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 March 31, 1997
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, $.01 par value,
outstanding on April 30, 1997 was 80,195,365.
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THE AES CORPORATION
INDEX
Page
PART 1. FINANCIAL INFORMATION
Item 1. Interim Financial Statements:
Consolidated Statements of Operations...................... 2
Consolidated Balance Sheets................................ 3
Consolidated Statements of Cash Flow....................... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 18
Item 2. Changes in Securities..................................... 19
Item 3. Defaults Upon Senior Securities........................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 19
Item 5. Other Information......................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................... 19
Signature .......................................................... 21
1
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 1996 AND 1997
- --------------------------------------------------------------------------------
(Unaudited) Three Three
Months Months
Ended Ended
03/31/96 03/31/97
- --------------------------------------------------------------------------------
($ in millions, except per share amounts)
REVENUES:
Sales and services ................................... $ 172 $ 261
OPERATING COSTS AND EXPENSES:
Cost of sales and services ........................... 98 167
Selling, general and administrative expenses ......... 9 9
Provision to reduce contract receivable .............. -- 7
----- -----
Total operating costs and expenses ................... 107 183
----- -----
OPERATING INCOME ..................................... 65 78
OTHER INCOME AND (EXPENSE):
Interest expense ..................................... (30) (44)
Interest income ...................................... 5 8
Equity in net earnings of affiliates
(net of income tax) .................................. 5 16
----- -----
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST ............................... 45 58
Income taxes ......................................... 15 16
Minority interest .................................... 1 2
----- -----
NET INCOME ........................................... $ 29 $ 40
===== =====
NET INCOME PER SHARE: ................................ $0.38 $0.50
===== =====
See Notes to Consolidated Financial Statements
2
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
- --------------------------------------------------------------------------------
(Unaudited) 12/31/96 03/31/97
- --------------------------------------------------------------------------------
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 185 $ 423
Short-term investments ............................... 20 26
Accounts receivable, less provision
to reduce contract receivable of $20 and $27 ........ 95 86
Inventory ............................................ 81 71
Receivable from affiliates ........................... 9 12
Deferred income taxes ................................ 65 49
Prepaid expenses and other current assets ............ 47 63
------- -------
Total current assets ................................. 502 730
PROPERTY, PLANT AND EQUIPMENT:
Land ................................................. 30 30
Electric and steam generating facilities ............. 1,884 1,889
Furniture and office equipment ....................... 14 14
Accumulated depreciation and amortization ............ (282) (295)
Construction in progress ............................. 574 666
------- -------
Property, plant and equipment, net ................... 2,220 2,304
OTHER ASSETS:
Deferred costs, net .................................. 47 59
Project development costs ............................ 53 59
Investments in and advances to affiliates ............ 491 590
Debt service reserves and other deposits ............. 175 207
Goodwill and other intangible assets, net ............ 52 52
Other assets ......................................... 82 77
------- -------
Total other assets ................................... 900 1,044
------- -------
TOTAL ................................................ $ 3,622 $ 4,078
======= =======
See Notes to Consolidated Financial Statements
3
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
- --------------------------------------------------------------------------------
(Unaudited) 12/31/96 03/31/97
- --------------------------------------------------------------------------------
($ in millions)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 64 $ 61
Income taxes payable ............................. -- 4
Accrued interest ................................. 25 31
Accrued and other liabilities .................... 95 70
Other notes payable - current portion ............ 88 --
Project financing debt - current portion ......... 110 110
------- -------
Total current liabilities ........................ 382 276
LONG-TERM LIABILITIES:
Project financing debt ........................... 1,558 1,841
Other notes payable .............................. 450 325
Deferred income taxes ............................ 243 228
Other long-term liabilities ...................... 55 56
------- -------
Total long-term liabilities ...................... 2,306 2,450
MINORITY INTEREST ................................ 213 211
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF AES .................. -- 250
STOCKHOLDERS' EQUITY:
Common stock ..................................... 1 1
Additional paid-in capital ....................... 360 509
Retained earnings ................................ 396 436
Cumulative foreign currency
translation adjustment ........................... (33) (52)
Less treasury stock at cost ...................... (3) (3)
------- -------
Total stockholders' equity ....................... 721 891
------- -------
TOTAL ............................................ $ 3,622 $ 4,078
======= =======
See Notes to Consolidated Financial Statements
4
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THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
- -------------------------------------------------------------------------------
(Unaudited) Three Three
Months Months
Ended Ended
03/31/96 03/31/97
- --------------------------------------------------------------------------------
($ in millions)
OPERATING ACTIVITIES:
Net Income ............................................... $ 29 $ 40
Adjustments to net income:
Depreciation, depletion and amortization ............. 14 15
Provision for deferred taxes ......................... 14 5
Undistributed earnings of affiliates ................. (4) (16)
Other ................................................ 1 (12)
Change in working capital ................................ (9) (22)
----- -----
Net cash provided/(used) by operating activities ......... 45 10
INVESTING ACTIVITIES:
Property additions ..................................... (45) (97)
Acquisitions, net of cash acquired ..................... (20) --
Sale/(purchase) of short-term investments .............. 8 (6)
Affiliate advances and investments ..................... (1) (90)
Project development costs .............................. (2) (6)
Debt service reserves and other assets ................. (6) (39)
----- -----
Net cash used in investing activities .................... (66) (238)
FINANCING ACTIVITIES:
Net repayments under the revolver ...................... (19) (213)
Issuance of company - obligated mandatorily
redeemable preferred securities ("TECONS") ........... -- 244
Issuance of project financing debt and
other notes payable .................................. 20 296
Repayments of project financing debt ................... (12) (12)
Minority partner payments .............................. (1) 2
Issuance of common stock ............................... 1 149
----- -----
Net cash provided/(used) by financing activities ......... (11) 466
Increase/(decrease) in cash and cash equivalents ......... (32) 238
Cash and cash equivalents, beginning ..................... 239 185
----- -----
Cash and cash equivalents, ending ........................ $ 207 $ 423
----- -----
===== =====
Supplemental disclosures:
Cash payments for interest ............................... $ 23 $ 38
Cash payments for income taxes ........................... 1 11
See notes to consolidated financial statements
5
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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 three months ended March 31, 1996
and 1997, respectively, are included. All such adjustments are accruals of a
normal and recurring nature. The results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the results of operations
to be expected for the full year. The financial statements are unaudited and
should be read in conjunction with the financial statements which are
incorporated by reference in the Company's Annual Report on Form 10K for the
year ended December 31, 1996.
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 include 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 76.1 million and 80.0 million for
the quarters ended March 31, 1996 and 1997, respectively.
SFAS No. 128, "Earnings per Share" becomes effective December 15, 1997, and
will be adopted by the Company at December 31, 1997. Early adoption is not
permitted, however, pro forma basic and diluted earnings per share as computed
in accordance with SFAS No. 128 would have been as follows:
Quarter Ended Quarter Ended
March 31, 1996 March 31, 1997
-------------- --------------
Basic earnings per share $ 0.38 $ 0.52
Diluted earnings per share $ 0.37 $ 0.50
6
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3. Financing
In March 1997, the Company issued approximately $250 million of
Company-obligated mandatorily redeemable preferred securities ("TECONS") with a
5 3/8% yield and a 23.5% conversion premium, and approximately $150 million of
its common stock at a price of $58.625 per share in a combined public offering.
4. 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, 1996 and March 31, 1997 consisted of the following (in millions):
1996 1997
---- ----
Coal, oil and other raw materials $ 57 $ 48
Spare parts, materials and supplies 24 23
---- ----
Total $ 81 $ 71
==== ====
5. Acquisitions
In January 1997, AES, through certain subsidiaries, acquired for
approximately $82 million an additional 2.4% of Light-Servicos de Electricidade
("Light"), the integrated electric utility that serves Rio de Janeiro, Brazil.
In May 1996, a subsidiary of AES participated in a consortium which acquired a
50.44% controlling interest in Light. The January investment increases AES's
holdings in Light to 13.75%.
In February 1997, AES agreed to acquire the international assets of Destec
Energy, Inc. ("Destec") for a total of $407 million (including approximately $42
million of net monetized assets). The purchase will include five electric
generating plants in construction or operation and a number of power projects in
development. The Company expects to fund its acquisition through corporate
borrowings and cash available from the proceeds of the offerings discussed in
footnote number three above. The acquisition remains subject to certain
governmental and other approvals.
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 Tisza Eromu Rt. ("AES Tisza"), an electricity
generating company in Hungary for $110 million. In December 1996, the subsidiary
of the Company acquired an additional 13% for $17 million.
7
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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 acquisitions were accounted for as purchases. The accompanying
statements of operations include the operating results of AES Tisza and AES
Ekibastuz and equity earnings from Light from the dates of those acquisitions
and investments. The following table presents supplemental unaudited pro forma
operating results as if all of the acquisitions had occurred at the beginning of
1996 (in millions, except per share amounts):
Three months
3/31/96
-------
Revenues $ 240
Net Income $ 22
Net Income Per Share $0.29
6. Investments In And Advances To Affiliates
The following table presents summarized financial information (in millions)
for equity method affiliates on a combined 100% basis. Amounts presented include
the condensed income statement accounts of NIGEN, Ltd. (47% owned UK affiliate)
and Medway Power Ltd. (25% owned UK affiliate) for the quarter ended March 31,
1996 and the condensed income statement accounts for NIGEN, Ltd., Medway Power
Ltd. and Light (13.75% owned Brazilian affiliate) for the quarter ended March
31, 1997.
March 31, March 31,
1996 1997
------- -------
Sales ................... 101 313
Operating Income ........ 46 93
Net Income .............. 13 41
7. Litigation
In December 1996, an action was filed against AES in the Court of Chancery
of the State of Delaware in and for New Castle County, by a holder of 750 shares
of AES Chigen Class A Common Stock, individually and on behalf of a purported
class of public shareholders of the approximately 8.2 million then outstanding
shares of AES Chigen Class A Common Stock. An amended complaint was filed by the
plaintiff on March 7, 1997. The amended complaint sought, among other items,
preliminarily and permanently to enjoin AES from acquiring the outstanding
shares of AES Chigen which it did not already own. In addition, the amended
complaint sought unspecified damages, including attorneys' fees and costs. On
March 13, 1997, counsel for the parties reached an agreement in principle to
resolve the lawsuit, subject to court approval and the satisfaction of certain
other conditions. The amalgamation was approved by the public shareholders of
AES Chigen on April 10, 1997, and the amalgamation was consummated on May 8,
1997.
8
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In February 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, four 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. In October 1995 an amended
complaint was filed in which several of the original causes of action have been
dropped. The claims for negligence, strict liability and fraudulent concealment
are still included. A number of original defendants have also been dismissed
from the case. 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 financial position.
8. Subsequent Events
In April 1997, the proposed amalgamation between AES Chigen and a
subsidiary of AES was approved by the shareholders of AES Chigen, and in May
1997, the amalgamation was completed. The Company issued approximately 2.5
million shares of its common stock for the additional 52% of AES Chigen.
Also in April 1997, a subsidiary of AES, and its partner, Community Energy
Alternatives ("CEA"), won a bid to acquire 90% of two integrated electricity
companies serving certain portions of the Province of Buenos Aires, Argentina
for an aggregate purchase price of $565 million. AES will own 60% of each
company, CEA will own 30% and 10% will be owned by the employees of each of the
two acquired companies. The Company expects to fund its portion of this
acquisition through a combination of project financing debt, corporate
borrowings and available cash. The Company anticipates that the acquisition will
be completed in the second quarter of 1997.
9
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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 selling electricity
to customers in the United States, England, Northern Ireland, Argentina, China,
Brazil, Hungary and Kazakstan. Electricity sales accounted for 97% of total
revenues during 1996. Other sales arise from the sale of steam and other
commodities related to the Company's cogeneration operations. Service revenues
represent fees earned in connection with energy consulting, wholesale power
services and services provided by AES to its affiliates.
The electricity sold is generated 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 megawatts. Of that total, approximately 9,600 are in
operation and approximately 1,700 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 completion of each plant in a timely manner 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 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, including both debt and equity financing, in
the short term.
Certain subsidiaries and affiliates 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
10
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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 March 31, 1997, capitalized costs for projects under
development were $59 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 and reach commercial operation.
A portion of the electricity sales from certain plants is not subject to a
contract and is available for sale, when economically advantageous, in the
relevant spot electricity market. The prices paid for electricity in the spot
markets may be volatile and are dependent on the behavior of the relevant
economies, including the demand for and retail price of electricity and the
competitive price and availability of power from other suppliers.
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 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.
The nature of most of the Company's 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 1996, the Company's five
largest customers accounted for 73% of total 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 results of operations.
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. Sales to Connecticut Light & Power
Company ("CL&P") represented 16% of the Company's total revenues in 1996.
Moody's Investor Services ("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-.
11
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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.
The Company's 4,000 megawatt mine-mouth, coal-fired power facility in
Kazakstan sells electricity to the government-owned distribution company under a
35-year power sales contract. Through March 31, 1997, approximately $52 million
(excluding VAT) was billed under the power sales contract for electricity, of
which the purchaser has paid approximately $13 million. The Company recorded a
provision of $20 million at December 31, 1996, and a provision of $7 million in
the first quarter of 1997 to reduce the carrying value of the contract
receivable as of March 31, 1997 to $12 million. As of March 31, 1997, the net
assets of this project were $32 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 March 31, 1997 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.
A portion of the electricity sales from certain plants is not subject to a
contract and is available for sale, when economically advantageous, in the
relevant spot electricity market. The prices paid for electricity in the spot
markets may be volatile and are dependent on the behavior of the relevant
economies, including the demand for and retail price of electricity and the
competitive price and availability of power from other suppliers.
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 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.
Because of the nature of AES's operations 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
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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 or its subsidiaries and affiliates 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.
In April 1997, a subsidiary of AES, and its partner, Community Energy
Alternatives ("CEA"), won a bid to acquire 90% of two integrated electricity
companies serving certain portions of the Province of Buenos Aires, Argentina
for an aggregate purchase price of $565 million. AES will own 60% of each
company, CEA will own 30% and 10% will be owned by the employees of each of the
two acquired companies. The Company anticipates that the acquisition will be
completed in the second quarter of 1997.
Also in April 1997, a subsidiary of the Company was selected to build, own
and operate a 600 megawatt, gas-fired combined-cycle power plant near
Uruguaiana, Brazil. The plant, if completed, will sell electricity to Companhia
Estadual de Energia Electrica under a 20 year power sales contract. Natural gas
will be supplied to the power plant from Argentina through an expansion of the
Argentine northern pipeline system.
In addition, the proposed amalgamation between AES Chigen and a subsidiary
of AES was approved by the shareholders of AES Chigen in April 1997, and in May
1997, the amalgamation was completed. The Company issued approximately 2.5
million shares of its common stock for the additional 52% of AES Chigen.
In February 1997, AES agreed to acquire the international assets of Destec
Energy, Inc. ("Destec") for a total of $407 million (including approximately $42
million of net monetized assets). The purchase will include five electric
generating plants and a number of power projects in development. In order to
fund the acquisition, and for future prospective acquisitions, the Company
issued $150 million of its common stock and $250 million principal amount of
Company-obligated mandatorily redeemable preferred securities ("TECONS") (See
Financial Resources and Liquidity for further discussion).
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First Quarter 1997 and 1996 Results of Operations
Revenues increased 52% or approximately $89 million, to $261 million from
the first quarter of 1996 to the first quarter of 1997. The increase in revenues
was primarily due to the acquisition of AES Tisza and AES Ekibastuz in August
1996 and higher revenues at AES Placerita and AES Deepwater due to higher
natural gas prices, offset slightly by decreased revenues at AES Barbers Point
due to a planned outage. Cost of sales and services increased 70% or
approximately $69 million, to $167 million from the first quarter of 1996 to the
first quarter of 1997. The increase in cost of sales and services was also
primarily due to the acquisition of AES Tisza and AES Ekibastuz in August 1996
and higher natural gas prices at AES Placerita, offset in part by lower costs at
AES San Nicolas due to cost reduction efforts at the plant. Gross margin, which
represents total revenues reduced by cost of sales and services (prior to
consideration of the provision to reduce contract receivable), increased 27%, or
approximately $20 million, to $94 million during the same period. The increase
in gross margin was primarily due to the acquisition of controlling interests in
AES Tiszai and AES Ekibastuz, improved performance at AES Deepwater due to
higher natural gas prices and AES San Nicolas due to cost reduction efforts at
the plant, offset in part by decreased production at Barbers Point due to a
planned outage in 1997. Gross margin as a percentage of total revenues decreased
to 36% for the first quarter of 1997 from 43% for the same period of 1996
primarily due to lower gross margin percentages at AES Tiszai and AES Ekibastuz,
offset in part by improved gross margin percentages at AES Deepwater and AES San
Nicolas.
Selling, general and administrative expenses were approximately $9 million
for both the first quarter of 1996 and 1997, and as a percentage of total
revenue, were 5% of revenues in 1996 and 3% of revenues in 1997. The Company's
selling, general and administrative costs do not necessarily vary with changes
in revenues.
Operating income increased 20%, or approximately $13 million, to $78
million from the first quarter of 1996 to the first quarter of 1997. This
increase was the result of the factors discussed above.
Interest expense increased 47%, or approximately $14 million, to $44
million from the first quarter of 1996 to the first quarter of 1997. The
increase in interest expense during the quarter reflects additional interest
associated with increased borrowings under the Company's revolving bank loan
("Revolver"), the $250 million 10 1/4% Senior Subordinated Notes, and project
financing debt associated with 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.
14
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Interest income increased 60%, or approximately $3 million from the first
quarter of 1996 to the first quarter of 1997. The increase was primarily due to
the investment of proceeds from the 10 1/8 % Notes due 2006, issued by AES
Chigen in December 1996.
Equity in earnings of affiliates (after income taxes) increased 220%, or
approximately $11 million to approximately $16 million from the first quarter of
1996 to the same period of 1997. The increase was almost entirely due to the
Company's equity in earnings from its initial acquisition of 11.35% of Light in
June 1996 and the additional 2.4% in January 1997.
Income taxes increased 7% or approximately $1 million, to $16 million from
the first quarter of 1996 to the first quarter of 1997. The increase resulted
primarily from an increase in the Company's estimated effective income tax rate
from approximately 39% in 1996 to 40% in 1997 and higher income before taxes.
Cash Flows, Financial Resources and Liquidity
At March 31, 1997 cash and cash equivalents totaled approximately $423
million, as compared to $185 million at the beginning of the year. The $238
million increase in cash resulted from a use of $238 million for investing
activities which were funded by $466 million from financing activities and $10
million provided by operating activities. Significant investing activities
included project construction progress at AES Barry, AES Lal Pir, AES Pak Gen
and AES Warrior Run; an additional purchase of Light shares; and the funding of
reserves relating to AES Chigen. Furthermore, the net source of cash from
financing activities was primarily the result of issuing TECONS and common stock
with net proceeds of $387 million, borrowing $296 million in project financing
debt, offset by repayments of $12 million of other project financing debt
related to scheduled amortization and $213 million of net repayments under the
revolver. Unrestricted net cash flow of the parent company amounted to
approximately $176 million for the four quarters ended March 31, 1997.
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
15
<PAGE>
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 March, the Company issued 2.55 million shares of common stock at a price
of $58.625 per share, and $250 million principal amount, 5 3/8% TECONS with a
conversion premium of 23.5%. The net proceeds to the Company of the combined
offerings was approximately $387 million. The proceeds will be used to fund the
Company's purchase of the international assets of Destec and other prospective
acquisitions.
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
16
<PAGE>
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.
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 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. 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
functional currency, the U.S. dollar. Such investments and advances were made to
fund equity requirements and to provide collateral for contingent obligations.
The Company accounts for any adjustments resulting from translation of the
financial statements of its foreign investments as a charge or credit directly
to a separate component of stockholders' equity until such time as the Company
realizes such charge or credit. At that time, any differences would be
recognized in the statement of operations as gains or losses.
In addition, certain of the Company's foreign subsidiaries have entered
into obligations in currencies other than their own functional currencies or the
U.S. dollar. These subsidiaries have attempted to limit potential foreign
exchange exposure by entering into revenue contracts 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.
17
<PAGE>
The Company had approximately $52 million in cumulative translation
adjustment losses at March 31, 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1996, an action was filed against AES in the Court of Chancery
of the State of Delaware in and for New Castle County, by a holder of 750 shares
of AES Chigen Class A Common Stock, individually and on behalf of a purported
class of public shareholders of the approximately 8.2 million then outstanding
shares of AES Chigen Class A Common Stock. An amended complaint was filed by the
plaintiff on March 7, 1997. The amended complaint sought, among other items,
preliminarily and permanently to enjoin AES from acquiring the outstanding
shares of AES Chigen which it did not already own. In addition, the amended
complaint sought unspecified damages, including attorneys' fees and costs. On
March 13, 1997, counsel for the parties reached an agreement in principle to
resolve the lawsuit, subject to court approval and the satisfaction of certain
other conditions. The amalgamation was approved by the public shareholders of
AES Chigen on April 10, 1997, and the amalgamation was consummated on May 8,
1997.
In February 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, four 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. In October 1995 an amended
complaint was filed in which several of the original causes of action have been
dropped. The claims for negligence, strict liability and fraudulent concealment
are still included. A number of original defendants have also been dismissed
from the case. 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.
18
<PAGE>
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.
Item 2. Changes in Securities
In March 1997, the Company issued 2.55 million shares of common stock at a
price of $58.625 per share and also issued Company-obligated mandatorily
redeemable preferred securities with a yield of 5 3/8% and a 23.5% conversion
premium in a combined public offering. The net proceeds to the Company were
approximately $387 million.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Document
11 Consolidated Statements Regarding
Computation of Earnings Per Share
12 Calculations of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission
for information only and not filed.
19
<PAGE>
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, (Item 5,
Other Events, and Item 7, Financial Statements and Exhibits)
dated January 30, 1997 with respect to its modification of an
offer to acquire all of the issued and outstanding shares of
Class A Common Stock of AES China Generating Co. Ltd.
The Registrant filed a Current Report on Form 8-K, (Item 5,
Other Events and Item 7 Financial Statements and Exhibits)
dated February 18, 1997 relating to the Company's agreement to
acquire the international business of Destec Energy, Inc.
The Registrant filed a Current Report on Form 8-K, (Item 7,
Financial Statements and Exhibits) containing the Company's
Discussion and Analysis of Financial Condition and Results of
Operations and its 1996 consolidated financial statements.
20
<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: May 15, 1997
21
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 ............ Consolidated Statements Regarding
Computation of Earnings Per Share
12 ............ Calculations of Ratio of Earnings to
Fixed Charges
27 ............ Financial Data Schedule, which is
submitted electronically to the
Securities and Exchange Commission
for information only and not filed.
THE AES CORPORATION
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIODS ENDED MARCH 31, 1996 AND 1997
- --------------------------------------------------------------------------------
Three Three
Months Months
Ended Ended
3/31/96 3/31/97
- --------------------------------------------------------------------------------
($ in millions, except per share amounts)
PRIMARY
Weighted Average Number of Shares
of Common Stock Outstanding ....................... 74.9 77.7
Net effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock
Method Using Average Market Price ................. 0.9 2.0
Stock Units Allocated to the Deferred
Compensation Plans for
Executives and Directors .......................... 0.3 0.3
------ ------
Weighted average shares
outstanding .................................... 76.1 80.0
====== ======
Net Income ....................................... 29 40
====== ======
Per Share Amount ................................. $ 0.38 $ 0.50
====== ======
FULLY DILUTED
Weighted Average Number of Shares
of Common Stock Outstanding ....................... 74.9 77.7
Net effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock
Method Using Ending Market Price .................. 0.9 2.0
Stock Units Allocated to the Deferred
Compensation Plans for
Executives and Directors .......................... 0.3 0.3
Effect of Convertible Debt - Based on
the If-Converted Method ........................... 1.9 0.3
------ ------
Weighted average shares
outstanding .................................... 78.0 80.3
====== ======
Net Income ....................................... 29 40
Additional Contribution to Net Income if
Convertible Debt is fully converted ................ 1 --
------ ------
Adjusted Net Income .............................. 30 40
====== ======
Per Share Amount ................................. $ 0.37 $ 0.50
====== ======
<TABLE>
<CAPTION>
THE AES CORPORATION AND SUBSIDIARIES
Calculations of Ratio of Earnings to Fixed Charges
(in thousands, unaudited)
Three Months
Ended
Year Ended December 31, March 31,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As defined:
Income from continuing operations before
income taxes ...................................... $ 65,161 $ 89,392 $ 141,807 $ 163,655 $ 185,284 $ 55,758
Adjustment for undistributed income .................. (2,509) (10,578) (12,039) (14,254) (35,677) (16,000)
Distributions from affiliates ........................ -- -- 6,116 17,499 15,781 --
Interest expense ..................................... 97,158 125,019 121,793 121,927 137,708 42,082
Depreciation of previously capitalized interest ...... 3,996 4,487 4,487 4,487 4,487 1,119
Net amortization of issuance costs ................... 2,775 2,558 3,500 4,630 5,818 2,004
--------- --------- --------- --------- --------- ---------
Earnings ............................................. $ 166,581 $ 210,878 $ 265,664 $ 297,944 $ 313,401 $ 84,963
========= ========= ========= ========= ========= =========
Interest expensed and capitalized amounts
(including construction related fixed charges) .... $ 118,178 $ 126,965 $ 123,945 $ 131,934 $ 164,708 $ 54,014
Net amortization of issuance costs (including
capitalized amounts) .............................. 3,120 2,558 3,500 4,630 5,818 2,004
--------- --------- --------- --------- --------- ---------
Fixed charges ........................................ $ 121,298 $ 129,523 $ 127,445 $ 136,564 $ 170,526 $ 56,018
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.37x 1.63x 2.08x 2.18x 1.84x 1.52x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 423
<SECURITIES> 26
<RECEIVABLES> 113
<ALLOWANCES> (27)
<INVENTORY> 71
<CURRENT-ASSETS> 730
<PP&E> 2599
<DEPRECIATION> (295)
<TOTAL-ASSETS> 4078
<CURRENT-LIABILITIES> 276
<BONDS> 2166
250
0
<COMMON> 1
<OTHER-SE> 890
<TOTAL-LIABILITY-AND-EQUITY> 4078
<SALES> 258
<TOTAL-REVENUES> 261
<CGS> 167
<TOTAL-COSTS> 183
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 58
<INCOME-TAX> 16
<INCOME-CONTINUING> 40
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
