likely.
OTHER NOTES PAYABLE -- Other notes payable at December 31, 1997 and 1996
consisted of the following (in millions):
- ---------------------------------------------------------------------------------------------------
INTEREST FINAL FIRST CALL
RATE(1) MATURITY DATE 1997 1996
- ---------------------------------------------------------------------------------------------------
Corporate revolving bank loan(2) 7.50% 2000 -- $ 27 $ 213
Senior subordinated notes 9.75% 2000 1997 -- 75
Senior subordinated notes 10.25% 2006 2001 250 250
Senior subordinated notes 8.38% 2007 2002 325 --
Senior subordinated notes 8.50% 2007 2002 375 --
Senior subordinated notes 8.88% 2027 2004 125 --
Unamortized discounts (6) --
- ---------------------------------------------------------------------------------------------------
SUBTOTAL 1,096 538
Less current maturities -- (88)
- ---------------------------------------------------------------------------------------------------
TOTAL $1,096 $ 450
===================================================================================================
(1) weighted average interest rate at December 31, 1997.
(2) floating rate loan
Under the terms of the $600 million corporate revolving bank loan and letter of
credit facility ("Revolver"), the Company must reduce its direct borrowings to
$225 million for 30 consecutive days annually to obtain additional loans.
Commitment fees on the unused portion at December 31, 1997 are .38% per annum,
and as of that date $393 million was available. The Company's senior
subordinated notes are general unsecured obligations of the Company. The
Company's 9.75% senior subordinated notes due 2000 were refinanced in August
1997. As a result, the Company recorded an extraordinary loss of $3 million, net
of tax.
FUTURE MATURITIES OF DEBT -- Scheduled maturities of total debt at
December 31, 1997 are (in millions):
1998 $ 596
1999 1,058
2000 286
2001 255
2002 237
Thereafter 2,749
- --------------------------------------------------------------------------------
Total $ 5,181
================================================================================
COVENANTS--The terms of the Company's Revolver, senior subordinated notes
and project financing debt agreements contain certain covenants. The covenants
provide for, among other items, maintenance of certain reserves, and require
that minimum levels of working capital, net worth and certain financial ratio
tests are met. The most restrictive of these covenants include limitations on
incurring additional debt and on the payment of dividends to shareholders.
The project financing debt limitations of AES's subsidiaries permit the
payment of dividends to the parent company out of current cash flow for
quarterly, semi-annual or annual periods only at the end of such periods and
only after payment of principal and interest on project loans due at the end of
such periods. As of December 31, 1997, approximately $68 million was available
under project loan documents for distribution by U.S. subsidiaries.
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Company and its consolidated subsidiaries
were obligated under long-term non-cancelable operating leases, primarily for
office rental and site leases. Rental expense for operating leases was $9
million, $4 million and $3 million in the years ended 1997, 1996 and 1995,
respectively. The future minimum lease commitments under these leases are $10
million for 1998, $7 million for 1999, $3 million for each year 2000 through
2001, $2 million for 2002, and a total of $64 million for the years thereafter.
A subsidiary of the Company has entered into a "take-or-pay" contract for
the purchase of electricity with a term of five years. Purchases in 1997 were
approximately $1 million. The future commitment under this contract is $7
million for each year 1998 through 2002.
Operating subsidiaries of the Company enter into various long-term
contracts for the purchase of fuel subject to termination only in certain
limited circumstances. These contracts have remaining terms of 1 to 29 years.
On November 24, 1997 the Company announced that it had won a bid to
acquire three natural gas-fired electric generating stations from Southern
California Edison for approximately $781 million. The Company anticipates
completion of the acquisition in 1998. It is expected that a significant portion
of the acquisition price will be raised from proceeds through a project
financing debt arrangement. However, both the acquisition and the financing are
contingent upon certain conditions precedent.
GUARANTEES -- In connection with certain of its project financing,
acquisition and power purchase agreements, AES has expressly undertaken limited
obligations and commitments, most of which will only be effective or will be
terminated upon the occurrence of future events. In addition, the Company has
undertaken commitments to fund its equity in projects currently under
development and construction. These obligations and commitments, excluding those
collateralized by letter of credit obligations discussed below, were limited as
of December 31, 1997, by the terms of the agreements, to an aggregate of
approximately $221 million. The Company is also obligated under other
commitments which are limited to amounts, or percentages of amounts, received by
AES as distributions from its project subsidiaries. These amounts aggregated $33
million as of December 31, 1997. Certain of the Company's subsidiaries have
obligations to fund equity and loans in their projects. At December 31, 1997
such commitments to invest amounted to approximately $129 million.
LETTERS OF CREDIT -- At December 31, 1997 and 1996, the Company had $180
million and $123 million, respectively, of letters of credit outstanding under
its credit facility which operate to guarantee performance relating to certain
project development activities and subsidiary operations. The Company pays a
letter of credit fee of 1.50% on the outstanding amounts.
LITIGATION -- The Company is involved in certain legal proceedings in the
normal course of business. It is the opinion of the Company that none of the
pending litigation will have a material adverse effect on its results of
operations, financial position, or cash flows.
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
During 1997, two wholly-owned special purpose business trusts
(individually, "AES Trust I" and "AES Trust II" and collectively, the "Trusts")
issued Term Convertible Securities ("Tecons"). On March 31, AES Trust I issued 5
million of $2.6875 Tecons (liquidation value $50) for total proceeds of $250
million and concurrently purchased $250 million of 5.375% junior subordinated
convertible debentures due 2027 of AES (individually the "5.375% Debentures").
On October 29, AES Trust II issued 6 million of $2.75 Tecons (liquidation value
$50) for total proceeds of $300 million and concurrently purchased $300 million
of 5.5% junior subordinated convertible due 2012 of AES (individually the "5.5%
Debentures" and collectively with the 5.375% Debentures the "Junior
Debentures"). The sole assets of AES Trust I are the 5.375% Debentures and the
sole assets of AES Trust II are the 5.5% Debentures. The obligations of the
Trusts, as provided under the terms of the Tecons, are fully and unconditionally
guaranteed by AES.
Dividends on the Tecons are payable quarterly at an annual rate of 5.375%
by AES Trust I and 5.5% for AES Trust II. The Trusts are each permitted to defer
payment of dividends for up to 20 consecutive quarters, provided that AES has
exercised its right to defer interest payments under the corresponding Junior
Debentures. During such deferral periods, dividends on the Tecons will
accumulate quarterly and accrue interest and AES may not declare or pay
dividends on its common stock. The Tecons are convertible into the common stock
of AES
at each holder's option prior to March 31, 2027 for AES Trust I and September
30, 2012 for AES Trust II at the rate of 1.3812 and .8914 shares, respectively,
representing a conversion price equivalent to $36.20 and $56.09 per share
respectively.
AES, at its option, can redeem the 5.375% Debentures after March 31, 2000
which would result in the required redemption of the Tecons issued by AES Trust
I, for $51.68 per Tecon, reduced annually by $0.336 to a minimum of $50 per
Tecon and can redeem the 5.5% Debentures after September 30, 2000 which would
result in the required redemption of the Tecons issued by AES Trust II, for
$51.72 per Tecon, reduced annually by $0.344 to a minimum of $50 per Tecon.
Interest expense for the year ended December 31, 1997 includes $10 million
and $3 million related to the dividends accrued on the Tecons of AES Trust I and
AES Trust II, respectively.
8. STOCKHOLDERS' EQUITY
(in millions)
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at January 1 and December 31 $ 2 $ 2 $ 2
=======================================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at January 1 $ 359 $ 292 $ 239
Issuance of common stock 494 -- --
Issuance of common stock pursuant to Chigen amalgamation 157 -- --
Issuance of common stock under benefit plans
and exercise of stock options 12 3 2
Tax benefit associated with the exercise of options 8 15 --
Issuance of common stock on conversion of 6.5%
subordinated debentures, net ($13.08 per share) -- 49 --
Chigen Class A redeemable common stock -- -- 51
- -------------------------------------------------------------------------------------------------------
Balance at December 31 $ 1,030 $ 359 $ 292
=======================================================================================================
RETAINED EARNINGS
Balance at January 1 $ 396 $ 271 $ 164
Net income for the year 185 125 107
- -------------------------------------------------------------------------------------------------------
Balance at December 31 $ 581 $ 396 $ 271
=======================================================================================================
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at December 31 $ (131) $ (33) $ (10)
=======================================================================================================
TREASURY STOCK
Balance at December 31 $ (1) $ (3) $ (6)
- -------------------------------------------------------------------------------------------------------
STOCK SPLIT AND STOCK DIVIDEND -- On July 15, 1997 the Board of Directors
authorized a two-for-one split, effected in the form of a stock dividend,
payable to stockholders of record on August 28, 1997. Accordingly, all
outstanding share, per share and stock option data in all periods presented have
been restated to reflect the split.
STOCK CONVERSION -- On July 30, 1996, the Company exercised its right to
redeem the 6.5% debentures at a redemption price equal to approximately 104% of
the principal amount of the debentures, together with accrued interest through
the date of redemption. As a result, $49 million of the debentures, net of
conversion costs, were converted into 3.8 million shares of common stock of the
Company at a conversion price of $13.08 per share.
STOCK OPTIONS AND WARRANTS -- The Company has granted options to purchase
shares of common stock under its stock option plans. Under the terms of the
plans, the Company may issue options to purchase shares of the Company's common
stock at a price equal to 100% of the market price at the date the option is
granted.
The options become eligible for exercise under various schedules. At December
31, 1997, there were approximately 4.5 million shares reserved for future grants
under the plans.
A summary of the option activity follows (in thousands of shares):
- -------------------------------------------------------------------------------------------------------------------
December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 8,020 $ 9.30 8,126 $ 7.28 7,080 $ 6.04
Exercised during the year (941) 7.78 (960) 5.35 (710) 1.76
Forfeitures during the year (58) 11.23 (432) 10.28 (114) 9.18
Granted during the year 949 35.62 1,286 19.39 1,870 10.02
Conversion of Chigen options 876 19.67 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 8,846 $13.20 8,020 $ 9.30 8,126 $ 7.28
==================================================================================================================
Eligible for exercise - end of year 6,163 $ 9.37 4,264 $ 6.43 2,418 $ 4.52
==================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1997 (in thousands of shares) :
- ----------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF TOTAL REMAINING LIFE AVERAGE TOTAL AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
$ .78 to $3.24 1,718 2.6 $ 2.75 1,718 $ 2.75
$ 5.83 to $9.88 2,159 6.0 8.84 1,503 8.61
$ 10.00 to $14.44 2,369 7.3 10.50 2,060 10.43
$ 14.66 to $22.85 1,611 8.3 20.25 795 20.39
$ 23.00 to $42.00 989 9.3 35.91 87 27.59
- ----------------------------------------------------------------------------------------------------
Total 8,846 $13.20 6,163 $ 9.37
- ----------------------------------------------------------------------------------------------------
The Company accounts for its stock-based compensation plans under APB No. 25,
and adopted SFAS No. 123 for disclosure purposes in 1996. No compensation
expense has been recognized in connection with the options, as all options have
been granted only to AES people, including Directors, with an exercise price
equal to the market price of the Company's common stock on the date of grant.
For SFAS No. 123 disclosure purposes, the weighted average fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 5.9%, 6.5% and 5.5% and expected volatility of 37%, 28% and 24%
for the years ended December 31, 1997, 1996 and 1995, respectively, a dividend
payout rate of zero for each year and an expected option life of 7 years. Using
these assumptions, the weighted average fair value of each stock option granted
was $17.86, $8.81 and $4.09, for the years ended December 31, 1997, 1996 and
1995, respectively. In calculating the fair value, there were no adjustments
made to account for vesting provisions or for non-transferability or risk of
forfeiture.
Had compensation expense been determined under the provisions of SFAS No.
123, utilizing the assumptions detailed above, the Company's net income and
earnings per share for the years ended December 31, 1997, 1996 and 1995 would
have been reduced to the following pro forma amounts (in millions):
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
NET INCOME:
As reported $ 185 $ 125 $ 107
Pro forma 168 121 106
BASIC EARNINGS PER SHARE:
As reported $1.11 $0.83 $0.71
Pro forma 1.01 0.80 0.71
DILUTED EARNINGS PER SHARE:
As reported $1.09 $0.80 $0.70
Pro forma 1.00 0.78 0.69
================================================================================
The disclosures of such amounts and assumptions are not intended to forecast any
possible future appreciation of the Company's stock price or change in dividend
policy.
In addition to the options described above, the Company has outstanding
warrants to purchase up to 1.3 million shares of its common stock at $14.72 per
share through July 2000, which were issued as partial settlement of a
shareholder class action suit and were expensed in 1995. Warrants exercised
under this settlement were not significant during December 1997 or 1996.
AES CHINA GENERATING CO. LTD. -- In May 1997, the Company acquired all of
the outstanding Class A shares of Chigen by amalgamating Chigen with a
wholly-owned subsidiary of the Company. As a result of this transaction, the
Company issued approximately 5 million shares of its common stock. As part of
the amalgamation, the Company also converted the outstanding options of the
Chigen stock option plan to AES stock options at the ratio of .29 to 1.
9. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for income
before extraordinary item. In the table below Income represents the numerator
(in millions) and Shares represent the denominator (in thousands):
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
$ PER $ PER $ PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
- ----------------------------------------------------------------------------------------------------------------
BASIC EPS
Income before extraordinary item
available to common stockholders $188 166.6 $1.13 $125 151.5 $0.83 $107 149.9 $0.71
EFFECT OF DILUTIVE SECURITIES
Stock Options and Warrants -- 4.4 -- 2.7 -- 1.5
Stock units allocated to deferred
compensation plans -- 0.5 -- 0.5 -- 0.5
Tecons and other convertible debt,
net of tax 10 6.3 1 2.5 2 3.8
- ----------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before extraordinary item
available to common stockholders
assuming conversion $198 177.8 $1.11 $126 157.2 $0.80 $109 155.7 $0.70
================================================================================================================
10. INCOME TAXES
INCOME TAX PROVISION -- The provision for income taxes consists of the following
(in millions):
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Federal
Current $ 7 $ 19 $ 4
Deferred 22 27 47
State
Current 19 12 5
Deferred (6) (2) 1
Foreign
Current 10 3 --
Deferred 4 1 --
- --------------------------------------------------------------------------------
Total $ 56 $ 60 $ 57
================================================================================
EFFECTIVE AND STATUTORY RATE RECONCILIATION -- A reconciliation of the
U.S. statutory Federal income tax rate to the Company's effective tax rate as a
percentage of income before taxes (excluding earnings and taxes from affiliates
accounted for on the equity method, and minority interests) is as follows:
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Statutory Federal tax rate 35% 35% 35%
Change in valuation allowance (2) (2) (6)
State taxes, net of Federal tax benefit 5 6 6
Taxes on foreign earnings 3 2 --
Other - net (1) (1) 3
- --------------------------------------------------------------------------------
Effective tax rate 40% 40% 38%
================================================================================
DEFERRED INCOME TAXES -- Deferred income taxes relate principally to
accelerated depreciation methods used for tax purposes and certain other
expenses which are deducted for income tax purposes, but not for financial
reporting purposes. Deferred income taxes reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credit carryforwards. These items are stated at the
enacted tax rates that are expected to be in effect when taxes are actually paid
or recovered. Deferred tax assets and deferred tax liabilities are as follows
(in millions):
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996
- --------------------------------------------------------------------------------
Differences between book and tax basis of
property and total deferred tax liability $ 476 $ 379
- --------------------------------------------------------------------------------
Operating loss carryforwards (75) (124)
Bad debt and other book provisions (47) --
Retirement costs (31) --
Tax credit carryforwards (104) (97)
Other deductible temporary differences (24) (13)
- --------------------------------------------------------------------------------
Total gross deferred tax asset (281) (234)
Less: valuation allowance 31 33
- --------------------------------------------------------------------------------
Total net deferred tax asset (250) (201)
- --------------------------------------------------------------------------------
Net deferred tax liability $ 226 $ 178
================================================================================
As of December 31, 1997, the Company had Federal net operating loss
carryforwards for tax purposes of approximately $159 million expiring from 2007
through 2009, Federal investment tax credit carryforwards for tax purposes of
approximately $51 million expiring in years 2001 through 2006, and Federal
alternative minimum tax credits of approximately $42 million which carry forward
without expiration.
The valuation allowance decreased during the current year by
approximately $2 million to $31 million at December 31, 1997. This decrease
resulted primarily from the utilization of foreign net operating loss
carryforwards, offset in part by a partial valuation allowance for the provision
to reduce contract receivables. The $31 million valuation allowance at December
31, 1997 relates primarily to U.S. state and foreign operating losses, and
foreign deferred tax assets, the ultimate realization of which is uncertain. The
Company believes that it is more likely than not that the remaining deferred tax
assets will be realized.
The valuation allowance increased during 1996 by approximately $24
million to $33 million at December 31, 1996. This increase resulted primarily
from the acquisition of foreign entities with certain pre-existing deferred tax
assets, the ultimate realization of which is uncertain. The valuation allowance
for these pre-existing deferred tax assets was recorded as acquisition
adjustments and had no effect on the current year income tax expense. The $33
million valuation allowance at December 31, 1996 relates primarily to U.S. state
and foreign tax credits, U.S. state operating losses, and foreign deferred tax
assets, the ultimate realization of which is uncertain.
Undistributed earnings of certain foreign affiliates aggregated $129
million on December 31, 1997. The Company considers these earnings to be
indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred
taxes have been recorded with respect to the earnings. Should the earnings be
remitted as dividends, the Company may be subject to additional U.S. taxes, net
of allowable foreign tax credits. It is not practicable to estimate the amount
of any additional taxes which may be payable on the undistributed earnings. A
deferred tax asset of $14 million has been recorded as of December 31, 1997 for
the cumulative effects of certain foreign currency translations.
11. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
PROFIT SHARING AND STOCK OWNERSHIP PLAN -- The Company sponsors two profit
sharing and stock ownership plans, qualified under section 401 of the Internal
Revenue Code, which are available to eligible AES people. The plans provide for
Company matching contributions, other Company contributions at the discretion of
the Compensation Committee of the Board of Directors, and discretionary tax
deferred contributions from the participants. Participants are fully vested in
their own contributions and the Company's matching contributions. Participants
vest in other Company contributions over a five-year period. Company
contributions to the plan were approximately $5 million for the year ended
December 31, 1997 and $4 million for both of the years ended December 31, 1996
and 1995.
DEFERRED COMPENSATION PLANS -- The Company sponsors a deferred
compensation plan under which directors of the Company may elect to have a
portion or all of their compensation deferred. The amounts allocated to each
participant's deferred compensation account may be converted into common stock
units. Upon termination or death of a participant, the Company is required to
distribute, under various methods, cash or the number of shares of common stock
accumulated within the participant's deferred compensation account. Distribution
of stock is to be made from common stock held in treasury or from authorized but
previously unissued shares. The plan terminates and full distribution is
required to be made to all participants upon any change of control of the
Company (as defined).
In addition, the Company sponsors an executive officers' deferred
compensation plan. At the election of an executive officer, the Company will
establish an unfunded, non-qualified compensation arrangement for each officer
who chooses to terminate participation in the Company's profit sharing and
employee stock ownership plan. The participant may elect to forego payment of
any portion of his or her compensation and have an equal amount allocated to a
contribution account. In addition, the Company will credit the participant's
account with an amount equal to the Company's contributions (both matching and
profit sharing) that would have been made on such officer's behalf if he or she
had been a participant in the profit sharing plan. The participant may elect to
have all or a portion of the Company's contribution converted into stock units.
Dividends paid on common stock are allocated to the participant's account in the
form of stock units. The participant's account balances are distributable upon
termination of employment or death.
During 1995, the Company adopted a supplemental retirement plan covering
certain highly-compensated AES people. The plan provides incremental profit
sharing and matching contributions to participants that would have been paid to
their accounts in the Company's profit sharing plan if it were not for
limitations imposed by income tax regulations. All contributions to the plan are
vested in the manner provided in the Company's profit sharing plan, and once
vested are nonforfeitable. The participant's account balances are distributable
upon termination of employment or death.
DEFINED BENEFIT PLAN -- The Company's subsidiary, Sul, has a contributory
defined benefit pension plan covering substantially all of its employees.
Pension benefits are based on years of credited service, age of the participant
and average earnings. Plan assets are comprised of Brazilian government
securities and bonds, stocks of publicly-traded Brazilian companies and real
estate holdings. Net pension expense for the two months ended December 31, 1997
(subsequent to the date of acquisition) includes the following components (in
millions):
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Benefit cost for service $ .3
Interest cost on projected benefit obligation .1
Actual return on plan assets .3
Net amortization and deferral .1
- --------------------------------------------------------------------------------
Net pension expense $ .8
================================================================================
The amounts included in the consolidated balance sheet were based on the funded
status of the plan at December 31, 1997 and are as follows (in millions):
- --------------------------------------------------------------------------------
December 31 1997
- --------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligation $ (31)
Nonvested benefit obligation (26)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (57)
Additional amounts related to assumed pay increases (15)
- --------------------------------------------------------------------------------
Projected benefit obligation (72)
Plan assets at fair value 31
- --------------------------------------------------------------------------------
Benefit obligations in excess of plan assets (41)
Unamortized net obligations at date of adoption (3)
- --------------------------------------------------------------------------------
Pension liability recognized in the consolidated balance sheet $ (44)
================================================================================
Significant assumptions used in the calculation of pension expense and
obligation are as follows:
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Discount rate 6%
Rate of compensation increase 2%
Long-term rate of return on plan 6%
- --------------------------------------------------------------------------------
The Company is not obligated under any post-retirement benefit plans other than
the profit sharing, deferred compensation plans, and defined benefit plan
described in this Note.
12. QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of operations
(in millions, except per share amounts):
- -------------------------------------------------------------------------------------------------------
Quarters ended 1997 MAR 31 JUN 30 SEP 30 DEC 31
- -------------------------------------------------------------------------------------------------------
Sales and services $ 261 $261 $358 $531
Gross margin 94 98 112 126
Net income before extraordinary item 40 42 50 56
Extraordinary item -- -- (3) --
Net income 40 42 47 56
Basic earnings per share:
Before extraordinary item $0.26 $0.26 $0.29 $0.32
Extraordinary item -- -- (0.02) --
Basic earnings per share $0.26 $0.26 $0.27 $0.32
Diluted earnings per share:
Before extraordinary item $0.25 $0.25 $0.28 $0.32
Extraordinary item -- -- (0.02) --
Diluted earnings per share $0.25 $0.25 $0.26 $0.32
- -------------------------------------------------------------------------------------------------------
Quarters ended 1996 MAR 31 JUN 30 SEP 30 DEC 31
- -------------------------------------------------------------------------------------------------------
Sales and services $ 172 $174 $205 $284
Gross margin 74 76 85 98
Net income 29 28 32 36
Basic earnings per share $0.19 $0.19 $0.21 $0.23
Diluted earnings per share 0.19 0.18 0.21 0.23
- -------------------------------------------------------------------------------------------------------
13. GEOGRAPHIC SEGMENTS
Information about the Company's operations in different geographic areas is as
follows (in millions):
- --------------------------------------------------------------------------------
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES
North America $ 577 $ 554 $ 542
South America/Central America 423 146 131
Asia 148 45 1
Europe 263 90 5
- --------------------------------------------------------------------------------
Total $ 1,411 $ 835 $ 679
================================================================================
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING INCOME
North America $ 261 $ 258 $ 251
South America/Central America 64 21 14
Asia 15 (9) (8)
Europe 28 8 (4)
- --------------------------------------------------------------------------------
Total $ 368 $ 278 $ 253
================================================================================
For the Years Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
EQUITY IN EARNINGS (NET OF INCOME TAXES)
North America $ -- $ -- $ --
South America/Central America 88 21 --
Asia 2 1 --
Europe 15 13 14
- --------------------------------------------------------------------------------
Total $ 105 $ 35 $ 14
================================================================================
December 31 1997 1996 1995
- --------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
North America $ 1,914 $ 1,831 $1,693
South America/Central America 4,712 683 230
Asia 1,571 744 328
Europe 712 364 90
- --------------------------------------------------------------------------------
Total $ 8,909 $ 3,622 $2,341
================================================================================
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's assets and liabilities have been
determined using available market information. The estimates are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of current financial assets, current liabilities, debt
service reserves and other deposits, and other assets are estimated to be equal
to their reported carrying amounts. The fair value of project financing debt is
estimated differently based upon the type of loan. For variable rate loans,
carrying value approximates fair value. For fixed rate loans, the fair value is
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates, or by the estimated discount rate a prospective
seller would pay to a credit-worthy third party to assume the obligations. The
carrying value and fair value of the Placerita and Indian Queens capital leases
have been excluded from this disclosure. The fair value of swap agreements is
the estimated net amount that the Company would pay to terminate the agreements
at the balance sheet date. The estimated fair values of the senior subordinated
notes and Tecons are based on quoted market prices.
The estimated fair values of the Company's financial instruments at December 31,
1997 and 1996 are as follows (in millions):
- --------------------------------------------------------------------------------
December 31 1997 1996
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
Project financing debt $3,942 $3,953 $1,562 $1,562
Other notes payable 1,096 1,116 538 560
Tecons 550 661 -- --
Interest rate swaps -- 81 -- 68
- --------------------------------------------------------------------------------
The fair value estimates presented herein are based on pertinent information
available as of December 31, 1997 and 1996. The Company is not aware of any
factors that would significantly affect the estimated fair value amounts since
that date.
15. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company will be required to adopt the provisions of SFAS No. 130,
Reporting Comprehensive Income and No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company will report comprehensive income
in a separate statement which will show the effects of the foreign currency
translation loss as a component of comprehensive income. The Company believes
its segment disclosures under SFAS 131 will be materially consistent with those
currently presented.
16. SUBSEQUENT EVENTS
In January 1998 the Company, pursuant to an option agreement with one of its
partners in Cemig, sold approximately 28% of its 13.06% ownership interest in
Cemig for $115 million, approximating its carrying value. As a result of the
sale, the Company's ownership percentage decreased to approximately 10%. The
Company continues to exert significant influence, as its voting interests remain
unchanged.
On February 10, 1998, the Company sold its investment in Hazelwood for
approximately $139 million, which approximated its carrying value as an asset
held for sale at December 31, 1997. The Company used the proceeds of these sales
to repay a portion of the project financing debt classified as a current
liability at December 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the information with respect to the ages of the Registrant's
directors in the table on page 4 and the information contained under the caption
"Election of Directors" on pages 1 through 3 inclusive, of the Proxy Statement
for the Annual Meeting of Stockholders of the Registrant to be held on April 21,
1998, which information is incorporated herein by reference. See also the
information with respect to executive officers of the Registrant under the
caption entitled "Executive Officers and Significant Employees of the
Registrant" in Item 1 of Part I hereof, which information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the information contained under the captions "Compensation of
Executive Officers" on pages 10 through 12 inclusive and "Compensation of
Directors" on page 5, of the Proxy Statement for the Annual Meeting of
Stockholders of the Registrant to be held on April 21, 1998, which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
EXECUTIVE OFFICERS.
(a) Security Ownership of Certain Beneficial Owners.
See the information contained under the caption "Security Ownership of
Certain Beneficial Owners, Directors, and Executive Officers" on page 4 of the
Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be
held on April 21, 1998, which information is incorporated herein by reference.
(b) Security Ownership of Directors and Executive Officers.
See the information contained under the caption "Security Ownership of
Certain Beneficial Owners, Directors, and Executive Officers" on page 4 of the
Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be
held on April 21, 1998, which information is incorporated herein by reference.
(c) Changes in Control.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information for Mr. Thomas I. Unterberg, a director of the
Registrant, contained under the caption "Election of Directors" on page 2 of the
Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be
held on April 21, 1998, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are of
the Company and its consolidated subsidiaries).
- Independent Auditors' Report is contained in the section
entitled "Financial Statements and Supplementary Data" at Item
8 hereof.
- Consolidated Balance Sheets at December 31, 1996 and 1997 are
contained in the section entitled "Financial Statements and
Supplementary Data" at Item 8 hereof.
- Consolidated Statements of Operations -- For the Years Ended
December 31, 1995, 1996 and 1997 are contained in the section
entitled "Financial Statements and Supplementary Data" at Item
8 hereof.
- Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1995, 1996 and 1997 are contained in the section
entitled "Financial Statements and Supplementary Data" at Item
8 hereof.
- Notes to Consolidated Financial Statements -- For the Years
Ended December 31, 1995, 1996 and 1997 are contained in the
section entitled "Financial Statements and Supplementary Data"
at Item 8 hereof.
(2) Financial Statement Schedules
- See Index to Financial Statement Schedules of the Registrant
and subsidiaries at page S-1 hereof, which Index is
incorporated herein by reference.
(3) Exhibits
3.1 Amended and Restated Certificate of Incorporation of The AES
Corporation is incorporated by herein reference to Exhibits
3.1 and 3.2 to the Registration Statement on Form S-8
(Registration No. 333-26225).
3.2 By-Laws of The AES Corporation, as amended, are incorporated
herein by reference to Exhibit 3.2 of the Registration
Statement on Form S-4 (Registration No. 333-22513).
4.1 Amended and Restated Declaration of Trust of AES Trust I,
among The AES Corporation, The First National Bank of Chicago
and First Chicago Delaware, Inc., to provide for the issuance
of the $2.6875 Term Convertible Securities, Series A.
4.2 Junior Subordinated Indenture, between The AES Corporation and
The First National Bank of Chicago, to provide for the
issuance of the $2.6875 Term Convertible Securities, Series A.
4.3 First Supplemental Indenture to Junior Subordinated Indenture,
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance of the
$2.6875 Term Convertible Securities, Series A.
4.4 Guarantee Agreement, between The AES Corporation and The First
National Bank of Chicago, as initial guarantee trustee, to
provide for the issuance of the $2.6875 Term Convertible
Securities, Series A.
4.5 Second Supplemental Indenture dated as of October 13, 1997
between the Company and the First National Bank of Chicago, as
trustee, to provide for the issuance from time to time of the
10.25% Senior Subordinated Notes Due 2006, is incorporated
herein by reference to Exhibit 4.2.1 of the Registration
Statement on Form S-3/A (Registration No. 333-39857) filed
November 19, 1997.
4.6 Indenture dated as of October 29, 1997 between The AES
Corporation and The First National Bank of Chicago, as
trustee, to provide for the issuance from time to time of the
8.50% Senior Subordinated Notes due 2007 of the Company and
the 8.875% Senior Subordinated Debentures due 2027, is
incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 (Registration No.
333-44845) filed January 23, 1998.
4.7 First Supplemental Indenture dated as of November 21, 1997
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance from time to
time of the 8.50% Senior Subordinated Notes due 2007 of the
Company and the 8.875% Senior Subordinated Debentures due
2027, is incorporated herein by reference to Exhibit 4.1.2 to
the Registration Statement on Form S-4 (Registration No.
333-44845) filed January 23, 1998.
4.8 Junior Subordinated Debt Trust Securities Indenture dated as
of March 1, 1997 between the Company and The First National
Bank of Chicago, to provide for the issuance of the $2.75 Term
Convertible Securities, Series B, is incorporated herein by
reference to Exhibit 4.1 to the Registration Statement on Form
S-3 (Registration No. 333-46189) filed February 12, 1998.
4.9 Second Supplemental Indenture dated as of October 29, 1997
between the Company and The First National Bank of Chicago, to
provide for the issuance of the $2.75 Term Convertible
Securities, Series B, is incorporated herein by reference to
Exhibit 4.1.1 to the Registration Statement on Form S-3
(Registration No. 333-46189) filed February 12, 1998.
4.10 Amended and Restated Declaration of Trust of AES Trust II, to
provide for the issuance of the $2.75 Term Convertible
Securities, Series B, is incorporated herein by reference to
Exhibit 4.3 to the Registration Statement on Form S-3
(Registration No. 333-46189) filed February 12, 1998.
4.11 Restated Certificate of Trust of AES Trust II, to provide for
the issuance of the $2.75 Term Convertible Securities, Series
B, is incorporated herein by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 (Registration No.
333-46189) filed February 12, 1998.
4.12 Form of Preferred Security, to provide for the issuance of the
$2.75 Term Convertible Securities, Series B, is incorporated
herein by reference to Exhibit 4.5 to the Registration
Statement on Form S-3 (Registration No. 333-46189) filed
February 12, 1998.
4.13 Form of Junior Subordinated Debt Trust Security, to provide
for the issuance of the $2.75 Term Convertible Securities,
Series B, is incorporated herein by reference to Exhibit 4.6
to the Registration Statement on Form S-3 (Registration No.
333-46189) filed February 12, 1998.
4.14 Preferred Securities Guarantee with respect to Preferred
Securities, to provide for the issuance of the $2.75 Term
Convertible Securities, Series B, is incorporated herein by
reference to Exhibit 4.7 to the Registration Statement on Form
S-3 (Registration No. 333-46189) filed February 12, 1998.
4.15 Other instruments defining the rights of holders of long-term
indebtedness of the Registrant and its consolidated
subsidiaries.
10.1 Amended Power Sales Agreement, dated as of December 10, 1985,
between Oklahoma Gas and Electric Company and AES Shady Point,
Inc. is incorporated herein by reference to Exhibit 10.5 to
the Registration Statement on Form S-1 (Registration No.
33-40483).
10.2 First Amendment to the Amended Power Sales Agreement, dated as
of December 19, 1985, between Oklahoma Gas and Electric
Company and AES Shady Point, Inc. is incorporated herein by
reference to Exhibit 10.45 to the Registration Statement on
Form S-1 (Registration No. 33-46011).
10.3 Electricity Purchase Agreement, dated as of December 6, 1985,
between The Connecticut Light and Power Company and AES
Thames, Inc. is incorporated herein by reference to Exhibit
10.4 to the Registration Statement on Form S-1 (Registration
No. 33-40483).
10.4 Power Purchase Agreement, dated March 25, 1988, between AES
Barbers Point, Inc. and Hawaiian Electric Company, Inc., as
amended, is incorporated herein by reference to Exhibit 10.6
to the Registration Statement on Form S-1 (Registration No.
33-40483).
10.5 The AES Corporation Profit Sharing and Stock Ownership Plan is
incorporated herein by reference to Exhibit 4(c)(1) to the
Registration Statement on Form S-8 (Registration No.
33-49262).
10.6 The AES Corporation Incentive Stock Option Plan of 1991, as
amended, is incorporated herein by reference to Exhibit 10.30
to the Annual Report on Form 10-K of the Registrant for the
fiscal year ended December 31, 1995.
10.7 Applied Energy Services, Inc. Incentive Stock Option Plan of
1982 is incorporated herein by reference to Exhibit 10.31 to
the Registration Statement on Form S-1 (Registration No.
33-40483).
10.8 Deferred Compensation Plan for Executive Officers, as amended,
is incorporated herein by reference to Exhibit 10.32 to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-40483).
10.9 Deferred Compensation Plan for Directors, as amended, is
incorporated herein by reference to Exhibit 10.33 to Amendment
No. 1 to the Registration Statement on Form S-1 (Registration
No. 33-40483).
10.10 The AES Corporation Stock Option Plan for Outside Directors is
incorporated herein by reference to Exhibit 10.43 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1991.
10.11 The AES Corporation Supplemental Retirement Plan is
incorporated herein by reference to Exhibit 10.64 to the
Annual Report on Form 10-K of the Registrant for the year
ended December 31, 1994.
11 Statement of computation of earnings per share.
12 Statement of computation of ratio of earnings to fixed
charges.
21 Significant subsidiaries of The AES Corporation.
23 Consent of independent auditors, Deloitte & Touche LLP.
24 Powers of attorney.
27 Financial Data Schedule (Article 5).
(b) Reports on Form 8-K.
- Registrant filed a Current Report on Form 8-K dated November 10, 1997
in respect of the acquisition by a subsidiary of the Registrant of 90%
of the common shares of CCODEE (AES Sul as used in this Annual Report
on Form 10-K) and disclosing the sale of equity securities pursuant to
Regulation S to finance the acquisition.
- Registrant filed a Current Report on Form 8-K dated November 6, 1997
including the Registrant's 1996 consolidated financial statements
updated for certain subsequent events.
- Registrant filed a Current Report on Form 8-K dated October 21, 1997 in
respect of (i) a press release issued on October 21, 1997, announcing
the Company's third quarter earnings, (ii) a press release issued on
October 21, 1997, announcing that the Company commenced private
offerings of senior subordinated notes and convertible securities, and
(iii) a press release issued on October 24, 1997, announcing pricing of
privately placed offerings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998 THE AES CORPORATION
(Company)
By: /s/ Dennis W. Bakke
----------------------
Name: Dennis W. Bakke
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* /s/ Roger W. Sant Chairman of the Board March 30, 1998
- -----------------------------
(Roger W. Sant)
/s/ Dennis W. Bakke President, Chief Executive Officer (principal March 30, 1998
- ----------------------------- executive officer) and Director
(Dennis W. Bakke)
* /s/ Hazel R. O'Leary Director March 30, 1998
- -----------------------------
(Hazel R. O'Leary)
* /s/ Vicki-Ann Assevero Director March 30, 1998
- -----------------------------
(Vicki-Ann Assevero)
* /s/ Dr. Alice F. Emerson Director March 30, 1998
- ------------------------------
(Dr. Alice F. Emerson)
* /s/ Robert F. Hemphill, Jr. Director March 30, 1998
- ------------------------------
(Robert F. Hemphill, Jr.)
* /s/ Frank Jungers Director March 30, 1998
- -------------------------------
(Frank Jungers)
* /s/ Dr. Henry R. Linden Director March 30, 1998
- -------------------------------
Dr. Henry R. Linden)
* /s/ John H. McArthur Director March 30, 1998
- -------------------------------
(John H. McArthur)
* /s/ Thomas I. Unterberg Director March 30, 1998
- -------------------------------
(Thomas I. Unterberg)
* /s/ Robert H. Waterman, Jr. Director March 30, 1998
- -------------------------------
(Robert H. Waterman, Jr.)
/s/ Barry J. Sharp Senior Vice President and Chief Financial Officer March 30, 1998
- --------------------------------- (principal financial and accounting officer)
(Barry J. Sharp)
By: * /s/ William R. Luraschi March 30, 1998
---------------------------
Attorney-in-Fact
THE AES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-6
Schedules other than those listed above are omitted as the information
is either not applicable, not required, or has been furnished in the financial
statements or notes thereto included in Item 8 hereof.
S-1
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
December 31,
------------
1996 1997
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 5 $ 5
Accounts receivable 2 --
Accounts and notes receivable from subsidiaries 53 130
Prepaid expenses and other current assets 2 25
---------- -----------
Total current assets 62 160
Investment in subsidiaries (on the equity method) 893 2,340
Office Equipment
Cost 5 5
Accumulated depreciation (4) (4)
---------- -----------
Office equipment, net 1 1
Other Assets
Deferred financing costs (less accumulated amortization: 1996, $6, 1997, $11) 16 57
Project development costs 53 55
Deferred income taxes 20 --
Notes receivable from subsidiaries 192 565
Escrow deposits and other assets 56 55
---------- -----------
Total other assets 337 732
---------- -----------
TOTAL $ 1,293 $ 3,233
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 2 $ 6
Accrued and other liabilities 29 53
Notes payable 88 --
---------- -----------
Total current liabilities 119 59
Long-term Liabilities
Notes payable 450 1,096
Deferred income taxes -- 44
Other long-term liabilities 3 3
---------- -----------
Total long-term liabilities 453 1,142
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures of AES -- 550
Stockholders' Equity:
Preferred stock -- --
Common stock 2 2
Additional paid-in capital 359 1,030
Retained earnings 396 581
Cumulative foreign currency translation adjustment (3) (1)
Treasury stock (33) (131)
---------- -----------
Total stockholders' equity 721 1,481
---------- -----------
TOTAL $ 1,293 $ 3,233
========== ===========
See notes to Schedule I
S-2
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED OPERATIONS
(IN MILLIONS)
For the Years Ended
December 31,
----------------------------------
1995 1996 1997
---- ---- ----
Revenues
Service revenues $ 58 $ 59 $ 22
Equity in earnings of subsidiaries 108 142 256
--------- -------- --------
Total revenues 166 201 278
Operating costs and expenses:
Cost of services 47 46 5
Selling, general and administrative expenses 19 30 36
--------- -------- --------
Total operating costs and expenses 66 76 41
Operating income 100 125 237
Interest income/(expense) 7 (15) (26)
--------- -------- --------
Income before income taxes and extraordinary item 107 110 211
Income tax expense (benefit) -- (15) 23
--------- -------- --------
Net income before extraordinary item 107 125 188
Extraordinary item - net loss on extinguishment of
debt (less applicable income taxes of $2) -- -- 3
--------- -------- --------
Net income $ 107 $ 125 $ 185
========= ======== ========
See notes to Schedule I
S-3
THE AES CORPORATION
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED CASH FLOWS
(IN MILLIONS)
For the Years Ended
December 31,
------------------------ ------------
1995 1996 1997
-------- --------- ----------
Net cash provided by/(used in) operating activities $ 3 $ 23 $ (30)
INVESTING ACTIVITIES
Issuance of notes receivable 2 (19) (372)
Acquisitions, net of cash acquired (130) (148) (1,274)
Dividends from subsidiaries 88 130 152
Project development costs, net (34) (16) (3)
Investment in subsidiaries (32) (322) (38)
Escrow deposits and other (4) (47) 1
-------- --------- ----------
Net cash provided by (used in) investing activities (110) (422) (1,534)
FINANCING ACTIVITIES
Borrowings (repayments) under the revolver 50 163 (186)
Issuance of notes payable and coupon bearing securities -- 243 1,535
Principal payments on notes payable -- -- (275)
Proceeds from issuance of common stock 1 2 503
Purchased treasury stock (6) -- --
Payments for deferred financing costs (2) (6) (13)
-------- --------- ----------
Net cash provided by financing activities 43 402 1,564
Increase/(decrease) in cash and cash equivalents (64) 3 0
Cash and cash equivalents, beginning 66 2 5
-------- --------- ----------
Cash and cash equivalents, ending $ 2 $ 5 $ 5
======== ========= ==========
See notes to Schedule I
S-4
THE AES CORPORATION
SCHEDULE I
NOTES TO SCHEDULE I
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for Subsidiaries -- The AES Corporation has accounted for
the earnings of its subsidiaries on the equity method in the unconsolidated
condensed financial information.
Income Taxes -- The unconsolidated income tax expense or benefit
computed for the Company in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, reflects the tax assets and
liabilities of the Company on a stand alone basis and the effect of filing a
consolidated U.S. income tax return with certain other affiliated companies.
Accounts and Notes Receivable from Subsidiaries -- Such amounts have
been shown in current or long-term assets based on terms in agreements with
subsidiaries, but payment is dependent upon meeting conditions precedent in the
subsidiary loan agreements.
2. NOTES PAYABLE
Notes payable at December 31, 1996 and 1997 consisted of the following
(in millions):
First
Interest Final Call
Rate(1) Maturity Date 1996 1997
--------- ---------- ----------- ---------- --------
Corporate revolving bank loan(2) 7.50% 2000 -- $ 213 $ 27
Senior subordinated notes 9.75% 2000 1997 75 --
Senior subordinated notes 10.25% 2006 2001 250 250
Senior subordinated notes 8.38% 2007 2002 -- 325
Senior subordinated notes 8.50% 2007 2002 -- 375
Senior subordinated notes 8.88% 2027 2004 -- 125
Unamortized discounts -- (6)
--------- ----------
Subtotal 538 1,096
Less current maturities (88) --
========= ==========
TOTAL $450 $ 1,096
========= ==========
(1) Weighted average interest rate at December 31, 1997.
(2) Floating rate loan.
S-5
THE AES CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Period
--------- -------- ------
Description
Allowance for contract receivables
Year ended December 31, 1996 -- 20 20
Year ended December 31, 1997 $ 20 $ 17 $ 37
Amortization of deferred costs
Year ended December 31, 1995 26 5 31
Year ended December 31, 1996 31 5 36
Year ended December 31, 1997 $ 36 $ 16 $ 52
S-6
EXHIBIT INDEX
Sequentially
Exhibit Description of Exhibit Numbered Page
- ------- ---------------------- -------------
3.1 Amended and Restated Certificate of Incorporation of The AES
Corporation is incorporated by herein reference to Exhibits 3.1 and 3.2
to the Registration Statement on Form S-8 (Registration No. 333) filed
April 30, 1997.
3.2 By-Laws of The AES Corporation, as amended, are incorporated herein by
reference to Exhibit 3.2 of the Registration Statement on Form S-4
(Registration No. 333-22513).
4.1 Amended and Restated Declaration of Trust of AES Trust I, among The AES
Corporation, The First National Bank of Chicago and First Chicago
Delaware, Inc., to provide for the issuance of the $2.6875 Term
Convertible Securities, Series A.
4.2 Junior Subordinated Indenture, between The AES Corporation and The
First National Bank of Chicago, to provide for the issuance of the
$2.6875 Term Convertible Securities, Series A.
4.3 First Supplemental Indenture to Junior Subordinated Indenture, between
The AES Corporation and The First National Bank of Chicago, as trustee,
to provide for the issuance of the $2.6875 Term Convertible Securities,
Series A.
4.4 Guarantee Agreement, between The AES Corporation and The First National
Bank of Chicago, as initial guarantee trustee, to provide for the
issuance of the $2.6875 Term Convertible Securities, Series A.
4.5 Second Supplemental Indenture dated as of October 13, 1997 between the
Company and the First National Bank of Chicago, as trustee, to provide
for the issuance from time to time of the 10.25% Senior Subordinated
Notes Due 2006, is incorporated herein by reference to Exhibit 4.2.1 of
the Registration Statement on Form S-3/A (Registration No. 333-39857)
filed November 19, 1997.
4.6 Indenture dated as of October 29, 1997 between The AES Corporation and
The First National Bank of Chicago, as trustee, to provide for the
issuance from time to time of the 8.50% Senior Subordinated Notes due
2007 of the Company and the 8.875% Senior Subordinated Debentures due
2027, is incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 (Registration No. 333-44845) filed
January 23, 1998.
4.7 First Supplemental Indenture dated as of November 21, 1997 between The
AES Corporation and The First National Bank of Chicago, as trustee, to
provide for the issuance from time to time of the 8.50% Senior
Subordinated Notes due 2007 of the Company and the 8.875% Senior
Subordinated Debentures due 2027, is incorporated herein by reference
to Exhibit 4.1.2 to the Registration Statement on Form S-4
(Registration No. 333-44845) filed January 23, 1998.
4.8 Junior Subordinated Debt Trust Securities Indenture dated as of March
1, 1997 between the Company and The First National Bank of Chicago, to
provide for the issuance of the $2.75 Term Convertible Securities,
Series B, is incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-3 (Registration No. 333-46189) filed
February 12, 1998.
4.9 Second Supplemental Indenture dated as of October 29, 1997 between the
Company and The First National Bank of Chicago, to provide for the
issuance of the $2.75 Term Convertible Securities, Series B, is
incorporated herein by reference to Exhibit 4.1.1 to the Registration
Statement on Form S-3 (Registration No. 333-46189) filed February 12,
1998.
4.10 Amended and Restated Declaration of Trust of AES Trust II, to provide
for the issuance of the $2.75 Term Convertible Securities, Series B, is
incorporated herein by reference to Exhibit 4.3 to the Registration
Statement on Form S-3 (Registration No. 333-46189) filed February 12,
1998.
4.11 Restated Certificate of Trust of AES Trust II, to provide for the
issuance of the $2.75 Term Convertible Securities, Series B, is
incorporated herein by reference to Exhibit 4.4 to the Registration
Statement on Form S-3 (Registration No. 333-46189) filed February 12,
1998.
4.12 Form of Preferred Security, to provide for the issuance of the $2.75
Term Convertible Securities, Series B, is incorporated herein by
reference to Exhibit 4.5 to the Registration Statement on Form S-3
(Registration No. 333-46189) filed February 12, 1998.
4.13 Form of Junior Subordinated Debt Trust Security, to provide for the
issuance of the $2.75 Term Convertible Securities, Series B, is
incorporated herein by reference to Exhibit 4.6 to the Registration
Statement on Form S-3 (Registration No. 333-46189) filed February 12,
1998.
4.14 Preferred Securities Guarantee with respect to Preferred Securities, to
provide for the issuance of the $2.75 Term Convertible Securities,
Series B, is incorporated herein by reference to Exhibit 4.7 to the
Registration Statement on Form S-3 (Registration No. 333-46189) filed
February 12, 1998.
4.15 Other instruments defining the rights of holders of unregistered
long-term indebtedness of the Registrant and its consolidated
subsidiaries.
10.1 Amended Power Sales Agreement, dated as of December 10, 1985, between
Oklahoma Gas and Electric Company and AES Shady Point, Inc. is
incorporated herein by reference to Exhibit 10.5 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.2 First Amendment to the Amended Power Sales Agreement, dated as of
December 19, 1985, between Oklahoma Gas and Electric Company and AES
Shady Point, Inc. is incorporated herein by reference to Exhibit 10.45
to the Registration Statement on Form S-1 (Registration No. 33-46011).
10.3 Electricity Purchase Agreement, dated as of December 6, 1985, between
The Connecticut Light and Power Company and AES Thames, Inc. is
incorporated herein by reference to Exhibit 10.4 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.4 Power Purchase Agreement, dated March 25, 1988, between AES Barbers
Point, Inc. and Hawaiian Electric Company, Inc., as amended, is
incorporated herein by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.5 The AES Corporation Profit Sharing and Stock Ownership Plan is
incorporated herein by reference to Exhibit 4(c)(1) to the Registration
Statement on Form S-8 (Registration No. 33-49262).
10.6 The AES Corporation Incentive Stock Option Plan of 1991, as amended, is
incorporated herein by reference to Exhibit 10.30 to the Annual Report
on Form 10-K of the Registrant for the fiscal year ended December 31,
1995.
10.7 Applied Energy Services, Inc. Incentive Stock Option Plan of 1982 is
incorporated herein by reference to Exhibit 10.31 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.8 Deferred Compensation Plan for Executive Officers, as amended, is
incorporated herein by reference to Exhibit 10.32 to Amendment No. 1 to
the Registration Statement on Form S-1 (Registration No. 33-40483).
10.9 Deferred Compensation Plan for Directors, as amended, is incorporated
herein by reference to Exhibit 10.33 to Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No. 33-40483).
10.10 The AES Corporation Stock Option Plan for Outside Directors is
incorporated herein by reference to Exhibit 10.43 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.
10.11 The AES Corporation Supplemental Retirement Plan is incorporated herein
by reference to Exhibit 10.64 to the Annual Report on Form 10-K of the
Registrant for the year ended December 31, 1994.
11 Statement of computation of earnings per share.
12 Statement of computation of ratio of earnings to fixed charges.
21 Significant subsidiaries of The AES Corporation.
23 Consent of Independent Auditors, Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule (Article 5).