<PAGE> 1
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 4, 1996)
5,000,000 Securities
AES TRUST I
$2.6875 Term Convertible Securities, Series A ("TECONS(SM)")
(Liquidation amount $50 per security) fully and unconditionally guaranteed as
set forth herein by, and convertible into Common Stock of,
(AES LOGO)
THE AES CORPORATION
The $2.6875 Term Convertible Securities, Series A (the "TECONS" or "Preferred
Securities"), liquidation amount $50 per security, offered hereby represent
preferred undivided beneficial interests in the assets of AES Trust I, a
statutory business trust formed under the laws of the State of Delaware ("AES
Trust" or the "Trust").
The TECONS offering (the "TECONS Offering") is being conducted concurrently with
an offering (the "Common Stock Offering") of common stock, par value $.01 per
share (the "AES Common Stock"), of The AES Corporation (the "Company"). The
consummation of the TECONS Offering is not contingent on the closing of the
Common Stock Offering.
The TECONS have been approved for listing on the New York Stock Exchange (the
"NYSE") under the symbol "AES PrT," subject to official notice of issuance. See
"Underwriting." (continued on the following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO AES
PUBLIC (1) COMPENSATION (2) TRUST (3)(4)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per TECONS $50.00 (3) $50.00
- --------------------------------------------------------------------------------------------------------------
Total (5) $250,000,000 (3) $250,000,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued Distributions (as defined herein), if any, from March 31, 1997.
(2) AES Trust and the Company have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(3) The Underwriting Agreement provides that the Company will pay to the
Underwriters, as compensation for their services, $1.375 per TECONS (or
$6,875,000 in the aggregate). See "Underwriting."
(4) The Company will pay expenses of the TECONS Offering estimated at $375,000.
(5) AES Trust and the Company have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus Supplement, to
purchase up to 500,000 additional TECONS on the same terms as set forth
above to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Compensation and
Proceeds to AES Trust will be $275,000,000, $7,562,500 and $275,000,000,
respectively. See "Underwriting."
The TECONS offered hereby are being offered severally by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to various prior conditions, including their right to
reject orders in whole or in part, and subject to approval of certain legal
matters by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected
that delivery of the TECONS will be made only in book-entry form through the
facilities of The Depository Trust Company, as Depositary, on or about March 31,
1997, against payment therefor in immediately available funds.
J.P. MORGAN & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
UNTERBERG HARRIS
March 24, 1997
<PAGE> 2
AES PLANTS IN OPERATION AND UNDER CONSTRUCTION
<TABLE>
<CAPTION>
YEAR OF
ACQUISITION OR AES
COMMENCEMENT OF EQUITY
COMMERCIAL CAPACITY INTEREST
PLANT FUEL OPERATIONS (MEGAWATTS) LOCATION (%)
-------------------------- --------- --------------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
IN OPERATION
[AES FLAGS] North America
Deepwater................. Pet Coke 1986(a) 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
Barbers Point............. Coal 1992 180 Hawaii 100
Europe
Kilroot (NIGEN)........... Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN)...... Coal 1992 240 United Kingdom 47
Medway.................... Gas 1995 660 United Kingdom 25
Borsod (Tiszai)........... Coal 1996 171 Hungary 63
Tisza II (Tiszai)......... Oil/Gas 1996 860 Hungary 93
Tiszapalkonya (Tiszai).... Coal 1996 250 Hungary 93
Asia
Cili Misty Mountain....... Hydro 1994 26 China 24
Yangchun Sun Spring....... Oil 1995 15 China 12
Wuxi Tin Hill............. Oil 1996 63 China 26
Wuhu Grassy Lake.......... Coal 1996 125(b) China 12
Ekibastuz................. Coal 1996 4,000(c) Kazakstan 70
South America
San Nicolas............... Multiple 1993 650 Argentina 69
Cabra Corral (Rio
Juramento).............. Hydro 1995 102 Argentina 98
El Tunal (Rio
Juramento).............. Hydro 1995 10 Argentina 98
Ullum (San Juan).......... Hydro 1996 45 Argentina 98
Sarmiento (San Juan)...... Gas 1996 33 Argentina 98
Fontes Nova (Light)....... Hydro 1996 144 Brazil 14
Pereira Passos (Light).... Hydro 1996 100 Brazil 14
Nilo Pecanha (Light)...... Hydro 1996 380 Brazil 14
Ilha dos Pombos (Light)... Hydro 1996 164 Brazil 14
--------
Total in Operation 9,627
UNDER CONSTRUCTION
Lal Pir................... Oil 1997(d) 337 Pakistan 90
PakGen.................... Oil 1997(d) 337 Pakistan 90
Jiaozou Aluminum Power.... Coal 1997(d) 250 China 34
Chengdu Lotus City........ Gas 1997(d) 48 China 17
Wuhu Grassy Lake.......... Coal 1997(d) 125(b) China 12
Aixi Heart River.......... Coal 1998(d) 50 China 34
Hefei Prosperity Lake..... Oil 1998(d) 115 China 34
Barry..................... Gas 1998(d) 230 United Kingdom 100
Warrior Run............... Coal 1999(d) 180 Maryland 100
--------
Total under Construction 1,672
</TABLE>
------------------------------
(a) Plant operations commenced in 1986, but control was acquired
in 1995.
(b) 125 megawatts of Wuhu Grassy Lake is currently in operation.
The other half is under construction.
(c) Due to poor historical maintenance over the ten years prior
to the Company's purchase, the facility's capacity factor is
approximately 20%.
(d) Estimated date of commencement of commercial operations.
<PAGE> 3
(Continued from previous page)
The Company will directly or indirectly own all the common securities (the
"Trust Common Securities," and together with the TECONS, the "Trust
Securities"), representing undivided beneficial interests in the assets of AES
Trust. AES Trust exists for the sole purpose of issuing the TECONS and the Trust
Common Securities and investing the proceeds thereof in 5.375% Junior
Subordinated Convertible Debentures due 2027 (the "Junior Subordinated
Debentures") of AES in an aggregate principal amount equal to the aggregate
liquidation amount of the Trust Securities. The Junior Subordinated Debentures
and the TECONS in respect of which this Prospectus Supplement is being delivered
are referred to herein as the "Offered Securities." The Junior Subordinated
Debentures, when issued, will be unsecured obligations of AES and will be
subordinate and junior in right of payment to certain other indebtedness of AES
as described herein. Upon a Declaration Event of Default (as defined herein),
the holders of the TECONS will have a preference over the holders of the Trust
Common Securities with respect to payment in respect of Distributions (as
defined herein) and payments upon redemption, liquidation and otherwise.
Holders of the TECONS are entitled to receive cumulative cash distributions at
an annual rate of $2.6875 per TECONS, accruing from March 31, 1997 and payable
quarterly in arrears on the last day of each calendar quarter, commencing on
June 30, 1997. The term "Distributions" as used herein includes such cash
distributions and any interest payable thereon unless otherwise stated. The
Distribution rate and the Distribution and other payment dates for the TECONS
will correspond to the interest rate and the interest and other payment dates on
the Junior Subordinated Debentures deposited in the Trust as trust assets. If
principal or interest is not paid on the Junior Subordinated Debentures,
including as a result of the Company's election to extend the interest payment
period on the Junior Subordinated Debentures as described below, the Trust will
not make payments on the Trust Securities. The Junior Subordinated Debentures
provide that, so long as the Company shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Company shall have the right
to defer payments of interest on the Junior Subordinated Debentures by extending
the interest payment period from time to time for a period not exceeding 20
consecutive quarterly interest periods (each, an "Extension Period"). No
interest shall be due and payable during an Extension Period and, as a
consequence, distributions on the Trust Securities will also be deferred, but at
the end of such Extension Period the Company shall pay all interest then accrued
and unpaid on the Junior Subordinated Debentures, together with interest thereon
at the rate specified for the Junior Subordinated Debentures to the extent
permitted by applicable law, compounded quarterly ("Compounded Interest"). All
references herein to interest shall include Compounded Interest unless otherwise
stated. There could be multiple Extension Periods of varying lengths throughout
the term of the Junior Subordinated Debentures, not to exceed 20 consecutive
quarters; provided, that no such period may extend beyond the stated maturity of
the Junior Subordinated Debentures. During any such Extension Period, the
Company may not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its common
stock or preferred stock; provided that the foregoing will not apply to any
stock dividends paid by the Company in AES Common Stock. See "Description of the
Junior Subordinated Debentures -- Interest" and " -- Option to Extend Interest
Payment Period" herein and "Risk Factors -- Option to Extend Interest Payment
Period; Tax Impact of Extension" in the accompanying Prospectus.
The payment of Distributions out of moneys held by AES Trust and payments on
liquidation of AES Trust and the redemption of TECONS, as set forth below, are
guaranteed by the Company on a subordinated basis as and to the extent described
herein (the "Preferred Securities Guarantee") and under "Description of the
Preferred Securities Guarantees" in the accompanying Prospectus. The Preferred
Securities Guarantee is a full and unconditional guarantee from the time of
issuance of the TECONS, but the Preferred Securities Guarantee covers
Distributions and other payments on the TECONS only if and to the extent that
AES Trust has funds available therefor, which will not be the case unless the
Company has made a payment to the Property Trustee (as defined in the
accompanying Prospectus) of interest or principal on the Junior Subordinated
Debentures deposited in the Trust as trust assets. The obligations of the
Company under the Preferred Securities Guarantee are subordinate and junior in
right of payment to all other liabilities of the Company, including Junior
Subordinated Debt Securities (as defined in the accompanying Prospectus), and
will rank pari passu in right of payment with the most senior preferred stock
issued, from time to time, if any, by AES. The obligations of the Company under
the Junior Subordinated Debentures are subordinate and junior in right of
payment to all present and future Senior and Subordinated Debt (as defined in
the accompanying Prospectus). Because the Company is a holding company, the
Junior Subordinated Debentures (and the Company's obligations under the
Preferred Securities Guarantee) are also effectively subordinated to all
existing and future liabilities, including trade payables, of the Company's
subsidiaries, except to the extent that the Company is a creditor of the
subsidiaries recognized as such.
S-2
<PAGE> 4
(Continued from previous page)
Each TECONS is convertible in the manner described herein at the option of the
holder, at any time prior to the Conversion Expiration Date (as defined herein),
into AES Common Stock at the initial rate of 0.6906 shares of AES Common Stock
for each TECONS (equivalent to an initial conversion price of $72.40 per share
of AES Common Stock), subject to adjustment in certain circumstances. See
"Description of the TECONS -- Conversion Rights." The AES Common Stock is listed
on the NYSE under the symbol "AES." On March 24, 1997, the reported last sale
price of the AES Common Stock on the NYSE Composite Tape was $58.625 per share.
The Junior Subordinated Debentures are redeemable by the Company (in whole or in
part) from time to time, on or after March 31, 2000 at the prices specified
herein or at any time in certain circumstances upon the occurrence of a Tax
Event (as defined herein) at 100% of the principal amount thereof plus accrued
and unpaid interest thereon to the date fixed for redemption (the "Redemption
Price"). If the Company redeems Junior Subordinated Debentures, the Trust must
redeem, at the Redemption Price, Trust Securities having an aggregate
liquidation amount equal to the aggregate principal amount of the Junior
Subordinated Debentures so redeemed. See "Description of the TECONS -- Mandatory
Redemption." The TECONS will be redeemed upon maturity of the Junior
Subordinated Debentures. The Junior Subordinated Debentures mature on March 31,
2027. In addition, upon the occurrence of a Special Event (as defined herein)
arising from a change in law or a change in legal interpretation, unless the
Junior Subordinated Debentures are redeemed in the limited circumstances
described below, the Trust shall be dissolved with the result that the Junior
Subordinated Debentures will be distributed to the holders of the Trust
Securities, on a pro rata basis, in lieu of any cash distribution. In the case
of a Special Event that is a Tax Event, the Company will have the right in
certain circumstances to redeem the Junior Subordinated Debentures, which would
result in the redemption by the Trust of the Trust Securities in the same amount
on a pro rata basis. If the Junior Subordinated Debentures are distributed to
the holders of the TECONS, the Company will use its best efforts to have the
Junior Subordinated Debentures listed on the NYSE or on such other exchange as
the TECONS are then listed. See "Description of the TECONS -- Special Event
Redemption or Distribution" and "Description of the Junior Subordinated
Debentures."
In the event of the voluntary or involuntary dissolution, winding up or
termination of the Trust, the holders of the TECONS will be entitled to receive,
for each TECONS, a liquidation amount of $50 plus accrued and unpaid
distributions thereon (including interest thereon) to the date of payment,
unless in connection with such dissolution, the Junior Subordinated Debentures
are distributed to the holders of the TECONS. See "Description of the
TECONS -- Liquidation Distribution Upon Dissolution."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SECURITIES
OR AES COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION
WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, THE PREFERRED SECURITIES OR
AES COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Prospectus Supplement or the
accompanying Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by AES Trust,
AES or any Underwriter. Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an offer to buy any
securities in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation.
S-3
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT PAGE
Special Note Regarding Forward
Looking Statements................. S-4
Prospectus Supplement Summary........ S-5
Use of Proceeds...................... S-14
Price Range of Common Stock and
Dividend Policy.................... S-14
Capitalization....................... S-15
Selected Consolidated Financial
Data............................... S-16
Discussion and Analysis of Financial
Condition and Results of
Operations......................... S-17
Business............................. S-26
AES Trust I.......................... S-30
Description of the TECONS............ S-30
Description of the Guarantee......... S-45
Description of the Junior
Subordinated Debentures............ S-45
Relationship between the TECONS, the
Junior Subordinated Debentures and
the Preferred Securities
Guarantee.......................... S-51
Certain Federal Tax Consequences..... S-52
Underwriting......................... S-56
Legal Matters........................ S-58
Experts.............................. S-58
Index to Consolidated Financial
Statements......................... F-1
PROSPECTUS PAGE
Available Information................ 2
Incorporation of Certain Documents by
Reference.......................... 2
Use of Proceeds...................... 3
Ratios of Earnings to Fixed
Charges............................ 3
The Company.......................... 4
Risk Factors......................... 4
The AES Trusts....................... 13
Description of the Preferred
Securities......................... 18
Description of the Preferred
Securities Guarantees.............. 19
Description of the Junior
Subordinated Debt Trust
Securities......................... 22
Plan of Distribution................. 27
Legal Matters........................ 28
Experts.............................. 28
</TABLE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements under the captions "Prospectus Supplement Summary," "The
Company," "Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in this Prospectus Supplement and under the caption
"Risk Factors" in the accompanying Prospectus and elsewhere in this Prospectus
Supplement and the accompanying Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance and achievements of AES, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following factors, as well as those factors discussed in
the section entitled "Risk Factors" in the accompanying Prospectus and those
discussed elsewhere in AES's filings with the Securities and Exchange Commission
(the "Commission"), including its Current Report on Form 8-K dated February 26,
1996: changes in company-wide operation and availability compared to AES's
historical performance; changes in AES's historical operating cost structure,
including changes in various costs and expenses; political and economic
considerations in certain non-U.S. countries where AES is conducting or is
seeking to conduct business; restrictions on foreign currency convertibility and
remittance abroad, exchange rate fluctuations and developing legal systems;
regulation and restrictions; legislation intended to promote competition in U.S.
and non-U.S. electricity markets; tariffs; governmental approval processes;
environmental matters; construction, operating and fuel risks; load growth,
dispatch and transmission constraints; conflict of interest of contracting
parties; and adherence to the AES principles; and other factors referenced in
this Prospectus Supplement and in the accompanying Prospectus. See "Risk
Factors" in the accompanying Prospectus.
S-4
<PAGE> 6
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read in
connection with, the more detailed information and Consolidated Financial
Statements and the Notes thereto included and incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. All information in the
Prospectus Supplement assumes that the Underwriters' over-allotment option will
not be exercised, unless otherwise indicated. References herein to "AES" or the
"Company" include The AES Corporation and its subsidiaries and affiliates unless
the context requires otherwise and references herein to "MW" are to megawatts.
THE COMPANY
AES is a global power company committed to supplying electricity to customers
world-wide in a socially responsible way. The Company was one of the original
entrants in the independent power market and today is one of the world's largest
independent power companies, based on net equity ownership of generating
capacity (in megawatts) in operation or under construction. AES markets power
principally from electricity generating facilities that it develops, acquires,
owns and operates.
Over the last five years, the Company has experienced significant growth. This
growth has resulted primarily from the development and construction of new
plants ("greenfield development") and also from the acquisition of existing
plants, through competitively bid privatization initiatives outside of the
United States or negotiated acquisitions. Since 1992, the Company's total
generating capacity in megawatts has grown by 426%, with the total number of
plants in operation increasing from eight to 26. Additionally, the Company's
total revenues have increased at a compound annual growth rate of 20% from $401
million in 1992 to $835 million in 1996, while net income has increased at a
compound annual growth rate of 22% from $56 million to $125 million over the
same period. AES operates and owns (entirely or in part), through subsidiaries
and affiliates, power plants in seven countries with a capacity of approximately
9,600 megawatts (including 4,000 megawatts attributable to Ekibastuz which
currently has a capacity factor of approximately 20%). AES is also constructing
eight additional power plants and one expansion in four countries with a
capacity of approximately 1,700 megawatts. The Company's total ownership in
plants in operation and under construction aggregates approximately 11,300
megawatts and its net equity ownership in such plants is approximately 7,500
megawatts. In addition, AES has numerous projects in advanced stages of
development, including seven projects in advanced stages of development with
design capacity of approximately 4,700 megawatts that have executed or been
awarded power sales agreements.
As a result of the Company's significant growth in recent years, the Company's
operations have become more diverse with regard to both geography and fuel
source and it has reduced its dependence upon any single project or customer.
During 1996, four of the Company's projects contributed more than 10% of the
Company's total revenues, Shady Point which represented 20%, San Nicolas which
represented 16%, Thames which represented 16% and Barbers Point which
represented 15%.
OUTLOOK
The global trend of electricity market restructuring has created significant new
business opportunities for companies like AES. Both domestic and international
electricity markets are being restructured and there is a trend away from
government-owned 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 systems. Some countries have or are in the process of
"privatizing" their electricity systems by selling all or part of such systems
to private investors. With 18 of its projects having been acquired or commenced
commercial operations since 1992, AES has been an active participant in both the
international privatization process and the development process. The Company is
currently pursuing over 60 projects including acquisitions, the expansion of
existing plants and new projects.
S-5
<PAGE> 7
AES believes that there is significant demand for both new and more efficiently
operated electric generating capacity in many regions around the world. In an
effort to further grow and diversify the Company's portfolio of electric
generating plants, AES is pursuing, through its integrated divisions, additional
greenfield developments and acquisitions in many countries. Several of these
acquisitions, if consummated, would require the Company to obtain substantial
additional financing, in the form of both debt and equity financing, in the
short term.
STRATEGY
The Company's strategy in helping meet the world's need for electricity is 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 the 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:
- Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
- Constructing or acquiring projects of a relatively large size
(generally larger than 100 megawatts);
- When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
- 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. 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.
Where possible, AES attempts to sell electricity under long-term power sales
contracts. The Company attempts, whenever possible, to structure the revenue
provisions of such power sales contracts such that changes in the cost
components of a facility (primarily fuel costs) correspond, as effectively as
possible, to changes in the revenue components of the contract. The Company also
attempts to provide fuel for its operating plants generally under long-term
supply agreements, either through contractual arrangements with third parties
or, in some instances, through acquisition of a dependable source of fuel.
As electricity markets become more competitive, it may be more difficult for AES
(and other power generation companies) to obtain long-term power sales
contracts. In markets where long-term contracts are not available, AES will
pursue methods to hedge costs and revenues to provide as much assurance as
possible of a project's profitability. In these situations, AES might choose to
purchase a project with a partial hedge or with no hedge, with the strategy that
its diverse portfolio of projects provides some hedge to the increased
volatility of the project's earnings and cash flow. Additionally, AES may choose
not to participate in these markets.
The Company attempts to finance each domestic and foreign plant 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 plant subsidiary or
affiliate. This type of financing is generally referred to as "project
financing." The lenders under these project financing structures 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.
S-6
<PAGE> 8
RECENT DEVELOPMENTS
In February 1997, AES entered into a definitive agreement to acquire the
international assets (inclusive of approximately $42 million of net monetized
assets) of Destec Energy, Inc. ("Destec"), a large independent energy producer
with headquarters in Houston, Texas, at a total price to AES of $407 million,
which price is subject to adjustment to reflect net cash flow between the
international assets of Destec and the rest of Destec from January 1, 1997 to
the closing date. NGC Corporation ("NGC"), working in conjunction with AES, was
selected as the winning bidder in an auction for all of Destec at a total
acquisition price of $1.27 billion. AES will acquire the international assets of
Destec immediately following NGC's acquisition of Destec. Destec's international
assets to be acquired by AES include ownership interests in the following five
electric generating plants (with ownership percentages in parentheses): (i) a
110 MW gas-fired combined cycle plant in Kingston, Canada (50 percent); (ii) a
405 MW gas-fired combined cycle plant in Terneuzen, Netherlands (50 percent);
(iii) a 140 MW gas-fired simple cycle plant in Cornwall, England (100 percent);
(iv) a 235 MW oil-fired simple cycle plant in Santo Domingo, Dominican Republic
(99 percent); and (v) a 1,600 MW coal-fired plant in Victoria, Australia (20
percent). The acquisition by AES of Destec's international assets also includes
all of Destec's non-U.S. developmental stage power projects, including projects
in Taiwan, England, Germany, the Philippines, Australia and Colombia. A number
of risks are associated with this acquisition including those relating to the
closing of the transaction (which, in itself, is contingent on the closing of
NGC's acquisition of Destec), the receipt of government approvals and other
consents, financing, operation and maintenance, construction and environmental
risk.
In February 1997, AES announced that its subsidiary, AES Electric Ltd., raised
L112.5 million of non-recourse project financing, underwritten solely by The
Industrial Bank of Japan, Limited, for its 230 MW gas-fired combined cycle
facility in Barry, South Wales, United Kingdom. The Barry facility will sell
electricity into the national electricity market in the United Kingdom, and is
expected to be operational by the second quarter of 1998. AES began construction
of the Barry facility in October 1996. Substantial risks to the successful
completion of this project exist, including those relating to governmental
approvals, the demand for and price of electricity in the United Kingdom
national electricity market, financing, construction and permitting. There can
be no assurance that this project will be completed.
In February 1997, AES announced the execution by subsidiaries of AES of three
power purchase agreements (the "PPAs"), for an aggregate generating capacity of
at least 457 MWs, with GPU Energy, the energy services and delivery business of
GPU, Inc., a public utility holding company. AES plans to build a 720 MW natural
gas-fired, combined cycle facility in Pennsylvania to sell power under the PPAs
beginning in 2000 and to sell power to other potential purchasers. Between March
and July 1996, subsidiaries of AES acquired the right to negotiate the PPAs from
other independent power producers for a net aggregate cost of approximately $28
million. GPU Energy is required to reimburse AES for substantially all its
initial net investment if the project does not receive the requisite regulatory
approvals and permits. In January 1997, a joint venture company led by a
subsidiary of AES was selected as the winning bidder to build, own and operate a
484 MW gas-fired combined cycle power plant in the City of Merida, Yucatan,
Mexico. These projects are subject to a number of risks, including those related
to financing, construction and contract compliance, and there can be no
assurance that these projects will be completed successfully.
In January 1997, AES acquired an additional 2.4% of the voting interest in Light
Servicos de Electricidade, S.A. ("Light"), a vertically integrated electric
utility in the state of Rio de Janeiro, Brazil, bringing its total equity
interest in Light to 13.75%. In December 1996, a subsidiary of AES completed a
$167.5 million syndicated bank financing related to its equity ownership of
Light (which at the time was 11.35%). Under the terms of the financing, a
wholly-owned subsidiary of AES pledged the shares of Light owned by it as
collateral for the loan. The proceeds of the financing were used to repay a
portion of the debt incurred in the original acquisition of Light.
In December 1996, AES, through a subsidiary, completed the purchase of an
additional 12.5% of Tiszai Eromu Rt., an electric generation company in Hungary
consisting of three power plants with an aggregate capacity of 1,281 MWs and a
coal mine, from employee pension plans at a cost of $17 million, bringing AES's
total equity interest in Tiszai Eromu Rt. to 93.3%. In August 1996, AES acquired
its initial 80.8% of Tiszai Eromu Rt. at a cost of $110 million.
S-7
<PAGE> 9
In November 1996, AES China Generating Company, Ltd. ("AES Chigen") and AES
entered into an Agreement and Plan of Amalgamation, providing among other things
for AES Chigen to become a wholly-owned subsidiary of AES (the "Amalgamation").
The Amalgamation is subject to various conditions, including the approval of the
holders of the Class A Common Stock of AES Chigen, and there can be no assurance
that the Amalgamation will be consummated. The AES Chigen shareholders meeting
to vote on the Amalgamation is scheduled for March 31, 1997. The Company is
party to pending litigation regarding the Amalgamation, which it does not
believe will have a material adverse effect on its results of operations or
financial position.
In August 1996, AES, together with its partner, acquired a 4,000 megawatt
mine-mouth, coal-fired power facility in Kazakstan. The facility sells
electricity to the government-owned distribution company under a 35 year power
sales contract. 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 approximately 20%. AES has agreed to
increase the availability to 63% over a five year period (contingent on the
purchaser's performance of its obligations under the power sales contract).
Through December 31, 1996, approximately $35 million (excluding VAT) was billed
under the power sales contract for electricity, of which the purchaser paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract receivable as of December 31, 1996 to
$10 million. As of December 31, 1996, the net assets of this project were $24
million, a portion of which was represented by the contract receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owed to AES as of December 31, 1996 or additional amounts related to future
deliveries of electricity under the power sales contract or the recoverability
of the Company's investment or additional amounts the Company may invest in the
project. Other substantial risks associated with this plant exist, including
those relating to operations and maintenance, construction, refurbishment,
political risk, repatriation of earnings and currency convertibility.
Sales to Connecticut Light & Power Company ("CL&P") represented 16% of the
Company's total revenues in 1996. Moody's Investor Service ("Moody's") and
Standard & Poor's ("S&P") have rated CL&P's senior secured long-term debt
Baa3/BBB- and placed CL&P on creditwatch with a negative outlook. In March 1997,
as a result of regulatory action by the Public Service Commission of New
Hampshire, Moody's and S&P downgraded the senior unsecured debt of Northeast
Utilities, the parent of CL&P, from Ba2/BB to Ba3/BB-. See "Risk Factors --
Dependence on Utility Customers and Certain Projects" in the accompanying
Prospectus.
S-8
<PAGE> 10
TECONS OFFERING
SECURITIES OFFERED.................. 5,000,000 $2.6875 Term Convertible
Securities, Series A ("TECONS" or
"Preferred Securities") (5,500,000 if
the Underwriters' over-allotment option
is exercised in full).
ISSUER.............................. AES Trust I, a Delaware business trust.
The sole assets of the Trust will
consist of the 5.375% Junior
Subordinated Convertible Debentures due
2027 (the "Junior Subordinated
Debentures") of AES.
GUARANTOR........................... The AES Corporation, a Delaware
corporation.
DISTRIBUTIONS....................... Distributions on the TECONS will accrue
from March 31, 1997 and will be payable
at an annual rate of $2.6875 per
TECONS. Subject to the Distribution
deferral provisions described below,
Distributions will be payable quarterly
in arrears on the last day of each
calendar quarter, commencing June 30,
1997. Because Distributions on the
TECONS constitute interest for U.S.
federal income tax purposes, corporate
holders thereof will not be entitled to
a dividends-received deduction.
DISTRIBUTION DEFERRAL PROVISIONS.... The ability of the Trust to pay
Distributions on the TECONS is solely
dependent on the receipt of interest
payments from AES on the Junior
Subordinated Debentures. So long as AES
shall not be in default in the payment
of interest on the Junior Subordinated
Debentures, AES has the right to defer
payments of interest on the Junior
Subordinated Debentures from time to
time for successive Extension Periods
not exceeding 20 consecutive quarters
for each such period; provided that no
such period may extend beyond the
stated maturity of the Junior
Subordinated Debentures. Quarterly
Distributions on the TECONS would be
deferred by the Trust (but would
continue to accumulate quarterly and
accrue interest) until the end of any
such Extension Period. Upon the
termination of an Extension Period,
payment is due on all accrued and
unpaid amounts on the Junior
Subordinated Debentures and upon such
payment, the Trust would be required to
pay all accumulated and unpaid
Distributions. AES will give notice of
its deferral of an interest payment to
the Trust no later than ten business
days prior to the related record date
(unless the Property Trustee shall be
the sole holder of the Junior
Subordinated Debentures, in which case
notice will be given no later than one
business day prior to the earlier of
(i) the next succeeding Interest
Payment Date (as defined herein) or
(ii) the date the Company is required
to give notice of the related record
date). See "Description of the
TECONS -- Distributions" and
"Description of the Junior Subordinated
Debentures -- Option to Extend Interest
Payment Period" herein and "Risk
Factors -- Option to Extend Interest
Payment Period; Tax Impact of
Extension" in the accompanying
Prospectus. If a deferral of an
interest payment occurs, the holders of
the TECONS will continue to accrue
income for U.S. federal income tax
purposes in advance of any
corresponding cash Distribu-
S-9
<PAGE> 11
tion. See "Certain Federal Tax
Consequences -- Accrual of Original
Issue Discount" herein and "Risk
Factors -- Option to Extend Interest
Payment Period; Tax Impact of
Extension" in the accompanying
Prospectus.
RIGHTS UPON DEFERRAL OF
DISTRIBUTIONS....................... During any period in which interest
payments on the Junior Subordinated
Debentures are deferred, interest will
accrue on the Junior Subordinated
Debentures (compounded quarterly) and
quarterly Distributions will continue
to accumulate with interest thereon (to
the extent permitted by applicable law)
at the Distribution rate, compounded
quarterly. AES has agreed, among other
things, not to declare or pay any
dividend on its common stock or
preferred stock or make any guarantee
payments with respect thereto during
any Extension Period, provided that the
foregoing shall not apply to any stock
dividends payable in AES Common Stock.
See "Description of the Junior
Subordinated Debentures -- Option to
Extend Interest Payment Period" herein
and "Risk Factors -- Option to Extend
Interest Payment Period; Tax Impact of
Extension" in the accompanying
Prospectus.
CONVERSION RIGHTS................... Each TECONS is convertible at any time
prior to the close of business on March
31, 2027 (or, in the case of TECONS
called for redemption, prior to the
close of business on the Business Day
(as defined herein) prior to the
applicable redemption date) at the
option of the holder into shares of AES
Common Stock, at the rate of 0.6906
shares of AES Common Stock for each
TECONS (equivalent to a conversion
price of $72.40 per share of AES Common
Stock), subject to adjustment in
certain circumstances. The reported
last sale price of AES Common Stock on
the NYSE Composite Tape on March 24,
1997 was $58.625 per share. In
connection with any conversion of a
TECONS, the Conversion Agent (as
defined herein) will exchange such
TECONS for the appropriate principal
amount of the Junior Subordinated
Debentures held for the Trust and
immediately convert such Junior
Subordinated Debentures into AES Common
Stock. No fractional shares of AES
Common Stock will be issued as a result
of conversion, but in lieu thereof such
fractional interest will be paid by AES
in cash. See "Description of the
TECONS -- Conversion Rights."
LIQUIDATION AMOUNT.................. In the event of any liquidation of the
Trust, holders will be entitled to
receive $50 per TECONS plus an amount
equal to any accrued and unpaid
Distributions thereon to the date of
payment, unless Junior Subordinated
Debentures are distributed to such
holders. See "Description of the
TECONS -- Liquidation Distribution Upon
Dissolution."
REDEMPTION.......................... The Junior Subordinated Debentures will
be redeemable for cash, at the option
of the Company, in whole or in part,
from time to time on or after March 31,
2000 at the prices specified herein or
at any time in certain circumstances
upon the occurrence of a Tax Event at a
redemption price equal to 100% of the
principal amount to be
S-10
<PAGE> 12
redeemed plus any accrued and unpaid
interest thereon, including Compounded
Interest, if any, to the date of
redemption. If the Company redeems
Junior Subordinated Debentures, the
Trust must redeem, at the Redemption
Price, Trust Securities having an
aggregate liquidation amount equal to
the aggregate principal amount of the
Junior Subordinated Debentures so
redeemed. The TECONS will not have a
stated maturity date, although they
will be subject to mandatory redemption
upon the repayment of the Junior
Subordinated Debentures at their stated
maturity (March 31, 2027), upon
acceleration, earlier redemption or
otherwise. See "Description of the
TECONS -- Mandatory Redemption" and
"Description of the Junior Subordinated
Debentures -- Optional Redemption."
PREFERRED SECURITIES GUARANTEE...... AES will irrevocably and
unconditionally guarantee, on a
subordinated basis and to the extent
set forth herein, the payment in full
of (i) any accrued and unpaid
Distributions and the amount payable
upon redemption of the TECONS to the
extent AES has made a payment to the
Property Trustee of interest or
principal on the Junior Subordinated
Debentures and (ii) generally, the
liquidation amount of the TECONS to the
extent the Trust has assets available
for distribution to holders of TECONS.
The Preferred Securities Guarantee will
be unsecured and will be subordinate
and junior in right of payment to all
other liabilities of AES and will rank
pari passu in right of payment with the
most senior preferred stock issued,
from time to time, if any, by AES. See
"Description of the Guarantee" herein
and "Description of Preferred
Securities Guarantees -- Status of the
Preferred Securities Guarantees" in the
accompanying Prospectus.
VOTING RIGHTS....................... Generally, holders of the TECONS will
not have any voting rights. If (i) the
Property Trustee fails to enforce its
rights under the Junior Subordinated
Debentures or (ii) the Guarantee
Trustee (as defined herein) fails to
enforce its rights under the Guarantee,
a record holder of the TECONS may
institute a legal proceeding directly
against AES to enforce such rights
without first instituting any legal
proceeding against any other person or
entity. Notwithstanding the foregoing,
if an Indenture Event of Default (as
defined herein) occurs and is
continuing and is attributable to the
failure of AES to pay interest or
principal on the Junior Subordinated
Debentures or AES has failed to make a
Guarantee Payment (as defined in the
accompanying Prospectus), a holder of
the TECONS may directly institute a
proceeding against AES for enforcement
of such payment. See "Description of
the TECONS -- Voting Rights" and
"-- Declaration Events of Default."
SPECIAL EVENT DISTRIBUTION; TAX
EVENT REDEMPTION.................... Upon the occurrence of a Special Event
(as defined herein), except in certain
limited circumstances, AES may cause
the Trust to be dissolved and cause the
Junior Subordi-
S-11
<PAGE> 13
nated Debentures to be distributed to
the holders of the TECONS. In the case
of a Tax Event (as defined herein), AES
may also elect to cause the TECONS to
remain outstanding and pay Additional
Interest (as defined herein), if any,
on the Junior Subordinated Debentures.
In certain circumstances upon the
occurrence of a Tax Event, the Junior
Subordinated Debentures may be redeemed
by AES at 100% of the principal amount
thereof plus accrued and unpaid
interest thereon. See "Description of
the TECONS--Special Event Redemption or
Distribution".
JUNIOR SUBORDINATED DEBENTURES OF
AES................................. The Junior Subordinated Debentures will
mature on March 31, 2027 and will bear
interest at the rate of 5.375% per
annum, payable quarterly in arrears. So
long as AES shall not be in default in
the payment of interest on the Junior
Subordinated Debentures, AES has the
right to defer payments of interest on
the Junior Subordinated Debentures from
time to time for successive periods not
exceeding 20 consecutive quarters for
each such period; provided that no such
period may extend beyond the stated
maturity of the Junior Subordinated
Debentures. Prior to the termination of
any Extension Period, AES may pay all
or a portion of the accrued
Distributions or may further defer
interest payments provided the
Extension Period, as previously and
further extended, does not exceed 20
consecutive quarters. During any
Extension Period no interest shall be
due, but such interest shall continue
to accrue and compound quarterly. Upon
termination of the Extension Period,
payment is due on all accrued and
unpaid amounts. After the payment of
all amounts then due, AES may commence
a new Extension Period, subject to the
conditions of this paragraph. During
any Extension Period, AES will be
prohibited from paying dividends on any
of its common stock or preferred stock
or making any guarantee payments with
respect thereto; provided that the
foregoing shall not apply to any stock
dividends payable in Common Stock.
The payment of principal and interest
on the Junior Subordinated Debentures
will be subordinated in right of
payment to all present and future
Senior and Subordinated Debt of AES. In
addition, payment of principal and
interest on the Junior Subordinated
Debentures will be structurally
subordinated to the liabilities of AES'
subsidiaries. As of December 31, 1996,
the Company had $661 million of Senior
and Subordinated Debt (which includes
letters of credit) outstanding. In
addition, the Company's subsidiaries
had debt of $1,668 million, to which
the Junior Subordinated Debentures are
effectively subordinated. The Trust
Indenture (as defined herein), under
which the Junior Subordinated
Debentures will be issued, does not
limit the aggregate amount of Senior
and Subordinated Debt that may be
incurred by AES and does not limit the
liabilities of the Company's
subsidiaries. The Junior Subordinated
Debentures will have provisions with
respect to interest, optional
redemption and conversion into AES
Common
S-12
<PAGE> 14
Stock and certain other terms
substantially similar or analogous to
those of the TECONS. See "Description
of the Junior Subordinated Debentures"
herein and "Risk Factors -- Leverage
and Subordination" in the accompanying
Prospectus.
COMMON STOCK OFFERING............... Concurrently with the TECONS Offering,
the Company is selling 2,550,000 shares
of AES Common Stock in the Common Stock
Offering (2,805,000 shares assuming the
underwriters' over-allotment option in
the Common Stock Offering is exercised
in full). The consummation of the
TECONS Offering is not contingent on
the closing of the Common Stock
Offering.
USE OF PROCEEDS..................... All of the proceeds from the sale of
the TECONS will be invested by the
Trust in Junior Subordinated Debentures
of AES. After paying the Underwriters'
compensation and other expenses
associated with the TECONS Offering,
AES will use the net proceeds in
connection with its acquisition of the
international assets of Destec. See
"Use of Proceeds" and
"Business -- Recent Developments."
NEW YORK STOCK EXCHANGE SYMBOL...... "AES PrT"
SUMMARY CONSOLIDATED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
---------------------------------------------
YEARS ENDED DECEMBER 31,
Dollars in millions, except per share data 1992 1993 1994 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.............................................. $ 401 $ 519 $ 533 $ 679 $ 835
Operating income...................................... 155 196 236 253 278
Net income............................................ 56 71 100 107 125
Net income per share.................................. $0.80 $0.98 $1.32 $1.41 $1.62
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................................ $3,622 $4,016
Short-term debt......................................................... 198 198
Long-term debt.......................................................... 2,008 2,008
Company-obligated mandatorily redeemable preferred securities of AES
Trust I............................................................... -- 250
Stockholders' equity.................................................... 721 865
</TABLE>
- ---------------
(1) The historical information has been derived from the Company's audited
consolidated financial statements.
(2) As adjusted to give effect to the issuance of the TECONS pursuant to the
TECONS Offering and the issuance of 2,550,000 shares of AES Common Stock
pursuant to the Common Stock Offering, but not the application of the proceeds
therefrom.
S-13
<PAGE> 15
USE OF PROCEEDS
The proceeds to the Trust from the sale of the TECONS offered hereby will be
$250 million ($275 million if the underwriters' over-allotment option is
exercised in full). The net proceeds to the Company from the Common Stock
Offering will be $144 million ($159 million if the underwriters' over-allotment
option in respect of the Common Stock Offering is exercised in full). The
proceeds of the sale of the TECONS will be invested by the Trust in Junior
Subordinated Debentures of the Company. The Company intends to use all $243
million ($267 million if the underwriters' over-allotment option in respect of
the TECONS Offering is exercised in full) of the net proceeds from the issuance
of the Junior Subordinated Debentures, after paying the Underwriters'
compensation and other expenses associated with the TECONS Offering, in
connection with its acquisition of the international assets of Destec. The
Company intends to use the net proceeds from the Common Stock Offering together
with cash on hand to finance the balance of the $407 million purchase price
payable in connection with the acquisition of the international assets of Destec
and for general corporate purposes, including potential acquisitions. Pending
such applications, the Company will use such proceeds to reduce amounts
outstanding under its revolving credit facility (the "Revolver"). See
"Business -- Recent Developments."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
AES Common Stock began trading on the NYSE on October 16, 1996 under the symbol
"AES." Prior to that date, AES Common Stock had been quoted on the NASDAQ
National Market System ("NASDAQ/NMS") under the symbol "AESC." The following
table sets forth for the periods indicated the high and low sale prices for the
Common Stock as reported on the NYSE Composite Tape and by NASDAQ/NMS.
<TABLE>
<CAPTION>
-------------
HIGH LOW
---- ----
<S> <C> <C>
1995
-----
First Quarter....................................................... 19 3/4 16
Second Quarter...................................................... 19 1/4 16
Third Quarter....................................................... 21 5/8 18 1/2
Fourth Quarter...................................................... 24 18 3/4
1996
-----
First Quarter....................................................... 25 1/4 21
Second Quarter...................................................... 29 5/8 22 1/4
Third Quarter....................................................... 40 1/2 27 7/8
Fourth Quarter...................................................... 50 1/8 39 1/4
1997
-----
First Quarter (through March 24, 1997).............................. 68 1/4 44 1/2
</TABLE>
No cash dividends have been paid on AES Common Stock since December 22, 1993 in
order to provide capital for the Company's equity investments in projects.
The Company's ability to declare and pay dividends (and to make payments with
respect to the Junior Subordinated Debentures) is dependent, among other things,
on the ability of its project subsidiaries to declare and pay dividends (and
otherwise distribute cash) to it, the Company's ability to service its parent
company debt and the Company's ability to meet certain criteria for paying
dividends under the Revolver and under certain outstanding indebtedness.
The ability of the Company's subsidiaries to declare and pay dividends and
otherwise distribute cash to the Company is subject to certain limitations in
the project loans and other documents entered into by such project subsidiaries.
Such limitations permit the payment of dividends 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.
Cash dividend payments on AES Common Stock are limited under the Revolver to a
certain percentage of cash flow. The indentures relating to the Company's
existing senior subordinated notes preclude the payment of cash dividends if at
the time of such payment or after giving effect thereto an event of default (as
defined), or an event that, after the giving of notice or lapse of time or both,
would become an event of default, shall have occurred and be continuing, if
certain fixed charge coverage ratios are not met or if the payment of such
dividends, together with other restricted payments, would exceed certain limits.
S-14
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of AES as of
December 31, 1996 and such capitalization as adjusted to give effect to the
issuance of the TECONS in the TECONS Offering and the issuance of 2,550,000
shares of AES Common Stock in the Common Stock Offering, but not the application
of the proceeds therefrom. See "Use of Proceeds".
<TABLE>
<CAPTION>
----------------------
DECEMBER 31, 1996
Dollars in millions, except per share data ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
SHORT-TERM DEBT:
Revolving bank loan (current portion)................................ $ 88 $ 88
Project financing debt (current portion)............................. 110 110
------ ------
Total short-term debt............................................. $ 198 $ 198
====== ======
LONG-TERM DEBT:
Revolving bank loan.................................................. $ 125 $ 125
Project financing debt............................................... 1,558 1,558
9 3/4% Senior Subordinated Notes due 2000............................ 75 75
10 1/4% Senior Subordinated Notes due 2006........................... 250 250
------ ------
Total long-term debt.............................................. 2,008 2,008
------ ------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF AES
TRUST I.............................................................. -- 250
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value: 100.0 million shares authorized; 77.4
million shares issued and outstanding (1)......................... 1 1
Additional paid-in capital........................................... 360 504
Retained earnings.................................................... 396 396
Treasury stock....................................................... (3) (3)
Cumulative foreign currency translation adjustment................... (33) (33)
------ ------
Total stockholders' equity........................................ 721 865
------ ------
Total capitalization............................................ $2,729 $3,123
====== ======
</TABLE>
- ---------------
(1) As adjusted, 80.0 million shares of AES Common Stock issued and outstanding.
In addition to the shares of AES Common Stock outstanding, as of December 31,
1996, there were outstanding warrants and options to purchase 4.7 million shares
of AES Common Stock and stock units to purchase 0.3 million shares of AES Common
Stock.
S-15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data,
which should be read in conjunction with the Company's consolidated financial
statements and related notes and with the "Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus
Supplement. The selected consolidated financial data as of and for each of the
five years in the period ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Company. The consolidated
financial statements as of December 31, 1995 and 1996, and for each of the three
years in the period ended December 31, 1996, and the independent auditors'
report thereon, are included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
----------------------------------------------
YEARS ENDED DECEMBER 31
In millions, except ratio and per share data 1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Sales............................................. $ 394 $ 508 $ 514 $ 672 $ 824
Services.......................................... 7 11 19 7 11
------ ------ ------ ------ ------
Total revenues................................. 401 519 533 679 835
------ ------ ------ ------ ------
Operating cost and expenses:
Cost of sales..................................... 222 257 252 388 495
Cost of services.................................. 6 9 13 6 7
Selling, general and administrative expenses...... 18 35 32 32 35
Provision to reduce carrying value of assets...... -- 22 -- -- 20
------ ------ ------ ------ ------
Total operating costs and expenses............. 246 323 297 426 557
------ ------ ------ ------ ------
Operating income.................................... 155 196 236 253 278
Other income and (expense):
Interest expense.................................. (99) (128) (125) (127) (144)
Interest income................................... 8 11 22 27 24
Equity in earnings of affiliates (net of income
taxes)......................................... 2 10 12 14 35
------ ------ ------ ------ ------
Income before income taxes, minority interest and
extraordinary item................................ 66 89 145 167 193
Income taxes........................................ 9 18 44 57 60
Minority interest................................... 1 -- 3 3 8
------ ------ ------ ------ ------
Net income before extraordinary item................ 56 71 98 107 125
Extraordinary item.................................. -- -- 2 -- --
------ ------ ------ ------ ------
Net income.......................................... $ 56 $ 71 $ 100 $ 107 $ 125
====== ====== ====== ====== ======
Net income per share................................ $ 0.80 $ 0.98 $ 1.32 $ 1.41 $ 1.62
====== ====== ====== ====== ======
Weighted average number of common and common
equivalent shares................................. 69.4 73.0 75.8 75.9 77.3
Ratio of earnings to fixed charges(1)............... 1.37x 1.63x 2.08x 2.18x 1.84x
BALANCE SHEET DATA:
Total assets........................................ $1,552 $1,687 $1,915 $2,341 $3,622
Revolving bank loan (current)....................... -- -- -- 50 88
Project financing debt (current).................... 71 79 61 84 110
Revolving bank loan (long-term)..................... -- -- -- -- 125
Project financing debt (long-term).................. 1,146 1,075 1,019 1,098 1,558
Other notes payable (long-term)..................... 50 125 125 125 325
Stockholders' equity................................ 177 309 401 549 721
</TABLE>
- ---------------
(1) During the period from January 1, 1992 until December 31, 1996, no shares of
Preferred Stock were issued or outstanding, and during that period the Company
did not pay any Preferred Stock dividends.
S-16
<PAGE> 18
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The AES Corporation and its subsidiaries and affiliates are primarily in the
business of selling electricity to customers in the U.S., England, Northern
Ireland, Argentina, China, Brazil, Hungary and Kazakstan. Electricity sales
accounted for 97% of total revenues during 1996 and 1995. 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 energy
consulting, wholesale power services and services provided to affiliates.
The electricity sold is generated (or manufactured) by power plants owned or
leased by subsidiaries and affiliates. AES now operates and owns (entirely or in
part) a diverse portfolio of electric power plants with a total capacity of
9,627 megawatts. Of that total, 60% are fueled by coal or petroleum coke, 8% are
fueled by natural gas, 10% are hydroelectric facilities, 1% are fueled by oil
and the remaining 21% are capable of using multiple fossil fuels. Of the total
megawatts, 1,069 (six plants) are located in the U.S., 1,420 (three plants) are
in the UK, 840 (five plants) are in Argentina, 229 (four plants) are in China,
1,281 (three plants) are in Hungary, 788 (four hydro-electric complexes) are in
Brazil and 4,000 (one plant) is in Kazakstan. AES has grown its portfolio of
generating assets by greenfield development and by acquisitions of existing
plants, primarily through competitively bid privatization initiatives outside
the U.S.
AES is currently in the process of adding 1,672 megawatts to its operating
portfolio by constructing two oil-fired power plants in Pakistan totaling 674
megawatts, a 180 megawatt coal-fired plant in the U.S., one oil-fired, one
natural gas-fired and three coal-fired plants in China (one of which is an
extension of an existing plant) totaling 588 megawatts and a 230 megawatt
natural gas-fired plant in Wales. In total, AES's net equity ownership in plants
in operation and under construction is 7,475 megawatts.
Because of the significant magnitude and complexity of building electric
generating plants, construction periods often range from two to four 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 1999. The completion of each plant in a
timely manner is generally supported by a guarantee from the plant's
construction contractor; however, it remains possible, due to changes in the
economic, political, technological, regulatory or logistical circumstances
surrounding individual plants and their locations, that commercial operations
may be delayed.
AES believes that there is significant demand for both new and more efficiently
operated electric generating capacity in many regions around the world. In an
effort to further grow and diversify the Company's portfolio of electric
generating plants, AES is pursuing, through its integrated divisions, additional
greenfield developments and acquisitions in many countries. Several of these
acquisitions, if consummated, would require the Company to obtain substantial
additional financing, in the form of both debt and equity financing, in the
short term.
Certain subsidiaries and affiliates (domestic and non-U.S.) have signed
long-term contracts for the sale of electricity and are in various stages of
developing the related greenfield projects. Because these potential projects
have yet to begin construction or procure committed long-term financing
("financial closing"), 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
December 31, 1996, capitalized costs for projects under development were
approximately $53 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 acquiring a portion of its portfolio by participating
in competitive bidding under government sponsored privatization initiatives and
has been particularly interested in acquiring existing assets in electricity
markets that are promoting competition. In such privatizations, sellers
generally seek to complete competitive solicitations in less than one year, much
quicker than greenfield development, and require payment in
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full on transfer. AES believes that its experience in competitive markets and
its integrated divisional structure, with geographically dispersed locations,
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 "Cash Flows,
Financial Resources and Liquidity") for specific potential acquisitions. As a
result, during 1996, the Company enhanced its financial capabilities to respond
to these more accelerated opportunities by expanding the Revolver to $425
million. AES also filed a $750 million "universal shelf" registration statement
that provides for the issuance of various additional debt and preferred or
common equity securities either individually or in combination. The TECONS
Offering and the Common Stock Offering are being made pursuant to such shelf
registration. AES also may consider an exchange of project ownership interests
to fund future acquisition opportunities.
RESULTS OF OPERATIONS
Revenues
Total revenues increased $156 million (23%) to $835 million from 1995 to 1996
after increasing $146 million (27%) to $679 million from 1994 to 1995. The
increase in 1996 primarily reflects the acquisition of controlling interests in
AES Tiszai and AES Ekibastuz. The increase from 1994 to 1995 primarily reflects
the additional revenues arising from the acquisition of a controlling interest
in AES San Nicolas, the consolidation of AES Deepwater (resulting from the
acquisition of its outstanding debt), and improved capacity factors at AES
Thames and AES Barbers Point. These increases were offset, in part, by decreased
energy revenues at AES Placerita.
The nature of most of the Company's operations is such that each power plant
generally relies on one power sales contract with a single electric utility
customer or a regional or national transmission and distribution customer for
the majority, if not all, of its revenues. During 1996, the Company's five
largest customers accounted for 73% of total revenues. The prolonged failure of
any one customer 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 may experience difficulty in meeting contractual
payment obligations.
In August 1996, AES, together with its partner, acquired a 4,000 megawatt
mine-mouth, coal-fired power facility in Kazakstan. The facility sells
electricity to the government-owned distribution company under a 35 year power
sales contract. 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 approximately 20%. AES has agreed to
increase the availability to 63% over a five year period (contingent on the
purchaser's performance of its obligations under the power sales contract).
Through December 31, 1996, approximately $35 million (excluding VAT) was billed
under the power sales contract for electricity, of which the purchaser paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract receivable as of December 31, 1996 to
$10 million. As of December 31, 1996, the net assets of this project were $24
million, a portion of which was represented by the contract receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owed to AES as of December 31, 1996 or additional amounts related to future
deliveries of electricity under the power sales contract or the recoverability
of the Company's investment or additional amounts the Company may invest in the
project. Other substantial risks associated with this plant exist, including
those relating to operations and maintenance, construction, refurbishment,
political risk, repatriation of earnings and currency convertibility.
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
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<PAGE> 20
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.
Costs of Sales and Services
Total costs of sales and services increased $108 million (27%) to $502 million
in 1996 after increasing $129 million (49%) to $394 million from 1994 to 1995.
The increase in 1996 was caused primarily by the costs of electricity sales
associated with the acquisition of controlling interests in AES Tiszai and AES
Ekibastuz. The increase from 1994 to 1995 was caused primarily by the additional
operating costs arising from the acquisitions of a controlling interest in AES
San Nicolas, the consolidation of AES Deepwater and increased fuel costs arising
from a higher capacity factor at AES Barbers Point, offset in part by decreased
fuel and operating costs at AES Placerita.
Gross Margin
Gross margin (revenues less costs of sales and services) increased (prior to
consideration of the $20 million provision to reduce contract receivable) $48
million (17%) to $333 million from 1995 to 1996 after increasing $17 million
(6%) to $285 million from 1994 to 1995. The improvement in 1996 primarily
reflects the additional gross margins contributed by the operations of AES
Tiszai and AES Ekibastuz, improved operations of AES San Nicolas and AES Thames
and higher electricity prices under the AES Deepwater sales contract due to
higher natural gas prices. The improvement in 1995 reflects the acquisitions of
a controlling interest in AES San Nicolas, the consolidation of AES Deepwater
and improved operations at AES Placerita and AES Thames, offset in part by lower
service revenues from affiliates. Gross margin as a percentage of total revenues
(net of the provision to reduce contract receivable) decreased from 42% in 1995
to 37% in 1996, primarily due to lower gross margin percentages at AES Tiszai
and AES Ekibastuz, offset in part by an improved gross margin percentage at AES
Deepwater. Gross margin as a percentage of total revenues decreased from 50% in
1994 to 42% in 1995, primarily due to a lower gross margin percentage at AES San
Nicolas.
Because the Company's operations are located in different geographical areas,
seasonal variations have not historically had a significant effect on quarterly
financial results. However, unusual weather conditions and the specific needs of
each plant to perform routine or unanticipated facility maintenance, which would
require an outage, could have an effect on quarterly financial results. In
addition, some power sales contracts permit the utility customer to
significantly 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 less than $3 million (9%)
to $35 million from 1995 to 1996 after increasing less than $1 million (3%) to
$32 million from 1994 to 1995. The 1996 increase is attributable to increases in
administrative costs and expenses associated with the development of new
business opportunities. The 1995 increase is attributable to an increase in
administrative costs. As a percentage of total revenues, selling, general and
administrative expenses decreased to 4% in 1996, down from 5% in 1995 and 6% in
1994. The Company's general and administrative costs do not necessarily vary
with changes in revenues.
Operating Income
Operating income improved $25 million (10%) to $278 million from 1995 to 1996
after increasing $17 million (7%) to $253 million from 1994 to 1995. The
increases result from the factors discussed in the preceding paragraphs, offset
in part for 1996 by the provision of $20 million to reduce the contract
receivable at AES Ekibastuz.
Other Income and Expense
Other income and expense, on a net basis, decreased $1 million (1%) to $85
million from 1995 to 1996 after decreasing $5 million (5%) to $86 million from
1994 to 1995. Interest expense increased 13% in 1996 and
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increased 2% in 1995. The increase in 1996 reflects additional interest
associated with increased borrowings under the Revolver, the issuance in June
1996 of $250 million of the Company's 10 1/4% senior subordinated notes due 2006
(the "10 1/4 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 AES Tiszai, offset, in part, by
declining balances related to other project financing debt. The increase in 1995
reflects the additional interest expense associated with the acquisition of a
controlling interest in AES San Nicolas offset almost entirely by declining
balances of other project financing debt. AES capitalizes interest incurred
during the development and construction of its facilities. Interest capitalized
totaled approximately $27 million in 1996, $8 million in 1995 and $2 million in
1994.
Interest income decreased 11% in 1996 and increased 23% in 1995. The 1996
decrease results primarily from lower invested funds at AES Chigen, offset in
part by interest income earned on notes receivable at AES Tiszai. The 1995
increase reflects higher cash and debt service reserve account balances at
operating plants, higher interest rates and a full year of interest on AES
Chigen's invested cash balances, offset in part by investments in new projects
at AES Chigen and a decrease in the balance of corporate unrestricted cash and
cash equivalents.
Equity in earnings of affiliates (after income taxes) increased 150% in 1996 and
17% in 1995. The increase in 1996 results almost entirely from the Company's
acquisition of an 11.35% interest in Light in June 1996, offset slightly by a
decrease in equity in earnings from NIGEN due to a planned outage. The increase
in 1995 results most significantly from the start of operations at Medway in
late 1995.
Income Taxes
The Company's effective tax rate increased to 40% in 1996 and to 38% in 1995
from 34% in 1994. The increase in 1996 is due primarily to foreign withholding
and income taxes. The increase in 1995 is due to the elimination of the U.S.
federal valuation allowance resulting from the purchase in 1995 of the
previously outstanding debt of AES Deepwater.
Extraordinary Items
During 1994, the Company purchased and retired the subordinated project
financing debt and accrued interest at AES Placerita, resulting in an
extraordinary gain of $4 million, net of taxes. Also, in 1994, the Company's
affiliate, NIGEN, refinanced its outstanding project financing loan through a
public debenture offering. The extinguishment of such debt resulted in an
extraordinary loss of $7 million, of which the Company's share was $2 million,
net of taxes.
OUTLOOK
All over the world, electricity markets are being 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 systems. 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 has created significant new business
opportunities for companies like AES.
Although recent activity in the U.S. electricity market has provided some
opportunities for independent and competitive power companies, most of the
country's generating capacity along with substantially all of the transmission
and distribution services continue to be regulated under a state and federal
regulatory framework. In the U.S., some states (for example, California,
Illinois, Massachusetts, Michigan and Pennsylvania) 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.
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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. 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 likely have a neutral or positive effect on the
Company's U.S. business.
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 capacity from vertically integrated utilities would presumably
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 in the integrity of its contracts, 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.
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 plants in those markets. Such an
investment, which would not necessarily be supported by a long-term electricity
sales contract for all or any of the plant's expected output, 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.
AES's involvement in the development of new projects and the acquisition of
existing plants in locations outside the U.S. is increasing and most of AES's
current development and acquisition activities are for projects and plants
outside the U.S. The financing, development and operation of such projects and
plants may entail significant political and financial uncertainties and other
structuring issues (including, without limitation, uncertainties associated with
the legal environments, with first-time privatization efforts in the countries
involved, currency exchange rate fluctuations, currency repatriation
restrictions, currency convertibility, political instability, civil unrest and
expropriation). These issues have the potential to cause substantial delays in
respect of or material impairment of the value of the project being developed or
plant being operated, which AES may not be capable of or choose to fully insure
or hedge against.
FINANCIAL POSITION
At December 31, 1996, AES had working capital of $120 million as compared to
$218 million at the end of 1995. The decrease is primarily attributable to
decreased balances of cash and short-term investments, increases in accounts
payable and accrued liabilities and increases in the current portion of
borrowings under the Revolver and project financing debt, offset in part by
increases in inventory, accounts receivable and deferred income taxes.
Property, plant and equipment, net of accumulated depreciation, was $2.22
billion at December 31, 1996, up from $1.55 billion at the end of 1995. The net
increase of $670 million (43%) is primarily attributable to the acquisition
during 1996 of AES San Juan, AES Tiszai and AES Ekibastuz, the continuation of
construction activities at AES Lal Pir, AES Pak Gen and AES Warrior Run and the
commencement of construction activities at Jiaozou and AES Barry.
Other assets increased $555 million (161%) to $900 million primarily due to the
Company's purchase of and undistributed earnings from an 11.35% interest in
Light, payments to debt service reserves, payments for deferred financing costs
associated with a higher level of debt financing, reimbursable payments for
contracts related to a project in development and intangible assets acquired
through the purchase of AES San Juan.
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Project financing debt, net of repayments, increased as a result of additional
borrowings associated with the Company's purchase of an 11.35% interest in Light
and additional construction borrowings associated with AES Lal Pir, AES Pak Gen
and AES Warrior Run. A significant portion of the AES Lal Pir and AES Pak Gen
loans, associated with equipment purchases, will be borrowed and repaid (as
scheduled in the future) in Japanese yen. The anticipated electricity prices
under the related power sales contracts (to be received beginning with
commercial operation of those plants) also include a yen component designed to
correlate with the yen-based financing.
Other notes payable (non-current) increased $325 million (260%) to $450 million
as a result of the issuance of the $250 million of the 10 1/4% Notes and
increased borrowings under the Revolver of $125 million that are due in excess
of one year, offset in part by the conversion of $50 million of the Company's
6 1/2% convertible subordinated debentures.
CASH FLOWS, FINANCIAL RESOURCES AND LIQUIDITY
Cash from Operations
Cash flows provided by operating activities totaled $182 million during 1996 as
compared to $197 million during 1995 and $164 million in 1994. The decrease in
1996 was primarily due to a larger proportion of net income being derived from
undistributed earnings from affiliates, larger cash payments for income taxes
and increased deferred financing costs associated with a higher level of debt
financing activity in 1996. 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 (as
defined in the Indenture for the 10 1/4% Notes, which is after cash paid for
general and administrative costs, taxes and project development expenses but
before investments and debt service) amounted to approximately $133 million for
the year ended December 31, 1996 as compared to $110 million for the year ended
December 31, 1995.
Cash from Investing Activities
Net cash used in investing activities totaled $1.135 billion during 1996 as
compared to $343 million during 1995 and $120 million in 1994. The 1996 amount
primarily reflects the acquisitions of AES San Juan, AES Tiszai and AES
Ekibastuz; the Light investment; construction progress at AES Lal Pir, AES Pak
Gen, AES Warrior Run and AES Barry; AES 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 AES Deepwater; additional ownership in
AES San Nicolas; the acquisition of AES Rio Juramento; construction efforts at
AES Lal Pir, AES Pak Gen and AES Warrior Run; and AES Chigen's investments in
the Wuxi and Yangchun Fuyang projects. The 1994 amount primarily reflects the
investment of cash in short-term investments, capital additions and investments
in projects in development.
Cash from Financing Activities
Net cash provided by financing activities aggregated $899 million during 1996 as
compared to $130 million during 1995 and $80 million in 1994. The significant
cash financing inflows in 1996 were caused by construction loan draws for AES
Lal Pir, AES Pak Gen and AES Warrior Run; project acquisition financing of the
Light investment; issuance of $250 million of the 10 1/4% Notes; initial project
financing at AES 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 AES Lal
Pir and AES Warrior Run and borrowed under the Revolver. Repayments of project
financing loans during the year were made in accordance with contracted debt
service requirements. During 1994, AES Chigen completed an initial public
offering of 10.2 million shares of Class A common stock. The Company also made
scheduled principal payments on project financing debt in 1994.
Financial Resources and Liquidity
AES has primarily utilized project financing loans to fund the capital
expenditures associated with constructing and acquiring its electric power
plants and related assets. Project financing borrowings have been substantially
non-
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recourse to other subsidiaries and affiliates and to The AES Corporation as the
parent company and are generally secured by the capital stock, physical assets,
contracts and cash flow of the related project 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 projects, 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) 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 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 project, and may cease
development of such project.
In addition to the project financing loans, if available, AES 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 senior subordinated notes, convertible debentures and common stock
of the Company. In August 1996, substantially all $50 million of the Company's
6 1/2% convertible subordinated debentures due in 2002 were converted into
approximately 1.9 million shares of AES Common Stock. The Company also expects
to issue approximately 2.5 million shares of AES Common Stock to purchase all of
the remaining outstanding Class A shares of AES Chigen at an exchange rate of
0.29 share of AES Common Stock for each share of AES Chigen Class A common stock
in April 1997, subject to approval by the holders of the Class A common stock.
Interim needs for shorter-term and working capital financing at the parent
company have been met with borrowings under the Revolver. Over the past several
years, the Company has continued to increase the amount of available financing
under the Revolver. In the second quarter of 1996, AES increased the size of the
Revolver to $425 million. Under the terms of the Revolver, AES will be required
to reduce its direct borrowings to $125 million for 30 consecutive days during
each twelve month period. The terms of the Revolver also include financial
covenants related to net worth, cash flow and investments, and restrictions
related to the incurrence of additional debt and certain other obligations and
limitations on cash dividends. At December 31, 1996, cash borrowings and letters
of credit outstanding under the Revolver amounted to $213 million and $123
million, compared with $50 million and $56 million in 1995. The Company may also
attempt to meet its short-term and interim funding needs with commitments from
banks and other financial institutions at the parent or subsidiary level on an
as needed basis.
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 project-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. These obligations and
contingent liabilities, excluding those collateralized using letter of credit
obligations under the Revolver, were limited by their terms as of December 31,
1996 to an aggregate of approximately $176 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, 1996. 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 plants and projects is
a distinct entity, the plants and projects are geographically diverse and the
obligations related to a single plant or project 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. AES's
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<PAGE> 25
obligations and contingent liabilities described above in certain cases take the
form of, or are supported by, letters of credit.
At December 31, 1996, the Company had future commitments to fund investments in
its projects under construction and in development of $106 million. Of this
amount, letters of credit in the amount of $76 million have been issued to
support these obligations. In February 1997, the Company agreed to acquire the
international assets of Destec at a total price to AES of $407 million
(including approximately $42 million of net monetized assets), which price is
subject to adjustment to reflect net cash flow between the international assets
and the rest of Destec from January 1, 1997 to the closing date. The Company has
not yet purchased such assets, but at the time of any such purchase, expects to
assume certain obligations which require the funding of equity investments in
some of these projects in the amount of approximately $82 million over the
ensuing two years. These future capital commitments are expected to be funded by
internally-generated cash flows and by external financings as may be necessary.
Inflation, Interest Rates, Exchange Rates, Changing Energy Prices and
Environmental Performance
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. AES has generally structured the energy
payments in its power sales contracts to adjust with similar price indices as
its contracts with the fuel suppliers for the corresponding plants. In some
cases a portion of revenues is associated with operations and maintenance costs,
and as such is indexed to adjust with inflation. AES has also used a hedging
strategy 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 hedges
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. Such swaps effectively increased
the total weighted average borrowing rate on the portion of the Company's hedged
debt by 4.1 percentage points, 3.5 percentage points and 4.5 percentage points
for the years ended December 31, 1994, 1995 and 1996, respectively. Swap
payments in excess of variable interest paid for those same periods were $44
million, $24 million and $29 million, respectively. The following table presents
(in millions) the aggregate notional principal amount of interest rate swaps
categorized by annual maturity at December 31, 1996 and the weighted average
interest rates paid and received (based on market conditions at December 31,
1996):
PAY FIXED RATE SWAPS
<TABLE>
<CAPTION>
----------------------------------------------
WEIGHTED AVERAGE
AGGREGATE NOTIONAL INTEREST RATE
ANNUAL MATURITY PRINCIPAL AMOUNT PAID RECEIVED
- --------------- ------------------- ------ ---------
<S> <C> <C> <C>
1997................................................ $ 137 12.48% 5.46%
1998................................................ $ 15 9.90% 5.43%
1999................................................ $ 167 10.40% 5.45%
2000................................................ $ 17 9.90% 5.43%
2001 through 2007................................... $ 214 9.90% 5.43%
</TABLE>
In addition, certain subsidiaries of the Company have interest rate cap
agreements with terms ranging from three to six years in an aggregate notional
amount of $280 million.
The hedging mechanisms described above are implemented through contractual
provisions with fuel suppliers and international financial institutions. 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 risk by entering into contracts with
creditworthy organizations, where possible, and where not possible, as in the
case of certain local fuel suppliers, to execute standby or option agreements
with a creditworthy organization.
Because of the complexity of hedging strategies and the diverse nature of AES's
operations, the financial performance of its portfolio, although significantly
hedged, will likely be somewhat affected by fluctuations in inflation, interest
rates and energy prices. For example, AES's current portfolio of operating
plants generally performs better
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<PAGE> 26
with higher oil and natural gas prices and with lower interest rates.
Performance is also sensitive to the difference between inflation and interest
rates, and generally performs better when increases in inflation are higher than
increases in interest rates.
Through its equity investments in foreign affiliates and subsidiaries, AES
operates in jurisdictions dealing in currencies other than the Company's
consolidated 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 as
a charge or credit directly to a separate component of stockholders' equity
until such time as the Company realizes such charge or credit. At that time any
differences would be recognized in the statement of operations as gains or
losses.
In addition, certain of the Company's foreign subsidiaries have entered into
obligations in currencies other than their own functional currencies or the U.S.
dollar. These subsidiaries have attempted to limit potential foreign exchange
exposure by entering into revenue contracts 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.
The Company had approximately $33 million in cumulative translation adjustment
losses at December 31, 1996.
Because of the nature of AES's operations and previous operations by others at
certain of its current and future facilities, its activities are subject to
stringent environmental regulation by relevant authorities at each plant
location and the risk of claims under environmental laws. 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 will be required to make significant capital
or other expenditures in connection with environmental matters. Although the
Company is not aware of non-compliance with environmental laws which would have
a material adverse effect on the Company's business or financial condition, at
times the Company has been in non-compliance, although no such instance has
resulted in revocation of any permit or license.
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BUSINESS
AES is a global power company committed to supplying electricity to customers
world-wide in a socially responsible way. The Company was one of the original
entrants in the independent power market and today is one of the world's largest
independent power companies, based on net equity ownership of generating
capacity (in megawatts) in operation or under construction. AES markets power
principally from electricity generating facilities that it develops, acquires,
owns and operates.
Over the last five years, the Company has experienced significant growth. This
growth has resulted primarily from greenfield development and also from the
acquisition of existing plants, through competitively bid privatization
initiatives outside of the United States or negotiated acquisitions. Since 1992,
the Company's total generating capacity in megawatts has grown by 426%, with the
total number of plants in operation increasing from eight to 26. Additionally,
the Company's total revenues have increased at a compound annual growth rate of
20% from $401 million in 1992 to $835 million in 1996, while net income has
increased at a compound annual growth rate of 22% from $56 million to $125
million over the same period. AES operates and owns (entirely or in part),
through subsidiaries and affiliates, power plants in seven countries with a
capacity of approximately 9,600 megawatts (including 4,000 megawatts
attributable to Ekibastuz which currently has a capacity factor of approximately
20%). AES is also constructing eight additional power plants and one expansion
in four countries with a capacity of approximately 1,700 megawatts. The
Company's total ownership in plants in operation and under construction
aggregates approximately 11,300 megawatts and its net equity ownership in such
plants is approximately 7,500 megawatts. In addition, AES has numerous projects
in advanced stages of development, including seven projects with design capacity
of approximately 4,700 megawatts that have executed or been awarded power sales
agreements.
As a result of the Company's significant growth in recent years, the Company's
operations have become more diverse with regard to both geography and fuel
service and it has reduced its dependence upon any single project or customer.
During 1996, four of the Company's projects contributed more than 10% of the
Company's total revenues, Shady Point which represented 20%, San Nicolas which
represented 16%, Thames which represented 16% and Barbers Point which
represented 15%.
OUTLOOK
The global trend of electricity market restructuring has created significant new
business opportunities for companies like AES. Both domestic and international,
electricity markets are being restructured and there is a trend away from
government-owned 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 systems. Some countries have or are in the process of
"privatizing" their electricity systems by selling all or part of such systems
to private investors. With 18 of its projects having been acquired or commenced
commercial operations since 1992, AES has been an active participant in both the
international privatization process and the development process. The Company is
currently pursuing over 60 projects including acquisitions, the expansion of
existing plants and new projects. AES believes that there is significant demand
for both new and more efficiently operated electric generating capacity in many
regions around the world. In an effort to further grow and diversify the
Company's portfolio of electric generating plants, AES is pursuing, through its
integrated divisions, additional greenfield developments and acquisitions in
many countries. Several of these acquisitions, if consummated, would require the
Company to obtain substantial additional financing, in the form of both debt and
equity financing, in the short term.
STRATEGY
The Company's strategy in helping meet the world's need for electricity is 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 the distribution and retail supply
businesses in certain limited instances, and will continue to review
opportunities in such markets in the future.
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Other elements of the Company's strategy include:
- Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
- Constructing or acquiring projects of a relatively large size
(generally larger than 100 megawatts);
- When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
- 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. 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.
Where possible, AES attempts to sell electricity under long-term power sales
contracts. The Company attempts, whenever possible, to structure the revenue
provisions of such power sales contracts such that changes in the cost
components of a facility (primarily fuel costs) correspond, as effectively as
possible, to changes in the revenue components of the contract. A plant's
revenue from a power sales contract usually consists of two components, energy
payments and capacity payments. Energy payments are usually based on a plant's
net electrical output, with payment rates usually indexed to the fuel costs of
the customer or to general inflation indices. Capacity payments are based on
either a plant's net electrical output or its available capacity. Capacity
payment rates vary over the term of a power sales contract according to various
schedules. Some power sales contracts permit the utility customer to dispatch
the plant (i.e., direct the plant to deliver a reduced amount of electric
output) within certain specified parameters. AES attempts to structure the power
sales contract payments so that, even when dispatching occurs, the plant
continues to receive capacity payments (which provide substantially all of the
plant's profits, if any), while it receives reduced energy payments (which
primarily cover the variable operating, maintenance and fuel costs associated
with operating at higher or lower levels).
The Company attempts to provide fuel for its operating plants generally under
long-term supply agreements, either through contractual arrangements with third
parties or, in some instances, through acquisition of a dependable source of
fuel. The Company will generally contract with outside parties, often the
project's fuel supplier, to provide for the removal and disposal of waste.
As electricity markets become more competitive, it may be more difficult for AES
(and other power generation companies) to obtain long-term power sales
contracts. In markets where long-term contracts are not available, AES will
pursue methods to hedge costs and revenues to provide as much assurance as
possible of a project's profitability. In these situations, AES might choose to
purchase a project with a partial hedge or with no hedge, with the strategy that
its diverse portfolio of projects provides some hedge to the increased
volatility of the project's earnings and cash flow. Additionally, AES may choose
not to participate in these markets.
The Company attempts to finance each domestic and foreign plant 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 plant subsidiary or
affiliate. This type of financing is generally referred to as "project
financing." The lenders under these project financing structures 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 guaranties, 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 guaranties 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
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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.
The Company, a corporation organized under the laws of Delaware, was formed in
1981. The principal office of the Company is located at 1001 North 19th Street,
Suite 2000, Arlington, Virginia 22209, and its telephone number is (703)
522-1315.
RECENT DEVELOPMENTS
In February 1997, AES entered into a definitive agreement to acquire the
international assets (inclusive of approximately $42 million of net monetized
assets) of Destec, a large independent energy producer with headquarters in
Houston, Texas, at a total price to AES of $407 million, which price is subject
to adjustment to reflect net cash flow between the international assets of
Destec and the rest of Destec from January 1, 1997 to the closing date. NGC,
working in conjunction with AES, was selected as the winning bidder in an
auction for all of Destec at a total acquisition price of $1.27 billion. AES
will acquire the international assets of Destec immediately following NGC's
acquisition of Destec. Destec's international assets to be acquired by AES
include ownership interests in the following five electric generating plants
(with ownership percentages in parentheses): (i) a 110 MW gas-fired combined
cycle plant in Kingston, Canada (50 percent); (ii) a 405 MW gas-fired combined
cycle plant in Terneuzen, Netherlands (50 percent); (iii) a 140 MW gas-fired
simple cycle plant in Cornwall, England (100 percent); (iv) a 235 MW oil-fired
simple cycle plant in Santo Domingo, Dominican Republic (99 percent); and (v) a
1,600 MW coal-fired plant in Victoria, Australia (20 percent). The acquisition
by AES of Destec's international assets also includes all of Destec's non-U.S.
developmental stage power projects, including projects in Taiwan, England,
Germany, the Philippines, Australia and Colombia. A number of risks are
associated with this acquisition including those relating to the closing of the
transaction (which, in itself, is contingent on the closing of NGC's acquisition
of Destec), the receipt of government approvals and other consents, financing,
operation and maintenance, construction and environmental risk.
In February 1997, AES announced that its subsidiary, AES Electric Ltd., raised
L112.5 million of non-recourse project financing, underwritten solely by The
Industrial Bank of Japan, Limited, for its 230 MW gas-fired combined cycle
facility in Barry, South Wales, United Kingdom. The Barry facility will sell
electricity into the national electricity market in the United Kingdom, and is
expected to be operational by the second quarter of 1998. AES began construction
of the Barry facility in October 1996. Substantial risks to the successful
completion of this project exist, including those relating to governmental
approvals, the demand for and price of electricity in the United Kingdom
national electricity market, financing, construction and permitting. There can
be no assurance that this project will be completed.
In February 1997, AES announced the execution by subsidiaries of AES of three
power purchase agreements (the "PPAs"), for an aggregate generating capacity of
at least 457 MWs, with GPU Energy, the energy services and delivery business of
GPU, Inc., a public utility holding company. AES plans to build a 720 MW natural
gas-fired, combined cycle facility in Pennsylvania to sell power under the PPAs
beginning in 2000 and to sell power to other potential purchasers. Between March
and July 1996, subsidiaries of AES acquired the right to negotiate the PPAs from
other independent power producers for a net aggregate cost of approximately $28
million. GPU Energy is required to reimburse AES for substantially all its
initial net investment if the project does not receive the requisite regulatory
approvals and permits. In January 1997, a joint venture company led by a
subsidiary of AES was selected as the winning bidder to build, own and operate a
484 MW gas-fired combined cycle power plant in the City of Merida, Yucatan,
Mexico. These projects are subject to a number of risks including those related
to financing, construction and contract compliance, and there can be no
assurance that the project will be completed successfully.
In January 1997, AES acquired an additional 2.4% of the voting interest in Light
Servicos de Electricidade, S.A. ("Light"), a vertically integrated electric
utility in the state of Rio de Janeiro, Brazil, bringing its total equity
interest in Light to 13.75%. In December 1996, a subsidiary of AES completed a
$167.5 million syndicated bank financing related to its equity ownership of
Light (which at the time was 11.35%). Under the terms of the financing,
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a wholly-owned subsidiary of AES pledged the shares of Light owned by it as
collateral for the loan. The proceeds of the financing were used to repay a
portion of the debt incurred in the original acquisition of Light.
In December 1996, AES, through a subsidiary, completed the purchase of an
additional 12.5% of Tiszai Eromu Rt., an electric generation company in Hungary
consisting of three power plants with an aggregate capacity of 1,281 MW and a
coal mine, from employee pension plans at a cost of $17 million, bringing AES's
total equity interest in Tiszai Eromu Rt. to 93.3%. In August 1996, AES acquired
its initial 80.8% of Tiszai Eromu Rt. at a cost of $110 million.
In November 1996, AES Chigen and AES entered into an Agreement and Plan of
Amalgamation, providing among other things for AES Chigen to become a
wholly-owned subsidiary of AES. The Amalgamation is subject to various
conditions, including the approval of the holders of the Class A Common Stock of
AES Chigen, and there can be no assurance that the Amalgamation will be
consummated. The AES Chigen shareholders meeting to vote on the Amalgamation is
scheduled for March 31, 1997. The Company is party to pending litigation
regarding the Amalgamation, which it does not believe will have a material
adverse effect on its results of operations or financial position.
In August 1996, AES, together with its partner, acquired a 4,000 megawatt
mine-mouth, coal-fired power facility in Kazakstan. The facility sells
electricity to the government-owned distribution company under a 35 year power
sales contract. 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 approximately 20%. AES has agreed to
increase the availability to 63% over a five year period (contingent on the
purchaser's performance of its obligations under the power sales contract).
Through December 31, 1996, approximately $35 million (excluding VAT) was billed
under the power sales contract for electricity, of which the purchaser paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract receivable as of December 31, 1996 to
$10 million. As of December 31, 1996, the net assets of this project were $24
million, a portion of which was represented by the contract receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owed to AES as of December 31, 1996 or additional amounts related to future
deliveries of electricity under the power sales contract or the recoverability
of the Company's investment or additional amounts the Company may invest in the
project. Other substantial risks associated with this plant exist, including
those relating to operations and maintenance, construction, refurbishment,
political risk, repatriation of earnings and currency convertibility.
Sales to CL&P represented 16% of the Company's total revenues in 1996. Moody's
Investor Service ("Moody's") and Standard & Poor's ("S&P") have rated CL&P's
senior secured long-term debt Baa3/BBB- and placed CL&P on creditwatch with a
negative outlook. In March 1997, as a result of regulatory action by the Public
Service Commission of New Hampshire, Moody's and S&P downgraded the senior
unsecured debt of Northeast Utilities, the parent of CL&P, from Ba2/BB to
Ba3/BB-. See "Risk Factors -- Dependence on Utility Customers and Certain
Projects" in the accompanying Prospectus.
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<PAGE> 31
AES TRUST I
AES I is a statutory business trust formed on November 1, 1996 under the
Delaware Business Trust Act (the "Business Trust Act") pursuant to a declaration
of trust among the Trustees and the Company and the filing of a certificate of
trust with the Secretary of State of the State of Delaware. Such declaration
will be amended and restated in its entirety (as so amended and restated, the
"Declaration") substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and the accompanying Prospectus
form a part, as of the date the TECONS are initially issued. The Declaration is
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). Upon issuance of the TECONS, the holders thereof will own all
of the issued and outstanding TECONS. The Company will acquire Common Securities
in an amount equal to at least 3% of the total capital of the Trust and will
own, directly or indirectly, all of the issued and outstanding Common
Securities. The Trust exists for the purpose of (a) issuing its Trust Securities
for cash and investing the proceeds thereof in an equivalent amount of Junior
Subordinated Debentures and (b) engaging in such other activities as are
necessary, convenient and incidental thereto. The rights of the holders of the
Trust Securities, including economic rights, rights to information and voting
rights, are as set forth in the Declaration, the Business Trust Act and the
Trust Indenture Act. The Declaration does not permit the incurrence by the Trust
of any indebtedness for borrowed money or the making of any investment other
than in the Junior Subordinated Debentures. In the Declaration, the Company has
agreed to pay for all debts and obligations (other than with respect to the
Trust Securities) and all costs and expenses of the Trust, including the fees
and expenses of the Trustees and any income taxes, duties and other governmental
charges, and all costs and expenses with respect thereto, to which the Trust may
become subject, except for United States withholding taxes.
DESCRIPTION OF THE TECONS
The TECONS will be issued pursuant to the terms of the Declaration which is
qualified under the Trust Indenture Act. The Property Trustee, The First
National Bank of Chicago, but not the other Trustees of the Trust, will act as
the indenture trustee for purposes of the Trust Indenture Act. The terms of the
TECONS and the Declaration include those stated in the Declaration and those
made part of the Declaration by the Trust Indenture Act and the Business Trust
Act. The following summarizes the material terms and provisions of the TECONS
and is qualified in its entirety by reference to, the Declaration, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
Supplement forms a part, the Business Trust Act and the Trust Indenture Act.
GENERAL
The Declaration authorizes the Trust to issue the TECONS, which represent
preferred undivided beneficial interests in the assets of the Trust, and the
Common Securities, which represent common undivided beneficial interests in the
assets of the Trust. All of the Common Securities will be owned, directly or
indirectly, by the Company. The Common Securities and the TECONS rank pari passu
with each other and will have equivalent terms except that (i) if a Declaration
Event of Default occurs and is continuing, the rights of the holders of the
Common Securities to payment in respect of periodic Distributions and payments
upon liquidation, redemption or otherwise are subordinated to the rights of the
holders of the TECONS and (ii) holders of Common Securities have the exclusive
right (subject to the terms of the Declaration) to appoint, remove or replace
Trustees and to increase or decrease the number of Trustees. The Declaration
does not permit the issuance by the Trust of any securities or other evidences
of beneficial ownership of, or beneficial interests in, the Trust other than the
TECONS and the Common Securities, the incurrence of any indebtedness for
borrowed money by the Trust or the making of any investment other than in the
Junior Subordinated Debentures. Pursuant to the Declaration, the Property
Trustee will own and hold the Junior Subordinated Debentures as trust assets for
the benefit of the holders of the TECONS and the Common Securities. The payment
of Distributions out of moneys held by the Property Trustee and payments on
redemption of the TECONS or liquidation of the Trust are guaranteed by the
Company on a subordinated basis as and to the extent described under
"Description of the Preferred Securities Guarantees" in the accompanying
Prospectus. The Property Trustee will hold the Preferred Securities Guarantee
for the benefit of holders of the TECONS. The Preferred Securities Guarantee is
a full and unconditional guarantee from the time of issuance of the TECONS, but
the Preferred Securities Guarantee covers Distributions and other payments on
the TECONS only if and to the
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extent that the Company has made a payment to the Property Trustee of interest
or principal on the Junior Subordinated Debentures deposited in the Trust as
trust assets. See "Voting Rights."
DISTRIBUTIONS
Distributions on the TECONS will be fixed at an annual rate of $2.6875 per
TECONS. Distributions in arrears for more than one calendar quarter will bear
interest thereon at the rate per annum of 5.375% (to the extent permitted by
law), compounded quarterly. The term "Distributions" as used herein includes any
such interest payable unless otherwise stated. The amount of distributions
payable for any period will be computed on the basis of a 360-day year of twelve
30 day months.
Distributions on the TECONS will be cumulative, will accrue from March 31, 1997
and, except as otherwise described below, will be payable quarterly in arrears
on the last day of each quarter, commencing on June 30, 1997, but only if, and
to the extent that, interest payments are made in respect of Junior Subordinated
Debentures held by the Property Trustee.
So long as the Company shall not be in default in the payment of interest on the
Junior Subordinated Debentures, the Company has the right under the Trust
Indenture to defer payments of interest on the Junior Subordinated Debentures by
extending the interest payment period from time to time on the Junior
Subordinated Debentures for a period not exceeding 20 consecutive quarterly
interest periods and, as a consequence, the Trust would defer quarterly
Distributions on the TECONS (though such Distributions would continue to accrue
with interest thereon at the rate of 5.375% per annum, compounded quarterly)
during any such Extension Period; provided that no such period may extend beyond
the stated maturity of the Junior Subordinated Debentures. If the Company
exercises the right to extend an interest payment period, the Company may not
declare or pay dividends on, or redeem, purchase, acquire or make a distribution
or liquidation payment with respect to, any of its common stock or preferred
stock during such Extension Period; provided that the foregoing will not apply
to any stock dividend by the Company payable in AES Common Stock. Prior to the
termination of any such Extension Period, the Company may further extend such
Extension Period; provided that such Extension Period together with all such
previous and further extensions thereof may not exceed 20 consecutive quarterly
interest periods. Upon the termination of any Extension Period and the payment
of all amounts then due, the Company may commence a new Extension Period,
subject to the above requirements. The Company may also prepay at any time all
or any portion of the interest accrued during an Extension Period. Consequently,
there could be multiple Extension Periods of varying lengths throughout the term
of the Junior Subordinated Debentures, not to exceed 20 consecutive quarters or
to cause any extension beyond the maturity of the Junior Subordinated
Debentures. See "Description of the Junior Subordinated Debentures -- Interest"
and "-- Option to Extend Interest Payment Period" herein and "Risk
Factors -- Option to Extend Interest Payment Period; Tax Impact of Extension" in
the accompanying Prospectus. Payments of accrued distributions will be payable
to holders of TECONS as they appear on the books and records of the Trust on the
first record date after the end of an Extension Period.
Distributions on the TECONS must be paid on the dates payable to the extent that
the Property Trustee has cash on hand in the Property Account to permit such
payment. The funds available for distribution to the holders of the TECONS will
be limited to payments received by the Property Trustee in respect of the Junior
Subordinated Debentures that are deposited in the Trust as trust assets. See
"Description of the Junior Subordinated Debentures." If the Company does not
make interest payments on the Junior Subordinated Debentures, the Property
Trustee will not make distributions on the TECONS. Under the Declaration, if and
to the extent the Company does make interest payments on the Junior Subordinated
Debentures deposited in the Trust as trust assets, the Property Trustee is
obligated to make distributions on the Trust Securities on a Pro Rata Basis. The
payment of distributions on the TECONS is guaranteed by the Company on a
subordinated basis as and to the extent set forth under "Description of the
Preferred Securities Guarantees" in the accompanying Prospectus. The Preferred
Securities Guarantee is a full and unconditional guarantee from the time of
issuance of the TECONS but the Preferred Securities Guarantee covers
distributions and other payments on the TECONS only if and to the extent that
the Company has made a payment to the Property Trustee of interest or principal
on the Junior Subordinated Debentures deposited in the Trust as trust assets.
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Distributions on the TECONS will be made to the holders thereof as they appear
on the books and records of the Trust on the relevant record dates, which, as
long as the TECONS remain in book-entry form, will be one Business Day (as
defined herein) prior to the relevant Distribution payment date. Distributions
payable on any TECONS that are not punctually paid on any Distribution payment
date as a result of the Company having failed to make the corresponding interest
payment on the Junior Subordinated Debentures will forthwith cease to be payable
to the person in whose name such TECONS is registered on the relevant record
date, and such defaulted Distribution will instead be payable to the person in
whose name such TECONS is registered on the special record date established by
the Regular Trustees, which record date shall correspond to the special record
date or other specified date determined in accordance with the Indenture;
provided, however, that Distributions shall not be considered payable on any
Distribution payment date falling within an Extension Period unless the Company
has elected to make a full or partial payment of interest accrued on the Junior
Subordinated Debentures on such Distribution payment date. Distributions on the
TECONS will be paid through the Property Trustee who will hold amounts received
in respect of the Junior Subordinated Debentures in the Property Account for the
benefit of the holders of the Preferred and Common Securities. Subject to any
applicable laws and regulations and the provisions of the Declaration, each such
payment will be made as described under "Book-Entry Only Issuance -- The
Depository Trust Company" below. In the event that the TECONS do not continue to
remain in book-entry form, the Regular Trustees shall have the right to select
relevant record dates which shall be more than one Business Day prior to the
relevant payment dates. The Declaration provides that the payment dates or
record dates for the TECONS shall be the same as the payment dates and record
dates for the Junior Subordinated Debentures. All distributions paid with
respect to the Trust Securities shall be paid on a Pro Rata Basis to the holders
thereof entitled thereto. If any date on which distributions are to be made on
the TECONS is not a Business Day, then payment of the distribution to be made on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) except that,
if such Business Day is in the next succeeding calendar year, such payment shall
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date. "Business Day" shall mean any day
other than Saturday, Sunday or any other day on which banking institutions in
the City of New York in the State of New York are permitted or required by any
applicable law to close.
CONVERSION RIGHTS
General
The TECONS will be convertible at any time prior to the close of business on
March 31, 2027 (or in the case of the TECONS called for redemption, prior to the
close of the business on the Business Day prior to the Redemption Date) (the
"Conversion Expiration Date"), at the option of the holders thereof and in the
manner described below, into shares of AES Common Stock at an initial conversion
rate of 0.6906 share of AES Common Stock for each TECONS (equivalent to a
conversion price of $72.40 per share of AES Common Stock (the "Initial
Conversion Price")), subject to adjustment as described under "-- Conversion
Price Adjustments -- General" and "-- Conversion Price
Adjustments -- Fundamental Change" below. If a TECONS is surrendered for
conversion after the close of business on any regular record date for payment of
a Distribution and before the opening of business on the corresponding
Distribution payment date, then, notwithstanding such conversion, the
Distribution payable on such Distribution payment date will be paid in cash to
the person in whose name the TECONS is registered at the close of business on
such record date, and (other than a TECONS or a portion of a TECONS called for
redemption on a redemption date occurring after such record date and on or prior
to such Distribution payment date) when so surrendered for conversion, the
TECONS must be accompanied by payment of an amount equal to the Distribution
payable on such Distribution payment date.
The terms of the TECONS provide that a holder of a TECONS wishing to exercise
its conversion right shall surrender such TECONS, together with an irrevocable
conversion notice, to the Property Trustee, as conversion agent (the "Conversion
Agent"), which shall, on behalf of such holder, exchange such TECONS for an
equivalent amount of Junior Subordinated Debentures and immediately convert such
Junior Subordinated Debentures into AES Common Stock. Holders may obtain copies
of the required form of the conversion notice from the Conversion Agent. So long
as a book-entry system for the TECONS is in effect, however, procedures for
converting the
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TECONS into shares of AES Common Stock will differ, as described under
"-- Book-Entry Only Issuance -- The Depository Trust Company."
No fractional shares of AES Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by AES in
cash based on the market price of AES Common Stock on the date such TECONS are
surrendered for conversion.
Conversion Price Adjustments -- General
The Initial Conversion Price is subject to adjustment (under formulae set forth
in the Trust Indenture) in certain events, including:
(i) the issuance of AES Common Stock as a dividend or distribution on
AES Common Stock;
(ii) certain subdivisions and combinations of AES Common Stock;
(iii) the issuance to all holders of AES Common Stock of certain rights
or warrants to purchase AES Common Stock at less than the then current
market price;
(iv) the distribution to all holders of AES Common Stock of (A) equity
securities of the Company (other than AES Common Stock), (B) evidences of
indebtedness of the Company and/or (C) other assets (including securities,
but excluding (1) any rights or warrants referred to in clause (iii) above,
(2) any rights or warrants to acquire any capital stock of any entity other
than the Company, (3) any dividends or distributions in connection with the
liquidation, dissolution or winding-up of the Company, (4) any dividends
payable solely in cash that may from time to time be fixed by the Board of
Directors of the Company and (5) any dividends or distributions referred to
in clause (i) above);
(v) distributions to all holders of AES Common Stock, consisting of
cash, excluding (a) any cash dividends on AES Common Stock to the extent
that the aggregate cash dividends per share of AES Common Stock in any
consecutive 12-month period do not exceed the greater of (x) the amount per
share of AES Common Stock of the cash dividends paid on AES Common Stock in
the immediately preceding 12-month period, to the extent that such
dividends for the immediately preceding 12-month period did not require an
adjustment of the conversion price pursuant to this clause (v) (as adjusted
to reflect subdivisions or combinations of AES Common Stock), and (y) 15%
of the average of the daily Closing Price (as defined in the Trust
Indenture) of AES Common Stock for the ten consecutive Trading Days (as
defined in the Trust Indenture) immediately prior to the date of
declaration of such dividend, and (b) any dividend or distribution in
connection with the liquidation, dissolution or winding up of the Company
or a redemption of any rights issued under a rights agreement; provided,
however, that no adjustment shall be made pursuant to this clause (v) if
such distribution would otherwise constitute a Fundamental Change (as
defined below) and be reflected in a resulting adjustment described below;
and
(vi) payment in respect of a tender or exchange offer by the Company or
any subsidiary of the Company for AES Common Stock to the extent that the
cash and value of any other consideration included in such payment per
share of AES Common Stock exceed (by more than 10%, with any smaller excess
being disregarded in computing the adjustment provided hereby) the first
reported sale price per share of AES Common Stock on the Trading Day next
succeeding the Expiration Time (as defined in the Trust Indenture) for such
tender or exchange offer.
If any adjustment is required to be made as set forth in clause (v) above as a
result of a distribution which is a dividend described in subclause (a) of
clause (v) above, such adjustment would be based upon the amount by which such
distribution exceeds the amount of the dividend permitted to be excluded
pursuant to such subclause (a) of clause (v). If an adjustment is required to be
made as set forth in clause (v) above as a result of a distribution which is not
such a dividend, such adjustment would be based upon the full amount of such
distribution. If an adjustment is required to be made as set forth in clause
(vi) above, such adjustment would be calculated based upon the amount by which
the aggregate consideration paid for the AES Common Stock acquired in the tender
or exchange offer exceeds 110% of the value of such shares based on the first
reported sale price of AES Common Stock on the Trading Day next succeeding the
Expiration Time. In lieu of making such a conversion price
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adjustment in the case of certain dividends or distributions, the Company may
provide that upon the conversion of the TECONS the holder converting such TECONS
will receive, in addition to the AES Common Stock to which such holder is
entitled, the cash, securities or other property which such holder would have
received if such holder had, immediately prior to the record date for such
dividend or distribution, converted its TECONS into AES Common Stock.
No adjustment in the conversion price will be required unless the adjustment
would require a change of at least 1% in the conversion price then in effect;
provided, however, that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
The Company from time to time may, to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 Business Days (as
defined in the Trust Indenture), in which case the Company shall give at least
15 days' notice of such reduction. In particular, the Company may, at its
option, make such reduction in the conversion price, in addition to those set
forth above, as the Company deems advisable to avoid or diminish any income tax
to holders of AES Common Stock resulting from any dividend or distribution of
stock (or rights to acquire stock) or from any event treated as such for tax
purposes or for any other reasons. See "Certain Federal Tax
Consequences -- Adjustment of Conversion Price."
Conversion Price Adjustments -- Fundamental Change
In the event that the Company shall be a party to any transaction or series of
transactions constituting a Fundamental Change, including, without limitation,
(i) any recapitalization or reclassification of AES Common Stock (other than a
change in par value or as a result of a subdivision or combination of AES Common
Stock); (ii) any consolidation or merger of the Company with or into another
corporation as a result of which holders of AES Common Stock shall be entitled
to receive securities or other property or assets (including cash) with respect
to or in exchange for AES Common Stock (other than a merger which does not
result in a reclassification, conversion, exchange or cancellation of the
outstanding AES Common Stock); (iii) any sale or transfer of all or
substantially all of the assets of the Company; or (iv) any compulsory share
exchange, pursuant to any of which holders of AES Common Stock shall be entitled
to receive other securities, cash or other property, then appropriate provision
shall be made so that the holder of each TECONS then outstanding shall have the
right thereafter to convert such TECONS only into (x) if any such transaction
does not constitute a Common Stock Fundamental Change (as defined below), the
kind and amount of the securities, cash or other property that would have been
receivable upon such recapitalization, reclassification, consolidation, merger,
sale, transfer or share exchange by a holder of the number of shares of AES
Common Stock issuable upon conversion of such TECONS immediately prior to such
recapitalization, reclassification, consolidation, merger, sale, transfer or
share exchange, after, in the case of a Non-Stock Fundamental Change (as defined
below), giving effect to any adjustment in the conversion price in accordance
with clause (i) of the following paragraph, and (y) if any such transaction
constitutes a Common Stock Fundamental Change, shares of common stock of the
kind received by holders of AES Common Stock as result of such Common Stock
Fundamental Change in an amount determined in accordance with clause (ii) of the
following paragraph. The company formed by such consolidation or resulting from
such merger or which acquires such assets or which acquires the AES Common
Stock, as the case may be, shall enter into a supplemental indenture with the
Indenture Trustee (as defined herein), satisfactory in form to the Indenture
Trustee and executed and delivered to the Indenture Trustee, the provisions of
which shall establish such right. Such supplemental indenture shall provide for
adjustments which, for events subsequent to the effective date of such
supplemental indenture shall be as nearly equivalent as practical to the
relevant adjustments provided for in the preceding paragraphs and in this
paragraph.
Notwithstanding any other provision in the preceding paragraphs, if any
Fundamental Change occurs, the conversion price in effect will be adjusted
immediately after that Fundamental Change as follows:
(i) in the case of a Non-Stock Fundamental Change, the conversion price
per share of AES Common Stock immediately following such Non-Stock
Fundamental Change will be the lower of (A) the conversion price in effect
immediately prior to such Non-Stock Fundamental Change, but after giving
effect to any other prior adjustments effected pursuant to the preceding
paragraphs, and (B) the result obtained by multiplying the greater of the
Applicable Price (as defined below) or the then applicable Reference Market
Price (as defined below) by a fraction of which the numerator will be 100
and the denominator of which will be an amount
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based on the date such Non-Stock Fundamental Change occurs. For the
12-month period beginning March 31, 1997, the denominator will be 105.375,
and the denominator will decrease by 0.672 during each successive 12-month
period; provided, that the denominator shall in no event be less than
100.0.
(ii) in the case of a Common Stock Fundamental Change, the conversion
price per share of AES Common Stock immediately following the Common Stock
Fundamental Change will be the conversion price in effect immediately prior
to the Common Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to the preceding paragraphs,
multiplied by a fraction, the numerator of which is the Purchaser Stock
Price (as defined below) and the denominator of which is the Applicable
Price; provided, however, that in the event of a Common Stock Fundamental
Change in which (A) 100% of the value of the consideration received by a
holder of AES Common Stock (subject to certain limited exceptions) is
shares of common stock of the successor, acquiror or other third party (and
cash, if any, paid with respect to any fractional interests in the shares
of common stock resulting from the Common Stock Fundamental Change) and (B)
all of the AES Common Stock (subject to certain limited exceptions) shall
have been exchanged for, converted into, or acquired for, shares of common
stock (and cash, if any, with respect to fractional interests) of the
successor, acquiror or other third party, the conversion price per share of
AES Common Stock immediately following the Common Stock Fundamental Change
shall be the conversion price in effect immediately prior to the Common
Stock Fundamental Change divided by the number of shares of common stock of
the successor, acquiror, or other third party received by a holder of one
share of AES Common Stock as a result of the Common Stock Fundamental
Change.
The foregoing conversion price adjustments are designed, in "Fundamental Change"
transactions where all or substantially all of the AES Common Stock is converted
into securities, cash, or property and not more than 50% of the value received
by the holders of AES Common Stock consists of stock listed or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on the Nasdaq National Market of the Nasdaq Stock Market, Inc. (a
"Non-Stock Fundamental Change," as defined herein), to increase the securities,
cash or property into which each TECONS is convertible.
In a Non-Stock Fundamental Change transaction where the initial value received
per share of AES Common Stock (measured as described in the definition of
Applicable Price below) is lower than the then applicable conversion price of
the TECONS but greater than or equal to the Reference Market Price (as defined
herein), the conversion price will be adjusted as described above with the
effect that each TECONS will be convertible into securities, cash or property of
the same type received by the holders of AES Common Stock in such transaction
but in an amount per TECONS equal to the amount indicated as the denominator as
of the date of such transaction as set forth in clause (i) above with respect to
conversion prices for Non-Stock Fundamental Changes.
In a Non-Stock Fundamental Change transaction where the initial value received
per share of AES Common Stock (measured as described in the definition of
Applicable Price below) is lower than both the conversion price of a TECONS and
the Reference Market Price, the conversion price will be adjusted as described
above but calculated as though such initial value had been the Reference Market
Price.
In a Fundamental Change transaction where all or substantially all the AES
Common Stock is converted into securities, cash, or property and more than 50%
of the value received by the holders of AES Common Stock (subject to certain
limited exceptions) consists of listed or Nasdaq National Market traded common
stock (a "Common Stock Fundamental Change," as defined herein), the foregoing
adjustments are designed to provide in effect that (a) where AES Common Stock is
converted partly into such common stock and partly into other securities, cash,
or property, each TECONS will be convertible solely into a number of shares of
such common stock determined so that the initial value of such shares (measured
as described in the definition of Purchaser Stock Price below) equals the value
of the shares of AES Common Stock into which such TECONS was convertible
immediately before the transaction (measured as aforesaid) and (b) where AES
Common Stock is converted solely into such common stock, each TECONS will be
convertible into the same number of shares of such common stock receivable by a
holder of the number of shares of AES Common Stock into which such TECONS was
convertible immediately before such transaction.
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In determining the amount and type of consideration received by a holder of AES
Common Stock in the event of a Fundamental Change, consideration received by a
holder of AES Common Stock pursuant to a statutory right of appraisal will be
disregarded.
"Applicable Price" means (i) in the event of a Non-Stock Fundamental Change in
which the holders of AES Common Stock receive only cash, the amount of cash
receivable by a holder of one share of AES Common Stock and (ii) in the event of
any other Fundamental Change, the average of the Closing Prices (as defined in
the First Supplemental Indenture) for one share of AES Common Stock during the
ten Trading Days immediately prior to the record date for the determination of
the holders of AES Common Stock entitled to receive cash, securities, property
or other assets in connection with such Fundamental Change or, if there is no
such record date, prior to the date on which the holders of the AES Common Stock
will have the right to receive such cash, securities, property or other assets.
"Common Stock Fundamental Change" means any Fundamental Change in which more
than 50% of the value (as determined in good faith by the Company's Board of
Directors) of the consideration received by holders of AES Common Stock (subject
to certain limited exceptions) pursuant to such transaction consists of shares
of common stock that, for the ten consecutive Trading Days immediately prior to
such Fundamental Change has been admitted for listing or admitted for listing
subject to notice of issuance on a national securities exchange or quoted on the
Nasdaq National Market, provided, however, that a Fundamental Change will not be
a Common Stock Fundamental Change unless either (i) the Company continues to
exist after the occurrence of such Fundamental Change and the outstanding TECONS
continue to exist as outstanding TECONS or (ii) the outstanding TECONS continue
to exist as TECONS and are convertible into shares of common stock of the
successor to the Company.
"Fundamental Change" means the occurrence of any transaction or event or series
of transactions or events pursuant to which all or substantially all of the AES
Common Stock is exchanged for, converted into, acquired for or constitutes
solely the right to receive cash, securities, property or other assets (whether
by means of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise); provided,
however, in the case of a plan involving more than one such transaction or event
for purposes of adjustment of the conversion price, such Fundamental Change will
be deemed to have occurred when substantially all of the AES Common Stock has
been exchanged for, converted into, or acquired for or constitutes solely the
right to receive cash, securities, property or other assets but the adjustment
shall be based upon the consideration that the holders of AES Common Stock
received in the transaction or event as a result of which more than 50% of the
AES Common Stock shall have been exchanged for, converted into, or acquired for,
or shall constitute solely the right to receive such cash, securities,
properties or other assets.
"Non-Stock Fundamental Change" means any Fundamental Change other than a Common
Stock Fundamental Change.
"Purchaser Stock Price" means, with respect to any Common Stock Fundamental
Change, the average of the Closing Prices for one share of common stock received
by holders of AES Common Stock in such Common Stock Fundamental Change during
the ten Trading Days immediately prior to the record date for the determination
of the holders of AES Common Stock entitled to receive such shares of common
stock or, if there is no such record date, prior to the date upon which the
holders of AES Common Stock shall have the right to receive such shares of
common stock.
"Reference Market Price" will initially mean $39.08 (which unless otherwise
specified in this Prospectus Supplement or the accompanying Prospectus will be
66 2/3% of the last reported sale price per share of AES's Common Stock on the
NYSE on March 24, 1997) and, in the event of any adjustment to the conversion
price other than as a result of a Fundamental Change, the Reference Market Price
will also be adjusted so that the ratio of the Reference Market Price to the
conversion price after giving effect to any adjustment will always be the same
as the ratio of the initial Reference Market Price to the Initial Conversion
Price of the TECONS.
Conversions of the TECONS may be effected by delivering them to the office or
agency of the Company maintained for such purpose in the Borough of Manhattan,
the City of New York.
Conversion price adjustments may, in certain circumstances, result in
constructive distributions that could be taxable as dividends under the Internal
Revenue Code of 1986, as amended (the "Code"), to holders of TECONS or
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<PAGE> 38
to holders of AES Common Stock issued upon conversion thereof. See "Certain
Federal Tax Consequences -- Adjustment of Conversion Price."
No adjustment in the conversion price will be required unless the adjustment
would require a change of at least 1% in the conversion price then in effect;
provided, however, that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If, at any time, a Tax Event or an Investment Company Event (each as hereinafter
defined, and each a "Special Event") shall occur and be continuing, the Trust
shall, unless the Junior Subordinated Debentures are redeemed in the limited
circumstances described below, be dissolved with the result that, after
satisfaction of creditors of the Trust, Junior Subordinated Debentures with an
aggregate principal amount equal to the aggregate stated liquidation amount of
the TECONS and the Common Securities would be distributed on a Pro Rata Basis to
the holders of the TECONS and the Common Securities in liquidation of such
holders' interests in the Trust, within 90 days following the occurrence of such
Special Event; provided, however, that in the case of the occurrence of a Tax
Event, as a condition of such dissolution and distribution, the Regular Trustees
shall have received an opinion of nationally recognized independent tax counsel
experienced in such matters (a "No Recognition Opinion"), which opinion may rely
on any then applicable published revenue rulings of the Internal Revenue
Service, to the effect that the holders of the TECONS will not recognize any
gain or loss for United States Federal income tax purposes as a result of such
dissolution and distribution of Junior Subordinated Debentures; and, provided,
further, that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90 day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, which has no adverse effect on the Trust
or the Company or the holders of the TECONS, the Trust will pursue such measure
in lieu of dissolution. Furthermore, if in the case of the occurrence of a Tax
Event, (i) the Regular Trustees have received an opinion (a "Redemption Tax
Opinion") of nationally recognized independent tax counsel experienced in such
matters that, as a result of a Tax Event, there is more than an insubstantial
risk that the Company would be precluded from deducting the interest on the
Junior Subordinated Debentures for United States federal income tax purposes
even if the Junior Subordinated Debentures were distributed to the holders of
TECONS and Common Securities in liquidation of such holders' interests in the
Trust as described above or (ii) the Regular Trustees shall have been informed
by such tax counsel that a No Recognition Opinion cannot be delivered to the
Trust, the Company shall have the right, upon not less than 30 nor more than 60
days notice, to redeem the Junior Subordinated Debentures in whole or in part
for cash within 90 days following the occurrence of such Tax Event, and promptly
following such redemption TECONS and Common Securities with an aggregate
liquidation amount equal to the aggregate principal amount of the Junior
Subordinated Debentures so redeemed will be redeemed by the Trust at the
Redemption Price on a Pro Rata Basis; provided, however, that if at the time
there is available to the Company or the Regular Trustees the opportunity to
eliminate, within such 90 day period, the Tax Event by taking some ministerial
action, such as filing a form or making an election, or pursuing some other
similar reasonable measure, which has no adverse effect on the Trust, the
Company or the holders of the TECONS, the Company will pursue such measure in
lieu of redemption and provided further that the Company shall have no right to
redeem the Junior Subordinated Debentures while the Regular Trustees on behalf
of the Trust are pursuing any such ministerial action. The Common Securities
will be redeemed on a Pro Rata Basis with the TECONS, except that if an Event of
Default under the Declaration has occurred and is continuing, the TECONS will
have a priority over the Common Securities with respect to payment of the
Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained an opinion of a
nationally recognized independent tax counsel experienced in such matters (a
"Dissolution Tax Opinion") to the effect that on or after the date of this
Prospectus Supplement as a result of (a) any amendment to, or change in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, (b) any amendment to, or
change in, an interpretation or application of any such laws or regulations by
any legislative body, court, governmental agency or regulatory authority
(including the enactment of any legislation and the publication of any judicial
decision or regulatory determination), (c) any interpretation or pronouncement
that provides for a position with respect to such laws or regulations that
differs from the theretofore generally accepted position or (d) any action taken
by any governmental agency or regulatory authority, which amendment or change is
enacted, promulgated,
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issued or effective or which interpretation or pronouncement is issued or
announced or which action is taken, in each case on or after the date of this
Prospectus Supplement, there is more than an insubstantial risk that (i) the
Trust is, or will be within 90 days of the date thereof, subject to United
States Federal income tax with respect to income accrued or received on the
Junior Subordinated Debentures, (ii) the Trust is, or will be within 90 days of
the date thereof, subject to more than a de minimis amount of other taxes,
duties or other governmental charges or (iii) interest payable by the Company to
the Trust on the Junior Subordinated Debentures is not, or within 90 days of the
date thereof will not be, deductible by the Company for United States federal
income tax purposes.
"Investment Company Event" means that the Regular Trustees shall have received
an opinion of nationally recognized independent counsel experienced in practice
under the Investment Company Act of 1940, as amended (the "1940 Act"), that as a
result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the date of this
Prospectus Supplement.
On the date fixed for any distribution of Junior Subordinated Debentures, upon
dissolution of the Trust, (i) the TECONS and the Common Securities will no
longer be deemed to be outstanding, (ii) the depositary or its nominee, as the
record holder of the TECONS, will receive a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution, and (iii) any certificates representing TECONS not held
by the depositary or its nominee will be deemed to represent Junior Subordinated
Debentures having an aggregate principal amount equal to the aggregate stated
liquidation amount of, with an interest rate identical to the distribution rate
of, and accrued and unpaid interest equal to accrued and unpaid distributions
on, such TECONS, until such certificates are presented to the Company or its
agent for transfer or reissuance.
There can be no assurance as to the market price for the Junior Subordinated
Debentures which may be distributed in exchange for TECONS if a dissolution and
liquidation of the Trust were to occur. Accordingly, the Junior Subordinated
Debentures which the investor may subsequently receive on dissolution and
liquidation of the Trust, may trade at a discount to the price of the TECONS
exchanged. If the Junior Subordinated Debentures are distributed to the holders
of TECONS upon the dissolution of the Trust, the Company will use its best
efforts to list the Junior Subordinated Debentures on the NYSE or on such other
exchange on which the TECONS are then listed.
MANDATORY REDEMPTION
Upon the repayment of the Junior Subordinated Debentures, whether at maturity,
upon redemption or otherwise, the proceeds from such repayment or payment will
be promptly applied to redeem TECONS and Common Securities having an aggregate
liquidation amount equal to the Junior Subordinated Debentures so repaid, upon
not less than 30 nor more than 60 days' notice, at the Redemption Price. The
Common Securities will be entitled to be redeemed on a Pro Rata Basis with the
TECONS, except that if an Event of Default under the Declaration has occurred
and is continuing, the TECONS will have a priority over the Common Securities
with respect to payment of the Redemption Price. Subject to the foregoing, if
fewer than all outstanding TECONS and Common Securities are to be redeemed, the
TECONS and Common Securities will be redeemed on a Pro Rata Basis. In the event
fewer than all outstanding TECONS are to be redeemed, TECONS registered in the
name of and held by DTC or its nominee will be redeemed as described under
"-- Redemption Procedures" below.
REDEMPTION PROCEDURES
The Trust may not redeem any outstanding TECONS unless all accrued and unpaid
distributions have been paid on all TECONS for all quarterly distribution
periods terminating on or prior to the date of notice of redemption.
If the Trust gives a notice of redemption in respect of TECONS (which notice
will be irrevocable) then, by 12:00 noon, New York City time, on the redemption
date and provided that the Company has paid to the Property Trustee a sufficient
amount of cash in connection with the related redemption or maturity of the
Junior Subordinated Debentures, the Trust will irrevocably deposit with the
Depositary funds sufficient to pay the applicable Redemption Price and will give
the Depositary irrevocable instructions and authority to pay the Redemption
Price to the holders of the TECONS. See "Book-Entry Only Issuance -- The
Depository Trust Company." If notice of
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redemption shall have been given and funds deposited as required, then,
immediately prior to the close of business on the date of such deposit,
distributions will cease to accrue on the TECONS called for redemption, such
TECONS shall no longer be deemed to be outstanding and all rights of holders of
such TECONS so called for redemption will cease, except the right of the holders
of such TECONS to receive the Redemption Price, but without interest on such
Redemption Price. Neither the Trustees nor the Trust shall be required to
register or cause to be registered the transfer of any TECONS which have been so
called for redemption. If any date fixed for redemption of TECONS is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay) except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date fixed for redemption. If the Company fails to repay Junior
Subordinated Debentures on maturity or on the date fixed for this redemption or
if payment of the Redemption Price in respect of TECONS is improperly withheld
or refused and not paid by the Property Trustee or by the Company pursuant to
the Preferred Securities Guarantee described under "Description of the Preferred
Securities Guarantees" in the accompanying Prospectus, distributions on such
TECONS will continue to accrue, from the original redemption date of the TECONS
to the date of payment, in which case the actual payment date will be considered
the date fixed for redemption for purposes of calculating the Redemption Price.
In the event that fewer than all of the outstanding TECONS are to be redeemed,
the TECONS will be redeemed as described below under "Book-Entry Only
Issuance -- The Depository Trust Company."
If a partial redemption of the TECONS would result in the delisting of the
TECONS by any national securities exchange or other organization on which the
TECONS are then listed, the Company pursuant to the Indenture will only redeem
Junior Subordinated Debentures in whole and, as a result, the Trust may only
redeem the TECONS in whole.
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), the Company or any of its subsidiaries
may at any time and from time to time purchase outstanding TECONS by tender, in
the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary dissolution, liquidation,
winding-up or termination of the Trust, the holders of the TECONS and Common
Securities at the date of dissolution, winding-up or termination of the Trust
will be entitled to receive on a Pro Rata Basis solely out of the assets of the
Trust, after satisfaction of liabilities of creditors (to the extent not
satisfied by the Company as provided in the Declaration), an amount equal to the
aggregate of the stated liquidation amount of $50 per Trust Security plus
accrued and unpaid distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"), unless, in connection with such
dissolution, liquidation, winding-up or termination, Junior Subordinated
Debentures in an aggregate principal amount equal to the aggregate stated
liquidation amount of such Trust Securities and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid distributions on such
Trust Securities, shall be distributed on a Pro Rata Basis to the holders of the
TECONS and Common Securities in exchange therefor.
If, upon any such dissolution, the Liquidation Distribution can be paid only in
part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the TECONS and the Common Securities shall be paid on a Pro Rata Basis.
The holders of the Common Securities will be entitled to receive distributions
upon any such dissolution on a Pro Rata Basis with the holders of the TECONS,
except that if an Event of Default under the Declaration has occurred and is
continuing, the TECONS shall have a priority over the Common Securities with
respect to payment of the Liquidation Distribution.
Pursuant to the Declaration, the Trust shall terminate: (i) on November 1, 2031,
the expiration of the term of the Trust; (ii) when all of the Trust Securities
shall have been called for redemption and the amounts necessary for redemption
thereof shall have been paid to the holders of Trust Securities in accordance
with the terms of the Trust Securities; or (iii) when all of the Junior
Subordinated Debentures shall have been distributed to the holders of Trust
Securities in exchange for all of the Trust Securities in accordance with the
terms of the Trust Securities.
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NO MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be replaced
by, or convey, transfer or lease its properties and assets to, any corporation
or other entity.
DECLARATION EVENTS OF DEFAULT
An Indenture Event of Default (as defined in the accompanying Prospectus) will
constitute an event of default under the Declaration with respect to the Trust
Securities (an "Event of Default"); provided that pursuant to the Declaration,
the holder of the Common Securities will be deemed to have waived any such Event
of Default with respect to the Common Securities until all Events of Default
with respect to the TECONS have been cured or waived. Until all such Events of
Default with respect to the TECONS have been so cured or waived, the Property
Trustee will be deemed to be acting solely on behalf of the holders of the
TECONS, and only the holders of the TECONS will have the right to direct the
Property Trustee with respect to certain matters under the Declaration and
consequently under the Indenture. In the event that any Event of Default with
respect to the TECONS is waived by the holders of the TECONS as provided in the
Declaration, the holders of Common Securities pursuant to the Declaration have
agreed that such waiver also constitutes a waiver of such Event of Default with
respect to the Common Securities for all purposes under the Declaration without
any further act, vote or consent of the holders of the Common Securities. See
"Voting Rights" below.
Upon the occurrence of an Event of Default, the Property Trustee as the holder
of all of the Junior Subordinated Debentures will have the right under the
Indenture to declare the principal of and interest on the Junior Subordinated
Debentures to be immediately due and payable. In addition, the Property Trustee
will have the power to exercise all rights, powers and privileges under the
Indenture. See "Description of the Junior Subordinated Debentures."
VOTING RIGHTS
Except as provided below, under "Modification and Amendment of the Declaration"
below and "Description of the Preferred Securities Guarantees -- Amendments and
Assignment" in the accompanying Prospectus and as otherwise required by the
Business Trust Act, the Trust Indenture Act and the Declaration, the holders of
the TECONS will have no voting rights.
Subject to the requirements of this paragraph, the holders of a majority in
aggregate liquidation amount of the TECONS have the right (i) on behalf of all
holders of TECONS, to waive any past default that is waivable under the
Declaration and (ii) to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising any
trust or power conferred upon the Property Trustee under the Declaration,
including the right to direct the Property Trustee, as the holder of the Junior
Subordinated Debentures, to (A) direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee (as defined
herein), or executing any trust or power conferred on the Indenture Trustee with
respect to the Junior Subordinated Debentures, (B) waive any past default that
is waivable under Section 6.06 of the Indenture, or (C) exercise any right to
rescind or annul a declaration that the principal of all the Junior Subordinated
Debentures shall be due and payable; provided that where a consent under the
Indenture would require the consent of (a) holders of Junior Subordinated
Debentures representing a specified percentage greater than a majority in
principal amount of the Junior Subordinated Debentures or (b) each holder of
Junior Subordinated Debentures affected thereby, no such consent shall be given
by the Property Trustee without the prior consent of, in the case of clause (a)
above, holders of TECONS representing such specified percentage of the aggregate
liquidation amount of the TECONS or, in the case of clause (b) above, each
holder of all TECONS affected thereby. The Property Trustee shall not revoke any
action previously authorized or approved by a vote of the holders of TECONS. The
Property Trustee shall notify all holders of record of TECONS of any notice of
default received from the Indenture Trustee with respect to the Junior
Subordinated Debentures. Other than with respect to directing the time, method
and place of conducting any proceeding for any remedy available to the Property
Trustee or the Indenture Trustee as set forth above, the Property Trustee shall
be under no obligation to take any of the foregoing actions at the direction of
the holders of the TECONS unless the Property Trustee shall have obtained an
opinion of nationally recognized independent tax counsel recognized as expert in
such matters to the effect that the Trust will not be classified for
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United States federal income tax purposes as an association taxable as a
corporation or a partnership on account of such action and will be treated as a
grantor trust for United States federal income tax purposes following such
action. If the Property Trustee fails to enforce its rights under the
Declaration (including, without limitation, its rights, powers and privileges as
a holder of the Junior Subordinated Debentures under the Indenture), any holder
of TECONS may, to the extent permitted by applicable law, after a period of 30
days has elapsed from such holder's written request to the Property Trustee to
enforce such rights, institute a legal proceeding directly against the Company
to enforce the Property Trustee's rights under the Declaration, without first
instituting a legal proceeding against the Property Trustee or any other Person.
In addition, in case of an Event of Default which is attributed to the failure
of the Company to pay interest or principal on the Junior Subordinated
Debentures, a holder of TECONS may directly institute a proceeding for
enforcement of payment to such holder of the principal of, or interest on, the
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the TECONS of such holder. See "The AES Trusts -- The
Property Trustee" in the accompanying Prospectus .
A waiver of an Indenture Event of Default by the Property Trustee at the
direction of holders of the TECONS will constitute a waiver of the corresponding
Event of Default under the Declaration in respect of the Trust Securities.
In the event the consent of the Property Trustee as the holder of the Junior
Subordinated Debentures is required under the Trust Indenture with respect to
any amendment, modification or termination of the Trust Indenture or the Junior
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
Securities voting together as a single class; provided, however, that where any
such amendment, modification or termination under the Indenture would require
the consent of holders of Junior Subordinated Debentures representing a
specified percentage greater than a majority in principal amount of the Junior
Subordinated Debentures, the Property Trustee may only give such consent at the
direction of the holders of Trust Securities representing such specified
percentage of the aggregate liquidation amount of the Trust Securities; and,
provided, further, that the Property Trustee shall be under no obligation to
take any such action in accordance with the directions of the holders of the
Trust Securities unless the Property Trustee has obtained an opinion of
nationally recognized independent tax counsel recognized as expert in such
matters to the effect that the Trust will not be classified for United States
federal income tax purposes as an association taxable as a corporation or a
partnership on account of such action and will be treated as a grantor trust for
United States Federal income tax purposes following such action.
Any required approval or direction of holders of TECONS may be given at a
separate meeting of holders of TECONS convened for such purpose, at a meeting of
all of the holders of Trust Securities or pursuant to written consent. The
Regular Trustees will cause a notice of any meeting at which holders of TECONS
are entitled to vote, or of any matter upon which action by written consent of
such holders is to be taken, to be mailed to each holder of record of TECONS.
Each such notice will include a statement setting forth (i) the date of such
meeting or the date by which such action is to be taken; (ii) a description of
any resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents.
No vote or consent of the holders of TECONS will be required for the Trust to
redeem and cancel TECONS or distribute Junior Subordinated Debentures in
accordance with the Declaration.
Notwithstanding that holders of TECONS are entitled to vote or consent under any
of the circumstances described above, any of the TECONS at such time that are
owned by the Company or by any entity directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company shall
not be entitled to vote or consent and shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
The procedures by which persons owning TECONS registered in the name of and held
by DTC or its nominee may exercise their voting rights are described under
"Book-Entry Only Issuance -- The Depository Trust Company" below.
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Holders of the TECONS will have no rights to increase or decrease the number of
Trustees or to appoint, remove or replace a Trustee, which rights are vested
exclusively in the holders of the Common Securities.
MODIFICATION AND AMENDMENT OF THE DECLARATION
The Declaration may be modified and amended on approval of a majority of the
Regular Trustees, provided, that, if any proposed modification or amendment
provides for, or the Regular Trustees otherwise propose to effect, (a) any
action that would adversely affect the powers, preferences or special rights of
the Trust Securities, whether by way of amendment to the Declaration or
otherwise, or (b) the dissolution, winding-up or termination of the Trust other
than pursuant to the terms of the Declaration, then the holders of the
outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least a majority in liquidation amount of the
Trust Securities, provided that if any amendment or proposal referred to above
would adversely affect only the TECONS or the Common Securities, then only the
affected class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of a
majority in liquidation amount of such class of Securities.
Notwithstanding the foregoing, (i) no amendment or modification may be made to
the Declaration unless the Regular Trustees shall have obtained (a) either a
ruling from the Internal Revenue Service or a written unqualified opinion of
nationally recognized independent tax counsel experienced in such matters to the
effect that such amendment will not cause the Trust to be classified for United
States federal income tax purposes as an association taxable as a corporation or
a partnership and to the effect that the Trust will continue to be treated as a
grantor trust for purposes of United States federal income taxation and (b) a
written unqualified opinion of nationally recognized independent counsel
experienced in such matters to the effect that such amendment will not cause the
Trust to be an "investment company" which is required to be registered under the
1940 Act; (ii) certain specified provisions of the Declaration may not be
amended without the consent of all of the holders of the Trust Securities; (iii)
no amendment which adversely affects the rights, powers and privileges of the
Property Trustee shall be made without the consent of the Property Trustee; (iv)
Article IV of the Declaration relating to the obligation of the Company to
purchase the Common Securities and to pay certain obligations and expenses of
the Trust as described under "The AES Trusts" in the accompanying Prospectus may
not be amended without the consent of the Company; and (v) the rights of holders
of Common Securities under Article V of the Declaration to increase or decrease
the number of, and to appoint, replace or remove, Trustees shall not be amended
without the consent of each holder of Common Securities.
The Declaration further provides that it may be amended without the consent of
the holders of the Trust Securities to (i) cure any ambiguity; (ii) correct or
supplement any provision in the Declaration that may be defective or
inconsistent with any other provision of the Declaration; (iii) to add to the
covenants, restrictions or obligations of the Company; and (iv) to conform to
changes in, or a change in interpretation or application of certain 1940 Act
requirements by the Commission, which amendment does not adversely affect the
rights, preferences or privileges of the holders.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depositary for the
TECONS. The TECONS will be issued only as fully registered securities registered
in the name of DTC or its nominee. One or more fully-registered global TECONS
certificates (each a "TECONS Global Certificate"), representing the total
aggregate number of TECONS, will be issued and will be deposited with DTC.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in a global TECONS.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in
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Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations ("Direct Participants"). DTC is owned by a number of its Direct
Participants and by the NYSE, the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Securities and
Exchange Commission.
Upon issuance of a TECONS Global Certificate, DTC will credit on its book-entry
registration and transfer system the number of TECONS represented by such TECONS
Global Certificate to the accounts of institutions that have accounts with DTC.
Ownership of beneficial interests in a TECONS Global Certificate will be limited
to Participants or persons that may hold interests through Participants. The
ownership interest of each actual purchaser of each TECONS ("Beneficial Owner")
is in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchases, but Beneficial Owners are expected to receive written confirmations
providing details of the transactions, as well as periodic statements of their
holdings, from the Direct or Indirect Participants through which the Beneficial
Owners purchased TECONS. Transfers of ownership interests in the TECONS are to
be accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the TECONS; DTC's
records reflect only the identity of the Direct Participants to whose accounts
such TECONS are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. So long as DTC, or its nominee, is the owner of a
TECONS Global Certificate, DTC or such nominee, as the case may be, will be
considered the sole owner and holder of record of the TECONS represented by such
TECONS Global Certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the TECONS
are being redeemed, DTC will reduce pro rata (subject to adjustment to eliminate
fractional TECONS) the amount of interest of each Direct Participant in the
TECONS to be redeemed.
Although voting with respect to the TECONS is limited, in those instances in
which a vote is required, neither DTC nor Cede & Co. itself will consent or vote
with respect to TECONS. Under its usual procedures, DTC would mail an Omnibus
Proxy to the Trust as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the TECONS are credited on the record date (identified in a
listing attached to the Omnibus proxy).
Distribution payments on the TECONS represented by a Preferred Series Global
Certificate will be made by the Property Trustee to DTC. DTC's practice is to
credit Direct Participants' accounts on the relevant payment date in accordance
with their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices and will be the responsibility of such Participants and not
of DTC, the Trust or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of distributions to
DTC is the responsibility of the Trust, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a global TECONS certificate
will not be entitled to receive physical delivery of TECONS. Accordingly, each
Beneficial Owner must rely on the procedures of DTC to exercise any rights under
the TECONS.
DTC may discontinue providing its services as securities depository with respect
to the TECONS at any time by giving reasonable notice to the Trust. Under such
circumstances, if a successor securities depository is not obtained,
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TECONS certificates will be required to be printed and delivered. Additionally,
the Trust may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor depository). In that event, certificates for the
TECONS will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that the Trust and the Company believe to be
reliable, but the Trust and the Company take no responsibility for the accuracy
thereof.
CONVERSION AGENT, REGISTRAR, TRANSFER AGENT AND PAYING AGENT
The Property Trustee will act as Conversion Agent. In addition, in the event the
TECONS do not remain in book-entry only form, the following provisions will
apply:
Payment of distributions and payments on redemption of the TECONS will be
payable, the transfer of the TECONS will be registrable, and TECONS will be
exchangeable for TECONS of other denominations of a like aggregate liquidation
amount, at the corporate trust office of the Property Trustee in New York, New
York; provided that payment of distributions may be made at the option of the
Regular Trustees on behalf of the Trust by check mailed to the address of the
persons entitled thereto and that the payment on redemption of any TECONS will
be made only upon surrender of such TECONS to the Property Trustee.
The First National Bank of Chicago or one of its affiliates will act as
registrar and transfer agent for the TECONS. The First National Bank of Chicago
will also act as paying agent and, with the consent of the Regular Trustees, may
designate additional paying agents.
Registration of transfers of TECONS will be effected without charge by or on
behalf of the Trust, but upon payment (with the giving of such indemnity as the
Trust or the Company may require) in respect of any tax or other governmental
charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of TECONS after such TECONS have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to a default with respect to the Trust Securities,
undertakes to perform only such duties as are specifically set forth in the
Declaration and, after default, shall exercise the same degree of care as a
prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of TECONS, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The Property
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Property
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
The Company and certain of its affiliates maintain a deposit account and banking
relationship with the Property Trustee.
GOVERNING LAW
The Declaration and the TECONS will be governed by, and construed in accordance
with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to take such action as they
deem reasonable in order that the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act or that the Trust will not
be classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership and will be treated as a grantor trust
for United States federal income tax purposes. In this connection, the Regular
Trustees are authorized to take any action, not inconsistent with applicable
law, the certificate of trust or the Declaration, that the Regular Trustees
determine in their discretion to be reasonable and
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necessary or desirable for such purposes, as long as such action does not
adversely affect the interests of holders of the Trust Securities.
The Company and the Regular Trustees on behalf of the Trust will be required to
provide to the Property Trustee annually a certificate as to whether or not the
Company and the Trust, respectively, is in compliance with all the conditions
and covenants under the Declaration.
DESCRIPTION OF THE GUARANTEE
Pursuant to the Preferred Securities Guarantee, AES will irrevocably and
unconditionally agree, to the extent set forth therein, to pay in full, to the
holders of the TECONS issued by the Trust, the Guarantee Payments (as defined in
the accompanying Prospectus) (except to the extent paid by the Trust), as and
when due, regardless of any defense, right of set-off or counterclaim which the
Trust may have or assert. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to the
holders of TECONS or by causing the Trust to pay such amounts to such holders.
The Preferred Securities Guarantee will be qualified as an indenture under the
Trust Indenture Act. The Property Trustee will act as indenture trustee under
the Preferred Securities Guarantee (the "Guarantee Trustee"). The terms of the
Preferred Securities Guarantee will be those set forth in such Preferred
Securities Guarantee and those made part of such Preferred Securities Guarantee
by the Trust Indenture Act. The Preferred Securities Guarantee will be held by
the Guarantee Trustee for the benefit of the holders of the TECONS. A summary
description of the Preferred Securities Guarantee appears in the accompanying
Prospectus under the caption "Description of the Preferred Securities
Guarantees."
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the Junior Subordinated Debentures in which
the Trust will invest the proceeds from the issuance and sale of the Trust
Securities and which will be deposited in the Trust as trust assets. The terms
of the Junior Subordinated Debentures include those stated in the Junior
Subordinated Debt Trust Securities Indenture dated as of March 1, 1997 between
the Company and The First National Bank of Chicago, as trustee (the "Indenture
Trustee"), as supplemented by the First Supplemental Indenture to be dated as of
March 31, 1997 between the Company and the Indenture Trustee (as so
supplemented, the "Trust Indenture"), forms of which have been filed as exhibits
to the Registration Statement of which this Prospectus Supplement forms a part,
and those made part of the Indenture by the Trust Indenture Act. This
description supplements the description of the general terms and provisions of
the Junior Subordinated Debt Trust Securities set forth in the accompanying
Prospectus under the caption "Description of the Junior Subordinated Debt Trust
Securities." The following description does not purport to be complete and is
qualified in its entirety by reference to the Indenture and the Trust Indenture
Act. Whenever particular provisions or defined terms in the Indenture are
referred to herein, such provisions or defined terms are incorporated by
reference herein.
The Indenture does not limit the aggregate principal amount of indebtedness
which may be issued thereunder and provides that junior subordinated debentures
may be issued thereunder from time to time in one or more series (collectively,
together with the Junior Subordinated Debentures, the "Subordinated
Debentures"). The Junior Subordinated Debentures constitute a separate series
under the Indenture.
Under certain circumstances involving the dissolution of the Trust following the
occurrence of a Special Event, Junior Subordinated Debentures may be distributed
to the holders of the Trust Securities in liquidation of the Trust. See
"Description of the TECONS -- Special Event Redemption or Distribution."
GENERAL
The Junior Subordinated Debentures are unsecured, subordinated obligations of
the Company, limited in aggregate principal amount to an amount equal to the sum
of (i) the stated liquidation amount of the TECONS issued by the Trust and (ii)
the proceeds received by the Trust upon issuance of the Common Securities to the
Company (which proceeds will be used to purchase an equal principal amount of
Junior Subordinated Debentures).
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The entire principal amount of the Junior Subordinated Debentures will become
due and payable, together with any accrued and unpaid interest thereon, on March
31, 2027. The Junior Subordinated Debentures are not subject to any sinking
fund.
If Junior Subordinated Debentures are distributed to holders of TECONS in
dissolution of the Trust, such Junior Subordinated Debentures will initially be
issued as a Global Security (as defined below). As described herein, under
certain limited circumstances, Junior Subordinated Debentures may be issued in
certificated form in exchange for a Global Security. See "Book-Entry and
Settlement" below. In the event that Junior Subordinated Debentures are issued
in certificated form, such Junior Subordinated Debentures will be in
denominations of $50 and integral multiples thereof and may be transferred or
exchanged at the offices described below. Payments on Junior Subordinated
Debentures issued as a Global Security will be made to DTC, a successor
depositary or, in the event that no depositary is used, to a paying agent for
the Junior Subordinated Debentures.
In the event that Junior Subordinated Debentures are issued in certificated
form, payments of principal and interest will be payable, the transfer of the
Junior Subordinated Debentures will be registrable, and Junior Subordinated
Debentures will be exchangeable for Junior Subordinated Debentures of other
denominations of a like aggregate principal amount, at the corporate trust
office of the Indenture Trustee in New York, New York; provided that payment of
interest may be made at the option of the Company by check mailed to the address
of the persons entitled thereto and that the payment of principal with respect
to any Junior Subordinated Debenture will be made only upon surrender of such
Junior Subordinated Debenture to the Indenture Trustee.
If the Junior Subordinated Debentures are distributed to the holders of TECONS
upon the dissolution of the Trust, the Company will use its best efforts to list
the Junior Subordinated Debentures on the NYSE or on such other exchange on
which the TECONS are then listed.
OPTIONAL REDEMPTION
Except as provided below, the Junior Subordinated Debentures may not be redeemed
prior to March 31, 2000. AES shall have the right to redeem the Junior
Subordinated Debentures, in whole or in part, from time to time, on or after
March 31, 2000, upon not less than 30 nor more than 60 days notice, at the
following prices (expressed as percentages of the principal amount of the Junior
Subordinated Debentures) together with accrued and unpaid interest, including
Compound Interest to, but excluding, the redemption date, if redeemed during the
12-month period beginning March 31:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
REDEMPTION
YEAR PRICE
----------------------------------------------------------------- ----------
<S> <C>
2000............................................................. 103.359%
2001............................................................. 102.688%
2002............................................................. 102.016%
2003............................................................. 101.344%
2004............................................................. 100.672%
</TABLE>
and 100% if redeemed on or after March 31, 2005.
If the Junior Subordinated Debentures are redeemed on any Interest Payment Date
(as defined below), accrued and unpaid interest shall be payable to holders of
record on the relevant record date.
So long as the corresponding TECONS are outstanding, the proceeds from the
redemption of any Junior Subordinated Debentures will be used to redeem TECONS.
The Company will also have the right to redeem the Junior Subordinated
Debentures at any time upon the occurrence of a Tax Event if certain conditions
are met as described under "Description of the TECONS -- Special Event
Redemption or Distribution."
The Company may not redeem any Junior Subordinated Debentures unless all accrued
and unpaid interest thereon, including Compounded Interest, has been paid for
all quarterly periods terminating on or prior to the date of notice of
redemption.
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If the Company gives a notice of redemption in respect of Junior Subordinated
Debentures (which notice will be irrevocable), then, by 12:00 noon, New York
City time, on the redemption date, the Company will deposit irrevocably with the
Indenture Trustee funds sufficient to pay the applicable Redemption Price and
will give irrevocable instructions and authority to pay such Redemption Price to
the holders of the Junior Subordinated Debentures. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit, interest will cease to accrue on the Junior Subordinated Debentures
called for redemption, such Junior Subordinated Debentures will no longer be
deemed to be outstanding and all rights of holders of such Junior Subordinated
Debentures so called for redemption will cease, except the right of the holders
of such Junior Subordinated Debentures to receive the applicable Redemption
Price, but without interest on such Redemption Price. If any date fixed for
redemption of Junior Subordinated Debentures is not a Business Day, then payment
of the Redemption Price payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date fixed for
redemption. If the Company fails to repay the Junior Subordinated Debentures on
maturity or the date fixed for this redemption, or if payment of the Redemption
Price in respect of Junior Subordinated Debentures is improperly withheld or
refused and not paid by the Company, interest on such Junior Subordinated
Debentures will continue to accrue, from the original redemption date to the
date of payment, in which case the actual payment date will be considered the
date fixed for redemption for purposes of calculating the applicable Redemption
Price. If fewer than all of the Junior Subordinated Debentures are to be
redeemed, the Junior Subordinated Debentures to be redeemed shall be selected by
lot or pro rata or in some other equitable manner determined by the Indenture
Trustee.
In the event of any redemption in part, the Company shall not be required to (i)
issue, register the transfer of or exchange any Junior Subordinated Debentures
during a period beginning at the opening of business 15 days before any
selection for redemption of Junior Subordinated Debentures and ending at the
close of business on the earliest date on which the relevant notice of
redemption is deemed to have been given to all holders of Junior Subordinated
Debentures to be redeemed and (ii) register the transfer of or exchange any
Junior Subordinated Debentures so selected for redemption, in whole or in part,
except the unredeemed portion of any Junior Subordinated Debentures being
redeemed in part.
INTEREST
The Junior Subordinated Debentures will bear interest at the rate of 5.375% per
annum from March 31, 1997. Interest will be payable quarterly in arrears on the
last day of each calendar quarter (each, an "Interest Payment Date"), commencing
on June 30, 1997, to the person in whose name such Junior Subordinated Debenture
is registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. In the event (i) the
TECONS shall not continue to remain in book-entry only form or (ii) if following
distribution of the Junior Subordinated Debentures to holders of Trust
Securities upon dissolution of the Trust as described under "Description of the
TECONS" below, the Junior Subordinated Debentures shall not continue to remain
in book-entry only form, the relevant record date will be the fifteenth day of
the month in which the relevant Interest Payment Date occurs. Interest payable
on any Junior Subordinated Debenture that is not punctually paid or duly
provided for on any Interest Payment Date will forthwith cease to be payable to
the person in whose name such Junior Subordinated Debenture is registered on the
relevant record date, and such defaulted interest will instead be payable to the
person in whose name such Junior Subordinated Debenture is registered on the
special record date or other specified date determined in accordance with the
Indenture; provided, however, that interest shall not be considered payable by
the Company on any Interest Payment Date falling within an Extension Period
unless the Company has elected to make a full or partial payment of interest
accrued on the Junior Subordinated Debentures on such Interest Payment Date.
The amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30 day months. If any date on which interest is payable
on the Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next
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succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as the Company shall not be in default in the payment of interest on the
Junior Subordinated Debentures, the Company shall have the right to extend the
interest payment period from time to time for a period not exceeding 20
consecutive quarters. The Company has no current intention of exercising its
right to extend an interest payment period. No interest shall be due and payable
during an Extension Period, except at the end thereof. During any Extension
Period, the Company shall not declare or pay any dividends on, or redeem,
purchase, acquire or make a distribution or liquidation payment with respect to,
any of its common stock or preferred stock or make any guarantee payments with
respect thereto; provided that the foregoing will not apply to stock dividends
payable in AES Common Stock paid by the Company. Prior to the termination of any
such Extension Period, the Company may further extend the interest payment
period; provided that such Extension Period together with all such previous and
further extensions thereof may not exceed 20 consecutive quarters or extend
beyond the maturity of the Junior Subordinated Debentures. On the Interest
Payment Date occurring at the end of each Extension Period, the Company shall
pay to the holders of Junior Subordinated Debentures of record on the record
date for such Interest Payment Date (regardless of who the holders of record may
have been on other dates during the Extension Period) all accrued and unpaid
interest on the Junior Subordinated Debentures, together with interest thereon
at the rate specified for the Junior Subordinated Debentures to the extent
permitted by applicable law, compounded quarterly. Upon the termination of any
Extension Period and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the above requirements. The Company
may also prepay at any time all or any portion of the interest accrued during an
Extension Period. Consequently, there could be multiple Extension Periods of
varying lengths throughout the term of the Junior Subordinated Debentures, not
to exceed 20 consecutive quarters; provided, that no such period may extend
beyond the stated maturity of the Junior Subordinated Debentures. The failure by
the Company to make interest payments during an Extension Period would not
constitute a default or an event of default under the Indenture or the Company's
currently outstanding indebtedness.
If the Property Trustee shall be the sole holder of the Junior Subordinated
Debentures, the Company shall give the Property Trustee notice of its selection
of such Extension Period one Business Day prior to the earlier of (i) the date
the distributions on the TECONS are payable or (ii) the date the Trust is
required to give notice to the NYSE or other applicable self-regulatory
organization or to holders of the TECONS of the record date or the date such
distribution is payable. The Trust shall give notice of the Company's selection
of such Extension Period to the holders of the TECONS.
If Junior Subordinated Debentures have been distributed to holders of Trust
Securities, the Company shall give the holders of the Junior Subordinated
Debentures notice of its selection of such Extension Period ten Business Days
prior to the earlier of (i) the next succeeding Interest Payment Date or (ii)
the date the Company is required to give notice to the NYSE (if the Junior
Subordinated Debentures are then listed thereon) or other applicable self-
regulatory organization or to holders of the Junior Subordinated Debentures of
the record or payment date of such related interest payment.
ADDITIONAL INTEREST
If at any time the Trust shall be required to pay any taxes, duties, assessments
or governmental charges of whatever nature (other than withholding taxes)
imposed by the U.S., or any other taxing authority, then, in any such case, AES
will pay as additional interest ("Additional Interest") on the Junior
Subordinated Debentures such additional amounts as shall be required so that the
net amounts received and retained by the Trust after paying any such taxes,
duties, assessments or other governmental charges will be equal to the amounts
the Trust would have received had no such taxes, duties, assessments or other
governmental charges been imposed.
CONVERSION OF THE JUNIOR SUBORDINATED DEBT TRUST SECURITIES
The Junior Subordinated Debentures are convertible into AES Common Stock at the
option of the holders of the Junior Subordinated Debentures at any time prior to
the close of business on March 31, 2027 (or, in the case of
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Junior Subordinated Debentures called for redemption, the close of business on
the Business Day prior to the Redemption Date) at the Initial Conversion Price
subject to the conversion price adjustments described under "Description of the
TECONS -- Conversion Rights." The Trust has agreed not to convert Junior
Subordinated Debentures held by it except pursuant to a notice of conversion
delivered to the Conversion Agent by a holder of TECONS. Upon surrender of a
TECONS to the Conversion Agent for conversion, the Trust will distribute Junior
Subordinated Debentures to the Conversion Agent on behalf of the holder of the
TECONS so converted, whereupon the Conversion Agent will convert such Junior
Subordinated Debentures to AES Common Stock on behalf of such holder. AES's
delivery to the holders of the Junior Subordinated Debentures (through the
Conversion Agent) of the fixed number of shares of AES Common Stock into which
the Junior Subordinated Debentures are convertible (together with the cash
payment, if any, in lieu of fractional shares) will be deemed to satisfy the
obligation of AES to pay the principal amount of the Junior Subordinated
Debentures so converted, and the accrued and unpaid interest thereon
attributable to the period from the last date to which interest has been paid or
duly provided for; provided, however, that if any Junior Subordinated Debenture
is converted after a record date for payment of interest, the interest payable
on the related Interest Payment Date with respect to such Junior Subordinated
Debenture shall be paid to the Trust (which will distribute such interest to the
converting holder) or other holder of Junior Subordinated Debentures, as the
case may be, despite such conversion.
COMPOUNDED INTEREST
Payments of Compounded Interest on the Junior Subordinated Debentures held by
the Trust will make funds available to pay any interest on distributions in
arrears in respect of the TECONS pursuant to the terms thereof.
BOOK-ENTRY AND SETTLEMENT
If any Junior Subordinated Debentures are distributed to holders of TECONS (see
"Description of the TECONS"), such Junior Subordinated Debentures will be issued
in the form of one or more global certificates (each a "Global Security")
registered in the name of the Depositary or its nominee. Except under the
limited circumstances described below, Junior Subordinated Debentures
represented by the Global Security will not be exchangeable for, and will not
otherwise be issuable as, Junior Subordinated Debentures in definitive form. The
Global Securities described above may not be transferred except by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or to a successor Depositary
or its nominee.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in such a Global Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Junior
Subordinated Debentures in definitive form and will not be considered the
holders (as defined in the Trust Indenture) thereof for any purpose under the
Indenture, and no Global Security representing Junior Subordinated Debentures
shall be exchangeable, except for another Global Security of like denomination
and tenor to be registered in the name of the Depositary or its nominee or to a
successor Depositary or its nominee. Accordingly, each Beneficial Owner must
rely on the procedures of the Depositary or if such person is not a Participant,
on the procedures of the Participant through which such person owns its interest
to exercise any rights of a holder under the Trust Indenture. If Junior
Subordinated Debentures are distributed to holder of TECONS, DTC will act as
securities depositary for the Junior Subordinated Debentures.
For a description of DTC and DTC's book-entry system, see "Description of the
TECONS -- Book-Entry Only Issuance -- The Depository Trust Company." As of the
date of this Prospectus Supplement, the description herein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the TECONS apply in all material respects to any debt
obligations represented by one or more Global Securities held by DTC. The
Company may appoint a successor to DTC or any successor depositary in the event
DTC or such successor depositary is unable or unwilling to continue as a
depository for the Global Securities.
None of the Company, the Indenture Trustee, any paying agent and any other agent
of the Company or the Indenture Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Security for such Junior
Subordinated Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
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A Global Security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such Global Security and no successor depositary
shall have been appointed; (ii) the Depositary, at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the Depositary
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed; (iii) the Company, in its sole discretion,
determines that such Global Security shall be so exchangeable; or (iv) there
shall have occurred an Indenture Event of Default with respect to such Junior
Subordinated Debentures. Any Global Security that is exchangeable pursuant to
the preceding sentence shall be exchangeable for Junior Subordinated Debentures
registered in such names as the Depositary shall direct. It is expected that
such instructions will be based upon directions received by the Depositary from
its Participants with respect to ownership of beneficial interests in such
Global Security.
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RELATIONSHIP BETWEEN THE TECONS, THE JUNIOR
SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
As set forth in the Declaration, the Trust exists for the sole purpose of (a)
issuing the Trust Securities evidencing undivided beneficial interests in the
assets of the Trust, and investing the proceeds from such issuance and sale in
the Junior Subordinated Debentures and (b) engaging in such other activities as
are necessary and incidental thereto.
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the TECONS primarily because (i) the
aggregate principal amount of Junior Subordinated Debentures held as trust
assets will be equal to the sum of the aggregate stated liquidation amount of
the TECONS and the proceeds received by the Trust upon issuance of the Common
Securities to the Company; (ii) the interest rate and interest and other payment
dates on the Junior Subordinated Debentures will match the distribution rate and
distribution and other payment dates for the TECONS; (iii) the Declaration
provides that the Company shall pay for all debts and obligations (other than
with respect to the Trust Securities) and all costs and expenses of the Trust,
including any taxes and all costs and expenses with respect thereto, to which
the Trust may become subject, except for United States withholding taxes; and
(iv) the Declaration further provides that the Trustees shall not cause or
permit the Trust, among other things, to engage in any activity that is not
consistent with the limited purposes of the Trust. With respect to clause (iii)
above, however, no assurance can be given that the Company will have sufficient
resources to enable it to pay such debts, obligations, costs and expenses on
behalf of the Trust.
Payments of distributions and other payments due on the TECONS are guaranteed by
the Company on a subordinated basis as and to the extent set forth under
"Description of the Preferred Securities Guarantees" in the accompanying
Prospectus. If the Company does not make interest or other payments on the
Junior Subordinated Debentures, the Trust will not make distributions or other
payments on the TECONS. Under the Declaration, if and to the extent the Company
does make interest or other payments on the Junior Subordinated Debentures, the
Property Trustee is obligated to make distributions or other payments on the
TECONS. The Preferred Securities Guarantee is a full and unconditional guarantee
from the time of issuance of the TECONS, but the Preferred Securities Guarantee
covers distributions and other payments on the TECONS only if and to the extent
that the Company has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets.
The Property Trustee will have the Power to exercise all rights, powers and
privileges under the Indenture with respect to the Junior Subordinated
Debentures, including its rights as the holder of the Junior Subordinated
Debentures to enforce the Company's obligations under the Junior Subordinated
Debentures upon the occurrence of an Indenture Event of Default, and will also
have the right to enforce the Preferred Securities Guarantee on behalf of the
holders of the TECONS. In addition, the holders of at least a majority in
liquidation amount of the TECONS will have the right to direct the Property
Trustee with respect to certain matters under the Declaration and the Preferred
Securities Guarantee. If the Property Trustee fails to enforce its rights under
the Trust Indenture any holder of TECONS may, after a period of 30 days has
elapsed from such holder's written request to the Property Trustee to enforce
such rights, institute a legal proceeding against the Company to enforce such
rights. If the Property Trustee fails to enforce the Preferred Securities
Guarantee, to the extent permitted by applicable law, any holder of TECONS may
institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights under the Preferred Securities Guarantee.
Notwithstanding the foregoing, if the Company has failed to make a guarantee
payment, a holder of TECONS may directly institute a proceeding against the
Company for enforcement of the Preferred Securities Guarantee for such payment.
See "Description of the TECONS" and "Description of the Guarantee" herein and
"Description of the Preferred Securities Guarantees -- Status of the Preferred
Securities Guarantees" in the accompanying Prospectus.
The above mechanisms and obligations, taken together, provide a full and
unconditional guarantee by the Company of payments due on the TECONS.
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CERTAIN FEDERAL TAX CONSEQUENCES
In the opinion of Davis Polk & Wardwell, counsel to the Company and the Trust,
the following are the material United States federal income tax consequences of
the ownership and disposition of TECONS. Unless otherwise stated, this summary
deals only with TECONS held as capital assets by holders who acquire the TECONS
upon original issuance at the price indicated on the cover of this Prospectus
Supplement. It does not deal with special classes of holders, such as dealers in
securities or currencies, life insurance companies, persons holding TECONS as
part of a straddle or as part of a hedging or conversion transaction, or persons
whose functional currency is not the United States dollar. This summary is based
on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations thereunder and administrative and judicial interpretations thereof
as of the date hereof, all of which are subject to change (possibly on a
retroactive basis).
INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF TECONS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE,
LOCAL OR OTHER TAX LAWS.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated Debentures
will be classified for United States federal income tax purposes as indebtedness
under current law. No assurance can be given, however, that such position of the
Company will not be challenged by the Internal Revenue Service. The remainder of
this discussion assumes that the Junior Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of the
Company.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the TECONS, Davis Polk & Wardwell, counsel to
the Company and the Trust, will render its opinion generally to the effect that,
assuming full compliance with the terms of the Declaration, the Trust will be
classified for United States federal income tax purposes as a grantor trust and
not as an association taxable as a corporation. Accordingly, each holder of
TECONS will be considered the owner of a pro rata portion of the Junior
Subordinated Debentures held by the Trust and will be required to include in
gross income its pro rata share of income accrued on the Junior Subordinated
Debentures.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
The Junior Subordinated Debentures will be considered to have been issued with
"original issue discount" ("OID"). Accordingly, each holder of TECONS, including
a taxpayer who otherwise uses the cash method of accounting, will be required to
include its pro rata share of original issue discount on the Junior Subordinated
Debentures in income as it accrues, in accordance with a constant yield method
based on a compounding of interest, before the receipt of cash distributions on
the TECONS. Generally, all of a holder's taxable interest income with respect to
the Junior Subordinated Debentures will be accounted for as "original issue
discount" and actual distributions of stated interest will not be separately
reported as taxable income. So long as the interest payment period is not
extended, cash distributions received by a holder for any quarterly interest
period (assuming no disposition prior to the record date for such distribution)
will generally equal the sum of the daily accruals of income for such quarterly
interest period.
The total amount of "original issue discount" on the Junior Subordinated
Debentures will equal the difference between the "issue price" of the Junior
Subordinated Debentures and their "stated redemption price at maturity." Because
the Company has the right to extend the interest payment period of the Junior
Subordinated Debentures, all of the stated interest payments on the Junior
Subordinated Debentures will be includible in determining their "stated
redemption price at maturity." The "issue price" of each $50 principal amount of
Junior Subordinated Debentures will be equal to the first price to the public at
which a substantial amount of the TECONS is sold for cash, which is expected to
be $50.
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A holder's initial tax basis for its pro rata share of the Junior Subordinated
Debentures will be equal to its pro rata share of their "issue price," as
defined above, and will be increased by original issue discount accrued with
respect to its pro rata share of the Junior Subordinated Debentures, and reduced
by the amount of cash distributions with respect thereto. No portion of the
amounts received on the TECONS will be eligible for the dividends received
deduction.
POTENTIAL EXTENSION OF PAYMENT PERIOD ON THE JUNIOR SUBORDINATED DEBENTURES
Holders of TECONS will continue to accrue original issue discount with respect
to their pro rata share of the Junior Subordinated Debentures during an extended
interest payment period. A holder who disposes of the TECONS during an extended
interest period may suffer a loss because the market will likely fall if AES
exercises its option to defer payments of interest on the Junior Subordinated
Debentures. See "Disposition of the TECONS" below. Furthermore, the market value
of the TECONS may not reflect the accumulated distributions that will be paid at
the end of the extended interest period, and a holder who sells the TECONS
during the extended interest period will not receive from AES any cash related
to the interest income the holder accrued and included in its taxable income
under the OID rule (because that cash will be paid to the holder of record at
the end of the extended interest period).
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TECONS
Under current law, a distribution by the Trust of the Junior Subordinated
Debentures as described under the caption "Description of the TECONS -- Special
Event Redemption or Distribution" will be non-taxable and will result in the
holder receiving directly its pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust, with a holding period
and tax basis equal to the holding period and adjusted tax basis such holder was
considered to have had in his pro rata share of the underlying Junior
Subordinated Debentures prior to such distribution.
DISPOSITION OF THE TECONS
Upon a sale, exchange or other disposition of the TECONS (including a
distribution of cash in redemption of a holder's TECONS upon redemption or
repayment of the underlying Junior Subordinated Debentures, but excluding the
distribution of Junior Subordinated Debentures), a holder will be considered to
have disposed of all or part of its pro rata share of the Junior Subordinated
Debentures, and will recognize gain or loss equal to the difference between the
amount realized and the holder's adjusted tax basis in its pro rata share of the
underlying Junior Subordinated Debentures deemed disposed of. Such gain or loss
will be long-term capital gain or loss if the TECONS have been held by the
holder for more than one year.
The TECONS may trade at a price that does not fully reflect the value of accrued
but unpaid interest with respect to the underlying Junior Subordinated
Debentures. A holder who disposes of its TECONS between record dates for
payments of distributions thereon will nevertheless be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as OID, and to add such amount to its adjusted tax
basis in its pro rata share of the underlying Junior Subordinated Debentures
deemed disposed of. Accordingly, such a holder will recognize a capital loss to
the extent the selling price (which may not fully reflect the value of accrued
but unpaid interest) is less than the holder's adjusted tax basis (which will
include accrued but unpaid interest). Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
CONVERSION OF TECONS TO AES COMMON STOCK
A holder of TECONS will not recognize income, gain or loss upon the conversion
through the Conversion Agent, of Junior Subordinated Debentures into AES Common
Stock. A holder of TECONS will also recognize gain upon the receipt of cash in
lieu of a fractional share of AES Common Stock equal to the amount of cash
received less such holder's tax basis in such fractional share. Such holder's
tax basis in the AES Common Stock received upon conversion will generally be
equal to such holder's tax basis in the TECONS delivered to the Conversion Agent
for exchange, less the basis allocated to any fractional share for which cash is
received. Such holder's holding period
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in the AES Common Stock received upon conversion will generally include the
holder's holding period of the TECONS delivered to the Conversion Agent for
exchange, except possibly with respect to AES Common Stock received in respect
of any accrued but unpaid OID.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under section 305 of the Code would treat
holders of TECONS as having received a constructive distribution from AES in
certain events pursuant to which the conversion rate of the Junior Subordinated
Debentures were adjusted. Thus, under certain circumstances, a reduction in the
conversion price for the Junior Subordinated Debentures may result in deemed
dividend income to holders of TECONS to the extent of the current or accumulated
earnings and profits of AES. Holders of TECONS are advised to consult their tax
advisors as to the income tax consequences of adjustments in the conversion rate
of TECONS.
INFORMATION REPORTING TO HOLDERS
The Trust will report the original issue discount that accrued during the year
with respect to the Junior Subordinated Debentures, and any gross proceeds
received by the Trust from the retirement or redemption of the Junior
Subordinated Debentures, annually to the holders of record of the TECONS and the
Internal Revenue Service. The Trust currently intends to deliver such reports to
holders of record prior to January 31 following each calendar year. It is
anticipated that persons who hold TECONS as nominees for beneficial holders will
report the required tax information to beneficial holders on Form 1099.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of TECONS may be subject to a
"backup" withholding tax of 31% unless the holder complies with certain
identification requirements. Any withheld amounts will generally be allowed as a
credit against the holder's federal income tax, provided the required
information is timely filed with the Internal Revenue Service.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, for U.S. federal
income tax purposes, a foreign corporation, a nonresident alien individual, a
foreign partnership, or a non-resident fiduciary of a foreign estate or trust.
Proposed United States Treasury Regulations were issued on April 15, 1996 (the
"Proposed Regulations") which, if adopted, would affect the procedures to be
followed by a United States Alien Holder in establishing its non-U.S. person
status. The Proposed Regulations are generally proposed to be effective with
respect to payments made after December 31, 1997, subject to certain transition
rules. The discussion below is not intended to be a complete discussion of the
provisions of the Proposed Regulations, and prospective investors are urged to
consult their tax advisors with respect to the effect the Proposed Regulations
would have if adopted.
Payments on TECONS. As discussed above, the Company intends to take the
position that the Junior Subordinated Debentures will be classified for U.S.
federal income tax purposes as indebtedness of AES under current law; no
assurance can be given, however, that such position of the Company will not be
challenged by the Internal Revenue Service.
Assuming that the Junior Subordinated Debentures are classified for U.S. federal
income tax purposes as indebtedness of AES, under present U.S. federal income
tax law, payments by the Trust or any of its paying agents to any holder of a
TECONS who or which is a United States Alien Holder would not be subject to U.S.
federal withholding tax; provided, that, (a) the beneficial owner of the TECONS
does not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of AES entitled to vote, (b) the beneficial owner
of the TECONS is not a controlled foreign corporation that is related to AES
through stock ownership, and (c) either (A) the beneficial owner of the TECONS
certifies to the Trust or its agent, under penalties of perjury, that it is not
a U.S. person and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"),
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and holds the TECONS in such capacity, certifies to the Trust or its agent,
under penalties of perjury, that such statement has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and furnishes the Trust or its agent with a copy thereof.
If the Junior Subordinated Debentures were not classified for U.S. federal
income tax purposes as indebtedness of AES, payments by the Trust or any of its
paying agents to any holder of a TECONS who or which is a United States Alien
Holder would be subject to U.S. withholding tax at a 30% rate (or a lower rate
prescribed by an applicable tax treaty). Prospective investors that would be
United States Alien Holders should consult their tax advisors concerning the
possible application of these rules.
Dividends on AES Common Stock. Subject to the discussion below, dividends paid
to a United States Alien Holder of AES Common Stock generally will be subject to
withholding tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume that dividends paid to an address in
a foreign country are paid to a resident of such country, absent knowledge that
such presumption is not warranted.
Under the Proposed Regulations, to obtain a reduced rate of withholding under a
treaty, a United States Alien Holder would generally be required to provide an
Internal Revenue Service form W-8 certifying such United States Alien Holder's
entitlement to benefits under a treaty. The Proposed Regulations would also
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a United States Alien Holder
that is an entity should be treated as paid to the entity or those holding an
interest in that entity.
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
its reports available to tax authorities in the recipient's country of
residence.
Sale or Exchange of TECONS or AES Common Stock. A United States Alien Holder
(other than certain U.S. expatriates) would not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of the
TECONS or AES Common Stock unless (i) the United States Alien Holder is an
individual who is present in the U.S. for 183 days or more in the taxable year
of disposition, and certain other conditions are satisfied; or (ii) AES is or
has been a "United States real property holding corporation" within the meaning
of section 897(c)(2) of the Code during the shorter of the United States Alien
Holder's holding period or the five year period ending on the date of the sale,
exchange or other disposition and certain other conditions are satisfied.
The Company believes that it is unlikely that it is or will be treated as a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code. Even if AES is treated as a United States real property
holding corporation, gain realized by a United States Alien Holder on a
disposition of TECONS or AES Common Stock will not be subject to U.S. federal
income tax so long as (i) the United States Alien Holder is deemed to have
beneficially owned, in the case of a disposition of AES Common Stock, less than
or equal to 5% of the AES Common Stock or, in the case of a disposition of
TECONS, less than or equal to 5% of the TECONS, and (ii) the AES Common Stock
and the TECONS are currently and will be, at the time of disposition, "regularly
traded" on an established securities market (within the meaning of Section
897(c)(3) of the Code and the temporary Treasury Regulations (the "Temporary
Regulations")). There can be no assurance that AES Common Stock or the TECONS
qualify or will continue to qualify as "regularly traded" on an established
securities market.
Effectively Connected Income. If a United States Alien Holder of a TECONS or
AES Common Stock is engaged in a trade or business in the United States, and if
original issue discount accrued on the TECONS or dividends on such Common Stock
is effectively connected with the conduct of such trade or business, the United
States Alien Holder, although exempt from the withholding tax on distributions
on TECONS and dividends on AES Common Stock, will generally be subject to
regular United States income tax on the original issue discount and dividends
and on any gain realized on the sale, exchange or other disposition of a TECONS
or AES Common Stock in the same manner as if it were a United States person.
Such a holder will be required to provide to the Company properly executed
Internal Revenue Service Form 4224 in order to claim an exemption from
withholding tax. In addition, if such
S-55
<PAGE> 57
United States Alien Holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% (or a lower rate prescribed by an applicable
treaty) of its effectively connected earnings and profits for the taxable year.
PROPOSED TAX LEGISLATION
On February 6, 1997, as part of President Clinton's Fiscal 1998 Budget Proposal,
the Treasury Department proposed legislation (the "Proposed Legislation") that,
among other things, would (i) treat as equity for U.S. federal income tax
purposes certain debt instruments with a maximum term of more than 15 years and
(ii) disallow interest deductions on certain convertible debt instruments or
defer interest deductions on certain debt instruments issued with OID. The
Proposed Legislation is proposed to be effective for debt instruments issued on
or after the date on which the first Congressional committee action is taken.
It is expected that if the Proposed Legislation were enacted, such legislation
would not apply to the Junior Subordinated Debentures since they would be issued
prior to the date of any "Congressional committee action." However, there can be
no assurances that the effective date guidance contained in the Proposed
Legislation will be incorporated in the legislation, if enacted, or that other
legislation enacted after the date hereof will not otherwise adversely affect
the tax treatment of the Junior Subordinated Debentures.
If the Proposed Legislation or any similar legislation changed the tax treatment
of the Junior Subordinated Debentures and the TECONS, the U.S. federal income
tax consequences of the purchase, ownership and disposition of the TECONS would
differ from those described herein. If legislation were enacted that would
constitute a Tax Event, there could be a distribution of the Junior Subordinated
Debentures to holders of the TECONS or, in certain circumstances, at AES's
option, redemption of the Junior Subordinated Debentures by AES. There can be no
assurances as to whether or in what form the Proposed Legislation may be enacted
into law or whether other legislation will be enacted that otherwise adversely
affects the tax treatment of the Junior Subordinated Debentures and the TECONS.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
the date hereof (the "Underwriting Agreement"), the Company and the Trust have
agreed that the Trust will sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase
the number of TECONS set forth opposite its name below.
<TABLE>
<CAPTION>
---------
NUMBER OF
UNDERWRITER TECONS
- --------------------------------------------------------------------------------- ---------
<S> <C>
J.P. Morgan Securities Inc. ..................................................... 833,335
Donaldson, Lufkin & Jenrette Securities Corporation.............................. 833,333
Goldman, Sachs & Co. ............................................................ 833,333
Morgan Stanley & Co. Incorporated................................................ 833,333
Salomon Brothers Inc............................................................. 833,333
Unterberg Harris................................................................. 833,333
---------
Total....................................................................... 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the TECONS offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions. If any TECONS are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such TECONS must be purchased.
The Underwriters propose to offer the TECONS in part directly to the public at
the initial public offering price set forth on the cover page of this Prospectus
Supplement, and in part to certain securities dealers at such price less a
concession of $0.8250 per TECONS. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per TECONS to certain brokers
and dealers. After the TECONS are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
S-56
<PAGE> 58
In view of the fact that the proceeds of the sale of the TECONS will be used to
purchase the Junior Subordinated Debentures of the Company, the Underwriting
Agreement provides that the Company will agree to pay as compensation
("Underwriters' Compensation") for the Underwriters' arranging the investment
therein of such proceeds an amount in same day funds of $1.375 per TECONS or
$6,875,000 in the aggregate ($7,562,500 in the aggregate if the Underwriters'
overallotment option is exercised in full) for the accounts of the several
Underwriters.
Pursuant to the Underwriting Agreement, the Trust and the Company have granted
to the Underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to 500,000 additional TECONS at the initial public offering price
set forth on the cover page hereof. The Underwriters may exercise such option to
purchase solely for the purpose of covering over-allotments, if any, made in
connection with the TECONS Offering. The Company will pay Underwriters'
Compensation in the amount per TECONS set forth above with respect to such
additional TECONS. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional TECONS as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of TECONS
offered by the Underwriters hereby.
The Trust, the Company, and certain of the Company's directors and executive
officers have agreed not to (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, file a
registration statement relating to, announce the intention to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
TECONS, any shares of AES Common Stock or any securities convertible into or
exchangeable for any shares of AES Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of AES Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of AES Common
Stock or other securities, in cash for a period of 90 days after the date of
this Prospectus Supplement, without the prior written consent of J.P. Morgan
Securities Inc.; provided that, the foregoing shall not apply to the offer and
sale of the AES Common Stock in the Common Stock Offering, the offer and sale of
the TECONS in the TECONS Offering or the issuance of any shares of AES Common
Stock upon any conversion of any TECONS offered hereby or any Junior Convertible
Debentures or any of the Company's outstanding warrants and provided further
that notwithstanding the foregoing, such executive officers and directors may
transfer, pledge or otherwise dispose of shares of AES Common Stock to certain
permitted transferees who agree to be similarly bound; and provided further that
the Company may make issuances of options or shares of AES Common Stock, or
securities convertible into, or exercisable or exchangeable therefor, pursuant
to employee benefit plans registered on Form S-8 for consideration for
accquisitions including, without limitation, the Amalgamation.
The TECONS have been approved for listing on the NYSE, subject to official
notice of issuance.
Prior to this offering, there has been no public market for the TECONS. In order
to meet one of the requirements for listing the TECONS on the NYSE, the
Underwriters will undertake to sell lots of 100 or more TECONS to a minimum of
400 beneficial holders.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
Morgan Guaranty Trust Company of New York has committed to provide bridge
financing to AES in connection with its acquisition of the international assets
of Destec in the event the TECONS Offering or the Common Stock Offering is not
consummated. Morgan Guaranty Trust Company of New York, an affiliate of J.P.
Morgan Securities Inc., is agent and a lender under the Revolver. The
Underwriters in the TECONS Offering are acting as underwriters in the Common
Stock Offering and from time to time, in the ordinary course of their respective
businesses, the Underwriters and their respective affiliates have engaged and
may engage in commercial and investment banking transactions with the Company.
Frank Jungers, an Advisory Director for an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation, one of the Underwriters, is also a director and
stockholder of AES. Mr. Jungers beneficially owns 551,770 shares of AES Common
Stock.
S-57
<PAGE> 59
Thomas I. Unterberg, a Managing Director of Unterberg Harris, one of the
Underwriters, is also a member of AES's Board of Directors. Mr. Unterberg
currently beneficially owns 675,557 shares of AES Common Stock.
In connection with the TECONS Offering and the Common Stock Offering, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the TECONS or the AES Common Stock. Specifically, the
underwriters may overallot such offerings, creating a syndicate short position.
In addition, the underwriters may bid for, and purchase, TECONS or shares of AES
Common Stock in the open market to cover syndicate shorts or to stabilize the
price of the TECONS or the AES Common Stock. Finally, the underwriting syndicate
may reclaim selling concessions allowed for distributing the TECONS or the AES
Common Stock in the offerings, if the syndicate repurchases previously
distributed TECONS or the AES Common Stock in syndicate covering transactions,
in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the TECONS or the AES Common Stock
above independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the Junior Subordinated Debentures, the Common Stock issuable
upon conversion of the TECONS, the Preferred Securities Guarantee and certain
matters relating thereto and certain U.S. federal income taxation matters will
be passed upon for AES and AES Trust by Davis Polk & Wardwell, and the validity
of the TECONS will be passed upon for the Company and AES Trust by Richards,
Layton & Finger, Wilmington, Delaware, special Delaware counsel to the Company
and AES Trust. Certain legal matters will be passed upon for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation).
EXPERTS
The consolidated financial statements included in this Prospectus Supplement and
in the Company's Current Report on Form 8-K, dated March 12, 1997, as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is included herein and therein, and has been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
In addition, see "Experts" in the accompanying Prospectus.
S-58
<PAGE> 60
THE AES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report........................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995.............................. F-3
Consolidated Statements of Operations -- For the Years Ended December 31, 1996, 1995
and 1994............................................................................. F-4
Consolidated Statements of Cash Flow -- For the Years Ended December 31, 1996, 1995 and
1994................................................................................. F-5
Notes to Consolidated Financial Statements -- For the Years Ended December 31, 1996,
1995 and 1994........................................................................ F-6
</TABLE>
F-1
<PAGE> 61
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, 1996 and 1995, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
January 30, 1997, except for Note 13,
as to which the date is February 18, 1997
F-2
<PAGE> 62
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------
DECEMBER 31
In millions, except par values 1996 1995
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $ 185 $ 239
Short-term investments.............................................................. 20 58
Accounts receivable, net............................................................ 95 54
Inventory........................................................................... 81 36
Receivable from affiliates.......................................................... 9 11
Deferred income taxes............................................................... 65 21
Prepaid expenses and other current assets........................................... 47 27
------ ------
Total current assets.................................................................. 502 446
Property, Plant and Equipment:
Land................................................................................ 30 9
Electric and steam generating facilities............................................ 1,884 1,594
Furniture and office equipment...................................................... 14 11
Accumulated depreciation and amortization........................................... (282) (222)
Construction in progress............................................................ 574 158
------ ------
Property, plant and equipment, net.................................................... 2,220 1,550
Other Assets:
Deferred costs, net................................................................. 47 32
Project development costs........................................................... 53 41
Investments in and advances to affiliates........................................... 491 48
Debt service reserves and other deposits............................................ 175 168
Goodwill & other intangible assets, net............................................. 52 37
Other assets........................................................................ 82 19
------ ------
Total other assets.................................................................... 900 345
------ ------
Total................................................................................. $3,622 $2,341
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................... $ 64 $ 33
Accrued interest.................................................................... 25 12
Accrued and other liabilities....................................................... 95 49
Other notes payable -- current portion.............................................. 88 50
Project financing debt -- current portion........................................... 110 84
------ ------
Total current liabilities............................................................. 382 228
Long-Term Liabilities:
Project financing debt.............................................................. 1,558 1,098
Other notes payable................................................................. 450 125
Deferred income taxes............................................................... 243 170
Other long-term liabilities......................................................... 55 13
------ ------
Total long-term liabilities........................................................... 2,306 1,406
Minority Interest..................................................................... 213 158
Commitments and Contingencies......................................................... -- --
Stockholders' Equity:
Preferred stock (no par value; 1 million shares authorized; none issued)............ -- --
Common stock ($.01 par value; 100 million shares authorized; shares issued and
outstanding: 1996 -- 77.4 million; 1995 -- 74.8 million).......................... 1 1
Additional paid-in capital.......................................................... 360 293
Retained earnings................................................................... 396 271
Cumulative foreign currency translation adjustment.................................. (33) (10)
Less treasury stock at cost (1996 -- .1 million shares; 1995 -- .3 million shares).... (3) (6)
------ ------
Total stockholders' equity............................................................ 721 549
------ ------
Total................................................................................. $3,622 $2,341
====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 63
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------
FOR THE YEARS ENDED
DECEMBER 31
In millions, except per share amounts 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Sales................................................................ $ 824 $ 672 $ 514
Services............................................................. 11 7 19
----- ----- -----
Total revenues......................................................... 835 679 533
OPERATING COSTS AND EXPENSES:
Cost of sales........................................................ 495 388 252
Cost of services..................................................... 7 6 13
Selling, general and administrative expenses......................... 35 32 32
Provision to reduce contract receivable.............................. 20 -- --
----- ----- -----
Total operating costs and expenses..................................... 557 426 297
----- ----- -----
OPERATING INCOME....................................................... 278 253 236
OTHER INCOME AND (EXPENSE):
Interest expense..................................................... (144) (127) (125)
Interest income...................................................... 24 27 22
Equity in earnings of affiliates (net of income tax)................. 35 14 12
----- ----- -----
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY
ITEM................................................................. 193 167 145
INCOME TAXES........................................................... 60 57 44
MINORITY INTEREST...................................................... 8 3 3
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM....................................... 125 107 98
Extraordinary item -- net gain on extinguishment of debt (less
applicable income taxes of $1)....................................... -- -- 2
----- ----- -----
NET INCOME............................................................. $ 125 $ 107 $ 100
===== ===== =====
NET INCOME PER SHARE:
Before extraordinary gain............................................ $1.62 $1.41 $1.30
Extraordinary gain................................................... -- -- 0.02
----- ----- -----
NET INCOME PER SHARE................................................... $1.62 $1.41 $1.32
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 64
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------
FOR THE YEARS ENDED
DECEMBER 31
In millions 1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 125 $ 107 $ 100
Adjustments to net income:
Depreciation and amortization...................................... 65 55 43
Provision for deferred taxes....................................... 26 48 39
Undistributed earnings of affiliates............................... (20) 3 (3)
Payments for deferred financing costs.............................. (13) (3) (6)
Other.............................................................. 6 4 --
Changes in working capital......................................... (7) (17) (9)
------- ----- -----
Net cash provided by operating activities............................ 182 197 164
INVESTING ACTIVITIES:
Property additions................................................... (506) (171) (10)
Acquisitions, net of cash acquired................................... (148) (121) --
Sale of short-term investments....................................... 103 254 132
Purchase of short-term investments................................... (66) (218) (204)
Affiliate advances and investments................................... (430) (10) --
Project development costs............................................ (16) (22) (17)
Debt service reserves and other assets............................... (72) (55) (21)
------- ----- -----
Net cash used in investing activities................................ (1,135) (343) (120)
FINANCING ACTIVITIES:
Net borrowings under the revolver.................................... 163 50 --
Issuance of project financing debt and other notes payable........... 802 133 --
Repayments of project financing debt................................. (75) (63) (72)
Other liabilities.................................................... (3) 8 --
Contributions by minority interests.................................. 10 7 152
Sale (repurchase) of common stock.................................... 2 (5) --
------- ----- -----
Net cash provided by financing activities............................ 899 130 80
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................... (54) (16) 124
CASH AND CASH EQUIVALENTS, BEGINNING................................. 239 255 131
------- ----- -----
CASH AND CASH EQUIVALENTS, ENDING.................................... $ 185 $ 239 $ 255
======= ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest........................................... $ 134 $ 120 $ 127
Cash payments for income taxes....................................... 32 6 3
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 65
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 developing, owning
and operating electric power generating facilities.
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. ("AES
Chigen"), a controlled affiliate, 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 unrealized gains or
losses are recorded as a separate component of stockholders' equity. Interest
and dividends on investments are reported in interest income. 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):
<TABLE>
<CAPTION>
------------
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Coal and other raw materials................................... $57 $24
Spare parts, materials and supplies............................ 24 12
--- ---
Total.......................................................... $81 $36
=== ===
</TABLE>
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost
including the cost of improvements. 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 and steam generating facilities and are depreciated
over the useful life of the related components.
INTANGIBLE ASSETS -- Goodwill and other intangible assets are amortized on a
straight-line basis over their estimated periods of benefit or their estimated
lives, which range from 30 to 40 years. Intangible assets at December 31, 1996
and 1995 are shown net of accumulated amortization of $3 million and $1 million,
respectively. The Company will review its goodwill and intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an 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 and steam generating facilities when the assets are ready for their
intended use. Interest capitalized during development and construction totaled
$27 million, $8 million and $2 million in 1996, 1995 and 1994, respectively.
DEFERRED 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 costs
are shown net of accumulated amortization of $36 million and $31 million for
1996 and 1995, respectively.
F-6
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 at December 31, 1996.
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. 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. Most of the Company's power plants rely
primarily on one power sales contract with a single customer for the majority of
its revenues. Five customers accounted for 20%, 16%, 16%, 11% and 10% of
revenues in 1996, four customers accounted for 24%, 18%, 18% and 13% of revenues
in 1995, and four customers accounted for 31%, 23%, 22% and 11% of revenues in
1994. The prolonged failure of any of these customers to fulfill its 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.
INTEREST RATE SWAP AND CAP AGREEMENTS -- The Company enters into interest rate
swap and cap agreements as a hedge against interest rate exposure on floating
rate project financing debt. The transactions are accounted for as a hedge and
interest is expensed or capitalized, as appropriate, using the effective
interest rates. Any fees or payments are amortized as yield adjustments. These
derivative financial instruments are classified as other than trading.
NET INCOME PER SHARE -- Net income per share is based on the weighted average
number of common stock and common stock equivalents outstanding, after giving
effect to stock splits and stock dividends. Common stock equivalents result from
dilutive stock options, warrants and deferred compensation arrangements. The
effect of such common stock equivalents on net income per share is computed
using the treasury stock method. The shares used in computing net income per
share were 77.3 million, 75.9 million, and 75.8 million for 1996, 1995 and 1994,
respectively. Primary and fully diluted earnings per share are approximately the
same.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior period
amounts to conform with the 1996 presentation.
2. ACQUISITIONS
In March 1996, the Company, through a subsidiary acquired a 98% interest in
Hidrotermica San Juan, S.A., ("AES San Juan"), which is the owner and operator
of a 78 megawatt power generation facility in the province of San Juan,
Argentina. The facility, which sells electricity into the Argentine spot market,
includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas
combustion plant. As a result of this acquisition, the Company acquired
intangible assets of $17 million which are being amortized over the life of the
hydroelectric concession of 30 years.
In May 1996, AES, through certain subsidiaries, acquired for approximately $393
million, common shares representing an 11.35% interest in Light Servicos de
Electricidade S. A. ("Light"), a publicly-held Brazilian corporation
F-7
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
that operates as the concessionaire of an approximately 3,800 megawatt
integrated electric power generation, transmission and distribution system which
serves Rio de Janeiro, Brazil. The AES subsidiary which owns an interest in
Light is participating in a consortium established through a shareholders'
agreement that owns a 50.44% controlling interest. As a result, the Company has
the ability to exert significant influence over the operation of Light, and is
recording its investment using the equity method.
In August 1996, the Company, through a subsidiary, acquired a controlling
interest in three power plants totaling 1,281 megawatts and a coal mine through
the purchase of an 81% share of Tiszai Eromu Rt. ("AES Tiszai") an electricity
generation company in Hungary for $110 million, and in December 1996 acquired an
additional 13% for $17 million.
Also, in August 1996, the Company acquired, through a subsidiary, a majority
controlling interest in a 4,000 megawatt coal-fired facility in Kazakstan, ("AES
Ekibastuz"), for approximately $3 million. The facility sells power to a
government-owned utility under a 35 year power purchase agreement. Through
December 31, 1996, approximately $35 million (excluding VAT) has been billed
under the power sales contract for electricity delivered of which the purchaser
has paid approximately $5 million. The Company has recorded a provision of $20
million to reduce the carrying value of the contract receivable at December 31,
1996 to $10 million. As of December 31, 1996, the net assets of the project were
$24 million, a portion of which was represented by the contract receivable
referred to above. There can be no assurance as to the ultimate collectibility
of amounts owed to AES as of December 31, 1996 or additional amounts related to
future deliveries of electricity under the power sales contract.
In January 1995, a subsidiary of the Company acquired the remaining outstanding
debt of AES Deepwater, a 140 megawatt cogeneration plant in Pasadena, Texas, for
$65 million from a syndicate of lenders. Prior to that date, the Company did not
maintain or exercise control or significant influence over the utilization of
the AES Deepwater facility, and accordingly, recorded its investment using the
cost method. The acquisition resulted in the creation of goodwill of
approximately $24 million which is being amortized over the remaining estimated
life of the plant.
In June and July 1995, a subsidiary of the Company increased its ownership
interest in Central Termica San Nicolas, S. A. ("AES San Nicolas"), a 650
megawatt power plant located in San Nicolas, Argentina from approximately 34% to
approximately 69% by purchasing the interests of two former minority
shareholders. The 1995 purchase price was $24 million. The net results
attributable to the Company's non-owned portion of earnings from AES San Nicolas
in 1995 is reflected as minority interest.
In addition, in December 1995, another subsidiary of the Company purchased
Hidroelectrica Rio Juramento S.A. ("AES Rio Juramento") a 112 megawatt
hydroelectric system in the province of Salta, Argentina for $43 million. As a
result of this acquisition, the Company acquired intangible assets of $14
million which are being amortized over the life of the hydroelectric concession
of 30 years.
These acquisitions were accounted for as purchases. The purchase price
allocations for Light, AES Tiszai and AES Ekibastuz 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 allocation period. The accompanying financial
statements include the operating results of AES Tiszai from August 1, 1996, the
operating results of AES Ekibastuz from August 10, 1996, equity earnings from
Light from June 10, 1996, and the operating results of AES Deepwater from
January 20, 1995, the operating results of AES San Nicolas from January 1, 1995
and the operating results of AES Rio Juramento from December 1, 1995. The
F-8
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
following table presents supplemental unaudited proforma operating results as if
all of the acquisitions had occurred at the beginning of 1995 (in millions,
except per share amounts):
<TABLE>
<CAPTION>
---------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995
------ -----
<S> <C> <C>
Revenues.................................................. $1,013 $ 892
Net income................................................ 100 91
Earnings per share........................................ $ 1.29 $1.20
</TABLE>
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, 1995, nor are they intended to be a projection of future results.
3. INVESTMENTS
At December 31, 1996 and 1995, 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, 1996 and 1995 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):
<TABLE>
<CAPTION>
------------
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Restricted cash and cash equivalents........................................... $104 $144
Held-to-maturity
US treasury and government agency securities................................... 1 33
Foreign certificates of deposit................................................ -- 3
Commercial paper............................................................... 39 3
Floating rate notes............................................................ -- 6
---- ----
Subtotal....................................................................... 40 45
Available-for-sale
US treasury and government agency securities................................... 43 30
Certificates of deposit........................................................ 3 4
Commercial paper............................................................... 5 --
Foreign certificates of deposit................................................ -- 3
---- ----
Subtotal....................................................................... 51 37
---- ----
Total.......................................................................... $195 $226
==== ====
</TABLE>
Short-term investments classified as held-to-maturity and available-for-sale
were $9 and $11 million, respectively, at December 31, 1996 and $44 million and
$14 million, respectively at December 31, 1995.
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
accounts of NIGEN, Ltd. (47% owned UK affiliate), Medway Power Ltd. (25% owned
UK affiliate), Light (11.35% owned Brazilian affiliate) and AES Chigen's
affiliates at December 31, 1996, and for the year then ended, the accounts of
NIGEN, Ltd. and Medway Power Ltd. at
F-9
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
December 31, 1995 and 1994 and for the years then ended, and the accounts of San
Nicolas (34% owned Argentine affiliate) at December 31, 1994 and for the year
then ended.
<TABLE>
<CAPTION>
------------------------
1996 1995 1994
------ ---- ------
<S> <C> <C> <C>
Sales................................................................ $1,960 $276 $ 335
Operating income..................................................... 498 86 75
Net income........................................................... 383 49 33
Current assets....................................................... 891 171 156
Noncurrent assets.................................................... 4,928 949 1,030
Current liabilities.................................................. 868 70 133
Noncurrent liabilities............................................... 2,111 973 945
Stockholders' equity................................................. 2,840 77 108
</TABLE>
In 1994, NIGEN, Ltd. refinanced its outstanding project financing loan through a
public debenture offering. The extinguishment of such debt resulted in an
extraordinary loss of $7 million. The Company's share, $2 million, net of taxes,
is included in the accompanying financial statements as an extraordinary loss.
The Company's share of undistributed earnings of affiliates included in
consolidated retained earnings was $33 million and $13 million at December 31,
1996 and 1995, respectively. The Company charged and recognized management fees
and interest on advances to its affiliates which aggregated $9 million, $8
million and $18 million for each of the years ended December 31, 1996, 1995 and
1994, respectively.
5. DEBT
PROJECT FINANCING DEBT -- Project financing debt at December 31, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
---------------------------------------------
INTEREST RATE FINAL
@ 12/31/96 MATURITY 1996 1995
------------- -------- ------ ------
<S> <C> <C> <C> <C>
Senior Debt -- floating
AES Beaver Valley....................................... 7.4% 1998 $ 21 $ 33
AES Thames.............................................. 6.8% 2004 163 181
AES Shady Point......................................... 7.4% 2004 306 320
AES Barbers Point....................................... 6.5% 2007 325 340
AES Lal Pir............................................. 5.0% 2008 135 28
AES Pak Gen............................................. 5.1% 2010 90 --
AES Coral Reef.......................................... 10.1% 2003 168 --
AES Warrior Run......................................... 6.7% 2014 37 22
Other................................................... 10.4% 2001 8 --
Senior Debt -- fixed
AES Placerita -- capital lease.......................... 8.1% 2009 105 111
AES Warrior Run -- tax exempt bonds..................... 7.4% 2019 74 74
AES Pak Gen............................................. 4.3% 2007 85 --
AES San Nicolas......................................... 10.4% 2000 80 --
Subordinated Debt....................................... 13.6% 2010 71 73
------ ------
Subtotal................................................ 1,668 1,182
Less current maturities................................. (110) (84)
------ ------
Total................................................... $1,558 $1,098
====== ======
</TABLE>
F-10
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
Project financing debt borrowings are primarily collateralized by the capital
stock of the project subsidiary, the physical assets of such facility and all
project agreements associated with such facility.
In 1994, the Company purchased and retired subordinated project financing debt
and accrued interest at AES Placerita, resulting in an extraordinary gain of $4
million, net of taxes.
The Company has interest rate swap agreements in an aggregate notional principal
amount of $550 million at December 31, 1996. 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 9.5% to
10.5%. The agreements expire at various dates from 1997 through 2007. 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, 1996, subsidiaries of the Company have interest
rate cap agreements at a ceiling of approximately 12.5% with remaining terms
ranging from three to six years in an aggregate notional amount of $280 million.
AES Shady Point and AES Barbers Point 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, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
-----------------------------------------
INTEREST RATE FINAL
@ 12/31/96 MATURITY 1996 1995
------------- -------- ---- ----
<S> <C> <C> <C> <C>
Corporate revolving bank loan*............................. 7.40% 1998 $213 $ 50
Senior subordinated notes.................................. 9.75% 2000 75 75
Convertible subordinated debentures........................ 6.50% 2002 -- 50
Senior subordinated notes.................................. 10.25% 2006 250 --
---- ----
Subtotal................................................... 538 175
Less current maturities.................................... (88) (50)
---- ----
Total...................................................... $450 $125
==== ====
</TABLE>
- ---------------
* floating rate loan
Under the terms of the $425 million corporate revolving bank loan and letter of
credit facility ("Revolver"), the Company must reduce its direct borrowings to
$125 million for 30 consecutive days annually to obtain additional loans.
Commitment fees on the unused portion at December 31, 1996 are .375% per annum,
and as of that date $89 million was available. The Company's 9 3/4% senior
subordinated notes due 2000 ("9 3/4% Notes") and 10 1/4% senior subordinated
notes due 2006 ("10 1/4% Notes") are general unsecured obligations of the
Company. The 9 3/4% Notes are redeemable at the Company's option, in whole or in
part, beginning June 1997 at redemption prices in excess of par and are
redeemable at par beginning June 1999. The 10 1/4% Notes are redeemable at the
Company's option, in whole or in part, beginning July 2001 at redemption prices
in excess of par and are redeemable at par beginning July 2003. The Company's
convertible subordinated debentures ("Debentures") were converted into common
stock of the Company at the rate of $26.16 per common share on August 30, 1996.
F-11
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
FUTURE MATURITIES OF DEBT -- Scheduled maturities of total long-term debt at
December 31, 1996 are (in millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------
<S> <C>
1997................................................ $ 198
1998................................................ 132
1999................................................ 303
2000................................................ 269
2001................................................ 202
Thereafter.......................................... 1,102
------
Total............................................... $2,206
======
</TABLE>
COVENANTS -- The terms of the Company's Revolver, 9 3/4% Notes, 10 1/4% Notes,
and project financing debt agreements contain certain covenants and provisions.
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, 1996, approximately $63 million was available under
project loan documents for distribution by U.S. subsidiaries.
AES CHIGEN NOTES -- Subsequent to its fiscal year end, AES Chigen issued $180
million of 10 1/8% Notes due 2006.
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company and its consolidated subsidiaries are
obligated under long-term non-cancelable operating leases, primarily for office
rental and site leases. Rental expense for operating leases was $4 million, $3
million and $2 million in the years ended 1996, 1995 and 1994, respectively. The
future minimum lease commitments under these leases are $6 million each year for
1997 and 1998, $5 million for 1999, $2 million each year for 2000 and 2001, and
$56 million for the years thereafter.
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 3 to 11 years.
GUARANTEES -- In connection with certain of its project financing, acquisition,
disposition, 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. These obligations and
commitments, excluding letter of credit obligations discussed below, were
limited as of December 31, 1996, by the terms of the agreements, to an aggregate
of approximately $176 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, 1996.
LETTERS OF CREDIT -- At December 31, 1996 and 1995, the Company had $123 million
and $56 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 1.75% on the outstanding amounts.
LITIGATION -- On February 25, 1993, an action was filed, jointly and severally,
in the 10th Judicial District Court, Galveston County, Texas against the
Company, over 25 other corporations (including major oil refineries and chemical
companies) and utilities, a utility district, four Texas cities, McGinnes
Industrial Maintenance Corpora-
F-12
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
tion, Roland McGinnes and Lawrence McGinnes, claiming personal injuries,
property, and punitive damages of $20 billion, arising from alleged releases of
hazardous and toxic substances to air, soil and water at the McGinnes waste
disposal site located in Galveston County. This matter was consolidated with two
other related cases in December 1993. The complaint sets forth numerous causes
of action, including fraud, negligence and strict liability, including, among
other things, allegations that the defendants sent hazardous, toxic and noxious
chemicals and other waste products to the McGinnes site for disposal. In March
1995, the Company entered into a settlement agreement with certain plaintiffs,
pursuant to which the Company paid seven thousand dollars in return for
withdrawal of their claims against the Company. Based on the Company's
investigation of the case to date, the Company believes it has meritorious
defenses to each and every cause of action stated in the complaint and this
action is being vigorously defended. The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.
On December 17, 1996, AES was named defendant in a complaint filed in the Court
of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES
Chigen Class A Common Stock individually and on behalf of a purported class of
public shareholders of AES Chigen in response to an amalgamation to be entered
into between AES Chigen and AES. The complaint alleges, among other things, that
AES breached its alleged fiduciary duty as a controlling shareholder to treat
the class with fairness, and questions the sufficiency of the consideration to
be paid to AES Chigen shareholders. The complaint seeks damages and injunctive
relief. AES Chigen was not named in the suit. Based on the Company's
investigation of the case to date, the Company believes it has meritorious
defenses to each and every cause of action stated in the complaint and this
action is being vigorously defended. The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.
The Company is involved in certain other 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.
F-13
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------
(In millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common stock
Balance at January 1 and December 31.................................. $ 1 $ 1 $ 1
==== ==== ====
Additional paid-in capital
Balance at January 1.................................................. $293 $240 $203
Issuance of common stock under benefit plans and exercise of stock
options and warrants............................................... 3 2 2
Tax benefit associated with the exercise of options................... 15 -- --
Issuance of common stock on conversion of 6.5% subordinated
debentures, net ($26.16 per share)................................. 49 -- --
Common stock dividends (1994-3% per share)............................ -- -- 47
AES Chigen Class A redeemable common stock............................ -- 51 (12)
---- ---- ----
Balance at December 31.................................................. $360 $293 $240
==== ==== ====
Retained earnings
Balance at January 1.................................................. $271 $164 $111
Net income for the year............................................... 125 107 100
Common stock dividends (1994-3% per share)............................ -- -- (47)
---- ---- ----
Balance at December 31.................................................. $396 $271 $164
==== ==== ====
Cumulative foreign currency translation adjustment
Balance at December 31................................................ $(33) $(10) $ (3)
==== ==== ====
Treasury stock
Balance at December 31.................................................. $ (3) $ (6) $ --
==== ==== ====
</TABLE>
Stock Split and Stock Dividend -- On December 7, 1993, the Board of Directors
authorized a three-for-two split, effected in the form of a stock dividend,
payable to stockholders of record on January 15, 1994. Additionally, on February
17, 1994, the Company declared a 3% stock dividend, payable to stockholders of
record on March 10, 1994. Accordingly, all outstanding share, per share and
stock option data in all periods presented have been restated to reflect the
split and the 3% stock dividend.
On July 30, 1996, the Company exercised its right to redeem the 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, $49.7 million of the debentures were converted into 1.9 million shares
of common stock of the Company at a conversion price of $26.16 per share.
Stock Options and Warrants -- The Company has granted options for 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
F-14
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
for exercise under various schedules. At December 31, 1996, there were
approximately 2 million shares reserved for future grants under the plans. A
summary of the option activity follows (in thousands of shares):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
DECEMBER 31
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -- beginning of
year.................................... 4,063 $ 14.56 3,540 $ 12.07 2,999 $ 9.78
Exercised during the year................. (480) 10.69 (355) 17.71 (187) 2.65
Forfeitures during the year............... (216) 20.55 (57) 18.36 (12) 13.17
Granted during the year................... 643 38.78 935 20.04 740 18.91
----- ------- ----- ------- ----- -------
Outstanding -- end of year................ 4,010 18.59 4,063 14.56 3,540 12.07
===== ======= ===== ======= ===== =======
Eligible for exercise -- end of year...... 2,132 12.86 1,209 9.03 1,059 6.02
===== ======= ===== ======= ===== =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996 (in thousands of shares):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
LIFE AVERAGE AVERAGE
TOTAL (IN EXERCISE TOTAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
- ----------------------------------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.55 to $6.47........................... 1,013 3.3 $ 5.14 1,011 $ 5.14
$11.65 to $19.75......................... 1,261 6.9 17.54 492 17.44
$20.00 to $28.88......................... 1,248 8.3 20.97 593 20.79
$31.75 to $44.13......................... 488 10.0 43.14 36 36.31
----- -----
Total.................................... 4,010 2,132
===== =====
</TABLE>
The Company accounts for its stock-based compensation plans under APB No. 25,
and as a result, 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. The Company adopted SFAS No. 123 for
disclosure purposes in 1996. For SFAS No. 123 purposes, the 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 6.5%, 5.5%, and 7.5% and expected volatility of 28%, 24%, and
22% for the years ended 1996, 1995 and 1994, 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 the stock options granted is
$17.61 and $8.17 for 1996 and 1995, respectively. There were no adjustments made
in calculating the fair value to account for vesting provisions or for
non-transferability or risk of forfeiture.
F-15
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions detailed above, the Company's net income and earnings per share
for the year ended December 31, 1996, 1995 and 1994 would have been reduced to
the following pro forma amounts (in millions):
<TABLE>
<CAPTION>
----------------------
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net Income:
As Reported.................................. $ 125 $ 107 $ 100
Pro forma.................................... 121 106 100
Net income per common share:
As Reported.................................. $1.62 $1.41 $1.32
Pro forma.................................... 1.57 1.40 1.32
</TABLE>
The use 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 0.7 million shares of its common stock at $29.43 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 at December 31, 1996.
AES China Generating Co. Ltd. -- During 1994, AES Chigen completed an initial
public offering for the sale of 10.2 million shares of Class A redeemable common
stock. Prior to the offering, AES contributed $50 million to AES Chigen for 7.5
million shares of Class B common stock. AES, as the sole Class B holder, is
entitled to elect one-half of the board of directors of AES Chigen. As of
December 22, 1995, AES Chigen had entered into binding commitments to invest in
excess of $50 million in power projects in the People's Republic of China and
the previously held right of Class A Shareholders to require AES Chigen to
repurchase their shares has expired. As a result, the Company has allocated the
net proceeds from the issuance of the Class A shares to additional paid-in
capital and minority interest during 1995. In November 1996, the Company and AES
Chigen signed a definitive agreement for the Company to acquire the
approximately 8.2 million outstanding Class A shares of AES Chigen. The
acquisition will be accomplished by amalgamating AES Chigen with a wholly owned
subsidiary of the Company. Subject to approval of the holders of the Class A
common stock, AES Chigen shareholders will receive shares of the Company common
stock at an exchange rate of 0.29 shares of the Company's common stock for each
share of AES Chigen common stock.
F-16
<PAGE> 76
PROSPECTUS
[LOGO THE AES CORPORATION]
$750,000,000
Junior Subordinated Debt Securities
AES TRUST I
AES TRUST II
AES TRUST III
------------------
PREFERRED TRUST SECURITIES FULLY AND UNCONDITIONALLY GUARANTEED AS SET FORTH
HEREIN BY THE AES CORPORATION
The AES Corporation (the "Company" or "AES") may from time to time offer,
together or separately unsecured junior subordinated securities (the "Junior
Subordinated Debt Trust Securities") consisting of debentures, notes or other
evidences of indebtedness in one or more series and in amounts, at prices and on
terms to be determined at or prior to the time of any such offering. The Junior
Subordinated Debt Trust Securities when issued will be unsecured obligations of
the Company. The Company's obligations under the Junior Subordinated Debt Trust
Securities will be subordinate and junior in right of payment to all Senior and
Subordinated Debt (as defined herein) of the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
AES Trust I, AES Trust II and AES Trust III (collectively, the "AES Trusts"),
each a statutory business trust formed under the laws of the State of Delaware,
may offer and sell, from time to time, preferred trust securities representing
undivided beneficial interests in the assets of the respective AES Trust (the
"Preferred Securities" and, together with the Junior Subordinated Debt Trust
Securities, the "Securities"). The Preferred Securities may be offered in
amounts, at prices and on terms to be determined at or prior to the time of any
such offering. The payment of periodic cash distributions ("distributions") with
respect to Preferred Securities of each of the AES Trusts out of moneys held by
the Property Trustee (as defined herein) of each of the AES Trusts, and payments
on liquidation of each AES Trust and on redemption of Preferred Securities of
such AES Trust, will be guaranteed by the Company fully and unconditionally as
described herein (each such guarantee, a "Preferred Securities Guarantee"). See
"Description of the Preferred Securities Guarantees." The Company's obligation
under each Preferred Securities Guarantee is an unsecured obligation of the
Company and will rank (i) subordinate and junior in right of payment to all
other liabilities of the Company, including the Junior Subordinated Debt Trust
Securities, except those made pari passu or subordinate by their terms, and (ii)
pari passu in right of payment with the most senior preferred stock issued, from
time to time, if any, by the Company. Junior Subordinated Debt Trust Securities
may be issued and sold from time to time in one or more series by the Company to
an AES Trust, or a trustee of such trust, in connection with the investment of
the proceeds from the offering of Preferred Securities and Common Securities (as
defined herein) of such AES Trust. The Junior Subordinated Debt Trust Securities
purchased by an AES Trust may be subsequently distributed pro rata to holders of
Preferred Securities and Common Securities in connection with the dissolution of
such AES Trust, upon the occurrence of certain events as may be described in an
accompanying Prospectus Supplement.
Specific terms of the Junior Subordinated Debt Trust Securities and Preferred
Securities in respect of which this Prospectus is being delivered (the "Offered
Securities") will be set forth in a Prospectus Supplement with respect to such
Offered Securities, which will describe, without limitation and where
applicable, the following: (i) in the case of Junior Subordinated Debt Trust
Securities, the specific designation, aggregate principal amount, authorized
denomination, maturity, premium, if any, exchangeability, redemption,
conversion, prepayment or sinking fund provisions, if any, interest rate (which
may be fixed or variable), if any, method, if any, of calculating interest
payments, and dates for payment thereof, dates on which premium, if any, will be
payable, the right of the Company, if any, to defer payment of interest on the
Junior Subordinated Debt Trust Securities and the maximum length of such
deferral period, the public offering price, any listing on a securities exchange
and other specific terms of the offering; and (ii) in the case of Preferred
Securities, the specific designation, number of securities, liquidation amount
per security, initial public offering price, and any listing on a securities
exchange, distribution rate (or method of calculation thereof), dates on which
distributions shall be payable and dates from which distributions shall accrue,
voting rights (if any), terms for any conversion or exchange into other
securities, any redemption or sinking fund provisions, any other rights,
preferences, privileges, limitations or restrictions relating to the Preferred
Securities and the terms upon which the proceeds of the sale of the Preferred
Securities shall be used to purchase a specific series of Junior Subordinated
Debt Trust Securities of the Company. Unless otherwise indicated in the
Prospectus Supplement, the Company does not intend to list any of the Offered
Securities on a national securities exchange.
Any Prospectus Supplement relating to any series of Offered Securities will
contain information concerning certain United States federal income tax
considerations, if applicable, to the Offered Securities. By separate
prospectus, the form of which is included in the Registration Statement of which
this Prospectus is a part, the Company may offer from time to time debt
securities or preferred stock. The aggregate initial public offering price of
the securities to be offered by this Prospectus and such other prospectus shall
not exceed $750,000,000.
The Offered Securities may be offered directly, through agents designated from
time to time, through dealers or through underwriters. Such agents or
underwriters may act alone or with other agents or underwriters. See "Plan of
Distribution." Any such agents, dealers or underwriters will be set forth in a
Prospectus Supplement. If an agent of the Company and/or any AES Trust, or a
dealer or underwriter is involved in the offering of the Offered Securities, the
agent's commission, dealer's purchase price, underwriter's discount and net
proceeds to the Company, as the case may be, will be set forth in, or may be
calculated from, the Prospectus Supplement. Any underwriters, dealers or agents
participating in the offering may be deemed "underwriters" within the meaning of
the Securities Act of 1933.
This Prospectus may not be used to consummate sales of Offered Securities unless
accompanied by a Prospectus Supplement.
The date of this Prospectus is December 4, 1996.
<PAGE> 77
AVAILABLE INFORMATION
The AES Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission").
These reports, proxy and information statements and other information may be
inspected without charge and copied at the public reference facilities
maintained by the Commission at its principal offices at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such materials also can be obtained at prescribed rates
from the Public Reference Section of the Commission at the principal offices of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form S-3
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby (including all amendments and
supplements thereto, the "Registration Statement"). This Prospectus, which forms
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits filed thereto, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. Statements contained herein concerning the provisions of any
documents are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
can be inspected and copied at the public reference facilities and regional and
other offices referred to above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates in this Prospectus by reference thereto and
makes a part hereof the following documents, heretofore filed with the
Commission pursuant to the Exchange Act: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995; (ii) the Company's Quarterly Report
on Form 10-Q for the quarters ended September 30, 1996, June 30, 1996 and March
31, 1996, (iii) the Company's Current Reports on Form 8-K filed on November 13,
1996, July 1, 1996, June 12, 1996, May 30, 1996, February 26, 1996 and February
6, 1996; (iv) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A (File No. 0-19281), filed on October 10, 1996
and (v) the Company's Registration Statement on Form S-3 filed on June 12, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to
termination of the offering being made hereby shall be deemed to be incorporated
in this Prospectus by reference and to be a part hereof from the respective
dates of the filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus and the
Registration Statement of which it is a part to the extent that a statement
contained herein or in any subsequently filed document which also is, or is
deemed to be, incorporated by reference herein, modifies or supersedes such
earlier statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus or
such Registration Statement.
The Company hereby undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon written or oral request of any
such person, a copy of any and all of the documents referred to above which have
been or may be incorporated in this Prospectus by reference, other than exhibits
to such documents which are not specifically incorporated by reference into such
documents. Requests for such copies should be directed to William R. Luraschi,
General Counsel and Secretary, The AES Corporation, 1001 North 19th Street,
Arlington, Virginia 22209, telephone (703) 522-1315.
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<PAGE> 78
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement, proceeds
from the sale of the Junior Subordinated Debt Trust Securities will be used by
the Company for general corporate purposes and initially may be temporarily
invested in short-term securities.
Each AES Trust will use all proceeds received from the sale of its Trust
Securities to purchase Junior Subordinated Debt Trust Securities from the
Company.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges.
<TABLE>
<CAPTION>
-------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges...................... 1.31 1.37 1.63 2.08 2.18 2.04
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and minority
interest, plus fixed charges, less capitalized interest, less excess of earnings
over dividends of less-than-fifty-percent-owned companies. Fixed charges consist
of interest (including capitalized interest) on all indebtedness, amortization
of debt discount and expense and that portion of rental expense which the
Company believes to be representative of an interest factor. A statement setting
forth the computation of the above ratios of earnings to fixed charges is on
file as an exhibit to the Registration Statement of which this Prospectus is a
part.
During the period from January 1, 1991 until September 30, 1996, no shares of
Preferred Stock were issued or outstanding, and during that period the Company
did not pay any Preferred Stock dividends.
3
<PAGE> 79
THE COMPANY
With a presence in over 35 countries, The AES Corporation is a global power
company committed to supplying electricity to customers world-wide in a socially
responsible way. The Company, based in Arlington, Virginia, markets power
principally from electric generating facilities that it develops, owns and
operates. AES was one of the original entrants in the independent power market
and today is one of the world's largest independent power companies, based on
net equity ownership of generating capacity (in megawatts) in operation or under
construction.
Over the last six years, the Company has experienced significant growth. This
growth has resulted primarily from the development and construction of new
plants ("greenfield development") and also from the acquisition of existing
plants, primarily through competitively bid privatization initiatives outside
the United States.
In part, the Company's strategy in helping meet the world's need for electricity
is to participate in competitive power generation markets as they develop either
by greenfield development or by acquiring and operating existing facilities in
these markets.
Other elements of the Company's strategy include:
- Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance.
- Constructing or acquiring projects of a relatively large size (generally
larger than 100 megawatts).
- Entering into power sales contracts with electric utilities or other
customers with credit strength.
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. 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 in the
future.
The Company, a corporation organized under the laws of Delaware, was formed in
1981. The principal office of the Company is located at 1001 North 19th Street,
Arlington, Virginia 22209, and its telephone number is (703) 522-1315.
RISK FACTORS
Purchasers of the Securities should read this entire Prospectus carefully.
Ownership of the Securities involves certain risks. The following factors should
be considered carefully in evaluating AES and its business before purchasing the
Securities offered by this Prospectus.
LEVERAGE AND SUBORDINATION
The Company and its subsidiaries had approximately $2.1 billion of outstanding
indebtedness at September 30, 1996. As a result of the Company's level of debt,
the Company might be significantly limited in its ability to meet its debt
service obligations, to finance the acquisition and development of additional
projects, to compete effectively or to operate successfully under adverse
economic conditions. As of September 30, 1996, the Company had a consolidated
ratio of total debt to total book capitalization (including current debt) of
approximately 75%.
The Junior Subordinated Debt Trust Securities will be subordinated to all Senior
and Subordinated Debt including, but not limited to, the Company's current $425
million credit facility debt. The obligations of AES under the Preferred
Securities Guarantee are subordinate and junior in right of payment to all
liabilities of AES and pari passu in right of payment with the most senior
preferred stock issued, from time to time, if any, by AES. As of September 30,
1996, the Company had approximately $656 million in aggregate principal amount
of Senior and Subordinated Debt.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, receivership, reorganization, assignment for the
benefit of creditors, marshaling of assets and liabilities or any bankruptcy,
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<PAGE> 80
insolvency or similar proceedings of the Company, the holders of Senior and
Senior Subordinated Debt will first be entitled to receive payment in full of
all amounts due or to become due under all Senior and Subordinated Debt before
the holders of the Junior Subordinated Debt Trust Securities will be entitled to
receive any payment in respect of the principal of, premium, if any, or interest
on such Junior Subordinated Debt Trust Securities. No payments on account of
principal, premium, if any, or interest in respect of the Junior Subordinated
Debt Trust Securities may be made if there shall have occurred and be continuing
a default in any payment under any Senior and Senior Subordinated Debt or during
certain periods when an event of default under certain Senior and Subordinated
Debt permits the lenders thereunder to accelerate the maturing of such Senior
and Senior Subordinated Debt. See "Description of Junior Subordinated Debt Trust
Securities -- Subordination." The Preferred Securities will rank subordinate and
junior in right of payment to all other liabilities of the Company, including
the Junior Subordinated Debt Trust Securities, except those made pari passu by
their terms and (ii) senior to all capital stock now or hereafter issued by the
Company and to any guarantee now or hereafter entered into by the Company in
respect of any of its capital stock. See "Description of the Preferred
Securities Guarantees -- Status of the Preferred Securities Guarantees."
The Junior Subordinated Debt Trust Securities will be effectively subordinated
to the indebtedness and other obligations (including trade payables) of the
Company's subsidiaries. At September 30, 1996, the indebtedness and obligations
of the Company's subsidiaries, aggregated approximately $1.5 billion. The
ability of the Company to pay principal of, premium, if any, and interest on the
Junior Subordinated Debt Trust Securities will be dependent upon the receipt of
funds from its subsidiaries by way of dividends, fees, interest, loans or
otherwise. There are no terms in the Junior Subordinated Debt Trust Securities,
the Preferred Securities or the Preferred Securities Guarantee that limit the
Company's or its subsidiaries' ability to incur additional indebtedness. Most of
the Company's subsidiaries with interests in power generation facilities
currently have in place arrangements that restrict their ability to make
distributions to the Company by way of dividends, fees, interest, loans or
otherwise. The Company's subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Junior Subordinated Debt Trust Securities or the Preferred Securities or
to make any funds available therefor, whether by dividends, loans or other
payments, and do not guarantee the payment of interest on or principal of the
Junior Subordinated Debt Trust Securities or the Preferred Securities. Any right
of the Company to receive any assets of any of its subsidiaries upon any
liquidation, dissolution, winding up, receivership, reorganization, assignment
for the benefit of creditors, marshaling of assets and liabilities or any
bankruptcy, insolvency or similar proceedings of the Company (and the consequent
right of the holders of the Junior Subordinated Debt Trust Securities and the
Preferred Securities to participate in the distribution of, or to realize
proceeds from, those assets) will be effectively subordinated to the claims of
any such subsidiary's creditors (including trade creditors and holders of debt
issued by such subsidiary). The Company currently conducts substantially all of
its operations through its subsidiaries. See "Description of the Preferred
Securities Guarantees -- Status of the Preferred Securities Guarantees" and
"Description of the Junior Subordinated Debt Securities -- Subordination."
ABILITY OF AES TO MAKE DISTRIBUTIONS
The ability of the AES Trusts to make distributions and other payments on the
Preferred Securities is solely dependent upon the Company making interest and
other payments on the Junior Subordinated Debt Trust Securities deposited as
trust assets as and when required. If the Company were not to make distributions
or other payments on the Junior Subordinated Debt Trust Securities for any
reason, including as a result of the Company's election to defer the payment of
interest on the Junior Subordinated Debt Trust Securities by extending the
interest period on the Junior Subordinated Debt Trust Securities, the AES Trusts
will not make payments on the Trust Securities (as defined herein). In such an
event, holders of the Preferred Securities would not be able to rely on the
Preferred Securities Guarantee since distributions and other payments on the
Preferred Securities are subject to such Guarantee only if and to the extent
that the Company has made a payment to the Property Trustee (as defined herein)
of interest or principal on the Junior Subordinated Debt Trust Securities
deposited in the Trust as trust assets. Instead, holders of Preferred Securities
would rely on the enforcement by the Property Trustee of its rights as
registered holder of the Junior Subordinated Debt Trust Securities against the
Company pursuant to the terms of the Indenture (as defined herein). However, if
the Trust's failure to make distributions on the Preferred Securities is a
consequence of the Company's exercise of its right to extend the interest
payment period for the Junior Subordi-
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<PAGE> 81
nated Debt Trust Securities, the Property Trustee will have no right to enforce
the payment of distributions on the Preferred Securities until an Event of
Default (as defined herein) under the Declaration (as defined herein) shall have
occurred.
The Declaration provides that the Company shall pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the AES Trusts, including any taxes and all costs and expenses with
respect thereto, to which the AES Trusts may become subject, except for United
States withholding taxes. No assurance can be given that the Company will have
sufficient resources to enable it to pay such debts, obligations, costs and
expenses on behalf of the AES Trusts.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX IMPACT OF EXTENSION
So long as the Company shall not be in default in the payment of interest on the
Junior Subordinated Debt Trust Securities, the Company has the right under the
Indenture to defer payments of interest on the Junior Subordinated Debt Trust
Securities by extending the interest payment period from time to time on the
Junior Subordinated Debt Trust Securities for an extension period not exceeding
20 consecutive quarterly interest periods (an "Extension Period"), during which
no interest shall be due and payable. In such an event, quarterly distributions
on the Preferred Securities would not be made by the applicable AES Trust during
any such Extension Period. If the Company exercises the right to extend an
interest payment period, the Company may not during such Extension Period
declare or pay dividends on, or redeem, purchase, acquire or make a distribution
or liquidation payment with respect to, any of its common stock or preferred
stock; provided that (i) the Company will be permitted to pay accrued dividends
upon the exchange or redemption of any series of preferred stock of the Company
as may be outstanding from time to time, in accordance with the terms of such
stock and (ii) the foregoing will not apply to stock dividends paid by the
Company. Under the Amended and Restated Certificate of Incorporation the Company
is authorized to issue up to 1,000,000 shares of preferred stock. As of
September 30, 1996, no shares of the Company's preferred stock were outstanding.
The Company may from time to time offer shares of its preferred stock to the
public.
Prior to the termination of any Extension Period, the Company may further extend
such Extension Period; provided that such Extension Period together with all
such previous and further extensions thereof may not exceed 20 consecutive
quarterly interest periods. Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may commence a new Extension
Period, subject to the above requirements. The Company may also prepay at any
time all or any portion of the interest accrued during an Extension Period.
Consequently, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debt Trust Securities, not to
exceed 20 consecutive quarters or to cause any extension beyond the maturity of
the Junior Subordinated Debt Trust Securities. See any accompanying Prospectus
Supplement relating to Junior Subordinated Debt Trust Securities.
Because the Company has the right to extend the interest payment period for an
Extension Period of up to 20 consecutive quarterly interest periods on various
occasions, the Junior Subordinated Debt Trust Securities will be treated as
issued with "original issue discount" for United States federal income tax
purposes. As a result, holders of Preferred Securities will be required to
include their pro rata share of original issue discount in gross income as it
accrues for United States federal income tax purposes in advance of the receipt
of cash. Generally, all of a securityholder's taxable interest income with
respect to the Junior Subordinated Debt Trust Securities will be accounted for
as "original issue discount" and actual distributions of stated interest will
not be separately reported as taxable income. See any accompanying Prospectus
Supplement relating to Junior Subordinated Debt Trust Securities.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence and during the continuation of a Tax Event or Investment
Company Event (each as defined herein), which may occur at any time, the
applicable AES Trust shall, unless the Junior Subordinated Debt Trust Securities
are redeemed in the limited circumstances described below, be dissolved with the
result that Junior Subordinated Debt Trust Securities having an aggregate
principal amount equal to the aggregate stated liquidation amount of, and
bearing accrued and unpaid distributions on, the Preferred Securities and Common
Securities would
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<PAGE> 82
be distributed on a Pro Rata Basis (as defined herein under "The AES Trusts") to
the holders of the Preferred Securities and Common Securities in liquidation of
such Trust. In the case of a Tax Event, in certain circumstances, the Company
shall have the right to redeem at any time the Junior Subordinated Debt Trust
Securities in whole or in part, in which event the applicable AES Trust will
redeem Preferred Securities and Common Securities on a Pro Rata Basis to the
same extent as the Junior Subordinated Debt Trust Securities are redeemed. There
can be no assurance as to the market prices for Preferred Securities or the
Junior Subordinated Debt Trust Securities which may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of the applicable AES
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debt Trust Securities that the investor may
receive on dissolution and liquidation of the applicable AES Trust, may trade at
a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debt Trust Securities upon the occurrence of a Special Event
(as defined herein), prospective purchasers of Preferred Securities are also
making an investment decision with regard to the Junior Subordinated Debt Trust
Securities and should carefully review all the information regarding the Junior
Subordinated Debt Trust Securities contained in any accompanying Prospectus
Supplement relating to Junior Subordinated Debt Trust Securities.
If enacted in their present form, certain legislative proposals in the Revenue
Reconciliation Bill of 1996 (the "Bill") would prevent the Company from
deducting interest on the Junior Subordinated Debt Trust Securities. The Bill as
proposed would be effective generally for instruments issued on or after
December 7, 1995. However, on March 29, 1996, the Chairmen of the Senate Finance
and House Ways and Means Committees issued a joint statement to the effect that
it was their intention that the effective date of the President's legislative
proposals, if adopted, will be no earlier than the date of appropriate
Congressional action.
There can be no assurance, however, that current or future federal legislative
proposals if enacted would not prevent the Company from deducting interest on
the Junior Subordinated Debt Trust Securities. This would constitute a Tax Event
and could result in the distribution of any Junior Subordinated Debt Trust
Securities to holders of the Preferred Securities or, in certain circumstances,
the redemption of such securities by the Company and the distribution of the
resulting cash in redemption of the Preferred Securities. See any accompanying
Prospectus Supplement relating to Junior Subordinated Debt Trust Securities.
"Tax Event" means that the Regular Trustees (as defined herein) shall have
obtained an opinion of a nationally recognized independent tax counsel
experienced in such matters (a "Dissolution Tax Opinion") to the effect that on
or after the date of any accompanying Prospectus Supplement relating to Junior
Subordinated Debt Trust Securities as a result of (a) any amendment to, or
change in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, (b) any amendment
to, or change in, an interpretation or application of any such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination), (c) any interpretation or
pronouncement that provides for a position with respect to such laws or
regulations that differs from the theretofore generally accepted position or (d)
any action taken by any governmental agency or regulatory authority, which
amendment or change is enacted, promulgated, issued or effective or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case on or after the date of such Prospectus Supplement, there is more
than an insubstantial risk that (i) the applicable AES Trust is, or will be
within 90 days of the date thereof, subject to United States federal income tax
with respect to income accrued or received on the Junior Subordinated Debt Trust
Securities, (ii) the applicable AES Trust is, or will be within 90 days of the
date thereof, subject to more than a de minimis amount of other taxes, duties or
other governmental charges or (iii) interest payable by the Company to the
applicable AES Trust on the Junior Subordinated Debt Trust Securities is not, or
within 90 days of the date thereof will not be, deductible by the Company for
United States federal income tax purposes.
"Investment Company Event" means that the Regular Trustees shall have received
an opinion of nationally recognized independent counsel experienced in practice
under the Investment Company Act of 1940, as amended (the "1940 Act"), that as a
result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that an AES Trust is or will be
considered an "investment company" which is required to be registered under the
1940 Act, which Change in 1940 Act Law
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<PAGE> 83
becomes effective on or after the date of any accompanying Prospectus Supplement
relating to Junior Subordinated Debt Trust Securities.
"Special Event" means a Tax Event or an Investment Company Event.
LIMITING VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights, but will not be
able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the Common Securities (as
defined herein under "The AES Trusts").
TRADING PRICES OF PREFERRED SECURITIES
The Preferred Securities constitute a new issue of securities with no
established trading market. The Preferred Securities may trade at a price that
does not fully reflect the value of accrued but unpaid interest with respect to
the underlying Junior Subordinated Debt Trust Securities. A holder who disposes
of his Preferred Securities between record dates for payments of distributions
thereon will be required to include accrued but unpaid interest on the Junior
Subordinated Debt Trust Securities through the date of disposition in income as
ordinary income, and to add such amount to his adjusted tax basis in his pro
rata share of the underlying Junior Subordinated Debt Trust Securities deemed
disposed of. Accordingly, such a holder will recognize a capital loss to the
extent the selling price (which may not fully reflect the value of accrued but
unpaid interest) is less than the holders adjusted tax basis (which will include
accrued but unpaid interest). Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for United States federal
income tax purposes. See any accompanying Prospectus Supplement relating to
Junior Subordinated Debt Trust Securities.
POTENTIAL MARKET VOLATILITY DURING EXTENSION PERIOD
As described above, the Company has the right to extend an interest payment
period on the Junior Subordinated Debt Trust Securities from time to time for a
period not exceeding 20 consecutive quarterly interest periods. If the Company
determines to extend an interest payment period, or if the Company thereafter
extends an Extension Period or prepays interest accrued during an Extension
Period as described above, the market price of the Preferred Securities is
likely to be affected. In addition, as a result of such rights, the market price
of the Preferred Securities (which represent an undivided interest in Junior
Subordinated Debt Trust Securities) may be more volatile than other securities
on which original issue discount accrues that do not have such rights. A holder
that disposes of its Preferred Securities during an Extension Period, therefore,
may not receive the same return on its investment as a holder that continues to
hold its Preferred Securities. See any accompanying Prospectus Supplement
relating to Junior Subordinated Debt Trust Securities.
NO PRIOR PUBLIC MARKET -- POSSIBLE PRICE VOLATILITY OF THE SECURITIES
Prior to the offering, there has been no public market for the Securities. There
can be no assurance that an active trading market for the Securities will
develop or be sustained. If such a market were to develop, the Securities, could
trade at prices that may be higher or lower than their offering price depending
upon many factors, including prevailing interest rates, the Company's operating
results and the markets for similar securities. Historically, the market for
non-investment grade debt has demonstrated substantial volatility in the prices
of securities similar to the Securities. There can be no assurance that the
future market for the Securities will not be subject to similar volatility.
Accordingly, no assurance can be given as to the liquidity of the Securities.
DOING BUSINESS OUTSIDE THE UNITED STATES
The Company's involvement in the development of new projects and the acquisition
of existing plants in locations outside the United States is increasing and most
of the Company's current development and acquisition activities are for projects
and plants outside the United States. The Company, through subsidiaries and
joint ventures, has ownership interests in 27 power plants outside the United
States in operation or under construction. Five of such power plants are located
in Argentina; four in Brazil; two in England; two in Northern Ireland; two in
Pakistan; eight in the People's Republic of China; three in Hungary; and one in
Kazakhstan.
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<PAGE> 84
The financing, development and operation of projects outside the United States
entail significant political and financial uncertainties (including, without
limitation, uncertainties associated with first-time privatization efforts in
the countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, currency convertibility, political instability, civil
unrest, and expropriation) and other structuring issues that have the potential
to cause substantial delays in respect of or material impairment of the value of
the project being developed or operated, which AES may not be capable of fully
insuring or hedging against. The ability to obtain financing on a commercially
acceptable non-recourse basis in developing nations may also require higher
investments by the Company than historically have been the case. In addition,
financing in countries with less than investment grade sovereign credit ratings
may also require substantial participation by multilateral financing agencies.
There can be no assurance that such financing can be obtained when needed.
The uncertainty of the legal environment in certain countries in which the
Company, its subsidiaries and its affiliates are or in the future may be
developing, constructing or operating could make it more difficult for the
Company to enforce its respective rights under agreements relating to such
projects. In addition, the laws and regulations of certain countries may limit
the Company's ability to hold a majority interest in some of the projects that
it may develop or acquire. International projects owned by the Company may, in
certain cases, be expropriated by applicable governments. Although AES may have
legal recourse in enforcing its rights under agreements and recovering damages
for breaches thereof, there can be no assurance that any such legal proceedings
will be successful.
COMPETITION
The global power production market is characterized by numerous strong and
capable competitors, many of whom may have extensive and diversified
developmental or operating experience (including both domestic and international
experience) and financial resources similar to or greater than the Company.
Further, in recent years, the power production industry has been characterized
by strong and increasing competition with respect to both obtaining power sales
agreements and acquiring existing power generation assets. In certain markets,
these factors have caused reductions in prices contained in new power sales
agreements and, in many cases, have caused higher acquisition prices for
existing assets through competitive bidding practices. The evolution of
competitive electricity markets and the development of highly efficient
gas-fired power plants have also caused, or are anticipated to cause, price
pressure in certain power markets where the Company sells or intends to sell
power. There can be no assurance that the foregoing competitive factors will not
have a material adverse effect on the Company.
DEVELOPMENT UNCERTAINTIES
The majority of the projects that AES develops are large and complex and the
completion of any such project is subject to substantial risks. Development can
require the Company to expend significant sums for preliminary engineering,
permitting, legal and other expenses in preparation for competitive bids which
the Company may not win or before it can be determined whether a project is
feasible, economically attractive or capable of being financed. Successful
development and construction is contingent upon, among other things, negotiation
on terms satisfactory to the Company of engineering, construction, fuel supply
and power sales contracts with other project participants, receipt of required
governmental permits and consents and timely implementation and satisfactory
completion of construction. There can be no assurance that AES will be able to
obtain new power sales contracts, overcome local opposition, if any, obtain the
necessary site agreements, fuel supply and ash disposal agreements, construction
contracts, steam sales contracts, licenses and certifications, environmental and
other permits and financing commitments necessary for the successful development
of its projects. There can be no assurance that development efforts on any
particular project, or the Company's efforts generally, will be successful. If
these development efforts are not successful, the Company may abandon a project
under development. At the time of abandonment, the Company would expense all
capitalized development costs incurred in connection therewith and could incur
additional losses associated with any related contingent liabilities. The future
growth of the Company is dependent, in part, upon the demand for significant
amounts of additional electrical generating capacity and its ability to obtain
contracts to supply portions of this capacity. Any material unremedied delay in,
or unsatisfactory completion of, construction of the Company's projects could,
under certain circumstances, have an adverse effect on the Company's ability to
meet its obligations, including the payment of principal of, premium, if any and
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interest on Debt Securities. The Company also is faced with certain development
uncertainties arising out of doing business outside of the United States. See
"-- Doing Business Outside the United States."
UNCERTAINTY OF ACCESS TO CAPITAL FOR FUTURE PROJECTS
Each of AES's projects under development and those independent power facilities
it may seek to acquire may require substantial capital investment. Continued
access to capital with acceptable terms is necessary to assure the success of
future projects and acquisitions. AES has primarily utilized project financing
loans to fund the capital expenditures associated with constructing and
acquiring its electric power plants and related assets. Project financing
borrowings have been 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 project
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
projects, 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) 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 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 project.
In addition to the project financing loans, if available, AES 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
borrowings under short-term credit facilities, and issuances of senior
subordinated notes, convertible debentures and common stock of the Company.
The Company's ability to arrange for financing on either a fully recourse or a
substantially non-recourse basis and the costs of such capital are dependent on
numerous factors, including general economic and capital market conditions, the
availability of bank credit, investor confidence in the Company, the continued
success of current projects and provisions of tax and securities laws which are
conducive to raising capital in this manner. Should future access to capital not
be available, AES may decide not to build new plants or acquire existing
facilities. While a decision not to build new plants or acquire existing
facilities would not affect the results of operations of AES on its currently
operating facilities or facilities under construction, such a decision would
affect the future growth of AES.
DEPENDENCE ON UTILITY CUSTOMERS AND CERTAIN PROJECTS
The nature of most of AES's power projects is such that each facility generally
relies on one power sales contract with a single customer for the majority, if
not all, of its revenues over the life of the power sales contract. During 1995,
four customers, including Connecticut Light & Power Company, a subsidiary of
Northeast Utilities, accounted for 73% of the Company's revenues. The prolonged
failure of any one utility customer to fulfill its contractual obligations could
have a substantial negative impact on AES's primary source of revenues. AES has
sought to reduce this risk in part by entering into power sales contracts with
utilities or other customers of strong credit quality and by locating its plants
in different geographic areas in order to mitigate the effects of regional
economic downturns.
Four of the Company's plants collectively represented approximately 61% of AES's
consolidated total assets at December 31, 1995 and generated approximately 80%
of AES's consolidated total revenues for the year ended December 31, 1995.
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In October 1996, Moody's Investor Service and Standard & Poor's revised their
ratings of the senior unsecured long-term debt of Connecticut Light & Power
Company from Baa3/BBB- to Ba1/BB+.
REGULATORY UNCERTAINTY
AES's cogeneration operations are subject to the provisions of various laws and
regulations, including the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA") and the Public Utility Holding Company Act, as amended
("PUHCA"). PURPA provides to qualifying facilities ("QFs") certain exemptions
from substantial federal and state legislation, including regulation as public
utilities. PUHCA regulates public utility holding companies and their
subsidiaries. AES is not and will not be subject to regulation as a holding
company under PUHCA as long as the domestic power plants it owns are QFs under
PURPA. QF status is conditioned on meeting certain criteria, and would be
jeopardized, for example, by the loss of a steam customer. The Company believes
that, upon the occurrence of an event that would threaten the QF status of one
of its domestic plants, it would be able to react in a manner that would avoid
the loss of QF status (such as by replacing the steam customer). In the event
the Company were unable to avoid the loss of such status for one of its plants,
to avoid public utility holding company status, AES could apply to the Federal
Energy Regulatory Commission ("FERC") to obtain status as an Exempt Wholesale
Generator ("EWG"), or could restructure the ownership of the project subsidiary.
EWGs, however, are subject to broader regulation by FERC and may be subject to
state public utility commissions regulation regarding non-rate matters. In
addition, any restructuring of a project subsidiary could result in, among other
things, a reduced financial interest in such subsidiary, which could result in a
gain or loss on the sale of the interest in such subsidiary, the removal of such
subsidiary from the consolidated income tax group or the consolidated financial
statements of the Company, or an increase or decrease in the results of
operations of the Company.
The United States Congress is considering proposed legislation which would
repeal PURPA entirely, or at least repeal the obligation of utilities to
purchase from QFs. There is strong support for grandfathering existing QF
contracts if such legislation is passed, and also support for requiring
utilities to conduct competitive bidding for new electric generation if the
PURPA purchase obligation is eliminated. Various bills have also proposed repeal
of PUHCA. Repeal of PUHCA would allow both independents and vertically
integrated utilities to acquire retail utilities in the United States that are
geographically widespread, as opposed to the current limitations of PUHCA which
require that retail electric systems be capable of physical integration. In
addition, registered holding companies would be free to acquire non-utility
businesses, which they may not do now, with certain limited exceptions. In the
event of a PUHCA repeal, competition for independent power generators from
vertically integrated utilities would likely increase. Repeal of PURPA and/or
PUHCA may or may not be part of comprehensive legislation to restructure the
electric utility industry, allow retail competition, and deregulate most
electric rates. The effect of any such repeal cannot be predicted, although any
such repeal could have a material adverse effect on the Company.
ELECTRIC UTILITY INDUSTRY RESTRUCTURING PROPOSALS
The FERC and many state utility commissions are currently studying a number of
proposals to restructure the electric utility industry in the United States.
Such restructuring would permit utility customers to choose their utility
supplier in a competitive electric energy market. The FERC issued a final rule
in April 1996 which requires utilities to offer wholesale customers and
suppliers open access on utility transmission lines, on a comparable basis to
the utilities' own use of the lines. The final rule is subject to rehearing and
may become the subject of court litigation. Many utilities have already filed
"open access" tariffs. The utilities contend that they should recover from
departing customers their fixed costs that will be "stranded" by the ability of
their wholesale customers (and perhaps eventually, their retail customers) to
choose new electric power suppliers. The FERC final rule endorses the recovery
of legitimate and verifiable "stranded costs." These may include the costs
utilities are required to pay under many QF contracts which the utilities view
as excessive when compared with current market prices. Many utilities are
therefore seeking ways to lower these contract prices or rescind the contracts
altogether, out of concern
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that their shareholders will be required to bear all or part of such "stranded"
costs. Some utilities have engaged in litigation against QFs to achieve these
ends.
In addition, future United States electric rates may be deregulated in a
restructured United States electric utility industry and increased competition
may result in lower rates and less profit for United States electricity sellers.
Falling electricity prices and uncertainty as to the future structure of the
industry is inhibiting United States utilities from entering into long-term
power purchase contracts. The effect of any such restructuring on the Company
cannot be predicted, although any such restructuring could have a material
adverse effect on the Company.
LITIGATION AND REGULATORY PROCEEDINGS
From time to time, the Company and its affiliates are parties to litigation and
regulatory proceedings. Investors should review the descriptions of such matters
contained in the Company's Annual, Quarterly and Current Reports filed with the
Commission and incorporated by reference herein. There can be no assurances that
the outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position.
BUSINESS SUBJECT TO STRINGENT ENVIRONMENTAL REGULATIONS
AES's activities are subject to stringent environmental regulation by federal,
state, local and foreign governmental authorities. For example, the Clean Air
Act Amendments of 1990 impose more stringent standards than those previously in
effect, and require states to impose permit fees on certain emissions. Congress
and other foreign governmental authorities also may consider proposals to
restrict or tax certain emissions. These proposals, if adopted, could impose
additional costs on the operation of AES's power plants. 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 domestic or
foreign environmental laws and regulations. The Company has made and will
continue to make capital and other expenditures to comply with environmental
laws and regulations. There can be no assurance that such expenditures will not
have a material adverse effect on the Company's financial condition or results
of operations.
CONTROL BY EXISTING STOCKHOLDERS
As of September 30, 1996, AES's two founders, Roger W. Sant and Dennis W. Bakke,
and their immediate families together owned beneficially approximately 26% of
AES's outstanding Common Stock. As a result of their ownership interests,
Messrs. Sant and Bakke may be able to significantly influence or exert control
over the affairs of AES, including the election of the Company's directors. As
of September 30, 1996, all of AES's officers and directors and their immediate
families together owned beneficially approximately 35% of AES's outstanding
Common Stock. To the extent that they decide to vote together, these
stockholders would be able to significantly influence or control the election of
AES's directors, the management and policies of AES and any action requiring
stockholder approval, including significant corporate transactions.
ADHERENCE TO AES'S PRINCIPLES -- POSSIBLE IMPACT ON RESULTS OF OPERATIONS
A core part of AES's corporate culture is a commitment to "shared principles":
to act with integrity, to be fair, to have fun and to be socially responsible.
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.
However, if the Company perceives a conflict between these principles and
profits, the Company will try to adhere to its principles -- even though doing
so might result in diminished or foregone opportunities or financial benefits.
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THE AES TRUSTS
Each of the AES Trust I, AES Trust II and AES Trust III is a statutory business
trust formed on November 1, 1996 under the Delaware Business Trust Act (the
"Business Trust Act") pursuant to a separate declaration of trust among the
Trustees (as defined herein) of such AES Trust and the Company and the filing of
a certificate of trust with the Secretary of State of the State of Delaware.
Such declaration will be amended and restated in its entirety (as so amended and
restated, the "Declaration") substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus forms a part, as of the date
the Preferred Securities of such AES Trust are initially issued. Each
Declaration will be qualified under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act").
This description summarizes the material terms of the Declarations and is
qualified in its entirety by reference to the form of Declaration, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part, and the Trust Indenture Act.
TRUST SECURITIES
Upon issuance of any Preferred Securities by an AES Trust, the holders thereof
will own all of the issued and outstanding Preferred Securities of such AES
Trust. The Company will acquire securities representing common undivided
beneficial interests in the assets of each AES Trust (the "Common Securities"
and, together with the Preferred Securities, the "Trust Securities") in an
amount equal to at least 3% of the total capital of such AES Trust and will own,
directly or indirectly, all of the issued and outstanding Common Securities of
each AES Trust. The Preferred Securities and the Common Securities will rank
pari passu with each other and will have equivalent terms; provided that (i) if
a Declaration Event of Default (as defined herein under "-- Events of Default")
under the Declaration of an AES Trust occurs and is continuing, the holders of
Preferred Securities of such AES Trust will have a priority over holders of the
Common Securities of such AES Trust with respect to payments in respect of
distributions and payments upon liquidation, redemption and maturity and (ii)
holders of Common Securities have the exclusive right (subject to the terms of
the Declaration) to appoint, remove or replace the Trustees and to increase or
decrease the number of Trustees. Each AES Trust exists for the purpose of (a)
issuing its Preferred Securities, (b) issuing its Common Securities to the
Company, (c) investing the gross proceeds from the sale of the Trust Securities
in Junior Subordinated Debt Trust Securities of the Company and (d) engaging in
only such other activities as are necessary, convenient or incidental thereto.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the applicable
Declaration, the Business Trust Act and the Trust Indenture Act.
POWERS AND DUTIES OF TRUSTEES
The number of trustees (the "Trustees") of each AES Trust shall initially be
five. Three of such Trustees (the "Regular Trustees") are individuals who are
employees or officers of the Company. The fourth such trustee will be The First
National Bank of Chicago, which is unaffiliated with the Company and which will
serve as the property trustee (the "Property Trustee") and act as the indenture
trustee for purposes of the Trust Indenture Act. The fifth such trustee is First
Chicago Delaware Inc. that has its principal place of business in the State of
Delaware (the "Delaware Trustee"). Pursuant to each Declaration, legal title to
the Junior Subordinated Debt Trust Securities purchased by an AES Trust will be
held by the Property Trustee for the benefit of the holders of the Trust
Securities of such AES Trust, and the Property Trustee will have the power to
exercise all rights, powers and privileges under the Indenture (as defined under
"Description of the Junior Subordinated Debt Trust Securities") with respect to
the Junior Subordinated Debt Trust Securities. In addition, the Property Trustee
will maintain exclusive control of a segregated non-interest bearing bank
account (the "Property Account") to hold all payments in respect of the Junior
Subordinated Debt Trust Securities purchased by an AES Trust for the benefit of
the holders of Trust Securities. The Property Trustee will promptly make
distributions to the holders of the Trust Securities out of funds from the
Property Account. The Preferred Securities Guarantees are separately qualified
under the Trust Indenture Act and will be held by The First National Bank of
Chicago, acting in its capacity as indenture trustee with respect thereto, for
the benefit of the holders of the applicable Preferred Securities. As used in
this Prospectus and any accompanying Prospectus Supplement, the term "Property
Trustee" with respect to an AES Trust refers to The First
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National Bank of Chicago acting either in its capacity as a Trustee under the
relevant Declaration and the holder of legal title to the Junior Subordinated
Debt Trust Securities purchased by that Trust or in its capacity as indenture
trustee under, and the holder of, the applicable Preferred Securities Guarantee,
as the context may require. The Company, as the direct or indirect owner of all
of the Common Securities of each AES Trust, will have the exclusive right
(subject to the terms of the related Declaration) to appoint, remove or replace
Trustees and to increase or decrease the number of Trustees, provided that the
number of Trustees shall be, except under certain circumstances, at least five
and the majority of Trustees shall be Regular Trustees. The term of an AES Trust
will be set forth in the Prospectus Supplement, but may terminate earlier as
provided in such Declaration.
The duties and obligations of the Trustees of an AES Trust shall be governed by
the Declaration of such AES Trust, the Business Trust Act and the Trust
Indenture Act. Under its Declaration, each AES Trust shall not, and the Trustees
shall cause such AES Trust not to, engage in any activity other than in
connection with the purposes of such AES Trust or other than as required or
authorized by the related Declaration. In particular, each AES Trust shall not
and the Trustees shall cause each AES Trust not to (a) invest any proceeds
received by such AES Trust from holding the Junior Subordinated Debt Trust
Securities purchased by such AES Trust but shall promptly distribute from the
Property Account all such proceeds to holders of Trust Securities pursuant to
the terms of the related Declaration and of the Trust Securities; (b) acquire
any assets other than as expressly provided in the related Declaration; (c)
possess Trust property for other than a Trust purpose; (d) make any loans, other
than loans represented by the Junior Subordinated Debt Trust Securities; (e)
possess any power or otherwise act in such a way as to vary the assets of such
AES Trust or the terms of its Trust Securities in any way whatsoever; (f) issue
any securities or other evidences of beneficial ownership of, or beneficial
interests in, such AES Trust other than its Trust Securities; (g) incur any
indebtedness for borrowed money or (h)(i) direct the time, method and place of
exercising any trust or power conferred upon the Indenture Trustee (as defined
under "Description of the Junior Subordinated Debt Trust Securities") with
respect to the Junior Subordinated Debt Trust Securities deposited in that AES
Trust as trust assets or upon the Property Trustee of that AES Trust with
respect to its Preferred Securities, (ii) waive any past default that is
waivable under the Indenture or the Declaration, (iii) exercise any right to
rescind or annul any declaration that the principal of all of the Junior
Subordinated Debt Trust Securities deposited in that AES Trust as trust assets
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Indenture or such Junior Subordinated Debt Trust Securities,
in each case where such consent shall be required, unless in the case of this
clause (h) the Property Trustee shall have received an unqualified opinion of
nationally recognized independent tax counsel recognized as expert in such
matters to the effect that such action will not cause such AES Trust to be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership and that such AES Trust will continue
to be classified as a grantor trust for United States federal income tax
purposes.
BOOKS AND RECORDS
The books and records of each AES Trust will be maintained at the principal
office of such AES Trust and will be open for inspection by a holder of
Preferred Securities of such AES Trust or his representative for any purpose
reasonably related to his interest in such AES Trust during normal business
hours.
VOTING
Holders of Preferred Securities will have limited voting rights, but will not be
able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the Common Securities.
THE PROPERTY TRUSTEE
The Property Trustee, for the benefit of the holders of the Trust Securities of
an AES Trust, is authorized under each Declaration to exercise all rights under
the Indenture with respect to the Junior Subordinated Debt Trust Securities
deposited in such AES Trust as trust assets, including its rights as the holder
of such Junior Subordinated Debt Trust Securities to enforce the Company's
obligations under such Junior Subordinated Debt Trust Securities upon the
occurrence of an Indenture Event of Default (as defined herein under
"Description of the Junior Subordinated Debt Trust Securities -- Indenture
Events of Default"). The Property Trustee shall also be authorized to enforce
the rights of holders of Preferred Securities of an AES Trust under the related
Preferred Securities Guarantee. If any
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AES Trust's failure to make distributions on the Preferred Securities of an AES
Trust is a consequence of the Company's exercise of any right under the terms of
the Junior Subordinated Debt Trust Securities deposited in such AES Trust as
trust assets to extend the interest payment period for such Junior Subordinated
Debt Trust Securities, the Property Trustee will have no right to enforce the
payment of distributions on such Preferred Securities until a Declaration Event
of Default shall have occurred. Holders of at least a majority in liquidation
amount of the Preferred Securities held by an AES Trust will have the right to
direct the Property Trustee for that AES Trust with respect to certain matters
under the Declaration for that AES Trust and the related Preferred Securities
Guarantee. If the Property Trustee fails to enforce its rights under the
Indenture or fails to enforce the Preferred Securities Guarantee, to the extent
permitted by applicable law, any holder of Preferred Securities may, after a
period of 30 days has elapsed from such Holder's written request to the Property
Trustee to enforce such rights, institute a legal proceeding against the Company
to enforce such rights or the Preferred Securities Guarantee, as the case may
be. In addition, the holders of at least 25% in aggregate liquidation preference
of the outstanding Preferred Securities would have the right to directly
institute proceedings for enforcement of payments to such holders of principal
of, or premium, if any, or interest on the Junior Subordinated Debt Trust
Securities having a principal amount equal to the aggregate liquidation
preference of the Preferred Securities of such holders (a "Direct Action"). In
connection with such Direct Action, the Company will be subrogated to the rights
of such holder of Preferred Securities under the Declaration to the extent of
any payment made by the Company to such holders of Preferred Securities in such
Direct Action. Notwithstanding the foregoing, if an Event of Default under the
applicable Declaration has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest or principal on the
applicable series of Junior Subordinated Debt Trust Securities on the date such
interest or principal is otherwise payable (or in the case of redemption, on the
redemption date), then a holder of Preferred Securities of such AES Trust may
directly institute a proceeding for enforcement of payment to such holder of the
principal of or interest on the applicable series of Junior Subordinated Debt
Trust Securities having a principal amount equal to the aggregate liquidation
amount of the Preferred Securities of such holder (a "Holder Direct Action") on
or after the respective due date specified in the applicable series of Junior
Subordinated Debt Trust Securities. In connection with such Holder Direct
Action, the Company will be subrogated to the rights of such holder of Preferred
Securities under the applicable Declaration to the extent of any payment made by
the Company to such holder of Preferred Securities in such Holder Direct Action.
DISTRIBUTIONS
Pursuant to each Declaration, distributions on the Preferred Securities of an
AES Trust must be paid on the dates payable to the extent that the Property
Trustee for that AES Trust has cash on hand in the applicable Property Account
to permit such payment. The funds available for distribution to the holders of
the Preferred Securities of an AES Trust will be limited to payments received by
the Property Trustee in respect of the Junior Subordinated Debt Trust Securities
that are deposited in the AES Trust as trust assets. If the Company does not
make interest payments on the Junior Subordinated Debt Trust Securities
deposited in an AES Trust as trust assets, the Property Trustee will not make
distributions on the Preferred Securities of such AES Trust. Under the
Declaration, if and to the extent the Company does make interest payments on the
Junior Subordinated Debt Trust Securities deposited in an AES Trust as trust
assets, the Property Trustee is obligated to make distributions on the Trust
Securities of such AES Trust on a Pro Rata Basis (as defined below). The payment
of distributions on the Preferred Securities of an AES Trust is guaranteed by
AES on a subordinated basis as and to the extent set forth under "Description of
the Preferred Securities Guarantee." A Preferred Securities Guarantee is a
guarantee from the time of issuance of the applicable Preferred Securities, but
the Preferred Securities Guarantee covers distributions and other payments on
the applicable Preferred Securities only if and to the extent that the Company
has made a payment to the Property Trustee of interest or principal on the
Junior Subordinated Debt Trust Securities deposited in the AES Trust as trust
assets. As used in this Prospectus, the term "Pro Rata Basis" shall mean pro
rata to each holder of Trust Securities of an AES Trust according to the
aggregate liquidation amount of the Trust Securities of such AES Trust held by
the relevant holder in relation to the aggregate liquidation amount of all Trust
Securities of such AES Trust outstanding unless, in relation to a payment, a
Declaration Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Preferred Securities of such AES Trust pro rata
according to the aggregate liquidation amount of the Preferred Securities held
by the relevant holder in relation to the aggregate liquidation amount of all
the Preferred Securities
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of such AES Trust outstanding, and only after satisfaction of all amounts owed
to the holders of such Preferred Securities, to each holder of Common Securities
of such AES Trust pro rata according to the aggregate liquidation amount of such
Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Common Securities of such AES Trust outstanding.
EVENTS OF DEFAULT
If an Indenture Event of Default occurs and is continuing with respect to Junior
Subordinated Debt Trust Securities deposited in an AES Trust as trust assets, an
Event of Default under the Declaration (a "Declaration Event of Default") of
such AES Trust will occur and be continuing with respect to any outstanding
Trust Securities of such AES Trust. In such event, each Declaration provides
that the holders of Common Securities of such AES Trust will be deemed to have
waived any such Declaration Event of Default with respect to the Common
Securities until all Declaration Events of Default with respect to the Preferred
Securities of such AES Trust have been cured or waived. Until all such
Declaration Events of Default with respect to the Preferred Securities of such
AES Trust have been so cured or waived, the Property Trustee will be deemed to
be acting solely on behalf of the holders of the Preferred Securities of such
AES Trust and only the holders of such Preferred Securities will have the right
to direct the Property Trustee with respect to certain matters under such
Declaration and consequently under the Indenture. In the event that any
Declaration Event of Default with respect to the Preferred Securities of such
AES Trust is waived by the holders of the Preferred Securities of such AES Trust
as provided in the Declaration, the holders of Common Securities pursuant to
such Declaration have agreed that such waiver also constitutes a waiver of such
Declaration Event of Default with respect to the Common Securities for all
purposes under the Declaration without any further act, vote or consent of the
holders of the Common Securities
RECORD HOLDERS
Each Declaration provides that the Trustees of such AES Trust may treat the
person in whose name a Certificate representing its Preferred Securities is
registered on the books and records of such AES Trust as the sole holder thereof
and of the Preferred Securities represented thereby for purposes of receiving
distributions and for all other purposes and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such certificate or in
the Preferred Securities represented thereby on the part of any person, whether
or not such AES Trust shall have actual or other notice thereof. Preferred
Securities will be issued in fully registered form. Unless otherwise specified
in a Prospectus Supplement, Preferred Securities will be represented by a global
certificate registered on the books and records of such AES Trust in the name of
a depositary (the "Depositary") named in an accompanying Prospectus Supplement
or its nominee. Under each Declaration:
(i) such AES Trust and the Trustees thereof shall be entitled to deal with
the Depositary (or any successor depositary) for all purposes, including
the payment of distributions and receiving approvals, votes or consents
under the related Declaration, and except as set forth in the related
Declaration with respect to the Property Trustee, shall have no obligation
to persons owning a beneficial interest in Preferred Securities ("Preferred
Security Beneficial Owners") registered in the name of and held by the
Depositary or its nominee; and
(ii) the rights of Preferred Security Beneficial Owners shall be exercised
only through the Depositary (or any successor depositary) and shall be
limited to those established by law and agreements between such Preferred
Security Beneficial Owners and the Depositary and/or its participants. With
respect to Preferred Securities registered in the name of and held by the
Depositary or its nominee, all notices and other communications required
under each Declaration shall be given to, and all distributions on such
Preferred Securities shall be given or made to, the Depositary (or its
successor).
The specific terms of the depositary arrangement with respect to the Preferred
Securities will be disclosed in the applicable Prospectus Supplement.
DEBTS AND OBLIGATIONS
In each Declaration, the Company has agreed to pay for all debts and obligations
(other than with respect to the Trust Securities) and all costs and expenses of
the applicable AES Trust, including the fees and expenses of its Trustees and
any taxes and all costs and expenses with respect thereto, to which such AES
Trust may become
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subject, except for United States withholding taxes. The foregoing obligations
of the Company under each Declaration are for the benefit of, and shall be
enforceable by, any person to whom any such debts, obligations, costs, expenses
and taxes are owed (a "Creditor") whether or not such Creditor has received
notice thereof. Any such Creditor may enforce such obligations of the Company
directly against the Company and the Company has irrevocably waived any right or
remedy to require that any such Creditor take any action against any AES Trust
or any other person before proceeding against the Company. The Company has
agreed in each Declaration to execute such additional agreements as may be
necessary or desirable in order to give full effect to the foregoing.
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DESCRIPTION OF THE PREFERRED SECURITIES
Each AES Trust may issue, from time to time, only one series of Preferred
Securities having terms described in the Prospectus Supplement relating thereto.
The Declaration of each AES Trust authorizes the Regular Trustees of such AES
Trust to issue on behalf of such AES Trust one series of Preferred Securities.
Each Declaration will be qualified as an indenture under the Trust Indenture
Act. The Preferred Securities will have such terms, including distributions,
redemption, voting, liquidation rights and such other preferred, deferred or
other special rights or such restrictions as shall be set forth in the related
Declaration or made part of such Declaration by the Trust Indenture Act.
Reference is made to the Prospectus Supplement relating to the Preferred
Securities of an AES Trust for specific terms, including (i) the specific
designation of such Preferred Securities, (ii) the number of Preferred
Securities issued by such AES Trust, (iii) the annual distribution rate (or
method of calculation thereof) for Preferred Securities issued by such AES
Trust, the date or dates upon which such distributions shall be payable and the
record date or dates for the payment of such distributions, (iv) whether
distributions on Preferred Securities issued by such AES Trust shall be
cumulative, and, in the case of Preferred Securities having such cumulative
distribution rights, the date or dates or method of determining the date or
dates from which distribution on Preferred Securities issued by such AES Trust
shall be cumulative, (v) the amount or amounts which shall be paid out of the
assets of such AES Trust to the holders of Preferred Securities of such AES
Trust upon voluntary or involuntary dissolution, winding-up or termination of
such AES Trust, (vi) the obligation or right, if any, of such AES Trust to
purchase or redeem Preferred Securities issued by such AES Trust and the price
or prices at which, the period or periods within which and the terms and
conditions upon which Preferred Securities issued by such AES Trust shall or may
be purchased or redeemed, in whole or in part, pursuant to such obligation or
right, (vii) the voting rights, if any, of Preferred Securities issued by such
AES Trust in addition to those required by law, including the number of votes
per Preferred Security and any requirement for the approval by the holders of
Preferred Securities, or of Preferred Securities issued by one or more AES
Trusts, or of both, as a condition to specified actions or amendments to the
Declaration of such AES Trust, (viii) terms for any conversion or exchange into
other securities and (ix) any other relevant rights, preferences, privileges,
limitations or restrictions of Preferred Securities issued by such AES Trust
consistent with the Declaration of such AES Trust or with applicable law. All
Preferred Securities offered hereby will be guaranteed by the Company as and to
the extent set forth below under "Description of the Preferred Securities
Guarantees." Certain United States federal income tax considerations applicable
to any offering of Preferred Securities will be described in the Prospectus
Supplement relating thereto.
In connection with the issuance of Preferred Securities, each AES Trust will
issue one series of Common Securities. The Declaration of each AES Trust
authorizes the Regular Trustees of such trust to issue on behalf of such AES
Trust one series of Common Securities having such terms including distributions,
redemption, voting, liquidation rights or such restrictions as shall be set
forth therein. The terms of the Common Securities issued by an AES Trust will be
substantially identical to the terms of the Preferred Securities issued by such
AES Trust and the Common Securities will rank pari passu, and payments will be
made thereon on a Pro Rata Basis with the Preferred Securities except that if a
Declaration Event of Default occurs and is continuing, the rights of the holders
of such Common Securities to payment in respect of distributions and payments
upon liquidation, redemption and maturity will be subordinated to the rights of
the holders of such Preferred Securities. Except in certain limited
circumstances, the Common Securities issued by an AES Trust will also carry the
right to vote and to appoint, remove or replace any of the Trustees of that AES
Trust. All of the Common Securities of an AES Trust will be directly or
indirectly owned by the Company.
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DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEES
Set forth below is a summary of information concerning the Preferred Securities
Guarantees that will be executed and delivered by the Company for the benefit of
the holders from time to time of Preferred Securities. Each Preferred Security
Guarantee will be separately qualified under the Trust Indenture Act and will be
held by The First National Bank of Chicago, acting in its capacity as indenture
trustee with respect thereto, for the benefit of holders of the Preferred
Securities of the applicable AES Trust. The terms of each Preferred Securities
Guarantee will be those set forth in such Preferred Securities Guarantee and
those made part of such Guarantee by the Trust Indenture Act. This description
summarizes the material terms of the Preferred Securities Guarantees and is
qualified in its entirety by reference to the form of Preferred Securities
Guarantee, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part, and the Trust Indenture Act. Section and Article
references used herein are references to the provisions of the form of Preferred
Securities Guarantee.
GENERAL
Pursuant to each Preferred Securities Guarantee, the Company will irrevocably
and unconditionally agree, to the extent set forth therein, to pay in full, to
the holders of the Preferred Securities issued by an AES Trust, the Guarantee
Payments (as defined herein) (without duplication of amounts theretofore paid by
such AES Trust), to the extent not paid by such AES Trust, regardless of any
defense, right of set-off or counterclaim that such AES Trust may have or
assert. The following payments or distributions with respect to Preferred
Securities issued by an AES Trust to the extent not paid or made by such AES
Trust (the "Guarantee Payments"), will be subject to the Preferred Securities
Guarantee (without duplication): (i) any accrued and unpaid distributions on
such Preferred Securities, and the redemption price, including all accrued and
unpaid distributions to the date of redemption, with respect to any Preferred
Securities called for redemption by such AES Trust but if and only to the extent
that in each case the Company has made a payment to the related Property Trustee
of interest or principal on the Junior Subordinated Debt Trust Securities
deposited in such AES Trust as trust assets and (ii) upon a voluntary or
involuntary dissolution, winding-up or termination of such AES Trust (other than
in connection with the distribution of such Junior Subordinated Debt Trust
Securities to the holders of Preferred Securities or the redemption of all of
the Preferred Securities upon the maturity or redemption of such Junior
Subordinated Debt Trust Securities) the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on such Preferred
Securities to the date of payment, to the extent such AES Trust has funds
available therefor or (b) the amount of assets of such AES Trust remaining
available for distribution to holders of such Preferred Securities in
liquidation of such AES Trust. The Company's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Company to the holders of Preferred Securities or by causing the applicable AES
Trust to pay such amounts to such holders.
The Preferred Securities Guarantee is a guarantee from the time of issuance of
the applicable Preferred Securities, but the Preferred Securities Guarantee
covers distributions and other payments on such Preferred Securities only if and
to the extent that the Company has made a payment to the Property Trustee of
interest or principal on the Junior Subordinated Debt Trust Securities deposited
in the applicable AES Trust as trust assets. If the Company does not make
interest or principal payments on the Junior Subordinated Debt Trust Securities
deposited in the applicable AES Trust as trust assets, the Property Trustee will
not make distributions of the Preferred Securities of such AES Trust and the AES
Trust will not have funds available therefor.
The Company's obligations under the Declaration for each Trust, the Preferred
Securities Guarantee issued with respect to Preferred Securities issued by that
Trust, the Junior Subordinated Debt Trust Securities purchased by that Trust and
the related Indenture (as defined below) in the aggregate will provide a full
and unconditional guarantee on a subordinated basis by the Company of payments
due on the Preferred Securities issued by that Trust.
CERTAIN COVENANTS OF THE COMPANY
In each Preferred Securities Guarantee, the Company will covenant that, so long
as any Preferred Securities issued by the applicable AES Trust remain
outstanding, the Company will not (A) declare or pay any dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payment with respect thereto or (B) make any payment of interest, premium
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<PAGE> 95
(if any) or principal on any debt securities issued by the Company which rank
pari passu with or junior to the Junior Subordinated Debt Trust Securities, if
at such time (i) the Company shall be in default with respect to its Guarantee
Payments or other payment obligations under the Preferred Securities Guarantee,
(ii) there shall have occurred any Declaration Event of Default under the
related Declaration or (iii) in the event that Junior Subordinated Debt Trust
Securities are issued to an AES Trust in connection with the issuance of Trust
Securities by such AES Trust, the Company shall have given notice of its
election to defer payments of interest on such Junior Subordinated Debt Trust
Securities by extending the interest payment period as provided in the terms of
the Junior Subordinated Debt Trust Securities and such period, or any extension
thereof, is continuing: provided that the foregoing will not apply to stock
dividends paid by the Company in its Common Stock. In addition, so long as any
Preferred Securities remain outstanding, the Company has agreed (i) to remain
the sole direct or indirect owner of all of the outstanding Common Securities
issued by the applicable AES Trust and shall not cause or permit the Common
Securities to be transferred except to the extent permitted by the related
Declaration; provided that any permitted successor of the Company under the
Indenture may succeed to the Company's ownership of the Common Securities issued
by the applicable AES Trust and (ii) to use reasonable efforts to cause such AES
Trust to continue to be treated as a grantor trust for United States federal
income tax purposes except in connection with a distribution of Junior
Subordinated Debt Trust Securities.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of Preferred Securities (in which case no consent will be required),
each Preferred Securities Guarantee may be amended only with the prior approval
of the holders of not less than a majority in liquidation amount of the
outstanding Preferred Securities issued by the applicable AES Trust. The manner
of obtaining any such approval of holders of such Preferred Securities will be
set forth in an accompanying Prospectus Supplement. All guarantees and
agreements contained in a Preferred Securities Guarantee shall bind the
successors, assignees, receivers, trustees and representatives of the Company
and shall inure to the benefit of the holders of the Preferred Securities of the
applicable AES Trust then outstanding. Except in connection with a
consolidation, merger or sale involving the Company that is permitted under the
Indenture, the Company may not assign its obligations under any Preferred
Securities Guarantee.
TERMINATION OF THE PREFERRED SECURITIES GUARANTEES
Each Preferred Securities Guarantee will terminate and be of no further force
and effect as to the Preferred Securities issued by the applicable AES Trust
upon full payment of the redemption price of all Preferred Securities of such
AES Trust, or upon distribution of the Junior Subordinated Debt Trust Securities
to the holders of the Preferred Securities of such AES Trust in exchange for all
of the Preferred Securities issued by such AES Trust, or upon full payment of
the amounts payable upon liquidation of such AES Trust. Notwithstanding the
foregoing, each Preferred Securities Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Preferred
Securities issued by the applicable AES Trust must restore payment of any sums
paid under such Preferred Securities or such Guarantee.
STATUS OF THE PREFERRED SECURITIES GUARANTEES
The Company's obligations under each Preferred Securities Guarantee to make the
Guarantee Payments will constitute an unsecured obligation of the Company and
will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company, including the Junior Subordinated Debt Trust
Securities, except those made pari passu or subordinate by their terms, and pari
passu in right of payment with the most senior preferred stock issued, from time
to time, if any, by the Company. The Company's obligations under each Preferred
Securities Guarantee will rank pari passu with each other Preferred Securities
Guarantee. Because the Company is a holding company, the Company's obligations
under each Preferred Securities Guarantee are also effectively subordinated to
all existing and future liabilities, including trade payables, of the Company's
subsidiaries, except to the extent that the Company is a creditor of the
subsidiaries recognized as such. Each Declaration provides that each holder of
Preferred Securities issued by the applicable AES Trust by acceptance thereof
agrees to the subordination provisions and other terms of the related Preferred
Securities Guarantee.
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Each Preferred Securities Guarantee will constitute a guarantee of payment and
not of collection (that is, the guaranteed party may institute a legal
proceeding directly against the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity). Each Preferred Securities Guarantee will be deposited with The First
National Bank of Chicago, as indenture trustee, to be held for the benefit of
the holders of the Preferred Securities issued by the applicable AES Trust. The
First National Bank of Chicago shall enforce the Preferred Securities Guarantee
on behalf of the holders of the Preferred Securities issued by the applicable
AES Trust. The holders of not less than a majority in aggregate liquidation
amount of the Preferred Securities issued by the applicable AES Trust have the
right to direct the time, method and place of conducting any proceeding for any
remedy available in respect of the related Preferred Securities Guarantee,
including the giving of directions to The First National Bank of Chicago . If
The First National Bank of Chicago fails to enforce such Preferred Securities
Guarantee as above provided, any holder of Preferred Securities issued by the
applicable AES Trust may institute a legal proceeding directly against the
Company to enforce its rights under such Preferred Securities Guarantee, without
first instituting a legal proceeding against the applicable AES Trust or any
other person or entity. Notwithstanding the foregoing, if the Company has failed
to make a guarantee payment, a holder of Preferred Securities may directly
institute a proceeding against the Company for enforcement of the Preferred
Securities Guarantee for such payment.
MISCELLANEOUS
The Company will be required to provide annually to The First National Bank of
Chicago a statement as to the performance by the Company of certain of its
obligations under the Preferred Securities Guarantees and as to any default in
such performance. The Company is required to file annually with The First
National Bank of Chicago an officer's certificate as to the Company's compliance
with all conditions under Preferred Securities Guarantees.
The First National Bank of Chicago, prior to the occurrence of a default,
undertakes to perform only such duties as are specifically set forth in the
applicable Preferred Securities Guarantee and, after default with respect to a
Preferred Securities Guarantee, shall exercise the same degree of care as a
prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, The First National Bank of Chicago is under no
obligation to exercise any of the powers vested in it by a Preferred Securities
Guarantee at the request of any holder of Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
GOVERNING LAW
The Guarantees will be governed by, and construed in accordance with, the laws
of the State of New York.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBT TRUST SECURITIES
Junior Subordinated Debt Trust Securities may be issued from time to time in one
or more series under an Indenture (the "Indenture") between the Company and The
First National Bank of Chicago, as trustee (the "Indenture Trustee"). The form
of Junior Subordinated Debt Trust Securities Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following description summarizes the material terms of the Indenture, and is
qualified in its entirety by reference to the Indenture and the Trust Indenture
Act. Whenever particular provisions or defined terms in the Indenture are
referred to herein, such provisions or defined terms are incorporated by
reference herein. Section and article references used herein are references to
provisions of the Indenture.
GENERAL
The Junior Subordinated Debt Trust Securities will be unsecured, junior
subordinated obligation of the Company. The Indenture does not limit the amount
of additional indebtedness the Company or any of its subsidiaries may incur.
Since the Company is a holding company, the Company's rights and the rights of
its creditors, including the holders of Junior Subordinated Debt Securities, to
participate in the assets of any subsidiary upon the latter's liquidation or
recapitalization will be subject to the prior claims of the subsidiary's
creditors, except to the extent that the Company may itself be a creditor with
recognized claims against the subsidiary.
The Indenture does not limit the aggregate principal amount of indebtedness
which may be issued thereunder and provides that Junior Subordinated Debt Trust
Securities may be issued thereunder from time to time in one or more series. The
Junior Subordinated Debt Trust Securities are issuable in one or more series
pursuant to an indenture supplemental to the Indenture.
In the event Junior Subordinated Debt Trust Securities are issued to an AES
Trust or a Trustee of such trust in connection with the issuance of Trust
Securities by such AES Trust, such Junior Subordinated Debt Trust Securities
subsequently may be distributed pro rata to the holders of such Trust Securities
in connection with the dissolution of such AES Trust upon the occurrence of
certain events described in the Prospectus Supplement relating to such Trust
Securities. Only one series of Junior Subordinated Debt Trust Securities will be
issued to an AES Trust or a trustee of such trust in connection with the
issuance of Trust Securities by such AES Trust.
Reference is made to the Prospectus Supplement which will accompany this
Prospectus for the following terms of the series of Junior Subordinated Debt
Trust Securities being offered thereby (to the extent such terms are applicable
to the Junior Subordinated Debt Trust Securities): (i) the specific designation
of such Junior Subordinated Debt Trust Securities, aggregate principal amount,
purchase price and premium, if any; (ii) any limit on the aggregate principal
amount of such Junior Subordinated Debt Trust Securities; (iii) the date or
dates on which the principal of such Junior Subordinated Debt Trust Securities
is payable and the right, to extend or defer such date or dates; (iv) the rate
or rates at which such Junior Subordinated Debt Trust Securities will bear
interest or the method of calculating such rate or rates, if any; (v) the date
or dates from which such interest shall accrue, the interest payment dates on
which such interest will be payable or the manner of determination of such
interest payment dates and the record dates for the determination of holders to
whom interest is payable on any such interest payment dates; (vi) the right, if
any, to extend the interest payment periods and the duration of such extension;
(vii) the period or periods within which, the price or prices at which, and the
terms and conditions upon which, such Junior Subordinated Debt Trust Securities
may be redeemed, in whole or in part, at the option of the Company; (viii) the
obligation, if any of the Company to redeem or purchase such Junior Subordinated
Debt Trust Securities pursuant to any sinking fund or analogous provisions or at
the option of the holder thereof and the period or periods for which, the price
or prices at which, and the terms and conditions upon which, such Junior
Subordinated Debt Trust Securities shall be redeemed or purchased, in whole or
part, pursuant to such obligation; (ix) any exchangeability, conversion or
prepayment provisions of the Junior Subordinated Debt Trust Securities; (x) any
applicable United States federal income tax consequences, including whether and
under what circumstances the Company will pay additional amounts on the Junior
Subordinated Debt Trust Securities held by a person who is not a U.S. person in
respect of any tax, assessment or governmental charge withheld or deducted and,
if so, whether the Company will have the option to redeem such Junior
Subordinated Debt Trust Securities rather than pay such additional amounts; (xi)
the form of such Junior Subordinated Debt Trust Securities; (xii) if other than
denominations
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of $25 or any integral multiple thereof, the denominations in which such Junior
Subordinated Debt Trust Securities shall be issuable; (xiii) any and all other
terms with respect to such series, including any modification of or additions to
the events of default or covenants provided for with respect to such series,
including any modification of or additions to the events of default or covenants
provided for with respect to the Junior Subordinated Debt Trust Securities, and
any terms which may be required by or advisable under applicable laws or
regulations not inconsistent with the Indenture; and (xiv) whether such Junior
Subordinated Debt Trust Securities are issuable as a global security, and in
such case, the identity of the depositary. (Section 2.01)
Unless otherwise indicated in the Prospectus Supplement relating thereto, the
Junior Subordinated Debt Trust Securities will be issued in United States
dollars in fully registered form without coupons in denominations of $50 or
integral multiples thereof. Junior Subordinated Debt Trust Securities may be
presented for exchange and Junior Subordinated Debt Trust Securities in
registered form may be presented for transfer in the manner, at the places and
subject to the restrictions set forth in the Junior Subordinated Debt Trust
Securities and the Prospectus Supplement. Such services will be provided without
charge, other than any tax or other governmental charge payable in connection
therewith, but subject to the limitations provided in the Junior Subordinated
Debt Trust Securities. Junior Subordinated Debt Trust Securities in bearer form
and the coupons, if any, appertaining thereto will be transferable by delivery.
Junior Subordinated Debt Trust Securities may bear interest at a fixed rate or a
floating rate. Junior Subordinated Debt Trust Securities bearing no interest or
interest at a rate that at the time of issuance is below the prevailing market
rate will be sold at a discount below their stated principal amount. Special
United States federal income tax considerations applicable to any such
discounted Junior Subordinated Debt Trust Securities or to certain Junior
Subordinated Debt Trust Securities issued at par which are treated as having
been issued at a discount for United States federal income tax purposes will be
described in the relevant Prospectus Supplement.
CERTAIN COVENANTS OF THE COMPANY APPLICABLE TO THE JUNIOR SUBORDINATED DEBT
SECURITIES
If Junior Subordinated Debt Trust Securities are issued to an AES Trust in
connection with the issuance of Trust Securities by such AES Trust, the Company
will covenant in the Indenture that, so long as the Preferred Securities issued
by the applicable AES Trust remain outstanding, the Company will not declare or
pay any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its common stock or preferred stock
or make any guarantee payment with respect to, any of its common stock or
preferred stock or make any guarantee payment with respect thereto if at such
time (i) the Company shall be in default with respect to its Guarantee Payments
or other payment obligations under the related Preferred Securities Guarantee,
(ii) there shall have occurred any Indenture Event of Default with respect to
the Junior Subordinated Debt Trust Securities or (iii) in the event that Junior
Subordinated Debt Trust Securities are issued to an AES Trust in connection with
the issuance of Trust Securities by such AES Trust, the Company shall have given
notice of its election to defer payments of interest on such Junior Subordinated
Debt Trust Securities by extending the interest payment period as provided in
the terms of such Junior Subordinated Debt Trust Securities and such period, or
any extension thereof, is continuing; provided that (x) the Company will be
permitted to pay accrued dividends (and cash in lieu of fractional shares) upon
the conversion of any Preferred Stock of the Company as may be outstanding from
time to time, in each case in accordance with the terms of such stock and (y)
the foregoing will not apply to any stock dividends paid by the Company. In
addition, if Junior Subordinated Debt Trust Securities are issued to an AES
Trust in connection with the issuance of Trust Securities by such AES Trust, for
so long as the Preferred Securities issued by the applicable AES Trust remain
outstanding, the Company has agreed (i) to remain the sole direct or indirect
owner of all of the outstanding Common Securities issued by the applicable AES
Trust and not to cause or permit the Common Securities to be transferred except
to the extent permitted by the related Declaration; provided that any permitted
successor of the Company under the Indenture may succeed to the Company's
ownership of the Common Securities issued by the applicable AES Trust, (ii) to
comply fully with all of its obligations and agreements contained in the related
Declaration and (iii) not to take any action which would cause the applicable
AES Trust to cease to be treated as a grantor trust for United States federal
income tax purposes, except in connection with a distribution of Junior
Subordinated Debt Trust Securities.
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SUBORDINATION
The payment of principal of, premium, if any, and interest on the Junior
Subordinated Trust Securities will, to the extent and in the manner set forth in
the Indenture, be subordinated in right of payment to the prior payment in full,
in cash or cash equivalents, of all Senior and Subordinated Debt of the Company.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, receivership, reorganization, assignment for the
benefit of creditors, marshalling of assets and liabilities or any bankruptcy,
insolvency or similar proceedings of the Company, the holders of all Senior and
Subordinated Debt will first be entitled to receive payment in full of all
amounts due or to become due thereon before the holders of the Junior
Subordinated Debt Trust Securities will be entitled to receive any payment in
respect of the principal of, premium, if any, or interest on the Junior
Subordinated Debt Trust Securities.
No payments on account of principal, premium, if any, or interest in respect of
the Junior Subordinated Debt Trust Securities may be made by the Company if
there shall have occurred and be continuing a default in any payment with
respect to Senior and Subordinated Debt or during certain periods when an event
of default under certain Senior and Subordinated Debt permits the lenders
thereunder to accelerate the maturity of such Senior and Subordinated Debt. In
addition, during the continuance of any other event of default (other than a
payment default) with respect to Designated Senior and Subordinated Debt
pursuant to which the maturity thereof may be accelerated, from and after the
date of receipt by the Trustee of written notice from holders of such Designated
Senior and Subordinated Debt or from an agent of such holders, no payments on
account of principal, premium, if any, or interest in respect of the Junior
Subordinated Debt Trust Securities may be made by the Company during a period
(the "Payment Blockage Period") commencing on the date of delivery of such
notice and ending 179 days thereafter (unless such Payment Blockage Period shall
be terminated by written notice to the Trustee from the holders of such
Designated Senior and Subordinated Debt or from an agent of such holders, or
such event of default has been cured or waived or has ceased to exist). Only one
Payment Blockage Period may be commenced with respect to the Junior Subordinated
Debt Trust Securities during any period of 360 consecutive days. No event of
default which existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior and Subordinated
Debt initiating such Payment Blockage Period shall be or be made the basis for
the commencement of any subsequent Payment Blockage Period by the holders of
such Designated Senior and Subordinated Debt, unless such event of default shall
have been cured or waived for a period of not less than 90 consecutive days.
By reason of such subordination, in the event of insolvency, funds that would
otherwise be payable to holders of Junior Subordinated Debt Trust Securities
will be paid to the holders of Senior and Subordinated Debt of the Company to
the extent necessary to pay such Debt in full, and the Company may be unable to
meet fully its obligations with respect to the Junior Subordinated Debt Trust
Securities.
"Debt" is defined to mean, with respect to any person at any date of
determination (without duplication), (i) all indebtedness of such person for
borrowed money, (ii) all obligations of such person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
person in respect of letters of credit or bankers' acceptance or other similar
instruments (or reimbursement obligations with respect thereto), (iv) all
obligations of such person to pay the deferred purchase price of property or
services, except trade payables, (v) all obligations of such person as lessee
under capitalized leases, (vi) all Debt of others secured by a lien on any asset
of such person, whether or not such Debt is assumed by such person; provided
that, for purposes of determining the amount of any Debt of the type described
in this clause, if recourse with respect to such Debt is limited to such asset,
the amount of such Debt shall be limited to the lesser of the fair market value
of such asset or the amount of such Debt, (vii) all Debt of others guaranteed by
such person to the extent such Debt is guaranteed by such person, (viii) all
redeemable stock valued at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends and (ix) to the extent
not otherwise included in this definition, all obligations of such person under
currency agreements and interest rate agreements.
"Designated Senior and Subordinated Debt" is defined to mean (i) Debt under the
Credit Agreement dated as of May 20, 1996 (the "Credit Agreement") among the
Company, the Banks named on the signature pages thereof and the Morgan Guaranty
Trust Company of New York, as agent for the banks, as such Credit Agreement has
been and may be amended, restated, supplemented or otherwise modified from time
to time and (ii) Debt constituting Senior
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and Subordinated Debt which, at the time of its determination, (A) has an
aggregate principal amount of at least $30 million and (B) is specifically
designated in the instrument evidencing such Senior and Subordinated Debt as
"Designated Senior and Subordinated Debt" by the Company.
"Senior and Subordinated Debt" is defined to mean the principal of (and premium,
if any) and interest on all Debt of the Company whether created, incurred or
assumed before, on or after the date of the Indenture; provided that such Senior
and Subordinated Debt shall not include (i) Debt of the Company to any
Affiliate, (ii) Debt of the Company that, when incurred and without respect to
any election under Section 1111(b) of Title 11, U.S. Code, was without recourse,
(iii) any other Debt of the Company which by the terms of the instrument
creating or evidencing the same are specifically designated as not being senior
in right of payment to the Junior Subordinated Debt Trust Securities, and in
particular the Junior Subordinated Debt Trust Securities shall rank pari passu
with all other debt securities and guarantees issued to any trust, partnership
or other entity affiliated with the Company which is a financing vehicle of the
Company in connection with an issuance of preferred securities by such financing
entity, and (iv) redeemable stock of the Company.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described events,
which has occurred and is continuing, constitutes an "Indenture Event of
Default" with respect to each series of Junior Subordinated Debt Securities:
(a) failure for 30 days to pay interest on the Junior Subordinated Debt
Trust Securities of such series when due; provided that a valid
extension of the interest payment period by the Company shall not
constitute a default in the payment of interest for this purpose;
(b) failure to pay principal of or premium, if any, on the Junior
Subordinated Debt Trust Securities of such series when due whether at
maturity, upon redemption, by declaration or otherwise;
(c) failure to observe or perform any other covenant contained in the
Indenture with respect to such series for 90 days after written notice
to the Company from the Indenture Trustee or the holders of at least
25% in principal amount of the outstanding Junior Subordinated Debt
Trust Securities of such series; or
(d) certain events in bankruptcy, insolvency or reorganization of the
Company.
In each and every such case, unless the principal of all the Junior Subordinated
Debt Trust Securities of that series shall have already become due and payable,
either the Indenture Trustee or the holders of not less than 25% in aggregate
principal amount of the Junior Subordinated Debt Trust Securities of that series
then outstanding, by notice in writing to the Company (and to the Indenture
Trustee if given by such holders), may declare the principal of all the Junior
Subordinated Debt Trust Securities of that series to be due and payable
immediately, and upon any such declaration the same shall become and shall be
immediately due and payable. (Section 6.01)
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debt Trust Securities of that series have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee. (Section 6.06) The Indenture Trustee or the
holders of not less than 25% in aggregate outstanding principal amount of the
Junior Subordinated Debt Trust Securities of that series may declare the
principal due and payable immediately upon an Indenture Event of Default with
respect to such series, but the holders of a majority in aggregate outstanding
principal amount of Junior Subordinated Debt Trust Securities of such series may
annul such declaration and waive the default if the default has been cured and a
sum sufficient to pay all matured installments of interest and principal
otherwise than by acceleration and any premium has been deposited with the
Indenture Trustee. (Sections 6.01 and 6.06)
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debt Trust Securities of that series may, on behalf of the
holders of all the Junior Subordinated Debt Trust Securities of that series,
waive any past default, except a default in the payment of principal, premium,
if any, or interest (unless such default has been cured and a sum sufficient to
pay all matured installments of interest and principal otherwise than by
acceleration and any premium has been deposited with the Indenture Trustee) or a
call for redemption of Junior Subordinated Debt Trust Securities. (Section 6.06)
The Company is required to file annually with the
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Indenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants under the Indenture. (Section
5.03)
If Junior Subordinated Debt Trust Securities are issued to an AES Trust in
connection with the issuance of Trust Securities of such AES Trust, then under
the applicable Declaration an Indenture Event of Default with respect to such
series of Junior Subordinated Debt Trust Securities will constitute a
Declaration Event of Default.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of the outstanding Junior Subordinated Debt Trust Securities of
each series affected, to modify the Indenture or any supplemental indenture
affecting the rights of the holders of such Junior Subordinated Debt Securities;
provided that no such modification may, without the consent of the holder of
each outstanding Junior Subordinated Debt Trust Security affected thereby, (i)
extend the fixed maturity of any Junior Subordinated Debt Trust Securities of
any series, reduce the principal amount thereof, reduce the rate or extent the
time of payment of interest thereon, reduce any premium payable upon the
redemption thereof, without the consent of the holder of each Junior
Subordinated Debt Trust Security so affected or (ii) reduce the percentage of
Junior Subordinated Debt Trust Securities, the holders of which are required to
consent to any such modification, without the consent of the holders of each
Junior Subordinated Debt Trust Security then outstanding and affected thereby.
(Section 9.02)
BOOK-ENTRY AND SETTLEMENT
If any Junior Subordinated Debt Trust Securities of a series are represented by
one or more global securities (each, a "Global Security"), the applicable
Prospectus Supplement will describe the circumstances, if any, under which
beneficial owners of interests in any such Global Security may exchange such
interests for Junior Subordinated Debt Trust Securities of such series and of
like tenor and principal amount in any authorized form and denomination.
Principal of and any premium and interest on a Global Security will be payable
in the manner described in the applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any portion of
a series of Junior Subordinated Debt Trust Securities to be represented by a
Global Security will be described in the applicable Prospectus Supplement.
CONSOLIDATION, MERGER AND SALE
The Indenture will provide that the Company may not consolidate with or merge
into any other person or transfer or lease its properties and assets
substantially as an entirety to any person and may not permit any person to
merge into or consolidate with the Company unless (i) either the Company will be
the resulting or surviving entity or any successor or purchaser is a corporation
organized under the laws of the United States of America, any State or the
District of Columbia, and any such successor or purchaser expressly assumes the
Company's obligations under the Indenture and (ii) immediately after giving
effect to the transaction no Event of Default shall have occurred and be
continuing. (Section 10.01)
DEFEASANCE AND DISCHARGE
Under the terms of the Indenture, the Company will be discharged from any and
all obligations in respect of the Junior Subordinated Debt Trust Securities of a
series (except in each case for certain obligations to register the transfer or
exchange of such Junior Subordinated Debt Trust Securities, replace stolen, lost
or mutilated Junior Subordinated Debt Trust Securities of that series, maintain
paying agencies and hold moneys for payment in trust) if (i) the Company
irrevocably deposits with the Indenture Trustee cash or U.S. Government
Obligations, as trust funds in an amount certified to be sufficient to pay at
maturity (or upon redemption) the principal of, premium, if any, and interest on
all outstanding Junior Subordinated Debt Trust Securities of such series; (ii)
such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which the Company is a party or by
which it is bound; (iii) the Company delivers to the Indenture Trustee an
opinion of counsel to the effect that the holders of the Junior Subordinated
Debt Trust Securities of such series will not recognize income, gain or loss for
United States federal income tax purposes as a result of such defeasance and
that
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defeasance will not otherwise alter holders' United States federal income tax
treatment of principal, premium and interest payments on such Junior
Subordinated Debt Trust Securities of such series (such opinion must be based on
a ruling of the Internal Revenue Service or a change in United States federal
income tax law occurring after the date of such Junior Subordinated Debt Trust
Securities Indenture, since such a result would not occur under current tax
law); (iv) the Company has delivered to the Indenture Trustee an Officer's
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the defeasance contemplated by such provision
have been complied with; and (v) no event or condition shall exist that,
pursuant to the subordination provisions applicable to such series, would
prevent the Company from making payments of principal of, premium, if any, and
interest on the Junior Subordinated Debt Trust Securities of such series at the
date of the irrevocable deposit referred to above. (Section 11.01)
GOVERNING LAW
The Indenture and the Junior Subordinated Debt Trust Securities will be governed
by the laws of the State of New York. (Section 13.05)
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, undertakes to perform only such duties
as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. (Section 7.01) Subject to such provision, the
Indenture Trustee is under no obligation to exercise any of the powers vested in
it by the Junior Subordinated Debt Trust Securities Indenture at the request of
any holder of Junior Subordinated Debt Trust Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
that might be incurred thereby. (Section 7.02) The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it. (Section
7.01)
The Company and its subsidiaries maintain ordinary banking and trust
relationships with The First National Bank of Chicago and its affiliates.
MISCELLANEOUS
The Company will have the right at all times to assign any of its rights or
obligations under the Indenture to a direct or indirect wholly-owned subsidiary
of the Company; provided that, in the event of any such assignment, the Company
will remain jointly and severally liable for all such obligations. Subject to
the foregoing, the Indenture will be binding upon and inure to the benefit of
the parties thereto and their respective successors and assigns. The Indenture
provides that it may not otherwise be assigned by the parties thereto other than
by the Company to a successor or purchaser pursuant to a consolidation, merger
or sale permitted by the Indenture. (Section 13.11)
PLAN OF DISTRIBUTION
The Company may sell any series of Junior Subordinated Debt Trust Securities and
the AES Trusts may sell the Preferred Securities being offered hereby in any of
three ways (or in any combination thereof): (i) through underwriters or dealers;
(ii) directly to a limited number of purchasers or to a single purchaser; or
(iii) through agents. The Prospectus Supplement with respect to any Offered
Securities will set forth the terms of the offering of such Offered Securities,
including the name or names of any underwriters, dealers or agents and the
respective amounts of such Offered Securities underwritten or purchased by each
of them, the initial public offering price of such Offered Securities and the
proceeds to the Company from such sale, any discounts, commissions or other
items constituting compensation from the Company and any discounts, commissions
or concessions allowed or reallowed or paid to dealers and any securities
exchanges on which such Offered Securities may be listed. Any public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
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If underwriters are used in the sale of any Offered Securities, such Offered
Securities will be acquired by the underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Such Offered Securities may be either offered to the public
through underwriting syndicates represented by managing underwriters, or
directly by underwriters. Unless otherwise set forth in the Prospectus
Supplement, the obligations of the underwriters to purchase such Offered
Securities will be subject to certain conditions precedent and the underwriters
will be obligated to purchase all of such Offered Securities if any are
purchased.
Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer or
sale of Offered Securities in respect of which this Prospectus is delivered will
be named, and any commissions payable by the Company to such agent will be set
forth, in the Prospectus Supplement. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis for
the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain purchasers to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts.
Agents and underwriters may be entitled under agreements entered into with the
Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may be customers of, engage in transactions
with, or perform services for the Company in the ordinary course of business.
LEGAL MATTERS
Unless otherwise indicated in the applicable Prospectus Supplement, certain
matters of Delaware law relating to the validity of the Preferred Securities
will be passed upon by Richards, Layton & Finger, Wilmington. The legality of
the Junior Subordinated Debt Trust Securities and the Preferred Securities
offered hereby will be passed upon for the Company by Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from the Company's Registration Statement on Form S-3 filed on June
12, 1996, and the consolidated financial statement schedules incorporated in
this Prospectus by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated by
reference herein and such consolidated financial statements and consolidated
financial statement schedules have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Light Servicos de Electicidade S.A. incorporated in
this Prospectus by reference, from Form 8-K of The AES Corporation dated May 30,
1996, for the years ended December 31, 1995 and 1994 have been audited by
Deloitte Touche Tohmatsu, Rio de Janeiro, Brazil, independent auditors, as
stated in their reports, which are incorporated herein by reference, and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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