<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19281
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
54-1163725
(IRS Employer Identification No.)
1001 North 19th Street
Arlington, Virginia 22209
(Address of principal executive office)
Telephone Number (703) 522-1315
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No/ /
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on October 15, 1996, was 77,104,441.
<PAGE>
THE AES CORPORATION
INDEX
Page
PART 1. FINANCIAL INFORMATION
Item 1. Interim Financial Statements:
Consolidated Statements of Operations.........................2
Consolidated Balance Sheets...................................3
Consolidated Statements of Cash Flow..........................5
Notes to Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................16
Item 2. Changes in Securities........................................16
Item 3. Defaults Upon Senior Securities..............................17
Item 4. Submission of Matters to a Vote of Security Holders..........17
Item 5. Other Information............................................17
Item 6. Exhibits and Reports on Form 8-K.............................21
Signature..................................................................22
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(Unaudited) Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/95 9/30/96 9/30/95 9/30/96
($ in millions, except per share amounts)
REVENUES:
Sales and services $ 174 $ 205 $ 512 $ 551
OPERATING COSTS AND EXPENSES:
Cost of sales and services 101 122 304 321
Selling, general and administrative exp 8 8 22 23
----- ----- ----- -----
Total operating costs and expenses 109 130 326 344
OPERATING INCOME 65 75 186 207
OTHER INCOME AND (EXPENSE):
Interest expense (31) (38) (92) (97)
Interest income 6 6 19 16
Equity in net earnings of affiliates 3 9 9 16
----- ----- ----- -----
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 43 52 122 142
Income taxes 15 16 43 47
Minority interest 1 4 -- 6
----- ----- ----- -----
NET INCOME $ 27 $ 32 $ 79 $ 89
===== ===== ===== =====
NET INCOME PER SHARE: $0.36 $0.42 $1.04 $1.16
===== ===== ===== =====
See Notes to Consolidated Financial Statements
<PAGE>
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
(Unaudited)
12/31/95 9/30/96
- -------------------------------------------------------------------------------
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 239 $ 243
Short-term investments 58 21
Accounts receivable 54 78
Inventory 36 73
Receivable from affiliates 11 14
Prepaid expenses and other current assets 27 31
------ ------
Total current assets 425 460
PROPERTY, PLANT AND EQUIPMENT:
Land 9 20
Electric and steam generating facilities 1,594 1,902
Furniture and office equipment 11 11
Accumulated depreciation, depletion,
and amortization (222) (262)
Construction in progress 158 430
------ ------
Property, plant and equipment, net 1,550 2,101
OTHER ASSETS:
Deferred costs, net 32 41
Project development costs 41 50
Investments in and advances to affiliates 48 473
Debt service reserves and other deposits 168 233
Goodwill and other intangible assets, net 37 40
Other assets 19 21
------- -------
Total other assets 345 858
------- -------
TOTAL $ 2,320 $ 3,419
====== ======
See Notes to Consolidated Financial Statements
<PAGE>
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
(Unaudited)
12/31/95 09/30/96
- -------------------------------------------------------------------------------
($ in millions)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $33 $36
Income taxes payable -- 5
Accrued interest 12 23
Accrued and other liabilities 49 96
Revolving bank loan - current portion 50 89
Project financing debt - current portion 84 243
------------ ------------
Total current liabilities 228 492
LONG-TERM LIABILITIES:
Project financing debt 1,098 1,301
Revolving bank loan -- 125
Other notes payable 125 325
Deferred income taxes 149 175
Other long-term liabilities 13 122
------------ ------------
Total long-term liabilities 1,385 2,048
MINORITY INTEREST 158 190
STOCKHOLDERS' EQUITY:
Common stock 1 1
Additional paid-in capital 293 344
Retained earnings 271 360
Cumulative foreign currency
translation adjustment (10) (13)
Less treasury stock at cost (6) (3)
------------ ------------
Total stockholders' equity 549 689
------------ ------------
TOTAL $ 2,320 $ 3,419
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
- --------------------------------------------------------------------------------
(Unaudited) Nine Nine
Months Months
Ended Ended
09/30/95 09/30/96
- --------------------------------------------------------------------------------
($ in millions)
OPERATING ACTIVITIES:
Net Income $79 $89
Adjustments to net income:
Depreciation, depletion and amortization 39 43
Provision for deferred taxes 39 30
Undistributed earnings of affiliates 4 (6)
Other (1) (4)
Change in working capital 6 (5)
------ ------
Net cash provided by operating activities 166 147
INVESTING ACTIVITIES:
Property additions (111) (324)
Acquisitions, net of cash acquired (89) (131)
Sale of short-term investments 38 38
Affiliate advances and investments (11) (411)
Project development costs (9) (13)
Debt service reserves and other assets (13) (64)
------ ------
Net cash used in investing activities (195) (905)
FINANCING ACTIVITIES:
Net borrowings under the revolver 20 164
Issuance of senior subordinated notes -- 243
Issuance of project financing debt 52 404
Repayments of project financing debt (50) (42)
Minority partner payments 3 2
Other long-term liabilities -- (9)
Repurchases of redeemable
common stock of subsidiary (3) --
------ ------
Net cash provided by financing activities 22 762
Increase/(decrease) in cash
and cash equivalents (7) 4
Cash and cash equivalents, beginning 255 239
------ ------
Cash and cash equivalents, ending $248 $243
====== ======
Supplemental disclosures
Cash payments for interest $94 $86
Cash payments for income taxes 5 17
See notes to consolidated financial statements
<PAGE>
PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of AES, its
subsidiaries, and controlled affiliates. Intercompany transactions and balances
have been eliminated. Investments in 50% or less owned affiliates over which the
Company has the ability to exercise significant influence, but not control, are
accounted for using the equity method. Under the equity method, the Company's
investment is recorded at cost and is adjusted to recognize its proportional
share of all earnings or losses of the entity. Distributions received reduce the
carrying amount of the Company's investment.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the nine months ended
September 30, 1995 and 1996, respectively, are included. All such adjustments
are accruals of a normal and recurring nature. The results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of the
results of operations to be expected for the full year. The financial statements
are unaudited.
2. 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. 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 76.0 million and 77.5
million for the quarters ended September 30, 1995 and 1996 respectively, and
75.9 million and 76.6 million for the nine months ended September 30, 1995 and
1996, respectively.
3. Inventory
Inventory, valued at the lower of cost (principally first in, first out
method) or market, consists of coal and other raw materials used in generating
electricity and steam, and spare parts, materials and supplies. Inventory at
December 31, 1995 and September 30, 1996 consisted of the following (in
millions):
1995 1996
---- ----
Coal and other raw materials 24 58
Spare parts, materials and supplies 12 15
------ ------
Total $36 $73
===== =====
<PAGE>
4. Acquisitions
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 that operates as the concessionaire of an approximately 3,800 MW
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 MW and a coal mine
through the purchase of an 81% share of Tiszai Eromu Rt. ("Tiszai"), an
electricity generation company in Hungary for $110 million.
Also in August 1996, the Company acquired, through a subsidiary, a
majority controlling interest in a 4,000 MW coal-fired facility in Kazakstan
("Ekibastuz"), for approximately $1 million. The facility sells power to a
government-owned utility under a 35 year power purchase agreement.
The acquisitions were all accounted for using the purchase method. The
accompanying financial statements include equity earnings of Light, net of tax
as of June 1, 1996, the results of operations of Tiszai as of August 1, 1996,
and the results of operations of Ekibastuz as of August 12, 1996. The goodwill
created as a result of the investment in Light is being amortized using the
straight line method over the 30 year length of the concession.
The following table presents supplemental unaudited proforma
financialinformation as if the acquisitions of Light, Tiszai and Ekibastuz had
occurred at the beginning of the periods presented (in million, except per share
amounts):
Nine months Nine months Year Ended
9/30/95 9/30/96 12/31/95
---------- ---------- ----------
Revenues $673 $764 $893
Net Income 69 72 92
Net Income Per Share 0.91 0.94 1.21
5. Litigation
On February 25, 1993, an action was filed 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, 4 Texas cities, McGinnes Industrial Maintenance Corporation, Roland
<PAGE>
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 fraudulent concealment, 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 approximately 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
consolidated financial statements.
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 consolidated financial position.
Item 2. Discussion and Analysis of Financial Condition and Results of
Operations.
General
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are primarily engaged in the business of developing,
acquiring, owning and operating electric power generation and related facilities
throughout the world. Electricity sales accounted for 97% of total revenues
during 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 by AES to its affiliates.
Electricity is generated (or manufactured) by power plants owned or
leased by the Company's subsidiaries and affiliates. AES operates and owns
(entirely or in part) a diverse portfolio of electric power plants with a total
capacity of approximately 11,300 MW, of which approximately 9,700 are in
operation and approximately 1,600 are in construction. 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 commercial operation date is generally supported
by a guarantee from each plant's construction contractor; however, it remains
possible, due to changes in the economic, political, technological, regulatory
or logistical circumstances surrounding individual plants
<PAGE>
and their locations, that commercial operations may be delayed or, in extreme
circumstances, prohibited.
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
and affiliates, additional greenfield developments and acquisitions in North
America, India, Pakistan, China, other areas in Southeast Asia, South America,
Europe, the Middle East, Africa and Australia. From time to time, AES also
investigates possible acquisitions of existing power plant facilities or energy
companies that would be consistent with its objectives and strategy. Such
acquisitions may be accomplished by a cash purchase, by an exchange of project
ownership interests or by the issuance of the Company's capital stock.
Certain subsidiaries of the Company (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
September 30, 1996, capitalized costs for projects under development were $50
million. The Company believes that the costs are recoverable; however, no
assurance can be given that changes in circumstances related to individual
projects will not occur or that any of these projects will be completed.
As discussed above, AES has been successful in acquiring a portion of
its portfolio of generating capacity 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, such as the United Kingdom and Argentina. Sellers
generally seek to complete competitive solicitations in less than one year, much
quicker than greenfield development, and require payment in full on transfer.
AES believes that its experience in competitive markets and its divisional
structure, with geographically dispersed locations, enable it to react quickly
and creatively in such situations.
Because of this relatively quick process, it may not be possible to
arrange "project financing" (the Company's historically preferred financing
method) for specific potential acquisitions at the time of such acquisition. As
a result, the Company enhanced its financial capabilities to respond to these
more accelerated opportunities by executing a $425 million revolving credit
facility in the second quarter of 1996. During the second quarter of 1996, a
subsidiary of the Company also entered into a Reimbursement Agreement (the
"Loan") in the amount of $225 million in connection with the acquisition of its
interest in Light. The Loan currently has a balance of $150 million. The Loan
has been classified as a current
<PAGE>
liability at September 30, 1996, however the Company intends to refinance the
Loan with long term project financing debt in the fourth quarter. In addition,
on July 2, 1996, the Company completed the issuance and sale of $250 million
principal amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Notes").
(See Cash Flow, Financial Resources, and Liquidity).
The nature of most of the Company's domestic independent power
operations is such that each facility 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 1995, four customers accounted for 73% of the Company's
revenues. The prolonged failure of any one utility customer to fulfill its
contractual payment obligations in the future could have a substantial negative
impact on AES's primary source of revenues. Where possible, the Company has
sought to reduce this risk, in part, by entering into power sales contracts with
utilities 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. While the Company has recently been expanding in a number of
geographic areas outside the U.S., it has had varying degrees of success in
obtaining customers with the equivalent of "investment grade" credit ratings in
those areas. One of the Company's customers, Connecticut Light and Power (a
subsidiary of Northeast Utilities), had its senior unsecured long-term debt
ratings revised by Moody's Investor Service and by Standard & Poor's from
Baa3/BBB- to Ba1/BB+ on October 8 and October 23, respectively.
Because the Company's plants are located in different geographical
areas, seasonal variations are not generally expected to have a significant
effect on quarterly financial results. However, unusual weather conditions and
the needs of each plant to perform routine (including annual or multi-year) or
unanticipated facility maintenance may 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 are not reduced.
The Company's activities are subject to stringent environmental
regulation by federal, state, local and foreign governmental authorities. There
can be no assurance that AES would be able to recover all or any part of
increased costs from its customers or that its business and financial condition
would not be materially and adversely affected by future changes in
environmental laws or regulations. The Company strives to comply with all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times has been in non-compliance. No such instance of non-compliance has
resulted in revocation of any permit or license.
In May 1996, a subsidiary of AES, along with its partners, acquired a
50.44% controlling interest in Light, a 3,800 MW integrated electric power
generation,
<PAGE>
transmission and distribution system which serves Rio de Janeiro, Brazil. AES's
interest in Light is 11.35%. Light currently serves approximately 2.8 million
customers, or approximately 70% of the population of the state of Rio de
Janeiro. Light generates about 17% of the total electricity it distributes
through four hydroelectric complexes having an installed generating capacity of
approximately 788 MW. Light purchases the remaining 83% of the electricity it
distributes. Under a shareholders' agreement AES co-manages the business with
the other members of the consortium, and is responsible for the electric
generation and bulk power supply aspects of Light.
In August 1996, the Company, through a subsidiary, acquired a
controlling interest in three power plants totaling 1,281 MW and a coal mine
through the purchase of an 81% share of Tiszai Eromu Rt., an electricity
generation company in Hungary for $110 million, and dependent upon certain
future events, the Company may be required to pay an additional $23 million. The
Company has also agreed to purchase an additional 15% of Tiszai's shares at an
equivalent per share price. The Hungarian generation facilities include an oil
and natural gas-fired plant supported by a 15 year contract and two coal-fired
plants with two and five year contracts, respectively. The transaction also
includes the right for AES to develop and operate a 150-300 MW coal-fired power
plant that uses circulating fluidized bed boilers. AES expects to sell
electricity generated by the new facilities, if developed, to the Hungarian
transmission company under a long term power purchase agreement.
In August 1996, a subsidiary of the Company won a bid to develop, own
and operate a 288 MW simple-cycle gas turbine power station in Townsville,
Queensland, Australia. The plant is expected to burn liquefied petroleum gas and
expects to sell electricity to the Queensland Transmission and Supply
Corporation under a 10 year power purchase agreement. Numerous steps remain to
be completed prior to plant operations, including, but not limited to, execution
of the power purchase agreement, permitting, financing and construction of the
facility. Commencement of commercial operations is scheduled for January 1999,
but no assurance can be given that this project will be completed.
Also in August 1996, the Company acquired, through a subsidiary, a
majority controlling interest in a 4,000 MW coal-fired facility in Kazakstan.
The facility sells power to a government owned utility under a 35 year power
purchase agreement. The facility currently operates at reduced availability
levels, and AES has committed to upgrade the safety, environmental and
performance standards of the plant, although no assurance can be given that the
Company will be able to upgrade the plant sufficiently.
In October 1996, a subsidiary of the Company began construction of a
230 megawatt gas-fired combined cycle plant in South Wales, United Kingdom.
Electric power will be sold into the U.K. national electricity pool. Numerous
steps remain to be completed prior to plant operations, including, but not
limited to, permitting, financing, and construction of the facility.
Commencement of commercial operations is scheduled for January 1999, but no
assurance can be given that this project will be completed.
<PAGE>
Third Quarter 1996 and 1995 Results of Operations
Revenues increased 18% or approximately $31 million, to $205 million
from the third quarter of 1995 to the third quarter of 1996. Cost of sales and
services increased 21% or approximately $21 million, to $122 million from the
third quarter of 1995 to the third quarter of 1996. Gross margin, which
represents total revenues reduced by cost of sales and services, increased 14%,
or approximately $10 million, to $83 million during the same period. Gross
margin as a percentage of total revenues was 41% for the third quarter of 1996
and 42% for the same period of 1995. The increase in gross margin was primarily
due to the acquisition of Tiszai and Ekibastuz, improved results at Deepwater
due to higher natural gas prices during the quarter, higher production at
Thames, and the start of commercial operations of an AES Chigen subsidiary which
was previously under construction, offset in part by lower production at Beaver
Valley.
Revenues increased 8% or approximately $39 million to $551 million from
the first nine months of 1995 to the nine months of 1996. Cost of sales and
services increased 6% or approximately $17 million to $321 million from the
first nine months of 1995 to the same period of 1996. Gross margin increased 11%
or approximately $22 million, to $230 million during the same period. Gross
margin as a percentage of total revenues was 42% for the first nine months of
1995 and 41% for the same period of 1996. The increase in gross margin was
primarily due to the acquisition of Tiszai and Ekibastuz, better performance at
San Nicolas due to cost reduction efforts at the plant and higher prices in the
Argentine electricity spot market, improved results at Deepwater due to higher
natural gas prices, higher production at Thames, and the start of commercial
operations of an AES Chigen subsidiary which was previously under construction,
offset in part by construction fees for Medway which were recognized in 1995.
Selling, general and administrative expenses were approximately $8
million for both the third quarter of 1995 and 1996, and as a percentage of
total revenue, were 5% of revenues in 1995, and 4% of revenues in 1996. Selling,
general and administrative expenses increased 5% or approximately $1 million,
from the first nine months of 1995 to the first nine months of 1996, but as a
percentage of total revenue, remained constant at 4% of revenues.
Operating income increased 15%, or approximately $10 million, to $75
million from the third quarter of 1995 to the third quarter of 1996, and
increased 11% or approximately $21 million, to $207 million from the first nine
months of 1995 to the same period of 1996. These increases were the result of
the factors discussed above.
Interest expense increased 23%, or approximately $7 million, to $38
million from the third quarter of 1995 to the third quarter of 1996. Interest
expense increased 5%, or approximately $5 million, to $97 million from the first
nine months of 1995
<PAGE>
to the first nine months of 1996. The increase in interest expense during the
quarter was primarily due to the interest expense associated with the credit
facility, the Loan, and the Notes. The increase for the first nine months was
primarily due to the interest expense associated with the credit facility, the
Loan and the Notes, offset in part by lower interest expense at San Nicolas.
Interest income remained constant at approximately $6 million, from the
third quarter of 1995 to the third quarter of 1996, and decreased 16% or
approximately $3 million, to $16 million from the first nine months of 1995 to
the same period of 1996. The decrease was primarily due to investments in new
projects at AES Chigen.
Equity in earnings of affiliates (net of income taxes) increased 200%,
or approximately $6 million to approximately $9 million from the third quarter
of 1995 to the same period of 1996. The increase was primarily due to the
acquisition of Light. From the first nine months of 1995 to the first nine
months of 1996, equity earnings increased 78% or approximately $7 million to $16
million. This increase was primarily due to the acquisition of Light and limited
operations at Medway in 1996, which was not in operation prior to the fourth
quarter of 1995, offset in part by a planned outage at NIGEN.
Income taxes increased 7% or approximately $1 million, to $16 million
from the third quarter of 1995 to the third quarter of 1996, and increased 9% or
approximately $4 million, to $47 million from the first nine months of 1995 to
the same period of 1996. These increases resulted primarily from an increase in
the Company's estimated effective income tax rate from approximately 38% in 1995
to 39% in 1996 and higher income before taxes.
Cash Flows, Financial Resources and Liquidity
At September 30, 1996 cash and cash equivalents totaled approximately
$243 million, as compared to $239 million at the beginning of the year. The $4
million increase in cash resulted from a use of $905 million for investing
activities which were funded by $762 million from financing activities and $147
million provided by operating activities. Significant investing activities were
the acquisition of the Company's interest in Light for approximately $393
million, property and construction in progress additions of $324 million, the
acquisition of Hidrotermica San Juan, S.A. for approximately $20 million, and
$110 million to acquire Tiszai Eromu Rt. Furthermore, the net source of cash
from financing activities was primarily the result of borrowing $164 million
under the revolving credit facility, issuing senior subordinated notes with net
proceeds of $243 million, borrowing $404 million in project financing debt,
offset by repayments of $42 million of other project financing debt related to
scheduled amortization. Unrestricted net cash flow of the parent company
amounted to approximately $109 million for the four quarters ended September 30,
1996.
AES has primarily utilized project financing loans to fund the capital
<PAGE>
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. In addition,
as a result of the speed that may be necessary to acquire and pay for assets
being privatized or constructed, the Company may not put project financing into
place at the time of acquisition or commencement of construction. In such cases
the Company may look to other financing sources to fund the transaction with the
intent of entering into project financing at a later date. There can be no
assurances that such later refinancing will be successful.
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 the
credit facility, the Loan, issuances of senior subordinated notes, convertible
debentures and common stock of the Company.
In the second quarter of 1996, the Company entered into the Loan which
was used to fund a portion of the Company's investment in Light. In July 1996,
the Company completed the issuance of $250 million of Notes. A portion of the
proceeds from the Notes was used to reduce the borrowing under the Loan, the
remaining amount was used to fund the Company's investment in Tiszai, and for
general corporate purposes. The Loan has a current balance of $150 million.
In August 1996 substantially all $50 million of the Company's 6 1/2%
Convertible Subordinated Debentures due 2002 were converted into approximately
1.9 million shares of the Company's common stock. Interim needs for shorter-term
<PAGE>
and working capital financing have been met with borrowings under AES's
revolving line of credit and letter of credit facility ("credit facility"). Over
the past several years, the Company has increased the amount of available
financing under the credit facility while striving to enhance its flexibility
and usefulness. In the second quarter of 1996, AES increased the size of its
credit facility to $425 million. The credit facility provides full availability
as borrowings or letters of credit. Under the terms of the credit facility, AES
is required to reduce its direct borrowings to $125 million for 30 consecutive
days during each twelve month period. The terms of the credit agreement 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.
Inflation, Interest Rates, Exchange Rates and Changing Energy Prices
The Company attempts, whenever possible, to hedge certain aspects of
its projects against the effects of fluctuations in inflation, interest and
currency exchange rates and energy prices. AES has generally structured the
energy payments in its power sales contracts to adjust with similar price
indices as do its contracts with the fuel suppliers for the corresponding
projects. In some cases a portion of revenues is associated with operations and
maintenance, and as such is indexed to adjust with inflation. AES has also used
a hedging strategy to insulate each project's financial performance, where
appropriate, against the risk of fluctuations in interest rates. Depending on
whether a project's capacity payments are either fixed or vary with inflation,
the Company attempts to hedge against interest rate fluctuations by arranging
fixed-rate or variable-rate financing. In certain cases, the Company executes
interest rate swap agreements, or interest rate caps, to effectively fix, or in
the case of interest rate caps, limit, the interest rate on the underlying
variable rate financing.
Such hedging techniques 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 contracts. 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 AES's
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 projects generally performs better with high oil and
natural gas prices and with lower interest rates. The Company's performance also
is sensitive to the difference between inflation and interest rates, and
generally performs better when increases in inflation are higher than increases
in interest rates. During 1996, the Company made acquisitions in several highly
<PAGE>
inflationary countries. Foreign currency gains and losses resulting from
transactions and the translation of financial statements of affiliates in highly
inflationary countries are included in results of operations.
Through its equity investments in foreign affiliates, AES operates in
jurisdictions dealing in currencies other than the Company's functional
currency, the U.S. dollar. Such investments were made to fund equity
requirements and to provide collateral for contingent obligations. The Company
accounts for any adjustments resulting from translation as a charge or credit
directly to a separate component of stockholders' equity. The Company had
approximately $13 million, net of tax, in cumulative translation adjustment
losses at September 30, 1996. Foreign currency transactions from the ongoing
operations of foreign subsidiaries are included in results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 25, 1993, an action was filed 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, 4 Texas cities, McGinnes Industrial Maintenance Corporation, 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 fraudulent concealment, 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 consolidated
financial position.
Item 2. Changes in Securities
On July 30, 1996 notice of redemption was sent to holders of the
Company's $50,000,000 principal amount of 6 1/2% Convertible Subordinated
Debentures due 2002 (the "Debentures") at a redemption price equal to 103.727%
of the principal amount of the debenture, together with accrued interest to the
date of redemption. The conversion price of the Debentures was $26.16 per share
of Common Stock. On or prior to the August 30 redemption date, $49,660,000
principal amount of Debentures representing 1,898,239 shares of common stock had
been converted in lieu of redemption.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Pro Forma Financial Information
On May 30, 1996, AES acquired for approximately $393 million, common
shares representing an 11.35% interest in Light, a publicly-held corporation
that operates as the concessionaire of an approximately 3,800 megawatt electric
power generation, transmission and distribution system in Rio de Janeiro,
Brazil. In July 1996, AES acquired three power plants totaling 1,281 megawatts
and a coal mine through the purchase of an 81% share of Tiszai, an electricity
generation company in Hungary for $110 million. Additionally, in August 1996,
AES acquired a majority controlling interest in the 4,000 megawatt Ekibastuz
coal-fired facility located in Kazakstan for approximately $1 million.
The unaudited pro forma statements of operations combine the results of
AES's investment in Light and acquisitions of Tiszai and Ekibastuz for the year
ended December 31, 1995 and the nine months ended September 30, 1996 as if the
acquisitions had occurred on January 1, 1995. All three transactions have been
accounted for using the purchase method.
The unaudited pro forma adjustments are based upon available historical
information and certain assumptions and estimates which the Company believes are
reasonable under the circumstances. The unaudited pro forma results do not
purport to be indicative of the results that would have been obtained had the
acquisitions occurred at the beginning of the periods presented, nor are they
intended to be a projection of future results. The unaudited pro forma financial
information should be read in conjunction with the notes thereto.
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------------------------------------
Unaudited) Pro Forma
Pro Forma for the Tiszai
Actual for the Light and Ekibastuz Pro Forma
Acquisition 1 Acquisitions 2 As Adjusted
- -------------------------------------------------------------------------------------------------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Sales and services $ 551 -- $ 213 $764
OPERATING COSTS AND EXPENSES:
Cost of sales and services 321 -- 203 524
Selling, general and admin expenses 23 -- -- 23
------ ------ ------ ------
Total operating costs and expenses 344 -- 203 547
------ ------ ------ ------
OPERATING INCOME 207 -- 10 217
OTHER INCOME AND (EXPENSE):
Interest expense (97) (17) (26) (140)
Interest income 16 -- 2 18
Equity in earnings of affiliates, net of tax 16 9 -- 25
------ ------ ------ ------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 142 (8) (14) 120
Income taxes 47 (7) (2) 38
Minority interest 6 -- 4 10
------ ------ ------ ------
NET INCOME $ 89 $ (1) $ (16) $ 72
====== ====== ====== ======
NET INCOME PER SHARE: $1.16 ($0.01) ($0.21) $ 0.94
====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------
Unaudited) Pro Forma
Pro Forma for the Tiszai
Actual for the Light and Ekibastuz Pro Forma
Acquisition 1 Acquisitions 2 As Adjusted
- -------------------------------------------------------------------------------------------------------------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Sales and services $685 -- $208 $893
OPERATING COSTS AND EXPENSES:
Cost of sales and services 405 -- 209 614
Selling, general and admin expenses 32 -- -- 32
------ ------ ------ ------
Total operating costs and expenses 437 -- 209 646
------ ------ ------ ------
OPERATING INCOME 248 -- (1) 247
OTHER INCOME AND (EXPENSE):
Interest expense (122) (35) (17) (174)
Interest income 27 -- 4 31
Equity in earnings of affiliates, net of tax 14 11 -- 25
------ ------- ------ ------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 167 (24) (14) 129
Income taxes 57 (14) (3) 40
Minority interest 3 -- (6) (3)
------ ------- ------ ------
NET INCOME $ 107 $ (10) $ (5) $ 92
====== ====== ====== ======
NET INCOME PER SHARE: $1.41 ($0.13) ($0.07) $1.21
====== ====== ====== ======
</TABLE>
<PAGE>
Notes to the Unaudited Pro Forma Consolidated Financial Information
1. a. Basis of Presentation--the AES subsidiary which owns an
11.35% interest in Light is participating in a consortium
that owns a 50.44% controlling interest. As a result, the
Company has the ability to exert significant influence
over the operations of Light, and is recording its
investment using the equity method.
The unaudited pro forma financial information has been
prepared based on the Company's estimate of Light's
results of operation in conformity with U.S. generally
accepted accounting principles.
b. Goodwill--the estimated excess of the purchase price over
the Company's proportionate share of the net assets
acquired is being amortized over the 30 year life of the
concession.
c. Financing--the acquisition of Light was funded through
drawings of $143 million under the Company's $425 million
Credit Agreement and $250 million through the issuance of
the Notes.
d. The following is a description of the unaudited pro forma
adjustments which are included with the results of Light
for the periods from January 1, 1995 through the date of
acquisition.
Entries were made to record:
-equity in earnings of Light, net of goodwill
amortization;
-interest expense associated with average borrowings
under and the credit agreement and the Notes during
the period, and amortization of deferred financing
costs; and
-the income tax benefit related to the interest costs.
2. a. Basis of Presentation--in August, the Company acquired,
through several subsidiaries, a majority controlling
interest in Tiszai and Ekibastuz, electricity generating
facilities in Hungary and Kazikstan, respectively.
The unaudited pro forma financial information has been
prepared based on the Company's estimate of Tiszai's and
Ekibastuz's results of operations for the year ended
December 31, 1995 and nine months ended September 30, 1996
in conformity with US generally accepted accounting
principles.
b. Goodwill--the fair value of the net assets acquired
exceeded the purchase price. That excess, or negative
goodwill, was recorded as a reduction of plant assets.
c. Financing--the acquisition of Tiszai was funded through
drawings under the Company's $425 million credit
agreement.
d. The following is a description of the pro forma
adjustments which are included with the results of
operations of Tiszai and Ekibastuz from January 1, 1995
through their respective dates of acquisition.
Entries were made to record:
-the results of operations adjusted for the decreases in
depreciation resulting from reduced plant asset values;
-interest expense associated with borrowing under the
credit agreement; and
-the income tax benefit related to the interest costs, and
applicable minority interest.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Document
11 Consolidated Statements Regarding Computation of
Earnings Per Share
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The AES Corporation (Registrant)
By/s/ BARRY J. SHARP
--------------------
BARRY J. SHARP
Vice President and Chief Financial Officer
Dated: November 1, 1996
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 Consolidated Statements Regarding Computation of Earnings Per
Share
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
THE AES CORPORATION Exhibit 11
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
- --------------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/95 9/30/96 9/30/95 9/30/96
- --------------------------------------------------------------------------------
($ in millions, except per share amounts)
PRIMARY
Weighted Average Number of Shares
of Common Stock Outstanding 75.1 75.8 75.0 75.2
Net effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock
Method Using Average Market Price 0.7 1.4 0.7 1.1
Stock Units Allocated to the Deferred
Compensation Plans for
Executives and Directors 0.2 0.3 0.2 0.3
------ ------ ------ ------
Weighted average shares
outstanding 76.0 77.5 75.9 76.6
====== ====== ====== ======
Net Income $ 27 $ 32 $ 79 $ 89
====== ====== ====== ======
Per Share Amount $0.36 $0.42 $1.04 $1.16
====== ====== ====== ======
FULLY DILUTED
Weighted Average Number of Shares
of Common Stock Outstanding 75.1 75.8 75.0 75.2
Net effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock
Method Using Ending Market Price 0.7 1.6 0.7 1.7
Stock Units Allocated to the Deferred
Compensation Plans for
Executives and Directors 0.2 0.3 0.2 0.3
Effect of Convertible Debt - Based on
the If-Converted Method 1.9 -- 1.9 --
------ ------ ------ ------
Weighted average shares
outstanding 77.9 77.7 77.8 77.2
====== ====== ====== ======
Net Income $ 27 $ 32 $ 79 $ 89
Additional Contribution to Net Income if
Convertible Debt is fully converted 1 -- 1 --
------ ------ ------ ------
Adjusted Net Income $ 28 $ 32 $ 80 $ 89
====== ====== ====== ======
Per Share Amount $0.36 $0.41 $1.03 $1.15
====== ====== ====== ======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<EXCHANGE-RATE> 1
<CASH> 243
<SECURITIES> 21
<RECEIVABLES> 78
<ALLOWANCES> 0
<INVENTORY> 73
<CURRENT-ASSETS> 460
<PP&E> 2363
<DEPRECIATION> (262)
<TOTAL-ASSETS> 3419
<CURRENT-LIABILITIES> 492
<BONDS> 1751
0
0
<COMMON> 1
<OTHER-SE> 688
<TOTAL-LIABILITY-AND-EQUITY> 3419
<SALES> 545
<TOTAL-REVENUES> 551
<CGS> 321
<TOTAL-COSTS> 344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 142
<INCOME-TAX> 47
<INCOME-CONTINUING> 89
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
</TABLE>
