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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19281
THE AES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 54-1163725
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209
(Address of Principal Executive Offices) (Zip Code)
(703) 522-1315
(Registrant's Telephone Number, Including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, par value
$0.01 per share, at July 31, 1998, was 175,886,504.
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THE AES CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flow 4
Notes to Consolidated Financial Statements 5
Item 2. Discussion and Analysis of Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 18
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998
- -----------------------------------------------------------------------------------------------------------------------
(UNAUDITED) THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
6/30/97 6/30/98 6/30/97 6/30/98
- -----------------------------------------------------------------------------------------------------------------------
(in millions, except per share amount)
REVENUES:
Sales and services $ 261 $ 565 $ 522 $ 1,140
OPERATING COSTS AND EXPENSES:
Cost of sales and services 163 385 330 782
Selling, general and administrative expenses 6 12 15 27
Provision to reduce contract receivables 3 - 10 15
------------ ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 172 397 355 824
------------ ------------ ------------ ------------
OPERATING INCOME 89 168 167 316
OTHER INCOME AND (EXPENSE):
Interest expense (48) (99) (92) (202)
Interest income 10 17 18 31
Equity in earnings (before income tax) 17 43 37 100
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 68 129 130 245
AND MINORITY INTEREST
Income taxes 22 36 42 69
Minority interest 4 22 6 40
------------ ------------ ------------ ------------
NET INCOME $ 42 $ 71 $ 82 $ 136
============ ============ ============ ============
BASIC EARNINGS PER SHARE: $ 0.26 $ 0.41 $ 0.51 $ 0.77
============ ============ ============ ============
DILUTED EARNINGS PER SHARE: $ 0.25 $ 0.39 $ 0.50 $ 0.75
============ ============ ============ ============
See Notes to Consolidated Financial Statements
1
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,1997 AND JUNE 30,1998
- -----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
12/31/97 6/30/98
- -----------------------------------------------------------------------------------------------------------------
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 302 $ 367
Short-term investments 127 80
Accounts receivable, less provision to reduce contract
receivables (1997-$37 and 1998-$52) 323 380
Inventory 95 121
Asset held for sale 139 -
Receivable from affiliates 23 21
Deferred income taxes 47 40
Prepaid expenses and other current assets 134 165
------------- -------------
Total current assets 1,190 1,174
PROPERTY, PLANT AND EQUIPMENT:
Land 29 31
Electric generation and distribution assets 3,809 5,334
Accumulated depreciation and amortization (373) (445)
Construction in progress 684 642
------------- -------------
Property, plant and equipment, net 4,149 5,562
OTHER ASSETS:
Deferred financing costs, net 122 148
Project development costs 87 96
Investments in and advances to affiliates 1,863 2,052
Debt service reserves and other deposits 236 185
Electricity sales concessions and contracts 1,179 1,133
Goodwill 23 26
Other assets 60 88
------------- -------------
Total other assets 3,570 3,728
------------- -------------
TOTAL $ 8,909 $ 10,464
============= =============
See Notes to Consolidated Financial Statements
2
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30,1998
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
12/31/97 6/30/98
- ------------------------------------------------------------------------------------------------------------------
($ in millions)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 205 $ 207
Accrued interest 68 114
Accrued and other liabilities 335 342
Other notes payable - current portion - 174
Project financing debt - current portion 596 599
------------- -------------
Total current liabilities 1,204 1,436
LONG-TERM LIABILITIES:
Project Financing Debt 3,489 4,560
Revolving bank loan 27 225
Other notes payable 1,069 1,069
Deferred income taxes 273 302
Other long-term liabilities 291 144
------------- -------------
Total long-term liabilities 5,149 6,300
MINORITY INTEREST 525 646
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES 550 550
STOCKHOLDERS' EQUITY:
Common stock 2 2
Additional paid-in capital 1,030 1,040
Retained earnings 581 717
Cumulative foreign currency translation adjustment (131) (226)
Less treasury stock at cost (1) (1)
------------- -------------
Total stockholders' equity 1,481 1,532
------------- -------------
TOTAL $ 8,909 $ 10,464
============= =============
See Notes to Consolidated Financial Statements
3
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1998
- ----------------------------------------------------------------------------------------------------------------
(Unaudited) SIX SIX
MONTHS MONTHS
ENDED ENDED
6/30/97 6/30/98
- ----------------------------------------------------------------------------------------------------------------
($ in millions)
OPERATING ACTIVITIES:
Net Income $ 82 $ 136
Adjustments to net income:
Depreciation and amortization 34 75
Provision for deferred taxes 12 35
Undistributed earnings of affiliates (12) (52)
Other (1) 47
Change in working capital (20) (43)
------------ ------------
Net cash provided by operating activities 95 198
INVESTING ACTIVITIES:
Property additions (206) (142)
Acquisitions, net of cash acquired (1,066) (1,356)
Proceeds from the sales of assets - 254
Sale of short-term investments 1 47
Affiliate advances and equity investments (643) (181)
Project development costs (13) (9)
Debt service reserves and other assets (17) 56
------------ ------------
Net cash used in investing activities (1,944) (1,331)
FINANCING ACTIVITIES:
Borrowings under the revolver 19 372
Issuance of project financing debt and other coupon bearing securities 1,611 1,449
Repayments of project financing debt and other coupon bearing securities (50) (458)
Payments for deferred financing costs - (10)
Other liabilities - (147)
Minority interest payments 258 (18)
Sales of common stock 149 10
------------ ------------
Net cash provided by financing activities 1,987 1,198
Increase in cash and cash equivalents 138 65
Cash and cash equivalents, beginning 185 302
------------ ------------
Cash and cash equivalents, ending $ 323 $ 367
SUPPLEMENTAL INTEREST AND INCOME TAXES DISCLOSURES:
Cash payments for interest $ 70 $ 156
Cash payments for income taxes 22 37
See Notes to Consolidated Financial Statements
4
THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of The AES
Corporation, its subsidiaries and controlled affiliates (the "Company" or
"AES"). Intercompany transactions and balances have been eliminated. Investments
in 50% or less owned affiliates over which the Company has the ability to
exercise significant influence, but not control, are accounted for using the
equity method.
In the Company's opinion, all adjustments necessary for a fair presentation
of the unaudited results of operations for the three and six months ended June
30, 1997 and 1998, respectively, are included. All such adjustments are accruals
of a normal and recurring nature. The results of operations for the period ended
June 30, 1998 are not necessarily indicative of the results of operations to be
expected for the full year. The financial statements are unaudited and should be
read in conjunction with the financial statements in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Net Income Per Share
Basic and diluted net income per share computations are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits. Potential
common stock, for purposes of determining diluted earnings per share, includes
the dilutive effects of stock options, warrants, deferred compensation
arrangements and convertible securities.
The effect of such potential common stock is computed using the treasury
stock method and the if-converted method, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Comparative
earnings per share data have been restated for prior periods. The number of
shares used in computing basic earnings per share were 163.4 million and 175.6
million for the quarters ended June 30, 1997 and 1998, respectively, and 159.5
million and 175.4 million for the six months ended June 30, 1997 and 1998,
respectively. The number of shares used in computing diluted earnings per share
were 168.0 million and 187.5 million for the quarters ended June 30, 1997 and
1998, respectively, and 164.0 million and 187.2 million for the six months ended
June 30, 1997 and 1998, respectively.
5
3. Inventory
Inventory, valued at the lower of cost (principally first-in, first-out
method) or market, consists of coal, raw materials, spare parts, and supplies.
Inventory at December 31, 1997 and June 30, 1998 consisted of the following (in
millions):
12/31/97 6/30/98
---------- ---------
Coal, oil and other raw materials $ 58 $ 55
Spare parts, materials and supplies 37 66
---------- ---------
Total $ 95 $ 121
========== =========
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 include
the condensed income statement information of NIGEN Ltd. (a 47% owned UK
affiliate), Medway Power Ltd. (a 25% owned UK affiliate), Light (a 13.75% owned
Brazilian affiliate), Chigen's affiliates, and CEMIG (a 9.45% owned Brazilian
affiliate) for the six months ended June 30, 1997 and the condensed income
statement information of NIGEN Ltd., Medway Power Ltd., Light, CEMIG, Chigen's
affiliates, Northern/AES Energy (a 45% owned U.S. affiliate) and Kingston (a 50%
owned Canadian affiliate) for the six months ended June 30, 1998.
6/30/97 6/30/98
------- -------
Revenues $ 1,201 $ 2,328
Operating Income 282 617
Net Income 188 526
5. 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.
6. Acquisitions
In February 1998, the Company acquired approximately 80% of Compania de Luz
Electrica de Santa Ana ("CLESA"), an electricity distribution company in El
Salvador, for approximately $96 million. The acquisition was accounted for as a
purchase.
In April 1998, AES Caracoles, a subsidiary of the Company, took over the
operations of a 45 MW hydroelectric plant, and signed a 40-year concession
agreement for its 230 MW construction project in San Juan Province, Argentina.
The signing of the concession and takeover marks the completion of the first
phase of the project. At this time, AES has not made any cash investment in the
project.
In May 1998, AES Southland and other subsidiaries of the Company completed
the purchase of three natural gas-fired electric generating stations located in
southern California from Southern California Edison for approximately $781
million.
6
In June 1998, a subsidiary of AES acquired approximately 90% of Empresa
Distribuidora de La Plata S.A. ("EDELAP"), an electric distribution company in
the province of Buenos Aires, Argentina for approximately $350 million.
The acquisitions above were accounted for as purchases. The purchase price
allocations have been prepared on a preliminary basis subject to adjustments
resulting from additional facts that may come to light when the engineering,
environmental, and legal analysis are completed during the allocation periods.
During 1997, the Company acquired EDEN and EDES (May 1997), CEMIG, Los
Mina, Kingston, Elsta, and Indian Queens (June 1997) and Sul and Altai (October
1997), all of which were also accounted for as purchases.
The accompanying statements of operations include the operating results or
equity in earnings for all of the acquired companies from the dates of the
acquisitions or investments. The following table presents supplemental unaudited
pro forma operating information as if each of the acquisitions or investments
had occurred at the beginning of the periods presented (in millions, except per
share amounts):
Six Months Six Months
Ended Ended
6/30/97 6/30/98
------------ -------------
Revenues 1,024 1,240
Net Income 44 133
Basic Earnings Per Share 0.25 0.76
Diluted Earnings Per Share 0.25 0.74
7. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. The
components of other comprehensive income include $21 million and $45 million of
foreign currency translation adjustment losses for the quarters ended June 30,
1997 and 1998, respectively, and $40 million and $95 million for the six months
ended June 30, 1997 and 1998, respectively. Comprehensive income is $21 million
and $25 million for the quarter ended June 30, 1997 and 1998, respectively, and
$42 million and $41 million for the six months ended June 30, 1997 and 1998,
respectively.
8. Subsequent Events
In August 1998, the Company sold 4.25 million shares of its common stock
from its shelf registration statement for gross proceeds of approximately $189.7
million or $44.625 per share. Simultaneously, the Company issued $150 million of
4.5% convertible junior subordinated debentures due 2005.
Also in August, the Company announced that it won a bid to acquire six
coal-fired, electric generating plants from NGE Generation, Inc., an affiliate
of New York State Electric & Gas Corporation ("NYSEG"), for approximately $950
million.
7
ITEM 2. 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 supplying electricity
to customers in many countries in a socially responsible way.
Until recently, the Company's sales of electricity were made almost
exclusively 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 are usually made
under long-term contracts from power plants owned by the Company. 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.
In its electricity generation business, AES now owns and operates (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
21,762 megawatts ("MW"). Of that total, 5,025 MW (nine plants) are located in
the United States, 1,588 MW (four plants) are in the United Kingdom, 885 MW (six
plants) are in Argentina, 728 MW (seven plants) are in China, 1,281 MW (three
plants) are in Hungary, 5,856 MW (thirty-nine plants) are in Brazil, 5,384 MW
(seven plants) are in Kazakhstan (including 4,000 MW attributable to Ekibastuz
which currently has a capacity factor of less than 20%), 210 MW (one plant) are
in the Dominican Republic, 110 MW (one plant) are in Canada, and 695 MW (two
plants) are in Pakistan.
AES also is currently in the process of adding approximately 5,806 MW to
its operating portfolio by constructing several new plants. These include a 180
MW coal-fired plant in the United States, three coal-fired plants in China
totaling 2,189 MW, one natural gas-fired and two hydro plants in Brazil totaling
1,200 MW, a 230 MW natural gas-fired plant in the United Kingdom, 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 and a 484 MW natural
gas-fired plant in Mexico.
As a result, AES's total of 90 power plants in operation or under
construction approximates 27,568 MW, and net equity ownership (total MW adjusted
for the Company's ownership percentage) represents approximately 16,290 MW.
Beginning in 1996, AES also has 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 three distribution companies in Argentina,
one in Brazil and one in El Salvador, and less than majority ownership in three
additional distribution companies in Brazil. These eight companies serve a total
of approximately 12.8 million customers with sales exceeding 100,000 gigawatt
hours. On a net equity basis, AES's
8
ownership represents approximately 2.7 million customers and sales exceeding
20,500 gigawatt hours.
AES does not limit its investments 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 transition from centrally planned to market oriented economies, the
electricity purchasers, both wholesale and retail, may experience difficulty in
meeting contractual payment obligations, and in such situations, that customer
may be subject to contractually imposed interest or penalty charges. The
prolonged failure of any of the Company's significant customers to fulfill its
contractual payment obligations could have a substantial negative impact on
AES's results of operations.
Beginning in August 1996 and continuing through June 30, 1998, AES has
recorded a provision of $34 million associated with aggregate outstanding
receivables (excluding VAT) of $73 million at June 30, 1998 related to the
operations of the Ekibastuz power plant in Kazakstan. Approximately $34 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 $83 million at June 30,
1998) or additional amounts the Company may invest.
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 substantial 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 June 30, 1998,
capitalized costs for projects under development were approximately $96 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.
The Company wishes to caution readers that there are important factors and
areas affecting the Company which involve risk and uncertainty. These factors
are set forth in the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 1997 under the heading "Cautionary
Statement and Risk Factors", and should be considered when reviewing the
Company's business. Such factors are relied upon by AES in issuing any
forward-looking statements and 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.
ACQUISITIONS AND OTHER EVENTS
In May 1998, AES Southland and other subsidiaries of AES completed the
purchase of three electric generating stations from Southern California Edison
("Edison") for approximately $781 million. In connection with the acquisition,
the Company obtained $713 million of non-recourse project financing. AES
Alamitos (located in Long Beach), AES Redondo Beach and AES Huntington Beach all
fire natural gas with a combined summer peak generating capacity of 3,956 MW.
AES has contracted to provide fuel conversion services from the facilities to
Williams Energy Services Company ("Williams"). Under the long-term agreement,
Williams delivers gas to the plants and owns and markets the electrical output.
Project debt financing for the acquisition was provided by a syndicate of banks
led by Credit
9
Suisse First Boston. Pursuant to California's electricity restructuring law,
Edison will remain under contract to operate and maintain the facilities for two
years, after which AES will assume operations.
Also in May, a subsidiary of AES entered into an agreement with Hanwha
Energy Co., Ltd. of South Korea ("Hanwha") to acquire Hanwha's power generation
assets located in the City of Inchon, South Korea, consisting of 1,500 MW in
operation and an additional 300 MW under construction, for approximately $873
million. Closing of the transactions contemplated by the agreement is subject to
significant conditions including negotiation and execution of definitive
documentation. The agreement requires AES to (i) fund $371 million of the
purchase price upon execution of a business transfer agreement and satisfaction
of certain conditions precedent contained therein, (ii) assume up to
approximately $273 million of existing project debt and leases upon closing, and
(iii) commit to fund the remaining $230 million towards construction of the
additional 300 MW. In connection with this potential transaction, AES has
entered into a $380 million standby non-recourse bridge loan with an affiliate
of Morgan Stanley & Co. Incorporated, secured by approximately 4 million shares
of common stock, to fund the initial $371 million payment. There can be no
assurance that the Hanwha acquisition will be consummated and the parties have
currently terminated negotiations on the transaction.
In June 1998, a subsidiary of the Company raised $173 million of
non-recourse project financing for the $230 million AES Merida III 484 MW
gas-fired combined cycle power plant currently under construction in the City of
Merida, Yucatan, Mexico. When constructed and in operation, the new facility
will provide power to the state utility in Mexico, Comision Federal de
Electricidad, under a 25- year power purchase agreement.
Also in June, a subsidiary of AES was selected by the Bangladesh Power
Development Board as the First-Ranked Sponsor to build, own and operate a 450 MW
(net) gas-fired combined cycle power plant at a site near Dhaka, Bangladesh on
the Meghna River (the "Meghnaghat Project"). The site is about 3 miles from
AES's Haripur project, a 360 MW gas-fired plant that is currently under
development. AES was awarded the Haripur project in January 1998. Electricity
from the Meghnaghat Project is anticipated to be sold to the Bangladesh Power
Development Board under the terms of a 22-year power purchase agreement, which
is expected to be signed shortly. Commercial operations of the Meghnaghat plant
is expected to commence in the year 2000. Titus Gas Transmission and
Distribution Company, a subsidiary of Petrobangla, will supply natural gas to
the facility from a nearby pipeline for the term of the power purchase
agreement.
Also in June, a subsidiary of AES acquired approximately 90% of Empresa
Distribuidora de La Plata S.A. ("EDELAP"), an electric distribution company in
the province of Buenos Aires, Argentina for approximately $350 million from a
joint venture of Houston Industries Energy, Inc. and a subsidiary of Techint
S.A., an Argentine industrial firm. EDELAP serves approximately 278,000
customers in and around the city of La Plata, the capital of Buenos Aires
Province. A $193 million non-recourse loan was provided by Citibank for a
portion of the purchase price. The balance of the purchase price was financed
through a $165 million bridge loan to a subsidiary of AES provided by an
affiliate of Salomon Brothers Holding Company Inc. secured by 8.4 million shares
of the Registrant's common stock. AES was able to renegotiate the terms of the
bridge loan such that the Company was not obligated to prepay the bridge loan as
a result of the offerings of common stock and convertible debentures discussed
below.
In July, two subsidiaries of AES, AES Lal Pir Limited ("AES Lal Pir") and
AES PakGen (Pvt) Company ("AES PakGen"), received "Notices of Intent to
Terminate"
10
certain project agreements from the Government of Pakistan. AES Lal Pir is a 351
MW (net) oil-fired thermal power plant located in the Punjab Province of
Pakistan. AES PakGen is a 344 MW (net) oil-fired thermal power plant located
adjacent to AES Lal Pir. The notices issued to these projects assert that AES's
subsidiaries made inaccurate anti-corruption representations to the Government
of Pakistan. AES believes that these notices are similar to notices received by
other independent power producers in Pakistan. AES strongly denies the
allegations made in the Notices of Intent to Terminate and intends to vigorously
pursue all available legal options to enforce and preserve its contractual
rights under the project agreements. To that end, in August 1998, AES Lal Pir
and AES PakGen filed a Request for Arbitration with the International Chamber of
Commerce International Court of Arbitration seeking a declaration that the
purported Notices of Intent to Terminate are invalid because, among other
things, the allegations contained therein have no basis in fact, there has been
no breach or event of default of any of the project documents relating to the
allegations and the Government of Pakistan has provided no evidence to
substantiate any of the allegations. Despite these notices, both plants continue
to operate normally and the customer, the Pakistan Water and Power Development
Authority, has continued to make its payments in accordance with the contracts.
In August 1998, the Company announced that it won a bid to acquire six
coal-fired, electric generating plants from NGE Generation, Inc., an affiliate
of New York State Electric & Gas Corporation ("NYSEG"), for approximately $950
million. The facilities represent the bulk of NYSEG's coal-fired generation
assets and were auctioned as part of NYSEG's implementation of its restructuring
plan in accordance with New York's introduction of wholesale and retail
competition into the state's electricity generation market. The six facilities,
located in western and west-central New York, are Kintigh (675 MW), Milliken
(306 MW), Goudey (126 MW), Greenidge (161 MW), Hickling (85 MW) and Jennison (71
MW). The facilities include low-cost generating plants and, with the exception
of some of the smaller units, are expected to run as based-load units in a
competitive New York electricity generation market. Sulfur dioxide scrubbers
have already been installed at the largest plants, Kintigh and Milliken. The
acquisition is expected to be completed during the first quarter of 1999 and is
subject to customary closing conditions, including the receipt of various
governmental approvals.
Also in August, the Company sold 4.25 million shares of its common stock
from its shelf registration statement for gross proceeds of approximately $189.7
million or $44.625 per share. Simultaneously, the Company issued $150 million of
4.5% convertible junior subordinated debentures due 2005. AES used the combined
net proceeds from the offerings of approximately $330 million for general
corporate purposes and to repay amounts outstanding under the Company's
Revolver.
SECOND QUARTER 1998 AND 1997 RESULTS OF OPERATIONS
Revenues increased 116%, or approximately $304 million, to $565 million
from the second quarter of 1997 to the second quarter of 1998. The increase in
revenues was due primarily to the acquisition of EDEN and EDES in May 1997, Los
Mina in June 1997, Altai and Sul in October 1997, the commencement of commercial
operations at Jiaozou and Hefei in August 1997, Lal Pir in November 1997 and Pak
Gen in February 1998, and the acquisitions of CLESA in February 1998 and
Southland in May 1998, offset slightly by lower production at Ekibastuz and a
planned outage at Thames. Cost of sales and services increased 136%, or
approximately $222 million, to $385 million from the second quarter of 1997 to
the second quarter of 1998. The increase in cost of sales and services was
primarily due to the new businesses acquired and the start of commercial
operations as discussed above, offset in part, by lower production at Ekibastuz.
Gross margin, which represents total revenues reduced by
11
cost of sales and services (before consideration of the provision to reduce
contract receivables), increased 84%, or approximately $82 million, to $180
million during the same period. The increase in gross margin was primarily due
to the factors discussed above. Gross margin as a percentage of revenues (net of
the provision to reduce contract receivables) decreased from 38% in the second
quarter of 1997 to 32% in the second quarter of 1998, primarily due to lower
relative gross margin percentages of the newly acquired businesses.
Revenues increased 118%, or approximately $618 million from the first six
months of 1997 to the first six months of 1998. The increase in revenues was
primarily due to the acquisitions of EDEN, EDES, Los Mina, Jiaozou, Hefei,
Altai, Sul, CLESA and Southland, and the commencement of commercial operations
at Lal Pir and Pak Gen. Cost of sales and services increased 137% or
approximately $452 million from the first half of 1997 to the same period of
1998. The increase was primarily due to the recent acquisitions and the
commencement of commercial operations as discussed above. Gross margin (before
consideration of the provision to reduce contract receivables) increased 86%, or
approximately $166 million to $358 million from the first six months of 1997 to
the first six months of 1998. The increase in gross margin was primarily due to
the factors discussed above. Gross margin as a percentage of revenues (net of
the provision to reduce contract receivables) decreased from 37% for the first
half of 1997 to 31% for the first half of 1998. The decrease was primarily due
to lower relative gross margin percentages of the newly acquired businesses.
Selling, general and administrative expenses increased 100%, or
approximately $6 million to $12 million from the second quarter of 1997 to the
second quarter of 1998, and as a percentage of total revenue, were 2% for both
quarters. Selling, general and administrative expenses increased 80%, or
approximately $12 million to $27 million from the first six months of 1997 to
the first six months of 1998 and as a percentage of revenues, were 3% for the
first half of 1997 and 2% for the first half of 1998. The increases were
primarily due to increased business development activities. The Company's
selling, general and administrative costs do not necessarily vary with changes
in revenues.
Operating income increased 89%, or approximately $79 million to $168
million from the second quarter of 1997 to the second quarter of 1998 and
increased 89%, or $149 million to $316 million from the first half of 1997 to
the first half of 1998. The increases were the result of the factors discussed
above.
Interest expense increased 106%, or approximately $51 million to $99
million from the second quarter of 1997 to the second quarter of 1998 and
increased 120%, or approximately $110 million to $202 million from the first six
months of 1997 to the first six months of 1998. The increases were the result of
additional interest expense associated with the Company's $250 million 5 3/8%
TECONS, the Company's outstanding senior subordinated notes, the TECONS and
project financing debt issued in 1997 relating to the acquisitions during the
year, offset by interest capitalized in the second quarter related to project
construction at CEMIG.
Interest income increased 70%, or approximately $7 million to $17 million
from the second quarter of 1997 to the second quarter of 1998 and increased 72%,
or approximately $13 million to $31 million from the first half of 1997 to the
first half of 1998. The increases were due primarily to interest income
associated with late payments on customer accounts at certain distribution
subsidiaries, interest income on higher cash balances at other subsidiaries and
interest on debt service reserve accounts.
Equity in earnings of affiliates (before income taxes) increased 153%, or
approximately $26 million to $43 million from the second quarter of 1997 to the
same period
12
of 1998, and increased 170%, or approximately $63 million to $100 million from
the first six months of 1997 to the first six months of 1998. The increases were
due primarily to earnings from the Company's June, 1997 investment in CEMIG, and
a one time gain at Light during the second quarter of 1998 associated with a
pension curtailment.
Income taxes increased 64%, or approximately $14 million to $36 million
from the second quarter of 1997 to the second quarter of 1998 and increased 64%,
or approximately $27 million to $69 million from the first six months of 1997 to
the same period of 1998. The increases were due primarily to higher income
before taxes.
Minority interest expense increased 450%, or approximately $18 million to
$22 million from the second quarter of 1997 to the same period of 1998 and
increased 567%, or approximately $34 million to $40 million from the first six
months of 1997 to the first six months of 1998. The increases were primarily due
to the sale of a portion of the Company's equity investment in CEMIG (January
1998) and the acquisition of an approximate 60% interest in EDEN and EDES (May
1997).
FINANCIAL POSITION, CASH FLOWS AND FOREIGN CURRENCY EXCHANGE RATES
At June 30, 1998, cash and cash equivalents totaled approximately $367
million, as compared to $302 million at December 31, 1997. The $65 million
increase in cash resulted from a use of $1,331 million for investing activities
which were funded by $1,198 million from financing activities and $198 million
provided by operating activities. Significant investing activities included
project construction at Barry, Mt. Stuart, Pak Gen and Warrior Run, the
acquisitions of CLESA, Southland, and EDELAP, and proceeds from the sales of the
Company's 20% interest in Hazelwood and a portion of the Company's CEMIG
investment. The net use of cash from financing activities was primarily the
result of repayments of $458 million of project financing debt offset by
borrowings of $372 million under the Company's Revolver, and borrowing $1,449
million of project financing debt. Unrestricted net cash flow of the parent
company totaled approximately $347 million for the four quarters ended June 30,
1998.
The increase in electric generation and distribution assets of $1,525
million to $5,334 million from December 31, 1997 to June 30, 1998 was due
primarily to the CLESA, Southern, and EDELAP acquisitions and Pak Gen's
commencement of operations. The decrease in construction in progress of $42
million to $642 million was due to construction completion at Pak Gen offset by
the progress payments at the other facilities in construction.
Through its equity investments in foreign affiliates and subsidiaries, AES
operates in jurisdictions with currencies other than the Company's functional
currency, the U.S. dollar. Such investments and advances were made to fund
equity requirements and to provide collateral for contingent obligations. Due
primarily to the long-term nature of the investments and advances, the Company
accounts for any adjustments resulting from translation of the financial
statements of its foreign investments as a charge or credit directly to a
separate component of stockholders' equity until such time as the Company
realizes such charge or credit. At that time, any differences would be
recognized in the statement of operations as gains or losses.
13
In addition, certain of the Company's foreign subsidiaries have entered
into obligations in currencies other than their own functional currencies or the
U.S. dollar. These subsidiaries have attempted to limit potential foreign
exchange exposure by entering into revenue contracts that adjust to changes in
the foreign exchange rates. Certain foreign affiliates and subsidiaries operate
in countries where the local inflation rates are greater than U.S. inflation
rates. In such cases the foreign currency tends to devalue relative to the U.S.
dollar over time. The Company's subsidiaries and affiliates have entered into
revenue contracts which attempt to adjust for these differences, however, there
can be no assurance that such adjustments will compensate for the full effect of
currency devaluation, if any. The Company had approximately $226 million in
cumulative foreign currency translation adjustment losses at June 30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The company believes that there have been no material changes in exposure
to market risks during the second quarter of 1998 set forth in the Company's
Annual Report filed with the Commission on Form 10-K for the year ended December
31, 1997.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August, the Company sold 4.25 million shares of its common stock from
its shelf registration statement for gross proceeds of approximately $189.7
million or $44.625 per share. Simultaneously, the Company issued $150 million of
4.5% convertible junior subordinated debentures due 2005. AES used the combined
net proceeds from the offerings of approximately $330 million for general
corporate purposes and to repay amounts outstanding under the Company's
Revolver.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Election of Directors
Nominee For Against/Abstain
- ------- --- ---------------
Roger W. Sant 147,318,762 1,216,197
Dennis W. Bakke 147,425,652 1,109,407
Alice F. Emerson 147,433,961 1,101,098
Bob Hemphill 147,329,278 1,205,781
Frank Jungers 147,289,955 1,245,104
John McArthur 147,739,133 795,926
Hazel O'Leary 147,729,322 805,737
Thomas I. Unterberg 146,600,000 1,935,059
Robert H. Waterman, Jr 147,326,731 1,208,328
Election of Auditors
For Against Abstain
- --- ------- -------
147,907,788 578,999 48,272
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
15
3.1 Fifth Amended and Restated Certificate of Incorporation of The AES
Corporation.
3.2 By-Laws of The AES Corporation, as amended.
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 is incorporated herein by reference
to Exhibit 4.1 to Annual Report on Form 10-K of the Registrant for the
year ended December 31, 1997 filed March 30, 1998.
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 is incorporated herein
by reference to Exhibit 4.1 to Annual Report on Form 10-K of the
Registrant for the year ended December 31, 1997 filed March 30, 1998.
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 is incorporated herein by reference to Exhibit
4.1 to Annual Report on Form 10-K of the Registrant for the year ended
December 31, 1997 filed March 30, 1998.
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 is
incorporated herein by reference to Exhibit 4.1 to Annual Report on
Form 10-K of the Registrant for the year ended December 31, 1997 filed
March 30, 1998.
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
16
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 Junior Subordinated Indenture dated as of August 10, 1998, between The
AES Corporation and The First National Bank of Chicago, as trustee, to
provide for the issuance of the 4.5% Convertible Junior Subordinated
Debentures due 2005.
4.16 First Supplemental Indenture dated as of August 10. 1998, to the
Junior Subordinated Indenture dated as of August 10, 1998, between The
AES Corporation and The First National Bank of Chicago, as trustee, to
provide for the issuance of the 4.5% Convertible Junior Subordinated
Debentures due 2005.
4.17 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).
17
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 is incorporated herein by
reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q of the
Registrant for the quarter ended March 31, 1998, filed May 15, 1998.
10.10The 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.
10.11The 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.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended June 30, 1998, the Company did not file any
Current Reports on Form 8-K.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE AES CORPORATION
(Registrant)
Date: August 14, 1998 By: /s/ Barry J. Sharp
------------------
Name: Barry J. Sharp
Title: Senior Vice
President and Chief
Financial Officer
19
EXHIBIT INDEX
Sequentially
Exhibit Description of Exhibit Numbered Page
3.1 Fifth Amended and Restated Certificate of Incorporation of The AES
Corporation.
3.2 By-Laws of The AES Corporation, as amended
4.15 Junior Subordinated Indenture dated as of August 10, 1998, between The AES
Corporation and The First National Bank of Chicago, as trustee, to provide
for the issuance of the 4.5% Convertible Junior Subordinated Debentures due
2005.
4.16 First Supplemental Indenture dated as of August 10. 1998, to the Junior
Subordinated Indenture dated as of August 10, 1998, between The AES
Corporation and The First National Bank of Chicago, as trustee, to provide
for the issuance of the 4.5% Convertible Junior Subordinated Debentures due
2005.
4.17 Other instruments defining the rights of holders of long-term indebtedness
of the Registrant and its consolidated subsidiaries.
11 Statement of Computation of Earnings Per Share.
27 Financial Data Schedule.