UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-19281
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 54-1163725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 N. 19th Street, Arlington, Virginia 22209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 522-1315
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
9-3/4% Senior Subordinated Notes due 2000 None
Warrants to Purchase Common Stock, par value
$.01 per share NASDAQ
10-1/4% Senior Subordinated Notes due 2006 None
$2.6875 Term Convertible Securities, Series A New York Stock Exchange
</TABLE>
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at March 3, 1997, was $3,405,813,628.
The number of shares outstanding of Registrant's Common Stock, par
value $0.01 per share, at March 3, 1997, was 77,492,990.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 15, 1997. Certain information therein is
incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The AES Corporation (the "Company", "AES" and/or the
"Registrant"), is a global power company committed to supplying electricity to
customers world-wide in a socially responsible way. The Company was one of the
original entrants in the independent power market and today is one of the
world's largest independent power companies, based on net equity ownership of
generating capacity (in megawatts) in operation or under construction. AES
markets power principally from electricity generating facilities that it
develops, acquires, owns and operates.
Over the last five years, the Company has experienced
significant growth. This growth has resulted primarily from the development and
construction of new plants ("greenfield development") and also from the
acquisition of existing plants, through competitively bid privatization
initiatives outside of the United States or negotiated acquisitions. Since 1992,
the Company's total generating capacity in megawatts has grown by 426 percent,
with the total number of plants in operation increasing from eight to 26. AES
operates and owns (entirely or in part), through subsidiaries and affiliates,
power plants in seven countries with a capacity of approximately 9,600 megawatts
(including 4,000 megawatts attributable to the Ekibastuz plant in Kazakstan
which at the time of its acquisition in August 1996 was running at approximately
20 percent of its capacity). AES is also constructing eight additional power
plants and one expansion in four countries with a design capacity of
approximately 1,700 megawatts. The Company's total ownership in plants in
operation and under construction aggregates approximately 11,300 megawatts and
its net equity ownership in such plants is approximately 7,500 megawatts. In
addition, AES has numerous projects in advanced stages of development, including
seven projects with an aggregate design capacity of approximately 4,700
megawatts that have executed or been awarded power sales agreements.
OUTLOOK
The global trend of electricity market restructuring has
created significant new business opportunities for companies like AES. There is
a trend away from government-owned electricity systems toward deregulated,
competitive market structures, in both domestic and international markets. Many
<PAGE>
countries have rewritten their laws and regulations to allow foreign investment
and private ownership of electricity generation, transmission or distribution
systems. Some countries have or are in the process of "privatizing" their
electricity systems by selling all or part of such systems to private investors.
With 18 of its projects having been acquired or having commenced commercial
operations since 1992, AES has been an active participant in both the
international privatization process and the development process. The Company is
currently pursuing over 70 projects through possible acquisitions, the expansion
of existing plants and greenfield development.
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.
The Company, a corporation organized under the laws of
Delaware, was formed in 1981. The principal office of the Company is located at
1001 North 19th Street, Suite 2000, Arlington, Virginia 22209, and its telephone
number is (703) 522-1315.
(b) Financial Information About Industry Segments
The Company operates in only one industry segment: electric
power supply.
(c) Narrative Description of Business
STRATEGY
The Company's strategy in helping meet the world's need for
electricity is to participate in competitive power markets as they develop
either by greenfield development or by acquiring and operating existing
facilities or systems in these markets. The Company generally operates electric
generating facilities that utilize natural gas, coal, oil, hydro power, or
combinations thereof. In addition, the Company participates in the distribution
and retail supply businesses in certain limited instances, and will continue to
review opportunities in such markets in the future.
Other elements of the Company's strategy include:
o Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
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o Constructing or acquiring projects of a relatively large size (generally
larger than 100 megawatts);
o When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
o Where possible, participating in distribution and retail supply markets
that grant concessions with long-term pricing arrangements.
The Company also strives for operating excellence as a key
element of its strategy, which it believes it accomplishes by minimizing
organizational layers and maximizing company-wide participation in
decision-making. AES has attempted to create an operating environment that
results in safe, clean and reliable electricity generation. Because of this
emphasis, the Company prefers to operate all facilities which it develops or
acquires; however, there can be no assurance that the Company will have
operating control of all of its facilities.
Where possible, AES attempts to sell electricity under
long-term power sales contracts. The Company attempts to structure the revenue
provisions of such power sales contracts such that changes in the cost
components of a facility (primarily fuel costs) correspond, as effectively as
possible, to changes in the revenue components of the contract. A plant's
revenue from a power sales contract usually consists of two components, energy
payments and capacity payments. Energy payments are usually based on a plant's
net electrical output, with payment rates usually indexed to the fuel costs of
the customer or to general inflation indices. Capacity payments are based on
either a plant's net electrical output or its available capacity. Capacity
payment rates vary over the term of a power sales contract according to various
schedules. Some power sales contracts permit the utility customer to dispatch
the plant (i.e., direct the plant to deliver a reduced amount of electric
output) within certain specified parameters. AES attempts to structure the power
sales contract payments so that, even when dispatching occurs, the plant
continues to receive capacity payments (which provide substantially all of the
plant's profits, if any), while it receives reduced energy payments (which
primarily cover the variable operating, maintenance and fuel costs associated
with operating at higher or lower levels).
The Company attempts to provide fuel for its operating plants
generally under long-term supply agreements, either through contractual
arrangements with third parties or, in some instances, through acquisition of a
dependable source of fuel. The Company will generally contract with outside
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parties, often the project's fuel supplier, to provide for the removal and
disposal of waste.
As electricity markets become more competitive, it may be more
difficult for AES (and other power generation companies) to obtain long-term
power sales contracts. In markets where long-term contracts are not available,
AES will pursue methods to hedge costs and revenues to provide as much assurance
as possible of a project's profitability. In markets where long-term power sales
contracts are unavailable, AES might choose to develop or acquire a project (i)
with a partial contractual hedge, or (ii) with no contractual hedge, or AES may
choose not to participate in these markets. To the extent that AES pursues a
project with no contractual hedge, AES's diverse portfolio of projects may
provide some hedge against the increased volatility of the project's earnings
and cash flow.
The Company attempts to finance each domestic and foreign
plant primarily under loan agreements and related documents which, except as
noted below, require the loans to be repaid solely from the project's revenues
and provide that the repayment of the loans (and interest thereon) is secured
solely by the capital stock, physical assets, contracts and cash flow of that
plant subsidiary or affiliate. This type of financing is generally referred to
as "project financing." The lenders under these project financing structures
cannot look to AES or its other projects for repayment, unless such entity
explicitly agrees to undertake liability. AES has explicitly agreed to undertake
certain limited obligations and contingent liabilities, most of which by their
terms will only be effective or will be terminated upon the occurrence of future
events. These obligations and liabilities take the form of guaranties, letter of
credit reimbursement agreements, and agreements to pay, in certain
circumstances, to project lenders or other parties amounts up to the amounts of
distributions previously made by the applicable subsidiary or affiliate to AES.
To the extent AES becomes liable under guaranties and letter of credit
reimbursement agreements, distributions received by AES from other projects are
subject to the possibility of being utilized by AES to satisfy these
obligations. To the extent of these obligations, the lenders to a project
effectively have recourse to AES and to the distributions to AES from other
projects. The aggregate contractual liability of AES is, in each case, usually a
small portion of the aggregate project debt, and thus the project financing
structures are generally described herein as being "substantially non-recourse"
to AES and its other projects.
AES PLANTS IN OPERATION AND UNDER CONSTRUCTION
The table below sets forth information on the Company's plants
and projects currently in operation or under construction.
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<TABLE>
<CAPTION>
Year of
Acquisition or
Commencement of AES Equity
Commercial Capacity Interest
Plant Fuel Operations (Megawatts) Location (%)
- ----- ---- -------------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
In Operation
North America
Deepwater.................. Pet Coke 1986(a) 143 Texas 100
Beaver Valley.............. Coal 1987 125 Pennsylvania 80
Placerita.................. Gas 1989 120 California 100
Thames..................... Coal 1990 181 Connecticut 100
Shady Point................ Coal 1991 320 Oklahoma 100
Barbers Point.............. Coal 1992 180 Hawaii 100
Europe
Kilroot (NIGEN)............ Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN)....... Coal 1992 240 United Kingdom 47
Medway..................... Gas 1995 660 United Kingdom 25
Borsod (Tiszai)............ Coal 1996 171 Hungary 63
Tisza II (Tiszai).......... Oil/Gas 1996 860 Hungary 93
Tiszapalkonya (Tiszai)..... Coal 1996 250 Hungary 93
Asia
Cili Misty Mountain........ Hydro 1994 26 China 24
Yangchun Sun Spring........ Oil 1995 15 China 12
Wuxi Tin Hill.............. Oil 1996 63 China 26
Wuhu Grassy Lake........... Coal 1996 125(b) China 12
Ekibastuz.................. Coal 1996 4,000(c) Kazakstan 70
South America
San Nicolas................ Multiple 1993 650 Argentina 69
Cabra Corral (Rio Juramento) Hydro 1995 102 Argentina 98
El Tunal (Rio Juramento)... Hydro 1995 10 Argentina 98
Ullum (San Juan)........... Hydro 1996 45 Argentina 98
Sarmiento (San Juan)....... Gas 1996 33 Argentina 98
Fontes Nova (Light)........ Hydro 1996 144 Brazil 14
Pereira Passos (Light)..... Hydro 1996 100 Brazil 14
Nilo Pecanha (Light)....... Hydro 1996 380 Brazil 14
Ilha dos Pombos (Light).... Hydro 1996 164 Brazil 14
Total in Operation 9,627
Under Construction
Lal Pir.................... Oil 1997(d) 337 Pakistan 90
PakGen..................... Oil 1997(d) 337 Pakistan 90
Jiaozuo Aluminium Power.... Coal 1997(d) 250 China 34
Chengdu Lotus City......... Gas 1997(d) 48 China 17
Wuhu Grassy Lake........... Coal 1997(d) 125(b) China 12
Aixi Heart River........... Coal 1998(d) 50 China 34
Hefei Prosperity Lake...... Oil 1998(d) 115 China 34
Barry...................... Gas 1998(d) 230 United Kingdom 100
Warrior Run................ Coal 1999(d) 180 Maryland 100
--------
Total under Construction 1,672
</TABLE>
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(a) Plant operations commenced in 1986, but control was acquired in 1995.
(b) 125 megawatts of Wuhu Grassy Lake is currently in operation. The other half
is under construction.
(c) Due to poor historical maintenance over the ten years prior to the
Company's purchase, the facility's capacity factor is approximately 20
percent.
(d) Estimated date of commencement of commercial operations.
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NORTH AMERICA
AES currently owns and operates, through subsidiaries and
affiliates, six plants in the United States representing approximately 1,069
megawatts.
AES Barbers Point, Inc. ("AES Barbers Point") is an indirectly
owned subsidiary of AES which owns and operates a 180 megawatt coal-fired
circulating fluidized bed ("CFB") cogeneration plant located in Kapolei, Oahu,
Hawaii. AES Barbers Point sells electricity to Hawaiian Electric Company, Inc.
("HECO") under a contract with a remaining term of 26 years. Steam generated by
the plant is sold to Chevron USA Inc. ("Chevron") for use in its oil refining
operations under a steam sales agreement with a remaining term of 16 years.
HECO's purchases represented approximately 16 percent of AES's 1996 consolidated
revenues.
AES Beaver Valley is a 125 megawatt pulverized coal-fired
cogeneration facility located in Monaca, Pennsylvania which is owned by BV
Partners, a Pennsylvania partnership ("BV Partners"). AES Beaver Valley, Inc.
("AES Beaver Valley"), a subsidiary of AES, and Shepperton Leasing Company are
the sole partners in BV Partners. AES Beaver Valley, as an 80 percent owner and
managing partner, operates the plant for the partnership. West Penn Power
Company ("West Penn") purchases electricity produced by the plant under a power
sales contract with a remaining term of approximately 20 years. BV Partners
sells steam to NOVA Chemicals Inc. for use in its chemical processing activities
under a requirements contract with a remaining term of approximately five years.
AES Deepwater, Inc. ("AES Deepwater") is a subsidiary of AES
which owns a 143 megawatt petroleum coke-fired cogeneration facility located
near Houston, Texas. The facility sells electricity to Houston Lighting and
Power Company ("HL&P") under a power sales contract which expires in 1998. AES
Deepwater, under a contract which also expires in 1998, produces and delivers
process steam to an ARCO Petroleum Products Company ("ARCO Petroleum") refinery
adjacent to the cogeneration facility.
AES Placerita, Inc. ("AES Placerita") is an indirectly owned
subsidiary of AES which leases and operates a 120 megawatt combined-cycle gas
turbine cogeneration facility near Los Angeles, California. The plant sells
electricity to Southern California Edison Company under a contract with a
remaining term of approximately 17 years. AES Placerita sells steam to Hillside
Oil Partners, which is engaged in oil recovery operations, and ARCO Oil and Gas
Company.
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AES Shady Point, Inc. ("AES Shady Point") is an indirectly
owned subsidiary of AES which owns and operates a 320 megawatt coal-fired, CFB
cogeneration plant in LeFlore County, Oklahoma. The AES Shady Point facility
includes a 240-ton per day food grade, liquid CO2 plant, which utilizes in its
CO2 production processes approximately 65,000 pounds per hour of process steam
produced by the plant. AES Shady Point sells electricity to Oklahoma Gas and
Electric Company ("OG&E") under a contract with a remaining term of
approximately 11 years. OG&E's purchases represented approximately 20 percent of
AES's 1996 consolidated revenues.
AES Thames, Inc. ("AES Thames") is an indirectly owned
subsidiary of AES which owns and operates a 181 megawatt coal-fired CFB
cogeneration plant located in Montville, Connecticut. Power generated by AES
Thames is sold to Connecticut Light and Power Company ("CL&P") under a contract
with a remaining term of approximately 18 years. AES Thames also sells steam to
Stone Container Paperboard Corporation for use in its recycled paperboard plant
located adjacent to the plant. CL&P's purchases represented approximately 16
percent of AES's 1996 consolidated revenues.
EUROPE
AES currently owns and operates, through subsidiaries and
affiliates, seven plants in Europe representing approximately 2,701 megawatts.
NIGEN Limited ("NIGEN"), a joint venture company owned by a
United Kingdom ("U.K.") subsidiary of the Company and a subsidiary of Tractebel,
S.A., a Belgian utility, owns and operates two power plants in Northern Ireland:
Kilroot, a 520 megawatt dual-fired (coal and oil) power plant, and Belfast West,
a 240 megawatt coal-fired power plant. The Kilroot and Belfast West plants have
entered into power sales contracts, subject to cancellation in 14 years and four
years, respectively, with Northern Ireland Electricity, plc, a transmission and
distribution company.
Medway Power Limited ("Medway Power") is a joint venture among
AES Medway Electric Limited, an indirectly owned U. K. subsidiary of AES ("AES
Medway"), and subsidiaries of Southern Electric plc ("Southern") and SEEBOARD
plc ("SEEBOARD"), which owns a 660 megawatt combined cycle gas-fired power plant
in Southeast England on the Isle of Grain. The plant began operations in
November 1995. AES Medway Operations Limited ("AESMO"), an indirectly owned U.K.
subsidiary of AES, operates and maintains the plant.
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Medway Power sells its entire output through national
electricity pool trading arrangements (the "Pool") at prices based on the supply
of, and demand for, electricity available in the Pool. In addition, Medway Power
has entered into a contract with each of Southern and SEEBOARD, under which
Southern and SEEBOARD will pay Medway Power capacity payments based on the
plant's available capacity, and energy cost payments, based on the plant's
actual sales of electricity to the Pool, that reflect fuel costs and variable
transmission charges incurred (each a "Contract for Differences"). The basis of
the contracts is 660 megawatts. Sales of electrical output in excess of 660
megawatts are sold into the Pool, and not subject to the Contract for
Differences.
The plant began commercial operations under the terms of the
Contracts for Differences on October 1, 1996. Commercial operations were delayed
by one year due to design difficulties with the rotors of the two combustion
turbines. These rotors were rebuilt with parts of a new design in the summer of
1996 and there has not been a recurrence of the difficulties since that time.
On December 23, 1996, one of the combustion turbines shut down
with damage resulting from a problem with its combustion system. The turbine was
repaired by Medway Power at its cost and returned to service in January 1997.
Medway Power has begun arbitration proceedings against the contractor to recover
the costs of the repairs, estimated at approximately $10 million, from the
contractor under the terms of the warranty. Although no assurance can be given
that Medway Power will prevail in the arbitration, the Company believes that the
outcome of this matter will not have a material adverse effect on its
consolidated financial position.
Tiszai Eromu Rt. is an indirectly owned subsidiary of AES
which owns and operates three power plants totaling 1,281 megawatts of gross
capacity (1,115 net megawatts) and a coal mine in Hungary. The plants consist of
(i) the Tisza II facility, an 860 megawatt oil and natural gas-fired facility
that sells electricity under a contract ending in 2010, (ii) the Tiszapalkonya
facility, a 250 megawatt coal-fired facility that sells electricity under a
contract ending in 2001, and (iii) the Borsod facility, a 171 megawatt
coal-fired facility that sells electricity under a contract ending in 2001. Each
plant sells electricity to Magyar Villamos Muvek Rt. ("MVM Rt."), a Hungarian,
state-owned integrated utility, under long-term power sales contracts. These
agreements currently are being renegotiated to conform their pricing methodology
with standard international practice. Aggregate purchases by MVM Rt. under the
three power sales agreements were approximately 10 percent of the Company's
consolidated revenues in 1996. AES also has the right to develop an additional
150 megawatt coal-fired electric generating facility.
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In August 1996, AES acquired its initial 80.8 percent of
Tiszai Eromu Rt. at a cost of $110 million. In December 1996, AES, through a
subsidiary, completed the purchase of an additional 12.5 percent of Tiszai Eromu
Rt., from employee pension plans at a cost of $17 million, bringing AES's total
equity interest in Tiszai Eromu Rt. to 93.3 percent. Substantial risks
associated with these plants exist, however, including those relating to the
successful renegotiation of power sales arrangements with the Hungarian
government, plant operation and maintenance, construction difficulties in
respect of the undeveloped facility, plant refurbishment, environmental risk,
political risk, repatriation of earnings and currency inconvertibility.
ASIA
AES currently owns and operates, through subsidiaries and
affiliates, five plants in Asia representing approximately 4,229 megawatts of
generating capacity.
AES China Generating Co. Ltd. ("AES Chigen") was founded in
December 1993 by AES to develop, acquire, finance, construct, own and operate
electric power generation facilities in the People's Republic of China (the
"PRC"). Since commencing business, AES Chigen has developed eight power projects
which are currently in operation or under construction in the PRC having an
aggregate nameplate capacity of approximately 817 megawatts.
AES currently owns all of the issued and outstanding shares of
AES Chigen's Class B Common Stock, which represents approximately 48% of the
economic value of AES Chigen, and 50% of the voting power, on most matters. The
remaining shares, constituting Class A Common Stock, are publicly-held.
In November 1996, AES Chigen and AES entered into an Agreement and Plan of
Amalgamation, providing among other things for AES Chigen to become a wholly
owned subsidiary of AES (the "Amalgamation"). The Amalgamation is subject to
various conditions, including the approval of the holders of the Class A Common
Stock of AES Chigen, and there can be no assurance that the Amalgamation will be
consummated. The special class meeting of the holders of the AES Chigen Class A
Common Stock and the special general meeting of the shareholders of AES Chigen
to vote on the Amalgamation are scheduled for April 10, 1997.
AES Suntree Ltd., is an indirectly owned subsidiary of AES
which owns and operates a 4,000 (design capacity) megawatt mine-mouth,
coal-fired power facility in Kazakstan. The facility sells electricity to a
government-owned distribution company under a 35-year power sales contract. Due
to economic difficulties over the ten years prior to the Company's purchase, the
facility has experienced a reduction in performance and has operated at a
capacity factor of approximately 20 percent. AES has agreed to increase the
capacity to 63 percent over a five-year period (contingent on the purchaser's
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performance of its obligations under the power sales contract). Through December
31, 1996, approximately $35 million (excluding value added taxes) was billed
under the power sales contract for electricity, of which the purchaser paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract receivable as of December 31, 1996 to
$10.0 million. As of December 31, 1996, the net assets of this project were $24
million, a portion of which was represented by the contract receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owned to AES as of December 31, 1996 or additional amounts related to future
deliveries of electricity under the power sales contract or the recoverability
of the Company's investment or additional amounts the Company may invest in the
project. Other substantial risks associated with this plant exist, including
those relating to operations and maintenance, construction, refurbishment,
political risk, repatriation of earnings and currency convertibility.
SOUTH AMERICA
AES currently owns and operates, through subsidiaries and
affiliates, and, in certain instances, together with partners, nine plants in
South America representing approximately 1,628 megawatts of generating capacity,
as well as 3,800 megawatts of transmission and distribution system.
Central Termica San Nicolas S.A. ("San Nicolas") is an
indirectly owned subsidiary of AES which owns and operates a 650 megawatt power
plant in San Nicolas, Argentina. AES owns approximately 69 percent of San
Nicolas, a subsidiary of a U.S. utility owns approximately 19 percent, and the
remaining 12 percent is owned by an employee stock ownership plan.
San Nicolas sells a total of 345 megawatts of electricity
(approximately 53 percent of the plant's output capability) under two power
sales contracts, each with a remaining term of four years. Under one of the
contracts, Empresa Social de Energia de Buenos Aires S.A. ("ESEBA"), a
distribution company controlled by the Argentine government, purchases 285
megawatts (except during the month of April of each year, when the amount
purchased is 57 megawatts). Under the other contract, EDELAP, S.A., a privatized
Argentine distribution company, purchases 60 megawatts of electricity. The plant
sells additional electricity, when profitable, into the Argentine spot market.
ESEBA's purchases accounted for approximately 11 percent of AES's 1996
consolidated revenues.
Hidroelectrica Rio Juramento S.A. ("Rio Juramento") is an
indirectly owned subsidiary of AES which leases and operates a 112 megawatt
hydroelectric station in the province of Salta, Argentina. The station consists
of
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a 102 megawatt facility with a large storage reservoir capable of inter-year
storage, and a 10 megawatt facility capable of inter-seasonal storage. Rio
Juramento has exclusive rights to operate the facility under a 30-year
concession agreement, and sells electricity in the Argentine spot market.
Hidrotermica San Juan, S.A. ("San Juan"), is an indirectly
owned subsidiary of AES and the owner and operator of two power generating
facilities totaling 78 megawatts in the province of San Juan, Argentina. The
facility includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas
combustion power plant.
Light Servicos de Electricidade, S.A. ("Light") is a 3,800
megawatt Brazilian electric power generation, transmission and distribution
system serving 28 municipalities in the state of Rio de Janeiro, Brazil that is
controlled by a consortium (the "Consortium") comprised of the following parties
(with each party's respective percentage ownership, as of December 31, 1996, in
parentheses): subsidiaries or affiliates of AES (11.35 percent), Electricite de
France (11.35 percent); Houston Industries Incorporated (11.35 percent);
Companhia Siderurgica Nacional (7.25 percent); and Banco Nacional de
Desenvolvimento Economico E Social (9.14 percent). In January 1997, AES acquired
an additional 2.4 percent of the voting interest in Light, bringing its total
equity interest in Light to 13.75 percent; this acquisition did not alter the
respective voting rights, or other rights and obligations, of the parties
constituting the Consortium.
In connection with the purchase of the controlling interest by
the Consortium, the Ministry of Mines and Energy of Brazil granted a 30-year
concession to Light pursuant to the terms of a concession agreement which
obligates Light to provide electric services to all customers within its
concession, and authorizes Light to charge its customers a tariff for electric
services which consists of two components - an expense pass-through component
and an inflation-adjusted operating cost component. Beginning in 2004, the
Ministry of Mines and Energy of Brazil has the authority to review Light's costs
to determine the adjustment, if any, to the operating cost component for
subsequent five-year periods.
Light generates about 16 percent of the total electricity it
distributes through four hydroelectric complexes having an aggregate installed
generating capacity of approximately 788 megawatts. Of the remaining electricity
distributed by Light (approximately 84 percent of the total), 53 percent is
purchased from Furnas Centrais Electricas S.A., a power generation and
transmission company owned by Eletrobras, and the remaining 31 percent is
purchased from Itaipu Binacional, a power generation company owned by the
Republic of Brazil and the Republic of Paraguay.
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In December 1996, a subsidiary of AES completed a $167.5
million syndicated bank financing related to its equity ownership of Light.
Under the terms of the financing, a wholly-owned subsidiary of AES pledged the
shares of Light owned by it as collateral for the loan. The proceeds of the
financing were used to repay a portion of the debt incurred in the acquisition
of AES's interest in Light.
PROJECTS UNDER CONSTRUCTION
AES Lal Pir Limited ("AES Lal Pir") and AES Pak Gen (Private)
Company ("AES Pak Gen"), are indirectly owned project subsidiaries of AES which
are constructing two substantially identical, adjacent 337 megawatt oil-fired
facilities in Punjab Province, Pakistan. The Water and Power Development
Authority ("WAPDA") has agreed to purchase the electrical capacity and
electrical output of the facilities through two separate 30-year power sales
agreements. Certain of the obligations of WAPDA under the power sales agreements
and PSO under the fuel supply agreements are guaranteed by the Government of
Pakistan.
Financing for the AES Lal Pir project was completed in May
1995 and is comprised of (i) a Y20.25 billion ($174 million) commercial loan
provided by a syndicate of lenders, (ii) an International Finance Corporation
("IFC") loan of $40 million, and (iii) equity of $95 million. IFC will make an
equity investment in AES Lal Pir of $9.5 million. AES has supported certain of
AES Lal Pir's pre-completion obligations in an aggregate amount of up to $42
million, and certain post-completion obligations in an aggregate amount of up to
$59 million. The financing for the AES Pak Gen project was completed in January
1996, and consists of (i) a buyer's credit facility established by The Export
Import Bank of Japan of US$40 million and Y14.203 billion (US$122 million), (ii)
an IFC direct loan of US$20 million, (iii) an IFC syndicated loan of US$50
million, and (iv) equity of $95 million. IFC will make an equity investment in
AES Pak Gen of US$9.5 million. AES has committed to fund the remaining equity of
US$85.5 million. The equity commitments in each of AES Lal Pir and AES Pak Gen
were partially satisfied as of December 31, 1996. AES has supported certain of
AES Pak Gen's pre-completion obligations in an aggregate amount of up to $42
million, and certain post-completion obligations in an aggregate amount of up to
$65 million. The facilities are being built by Nichimen Corporation under two
"turn-key", lump sum price contracts, with key equipment in each case being
supplied by Mitsubishi Heavy Industries. The projects are scheduled to commence
commercial operations by the end of 1997. All yen amounts set forth in this
Report have been translated into U.S. dollar ($)
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amounts at an exchange rate of Y116/US$1.00, the noon buying rate in The City of
New York for cable transfers payable in Japanese Yen as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1996.
Substantial risks to the successful completion of these
projects exist, including those relating to political risk, exchange rate risk,
currency inconvertibility, governmental approvals, siting, construction and
permitting, and the possible termination of the power sales contract as a result
of the failure to meet certain construction milestones. No assurance can be
given that these projects will be completed.
AES WR Limited Partnership ("AES Warrior Run"), an indirectly
owned subsidiary of AES, is currently constructing a 180 megawatt coal-fired
cogeneration facility in Allegany County, Maryland. The Potomac Edison Company
will purchase all of the electrical capacity of the facility pursuant to a
30-year dispatchable power sales contract and that the plant is scheduled to
begin commercial operation by October 1, 1999. The project obtained its
financing in September 1995 consisting of (i) commercial bank loan commitments
of $331 million, (ii) approximately $74 million of tax-exempt bonds issued by
the Maryland Energy Financing Administration and (iii) an equity commitment of
approximately $46 million. Construction services are being performed under a
lump sum, turn-key contract by a consortium consisting of Raytheon Engineers &
Constructors, Inc. and ABB/Combustion Engineering, Inc. with key equipment
supplied by ABB/Combustion Engineering. Coal will be supplied to the project
under a 20-year contract.
Substantial risks to the successful completion of this project
exist, including those relating to construction and permitting, and the possible
termination of the power sales contract as a result of a failure to meet certain
construction milestones and, as a result, no assurance can be given that this
project will be completed.
AES Barry Ltd. ("AES Barry"), an indirectly owned subsidiary
of AES, began constructing a 230 megawatt gas-fired combined cycle facility in
Barry, South Wales, United Kingdom in October 1996. Construction services are
being supplied by TBV Power Limited under a lump sum, turnkey construction
contract. The Barry facility will sell electricity into the national electricity
"spot" market in the United Kingdom and it is expected to be operational by the
second quarter of 1998. In February 1997, AES Barry raised $184 million of
non-recourse project financing, underwritten solely by The Industrial Bank of
Japan, Limited. Substantial risks to the successful completion of this project
exist, including those relating to governmental approvals, the
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<PAGE>
demand for and price of electricity in the United Kingdom national electricity
market, financing, construction and permitting. There can be no assurance that
this project will be completed.
POTENTIAL ACQUISITIONS/PROJECTS IN ADVANCED DEVELOPMENT
In February 1997, AES entered into a definitive agreement to
acquire the international assets (inclusive of approximately $42 million of net
monetized assets) of Destec Energy, Inc. ("Destec"), a large independent energy
producer with headquarters in Houston, Texas, for a total price to AES of $407
million, which price is subject to adjustment to reflect net cash flow between
the international assets of Destec and the rest of Destec from January 1, 1997
to the closing date. NGC Corporation ("NGC"), working in conjunction with AES,
was selected as the winning bidder in an auction for all of Destec at a total
acquisition price of $1.27 billion. AES will acquire the international assets of
Destec immediately following NGC's acquisition of Destec. Destec's international
assets to be acquired by AES include ownership interests in the following five
electric generating plants (with ownership percentages in parentheses): (i) a
110 megawatt gas-fired combined cycle plant in Kingston, Canada (50 percent),
(ii) a 405 megawatt gas-fired combined cycle plant in Terneuzen, Netherlands (50
percent), (iii) a 140 megawatt gas-fired simple cycle plant in Cornwall, England
(100 percent), (iv) a 235 megawatt oil-fired simple cycle plant in Santo
Domingo, Dominican Republic (99 percent); and (v) a 1600 megawatt coal-fired
plant in Victoria, Australia (20 percent). The acquisition by AES of Destec's
international assets also includes all of Destec's non-U.S. developmental stage
power projects, including projects in Taiwan, England, Germany, the Philippines,
Australia and Colombia. A number of risks are associated with this acquisition,
including those relating to the closing of the transaction (which is contingent
on the closing of NGC's acquisition of Destec), the receipt of government
approvals and other consents, financing, operation and maintenance, construction
and environmental risks.
In February 1997, subsidiaries of AES executed three power
purchase agreements (the "PPAs"), for an aggregate generating capacity of at
least 457 megawatts, with GPU Energy, the energy services and delivery business
of GPU, Inc., a public utility holding company. AES plans to build a 720
megawatt natural gas-fired, combined cycle facility in Pennsylvania to sell
power under the PPAs beginning in 2000 and to sell power to other potential
purchasers. Between March and July 1996, subsidiaries of AES acquired the right
to negotiate the PPAs from other independent power producers for a net aggregate
cost of approximately $28 million. GPU Energy is required to
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<PAGE>
reimburse AES for substantially all its initial net investment if the project
does not receive the requisite regulatory approvals and permits. This project is
subject to a number of risks, including those related to governmental approvals,
siting, permitting, financing, construction and contract compliance, and there
can be no assuance that it will be completed successfully.
In January 1997, a joint venture company led by a subsidiary
of AES was selected as the winning bidder to build, own and operate a 484
megawatt gas-fired combined cycle power plant in the city of Merida, Yucatan,
Mexico. This project is subject to a number of risks, including those related to
governmental approvals, financing, construction and contract compliance, and
there can be no assurance that it will be completed successfully.
Another subsidiary of the Company, AES Puerto Rico, L.P. ("AES
Puerto Rico"), is developing a 454 megawatt coal-fired cogeneration facility in
Guayama, Puerto Rico. The Puerto Rico Electricity Power Authority has agreed to
purchase the electrical output of the facility pursuant to a 25-year power sales
agreement. However, substantial risks to the successful completion of this
project exist, including those relating to governmental approvals, financing,
construction and permitting, and possible termination of the power sales
contract as a result of a failure to meet certain development or construction
milestones. There can be no assurance that this project will be completed.
An affiliate of the Company, San Francisco Energy Company, LP
("SFEC"), which is a joint venture between AES and Sonat Inc., is developing a
240 megawatt gas fired facility in San Francisco, California. The electrical
capacity of the facility is to be purchased by Pacific Gas & Electric ("PG&E")
under a 30-year power sales agreement, which SFEC executed in April 1994.
However, a ruling by the Federal Energy Regulatory Commission ("FERC") has
questioned the validity of the California Biennial Resource Plan Update
("BRPU"), pursuant to which SFEC was awarded its contract. The Company believes
that its contract with PG&E is valid, but the Company is currently involved in
litigation with PG&E over the validity of the contract. The Company does not
believe that the ultimate resolution of this matter will have a material adverse
effect on the Company. Substantial risks to the successful completion of this
project exist, including those relating to the contract litigation, FERC
decision, siting, financing, construction and permitting. No assurance can be
given that this project will be completed.
A project subsidiary of the Company, AES Ib Valley Corporation
("AES Ib Valley"), has been developing a 420 megawatt coal-fired facility in the
State of Orissa, India. Under the terms of an executed power sales agreement,
the Orissa State Electricity Board ("OSEB") agreed to purchase at least 85
percent of the electrical capacity of the facility pursuant to a 30-year
contract. Certain of OSEB's obligations are guaranteed by the Government of
Orissa ("GOO"). In addition, the Government of India ("GOI") agreed to guarantee
a
15
<PAGE>
portion of GOO's obligations. In July 1995, a newly elected state government
initiated a review of the terms and conditions of AES Ib Valley's agreements
with OSEB and GOO. This review has led OSEB and GOO to seek significant
modifications to the terms of the power sales agreement. In light of this review
AES has been unable to reach financial closing on this project and has been
forced to terminate certain financing and contractual commitments relating to
the project. AES Ib Valley is currently in negotiation with GOO and OSEB and may
agree to changes, including those relating to the plant's technical
configuration, capital cost, size and the price paid for electricity.
Notwithstanding the Company's willingness to discuss modifications to the
project, the Company believes that its current agreements with GOO, OSEB and GOI
are valid, and if agreements cannot be restructured on terms acceptable to AES,
the Company intends to pursue its rights with respect to enforcement of the
existing contracts. No assurance can be given that either (i) the terms of a new
contract will be agreed to or (ii) if AES pursues its legal claims, that it will
be able to compel specific performance or recover significant damages.
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 will burn liquefied petroleum gas
and will sell electricity to the Queensland Transmission and Supply Corporation
under a 10-year power purchase agreement. This project is subject to numerous
risks, including those relating to governmental approvals, permitting, financing
and construction of the facility. No assurance can be given that this project
will be completed successfully.
AES has dedicated significant resources to pursue the
development and acquisition of additional projects located in the United States,
Europe, Pakistan, India, Southeast Asia, Central and South America, Africa, the
Middle East and the countries comprising the former Soviet Union. Most of the
Company's current development and acquisition activities are in respect of
projects and plants outside the United States. Acquisitions of existing power
facilities or companies could be accomplished by the payment of cash, by an
exchange of project ownership interests or by the issuance of the Company's
securities. The Company expects that its involvement in connection with any such
acquisitions will be consistent with its overall strategy. In particular, the
Company would generally seek projects of a relatively large size that would
likely be operated by the Company, have long-term power sales contracts, and be
financed, to the maximum extent possible, with debt on a basis that is
substantially non-recourse to AES and its other projects. Based on the Company's
experience, it is likely that no more than a few of these projects or
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<PAGE>
existing plants will be developed or acquired. As of December 31, 1996,
capitalized costs for projects under development were approximately $53 million.
REGULATORY MATTERS
Electricity markets in the United States may be considered to
be more regulated than those in some other countries in which AES is operating,
or is seeking to operate, such as those in Argentina, the United Kingdom and
Australia. U.S. laws and regulations still govern to some extent wholesale
electricity transactions, the type of fuel utilized, the type of energy
produced, and power plant ownership. State regulatory commissions have
jurisdiction over retail electricity transactions. U.S. power projects also are
subject to laws and regulations controlling emissions and other substances
produced by a plant and the siting of plants. These laws and regulations
generally require that a wide variety of permits and other approvals be obtained
before the construction or operation of a power plant commences, and that the
facility operate in compliance with these permits thereafter. FERC must also
approve rates charged by certain power marketers such as those of the Company's
subsidiary, AES Power.
In the United States, so-called Qualifying Facilities ("QFs")
are relieved of compliance with extensive federal, state and local regulations
by the provisions of the Public Utility Regulatory Policies Act, as amended
("PURPA"). Each of AES's current domestic plants is a QF. Loss of QF status, if
not prevented, would subject these plants to more extensive regulations.
Furthermore, loss of QF status would permit the utility customer to alter or
terminate the power sales contract for the Deepwater plant and, in the case of
the AES Beaver Valley, AES Thames and AES Shady Point plants, would permit the
utility customer to pay the lesser of the price under the respective power sales
contract or the rates approved by FERC. The Company believes, however, that it
will usually be able to react in a manner that would avoid the loss of QF
status.
State public utility commissions ("PUCs") regulate both the
retail rates and financial performance of electric utilities. Since a wholesale
power sales contract is generally reflected in a utility's retail rates, power
sales contracts from QFs are indirectly under the regulatory purview of PUCs.
PUCs often will pre-approve contracts with prices that do not exceed so-called
"avoided costs" because such contracts often have been acquired through a
competitive or market-based process. Recognizing the competitive nature of most
acquisition processes, most PUCs will permit utilities to "pass through"
expenses associated with an independent power contract to the utility's retail
17
<PAGE>
customers, although no assurance can be given that a PUC will not attempt to
deny the "pass through" of these expenses in the future. The Company believes
that any such attempt by a PUC would, among other things, be pre-empted by
federal law.
AES must obtain exemptions from, or become subject to
regulation by, the Securities and Exchange Commission under the Public Utility
Holding Company Act ("PUHCA") in regard to both its domestic and foreign utility
company holdings. There are a number of exemptions from PUHCA that are available
for both domestic and foreign utility company owners, including those for QFs,
Exempt Wholesale Generators and Foreign Utility Companies. AES has obtained, and
believes that it will be able to obtain and maintain in the future, appropriate
PUHCA exemptions for its utility acquisitions.
U.S. Environmental Regulations
The construction and operation of power projects are subject
to extensive environmental and land use regulation. In the United States those
regulations applicable to AES primarily involve the discharge of effluents into
the water and emissions into the air and the use of water, but can also include
wetlands preservation, endangered species, waste disposal and noise regulation.
These laws and regulations often require a lengthy and complex process of
obtaining licenses, permits and approvals from federal, state and local
agencies. If such laws and regulations are changed and AES's facilities are not
"grandfathered" (that is, made exempt by the fact that the facility pre-existed
the law) or are otherwise not excluded, extensive modifications to a project's
technologies and facilities could be required. If environmental laws or
regulations were to change in the future, there can be no assurance that AES
would be able to recover all or any increased costs from its customers or that
its business and financial condition would not be materially and adversely
affected. In addition, the Company may be required to make significant capital
or other expenditures in connection with such changes in environmental laws or
regulations. 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. While AES expects that environmental and land use regulations
in the United States will continue to become more stringent over time, the
Company is not aware of any currently planned changes in law that would result
in a material adverse effect on its consolidated financial position.
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Clean Air Act. The original Clean Air Act of 1970 set
guidelines for emissions standards for major pollutants (e.g., SO2 and NOx) from
newly-built sources. In late 1990, Congress passed a set of amendments to the
Clean Air Act (the "1990 Amendments"). All of AES's domestic operating plants
perform at levels better than federal emission standards mandated for such
plants under the Clean Air Act (as amended). The 1990 Amendments attempt to
reduce acid rain precursor emissions (SO2 and NOX) from existing sources --
particularly large, older power plants that were exempted from certain
regulations under the original Clean Air Act. Because AES's facilities are
relatively new cogeneration units with low air emissions that qualify as
"existing sources" under the 1990 Amendments, they have been "grandfathered"
from certain acid rain compliance provisions of the 1990 Amendments. Other
provisions of the Clean Air Act related to the reduction of ozone precursor
emissions (VOC and NOx) have triggered "reasonably available control technology"
("RACT") requirements by various states to reduce such emissions.
The hazardous air pollutant provisions of the 1990 Amendments
presently exclude electric steam generating facilities such as AES's domestic
plants; however, the 1990 Amendments directed that the Environmental Protection
Agency ("EPA" or the "Agency") prepare a study on hazardous air pollutant
("HAP") emissions from power plants. In the fall of 1996, EPA released an
interim report on HAP emissions from power plants that tentatively concluded
that the risk of contracting cancer from exposure to HAPs (except mercury) from
most plants was very low (less than one in 1 million). EPA is developing a
separate study on mercury emissions from power plants. The draft mercury study
report is currently being reviewed by the federal Scientific Advisory Board and
it is not certain when a final report will be released. A final comprehensive
HAP report with recommendations is expected to be issued after EPA's review of
mercury emissions from power plants is complete. If it is determined that
mercury from power plants should be regulated, the use of "maximum available
control technology" ("MACT") for mercury (which is now not subject to
regulation) could be required.
In December 1996, EPA also released proposals to tighten
ambient air quality standards for ozone and small particulate matter (so-called
PM 2.5). If approved, these new standards will likely increase the number of
nonattainment regions for ozone and particulates. These proposals are scheduled
to be finalized in the summer of 1997. If new ozone and particulate matter
nonattainment areas are created, AES's plants may be faced with further emission
reduction requirements that could necessitate the installation of additional
control technology.
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Further, the Ozone Transport Assessment Group ("OTAG"),
composed of state and local air regulatory officials from the 37 eastern-most
states, is considering additional NOx emission reduction requirements that would
go beyond current federal standards. In January 1997, EPA issued a notice of
intent to require regional reductions in ozone precursors. EPA expects to issue
its call for revisions to state implementation plans ("SIPs") in the spring of
1997. EPA's "SIP call" may implement some of the OTAG recommendations calling
for reductions in NOx emissions. If more stringent NOx standards are adopted by
EPA and/or certain states, AES could be required to install additional NOx
emission control technologies at some of its plants, and/or obtain offsets or
allocations from other emitters of these substances.
The Company does not believe that any of the potential
additional requirements discussed above, if implemented, will have a material
adverse effect on its results of operations and consolidated financial position.
Hazardous Waste Regulation. Based on a 1988 study, EPA has
decided not to regulate most coal combustion ash as a hazardous waste; however,
EPA reserved making a decision with respect to coal ash from fluidized bed
combustion (the burning of coal in the presence of limestone), which is still
being evaluated by the Agency. AES, along with other CFB owners and
manufacturers, is currently participating in a study to evaluate whether or not
CFB ash should be classified as hazardous. EPA is required to make a
determination on whether to regulate CFB ash by April 1, 1998. If EPA decides to
regulate fluidized bed coal ash as a hazardous or special waste, AES could incur
additional ash disposal costs to dispose of ash from its plants that utilize
fluidized bed boilers.
FOREIGN ENVIRONMENTAL REGULATIONS
AES now has ownership interests in operating power plants in a
variety of countries outside the United States (China, Argentina, Brazil, United
Kingdom, Hungary and Kazakstan). Each of these countries and the localities
therein have separate laws and regulations governing the siting, permitting,
ownership and power sales from AES's plants. These laws and regulations are
often quite different than those in effect in the United States--and AES's
non-U.S. businesses have been in substantial compliance with these different
laws and regulations. In addition, projects funded by the World Bank are subject
to World Bank environmental standards, which may be more stringent than local
country standards but are typically not as strict as U.S. standards. Whenever
possible, AES attempts to use advanced environmental cleanup technologies
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<PAGE>
(such as CFB coal technology or advanced gas turbines) in its non-U.S. power
generation projects, in order to minimize environmental impacts.
Based on current trends, AES expects that environmental and
land use regulations affecting its plants located outside the U.S. will likely
become more stringent over time. This appears to be due in part to a greater
participation by local citizenry in the monitoring and enforcement of
environmental laws, better enforcement of applicable environmental laws by the
regulatory agencies, and the adoption of more sophisticated environmental
requirements. If foreign environmental and land use regulations were to change
in the future, the Company may be required to make significant capital or other
expenditures in order to comply. There can be no assurance that AES would be
able to recover all or any increased costs from its customers or that its
business, financial condition or results of operations would not be materially
and adversely affected by future changes in foreign environmental and land use
regulations.
PROPOSED LEGISLATION
In the United States, some states (for example, California,
Illinois, Michigan, Massachusetts and Pennsylvania) have passed or are
considering new legislation that permits utility customers to choose their
electricity supplier in a competitive electricity market (so-called "retail
access" or "customer choice" laws). While such "customer choice" plans differ in
details, they usually share some important elements: (1) they allow customers to
choose their electricity suppliers by a certain date (the dates in the existing
or proposed legislation vary between 1998 and 2003); (2) they allow utilities to
recover so-called "stranded assets"--the remaining costs of uneconomic
generating or regulatory assets; and (3) they reaffirm the validity of existing
QF contracts, and make provisions to assure payment over the contract life.
In order to guarantee payment of utilities' costs and the
costs of QF contracts, some states have used or are proposing to use financial
methods to "securitize" these payments. The "securitization" process might
involve the following steps: first, the financial obligations to be
"securitized" would be legally affirmed through legislation. This legal
obligation then is used to borrow money in public debt markets to pay off the
obligation. The legal obligation allows the borrower to obtain a good credit
rating and therefore a lower interest rate. In some cases, the benefits of the
lower interest rate are passed on to retail electric customers (perhaps in the
form of a rate decrease). "Securitization" of QF contract obligations, if
applied to AES contracts in the future, would significantly reduce the risk to
AES that its power sales contracts would not be honored due to potential
financial difficulties of the utility purchaser.
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In addition to state restructuring legislation, members of
Congress have proposed new federal legislation to encourage customer choice and
recovery of stranded assets. Some argue that federal legislation is needed to
avoid the "patchwork quilt" effect of each state acting separately to pass
restructuring legislation; others argue that each state should decide whether to
allow retail choice. In early 1997 several bills were (and others are expected
to be) submitted to Congress on electricity restructuring. While it is uncertain
whether or when federal legislation dealing with electricity restructuring might
be passed, it is the opinion of the Company that such legislation would not have
a materially adverse effect on the Company's U.S. business.
In addition to the federal restructuring legislation
proposals, a number of bills have been proposed by members of Congress to repeal
all or portions of PURPA and/or PUHCA--as separate legislation if a
comprehensive restructuring bill fails to pass. The Company believes that the
repeal of PURPA and/or PUHCA is unlikely (and inappropriate) unless it is a part
of a comprehensive restructuring bill.
In anticipation of restructuring legislation, many U.S.
utilities are seeking ways to lower their costs in order to become more
competitive. These include the costs that utilities are required to pay under QF
contracts, which the utilities may view as excessive when compared to current
market prices. Many utilities are therefore seeking ways to lower these contract
prices by renegotiating the contracts, or in some cases by litigation. While the
Company is generally open to renegotiation of existing contracts, it believes
that the aforementioned electricity market restructuring legislation will likely
reduce both the pressure to renegotiate and the need for such contract
renegotiations.
EMPLOYEES
At December 31, 1996, AES and its subsidiaries employed
approximately 5,700 people, approximately 5,500 of whom are involved in
operations or construction. Approximately 50 people are covered by a collective
bargaining agreement at the AES Beaver Valley plant. The total number of people
employed in facilities which AES operates or has an equity interest is
approximately 13,000.
(d) Financial Information About Foreign and Domestic Operations
and Export Sales
See the information contained under the caption "Geographic
Segments" in Note 11 to the Consolidated Financial Statements contained in the
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Registrant's Current Report on Form 8-K dated March 12, 1997, which information
is incorporated herein by reference.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following is certain information concerning the present
executive officers of the Registrant.
Roger W. Sant, 65 years old, co-founded the Company with
Dennis Bakke in 1981. He has been Chairman of the Board and a director of the
Registrant since its inception, and he held the office of Chief Executive
Officer through December 31, 1993. He currently is Chairman of the Board of
Directors of AES Chigen, an affiliate of the Registrant, The Summit Foundation
and The World Wildlife Fund U.S., and serves on the Board of Directors of The
World Resources Institute, World Wide Fund for Nature and Marriott
International, Inc. He was Assistant Administrator for Energy Conservation and
the Environment of the Federal Energy Agency ("FEA") from 1974 to 1976 and the
Director of the Energy Productivity Center, an energy research organization
affiliated with The Mellon Institute at Carnegie-Mellon University, from 1977 to
1981.
Dennis W. Bakke, 51 years old, co-founded the Registrant with
Roger Sant in 1981 and has been a director of the Registrant since 1986. He has
been President of the Registrant since 1987 and Chief Executive Officer since
January 1, 1994. He currently is a director of AES Chigen. From 1987 to 1993, he
served as Chief Operating Officer of the Registrant; from 1982 to 1986, he
served as Executive Vice President of the Registrant; and from 1985 to 1986 he
also served as Treasurer of the Registrant. He served with Mr. Sant as Deputy
Assistant Administrator of the FEA from 1974 to 1976 and as Deputy Director of
the Energy Productivity Center from 1978 to 1981. He is a trustee of Geneva
College, Rivendell School and a member of the Board of Directors of MacroSonics
Corporation.
Kenneth R. Woodcock, 53 years old, has been Senior Vice
President for business development of the Registrant since 1987. From 1984 to
1987, he served as a Vice President for business development.
Thomas A. Tribone, 44 years old, has been Senior Vice
President of the Registrant since 1990, and now heads an AES division
responsible for power marketing, project development, construction and plant
operations in South and Central America. From 1987 to 1990 he served as Vice
President for project development and from 1985 to 1987 he served as project
director of the AES Shady Point plant. He currently is as a director of AES
Chigen.
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<PAGE>
Mark S. Fitzpatrick, 46 years old, has served as a Vice
President of the Registrant since 1987, and became Managing Director of Applied
Energy Services Electric Limited for the United Kingdom and Western Europe
operations in 1990. From 1984 to 1987, he served as a project director of the
AES Beaver Valley and AES Thames projects.
David G. McMillen, 58 years old, was named Vice President of
the Company in December 1991. He was named President of AES Shady Point in 1995
and is currently plant manager of the AES Shady Point Plant. He was President of
AES Thames from 1989 to 1995. From 1985 to 1988, he served as plant manager of
the AES Beaver Valley plant and from 1986 to 1988 he served as President of AES
Beaver Valley.
Dr. Roger F. Naill, 49 years old, has been Vice President for
planning since 1981. Prior to joining the Registrant, Dr. Naill was Director of
the Office of Analytical Services at the U.S. Department of Energy.
Barry J. Sharp, 37 years old, has been Vice President and
Chief Financial Officer since 1987. He also served as Secretary of the
Registrant until February 1996. From 1986 to 1987, he served as Director of
Finance and Administration. Mr. Sharp is a CPA.
J. Stuart Ryan, 38 years old, was appointed Vice President of
the Registrant effective January 1, 1994, and heads an AES division responsible
for project development, construction and plant operations in Asia (excluding
China), California and Hawaii. He served as general manager of a group within
AES from 1988 to 1993.
Paul T. Hanrahan, 39 years old, was appointed Vice President
of the Registrant effective January 1, 1994. He currently is President and Chief
Executive Officer of AES Chigen, where he served as Executive Vice President,
Chief Operating Officer and Secretary from December 1993 until February 1995. He
was General Manager of AES Transpower, Inc., a subsidiary of the Registrant,
from 1990 to 1993.
John Ruggirello, 46 years old, was appointed Vice President of
the Registrant effective January 1997, and heads an AES division responsible for
project development, construction and plant operations in North America
(excluding Oklahoma, Hawaii and parts of California). He served as President of
AES Beaver Valley from 1990 to 1996.
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ITEM 2. PROPERTIES
The Registrant leases its principal office in Arlington,
Virginia. The Arlington lease expires in April 1999, and the Registrant has two
renewal options thereafter for five years each. Subsidiaries of the Registrant
also lease office space in Richmond, England; San Francisco, California; San
Juan, Puerto Rico; Hong Kong; Beijing, China; Singapore; Buenos Aires,
Argentina; New Delhi, India; Lahore, Pakistan; Brisbane, Australia; Taipei,
Taiwan; Bangkok, Thailand; Rio de Janeiro, Brazil; and Sao Paulo, Brazil, none
of which leases or leased premises is material.
The following table shows the material properties owned or
leased by the Registrant, its subsidiaries, partnerships or affiliated plants.
Except as noted, all of these properties are subject to mortgages or other liens
or encumbrances granted to the lenders providing financing for the plant or
project.
<TABLE>
<CAPTION>
Land
Interest
Plant or Project Location Held Plant Description
- ------------------------------- ----------------------- ----------------- ------------------------------------
<S> <C> <C> <C>
AES Deepwater Houston, Texas Owned1 Coke-fired cogeneration power plant
AES Beaver Valley Monaca, Pennsylvania Leased Coal-fired cogeneration power plant
AES Placerita Newhall, California Leased Natural gas-fired cogeneration
power plant
AES Thames Montville, Connecticut Leased Coal-fired cogeneration power plant
AES Shady Point LeFlore County, Owned Coal-fired cogeneration facility
Oklahoma and liquid carbon dioxide power
plant
</TABLE>
- ----------
1 Owmership by an owner trust for the benefit of bondholders; a subsidiary of
AES is now the owner of all outstanding bonds.
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Land
Interest
Plant or Project Location Held Plant Description
- ------------------------------- ----------------------- ----------------- ------------------------------------
AES Barbers Point Oahu, Hawaii Leased Coal-fired cogeneration power plant
Kilroot Belfast Lough, Leased Coal and oil-fired power plant
Northern Ireland
Belfast West Belfast Port, Leased Coal-fired power plant
Northern Ireland
Medway Isle of Grain, England Leased Gas-fired power plant
Borsod (Tiszai) Kazincbarcika, Hungary Owned2 Coal-fired power station and two
underground coal mines
Tisza II (Tiszai) Tiszaujvaros, Hungary Owned2 Oil and natural gas-fired power
plant
Tiszapalkonya (Tiszai) Tiszapalkonya, Hungary Owned2 Coal-fired cogeneration power plant
Cili Misty Mountain Hunan Province, Land Use Right2 Hydroelectric power plants
People's Republic of
China
Yangchun Sun Spring Guangdong Province, Land Use Right2 Diesel power plant
People's Republic of
China
</TABLE>
- ----------
2 Not subject to mortgages, liens or encumbrances in favor of any lenders.
26
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Land
Interest
Plant or Project Location Held Plant Description
- ------------------------------- ----------------------- ----------------- ------------------------------------
Wuxi Tin Hill Jiangsu Province, Land Use Right2 Oil-fired gas turbine and heat
People's Republic of recovery steam turbine power
China plants currently under
construction
Wuhu Grassy Lake Anhui Province, Land Use Right2 Coal-fired power plant
People's Republic of
China
Ekibastuz Pavlodar Region, Land Use Right2 Coal-fired power plant
Kazakstan
San Nicolas San Nicolas, Argentina Owned Power plant fueled by coal, oil,
gas or petroleum coke
Rio Juramento Salta, Argentina Leased Hydroelectric power plants
San Juan San Juan, Argentina Leased Hydroelectric power plants
AES Lal Pir and Pak Gen Punjab, Pakistan Owned Oil-fired power plants under
construction
Jiaozuo Aluminum Power Henan Province, Land Use Right2 Coal-fired power plant
People's Republic of
China
Chengdu Lotus City Sichuan Province, Land Use Right2 Natural gas-fired power plant
People's Republic of
China
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Land
Interest
Plant or Project Location Held Plant Description
- ------------------------------- ----------------------- ----------------- ------------------------------------
Aixi Heart River Sichuan Province, Land Use Right2 Coal-fired power plant currently
People's Republic of under construction
China
- ----------
2 Not subject to mortgages, liens or encumbrances in favor of any lenders.
Hefei Prosperity Lake Anhui Province, Land Use Right2 Oil-fired cogeneration power plant
People's Republic of
China
Barry Barry, United Kingdom Leased Gas-fired power plant
AES Warrior Run Cumberland, Maryland Owned Coal-fired power plant under
construction
</TABLE>
- ----------
2 Not subject to mortgages, liens or encumbrances in favor of any lenders.
ITEM 3. LEGAL PROCEEDINGS
In November 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
outstanding shares of AES Chigen Class A Common Stock. AES Chigen is not named
in the suit. An amended complaint was filed by the plaintiff on March 7, 1997.
The amended complaint seeks preliminarily and permanently to enjoin AES from
acquiring the outstanding shares of AES Chigen which it does not already own. In
addition, the amended complaint seeks unspecified damages, including attorneys'
fees and costs. In the original complaint, plaintiff's allegations state that
AES, as the controlling shareholder of AES Chigen, breached its fiduciary duties
to treat the plaintiff class with entire fairness in connection with AES's
execution of an agreement with AES Chigen to acquire the outstanding AES Chigen
Class A Common Stock at an allegedly grossly inadequate price. Plaintiff's
amended complaint supplements the prior complaint and asserts claims that, among
others things, AES breached its duty
28
<PAGE>
of candor to the plaintiff class. 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
PRICE RANGE OF COMMON STOCK
The common stock of the Company is currently traded on the New
York Stock Exchange Composite Transaction reporting system (the "NYSE") under
the symbol "AES". All stock prices from January 1, 1995 to and including October
15, 1996 were quoted on the Nasdaq National Market System ("Nasdaq") under the
symbol "AESC". The following table sets forth the high and low sale prices for
the common stock as reported by Nasdaq or the NYSE for the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------ ---------------------- -----------------------
1995 High Low
- ------------------------ ---------------------- -----------------------
First Quarter $ 193/4 $ 16
Second Quarter 191/4 16
Third Quarter 215/8 181/2
Fourth Quarter 24 183/4
- ------------------------ ---------------------- -----------------------
1996 High Low
- ------------------------ ---------------------- -----------------------
First Quarter $ 251/4 $ 21
Second Quarter 295/8 221/4
Third Quarter 401/2 277/8
Fourth Quarter 501/8 391/4
- ------------------------ ---------------------- -----------------------
</TABLE>
(b) Holders
On March 3, 1997, there were 731 record holders of
Registrant's Common Stock, par value $0.01 per share.
(c) Dividends
Under the terms of a corporate revolving loan and letters of
credit facility of $425 million entered into with a commercial bank syndicate,
the Company is currently prohibited from paying cash dividends. In addition, the
Registrant is precluded from paying cash dividends on its Common Stock under the
terms of a guaranty to the utility customer in connection with the AES Thames
project in the event certain net worth and liquidity tests of the Registrant are
not met. The Registrant has met these tests at all times since making the
guaranty.
30
<PAGE>
The ability of the Registrant's project subsidiaries to declare and pay cash
dividends to the Registrant is subject to certain limitations in the project
loan and other documents entered into by such project subsidiaries. Such
limitations permit the payment of cash dividends out of current cash flow for
quarterly, semiannual or annual periods only at the end of such periods and only
after payment of principal and interest on project loans due at the end of such
periods, and in certain cases after providing for debt service reserves. As of
December 31, 1996, approximately $63 million was available under project loan
documents for distribution by subsidiaries to the Registrant.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(in millions, except per share data)
- ------------------------------------------------ ------------- ------------- ------------- ------------- -------------
For the Years Ended December 31 1996 1995 1994 1993 1992
- ------------------------------------------------ ------------- ------------- ------------- ------------- -------------
Statement of Operations Data
Revenues $ 835 $ 679 $ 533 $ 519 $ 401
Operating costs and expenses 557 426 297 323 246
Operating income 278 253 236 196 155
Income before income taxes, minority
interest, and extraordinary item 193 167 145 89 66
Extraordinary item ---- ---- 2 ---- ----
Net income 125 107 100 71 56
Net income per share:
Before extraordinary item 1.62 1.41 1.30 0.98 0.80
Extraordinary item ---- ---- 0.02 ---- ----
Net income per share 1.62 1.41 1.32 0.98 0.80
Dividends per share - common stock ---- ---- ---- 0.58 0.39
- ------------------------------------------------ ------------- ------------- ------------- ------------- -------------
As of December 31 1996 1995 1994 1993 1992
- ------------------------------------------------ ------------- ------------- ------------- ------------- -------------
Balance Sheet Data
Total assets $3,622 $2,341 $1,915 $1,687 $1,552
Revolving bank loan (current) 88 50 ---- ---- ----
Project financing debt (long term) 1,558 1,098 1,019 1,075 1,146
Other notes payable (long term) 450 125 125 125 50
Stockholders' equity 721 549 401 309 177
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See the section entitled "Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Registrant's Current
Report on Form 8-K dated March 12, 1997, which discussion and analysis are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information contained in the consolidated financial
statements contained in the Registrant's Current Report on Form 8-K dated March
12, 1997, which information is incorporated herein by reference.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information with respect to the ages of the
Registrant's directors in the table on page 5 and the information contained
under the caption "Election of Directors" on pages 2 through 4 inclusive, of the
Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be
held on April 15, 1997, which information is incorporated herein by reference.
See also the information with respect to executive officers of the Registrant
under Item 1A of Part I hereof, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information contained under the captions "Compensation
of Executive Officers" on pages 11 through 13 inclusive and "Compensation of
Directors" on page 6, of the Proxy Statement for the Annual Meeting of
Stockholders of the Registrant to be held on April 15, 1997, which information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
See the information contained under the caption "Security
Ownership of Certain Beneficial Owners, Directors, and Executive Officers" on
page 5 of the Proxy Statement for the Annual Meeting of Stockholders of the
33
<PAGE>
Registrant to be held on April 15, 1997, which information is incorporated
herein by reference.
(b) Security Ownership of Management
See the information contained under the caption "Security
Ownership of Certain Beneficial Owners, Directors, and Executive Officers" on
page 5 of the Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 15, 1997, which information is incorporated
herein by reference.
(c) Changes in Control
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed
below are of the Company and its consolidated subsidiaries)
-- Report of Independent Auditors is incorporated herein by
reference to the Registrant's Current Report on Form 8-K dated March 12, 1997.
-- Consolidated Balance Sheets at December 31, 1995 and 1996
are incorporated herein by reference to the Registrant's Current Report on Form
8-K dated March 12, 1997.
-- Consolidated Statements of Operations -- For the Years
Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated March 12, 1997.
-- Consolidated Statements of Cash Flows -- For the Years
Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated March 12, 1997.
-- Notes to Consolidated Financial Statements -- For the Years
Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated March 12, 1997.
34
<PAGE>
(2) Financial Statement Schedules
-- See Index to Financial Statement Schedules of the
Registrant and subsidiaries at page S-1 hereof, which Index is incorporated
herein by reference.
(3) Exhibits
3.1 Amended and Restated Certificate of Incorporation of The
AES Corporation is incorporated herein by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (Registration No. 33-40483).
3.2 By-Laws of The AES Corporation, as amended, are
incorporated herein by reference to Exhibit 3.2 to the Registration Statement on
Form S-4 (Registration No. 333-22513).
4.1(a) Indenture dated as of June 15, 1993 between The AES
Corporation and The Bank of New York, including the form of 9 3/4 percent Senior
Subordinated Note Due 2000, is incorporated herein by reference to Amendment No.
1 to the Registration Statement on Form S-3 (Registration No. 33-62910).
4.1(b) Form of Indenture dated as of July 1, 1996 between The
AES Corporation and The First National Bank of Chicago, as Trustee, for the
issuance from time to time of debentures, notes and other evidences of
indebtedness is incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-3 (Registration No. 333-01286).
4.1(c) First Supplemental Indenture dated as of July 1, 1996
(Supplemental to Indenture dated as of July 1, 1996) between The AES Corporation
and The First National Bank of Chicago, as Trustee, including the form of 10 1/4
percent Senior Subordinated Notes Due 2006, is incorporated herein by reference
to Exhibit 4.1(c) to the Current Report on Form 8-K of the Registrant dated July
1, 1996.
10.1 Agreement for Purchased Power, dated January 10, 1983,
between AES and Houston Lighting & Power Company, as amended, is incorporated
herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1
(Registration No. 33-40483).
10.2 Electric Energy Purchase Agreement, dated August 15,
1985, between BV Partners and West Penn Power Company is incorporated herein by
reference to Exhibit 10.2 to the Registration Statement on Form S-1
(Registration No. 33-40483).
35
<PAGE>
10.3 Electricity Purchase Agreement, dated as of December
6, 1985, between The Connecticut Light and Power Company and AES Thames, Inc. is
incorporated herein by reference to Exhibit 10.4 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
10.4 Amended Power Sales Agreement, dated as of December
10, 1985, between Oklahoma Gas and Electric Company and AES Shady Point, Inc. is
incorporated herein by reference to Exhibit 10.5 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
10.5 Power Purchase Agreement, dated March 25, 1988,
between AES Barbers Point, Inc. and Hawaiian Electric Company, Inc., as amended,
is incorporated herein by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.6 Amended and Restated Coal Supply Agreement, dated
April 13, 1988, between BV Partners and United Pittsburgh Coal Sales, Inc. is
incorporated herein by reference to Exhibit 10.8 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
10.7 Coal and Limestone Supply and Ash Disposal Agreement,
dated as of September 15, 1988, between LeFlore County Coal Company and AES
Shady Point, Inc., as amended, is incorporated herein by reference to Exhibit
10.9 to the Registration Statement on Form S-1 (Registration No.
33-40483).
10.8 Coal and Limestone Supply and Ash Disposal
Agreement, dated August 15, 1988, between P&K Co., Ltd. and AES Shady Point,
Inc. is incorporated herein by reference to Exhibit 10.10 to Amendment No. 3 to
the Registration Statement on Form S-1 (Registration No. 33-40483).
10.9 Coal, Limestone, Waste Disposal and Railroad
Transportation Agreement, dated as of September 18, 1986, between CSX
Transportation, Inc. and AES Thames, Inc., as amended, is incorporated herein by
reference to Exhibit 10.11 to the Registration Statement on Form S-1
(Registration No. 33-40483).
10.10 Amended and Restated Fuel Supply Agreement, dated as of
January 12, 1990, among AES Barbers Point, Inc., PT Kaltim Prima Coal and
Sprague Energy Corp., as amended, is incorporated herein by reference to Exhibit
10.12 to Amendment No. 3 to the Registration Statement on Form S-1 (Registration
No. 33-40483).
36
<PAGE>
10.11 Inducement, Assignment and Stock Pledge Agreement,
dated as of December 27, 1983, between Applied Energy Services, Inc. and The
Connecticut Bank and Trust Company, National Association is incorporated herein
by reference to Exhibit 10.16 to the Registration Statement on Form S-1
(Registration No. 33-40483).
10.12 Amended and Restated Guarantee, dated as of November
30, 1990, by Applied Energy Services, Inc. and AES Connecticut Management, Inc.
to The Connecticut Light and Power Company is incorporated herein by reference
to Exhibit 10.17 to the Registration Statement on Form S-1 (Registration No.
33-40483).
10.13 Guarantee Agreement, dated March 25, 1988, between
Applied Energy Services Inc. and Hawaiian Electric Company, Inc., as amended, is
incorporated herein by reference to Exhibit 10.18 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
10.14 Application for Letter of Credit and Reimbursement
Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security
Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of
Nova Scotia and Standard Chartered Bank is incorporated herein by reference to
Exhibit 10.20 to the Registration Statement on Form S-1 (Registration No.
33-40483).
10.15 Amended and Restated Credit Agreement, dated as of
November 30, 1990, among AES Montville, Inc., certain banks named therein and
Citibank, N.A., as agent, is incorporated herein by reference to Exhibit 10.21
to the Registration Statement on Form S-1 (Registration No. 33-40483).
10.16 Ground Lease, dated as of August 15, 1985, between
Atlantic Richfield Company and BV Partners is incorporated herein by reference
to Exhibit 10.22 to the Registration Statement on Form S-1 (Registration No.
33-40483).
10.17 Ground Lease, dated as of November 25, 1986, between
Stone Connecticut Paperboard Corporation and AES Thames, Inc., as amended, is
incorporated herein by reference to Exhibit 10.26 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
10.18 Sublease, dated as of August 20, 1990, between
Hawaii Pacific Industries, Inc. and AES Barbers Point, Inc., as amended, is
incorporated herein by reference to Exhibit 10.27 to the Registration Statement
on Form S-1 (Registration No. 33-40483).
37
<PAGE>
10.19 The AES Corporation Profit Sharing and Stock Ownership
Plan is incorporated herein by reference to Exhibit 4c1 to the Registration
Statement on Form S-8 (Registration No. 33-49262).*
10.20 The AES Corporation Incentive Stock Option Plan of 1991,
as amended, is incorporated herein by reference to Exhibit 10.30 to the Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31,
1995.*
10.21 Applied Energy Services, Inc. Incentive Stock Option
Plan of 1982 is incorporated herein by reference to Exhibit 10.31 to the
Registration Statement on Form S-1 (Registration No. 33-40483).*
10.22 Deferred Compensation Plan for Executive Officers,
as amended, is incorporated herein by reference to Exhibit 10.32 to Amendment
No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483).*
10.23 Deferred Compensation Plan for Directors, as
amended, is incorporated herein by reference to Exhibit 10.33 to Amendment No. 1
to the Registration Statement on Form S-1 (Registration No. 33-40483).*
10.24 Assumption Agreement, dated as of November 30, 1990
among AES Montville, Inc., AES Thames, Inc. and Citibank, N.A., as agent, is
incorporated herein by reference to Exhibit 10.35 to Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No. 33-40483).
10.25 Credit and Reimbursement Agreement, dated as of March
20, 1990, among AES Barbers Point, Inc., certain banks named therein and
Security Pacific National Bank, as agent, is incorporated herein by reference to
Exhibit 10.36 to Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-40483).
10.26 Transmission Agreement, dated as of August 28, 1985,
between Duquesne Light Company and AES Beaver Valley, Inc. is incorporated
herein by reference to Exhibit 10.42 to Amendment No. 1 to the Registration
Statement on Form S-1 (Registration No. 33-40483).
10.27 The AES Corporation Stock Option Plan for Outside
Directors is incorporated herein by reference to Exhibit 10.43 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.*
10.28 Subordinated Debt Agreement between AES Shady Point,
Inc. and The AES Corporation dated as of December 6, 1991 is incorporated
38
<PAGE>
herein by reference to Exhibit 10.44 to the Registration Statement on Form S-1
(Registration No. 33-46011).
10.29 First Amendment to the Amended Power Sales
Agreement, dated as of December 19, 1985, between Oklahoma Gas and Electric
Company and AES Shady Point, Inc. is incorporated herein by reference to Exhibit
10.45 to the Registration Statement on Form S-1 (Registration No. 33-46011).
10.30 Amendment No. 1 dated as of July 16, 1987 to Application
for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987,
among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit
Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is
incorporated herein by reference to Exhibit 10.47 to the Registration Statement
on Form S-1 (Registration No. 33-46011).
10.31 Amendment No. 2 dated as of December 18, 1987 to
Application for Letter of Credit and Reimbursement Agreement, dated as of June
23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union
Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard
Chartered Bank is incorporated herein by reference to Exhibit 10.48 to the
Registration Statement on Form S-1 (Registration No. 33-46011).
10.32 Amendment No. 3 dated as of June 3, 1988 to Application
for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987,
among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit
Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is
incorporated herein by reference to Exhibit 10.49 to the Registration Statement
on Form S-1 (Registration No. 33-46011).
10.33 Amendment No. 4 dated as of July 1, 1991 to Application
for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987,
among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit
Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is
incorporated herein by reference to Exhibit 10.50 to the Registration Statement
on Form S-1 (Registration No. 33-46011).
10.34 Amendment No. 5 dated as of December 6, 1991 to
Application for Letter of Credit and Reimbursement Agreement, dated as of June
23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union
Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard
Chartered Bank is incorporated herein by reference to Exhibit 10.51 to the
Registration Statement on Form S-1 (Registration No. 33-46011).
39
<PAGE>
10.35 Agreement for the sale and purchase of the whole of the
issued share capital of Kilroot Power Limited, Belfast West Power Limited and
Cloghan Point (Holdings) Limited dated March 6, 1992 between The Department of
Economic Development, Nigen Limited, The AES Corporation and Powerfin S.A., is
incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.
10.36 Variation Agreement dated May 31, 1992 between Cloghan
Limited, The Department of Economic Development, Nigen Limited, The AES
Corporation and Powerfin S.A., is incorporated herein by reference to Exhibit
10.55 to the Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1992.
10.37 Lease of Belfast West Power Station dated April 1, 1992
between Northern Ireland Electricity plc and Belfast West Power Limited, is
incorporated herein by reference to Exhibit 10.56 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.
10.38 Lease of Kilroot Power Station dated April 1, 1992
between Northern Ireland Electricity plc and Kilroot Power Limited, is
incorporated herein by reference to Exhibit 10.57 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.
10.39 Facility Agreement dated May 31, 1992 between Nigen
Limited, Barclays Bank PLC and National Westminster Bank Plc as Lead Arrangers,
ABN AMRO Bank N.V., Banque Indosuez, Barclays Bank PLC, The Industrial Bank of
Japan, Limited and National Westminster Bank Plc as arrangers, Generale Bank
S.A./NV as sponsor relationship bank, Barclays Bank PLC as agent, Ulster Bank
Limited and the financial institutions named in the first schedule thereto, is
incorporated herein by reference to Exhibit 10.58 to the Annual Report on Form
10-K of the Registrant for the fiscal year ended December 31, 1992.
10.40 Coal and Oil Supply Contract for Kilroot Power Station
dated May 31, 1992 between Powerfin S.A., Tractebel S.A. and Kilroot Power
Limited, is incorporated herein by reference to Exhibit 10.59 to the Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31,
1992.
10.41 Coal Supply Contract for Belfast West Power Station
dated May 31, 1992 between Powerfin S.A., Tractebel S.A. and Belfast West Power
Limited, is incorporated herein by reference to Exhibit 10.60 to the Annual
Report on Form 10-K of the Registrant for the fiscal year ended December 31,
1992.
40
<PAGE>
10.42 Agreement in Respect of Kilroot Power Station Generating
Unit GT1 dated April 1, 1992 between Kilroot Power Limited and Northern Ireland
Electricity plc., is incorporated herein by reference to Exhibit 10.61 to the
Annual Report on Form 10-K of the Registrant for the fiscal year ended December
31, 1992.
10.43 Schedule identifying a substantially identical agreement
to the Agreement constituting Exhibit 10.42 hereto entered into between Kilroot
Power Limited and Northern Ireland Electricity plc., is incorporated herein by
reference to Exhibit 10.61(a) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992.
10.44 Agreement in Respect of Kilroot Power Station Generating
Unit No. 1 dated April 1, 1992 between Kilroot Power Limited and Northern
Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.62
to the Annual Report on Form 10-K of the Registrant for the fiscal year ended
December 31, 1992.
10.45 Schedule identifying a substantially identical agreement
to the Agreement constituting Exhibit 10.44 hereto entered into between Kilroot
Power Limited and Northern Ireland Electricity plc., is incorporated herein by
reference to Exhibit 10.62(a) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992.
10.46 Agreement in Respect of Belfast West Power Station
Generating Unit No. 1 dated April 1, 1992 between Belfast West Power Limited and
Northern Ireland Electricity plc., is incorporated herein by reference to
Exhibit 10.63 to the Annual Report on Form 10-K of the Registrant for the fiscal
year ended December 31, 1992.
10.47 Schedule identifying substantially identical agreements
to the Agreement constituting Exhibit 10.46 hereto entered into between Belfast
West Power Limited and Northern Ireland Electricity plc., is incorporated herein
by reference to Exhibit 10.63(a) to the Annual Report on Form 10-K of the
Registrant for the fiscal year ended December 31, 1992.
10.48 $425,000,000 Credit Agreement dated as of May 20, 1996
among The AES Corporation, the Banks listed therein, Barclays Bank PLC, Morgan
Guaranty Trust Company of New York and Union Bank of California, N.A., as
Fronting Banks, and Morgan Guaranty Trust Company of New York, as Agent is
incorporated herein by reference to Exhibit 10.61 to the Company's Current
Report on Form 8-K dated June 10, 1996.
41
<PAGE>
10.49 Shareholders' Agreement dated as of May 27, 1996 among
AES Coral Reef, Inc., Companhia Siderurgica Nacional, EDF International S.A.,
Houston Industries Energy - Cayman, Inc. (the "Shareholders") and BNDES
Participacoes S.A. is incorporated herein by reference to Exhibit 10.67 to the
Company's Current Report on Form 8-K dated June 10, 1996.
10.50 Addendum to Shareholders Agreement dated as of May 30,
1996 among the Shareholders and InvestLight - Clube de Investimento dos
Empregados da Light is incorporated herein by reference to Exhibit 10.68 to the
Company's Current Report on Form 8-K dated June 10, 1996.
10.51 The AES Corporation Supplemental Retirement Plan is
incorporated herein by reference to Exhibit 10.64 to the Annual Report on Form
10-K of the Registrant for the year ended December 31, 1994.*
10.52 Sponsors' Support Agreement dated as of May 16, 1995
among AES Transpower, Inc. and The AES Corporation as Sponsors; AES Lal Pir
Limited as the Borrower; the International Finance Corporation and The Bank of
Tokyo, Ltd. as Facility Agents, is incorporated herein by reference to Exhibit
10.30 to the Annual Report on Form 10-K of the Registrant for the fiscal year
ended December 31, 1995.
10.53 Sponsors' Support Agreement dated as of January 5, 1996
among The AES Corporation as Sponsor; AES Pakistan Holdings and AES Pak Gen
Holdings, Inc. as Sponsors and Shareholders; AES Pak Gen (Private) Company as
Borrower; the International Finance Corporation and The Bank of Tokyo, Ltd. as
Facility Agents, is incorporated herein by reference to Exhibit 10.30 to the
Annual Report on Form 10-K of the Registrant for the fiscal year ended December
31, 1995.
10.54 Asset Purchase Agreement dated as of February 17, 1997
by and between NGC Corporation and The AES Corporation.
42
<PAGE>
11 Statement of computation of earnings per share is
incorporated herein by reference to Exhibit 11 to the Company's Current Report
on Form 8-K dated March 12, 1997.
12 Statement of computation of ratio of earnings to fixed
charges is incorporated herein by reference to Exhibit 12 to the Company's
Current Report on Form 8-K dated March 12, 1997.
21 Significant subsidiaries of The AES Corporation.
23 Consent of Independent Auditors, Deloitte & Touche LLP.
24 Powers of Attorney.
27 Financial Data Schedule (Article 5) is incorporated
herein by reference to Exhibit 27 to the Company's Current Report on Form 8-K
dated March 12, 1997.
99 Current Report on Form 8-K of the Registrant dated
March 12, 1997.
* indicates that exhibit is a compensatory plan or arrangement.
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K dated November
13, 1996 in respect of Registrant's press release dated November 12, 1996
announcing that Registrant had entered into an agreement to acquire all the
outstanding shares of the Class A Common Stock of AES Chigen.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 1997
THE AES CORPORATION
(Company)
By: /s/ Dennis W. Bakke
-------------------------
Name: Dennis W. Bakke
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Roger W. Sant *
- ---------------------------------------- Chairman of the Board March 28, 1997
(Roger W. Sant)
/s/ Dennis W. Bakke
- ---------------------------------------- President, Chief Executive March 28, 1997
(Dennis W. Bakke) Officer (principal executive
officer) and Director
/s/ Vicki-Ann Assevero *
- ---------------------------------------- March 28, 1997
(Vicki-Ann Assevero) Director
/s/ Alice F. Emerson *
- ---------------------------------------- March 28, 1997
(Dr. Alice F. Emerson) Director
/s/ Robert F. Hemphill, Jr. *
- ---------------------------------------- March 28, 1997
(Robert F. Hemphill, Jr.) Director
/s/ Frank Jungers *
- ---------------------------------------- March 28, 1997
(Frank Jungers) Director
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Henry R. Linden *
- ---------------------------------------- March 28, 1997
(Dr. Henry R. Linden) Director
- ---------------------------------------- March , 1997
(John H. McArthur) Director
/s/ Russell E. Train *
- ---------------------------------------- March 28, 1997
(Russell E. Train) Director
/s/ Thomas I. Unterberg *
- ---------------------------------------- March 28, 1997
(Thomas I. Unterberg) Director
/s/ Robert H. Waterman, Jr. *
- ---------------------------------------- March 28, 1997
(Robert H. Waterman, Jr.) Director
/s/ Barry J. Sharp
- ---------------------------------------- Vice President and Chief March 28, 1997
(Barry J. Sharp) Financial Officer (principal
financial and accounting officer)
*By: /s/ William R. Luraschi
-------------------------
Attorney-in-fact
</TABLE>
45
<PAGE>
THE AES CORPORATION AND SUBSIDIARIES
- ------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
INDEPENDENT
S- 2 Independent Auditors' Report
S- 3 Schedule I - Condensed Financial Information of Registrant
S- 8 Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted as the
information is either not applicable, not required, or has been furnished in the
financial statements or notes thereto incorporated by reference in Item 8
hereof.
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of The AES Corporation:
We have audited the consolidated financial statements of The AES Corporation as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, and have issued our report thereon dated January 30,
1997, except for Note 13, as to which the date is February 18, 1997; such
consolidated financial statements and report are included in your Current Report
on Form 8-K dated March 12, 1997 and are incorporated herein by reference. Our
audits also included the consolidated financial statement schedules of The AES
Corporation, listed in the index to the consolidated financial statement
schedules on page S-1. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Washington, D.C.
January 30, 1997
S-2
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION SCHEDULE I
--------------------------------------------- ------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED BALANCE SHEETS
(in millions)
ASSETS December 31
- ------------------------------------------------------- -------------------------------
<S> <C> <C>
1995 1996
Current Assets:
Cash and cash equivalents $ 2 $ 5
Accounts receivable 2 2
Accounts and notes receivable from subsidiaries
64 89
Prepaid expenses and other 11 2
- ------------------------------------------------------- --------------- ---------------
Total current assets 79 98
Investment in subsidiaries (on the equity method) 556 893
Office Equipment:
Cost 4 5
Accumulated depreciation (3) (4)
- ------------------------------------------------------- --------------- ---------------
Office equipment, net 1 1
Other Assets:
Deferred costs (Less accumulated amortization:
1995, $3, 1996, $9) 6 16
Project Development costs 40 53
Investment in affiliate -- --
Deferred income taxes 8 20
Notes receivable from subsidiaries 40 156
Escrow deposits and other assets 9 56
- ------------------------------------------------------- --------------- ---------------
Total other assets 103 301
- ------------------------------------------------------- --------------- ---------------
TOTAL $739 $1,293
- ------------------------------------------------------- --------------- ---------------
</TABLE>
See notes to Schedule I
S-3
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION SCHEDULE I
- ------------------------------------------------ ---------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED BALANCE SHEETS
(in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31
----------------------------------------------------------- --------------------------
<S> <C> <C>
1995 1996
Current Liabilities:
Accounts payable $ 3 $ 2
Accrued liabilities 9 29
Other notes payable 50 88
------------------------------------------------------- -------------- ---------------
Total current liabilities 62 119
Long-term Liabilities:
Other notes payable 125 450
Other long-term liabilities 3 3
------------------------------------------------------- -------------- ---------------
Total long-term liabilities 128 453
Stockholders' Equity:
Preferred stock -- --
Common stock 1 1
Additional paid-in capital 293 360
Retained earnings 271 396
Treasury Stock (6) (3)
Cumulative translation adjustment (10) (33)
------------------------------------------------------- -------------- ---------------
Total stockholders' equity 549 721
------------------------------------------------------- -------------- ---------------
TOTAL $739 $1,293
------------------------------------------------------- -------------- ---------------
</TABLE>
See notes to Schedule I
S-4
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION SCHEDULE I
- ------------------------------------------------------ ------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED OPERATIONS
(in millions)
For the Years Ended December 31
- -------------------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
Revenues $ 47 $ 58 $ 59
Equity in earnings of subsidiaries 106 108 142
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Total revenues 153 166 201
Operating Costs and Expenses:
Cost of sales and services 30 47 46
Selling, general and administrative expenses 24 19 30
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Total operating costs and expenses 54 66 76
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Operating Income 99 100 125
Interest Income/(Expense) 7 7 (15)
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Income before income taxes and extraordinary item 106 107 110
Income Tax Expense (Benefit) 4 -- (15)
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Net income before extraordinary item 102 107 125
Extraordinary item - loss on extinguishment of debt (less
applicable income taxes of $1) 2 -- --
- -------------------------------------------------------------- ---------------- ----------------- -----------------
- -------------------------------------------------------------- ---------------- ----------------- -----------------
Net Income $100 $107 $125
- -------------------------------------------------------------- ---------------- ----------------- -----------------
</TABLE>
See notes to Schedule I
S-5
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION SCHEDULE I
- ----------------------------------------------------------- ---------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF UNCONSOLIDATED CASH FLOWS
(in millions)
For the Years Ended December 31,
- -------------------------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
Net cash provided by operating activities $ 1 $ 1 17
Investing Activities
Issuance of notes receivable (1) 2 (19)
Acquisitions -- (130) (148)
Dividends from subsidiaries 62 88 130
Additions to office equipment (1) -- --
Project development costs, net (17) (34) (16)
Investment in subsidiaries (6) (32) (322)
Escrow deposits and other 3 (4) (47)
- -------------------------------------------------------------------------- ------------ ------------ ----------------
Net cash provided by (used in) investing activities 40 (110) (422)
Financing Activities
Net borrowings under the revolver -- 50 163
Proceeds from other notes payable -- -- 243
Principal payments on other notes payable -- -- --
Proceeds from issuance of common stock 1 1 2
Purchased treasury stock -- (6) --
Dividends paid -- -- --
Other -- -- --
- -------------------------------------------------------------------------- ------------ ------------ ----------------
Net cash provided by financing activities 1 45 408
Increase/(decrease) in cash and cash equivalents 42 (64) 3
Cash and cash equivalents, beginning 24 66 2
- -------------------------------------------------------------------------- ------------ ------------ ----------------
Cash and cash equivalents, ending $ 66 $ 2 $ 5
- -------------------------------------------------------------------------- ------------ ------------ ----------------
</TABLE>
See notes to Schedule I
S-6
<PAGE>
THE AES CORPORATION SCHEDULE I
- ----------------------------------------------------------- --------------------
NOTES TO SCHEDULE I
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for Subsidiaries -- The AES Corporation has
accounted for the earnings of its subsidiaries on the equity method in the
unconsolidated condensed financial information.
Revenues -- Construction management fees earned by the parent
from its consolidated subsidiaries are eliminated.
Income Taxes -- Effective January 1, 1995, The AES Corporation
and other affiliated companies (the "group") changed its method of allocating
income taxes and no longer allocates tax benefits available from other members
of the group when calculating its tax balances. This more accurately depicts the
tax assets and liabilities of The AES Corporation and its subsidiaries on a
"stand alone" basis. The Company joins in filing a consolidated U.S. income tax
return with the group. This allows the Company to combine its separate Company
income or loss with the income or loss of the group. The unconsolidated income
tax expense or benefit computed for the Company in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, reflects
the tax assets and liabilities of the Company on a stand alone basis and the
effect of filing a consolidated U.S. income tax return with the group. The
effect of this change on the unconsolidated balance sheet was to decrease the
deferred tax liability at the parent company level by approximately $81 million
and decrease the accounts and notes receivable from subsidiaries by the same
amount at January 1, 1995. The resulting deferred tax asset recorded on the
unconsolidated balance sheet represents tax payments due from affiliates under
tax sharing agreements.
Accounts and Notes Receivable from Subsidiaries -- Such
amounts have been shown in current or long-term assets based on terms in
agreements with subsidiaries, but payment is dependent upon meeting conditions
precedent in the subsidiary loan agreements. The non-current portion of this
balance includes a loan to AES Tiszai of $99 million.
2. SCHEDULE OF MATURITIES
Long-term debt of $125.0 million at December 31, 1995
consisted of senior subordinated of $75.0 payable in 2000 and $50.0 million
convertible subordinated debentures which were converted into 1.9 million shares
of common stock of the Company at a conversion price of $26.16 per share. The
long-term debt of $450 million at December 31, 1996 consisted of $75 million of
senior subordinated notes due 2000, $250 million of senior subordinated notes
due 2006, and the corporate revolving bank loan of $125 million.
S-7
<PAGE>
<TABLE>
<CAPTION>
THE AES CORPORATION SCHEDULE II
- ----------------------------------------------------------- ------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Period
<S> <C> <C> <C>
- ----------------------------------------------------- -------------- ---------------- -------------
Allowance for contract receivables
Year ended December 31, 1996 $ -- $ 20 $ 20
Amortization of deferred costs
Year ended December 31, 1994 $ 23 $ 3 $ 26
Year ended December 31, 1995 26 5 31
Year ended December 31, 1996 31 5 36
</TABLE>
S-8
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Document Numbered Page
- ------ -------- -------------
<S> <C>
10.54 Asset Purchase Agreement dated as of February 17,
1997 by and between NGC Corporation and The AES
Corporation.
21 Significant subsidiaries of The AES Corporation.
23 Consent of Independent Auditors, Deloitte & Touche
LLP.
24 Power of Attorney.
99 Current Report on Form 8-K of the Registrant dated
March 12, 1997.
</TABLE>
<PAGE>
Exhibit 10.54
=================================================================
ASSET PURCHASE AGREEMENT
by and between
NGC CORPORATION
and
THE AES CORPORATION
dated as of
February 17, 1997
=================================================================
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
ASSET PURCHASE AGREEMENT, dated as of February 17, 1997, by and
between NGC Corporation, a Delaware corporation ("NGC"), and The AES
Corporation, a Delaware corporation ("Parent").
WHEREAS, simultaneously with the execution and delivery hereof,
Parent, NGC or its affiliate, Destec Energy, Inc., a Delaware corporation (the
"Company"), and The Dow Chemical Company, a Delaware corporation ("Dow"), are
entering into an agreement and plan of merger (the "Merger Agreement") pursuant
to which the Company has agreed to merge with a subsidiary of NGC (the
"Merger");
WHEREAS, the Company owns and operates certain international
businesses and assets;
WHEREAS, Parent desires to cause a wholly-owned subsidiary, a Delaware
corporation ("Purchaser"), to buy and immediately following the Merger, NGC
desires to cause the Company to sell the international businesses and assets of
the Company and its subsidiaries, and Purchaser is willing to assume certain
related liabilities and obligations of the Company and its subsidiaries, all
upon the terms and conditions hereinafter set forth; and
WHEREAS, in furtherance of such acquisition, the Boards of Directors
of Parent and NGC have each approved the transactions contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
Section 1.1 Purchase and Sale of the International Assets. Subject
---------------------------------------------
to the terms and conditions of this Agreement, on the Closing Date (as
hereinafter defined), and immediately following the consummation of the Merger,
NGC shall cause the Company to sell, convey, assign, transfer and deliver (or
cause to be sold, conveyed, assigned, transferred and delivered) to Purchaser,
and the Purchaser shall purchase and acquire the international assets of the
Company, including, without limitation, all of the Company's or its
Subsidiaries' (as defined in the Merger
<PAGE>
Agreement) right, title and interest in and to the following:
(i) all of the issued and outstanding shares of capital stock (or
their equivalent under local law) (the "Purchased Shares") as set forth in
Part I of Schedule 1.1 of the disclosure schedule attached hereto (the
"Disclosure Schedule"), which when delivered to Purchaser at the Closing
(as hereinafter defined) will be free and clear of any liens, claims,
security interests, charges, leases, licenses or sublicenses created by,
through or under NGC ("Liens");
(ii) all rights, options and other interests in projects or projects
in development outside of the United States, including those set forth in
Part II of Schedule 1.1 of the Disclosure Schedule;
(iii) all contracts and other agreements associated with or relating
to the projects known as Elsta, Los Mina, Indian Queens, Hazelwood and
Kingston Cogen (collectively, the "Projects"), including those listed on
Part III of Schedule 1.1 of the Disclosure Schedule;
(iv) all licenses, permits or franchises issued by any Governmental
Entity (as hereinafter defined) relating to the Projects; and
(v) those other assets and properties set forth in Part IV of Schedule
1.1 of the Disclosure Schedule.
The assets being sold, conveyed, assigned, transferred and delivered
to Purchaser by the Company hereunder are hereinafter referred to as the
"International Assets" or the "International Businesses."
Section 1.2 Instruments of Conveyance and Transfer. At the Closing,
--------------------------------------
NGC shall cause the Company to (a) deliver or cause to be delivered to Purchaser
stock certificates, stock powers, assignments and other good and sufficient
instruments of transfer, conveyance and assignment as the Purchaser and its
counsel shall deem necessary or appropriate to vest in Purchaser all of the
Company's and the Subsidiaries' right, title and interest in and to the
International Assets, and (b) transfer to Purchaser all of the Company's and its
Subsidiaries' right, title and interest in and to the contracts, agreements,
commitments, books, records, files and other data relating to the International
Assets.
2
<PAGE>
Section 1.3 Assumed Liabilities. At the Closing, Purchaser shall
-------------------
deliver to the Company an undertaking (the "Assumption Agreement") in the form
to be agreed upon whereby Purchaser, on and as of the Closing Date, assumes and
agrees to pay, perform and discharge when due, (i) the liabilities and
obligations of the Company and its Subsidiaries primarily attributable to the
International Assets including, without limitation, the liabilities and
obligations listed on Schedule 1.3 of the Disclosure Schedule, (ii) with respect
to any corporate liabilities of the Company unknown to NGC or Parent that are
not primarily attributable to the International Assets or to the Company's
domestic assets, a pro rata portion of such corporate liabilities calculated
based on a fraction the numerator of which is the Purchase Price and the
denominator of which is the Merger Consideration (as defined in the Merger
Agreement), (iii) all liabilities and obligations with respect to the
International Employees described in Section 6.2, including, without limitation,
all liabilities and obligations relating to the International Employees under
(a) the Destec Energy, Inc. 1996 Variable Pay Plan, (b) the Destec Energy, Inc.
1995 Variable Pay Plan, (c) the Destec Special Recognition Award (SRA) Program,
(d) the Destec Energy, Inc. Amended and Restated 1990 Award and Option Plan, (e)
the Destec Foreign Service Policy, (iv) all severance costs, obligations under
employment agreements and consulting agreements, and employee benefit
liabilities arising as a result of (I) the termination of employment of any
International Employees from and after the Closing Date or (II) the transactions
consummated under this Agreement in respect of the International Employees (the
cost, obligations and liabilities under this clause (iv) are collectively the
"International Employee Obligations"), and (v) each liability or obligation
relating to any International Employee (with respect to employee benefit plans,
in excess of any assets owned by the Company or the Subsidiaries and directly
related to such plan or held by any trust with respect thereto sponsored or
maintained by the Company or the Subsidiaries (other than the International
Assets) which are available to satisfy or otherwise offset such liability or
obligation), relating to any bonus, deferred compensation, incentive
compensation, stock purchase, stock option, restricted stock, deferred stock,
stock appreciation right, vacation policy, superannuation, severance or
termination pay, hospitalization or other medical, life or other insurance,
flexible benefit, cafeteria plan, supplemental unemployment benefits, profit
sharing, pension, or retirement plan, program, agreement or arrangement,
employment agreements, consulting agreements and each other employee benefit
plan, program, agreement or arrangement, sponsored, maintained or
3
<PAGE>
contributed to by the Company or its Subsidiaries (the "International Employee
Plans") and (vi) all obligations and liabilities with respect to transfer stamp
taxes or similar taxes arising in connection with the purchase of the
International Assets by Purchaser. The liabilities and obligations assumed by
Purchaser in accordance with this Section 1.3 are hereinafter referred to as the
"Assumed Liabilities."
Section 1.4 Excluded Liabilities. Any liability of the Company or
--------------------
any affiliate thereof other than the Assumed Liabilities shall not be assumed by
Purchaser or its affiliates including, without limitation, all liabilities and
obligations relating to the Plans (as defined in the Merger Agreement), except
for any of the International Employee Obligations and the International Employee
Plans. The liabilities that are not to be assumed by Purchaser or its
affiliates in accordance with this Section 1.4 are hereinafter referred to as
the "Excluded Liabilities."
Section 1.5 Closing. Unless this Agreement shall have been
-------
terminated and the transactions contemplated herein shall have been abandoned
pursuant to Section 8.1 hereof, the closing of the transactions contemplated by
this Agreement (the "Closing") will take place after all of the conditions
herein or incorporated herein are satisfied or waived immediately following the
Effective Time (as defined in the Merger Agreement), at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022,
unless an earlier date or place is agreed to in writing by the parties hereto.
The date on which the Closing occurs is referred to herein as the "Closing
Date."
Section 1.6 Purchase Price and Payment. (a) In consideration for
--------------------------
the International Assets and subject to the terms and conditions of this
Agreement, Purchaser shall on the Closing Date assume the Assumed Liabilities as
provided in Section 1.3 hereof pursuant to the Assumption Agreement and shall
transfer to or to the order of the Company in immediately available funds in New
York City an amount equal to U.S. $407,055,000 (the "Base Purchase Price"), as
adjusted as set forth in accordance with the provisions of this Section 1.6 (the
"Purchase Price"). NGC and Purchaser agree to negotiate in good faith to adjust
the Base Purchase Price to be paid at the Closing if allocations of net cash
flow to be made pursuant to Section 1.6(c) between the date hereof and the
Closing Date are expected to be at least $10,000,000.
(b) One business day prior to the proposed Effective Time, Parent or
Purchaser shall deposit the Base
4
<PAGE>
Purchase Price in trust with the Paying Agent (as defined in the Merger
Agreement) in a segregated account (the "AES Fund"). NGC shall instruct the
Paying Agent that the AES Fund shall not be released without the written consent
of Parent and NGC. Parent shall give its written consent upon satisfaction of
the conditions set forth in Article VII of this Agreement. The AES Fund shall be
deposited in an interest bearing account. If the conditions set forth in Article
VII of this Agreement have not been satisfied by 12:00 noon on the second
business day after the AES Fund was initially deposited, or such later date or
time as Parent in its sole discretion may agree, NGC shall instruct the Paying
Agent to return the AES Fund to Parent or Purchaser, as the case may be,
including all interest earned thereon. Upon release of the AES Fund other than
to Parent or Purchaser, NGC shall instruct the Paying Agent to promptly pay the
interest earned on the AES Fund until the Effective Time of the Merger to Parent
or Purchaser, as the case may be.
(c) The Base Purchase Price shall be adjusted as set forth in this
clause (c) to reflect the following allocation of the net cash flow of the
Company and its Subsidiaries for the period from January 1, 1997 to the Closing
Date: the net cash flow of the Company and its Subsidiaries for the period from
and including January 1, 1997 to and excluding the Closing will be allocated in
a fair and reasonable manner between the International Assets, on the one hand,
and the Company and its Subsidiaries (other than the International Assets), on
the other hand. Within three business days after such allocation becomes final
and binding upon Parent and NGC pursuant to clause (d) below, if the net cash
flow so allocated to the International Assets is greater than zero, Parent shall
cause Purchaser to pay the Company such difference, and if the net cash flow so
allocated to the International Assets is less than zero, NGC shall cause the
Company to pay Purchaser such difference. Any such adjusting payment shall bear
interest at 7.5% per annum for the period from and including the Closing Date
through and excluding the date of payment to the party to which it is owed
pursuant to this Section 1.6(c).
(d) Within 60 days after the Closing Date, NGC shall deliver to
Parent a proposed settlement statement (the "Proposed Settlement Statement")
prepared in good faith setting forth the allocation of such net cash flows
between the International Assets and the Company and its Subsidiaries (other
than the International Assets), together with supporting documentation in
reasonable detail. NGC shall provide Parent with full access to the same
information available to NGC for purposes of determining such allocation of net
cash flow. If Parent objects to the
5
<PAGE>
Proposed Settlement Statement, it shall so notify NGC in writing within 30 days
after receipt of the Proposed Settlement Statement, which notice shall set forth
in reasonable detail any such objections. If Parent fails to deliver any such
objection within such 30-day period, Parent shall be deemed to have accepted the
Proposed Settlement Statement (including the calculation of the Purchase Price
therein). NGC and Parent shall promptly meet to attempt to resolve any such
objections, and if they fail to resolve such objections within 30 days after
receipt by NGC of Parent's objections, such objections shall be resolved by an
independent accounting firm (the "Accountants") selected by Deloitte & Touche
and Arthur Andersen & Co., with Parent and NGC to bear the fees and expenses of
the Accountants pro rata in inverse proportion to the amounts of their
--- ----
respective awards with respect to the disputed items. The Purchase Price as
determined by agreement by NGC and Parent, by failure of Parent to deliver an
objection as described above or by the Accountants pursuant to this Section
1.6(d) shall be final and binding upon the parties.
Section 1.7 Allocation of Purchase Price. The Purchase Price shall
----------------------------
be allocated among the International Assets in writing, by the parties hereto
prior to the Closing. The parties hereto agree that the net book value of any
International Asset may not be indicative of its fair market value.
Section 1.8 Transfer of Purchased Assets, Assignment of Contractual
-------------------------------------------------------
Rights, Governmental Consents, Etc. (a) Anything contained in this Agreement
- ----------------------------------
to the contrary notwithstanding, this Agreement shall not constitute an
agreement or an attempted agreement to transfer, sublease or assign any
contract, license, lease, commitment, purchase order, sales order or other
agreement or any claim, right, benefit, license, permit or authorization arising
thereunder or resulting therefrom if a transfer, sublease or assignment or an
attempted transfer, sublease or assignment thereof, without the consent of any
other party thereto, would be ineffective, would constitute a breach thereof or
would in any way affect the rights of the Purchaser thereunder. Additionally,
this Agreement shall not constitute an agreement or an attempt to transfer any
of the International Assets, the transfer of which may require the prior consent
of any United States or foreign governmental authority or agency until such
consent is obtained. NGC, Parent and Purchaser shall use their reasonable best
efforts to obtain the consent of any such governmental authority and to obtain
the consent of the other party to any of the agreements referred to above, to
the transfer of the International Assets to the Purchaser in
6
<PAGE>
all cases in which such consent is required for such transfer. Except as
otherwise agreed between NGC and Parent pursuant to Section 1.8(b) hereof, if,
upon the satisfaction of all conditions to the Closing, any such consent
(governmental or otherwise) is not obtained or if a transfer, sublease, or
assignment or an attempted transfer, sublease or assignment of any of the
International Assets would be ineffective, would constitute a breach thereof or
would in any way materially affect the rights thereunder such that the Purchaser
would not in fact receive all of the rights or ownership to the International
Assets as provided in this Agreement (any such International Assets, the
"Deferred Assets"), title to the Deferred Assets shall be retained by the
Company but there shall be no reduction or reimbursement of the Purchase Price.
After the Closing, NGC, the Company, Parent and Purchaser shall continue to use
their reasonable best efforts to (i) cooperate to attempt to obtain any such
consents and (ii) to transfer to Parent or Purchaser pursuant to reasonable and
lawful arrangements the benefits and liabilities with respect to the Deferred
Assets effective as of the Closing. After the Closing, such efforts shall
include, without limitation, the enforcement for the benefit of the Purchaser
(at Purchaser's cost) of any and all rights of NGC, the Company or their
subsidiaries against third parties to any contract or agreement and the transfer
or sale of such Deferred Asset to any person or entity designated by the
Purchaser (and the net proceeds from any such transfer or sale shall be for
Purchaser's account). NGC shall cooperate with Parent and the Company in all
reasonable requests Parent, Purchaser or the Company shall make in connection
with the obtaining of all such consents and approvals. Upon receipt of the
required consents or approvals with respect to any Deferred Assets, NGC shall
cause the Company to transfer such Deferred Asset (and the liabilities related
thereto) to Parent or Purchaser, without recourse except as to encumbrances in
each case created by, through or under NGC, the Company or their affiliates from
and after the Closing. Any such transfer shall to the extent possible be
effective as of the Closing, and arrangements will be made to transfer the net
cash flow between the Deferred Assets, on the one hand, and the Company and the
Subsidiaries (excluding the International Assets) on the other hand attributable
to projects so transferred for the period from the date of the Closing through
the date of such transfer, to the extent that they were not theretofore
transferred.
(b) With respect to the project known as "Hazelwood," NGC and Parent
acknowledge that there is a question as to whether consents of the Government of
Victoria of Australia that are required pursuant to certain
7
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financing, project and other documents relating to the Hazelwood project will be
received at or prior to the Closing. Therefore, NGC and Parent agree to fully
cooperate to determine whether such consents will be received prior to or at
Closing by acting together to seek such consents as expeditiously as possible.
If after 15 days from the date of this Agreement it appears to either of the
parties that such consents are not reasonably likely to be received prior to or
at the Closing, NGC and the Parent agree to negotiate in good faith with respect
to (i) whether reasonable and lawful arrangements (which do not violate any law
or contractual obligations applicable to the Hazelwood project) can be designed
to achieve the transfer described above with respect to the Hazelwood project,
including to the extent feasible trust arrangements, put/call arrangements, or
obligations on the part of NGC to cause the timely sale of the Hazelwood project
(with proceeds thereof to be delivered to Parent or Purchaser with adjustments
to be agreed upon to reflect benefits and liabilities of the Hazelwood project
from the date of the Closing through the date of the sale of the Hazelwood
project), and (ii) whether the structure of the transactions contemplated in
this Agreement and the Merger Agreement could be "flipped" so that the Parent or
its affiliate merges with the Company and immediately thereafter the Parent
causes the Company to sell its assets (other than the International Assets) to
NGC. In addition, NGC agrees that, if after such 15 days it appears that the
consents will not be received prior to or at the Closing, it shall as
expeditiously as possible seek the third party consents necessary to consummate
such a flipped transaction. Notwithstanding anything herein to the contrary, NGC
shall not be under any obligation to consummate such a flipped transaction if a
necessary third party consent is not obtainable after a reasonable good faith
effort on NGC's behalf to obtain such a consent or NGC determines in good faith
that such a transaction would be significantly adverse to NGC.
(c) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN
ARTICLE III AND EXCEPT AS OTHERWISE PROVIDED IN SECTION 1.1(i), THE
INTERNATIONAL ASSETS ARE BEING SOLD TO PURCHASER AS IS, WHERE IS, WITH ALL
FAULTS, DEFECTS, LIENS AND OTHER ENCUMBRANCES; PROVIDED THAT THE FOREGOING SHALL
NOT AFFECT PARENT'S RIGHTS UNDER SECTION 7.1.
ARTICLE II
[Intentionally Omitted]
8
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NGC AND THE COMPANY
NGC represents and warrants to Parent and Purchaser as follows:
Section 3.1 Organization. NGC is a corporation duly organized,
------------
validly existing and in good standing under the laws of the State of Delaware.
NGC has all requisite corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted and is or
will be qualified or licensed to do business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so qualified or licensed would not have a material adverse effect on the
business or financial condition of NGC and its subsidiaries, taken as a whole,
or materially impair or delay the consummation of the transactions contemplated
by this Agreement. NGC has previously delivered to the Parent and Purchaser
complete and correct copies of its certificate of incorporation and by-laws, as
currently in effect, and prior to the Closing NGC will have delivered to Parent
complete and correct copies of the certificate of incorporation and by-laws of
the Company, as in effect at the time of such delivery.
Section 3.2 Authorization; Validity of Agreement. NGC has the
------------------------------------
requisite corporate power and authority to execute and deliver this Agreement.
NGC has, and as of the Closing the Company will have, the requisite corporate
power and authority to consummate the transactions contemplated hereby. The
execution and delivery by NGC of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by NGC's Board of
Directors and no other corporate proceedings on the part of NGC are necessary to
authorize the execution and delivery of this Agreement by NGC and the
consummation of the transactions contemplated hereby. The consummation of the
transactions contemplated hereby will be duly authorized by the Board of
Directors of the Company and no other corporate proceedings on the part of the
Company will be necessary to authorize the transactions contemplated hereby.
This Agreement has been duly executed and delivered by NGC and, assuming due
authorization, execution and delivery of this Agreement by Parent, is a valid
and binding obligation of NGC enforceable against it in accordance with its
terms.
9
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Section 3.3 No Violations; Consents and Approvals.
-------------------------------------
(a) Neither the execution and delivery of this Agreement by NGC nor
the consummation by NGC of the transactions contemplated hereby will (i) violate
any provision of the respective certificates of incorporation or by-laws of NGC
or, as of the Closing, the Company, (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, license, lease, contract, agreement
or other instrument or obligation to which NGC or, with respect to agreements
entered into by or on behalf of NGC ("New Agreements"), the Company is a party,
or by which NGC or, pursuant to New Agreements, the Company or any of their
respective assets are bound or (iii) assuming that all consents, authorizations
and approvals contemplated by Section 3.3(b) or Section 1.8 have been obtained
and all filings contemplated thereby have been made, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to NGC, any of its
subsidiaries (excluding for purposes of this clause (iii) the Company and its
subsidiaries) or any of their properties or assets; except for such violations,
breaches, defaults, terminations, amendments, cancellations or accelerations
which would not materially impair or delay the consummation of the transactions
contemplated by this Agreement.
(b) No filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity is required in
connection with the execution and delivery of this Agreement by NGC or the
consummation by NGC of the transactions contemplated hereby, except (i)
applicable requirements under Competition Laws (as hereinafter defined), (ii)
applicable requirements under the Securities Exchange Act of 1934, as amended
and the regulations thereunder (the "Exchange Act") and (iii) such other
consents, approvals, orders, authorizations, notifications, registrations,
declarations and filings the failure of which to be obtained or made would not
materially impair or delay the consummation of the transactions contemplated by
this Agreement.
Section 3.4 No Other Representations or Warranties. Except for the
--------------------------------------
representations and warranties contained in this Article III, neither NGC nor
any other Person (as defined in the Merger Agreement) makes any other
10
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express or implied representation or warranty on behalf of NGC.
ARTICLE IV
[Intentionally Omitted]
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent represents and warrants and Purchaser as of the Closing will
represent and warrant to NGC as follows:
Section 5.1 Organization. Parent is a corporation duly organized,
------------
validly existing and in good standing under the laws of the State of Delaware
and Purchaser as of the Closing will be a corporation duly organized, validly
existing and in good standing under the laws of Delaware. Parent has and as of
the Closing Purchaser will have all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
or will be conducted and is or will be qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed would not
have a material adverse effect on the business or financial condition of Parent
and its Subsidiaries, taken as a whole, or materially impair or delay the
consummation of the transactions contemplated by this Agreement. Parent has
previously delivered to NGC complete and correct copies of its certificate of
incorporation and by-laws, as currently in effect and prior to the Closing
Parent will have delivered to NGC complete and correct copies of the certificate
of incorporation and by-laws of Purchaser, as in effect at the time of such
delivery.
Section 5.2 Authorization; Validity of Agreement. Parent has the
------------------------------------
requisite corporate power and authority to execute and deliver this Agreement.
Parent has, and as of the Closing Purchaser will have, the requisite corporate
power and authority to consummate the transactions contemplated hereby. The
execution and delivery by Parent of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Parent and no other corporate proceedings on the part of Parent are
necessary to authorize the execution
11
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and delivery of this Agreement by Parent and the consummation of the
transactions contemplated hereby. The consummation of the transactions
contemplated hereby will be duly authorized by the Board of Directors of
Purchaser and no other corporate proceedings on the part of Purchaser will be
necessary to authorize the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Parent and, assuming due authorization,
execution and delivery of this Agreement by NGC, is a valid and binding
obligation of Parent enforceable against Parent in accordance with its terms.
Section 5.3 No Violations; Consents and Approvals.
-------------------------------------
(a) Neither the execution and delivery of this Agreement by Parent
nor the consummation by Parent and Purchaser of the transactions contemplated
hereby will (i) violate any provision of the respective certificates of
incorporation or by-laws of Parent or Purchaser, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, guarantee, other evidence of indebtedness, license, lease, contract,
agreement or other instrument or obligation to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their assets may be
bound or (iii) assuming that all consents, authorizations and approvals
contemplated by Section 5.3(b) have been obtained and all filings contemplated
thereby have been made, violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Parent, any of its Subsidiaries or any of their
properties or assets; except for such violations, breaches, defaults,
terminations, amendments, cancellations or accelerations which would not
materially impair or delay the consummation of the transactions contemplated by
this Agreement.
(b) No filing or registration with, notification to, or
authorization, consent or approval of, any Governmental Entity is required in
connection with the execution and delivery of this Agreement by Parent or the
consummation by Parent and Purchaser of the transactions contemplated hereby,
except (i) applicable requirements under Competition Laws, (ii) applicable
requirements under the Exchange Act and (iii) such other consents, approvals,
orders, authorizations, notifications, registrations, declarations and filings
the failure of which to be obtained or made would not materially impair or delay
the
12
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consummation of the transactions contemplated by this Agreement.
Section 5.4 Financing. One business day prior to the Effective Time,
---------
Parent and Purchaser will have sufficient funds available (through existing
credit arrangements or otherwise) to pay the Purchase Price and to perform their
obligations hereunder.
Section 5.5 Brokers. No broker, finder or investment banker is
-------
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Parent and Purchaser.
Section 5.6 Public Utility Company; Public Utility Regulatory
-------------------------------------------------
Policies Act. Neither Parent nor its Subsidiaries is subject to regulation as a
- ------------
"holding company" or a "subsidiary company" of a holding company or a "public
utility company" under Section 2(a) of the Public Utility Holding Company Act of
1935.
Section 5.7 Absence of Litigation. As of the date hereof, there is
---------------------
no suit, claim, action, proceeding or investigation pending against, or to the
actual knowledge of Parent, threatened against, Parent or any of its respective
properties before any Governmental Entity or arbitrator which challenges or
seeks to prevent, enjoin, alter or delay the transactions contemplated by this
Agreement. As of the date hereof, neither Parent nor any of its respective
properties is subject to any judgment, decree, order or injunction of any
Governmental Entity or arbitrator which would prevent or delay the consummation
of the transactions contemplated hereby.
Section 5.8 No Other Representations or Warranties. Except for the
--------------------------------------
representations and warranties contained in this Article V, neither Parent,
Purchaser nor any other Person makes any other express or implied representation
or warranty on behalf of Parent or Purchaser.
ARTICLE VI
COVENANTS
Section 6.1 Further Action; Reasonable Best Efforts.
---------------------------------------
(a) Upon the terms and subject to the conditions herein provided,
each of the parties hereto agrees to use
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its reasonable best efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using reasonable best efforts to
effect all necessary registrations and filings. Each of the parties hereto will
furnish to the other parties such necessary information and reasonable
assistance as such other parties may reasonably request in connection with the
foregoing and will provide the other parties with copies of all filings made by
such party with any Governmental Entity or any other information supplied by
such party to a Governmental Entity in connection with this Agreement, and the
transactions contemplated hereby. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and/or directors of the Company, including any
successor, shall take or cause to be taken all such necessary action.
(b) Parent and NGC shall use their respective reasonable best efforts
to resolve such objections, if any, as may be asserted with respect to the
transactions contemplated hereby under the laws, rules, guidelines or
regulations of any Governmental Entity. Without limiting the foregoing, Parent
and NGC shall, as soon as practicable, file Notification and Report Forms under
the HSR Act (as defined below) with the Federal Trade Commission (the "FTC") and
the Antitrust Division of the Department of Justice (the "Antitrust Division")
and shall use reasonable best efforts to respond as promptly as practicable to
all inquiries received from the FTC or the Antitrust Division for additional
information or documentation; and Parent and NGC shall use their reasonable best
efforts to take or cause to be taken all actions necessary, proper or advisable
to obtain any consent, waiver, approval or authorization relating to any
Competition Law that is required for the consummation of the transactions
contemplated by this Agreement; provided, however, that the foregoing shall not
-------- -------
obligate Parent or NGC to take any action which would have a material adverse
effect on the International Assets. "Competition Laws" means statutes, rules,
regulations, orders, decrees, administrative and judicial doctrines, and other
laws that are designed or intended to prohibit, restrict or regulate actions
having the purpose or effect of monopolization, lessening of competition or
restraint of trade and includes the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act").
14
<PAGE>
Section 6.2 Employee Benefits.
-----------------
(a) For purposes of this Agreement, the term "International
Employees" means those employees of the Company and the Subsidiaries who devote
a substantial amount of time to the International Business and those consultants
whose services relate primarily to the International Businesses. Parent and
Purchaser hereby agree to honor without modification or contest, and to make
required payments when due under, all portions of the International Employee
Plans in existence on the date hereof (or as modified to the extent permitted by
the Merger Agreement); provided, however, that nothing in this Section 6.2 shall
-------- -------
be construed to limit the ability of Parent and Purchaser to amend or terminate
such Plans after the Closing to the extent permitted under the terms of the
International Employee Plans.
(b) Parent and Purchaser hereby agree that for a period of one year
immediately following the Effective Time, they shall, or shall cause the
International Entities (as hereinafter defined) to either (i) continue to
maintain the International Employee Plans on terms no less favorable in the
aggregate than those provided to the International Employees and former
international employees on the date hereof or (ii) provide that International
Employees and former international employees may participate in analogous plans
of Parent which provide benefits which in the aggregate are substantially
similar to those provided to them under the International Employee Plans on the
date hereof.
Section 6.3 Indemnification. (a) NGC shall, and NGC shall cause the
---------------
Company to, jointly and severally indemnify, defend and hold Parent, Purchaser
and their affiliates harmless against and in respect of (i) all claims asserted
by third parties with respect to Excluded Liabilities and (ii) all costs and
expenses (including expenses of investigation, settlement negotiation and
attorneys' fees) incurred by Parent or Purchaser in connection with any action,
suit, proceeding, demand, claim, investigation, assessment or judgment incident
to any of the matters indemnified against in this Section 6.3(a).
(b) Parent shall, and Parent shall cause the Purchaser to, jointly
and severally indemnify, defend and hold NGC, the Company and their affiliates
harmless against and in respect of (i) claims asserted by third parties with
respect to the Assumed Liabilities, (ii) all credit support obligations,
guarantees and contribution obligations relating to the International Assets,
including but not
15
<PAGE>
limited to those listed on Schedule 1.3 of the Disclosure Schedule with respect
to which the Company and its Subsidiaries have not been fully released by the
Closing to the reasonable satisfaction of NGC and (iii) all costs and expenses
(including expenses of investigation settlement negotiation and attorneys' fees)
incurred by the Company, NGC and their affiliates in connection with any action,
suit, proceeding, demand, claim, investigation assessment or judgment incident
to any of the matters indemnified against in this Section 6.3(b).
(c) Promptly after receipt by an indemnified party under this Section
6.3 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6.3, notify the indemnifying party in
writing of the claim or the commencement of that action, provided that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to the indemnified party except to the extent that the
indemnifying party is prejudiced by such failure to notify. If any such claim
shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein, and to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party, and to settle and compromise any such
claim or action; provided, however, such settlement or compromise shall be
effected only with the consent of the indemnified party, which consent shall not
be unreasonably withheld. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim or action,
the indemnifying party shall not be liable to the indemnified party under this
Section 6.3 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation (including related reasonable attorney's fees and
expenses), provided, however, that the indemnified party shall have the right to
employ counsel to represent it if, in the indemnified party's reasonable
judgment, it is advisable for the indemnified party to be represented by
separate counsel), and in that event the fees and expenses of such separate
counsel shall be paid by the indemnified party unless the named parties to any
such claim or action (including any impleaded parties) include both the
indemnifying party and the indemnified party and in the opinion of counsel to
the indemnified party (which counsel is reasonably satisfactory to the
indemnifying party) representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them, in
which case
16
<PAGE>
the reasonable fees and expenses of separate counsel (which counsel is
reasonably satisfactory to the indemnifying party) shall be paid by the
indemnifying party. Purchaser and the Company shall each render to each other
such assistance (including by asserting reasonable counterclaims and bringing
suit against third parties) as may reasonably be requested in order to insure
the proper and adequate defense of any such claim or proceeding.
(d) The indemnities provided in this Agreement shall survive the
Closing.
(e) The parties agree that the indemnification payments made pursuant
to this Agreement shall be treated for tax purposes as an adjustment to the
Purchase Price, unless otherwise required by applicable law.
Section 6.4 Publicity. None of NGC, Parent, Purchaser nor any of
---------
their respective affiliates shall issue or cause the publication of any press
release or other announcement with respect to this Agreement, or the other
transactions contemplated hereby without prior consultation with the other
parties, except as may be required by law or by any listing agreement with a
national securities exchange after prior notice has been given to, and all
reasonable efforts have been made to consult with the other parties.
Section 6.5 Corporate Names; Termination of Trademark Licensing
---------------------------------------------------
Agreements.
- ----------
(a) Each of Parent and Purchaser shall change any of the names of the
corporations or other Persons included as part of the International Assets which
contain "Destec" to corporate names not containing "Destec" within 90 days after
the transfer of such Person to Purchaser and shall use their respective
reasonable best efforts to remove all corporate names, service marks, trademarks
and trade names containing "Destec" (the "Destec Names") from any of the
International Assets within one year after the Closing Date. After the Closing
Date, neither Parent nor Purchaser shall seek to obtain any rights to or use the
Destec Names except as specifically provided in this Section 6.5.
(b) All trademark licensing agreements by and between the Company and
any of the entities included as part of the International Assets shall be
terminated as of the Closing Date subject to the provisions of this Section 6.5.
17
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Section 6.6 No Non-Compete Obligation.
-------------------------
The parties hereby acknowledge that the consummation of the
transactions contemplated hereby will not create an obligation of (i) NGC or its
affiliates not to compete in any business with Parent, Purchaser or their
respective affiliates; provided that none of NGC, the Company or their
affiliates shall use any confidential information obtained from the Company in
connection with NGC entering into the Merger Agreement or this Agreement to so
compete or (ii) Parent or its affiliates not to compete in any business with
NGC, the Company or their respective affiliates; provided that none of Parent,
Purchaser or their affiliates shall use any confidential information obtained
from the Company in connection with Parent entering into this Agreement.
Section 6.7 Obligations under Merger Agreement. If the conditions to
----------------------------------
NGC's obligations under the Merger Agreement have been satisfied, NGC will
consummate the Merger; provided, that Parent shall be in compliance with Section
1.6(b) of this Agreement.
Section 6.8 Transfer Taxes. Parent shall cause Purchaser to pay all
--------------
transfer taxes, stamp taxes or similar taxes arising in connection with the sale
and purchase of the International Assets hereunder.
Section 6.9 Merger Agreement Break-Up Fee. NGC shall promptly pay to
-----------------------------
Parent its pro rata share of any proceeds received by NGC pursuant to Section
8.3 of the Merger Agreement.
Section 6.10 Site Development Agreement. If the Company receives
--------------------------
notice from The Dow Chemical Company ("Dow") under Section 3.1 of the Site
Development Agreement between the Company and Dow dated February 17, 1997 with
respect to any project outside the United States of America, NGC shall cause the
Company to promptly send to Purchasers a copy of such notice.
Section 6.11 Certain Confidentiality Obligations. Parent hereby
-----------------------------------
agrees to be bound by the terms and conditions of Section 6.4 of the Merger
Agreement.
Section 6.12 Tax Matters.
-----------
(a) NGC and Parent shall make a joint election for the International
Entities (as hereinafter defined) that are U.S. corporations under Section
338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") and
18
<PAGE>
under any applicable similar provisions of state or local law (collectively, the
"Section 338(h)(10) Elections"). On the Closing Date, NGC and Parent shall
exchange completed and executed copies of Internal Revenue Service Form 8023-A
and any similar state or local forms (collectively, the "Forms"). If any
changes are required in the Forms as a result of information which is first
available after such Forms are prepared, the parties will promptly agree on such
changes. After all required schedules to support the Forms are completed, NGC
and Parent shall file the Forms, which filing shall be made within the time
period specified under applicable law. NGC, Parent, the International Entities
and the Company shall make all required filings relating to the Section
338(h)(10) Elections in connection with their federal and applicable state and
local income tax returns, and shall cooperate fully with each other with respect
to such filings. For purposes of this Agreement, "International Entities" means
those Persons which own, or have any rights to or interest in (direct or
indirect), the International Assets.
Within 180 days following the Closing Date, Parent shall (i) draft a
schedule (the "Allocation Schedule") allocating the Modified Adjusted Deemed
Sales Price (as defined in Section 1.338(h)(10)-1(f) of the Treasury
regulations), and the Adjusted Deemed Sales Price (as defined in Section 1.338-
3(d) of the Treasury Regulations for the International Entities for which
Section 338(h)(10) Elections or Section 338(g) elections will be among the
International Assets and (ii) deliver such Allocation Schedule to NGC. The
Allocation Schedule shall be reasonable and shall be prepared in accordance with
Section 338 of the Code and the Treasury regulations thereunder. Each of
Parent, on the one hand, and NGC (upon its consent to the Allocation Schedule,
which consent shall not be unreasonably withheld) on the other hand, shall
report the transactions contemplated hereby, and file all Tax Returns (as
defined below), in each case, for federal, state, local and foreign Tax purposes
in accordance with the Allocation Schedule.
NGC represents and warrants that it will make joint Section 338(h)(10)
Elections with Dow for the International Entities that are U.S. corporations and
will file Section 338(g) elections only for those International Entities
designated by Parent. Parent represents and covenants that it will not file, or
permit to be filed by any affiliate, Section 338(g) Elections except for those
International Entities designated for such Elections pursuant to the preceding
sentence.
19
<PAGE>
(b) Nothing contained herein shall be construed as altering the
rights, obligations and duties of Dow, the Company and any Subsidiaries of the
Company to each other pursuant to the Tax Sharing Agreement between Dow, the
Company and its Subsidiaries dated May 15, 1996 (the "Tax Sharing Agreement")
(attached hereto as Exhibit 6.12). The Tax Sharing Agreement shall continue to
govern the rights and obligations of Dow, the Company and any Subsidiaries of
the Company with respect to the taxable periods for which it is effective.
Parent acknowledges that the Tax Sharing Agreement shall be amended effective as
of the Closing Date in the form of the First Amendment to the Tax Sharing
Agreement, which has been previously distributed to Parent.
Parent shall pay or cause the International Entities to pay to NGC all
amount required to be paid by the International Entities to Dow under the Tax
Sharing Agreement. NGC shall pay to the International Entities all amounts Dow
is required to pay to the International Entities under the Tax Sharing
Agreement.
(c) (i) NGC shall be liable for, and shall indemnify Parent and
Purchaser for and hold Parent and Purchaser harmless against (A) all income
Taxes (as defined below) imposed for any taxable year on Dow's "affiliated
group" (as defined in Section 1504(a) of the Code without regard to the
limitations contained in Section 1504(b) of the Code) or any other combined or
unitary group for state, local or foreign tax purposes that include Dow (not
including the use of any losses or other Tax attributes) (B) any incremental
amount of state and local income Taxes imposed on the International Entities
(other than any amount of state or local Taxes imposed on a combined or unitary
group that includes Dow) for the taxable year that includes the Closing Date, to
the extent that such amount is incurred as a result of the Section 338(h)(10)
Elections or any election under Section 338(g) of the Code and (C) all liability
for income Taxes imposed on any International Entities pursuant to Section
1.1502-6 of the Treasury Regulations or any comparable provision of state or
local law. NGC shall be entitled to any refund of (or credit for) Taxes
allocable or attributable to Taxes for which NGC is liable to Parent or
Purchaser pursuant to this paragraph (c)(i) of this Section 6.12.
(ii) Parent and Purchaser shall be liable for, and shall indemnify NGC
for and hold Seller harmless against all Taxes of or imposed on any of the
International Entities for any taxable period other than those Taxes referred to
in paragraph (c)(i) of this Section 6.12. Parent shall be entitled to any
refund of (or credit for)
20
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Taxes allocable or attributable to Taxes for which Parent is liable to NGC
pursuant to this paragraph (c)(ii) of Section 6.12.
(iii) Notwithstanding anything to the contrary contained herein,
Parent shall assume and pay all sales, use, privilege, transfer, stock transfer,
real property transfer, documentary, gains, stamp, duties, recording and similar
Taxes and fees and all foreign Taxes (including any penalties, interest or
additions) imposed upon any party incurred in connection with any of the
transfers contemplated by this Agreement (collectively, "Transfer Taxes") and
Parent shall, at its own expense, accurately file all necessary Tax Returns and
other documentation with respect to any Transfer Tax other than Tax Returns
which Seller is responsible for filing under applicable law. Parent and Seller
agree to timely sign and deliver such certificates or forms as may be necessary
or appropriate to establish an exemption from (or otherwise reduce), or file Tax
Returns with respect to, such Transfer Taxes.
(d) (i) Parent acknowledges that Dow shall file or cause to be filed
when due all Tax Returns Dow has elected to file pursuant to the Tax Sharing
Agreement and Dow shall remit or cause to be remitted any Taxes due in respect
of such Tax Returns, and Parent shall file or cause to be filed when due all Tax
Returns other than those Tax Returns Dow has elected to file pursuant to the Tax
Sharing Agreement that are required to be filed by or with respect to the
International Entities and Parent shall remit or cause to be remitted any Taxes
due in respect of such Tax Returns.
(ii) None of Parent or any affiliate of Parent shall (or shall cause
or permit the Company or any of its Subsidiaries to) amend, refile or otherwise
modify any Tax Return relating in whole or in part to the Company or any of its
Subsidiaries with respect to any Company or any of its Subsidiaries with respect
to any taxable year or period ending on or before the Closing Date without the
prior written consent of NGC.
(iii) Parent shall promptly cause the International Entities to
prepare and provide to, or at the direction of, NGC, all Tax information
materials, including, without limitation, schedules and work papers which the
Company is required to provide Dow pursuant to the Tax Sharing Agreement. Each
of NGC and Parent shall (and shall cause their respective affiliates to): (A)
assist the other party and/or Dow in preparing any Tax Returns which such other
party or Dow is responsible for preparing and filing
21
<PAGE>
in accordance with clause (i) of this Section 6.12, (B) cooperate fully in
preparing for any audits of, or disputes with taxing authorities regarding, any
Tax Returns of the Company and each Subsidiary of the Company, and (C) make
available to the other party and to any taxing authority as reasonably requested
all information, records, and documents relating to Taxes of the Company and
each Subsidiary of the Company, provided, NGC or Parent (or respective
--------
affiliates) has access to information, records or personnel concerning such Tax
Returns that is not available to the other party.
(e) NGC or Parent shall pay the other party for the Taxes for which
NGC or Parent, respectively, is liable pursuant to paragraph (c) of Section 6.12
upon the written request of the party entitled to the payment, setting forth in
detail the nature and the amount of the Taxes to which the payment relates.
(f) Each of NGC and Parent shall (and cause their respective
affiliates to): (A) provide timely notice to the other in writing of any notice
of deficiency, proposed adjustment, adjustment, assessment, audit, examination,
suit, dispute or other claim ("Tax Claim") delivered, sent, commenced or
initiated to or against the Company or any Subsidiary of the Company by any
Taxing authority with respect to taxable periods for which the other may have a
liability under this Section 6.12, and (B) furnish the other with copies of all
correspondence received from any taxing authority in connection with any Tax
audit or information request with respect to any such taxable period.
(g) Parent acknowledges that Dow shall have the sole right to
represent the Company's and each of its Subsidiaries' interests in any Tax
Claim, Tax audit or administrative or court proceeding ("Proceeding") relating
to any Taxes (A) imposed for any taxable year on Dow's "affiliated group" (as
defined in Section 1504(a) of the Code without regard to the limitations
contained in Section 1504(b) of the Code) or any other combined or unitary group
of Dow, (B) imposed on the Company or any Subsidiary of the Company as a result
of the Section 338(h)(10) Elections (or similar provision under state, local or
foreign law) pursuant to paragraph (a) of Section 6.12. None of Parent, any of
its affiliates, or any International Entities may settle any Proceeding for any
taxable year which may be the subject of indemnification by NGC under paragraph
(c) of Section 6.12 without the prior written consent of NGC, which consent may
not be unreasonably withheld. Parent shall have the sole right to represent the
- --- ------------
International Entities' interests in any Proceeding relating to any Taxes for
which
22
<PAGE>
Parent could be liable to NGC pursuant to Section 6.12(c) of this Agreement. If
the resolution of any Proceeding could adversely affect a party other than the
party with the sole right to represent the Company's or any Subsidiary's
interest in any Tax Claim then such other party shall have the right to
participate in such Proceeding at its own cost and expense.
(h) Any payment by Parent, Purchaser or NGC pursuant to this Section
6.12 shall be an adjustment to the Purchase Price.
(i) For purposes of this Agreement, "Taxes" shall mean any and all
taxes, charges, fees, levies or other assessments, including, without
limitation, all net income, gross income, gross receipts, excise, stamp, real or
personal property, ad valorem, withholding, estimated, social security,
unemployment, occupation, use, service, service use, license, net worth,
payroll, franchise, severance, transfer, recording or other taxes, assessments
or charges imposed by any Governmental Entity and any interest, penalties, or
additions to tax attributable thereto. For purposes of this Agreement, "Tax
Return" shall mean any return, report or similar statement required to be filed
with respect to any Tax (including any attached schedules), including, without
limitation,, any information return, claim for refund, amended return or
declaration of estimated Tax.
(j) The obligations set forth in this Section 6.12 shall be
unconditional and absolute and shall remain in effect without limitation as to
time.
Section 6.13 Financing Commitment.
--------------------
Parent agrees that:
(a) Within 10 days of the signing of this agreement, Parent will
provide to NGC a commitment letter substantially in the form of that original
letter dated February 17, 1997 from Morgan Guaranty Trust Company of New York
and J.P. Morgan Securities, Inc. (Morgan) except that (a) clauses (iii) and (iv)
shall be deleted in their entirety and (b) a termsheet evidencing the
substantive terms and conditions under which Morgan will finance AES's purchase
of the International Assets shall be referenced and attached.
23
<PAGE>
(b) No later than three weeks before the special meeting of Destec's
stockholders to approve the Agreement and Plan of Merger, Parent will provide to
NGC either (a) evidence that Parent has sufficient cash on hand to fund its
obligations under this Agreement or (b) a commitment letter substantially in the
form described in (a) above except the due diligence condition in clause (i)
therein shall be deleted in its entirety, or (c) such other evidence of a firm
financing commitment as may be reasonably satisfactory to NGC and Parent.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Purchaser's Obligation to Purchase the
----------------------------------------------------
International Assets. The obligation of Purchaser to purchase the International
- --------------------
Assets hereunder shall be subject to the satisfaction or waiver by Purchaser at
or prior to the Closing of the following: (a) the representations and
warranties of NGC and the Company set forth in this Agreement shall be true and
correct (except in the case of any representation and warranty made as of a
specified date, which need only be true as of such date) as of the date of the
Closing as if such representations and warranties were made on such date except
for such representations and warranties the failure of which to be true and
correct would not have a material adverse effect on the transactions
contemplated by this Agreement; (b) no representation, warranty, condition,
covenant or other term in the Merger Agreement relating to the International
Assets shall be amended, modified or waived, which amendment, modification or
waiver could reasonably be expected to have a material adverse effect on the
International Assets taken as a whole, without the prior written consent of
Parent or Purchaser; (c) the Merger Agreement shall have been consummated,
without waiver of any of the conditions contained in the Merger Agreement, which
waiver could reasonably be expected to have a material adverse effect on the
International Assets taken as a whole, without the written consent of Parent or
Purchaser.
Section 7.2. Conditions to NGC's Obligation to Sell the International
--------------------------------------------------------
Assets. The obligation of NGC to sell the International Assets hereunder shall
- ------
be subject to the satisfaction or waiver by NGC at or prior to the Closing of
the following: (a) the Merger shall have been consummated, (b) the
representations and warranties of the Parent and Purchaser set forth in this
Agreement shall be true and correct (except in the case of any representation
24
<PAGE>
and warranty made as of a specified date, which need only be true as of such
date) as of the date of the Closing as if such representations and warranties
were made on such date except for such representations and warranties the
failure of which to be true and correct would not have a material adverse effect
on the transactions contemplated by this Agreement and (c) Purchaser shall have
complied with Section 1.6(b) hereof.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. Notwithstanding anything herein to the
-----------
contrary, this Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
(a) By the mutual written consent of Parent and NGC; or
(b) By Parent or NGC, if: (i) the Merger Agreement is terminated;
(ii) the transactions contemplated by this Agreement have not been
consummated on or prior to December 31, 1997, or such other date, if any,
as Parent and NGC shall agree upon; provided that the right to terminate
this Agreement under this Section 8.1(b) shall not be available to a party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Closing to occur on or before
such date; or (iii) any Governmental Entity shall have issued a statute,
order, decree or regulation or taken any other action (which statute,
order, decree, regulation or other action the parties hereto shall use
their reasonable best efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement or making such transactions illegal and such
statute, order, decree, regulation or other action shall have become final
and non-appealable.
Section 8.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement as provided in Section 8.1, written notice thereof shall
forthwith be given to the other party or parties specifying the provision hereof
pursuant to which such termination is made, and this Agreement shall terminate,
and there shall be no liability on the part of Parent, Purchaser or NGC except
as set forth in Section 9.1 hereof; provided that the termination of this
25
<PAGE>
Agreement shall not relieve any party from liability for breach of this
Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Fees and Expenses. Except as contemplated by this
-----------------
Agreement, all costs and expenses incurred in connection with this Agreement and
the consummation of the transactions contemplated hereby shall be paid by the
party incurring such expenses.
Section 9.2 Specific Performance. The parties hereto agree that
--------------------
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
Section 9.3 Amendment; Waiver.
-----------------
(a) This Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors, at any time. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
(b) At any time prior to the Closing, the parties may (i) extend the
time for the performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations and
warranties of the other parties contained herein or in any document, certificate
or writing delivered pursuant hereto or (iii) waive compliance with any of the
agreements or conditions of the other parties hereto contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
Section 9.4 Survival. The respective representations and warranties
--------
of Parent, Purchaser and NGC contained herein or in any certificates or other
documents delivered prior to or as of the Closing shall not survive beyond the
Closing. The covenants and agreements of the parties hereto shall survive the
Closing without limitation (except for those which, by their terms, contemplate
a shorter survival period).
26
<PAGE>
Section 9.5 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given upon (a) transmitter's
confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by
a standard overnight carrier or when delivered by hand or (c) the expiration of
five business days after the day when mailed in the United States by certified
or registered mail, postage prepaid, addressed at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to NGC, to:
NGC Corporation
13430 Northwest Freeway
2500 Citywest Blvd.
Suite 1200
Houston, Texas 77040-6095
Telephone: (713)
Facsimile: (713) 507-6505
Attention: Hugh Tarpley
with a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
Telephone: (713) 758-2222
Facsimile: (713) 758-2346
Attention: T. Mark Kelly, Esq.
Keith R. Fullenweider, Esq.
and
(b) if to Parent, to:
The AES Corporation
1001 North 19th Street
Arlington, Virginia 22209
Telephone: (703) 522-1315
Facsimile: (703) 528-4510
Attention: Katherine Oster
27
<PAGE>
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 408-5100
Facsimile: (212) 541-5369
Attention: John T. Baecher, Esq.
Section 9.6 Interpretation. When a reference is made in this
--------------
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. Whenever the words "include", "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation". The phrase "made available" when used in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
words "affiliates" and "associates" when used in this Agreement shall have the
respective meanings ascribed to them in Rule 12b-2 under the Exchange Act. The
phrase "beneficial ownership" and words of similar import when used in this
Agreement shall have the meaning ascribed to it in Rule 13d-3 under the Exchange
Act.
Section 9.7 Headings; Schedules. The headings contained in this
-------------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Any matter disclosed pursuant to
any Schedule to the Disclosure Schedule shall be deemed to be disclosed for all
purposes under this Agreement but such disclosure shall not be deemed to be an
admission or representation as to the materiality of the item so disclosed.
Section 9.8 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original but all of which
shall be considered one and the same agreement.
Section 9.9 Entire Agreement. This Agreement constitutes the entire
----------------
agreement, and supersedes all prior agreements and understandings (written and
oral) among the parties with respect to the subject matter hereof, including,
without limitation, that certain Joint Bidding Agreement, dated February 10,
1997, by and between Parent and NGC.
Section 9.10 Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to
28
<PAGE>
be invalid, void, unenforceable or against its regulatory policy, the remainder
of the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
Section 9.11 Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of Delaware without giving
effect to the principles of conflicts of law thereof.
Section 9.12 Assignment. Neither this Agreement nor any of the
----------
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by,
the parties and their respective successors and assigns. The provisions of this
Agreement are not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
Section 9.13 Consent to Jurisdiction. Each of the parties hereto
-----------------------
hereby irrevocably and unconditionally consents to submit to jurisdiction of the
courts of the State of Delaware and of the United States of America located in
the State of Delaware (the "Delaware Courts") for any litigation arising out of
or relating to this Agreement and the transactions contemplated hereby (and
agrees not to commence any litigation relating thereto except in such Delaware
Courts), waives any objection to the laying of venue of any such litigation in
the Delaware Courts and agrees not to plead or claim in any Delaware Court that
such litigation brought therein has been brought in an inconvenient forum.
29
<PAGE>
IN WITNESS WHEREOF, Parent and NGC have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
NGC CORPORATION
By: /s/ Kenneth E. Randolph
--------------------------
Name: Kenneth E. Randolph
Title: Senior Vice President
and General Manager
THE AES CORPORATION
By: /s/ Kenneth R. Woodcock
--------------------------
Name: Kenneth R. Woodcock
Title: Senior Vice President
30
<PAGE>
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OR OTHER BUSINESS ORGANIZATIONS
OF THE AES CORPORATION
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Company Name or Organization
- -----------------------------------------------------------------------
<S> <C>
AES Beaver Valley, Inc. Delaware
BV Partners Pennsylvania
AES Connecticut Management, Inc. Delaware
AES Thames, Inc. Delaware
AES Hawaii Management, Inc. Delaware
AES Barbers Point, Inc. Delaware
AES Oklahoma Management, Inc. Delaware
AES Shady Point, Inc. Delaware
AES Electric, Ltd. United Kingdom
NIGEN, Limited United Kingdom
AES Brazil Holdings, Inc. Delaware
AES Light II, Inc. Delaware
AES Cayman I, LLC Cayman Islands
AES Coral Reef, LLC Cayman Islands
Light Servicos de Electricidade, S.A. Brazil
</TABLE>
<PAGE>
Exhibit 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby constitute and appoint BARRY J. SHARP and
WILLIAM R. LURASCHI and each of them severally, the attorneys-in-fact of the
undersigned with full power to them and each of them to sign for and in the name
of the undersigned in the capacities indicated below the Company's Annual Report
on Form 10-K and any and all amendments and supplements thereto.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Roger W. Sant Chairman of the Board January 29, 1997
- ------------------------------ and Director
Roger W. Sant
/s/ Dennis W. Bakke President, January 29, 1997
- ------------------------------ Chief Executive Officer
Dennis W. Bakke and Director
/s/ Barry J. Sharp Vice President, Chief January 29, 1997
- ------------------------------ Financial Officer and
Barry J. Sharp Secretary
/s/ Frank Jungers
- ------------------------------ Director January 29, 1997
Frank Jungers
/s/ Robert F. Hemphill, Jr.
- ------------------------------ Director January 29, 1997
Robert F. Hemphill, Jr.
/s/ Dr. Henry R. Linden
- ------------------------------ Director January 29, 1997
Dr. Henry R. Linden
/s/ Dr. Alice Emerson
- ------------------------------ Director January 29, 1997
Dr. Alice Emerson
</TABLE>
The AES Corporation 1 Power of Attorney
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Russell E. Train
- ------------------------------ Director January 29, 1997
Russell E. Train
/s/ Thomas I. Unterberg
- ------------------------------ Director January 29, 1997
Thomas I. Unterberg
/s/ Robert H. Waterman, Jr.
- ------------------------------ Director January 29, 1997
Robert H. Waterman, Jr.
/s/ Vicki Ann Assevero
- ------------------------------ Director January 29, 1997
Vicki Ann Assevero
</TABLE>
The AES Corporation 2 Power of Attorney
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in The AES Corporation's
Registration Statement No. 33-44498 on Form S-8, Registration Statement No.
33-49262 on Form S-8, Registration Statement No. 33-95046 on Form S-3, and
Registration Statement No. 333-15487 on Form S-3 of our reports dated January
30, 1997, except for Note 13, as to which the date is February 18, 1997,
appearing in and incorporated by reference in this Annual Report on Form 10-K of
The AES Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 28, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) N/A
----------------
The AES Corporation
--------------------------------------------------
(Exact Name of Registrant as specified in charter)
Delaware 0-19281 54-1163725
- ------------------------- ------------ -------------------
(State or other jurisdic- (Commission (IRS Employer
tion of incorporation) File Number) Identification No.)
1001 North 19th Street, Arlington, Virginia 22209
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 703-522-1315
----------------
N/A
- --------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K includes the Discussion and Analysis of
Financial Condition and Results of Operations and the 1996 consolidated
financial statements filed under Item 7.
2
<PAGE>
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The AES Corporation and its subsidiaries and affiliates are primarily in the
business of selling electricity to customers in the U.S., England, Northern
Ireland, Argentina, China, Brazil, Hungary and Kazakstan. Electricity sales
accounted for 97% of total revenues during 1996 and 1995. Other sales arise from
the sale of steam and other commodities related to the Company's cogeneration
operations. Service revenues represent fees earned in connection with energy
consulting, wholesale power services and services provided to affiliates.
The electricity sold is generated (or manufactured) by power plants owned or
leased by subsidiaries and affiliates. AES now operates and owns (entirely or in
part) a diverse portfolio of electric power plants with a total capacity of
9,627 megawatts. Of that total, 60% are fueled by coal or petroleum coke, 8% are
fueled by natural gas, 10% are hydroelectric facilities, 1% are fueled by oil
and the remaining 21% are capable of using multiple fossil fuels. Of the total
megawatts, 1,069 (six plants) are located in the U.S., 1,420 (three plants) are
in the UK, 840 (five plants) are in Argentina, 229 (four plants) are in China,
1,281 (three plants) are in Hungary, 788 (four hydro-electric complexes) are in
Brazil and 4,000 (one plant) is in Kazakstan. AES has grown its portfolio of
generating assets by greenfield development and by acquisitions of existing
plants, primarily through competitively bid privatization initiatives outside
the U.S.
AES is currently in the process of adding 1,672 megawatts to its operating
portfolio by constructing two oil-fired power plants in Pakistan totaling 674
megawatts, a 180 megawatt coal-fired plant in the U.S., one oil-fired, one
natural gas-fired and three coal-fired plants in China (one of which is an
extension of an existing plant) totaling 588 megawatts and a 230 megawatt
natural gas-fired plant in Wales. In total, AES's net equity ownership in plants
in operation and under construction is 7,475 megawatts.
Because of the significant magnitude and complexity of building electric
generating plants, construction periods often range from two to four years,
depending on the technology and location. AES currently expects that projects
now under construction will reach commercial operation and begin to sell
electricity at various dates through 1999. The completion of each plant in a
timely manner is generally supported by a guarantee from the plant's
construction contractor; however, it remains possible, due to changes in the
economic, political, technological, regulatory or logistical circumstances
surrounding individual plants and their locations, that commercial operations
may be delayed.
AES believes that there is significant demand for both new and more efficiently
operated electric generating capacity in many regions around the world. In an
effort to further grow and diversify the Company's portfolio of electric
generating plants, AES is pursuing, through its integrated divisions, additional
greenfield developments and acquisitions in many countries. Several of these
acquisitions, if consummated, would require the Company to obtain substantial
additional financing, in the form of both debt and equity financing, in the
short term.
Certain subsidiaries and affiliates (domestic and non-U.S.) have signed
long-term contracts for the sale of electricity and are in various stages of
developing the related greenfield projects. Because these potential projects
have yet to begin construction or procure committed long-term financing
("financial closing"), there exist substantial risks to their successful
completion, including, but not limited to, those relating to failures of siting,
financing, construction, permitting, governmental approvals or termination of
the power sales contract as a result of a failure to meet milestones. As of
December 31, 1996, capitalized costs for projects under development were
approximately $53 million. The Company believes that these costs are
recoverable; however, no assurance can be given that changes in circumstances
related to individual development projects will not occur or that any of these
projects will be completed and reach commercial operation.
AES has been successful in acquiring a portion of its portfolio by participating
in competitive bidding under government sponsored privatization initiatives and
has been particularly interested in acquiring existing assets in electricity
markets that are promoting competition. In such privatizations, sellers
generally seek to complete competitive solicitations in less than one year, much
quicker than greenfield development, and require payment in
3
<PAGE>
full on transfer. AES believes that its experience in competitive markets and
its integrated divisional structure, with geographically dispersed locations,
enable it to react quickly and creatively in such situations.
Because of this relatively quick process or other considerations, it may not
always be possible to arrange "project financing" (the Company's historically
preferred financing method, which is discussed further under "Cash Flows,
Financial Resources and Liquidity") for specific potential acquisitions. As a
result, during 1996, the Company enhanced its financial capabilities to respond
to these more accelerated opportunities by expanding the Revolver to $425
million. AES also filed a $750 million "universal shelf" registration statement
that provides for the issuance of various additional debt and preferred or
common equity securities either individually or in combination. AES also may
consider an exchange of project ownership interests to fund future acquisition
opportunities.
RESULTS OF OPERATIONS
Revenues
Total revenues increased $156 million (23%) to $835 million from 1995 to 1996
after increasing $146 million (27%) to $679 million from 1994 to 1995. The
increase in 1996 primarily reflects the acquisition of controlling interests in
AES Tiszai and AES Ekibastuz. The increase from 1994 to 1995 primarily reflects
the additional revenues arising from the acquisition of a controlling interest
in AES San Nicolas, the consolidation of AES Deepwater (resulting from the
acquisition of its outstanding debt), and improved capacity factors at AES
Thames and AES Barbers Point. These increases were offset, in part, by decreased
energy revenues at AES Placerita.
The nature of most of the Company's operations is such that each power plant
generally relies on one power sales contract with a single electric utility
customer or a regional or national transmission and distribution customer for
the majority, if not all, of its revenues. During 1996, the Company's five
largest customers accounted for 73% of total revenues. The prolonged failure of
any one customer to fulfill its contractual payment obligations in the future
could have a substantial negative impact on AES's results of operations. Where
possible, the Company has sought to reduce this risk, in part, by entering into
power sales contracts with customers that have their debt or preferred stock
rated "investment grade" by nationally recognized rating agencies and by
locating its plants in different geographic areas in order to mitigate the
effects of regional economic downturns.
However, AES does not limit its business solely to the most developed countries
or economies, or only to those countries with investment grade sovereign credit
ratings. In certain locations, particularly developing countries or countries
that are in a transition from centrally planned to market oriented economies,
the electricity purchasers may experience difficulty in meeting contractual
payment obligations.
In August 1996, AES, together with its partner, acquired a 4,000 megawatt
mine-mouth, coal-fired power facility in Kazakstan. The facility sells
electricity to the government-owned distribution company under a 35 year power
sales contract. Due to economic difficulties over the ten years prior to the
Company's purchase, the facility has experienced a reduction in performance and
has operated at a capacity factor of approximately 20%. AES has agreed to
increase the availability to 63% over a five year period (contingent on the
purchaser's performance of its obligations under the power sales contract).
Through December 31, 1996, approximately $35 million (excluding VAT) was billed
under the power sales contract for electricity, of which the purchaser paid
approximately $5 million. The Company has recorded a provision of $20 million to
reduce the carrying value of the contract receivable as of December 31, 1996 to
$10 million. As of December 31, 1996, the net assets of this project were $24
million, a portion of which was represented by the contract receivable referred
to above. There can be no assurance as to the ultimate collectibility of amounts
owed to AES as of December 31, 1996 or additional amounts related to future
deliveries of electricity under the power sales contract or the recoverability
of the Company's investment or additional amounts the Company may invest in the
project. Other substantial risks associated with this plant exist, including
those relating to operations and maintenance, construction, refurbishment,
political risk, repatriation of earnings and currency convertibility.
A portion of the electricity sales from certain plants is not subject to a
contract and is available for sale, when economically advantageous, in the
relevant spot electricity market. The prices paid for electricity in the spot
4
<PAGE>
markets may be volatile and are dependent on the behavior of the relevant
economies, including the demand for and retail price of electricity and the
competitive price and availability of power from other suppliers.
Costs of Sales and Services
Total costs of sales and services increased $108 million (27%) to $502 million
in 1996 after increasing $129 million (49%) to $394 million from 1994 to 1995.
The increase in 1996 was caused primarily by the costs of electricity sales
associated with the acquisition of controlling interests in AES Tiszai and AES
Ekibastuz. The increase from 1994 to 1995 was caused primarily by the additional
operating costs arising from the acquisitions of a controlling interest in AES
San Nicolas, the consolidation of AES Deepwater and increased fuel costs arising
from a higher capacity factor at AES Barbers Point, offset in part by decreased
fuel and operating costs at AES Placerita.
Gross Margin
Gross margin (revenues less costs of sales and services) increased (prior to
consideration of the $20 million provision to reduce contract receivable) $48
million (17%) to $333 million from 1995 to 1996 after increasing $17 million
(6%) to $285 million from 1994 to 1995. The improvement in 1996 primarily
reflects the additional gross margins contributed by the operations of AES
Tiszai and AES Ekibastuz, improved operations of AES San Nicolas and AES Thames
and higher electricity prices under the AES Deepwater sales contract due to
higher natural gas prices. The improvement in 1995 reflects the acquisitions of
a controlling interest in AES San Nicolas, the consolidation of AES Deepwater
and improved operations at AES Placerita and AES Thames, offset in part by lower
service revenues from affiliates. Gross margin as a percentage of total revenues
(net of the provision to reduce contract receivable) decreased from 42% in 1995
to 37% in 1996, primarily due to lower gross margin percentages at AES Tiszai
and AES Ekibastuz, offset in part by an improved gross margin percentage at AES
Deepwater. Gross margin as a percentage of total revenues decreased from 50% in
1994 to 42% in 1995, primarily due to a lower gross margin percentage at AES San
Nicolas.
Because the Company's operations are located in different geographical areas,
seasonal variations have not historically had a significant effect on quarterly
financial results. However, unusual weather conditions and the specific needs of
each plant to perform routine or unanticipated facility maintenance, which would
require an outage, could have an effect on quarterly financial results. In
addition, some power sales contracts permit the utility customer to
significantly dispatch the related plant (i.e., direct the plant to deliver a
reduced amount of electrical output) within certain specified parameters. Such
dispatching, however, does not have a material impact on the results of
operations of the related subsidiary because, even when dispatched, the plant's
capacity payments generally are not reduced.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased less than $3 million (9%)
to $35 million from 1995 to 1996 after increasing less than $1 million (3%) to
$32 million from 1994 to 1995. The 1996 increase is attributable to increases in
administrative costs and expenses associated with the development of new
business opportunities. The 1995 increase is attributable to an increase in
administrative costs. As a percentage of total revenues, selling, general and
administrative expenses decreased to 4% in 1996, down from 5% in 1995 and 6% in
1994. The Company's general and administrative costs do not necessarily vary
with changes in revenues.
Operating Income
Operating income improved $25 million (10%) to $278 million from 1995 to 1996
after increasing $17 million (7%) to $253 million from 1994 to 1995. The
increases result from the factors discussed in the preceding paragraphs, offset
in part for 1996 by the provision of $20 million to reduce the contract
receivable at AES Ekibastuz.
Other Income and Expense
Other income and expense, on a net basis, decreased $1 million (1%) to $85
million from 1995 to 1996 after decreasing $5 million (5%) to $86 million from
1994 to 1995. Interest expense increased 13% in 1996 and
5
<PAGE>
increased 2% in 1995. The increase in 1996 reflects additional interest
associated with increased borrowings under the Revolver, the issuance in June
1996 of $250 million of the Company's 10 1/4% senior subordinated notes due 2006
(the "10 1/4 Notes") and project financing debt associated with the acquisition
of the Company's equity investment in Light and additional project financing
debt associated with the acquisition of AES Tiszai, offset, in part, by
declining balances related to other project financing debt. The increase in 1995
reflects the additional interest expense associated with the acquisition of a
controlling interest in AES San Nicolas offset almost entirely by declining
balances of other project financing debt. AES capitalizes interest incurred
during the development and construction of its facilities. Interest capitalized
totaled approximately $27 million in 1996, $8 million in 1995 and $2 million in
1994.
Interest income decreased 11% in 1996 and increased 23% in 1995. The 1996
decrease results primarily from lower invested funds at AES Chigen, offset in
part by interest income earned on notes receivable at AES Tiszai. The 1995
increase reflects higher cash and debt service reserve account balances at
operating plants, higher interest rates and a full year of interest on AES
Chigen's invested cash balances, offset in part by investments in new projects
at AES Chigen and a decrease in the balance of corporate unrestricted cash and
cash equivalents.
Equity in earnings of affiliates (after income taxes) increased 150% in 1996 and
17% in 1995. The increase in 1996 results almost entirely from the Company's
acquisition of an 11.35% interest in Light in June 1996, offset slightly by a
decrease in equity in earnings from NIGEN due to a planned outage. The increase
in 1995 results most significantly from the start of operations at Medway in
late 1995.
Income Taxes
The Company's effective tax rate increased to 40% in 1996 and to 38% in 1995
from 34% in 1994. The increase in 1996 is due primarily to foreign withholding
and income taxes. The increase in 1995 is due to the elimination of the U.S.
federal valuation allowance resulting from the purchase in 1995 of the
previously outstanding debt of AES Deepwater.
Extraordinary Items
During 1994, the Company purchased and retired the subordinated project
financing debt and accrued interest at AES Placerita, resulting in an
extraordinary gain of $4 million, net of taxes. Also, in 1994, the Company's
affiliate, NIGEN, refinanced its outstanding project financing loan through a
public debenture offering. The extinguishment of such debt resulted in an
extraordinary loss of $7 million, of which the Company's share was $2 million,
net of taxes.
OUTLOOK
All over the world, electricity markets are being restructured and there is a
trend away from government-owned and government-regulated electricity systems
toward deregulated, competitive market structures. Many countries have rewritten
their laws and regulations to allow foreign investment and private ownership of
electricity generation, transmission or distribution systems. Some countries
(for example, the UK, Brazil and some of those of the former Soviet Union, among
others) have or are in the process of "privatizing" their electricity systems by
selling all or part of such to private investors. This global trend of
electricity market restructuring has created significant new business
opportunities for companies like AES.
Although recent activity in the U.S. electricity market has provided some
opportunities for independent and competitive power companies, most of the
country's generating capacity along with substantially all of the transmission
and distribution services continue to be regulated under a state and federal
regulatory framework. In the U.S., some states (for example, California,
Illinois, Massachusetts, Michigan and Pennsylvania) have passed or are
considering new legislation that would permit utility customers to choose their
electricity supplier in a competitive electricity market (so-called "retail
access" or "customer choice" laws). While each state's plan differs in details,
there are certain consistent elements, including allowing customers to choose
their electricity suppliers by a certain date (the dates in the existing or
proposed legislation vary between 1998 and 2003), allowing utilities to recover
"stranded assets" (the remaining costs of uneconomic generating or regulatory
assets) and a reaffirmation of the validity of contracts like the Company's U.S.
contracts.
6
<PAGE>
In addition to the potential for state restructuring legislation, the U.S.
Congress has proposed new federal legislation to encourage customer choice and
recovery of stranded assets. Federal legislation might be needed to avoid the
"patchwork quilt" effect of each state acting separately to pass restructuring
legislation. While it is uncertain whether or when federal legislation dealing
with electricity restructuring might be passed, it is the opinion of the Company
that such legislation would likely have a neutral or positive effect on the
Company's U.S. business.
There is also legislation currently before the U.S. Congress to repeal part or
all of the current provisions of the Public Utility Regulatory Policies Act of
1978 ("PURPA") and of the Public Utility Holding Company Act of 1935 ("PUHCA").
The Company believes that if such legislation is adopted, competition in the
U.S. for new capacity from vertically integrated utilities would presumably
increase. However, independents like AES would also be free to acquire retail
utilities.
As consumers, regulators and suppliers continue the debate about how to further
decrease the regulatory aspects of providing electricity services, the Company
believes in and is encouraging the continued orderly transition to a more
competitive electricity market. Inherent in any significant transition to
competitive markets are risks associated with the competitiveness of existing
regulated enterprises, and as a result, their ability to perform under long-term
contracts such as the Company's electricity sale contracts. Although AES
strongly believes in the integrity of its contracts, there can be no assurance
that each of its customers, in a restructured and competitive environment, will
be capable in all circumstances of fulfilling their financial and legal
obligations.
It is also possible that as more of the world's markets for electricity move
toward competition, an increasing proportion of the Company's revenues may be
dependent on prices determined in spot markets. In order to capture a portion of
the market share in competitive generation markets, AES is considering and may
elect to invest in and construct low-cost plants in those markets. Such an
investment, which would not necessarily be supported by a long-term electricity
sales contract for all or any of the plant's expected output, may require the
Company (as well as its competitors) to make larger equity contributions (as a
percentage of the total capital cost) than the more "traditional" contract-based
investments.
AES's involvement in the development of new projects and the acquisition of
existing plants in locations outside the U.S. is increasing and most of AES's
current development and acquisition activities are for projects and plants
outside the U.S. The financing, development and operation of such projects and
plants may entail significant political and financial uncertainties and other
structuring issues (including, without limitation, uncertainties associated with
the legal environments, with first-time privatization efforts in the countries
involved, currency exchange rate fluctuations, currency repatriation
restrictions, currency convertibility, political instability, civil unrest and
expropriation). These issues have the potential to cause substantial delays in
respect of or material impairment of the value of the project being developed or
plant being operated, which AES may not be capable of or choose to fully insure
or hedge against.
FINANCIAL POSITION
At December 31, 1996, AES had working capital of $120 million as compared to
$218 million at the end of 1995. The decrease is primarily attributable to
decreased balances of cash and short-term investments, increases in accounts
payable and accrued liabilities and increases in the current portion of
borrowings under the Revolver and project financing debt, offset in part by
increases in inventory, accounts receivable and deferred income taxes.
Property, plant and equipment, net of accumulated depreciation, was $2.22
billion at December 31, 1996, up from $1.55 billion at the end of 1995. The net
increase of $670 million (43%) is primarily attributable to the acquisition
during 1996 of AES San Juan, AES Tiszai and AES Ekibastuz, the continuation of
construction activities at AES Lal Pir, AES Pak Gen and AES Warrior Run and the
commencement of construction activities at Jiaozou and AES Barry.
Other assets increased $555 million (161%) to $900 million primarily due to the
Company's purchase of and undistributed earnings from an 11.35% interest in
Light, payments to debt service reserves, payments for deferred financing costs
associated with a higher level of debt financing, reimbursable payments for
contracts related to a project in development and intangible assets acquired
through the purchase of AES San Juan.
7
<PAGE>
Project financing debt, net of repayments, increased as a result of additional
borrowings associated with the Company's purchase of an 11.35% interest in Light
and additional construction borrowings associated with AES Lal Pir, AES Pak Gen
and AES Warrior Run. A significant portion of the AES Lal Pir and AES Pak Gen
loans, associated with equipment purchases, will be borrowed and repaid (as
scheduled in the future) in Japanese yen. The anticipated electricity prices
under the related power sales contracts (to be received beginning with
commercial operation of those plants) also include a yen component designed to
correlate with the yen-based financing.
Other notes payable (non-current) increased $325 million (260%) to $450 million
as a result of the issuance of the $250 million of the 10 1/4% Notes and
increased borrowings under the Revolver of $125 million that are due in excess
of one year, offset in part by the conversion of $50 million of the Company's 6
1/2% convertible subordinated debentures.
CASH FLOWS, FINANCIAL RESOURCES AND LIQUIDITY
Cash from Operations
Cash flows provided by operating activities totaled $182 million during 1996 as
compared to $197 million during 1995 and $164 million in 1994. The decrease in
1996 was primarily due to a larger proportion of net income being derived from
undistributed earnings from affiliates, larger cash payments for income taxes
and increased deferred financing costs associated with a higher level of debt
financing activity in 1996. These factors offset a significant increase in net
income before depreciation as compared with 1995. The increase in 1995 was
primarily due to increased pre-tax income. Unrestricted net cash flow (as
defined in the Indenture for the 10 1/4% Notes, which is after cash paid for
general and administrative costs, taxes and project development expenses but
before investments and debt service) amounted to approximately $133 million for
the year ended December 31, 1996 as compared to $110 million for the year ended
December 31, 1995.
Cash from Investing Activities
Net cash used in investing activities totaled $1.135 billion during 1996 as
compared to $343 million during 1995 and $120 million in 1994. The 1996 amount
primarily reflects the acquisitions of AES San Juan, AES Tiszai and AES
Ekibastuz; the Light investment; construction progress at AES Lal Pir, AES Pak
Gen, AES Warrior Run and AES Barry; AES Chigen's investments in various
projects; reimbursable payments for contracts related to a project in
development; and the funding of debt service reserves for the project financing
of the Light investment. The 1995 amount primarily reflects the Company's
investments in the outstanding debt of AES Deepwater; additional ownership in
AES San Nicolas; the acquisition of AES Rio Juramento; construction efforts at
AES Lal Pir, AES Pak Gen and AES Warrior Run; and AES Chigen's investments in
the Wuxi and Yangchun Fuyang projects. The 1994 amount primarily reflects the
investment of cash in short-term investments, capital additions and investments
in projects in development.
Cash from Financing Activities
Net cash provided by financing activities aggregated $899 million during 1996 as
compared to $130 million during 1995 and $80 million in 1994. The significant
cash financing inflows in 1996 were caused by construction loan draws for AES
Lal Pir, AES Pak Gen and AES Warrior Run; project acquisition financing of the
Light investment; issuance of $250 million of the 10 1/4% Notes; initial project
financing at AES San Nicolas; and net borrowings under the Company's revolving
line of credit. Significant cash financing outflows were due to scheduled debt
amortization of the project financings. During 1995 the Company drew on its
project financing loan commitments associated with the construction of AES Lal
Pir and AES Warrior Run and borrowed under the Revolver. Repayments of project
financing loans during the year were made in accordance with contracted debt
service requirements. During 1994, AES Chigen completed an initial public
offering of 10.2 million shares of Class A common stock. The Company also made
scheduled principal payments on project financing debt in 1994.
Financial Resources and Liquidity
AES has primarily utilized project financing loans to fund the capital
expenditures associated with constructing and acquiring its electric power
plants and related assets. Project financing borrowings have been substantially
non-
8
<PAGE>
recourse to other subsidiaries and affiliates and to The AES Corporation as the
parent company and are generally secured by the capital stock, physical assets,
contracts and cash flow of the related project subsidiary or affiliate. The
Company intends to continue to seek, where possible, such non-recourse project
financing in connection with the assets which the Company or its affiliates may
develop, construct or acquire. However, depending on market conditions and the
unique characteristics of individual projects, the Company's traditional
providers of project financing, particularly multinational commercial banks, may
seek higher borrowing spreads and increased equity contributions.
Furthermore, because of the reluctance of commercial lending institutions to
provide non-recourse project financing (including financial guarantees) in
certain less developed economies, the Company, in such locations, has and will
continue to seek direct or indirect (through credit support or guarantees)
project financing from a limited number of multilateral or bilateral
international financial institutions or agencies. As a precondition to making
such project financing available, these institutions may also require
governmental guarantees of certain project and sovereign related risks.
Depending on the policies of specific governments, such guarantees may not be
offered and as a result, AES may determine that sufficient financing will
ultimately not be available to fund the related project, and may cease
development of such project.
In addition to the project financing loans, if available, AES provides a
portion, or in certain instances all, of the remaining long-term financing
required to fund development, construction or acquisition. These investments
have generally taken the form of equity investments or loans, which are
subordinated to the project financing loans. The funds for these investments
have been provided by cash flows from operations and by the proceeds from
issuances of senior subordinated notes, convertible debentures and common stock
of the Company. In August 1996, substantially all $50 million of the Company's 6
1/2% convertible subordinated debentures due in 2002 were converted into
approximately 1.9 million shares of AES Common Stock. The Company also expects
to issue approximately 2.5 million shares of AES Common Stock to purchase all of
the remaining outstanding Class A shares of AES Chigen at an exchange rate of
0.29 shares of AES Common Stock for each share of AES Chigen Class A common
stock in April 1997, subject to approval by the holders of the Class A common
stock.
Interim needs for shorter-term and working capital financing at the parent
company have been met with borrowings under the Revolver. Over the past several
years, the Company has continued to increase the amount of available financing
under the Revolver. In the second quarter of 1996, AES increased the size of the
Revolver to $425 million. Under the terms of the Revolver, AES will be required
to reduce its direct borrowings to $125 million for 30 consecutive days during
each twelve month period. The terms of the Revolver also include financial
covenants related to net worth, cash flow and investments, and restrictions
related to the incurrence of additional debt and certain other obligations and
limitations on cash dividends. At December 31, 1996, cash borrowings and letters
of credit outstanding under the Revolver amounted to $213 million and $123
million, compared with $50 million and $56 million in 1995. The Company may also
attempt to meet its short-term and interim funding needs with commitments from
banks and other financial institutions at the parent or subsidiary level on an
as needed basis.
The ability of AES's subsidiaries and affiliates to declare and to pay dividends
to AES is restricted under the terms of existing project financing debt
agreements. See Note 5 to the consolidated financial statements for additional
information. In connection with its project financings and project-related
contracts, AES has expressly undertaken certain limited obligations and
contingent liabilities, most of which will only be effective or will be
terminated upon the occurrence of future events. These obligations and
contingent liabilities, excluding those collateralized using letter of credit
obligations under the Revolver, were limited by their terms as of December 31,
1996 to an aggregate of approximately $176 million. The Company is obligated
under other contingent liabilities which are limited to amounts, or percentages
of amounts, received by AES as distributions from its project subsidiaries.
These contingent liabilities aggregated $33 million as of December 31, 1996. In
addition, AES has expressly undertaken certain other contingent obligations
which the Company does not expect to have a material adverse effect on its
results of operations or financial position, but which by their terms are not
capped at a dollar amount. Because each of the Company's plants and projects is
a distinct entity, the plants and projects are geographically diverse and the
obligations related to a single plant or project are based on contingencies of
varying types, the Company believes it is unlikely that it will be called upon
to perform under several of such obligations at any one time. AES's
9
<PAGE>
obligations and contingent liabilities described above in certain cases take the
form of, or are supported by, letters of credit.
At December 31, 1996, the Company had future commitments to fund investments in
its projects under construction and in development of $106 million. Of this
amount, letters of credit in the amount of $76 million have been issued to
support these obligations. In February 1997, the Company agreed to acquire the
international assets of Destec at a total price to AES of $407 million
(including approximately $42 million of net monetized assets), which price is
subject to adjustment to reflect net cash flow between the international assets
and the rest of Destec from January 1, 1997 to the closing date. The Company has
not yet purchased such assets, but at the time of any such purchase, expects to
assume certain obligations which require the funding of equity investments in
some of these projects in the amount of approximately $82 million over the
ensuing two years. These future capital commitments are expected to be funded by
internally-generated cash flows and by external financings as may be necessary.
Inflation, Interest Rates, Exchange Rates, Changing Energy Prices and
Environmental Performance
The Company attempts, whenever possible, to hedge certain aspects of its
projects against the effects of fluctuations in inflation, interest rates,
exchange rates and energy prices. AES has generally structured the energy
payments in its power sales contracts to adjust with similar price indices as
its contracts with the fuel suppliers for the corresponding plants. In some
cases a portion of revenues is associated with operations and maintenance costs,
and as such is indexed to adjust with inflation. AES has also used a hedging
strategy to insulate each plant's financial performance, where appropriate,
against the risk of fluctuations in interest rates. Depending on whether
capacity payments are fixed or vary with inflation, the Company generally hedges
against interest rate fluctuations by arranging fixed-rate or variable rate
financing, respectively. In certain cases, the Company executes interest rate
swap and interest rate cap agreements to effectively fix or limit the interest
rate on the underlying variable rate financing. Such swaps effectively increased
the total weighted average borrowing rate on the portion of the Company's hedged
debt by 4.1 percentage points, 3.5 percentage points and 4.5 percentage points
for the years ended December 31, 1994, 1995 and 1996, respectively. Swap
payments in excess of variable interest paid for those same periods were $44
million, $24 million and $29 million, respectively. The following table presents
(in millions) the aggregate notional principal amount of interest rate swaps
categorized by annual maturity at December 31, 1996 and the weighted average
interest rates paid and received (based on market conditions at December 31,
1996):
PAY FIXED RATE SWAPS
<TABLE>
<CAPTION>
----------------------------------------------
WEIGHTED AVERAGE
AGGREGATE NOTIONAL INTEREST RATE
ANNUAL MATURITY PRINCIPAL AMOUNT PAID RECEIVED
- ---------------------------------------------------- ------------------- ------ ---------
<S> <C> <C> <C>
1997................................................ $ 137 12.48% 5.46%
1998................................................ $ 15 9.90% 5.43%
1999................................................ $ 167 10.40% 5.45%
2000................................................ $ 17 9.90% 5.43%
2001 through 2007................................... $ 214 9.90% 5.43%
</TABLE>
In addition, certain subsidiaries of the Company have interest rate cap
agreements with terms ranging from three to six years in an aggregate notional
amount of $280 million.
The hedging mechanisms described above are implemented through contractual
provisions with fuel suppliers and international financial institutions. As a
result, their effectiveness is dependent, in part, on each counterparty's
ability to perform in accordance with the provisions of the relevant contract.
The Company has sought to reduce this risk by entering into contracts with
creditworthy organizations, where possible, and where not possible, as in the
case of certain local fuel suppliers, to execute standby or option agreements
with a creditworthy organization.
Because of the complexity of hedging strategies and the diverse nature of AES's
operations, the financial performance of its portfolio, although significantly
hedged, will likely be somewhat affected by fluctuations in inflation, interest
rates and energy prices. For example, AES's current portfolio of operating
plants generally performs better
10
<PAGE>
with higher oil and natural gas prices and with lower interest rates.
Performance is also sensitive to the difference between inflation and interest
rates, and generally performs better when increases in inflation are higher than
increases in interest rates.
Through its equity investments in foreign affiliates and subsidiaries, AES
operates in jurisdictions dealing in currencies other than the Company's
consolidated functional currency, the U.S. dollar. Such investments and advances
were made to fund equity requirements and to provide collateral for contingent
obligations. Due primarily to the long-term nature of the investments and
advances, the Company accounts for any adjustments resulting from translation as
a charge or credit directly to a separate component of stockholders' equity
until such time as the Company realizes such charge or credit. At that time any
differences would be recognized in the statement of operations as gains or
losses.
In addition, certain of the Company's foreign subsidiaries have entered into
obligations in currencies other than their own functional currencies or the U.S.
dollar. These subsidiaries have attempted to limit potential foreign exchange
exposure by entering into revenue contracts which adjust to changes in the
foreign exchange rates. Certain foreign affiliates and subsidiaries operate in
countries where the local inflation rates are greater than U.S. inflation rates.
In such cases the foreign currency tends to devalue relative to the U.S. dollar
over time. The Company's subsidiaries and affiliates have entered into revenue
contracts which attempt to adjust for these differences; however, there can be
no assurance that such adjustments will compensate for the full effect of
currency devaluation, if any.
The Company had approximately $33 million in cumulative translation adjustment
losses at December 31, 1996.
Because of the nature of AES's operations and previous operations by others at
certain of its current and future facilities, its activities are subject to
stringent environmental regulation by relevant authorities at each plant
location and the risk of claims under environmental laws. If environmental laws
or regulations were to change in the future, there can be no assurance that AES
would be able to recover all or any increased costs from its customers or that
its business and financial condition would not be materially and adversely
affected. In addition, the Company will be required to make significant capital
or other expenditures in connection with environmental matters. Although the
Company is not aware of non-compliance with environmental laws which would have
a material adverse effect on the Company's business or financial condition, at
times the Company has been in non-compliance, although no such instance has
resulted in revocation of any permit or license.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
The Company's consolidated balance sheets as of December 31, 1996 and
1995, and the related consolidated statements of operations and cash flows for
each of the three years in the period ended December 31, 1996.
(b) Exhibits:
11 Statement of Computation of Earnings per Share
12 Calculations of Ratio of Earnings to Fixed Charges
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders Of The AES Corporation:
We have audited the accompanying consolidated balance sheets of The AES
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The AES Corporation and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
January 30, 1997, except for Note 13,
as to which the date is February 18, 1997
13
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------
DECEMBER 31
In millions, except par values 1996 1995
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $ 185 $ 239
Short-term investments.............................................................. 20 58
Accounts receivable, net............................................................ 95 54
Inventory........................................................................... 81 36
Receivable from affiliates.......................................................... 9 11
Deferred income taxes............................................................... 65 21
Prepaid expenses and other current assets........................................... 47 27
------ ------
Total current assets.................................................................. 502 446
Property, Plant and Equipment:
Land................................................................................ 30 9
Electric and steam generating facilities............................................ 1,884 1,594
Furniture and office equipment...................................................... 14 11
Accumulated depreciation and amortization........................................... (282) (222)
Construction in progress............................................................ 574 158
------ ------
Property, plant and equipment, net.................................................... 2,220 1,550
Other Assets:
Deferred costs, net................................................................. 47 32
Project development costs........................................................... 53 41
Investments in and advances to affiliates........................................... 491 48
Debt service reserves and other deposits............................................ 175 168
Goodwill & other intangible assets, net............................................. 52 37
Other assets........................................................................ 82 19
------ ------
Total other assets.................................................................... 900 345
------ ------
Total................................................................................. $3,622 $2,341
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................... $ 64 $ 33
Accrued interest.................................................................... 25 12
Accrued and other liabilities....................................................... 95 49
Other notes payable -- current portion.............................................. 88 50
Project financing debt -- current portion........................................... 110 84
------ ------
Total current liabilities............................................................. 382 228
Long-Term Liabilities:
Project financing debt.............................................................. 1,558 1,098
Other notes payable................................................................. 450 125
Deferred income taxes............................................................... 243 170
Other long-term liabilities......................................................... 55 13
------ ------
Total long-term liabilities........................................................... 2,306 1,406
Minority Interest..................................................................... 213 158
Commitments and Contingencies......................................................... -- --
Stockholders' Equity:
Preferred stock (no par value; 1 million shares authorized; none issued)............ -- --
Common stock ($.01 par value; 100 million shares authorized; shares issued and
outstanding: 1996 -- 77.4 million; 1995 -- 74.8 million).......................... 1 1
Additional paid-in capital.......................................................... 360 293
Retained earnings................................................................... 396 271
Cumulative foreign currency translation adjustment.................................. (33) (10)
Less treasury stock at cost (1996 -- .1 million shares; 1995 -- .3 million shares).... (3) (6)
------ ------
Total stockholders' equity............................................................ 721 549
------ ------
Total................................................................................. $3,622 $2,341
====== ======
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------
FOR THE YEARS ENDED
DECEMBER 31
In millions, except per share amounts 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Sales................................................................ $ 824 $ 672 $ 514
Services............................................................. 11 7 19
----- ----- -----
Total revenues......................................................... 835 679 533
OPERATING COSTS AND EXPENSES:
Cost of sales........................................................ 495 388 252
Cost of services..................................................... 7 6 13
Selling, general and administrative expenses......................... 35 32 32
Provision to reduce contract receivable.............................. 20 -- --
----- ----- -----
Total operating costs and expenses..................................... 557 426 297
----- ----- -----
OPERATING INCOME....................................................... 278 253 236
OTHER INCOME AND (EXPENSE):
Interest expense..................................................... (144) (127) (125)
Interest income...................................................... 24 27 22
Equity in earnings of affiliates (net of income tax)................. 35 14 12
----- ----- -----
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY
ITEM................................................................. 193 167 145
INCOME TAXES........................................................... 60 57 44
MINORITY INTEREST...................................................... 8 3 3
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM....................................... 125 107 98
Extraordinary item -- net gain on extinguishment of debt (less
applicable income taxes of $1)....................................... -- -- 2
----- ----- -----
NET INCOME............................................................. $ 125 $ 107 $ 100
===== ===== =====
NET INCOME PER SHARE:
Before extraordinary gain............................................ $1.62 $1.41 $1.30
Extraordinary gain................................................... -- -- 0.02
----- ----- -----
NET INCOME PER SHARE................................................... $1.62 $1.41 $1.32
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------
FOR THE YEARS ENDED
DECEMBER 31
In millions 1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 125 $ 107 $ 100
Adjustments to net income:
Depreciation and amortization...................................... 65 55 43
Provision for deferred taxes....................................... 26 48 39
Undistributed earnings of affiliates............................... (20) 3 (3)
Payments for deferred financing costs................................ (13) (3) (6)
Other................................................................ 6 4 --
Changes in working capital........................................... (7) (17) (9)
------- ----- -----
Net cash provided by operating activities............................ 182 197 164
INVESTING ACTIVITIES:
Property additions................................................... (506) (171) (10)
Acquisitions, net of cash acquired................................... (148) (121) --
Sale of short-term investments....................................... 103 254 132
Purchase of short-term investments................................... (66) (218) (204)
Affiliate advances and investments................................... (430) (10) --
Project development costs............................................ (16) (22) (17)
Debt service reserves and other assets............................... (72) (55) (21)
------- ----- -----
Net cash used in investing activities................................ (1,135) (343) (120)
FINANCING ACTIVITIES:
Net borrowings under the revolver.................................... 163 50 --
Issuance of project financing debt and other notes payable........... 802 133 --
Repayments of project financing debt................................. (75) (63) (72)
Other liabilities.................................................... (3) 8 --
Contributions by minority interests.................................. 10 7 152
Sale (repurchase) of common stock.................................... 2 (5) --
------- ----- -----
Net cash provided by financing activities............................ 899 130 80
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................... (54) (16) 124
CASH AND CASH EQUIVALENTS, BEGINNING................................. 239 255 131
------- ----- -----
CASH AND CASH EQUIVALENTS, ENDING.................................... $ 185 $ 239 $ 255
====== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest........................................... $ 134 $ 120 $ 127
Cash payments for income taxes....................................... 32 6 3
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The AES Corporation and its subsidiaries and affiliates (collectively "AES" or
the "Company") is a global power company primarily engaged in developing, owning
and operating electric power generating facilities.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the
Company include the accounts of AES, its subsidiaries and controlled affiliates.
Investments in 50% or less owned affiliates over which the Company has the
ability to exercise significant influence, but not control, are accounted for
using the equity method. The accounts of AES China Generating Co. Ltd. ("AES
Chigen"), a controlled affiliate, are consolidated based on its fiscal year
ended November 30. Intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS -- The Company considers cash on hand, deposits in
banks, certificates of deposit and short-term marketable securities with an
original maturity of three months or less as cash and cash equivalents.
INVESTMENTS -- Securities that the Company has both the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at historical cost. Other investments that the Company does not intend to hold
to maturity are classified as available-for-sale, and any unrealized gains or
losses are recorded as a separate component of stockholders' equity. Interest
and dividends on investments are reported in interest income. Short-term
investments consist of investments with original maturities in excess of three
months but less than one year. Debt service reserves and other deposits, which
might otherwise be considered cash and cash equivalents are treated as
noncurrent assets (see Note 3).
INVENTORY -- Inventory, valued at the lower of cost or market (first in, first
out method), consists of coal, raw materials, spare parts, and supplies.
Inventory consists of the following (in millions):
<TABLE>
<CAPTION>
------------
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Coal and other raw materials................................... $57 $24
Spare parts, materials and supplies............................ 24 12
--- ---
Total.......................................................... $81 $36
=== ===
</TABLE>
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost
including the cost of improvements. Depreciation, after consideration of salvage
value, is computed using the straight-line method over the estimated composite
lives of the assets, which range from 3 to 40 years. Maintenance and repairs are
charged to expense as incurred. Emergency and rotable spare parts inventories
are included in electric and steam generating facilities and are depreciated
over the useful life of the related components.
INTANGIBLE ASSETS -- Goodwill and other intangible assets are amortized on a
straight-line basis over their estimated periods of benefit or their estimated
lives, which range from 30 to 40 years. Intangible assets at December 31, 1996
and 1995 are shown net of accumulated amortization of $3 million and $1 million,
respectively. The Company will review its goodwill and intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
CONSTRUCTION IN PROGRESS -- Construction progress payments, engineering costs,
insurance costs, wages, interest and other costs relating to construction in
progress are capitalized. Construction in progress balances are transferred to
electric and steam generating facilities when the assets are ready for their
intended use. Interest capitalized during development and construction totaled
$27 million, $8 million and $2 million in 1996, 1995 and 1994, respectively.
DEFERRED COSTS -- Financing costs are deferred and amortized using the
straight-line method over the related financing period, which does not differ
materially from the effective interest method of amortization. Deferred costs
are shown net of accumulated amortization of $36 million and $31 million for
1996 and 1995, respectively.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of developing new
projects. These costs represent amounts incurred for professional services,
salaries, permits, options, capitalized interest and other related direct costs.
These costs are included in investments in affiliates, or property when
financing is obtained, or expensed at the time the Company determines that a
particular project will no longer be developed. The continued capitalization is
subject to on-going risks related to successful completion, including those
related to political, siting, financing, construction, permitting and contract
compliance. Certain reimbursable costs related to one of the projects have been
classified as other assets at December 31, 1996.
FOREIGN CURRENCY TRANSLATION -- Foreign subsidiaries and affiliates translate
their assets and liabilities into U.S. dollars at the current exchange rates in
effect at the end of the fiscal period. The gains or losses that result from
this process, and gains and losses on intercompany transactions which are
long-term in nature, and which the Company does not intend to repatriate are
shown in the cumulative foreign currency translation adjustment balance in the
stockholders' equity section of the balance sheet. The revenue and expense
accounts of foreign subsidiaries and affiliates are translated into U.S. dollars
at the average exchange rates that prevailed during the period.
REVENUE RECOGNITION AND CONCENTRATION -- Revenues from the sale of electricity
and steam are recorded based upon output delivered and capacity provided at
rates as specified under contract terms. Most of the Company's power plants rely
primarily on one power sales contract with a single customer for the majority of
its revenues. Five customers accounted for 20%, 16%, 16%, 11% and 10% of
revenues in 1996, four customers accounted for 24%, 18%, 18% and 13% of revenues
in 1995, and four customers accounted for 31%, 23%, 22% and 11% of revenues in
1994. The prolonged failure of any of these customers to fulfill its contractual
obligations could have a substantial negative impact on AES's revenues and
profits. However, the Company does not anticipate non-performance by the
customers under these contracts.
INTEREST RATE SWAP AND CAP AGREEMENTS -- The Company enters into interest rate
swap and cap agreements as a hedge against interest rate exposure on floating
rate project financing debt. The transactions are accounted for as a hedge and
interest is expensed or capitalized, as appropriate, using the effective
interest rates. Any fees or payments are amortized as yield adjustments. These
derivative financial instruments are classified as other than trading.
NET INCOME PER SHARE -- Net income per share is based on the weighted average
number of common stock and common stock equivalents outstanding, after giving
effect to stock splits and stock dividends. Common stock equivalents result from
dilutive stock options, warrants and deferred compensation arrangements. The
effect of such common stock equivalents on net income per share is computed
using the treasury stock method. The shares used in computing net income per
share were 77.3 million, 75.9 million, and 75.8 million for 1996, 1995 and 1994,
respectively. Primary and fully diluted earnings per share are approximately the
same.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of estimates. Actual
results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior period
amounts to conform with the 1996 presentation.
2. ACQUISITIONS
In March 1996, the Company, through a subsidiary acquired a 98% interest in
Hidrotermica San Juan, S.A., ("AES San Juan"), which is the owner and operator
of a 78 megawatt power generation facility in the province of San Juan,
Argentina. The facility, which sells electricity into the Argentine spot market,
includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas
combustion plant. As a result of this acquisition, the Company acquired
intangible assets of $17 million which are being amortized over the life of the
hydroelectric concession of 30 years.
In May 1996, AES, through certain subsidiaries, acquired for approximately $393
million, common shares representing an 11.35% interest in Light Servicos de
Electricidade S. A. ("Light"), a publicly-held Brazilian corporation
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
that operates as the concessionaire of an approximately 3,800 megawatt
integrated electric power generation, transmission and distribution system which
serves Rio de Janeiro, Brazil. The AES subsidiary which owns an interest in
Light is participating in a consortium established through a shareholders'
agreement that owns a 50.44% controlling interest. As a result, the Company has
the ability to exert significant influence over the operation of Light, and is
recording its investment using the equity method.
In August 1996, the Company, through a subsidiary, acquired a controlling
interest in three power plants totaling 1,281 megawatts and a coal mine through
the purchase of an 81% share of Tiszai Eromu Rt. ("AES Tiszai") an electricity
generation company in Hungary for $110 million, and in December 1996 acquired an
additional 13% for $17 million.
Also, in August 1996, the Company acquired, through a subsidiary, a majority
controlling interest in a 4,000 megawatt coal-fired facility in Kazakstan, ("AES
Ekibastuz"), for approximately $3 million. The facility sells power to a
government-owned utility under a 35 year power purchase agreement. Through
December 31, 1996, approximately $35 million (excluding VAT) has been billed
under the power sales contract for electricity delivered of which the purchaser
has paid approximately $5 million. The Company has recorded a provision of $20
million to reduce the carrying value of the contract receivable at December 31,
1996 to $10 million. As of December 31, 1996, the net assets of the project were
$24 million, a portion of which was represented by the contract receivable
referred to above. There can be no assurance as to the ultimate collectibility
of amounts owed to AES as of December 31, 1996 or additional amounts related to
future deliveries of electricity under the power sales contract.
In January 1995, a subsidiary of the Company acquired the remaining outstanding
debt of AES Deepwater, a 140 megawatt cogeneration plant in Pasadena, Texas, for
$65 million from a syndicate of lenders. Prior to that date, the Company did not
maintain or exercise control or significant influence over the utilization of
the AES Deepwater facility, and accordingly, recorded its investment using the
cost method. The acquisition resulted in the creation of goodwill of
approximately $24 million which is being amortized over the remaining estimated
life of the plant.
In June and July 1995, a subsidiary of the Company increased its ownership
interest in Central Termica San Nicolas, S. A. ("AES San Nicolas"), a 650
megawatt power plant located in San Nicolas, Argentina from approximately 34% to
approximately 69% by purchasing the interests of two former minority
shareholders. The 1995 purchase price was $24 million. The net results
attributable to the Company's non-owned portion of earnings from AES San Nicolas
in 1995 is reflected as minority interest.
In addition, in December 1995, another subsidiary of the Company purchased
Hidroelectrica Rio Juramento S.A. ("AES Rio Juramento") a 112 megawatt
hydroelectric system in the province of Salta, Argentina for $43 million. As a
result of this acquisition, the Company acquired intangible assets of $14
million which are being amortized over the life of the hydroelectric concession
of 30 years.
These acquisitions were accounted for as purchases. The purchase price
allocations for Light, AES Tiszai and AES Ekibastuz have been completed on a
preliminary basis, subject to adjustments resulting from new or additional facts
that may come to light when the engineering, environmental, and legal analyses
are completed during the allocation period. The accompanying financial
statements include the operating results of AES Tiszai from August 1, 1996, the
operating results of AES Ekibastuz from August 10, 1996, equity earnings from
Light from June 10, 1996, and the operating results of AES Deepwater from
January 20, 1995, the operating results of AES San Nicolas from January 1, 1995
and the operating results of AES Rio Juramento from December 1, 1995. The
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
following table presents supplemental unaudited proforma operating results as if
all of the acquisitions had occurred at the beginning of 1995 (in millions,
except per share amounts):
<TABLE>
<CAPTION>
------------------
FOR THE YEARS
ENDED
DECEMBER 31
1996 1995
------ -----
<S> <C> <C>
Revenues.................................................. $1,013 $ 892
Net income................................................ 100 91
Earnings per share........................................ $ 1.29 $1.20
</TABLE>
The proforma results are based upon assumptions and estimates which the Company
believes are reasonable. The proforma results do not purport to be indicative of
the results that actually would have been obtained had the acquisitions occurred
on January 1, 1995, nor are they intended to be a projection of future results.
3. INVESTMENTS
At December 31, 1996 and 1995, the Company's investments were classified as
either held-to-maturity or available-for-sale. The amortized cost and estimated
fair value of the investments at December 31, 1996 and 1995 classified as
held-to-maturity and available-for-sale were approximately the same.
The short-term investments and debt service reserves and other deposits were
invested as follows (in millions):
<TABLE>
<CAPTION>
------------
DECEMBER 31
1996 1995
---- ----
<S> <C> <C>
Restricted cash and cash equivalents........................................... $104 $144
Held-to-maturity
US treasury and government agency securities................................... 1 33
Foreign certificates of deposit................................................ -- 3
Commercial paper............................................................... 39 3
Floating rate notes............................................................ -- 6
---- ----
Subtotal....................................................................... 40 45
Available-for-sale
US treasury and government agency securities................................... 43 30
Certificates of deposit........................................................ 3 4
Commercial paper............................................................... 5 --
Foreign certificates of deposit................................................ -- 3
---- ----
Subtotal....................................................................... 51 37
---- ----
Total.......................................................................... $195 $226
==== ====
</TABLE>
Short-term investments classified as held-to-maturity and available-for-sale
were $9 and $11 million, respectively, at December 31, 1996 and $44 million and
$14 million, respectively at December 31, 1995.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The following table presents summarized financial information (in millions) for
equity method affiliates on a combined 100% basis. Amounts presented include the
accounts of NIGEN, Ltd. (47% owned UK affiliate), Medway Power Ltd. (25% owned
UK affiliate), Light (11.35% owned Brazilian affiliate) and AES Chigen's
affiliates at December 31, 1996, and for the year then ended, the accounts of
NIGEN, Ltd. and Medway Power Ltd. at
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
December 31, 1995 and 1994 and for the years then ended, and the accounts of San
Nicolas (34% owned Argentine affiliate) at December 31, 1994 and for the year
then ended.
<TABLE>
<CAPTION>
------------------------
1996 1995 1994
------ ---- ------
<S> <C> <C> <C>
Sales................................................................ $1,960 $276 $ 335
Operating income..................................................... 498 86 75
Net income........................................................... 383 49 33
Current assets....................................................... 891 171 156
Noncurrent assets.................................................... 4,928 949 1,030
Current liabilities.................................................. 868 70 133
Noncurrent liabilities............................................... 2,111 973 945
Stockholders' equity................................................. 2,840 77 108
</TABLE>
In 1994, NIGEN, Ltd. refinanced its outstanding project financing loan through a
public debenture offering. The extinguishment of such debt resulted in an
extraordinary loss of $7 million. The Company's share, $2 million, net of taxes,
is included in the accompanying financial statements as an extraordinary loss.
The Company's share of undistributed earnings of affiliates included in
consolidated retained earnings was $33 million and $13 million at December 31,
1996 and 1995, respectively. The Company charged and recognized management fees
and interest on advances to its affiliates which aggregated $9 million, $8
million and $18 million for each of the years ended December 31, 1996, 1995 and
1994, respectively.
5. DEBT
PROJECT FINANCING DEBT -- Project financing debt at December 31, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
-----------------------------------------
INTEREST RATE FINAL
@ 12/31/96 MATURITY 1996 1995
------------- -------- ------ ------
<S> <C> <C> <C> <C>
Senior Debt -- floating
AES Beaver Valley....................................... 7.4% 1998 $ 21 $ 33
AES Thames.............................................. 6.8% 2004 163 181
AES Shady Point......................................... 7.4% 2004 306 320
AES Barbers Point....................................... 6.5% 2007 325 340
AES Lal Pir............................................. 5.0% 2008 135 28
AES Pak Gen............................................. 5.1% 2010 90 --
AES Coral Reef.......................................... 10.1% 2003 168 --
AES Warrior Run......................................... 6.7% 2014 37 22
Other................................................... 10.4% 2001 8 --
Senior Debt -- fixed
AES Placerita -- capital lease.......................... 8.1% 2009 105 111
AES Warrior Run -- tax exempt bonds..................... 7.4% 2019 74 74
AES Pak Gen............................................. 4.3% 2007 85 --
AES San Nicolas......................................... 10.4% 2000 80 --
Subordinated Debt....................................... 13.6% 2010 71 73
------ ------
Subtotal................................................ 1,668 1,182
Less current maturities................................. (110) (84)
------ ------
Total................................................... $1,558 $1,098
====== ======
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
Project financing debt borrowings are primarily collateralized by the capital
stock of the project subsidiary, the physical assets of such facility and all
project agreements associated with such facility.
In 1994, the Company purchased and retired subordinated project financing debt
and accrued interest at AES Placerita, resulting in an extraordinary gain of $4
million, net of taxes.
The Company has interest rate swap agreements in an aggregate notional principal
amount of $550 million at December 31, 1996. The swap agreements effectively
change the interest rate on the portion of the debt covered by the notional
amounts, to a weighted average fixed rate ranging from approximately 9.5% to
10.5%. The agreements expire at various dates from 1997 through 2007. In the
event of nonperformance by the counterparties, the subsidiaries may be exposed
to increased interest rates, however, the Company does not anticipate
nonperformance by the counterparties, which are multinational financial
institutions. At December 31, 1996, subsidiaries of the Company have interest
rate cap agreements at a ceiling of approximately 12.5% with remaining terms
ranging from three to six years in an aggregate notional amount of $280 million.
AES Shady Point and AES Barbers Point have issued commercial paper supported by
irrevocable letters of credit issued by multinational financial institutions. In
the event of nonperformance or credit deterioration of these institutions, the
Company may be exposed to the risk of higher effective interest rates. The
Company does not believe that such nonperformance or credit deterioration is
likely.
OTHER NOTES PAYABLE -- Other notes payable at December 31, 1996 and 1995
consisted of the following (in millions):
<TABLE>
<CAPTION>
--------------------------------------
INTEREST RATE FINAL
@ 12/31/96 MATURITY 1996 1995
------------- -------- ---- ----
<S> <C> <C> <C> <C>
Corporate revolving bank loan*............................. 7.40% 1998 $213 $ 50
Senior subordinated notes.................................. 9.75% 2000 75 75
Convertible subordinated debentures........................ 6.50% 2002 -- 50
Senior subordinated notes.................................. 10.25% 2006 250 --
---- ----
Subtotal................................................... 538 175
Less current maturities.................................... (88) (50)
---- ----
Total...................................................... $450 $125
==== ====
</TABLE>
- ---------------
* floating rate loan
Under the terms of the $425 million corporate revolving bank loan and letter of
credit facility ("Revolver"), the Company must reduce its direct borrowings to
$125 million for 30 consecutive days annually to obtain additional loans.
Commitment fees on the unused portion at December 31, 1996 are .375% per annum,
and as of that date $89 million was available. The Company's 9 3/4% senior
subordinated notes due 2000 ("9 3/4% Notes") and 10 1/4% senior subordinated
notes due 2006 ("10 1/4% Notes") are general unsecured obligations of the
Company. The 9 3/4% Notes are redeemable at the Company's option, in whole or in
part, beginning June 1997 at redemption prices in excess of par and are
redeemable at par beginning June 1999. The 10 1/4% Notes are redeemable at the
Company's option, in whole or in part, beginning July 2001 at redemption prices
in excess of par and are redeemable at par beginning July 2003. The Company's
convertible subordinated debentures ("Debentures") were converted into common
stock of the Company at the rate of $26.16 per common share on August 30, 1996.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
FUTURE MATURITIES OF DEBT -- Scheduled maturities of total long-term debt at
December 31, 1996 are (in millions):
<TABLE>
<CAPTION>
-------------------------------------------------------------
<S> <C>
1997................................................ $ 198
1998................................................ 132
1999................................................ 303
2000................................................ 269
2001................................................ 202
Thereafter.......................................... 1,102
------
Total............................................... $2,206
======
</TABLE>
COVENANTS -- The terms of the Company's Revolver, 9 3/4% Notes, 10 1/4% Notes,
and project financing debt agreements contain certain covenants and provisions.
The covenants provide for, among other items, maintenance of certain reserves,
and require that minimum levels of working capital, net worth and certain
financial ratio tests are met. The most restrictive of these covenants include
limitations on incurring additional debt and on the payment of dividends to
shareholders.
The project financing debt limitations of AES's subsidiaries permit the payment
of dividends to the parent company out of current cash flow for quarterly,
semi-annual or annual periods only at the end of such periods and only after
payment of principal and interest on project loans due at the end of such
periods. As of December 31, 1996, approximately $63 million was available under
project loan documents for distribution by U.S. subsidiaries.
AES CHIGEN NOTES -- Subsequent to its fiscal year end, AES Chigen issued $180
million of 10 1/8% Notes due 2006.
6. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company and its consolidated subsidiaries are
obligated under long-term non-cancelable operating leases, primarily for office
rental and site leases. Rental expense for operating leases was $4 million, $3
million and $2 million in the years ended 1996, 1995 and 1994, respectively. The
future minimum lease commitments under these leases are $6 million each year for
1997 and 1998, $5 million for 1999, $2 million each year for 2000 and 2001, and
$56 million for the years thereafter.
Operating subsidiaries of the Company enter into various long-term contracts for
the purchase of fuel subject to termination only in certain limited
circumstances. These contracts have remaining terms of 3 to 11 years.
GUARANTEES -- In connection with certain of its project financing, acquisition,
disposition, and power purchase agreements, AES has expressly undertaken limited
obligations and commitments most of which will only be effective or will be
terminated upon the occurrence of future events. These obligations and
commitments, excluding letter of credit obligations discussed below, were
limited as of December 31, 1996, by the terms of the agreements, to an aggregate
of approximately $176 million. The Company is also obligated under other
commitments which are limited to amounts, or percentages of amounts, received by
AES as distributions from its project subsidiaries. These amounts aggregated $33
million as of December 31, 1996.
LETTERS OF CREDIT -- At December 31, 1996 and 1995, the Company had $123 million
and $56 million, respectively, of letters of credit outstanding under its credit
facility which operate to guarantee performance relating to certain project
development activities and subsidiary operations. The Company pays a letter of
credit fee of 1.75% on the outstanding amounts.
LITIGATION -- On February 25, 1993, an action was filed, jointly and severally,
in the 10th Judicial District Court, Galveston County, Texas against the
Company, over 25 other corporations (including major oil refineries and chemical
companies) and utilities, a utility district, four Texas cities, McGinnes
Industrial Maintenance Corpora-
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
tion, Roland McGinnes and Lawrence McGinnes, claiming personal injuries,
property, and punitive damages of $20 billion, arising from alleged releases of
hazardous and toxic substances to air, soil and water at the McGinnes waste
disposal site located in Galveston County. This matter was consolidated with two
other related cases in December 1993. The complaint sets forth numerous causes
of action, including fraud, negligence and strict liability, including, among
other things, allegations that the defendants sent hazardous, toxic and noxious
chemicals and other waste products to the McGinnes site for disposal. In March
1995, the Company entered into a settlement agreement with certain plaintiffs,
pursuant to which the Company paid seven thousand dollars in return for
withdrawal of their claims against the Company. Based on the Company's
investigation of the case to date, the Company believes it has meritorious
defenses to each and every cause of action stated in the complaint and this
action is being vigorously defended. The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.
On December 17, 1996, AES was named defendant in a complaint filed in the Court
of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES
Chigen Class A Common Stock individually and on behalf of a purported class of
public shareholders of AES Chigen in response to an amalgamation to be entered
into between AES Chigen and AES. The complaint alleges, among other things, that
AES breached its alleged fiduciary duty as a controlling shareholder to treat
the class with fairness, and questions the sufficiency of the consideration to
be paid to AES Chigen shareholders. The complaint seeks damages and injunctive
relief. AES Chigen was not named in the suit. Based on the Company's
investigation of the case to date, the Company believes it has meritorious
defenses to each and every cause of action stated in the complaint and this
action is being vigorously defended. The Company believes that the outcome of
this matter will not have a material adverse effect on its results of operations
or financial position.
The Company is involved in certain other legal proceedings in the normal course
of business. It is the opinion of the Company that none of the pending
litigation is expected to have a material adverse effect on its results of
operations or financial position.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------
(In millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common stock
Balance at January 1 and December 31.................................. $ 1 $ 1 $ 1
==== ==== ====
Additional paid-in capital
Balance at January 1.................................................. $293 $240 $203
Issuance of common stock under benefit plans and exercise of stock
options ........................................................... 3 2 2
Tax benefit associated with the exercise of options................... 15 -- --
Issuance of common stock on conversion of 6.5% subordinated
debentures, net ($26.16 per share)................................. 49 -- --
Common stock dividends (1994-3% per share)............................ -- -- 47
AES Chigen Class A redeemable common stock............................ -- 51 (12)
---- ---- ----
Balance at December 31.................................................. $360 $293 $240
==== ==== ====
Retained earnings
Balance at January 1.................................................. $271 $164 $111
Net income for the year............................................... 125 107 100
Common stock dividends (1994-3% per share)............................ -- -- (47)
---- ---- ----
Balance at December 31.................................................. $396 $271 $164
==== ==== ====
Cumulative foreign currency translation adjustment
Balance at December 31................................................ $(33) $(10) $ (3)
==== ==== ====
Treasury stock
Balance at December 31.................................................. $ (3) $ (6) $ --
==== ==== ====
</TABLE>
Stock Split and Stock Dividend -- On December 7, 1993, the Board of Directors
authorized a three-for-two split, effected in the form of a stock dividend,
payable to stockholders of record on January 15, 1994. Additionally, on February
17, 1994, the Company declared a 3% stock dividend, payable to stockholders of
record on March 10, 1994. Accordingly, all outstanding share, per share and
stock option data in all periods presented have been restated to reflect the
split and the 3% stock dividend.
On July 30, 1996, the Company exercised its right to redeem the Debentures at a
redemption price equal to approximately 104% of the principal amount of the
debentures, together with accrued interest through the date of redemption. As a
result, $49.7 million of the debentures were converted into 1.9 million shares
of common stock of the Company at a conversion price of $26.16 per share.
Stock Options and Warrants -- The Company has granted options for shares of
common stock under its stock option plans. Under the terms of the plans, the
Company may issue options to purchase shares of the Company's common stock at a
price equal to 100% of the market price at the date the option is granted. The
options become eligible
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
for exercise under various schedules. At December 31, 1996, there were
approximately 2 million shares reserved for future grants under the plans. A
summary of the option activity follows (in thousands of shares):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
DECEMBER 31
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -- beginning of
year.................................... 4,063 $ 14.56 3,540 $ 12.07 2,999 $ 9.78
Exercised during the year................. (480) 10.69 (355) 17.71 (187) 2.65
Forfeitures during the year............... (216) 20.55 (57) 18.36 (12) 13.17
Granted during the year................... 643 38.78 935 20.04 740 18.91
----- ------- ----- ------- ----- -------
Outstanding -- end of year................ 4,010 18.59 4,063 14.56 3,540 12.07
===== ======= ===== ======= ===== =======
Eligible for exercise -- end of year...... 2,132 12.86 1,209 9.03 1,059 6.02
===== ======= ===== ======= ===== =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996 (in thousands of shares):
<TABLE>
<CAPTION>
-----------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
LIFE AVERAGE AVERAGE
TOTAL (IN EXERCISE TOTAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
- ----------------------------------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.55 to $6.47........................... 1,013 3.3 $ 5.14 1,011 $ 5.14
$11.65 to $19.75......................... 1,261 6.9 17.54 492 17.44
$20.00 to $28.88......................... 1,248 8.3 20.97 593 20.79
$31.75 to $44.13......................... 488 10.0 43.14 36 36.31
----- -----
Total.................................... 4,010 2,132
===== =====
</TABLE>
The Company accounts for its stock-based compensation plans under APB No. 25,
and as a result, no compensation expense has been recognized in connection with
the options, as all options have been granted only to AES people, including
Directors, with an exercise price equal to the market price of the Company's
common stock on the date of grant. The Company adopted SFAS No. 123 for
disclosure purposes in 1996. For SFAS No. 123 purposes, the fair value of each
option grant has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 6.5%, 5.5%, and 7.5% and expected volatility of 28%, 24%, and
22% for the years ended 1996, 1995 and 1994, respectively, a dividend payout
rate of zero for each year and an expected option life of 7 years. Using these
assumptions, the weighted average fair value of the stock options granted is
$17.61 and $8.17 for 1996 and 1995, respectively. There were no adjustments made
in calculating the fair value to account for vesting provisions or for
non-transferability or risk of forfeiture.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation expense been determined consistent with SFAS No. 123, utilizing
the assumptions detailed above, the Company's net income and earnings per share
for the year ended December 31, 1996, 1995 and 1994 would have been reduced to
the following pro forma amounts (in millions):
<TABLE>
<CAPTION>
----------------------
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net Income:
As Reported.................................. $ 125 $ 107 $ 100
Pro forma.................................... 121 106 100
Net income per common share:
As Reported.................................. $1.62 $1.41 $1.32
Pro forma.................................... 1.57 1.40 1.32
</TABLE>
The use of such amounts and assumptions are not intended to forecast any
possible future appreciation of the Company's stock price or change in dividend
policy.
In addition to the options described above, the Company has outstanding warrants
to purchase up to 0.7 million shares of its common stock at $29.43 per share
through July 2000, which were issued as partial settlement of a shareholder
class action suit and were expensed in 1995. Warrants exercised under this
settlement were not significant at December 31, 1996.
AES China Generating Co. Ltd. -- During 1994, AES Chigen completed an initial
public offering for the sale of 10.2 million shares of Class A redeemable common
stock. Prior to the offering, AES contributed $50 million to AES Chigen for 7.5
million shares of Class B common stock. AES, as the sole Class B holder, is
entitled to elect one-half of the board of directors of AES Chigen. As of
December 22, 1995, AES Chigen had entered into binding commitments to invest in
excess of $50 million in power projects in the People's Republic of China and
the previously held right of Class A Shareholders to require AES Chigen to
repurchase their shares has expired. As a result, the Company has allocated the
net proceeds from the issuance of the Class A shares to additional paid-in
capital and minority interest during 1995. In November 1996, the Company and AES
Chigen signed a definitive agreement for the Company to acquire the
approximately 8.2 million outstanding Class A shares of AES Chigen. The
acquisition will be accomplished by amalgamating AES Chigen with a wholly owned
subsidiary of the Company. Subject to approval of the holders of the Class A
common stock, AES Chigen shareholders will receive shares of the Company common
stock at an exchange rate of 0.29 shares of the Company's common stock for each
share of AES Chigen common stock.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Income Tax Provision -- The provision for income taxes attributable to
continuing operations consists of the following (in millions):
<TABLE>
<CAPTION>
--------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal
Current........................................ $19 $ 4 $ 2
Deferred....................................... 27 47 35
State
Current........................................ 12 5 4
Deferred....................................... (2) 1 3
Foreign
Current........................................ 3 -- --
Deferred....................................... 1 -- --
--- --- ---
Total............................................ $60 $57 $44
=== === ===
</TABLE>
Effective and Statutory Rate Reconciliation -- A reconciliation of the U.S.
statutory federal income tax rate to the Company's effective tax rate as a
percentage of income before taxes (excluding earnings and taxes from affiliates
accounted for on the equity method, and minority interests) is as follows:
<TABLE>
<CAPTION>
--------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate............................................... 35% 35% 35%
Change in valuation allowance............................................ (2) (6) (2)
State taxes, net of federal tax benefit.................................. 6 6 5
Foreign taxes............................................................ 2 -- --
Other -- net............................................................. (1) 3 (4)
-- -- --
Effective tax rate....................................................... 40% 38% 34%
== == ==
</TABLE>
Deferred Income Taxes -- Deferred income taxes relate principally to accelerated
depreciation methods used for tax purposes and certain other expenses which are
deducted for income tax purposes, but not for financial reporting purposes.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. These items are stated at the enacted tax rates
that are expected to
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
be in effect when taxes are actually paid or recovered. Deferred tax assets and
deferred tax liabilities are as follows (in millions):
<TABLE>
<CAPTION>
-----------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Differences between book and tax basis of property and total deferred
tax liability........................................................ $ 379 $ 379 $ 219
----- ----- -----
Operating loss carryforwards........................................... (124) (167) (231)
Tax credit carryforwards............................................... (97) (71) (68)
Other deductible temporary differences................................. (13) (1) (15)
----- ----- -----
Total gross deferred tax asset......................................... (234) (239) (314)
Less: valuation allowance.............................................. 33 9 168
----- ----- -----
Total net deferred tax asset........................................... (201) (230) (146)
----- ----- -----
Net deferred tax liability............................................. $ 178 $ 149 $ 73
===== ===== =====
</TABLE>
As of December 31, 1996, the Company had federal net operating loss
carryforwards for tax purposes of approximately $295 million expiring from 2001
through 2010, federal investment tax credit carryforwards for tax purposes of
approximately $54 million expiring in years 2001 through 2006, foreign tax
credit carryforwards of $3 million expiring in 2001 and federal alternative
minimum tax credits of approximately $30 million which carryforward without
expiration.
The valuation allowance increased during the current year by approximately $24
million to $33 million at December 31, 1996. This increase resulted primarily
from the acquisition of foreign entities with certain pre-existing deferred tax
assets, the ultimate realization of which cannot be determined on a more likely
than not basis. The valuation allowance for these pre-existing deferred tax
assets was recorded as acquisition adjustments and had no effect on the current
year income tax expense. The $33 million valuation allowance at December 31,
1996 relates primarily to state and foreign tax credits, state operating losses,
and deferred tax assets, the ultimate realization of which is uncertain. The
Company believes that it is more likely than not that the remaining deferred tax
assets will be realized.
The valuation allowance decreased during 1995 by approximately $159 million to
$9 million. The primary reason for this decrease was the Company's purchase of
the outstanding debt of AES Deepwater on January 20, 1995, which had the effect
of reducing certain of the Company's deferred tax assets. The $9 million
valuation allowance at December 31, 1995 related primarily to state tax credits
and foreign operating losses, the ultimate realization of which is uncertain.
The Company believes that it is more likely than not that the remaining deferred
tax assets will be realized.
Undistributed earnings of certain foreign affiliates aggregated $85 million on
December 31, 1996. The Company considers these earnings to be indefinitely
reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes have
been recorded with respect to the earnings. Should the earnings be remitted as
dividends, the Company may be subject to additional U.S. taxes, net of allowable
foreign tax credits. It is not practicable to estimate the amount of any
additional taxes which may be payable on the undistributed earnings.
9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
Profit Sharing and Stock Ownership Plan -- The Company has a profit sharing and
stock ownership plan, qualified under section 401 of the Internal Revenue Code,
which is available to all AES people. The profit sharing plan provides for
Company matching contributions, other Company contributions at the discretion of
the Compensation Committee of the Board of Directors, and discretionary tax
deferred contributions from the participants. Participants are fully vested in
their own contributions and the Company's matching contributions. Participants
vest in
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS (CONTINUED)
other Company contributions over a five-year period. Company contributions to
the plan were $4 million for each of the years ended 1996, 1995 and 1994.
Deferred Compensation Plans -- The Company has a deferred compensation plan
under which directors of the Company may elect to have a portion or all of their
compensation deferred. The amounts allocated to each participant's deferred
compensation account may be converted into common stock units. Upon termination
or death of a participant, the Company is required to distribute, under various
methods, cash or the number of shares of common stock accumulated within the
participant's deferred compensation account. Distribution of stock is to be made
from common stock held in treasury or from authorized but previously unissued
shares. The plan terminates and full distribution is required to be made to all
participants upon any changes of control of the Company (as defined).
In addition, the Company has an executive officers' deferred compensation plan.
At the election of an executive officer, the Company will establish an unfunded,
non-qualified compensation arrangement for each officer who chooses to terminate
participation in the Company's profit sharing and employee stock ownership plan.
The participant may elect to forego payment of any portion of his or her
compensation and have an equal amount allocated to a contribution account. In
addition, the Company will credit the participant's account with an amount equal
to the Company's contributions (both matching and profit sharing) that would
have been made on such officer's behalf if he or she had been a participant in
the profit sharing plan. The participant may elect to have all or a portion of
the Company's contribution converted into stock units. Dividends paid on common
stock are allocated to the participant's account in the form of stock units. The
participant's account balances are distributable upon termination of employment
or death.
During 1995, the Company adopted a supplemental retirement plan covering certain
AES people. The plan provides incremental profit sharing and matching
contributions to participants that would have been paid to their accounts in the
Company's profit sharing plan if it were not for limitations imposed by income
tax regulations. All contributions to the plan are vested in the manner provided
in the Company's profit sharing plan, and once vested are nonforfeitable. The
participant's account balances are distributable upon termination of employment
or death.
The Company is not obligated under any post-retirement benefit plans other than
the profit sharing and deferred compensation plans described in this Note.
10. QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of operations
(in millions, except per share amounts):
<TABLE>
<CAPTION>
-----------------------------------
QUARTERS ENDED 1996
MAR 31 JUN 30 SEP 30 DEC 31
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and services........................................... $ 172 $ 174 $ 205 $ 284
Gross margin................................................. 74 76 85 98
Net income................................................... 29 28 32 36
Net income per share......................................... $0.38 $0.37 $0.42 $0.46
<CAPTION>
-----------------------------------
QUARTERS ENDED 1995
MAR 31 JUN 30 SEP 30 DEC 31
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales and services........................................... $ 169 $ 166 $ 173 $ 171
Gross margin................................................. 69 69 73 74
Net income................................................... 25 27 27 28
Net income per share......................................... $0.33 $0.35 $0.36 $0.37
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. GEOGRAPHIC SEGMENTS
Information about the Company's operations in different geographic areas is as
follows (in millions):
<TABLE>
<CAPTION>
--------------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
REVENUES
North America....................................................... $ 554 $ 542 $ 523
South America....................................................... 146 131 2
Asia................................................................ 45 1 --
Europe.............................................................. 90 5 8
------ ------ ------
Total............................................................... $ 835 $ 679 $ 533
====== ====== ======
<CAPTION>
--------------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
OPERATING INCOME
North America....................................................... $ 258 $ 251 $ 245
South America....................................................... 21 14 --
Asia................................................................ (9) (8) (11)
Europe.............................................................. 8 (4) 2
------ ------ ------
Total............................................................... $ 278 $ 253 $ 236
====== ====== ======
<CAPTION>
--------------------------
FOR THE YEARS ENDED
DECEMBER 31
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
North America....................................................... $1,831 $1,693 $1,569
South America....................................................... 683 230 46
Asia................................................................ 744 328 221
Europe.............................................................. 364 90 79
------ ------ ------
Total............................................................... $3,622 $2,341 $1,915
====== ====== ======
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's assets and liabilities have been
determined using available market information. The estimates are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of current financial assets, current liabilities, debt service
reserves and other deposits, and other assets are assumed to be equal to their
reported carrying amounts. The fair value of project financing debt is estimated
differently based upon the type of loan. For variable rate loans, carrying value
approximates fair value. For fixed rate loans, the fair value is estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rates at which similar borrowing arrangements would be made under
current conditions, or by the estimated discount rate a prospective seller would
pay to a credit-worthy third party to assume the obligations. The carrying value
and fair value of the AES Placerita capital lease have been excluded from this
disclosure. The fair value of swap agreements is the estimated net amount that
the Company would pay to terminate
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
the agreements at the balance sheet date. The estimated fair values of the
Debentures, 9 3/4% Notes and 10 1/4% Notes are based on the quoted market prices
at December 31, 1996 and 1995.
The estimated fair values of the Company's financial instruments at December 31,
1996 and 1995 are as follows (in millions):
<TABLE>
<CAPTION>
--------------------------------------
1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Project financing debt..................................... $1,562 $1,562 $1,071 $1,078
Other notes payable........................................ 538 560 175 180
Interest rate swaps........................................ -- 68 -- 137
</TABLE>
The fair value estimates presented herein are based on pertinent information
available as of December 31, 1996 and 1995. The Company is not aware of any
factors that would significantly affect the estimated fair value amounts since
that date.
13. SUBSEQUENT EVENT
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. The plants to
be acquired by AES (with ownership percentages in parenthesis) include a 110 MW
gas-fired combined cycle plant in Kingston, Canada (50%); a 405 MW gas-fired
combined cycle plant in Terneuzen, Netherlands (50%); a 140 MW gas-fired simple
cycle plant in Cornwall, England (100%); a 235 MW oil-fired simple cycle plant
in Santo Domingo, Dominican Republic (99%); and a 1600 MW coal-fired plant in
Victoria, Australia (20%). The acquisition remains subject to certain
governmental approvals.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE AES CORPORATION
-------------------------
(Registrant)
Date: March 12, 1997 By /s/ BARRY J. SHARP
-----------------------
Barry J. Sharp
Chief Financial Officer
<PAGE>
EXHIBIT 11
THE AES CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For Years ended December 31
- --------------------------------------------------------------------------------------------------
1994 1995 1996
<S> <C> <C> <C>
PRIMARY
Weighted Average Number of Shares of Common
Stock Outstanding 74.6 74.9 75.7
Net Effect of Dilutive Stock Options and
Warrants-Based on the Treasury Stock
Method Using Average Market Price 1.0 0.7 1.3
Stock Units Allocated to the Deferred
Compensation Plans for Executives and
Directors 0.2 0.3 0.3
- --------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 75.8 75.9 77.3
- --------------------------------------------------------------------------------------------------
Net Income $100 $107 $125
- --------------------------------------------------------------------------------------------------
Per Share Amount $1.32 $1.41 $1.62
- --------------------------------------------------------------------------------------------------
FULLY DILUTED
Weighted Average Number of Shares of Common
Stock Outstanding 74.6 74.9 75.7
Net effect of Dilutive Stock Options and
Warrants - Based on the Treasury Stock
Method Using Ending Market Price 1.0 1.0 1.9
Stock Units Allocated to the Deferred
Compensation Plans for Executives and
Directors 0.2 0.3 0.3
Effect of Convertible Debt - Based on the If-
Converted Method 1.9 1.9 1.3
- --------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding 77.7 78.1 79.2
- --------------------------------------------------------------------------------------------------
Net Income $100 $107 $125
Additional Contribution to Net Income if
Convertible Debt is Fully Converted 2 2 1
- --------------------------------------------------------------------------------------------------
Adjusted Net Income $102 $109 $126
- --------------------------------------------------------------------------------------------------
Per Share Amount $1.31 $1.40 $1.59
- --------------------------------------------------------------------------------------------------
</TABLE>
NOTE: All net income per share and share data have been adjusted to reflect the
three percent stock dividend declared February 17, 1994.
<PAGE>
THE AES CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CALCULATIONS OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
(in thousand, unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
AS DEFINED:
Income from continuing operations before
income taxes $ 65.2 $ 89.4 $ 141.8 $ 163.7 $ 185.3
Adjustment for undistributed income, net
of distributions (2.5) (10.6) (5.9) 3.2 (19.9)
Interest expense 97.1 125.0 121.8 121.9 137.7
Depreciation of previously capitalized interest 4.0 4.5 4.5 4.5 4.5
Net amortization of issuance costs 2.8 2.6 3.5 4.6 5.8
------ ------- ------- ------- -------
Earnings $ 166.6 $ 210.9 $ 265.7 $ 297.9 $ 313.4
====== ======= ======= ======= =======
Interest expensed and capitalized amounts
(including construction related fixed charges) $ 118.2 $ 127.0 $ 123.9 $ 131.9 $ 164.7
Net amortization of issuance costs (including
capitalized amounts) 3.1 2.5 3.5 4.6 5.8
------ ------- ------- ------- -------
Fixed charges $ 121.3 $ 129.5 $ 127.4 $ 136.5 $ 170.5
====== ======= ======= ======= =======
Ratio of earnings to fixed charges 1.37 x 1.63 x 2.08 x 2.18 x 1.84 x
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-15487 of The AES Corporation (the "Company") on Form S-3 of our report on
the consolidated financial statements of the Company as of December 31, 1996 and
1995 and for the three years in the period ended December 31, 1996, dated
January 30, 1997, except for Note 13, as to which the date is February 18, 1997,
appearing in this Current Report on Form 8-K of The AES Corporation dated March
12, 1997. We also consent to the reference to us under the heading "Experts" in
the Prospectus and Prospectus Supplement which are a part of Registration
Statement No. 333-15487.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 185
<SECURITIES> 20
<RECEIVABLES> 115
<ALLOWANCES> (20)
<INVENTORY> 81
<CURRENT-ASSETS> 502
<PP&E> 2502
<DEPRECIATION> (282)
<TOTAL-ASSETS> 3622
<CURRENT-LIABILITIES> 382
<BONDS> 2008
0
0
<COMMON> 1
<OTHER-SE> 720
<TOTAL-LIABILITY-AND-EQUITY> 3622
<SALES> 824
<TOTAL-REVENUES> 835
<CGS> 495
<TOTAL-COSTS> 557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144
<INCOME-PRETAX> 193
<INCOME-TAX> 60
<INCOME-CONTINUING> 125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.59
</TABLE>
