UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19281
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
54-1163725
(IRS Employer Identification No.)
1001 North 19th Street
Arlington, Virginia 22209
(Address of principal executive office)
Telephone Number (703) 522-1315
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No/ /
The total number of shares of the registrant's Common Stock, $.01 par value,
outstanding on July 31, 1997 was 87,195,334.
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THE AES CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements:
Consolidated Statements of Operations..................... 2
Consolidated Balance Sheets............................... 3
Consolidated Statements of Cash Flow...................... 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... ......... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 17
Item 2. Changes in Securities..................................... 17
Item 3. Defaults Upon Senior Securities........................... 17
Item 4. Submission of Matters to a Vote of Security Holders....... 17
Item 5. Other Information......................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................... 18
Signature ......................................................... 19
1
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 1996 AND 1997
- --------------------------------------------------------------------------------
(Unaudited) Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
06/30/96 06/30/97 06/30/96 06/30/97
- --------------------------------------------------------------------------------
($ in millions, except per share amounts)
REVENUES:
Sales and services ....................... $ 174 $ 261 $ 346 $ 522
OPERATING COSTS AND EXPENSES:
Cost of sales and services ............... 98 163 196 330
Selling, general and
administrative expenses ................ 6 6 15 15
Provision to reduce contract receivable .. -- 3 -- 10
----- ----- ----- -----
Total operating costs and expenses ....... 104 172 211 355
----- ----- ----- -----
OPERATING INCOME ......................... 70 89 135 167
OTHER INCOME AND (EXPENSE):
Interest expense ......................... (32) (48) (62) (92)
Interest income .......................... 5 10 10 18
Equity in net earnings of affiliates
(net of income tax) ................... 2 14 7 30
----- ----- ----- -----
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST ................... 45 65 90 123
Income taxes ............................. 16 19 31 35
Minority interest ........................ 1 4 2 6
----- ----- ----- -----
NET INCOME ............................... $ 28 $ 42 $ 57 $ 82
===== ===== ===== =====
NET INCOME PER SHARE: .................... $0.37 $0.50 $0.75 $1.00
===== ===== ===== =====
See Notes to Consolidated Financial Statements
2
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
- --------------------------------------------------------------------------------
(Unaudited)
12/31/96 06/30/97
- --------------------------------------------------------------------------------
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 185 $ 323
Short-term investments ............................... 20 19
Accounts receivable, less provision to reduce
contract receivable of $20 and $30, respectively .... 95 198
Inventory ............................................ 81 71
Receivable from affiliates ........................... 9 10
Deferred income taxes ................................ 65 49
Prepaid expenses and other current assets ............ 47 65
----- -----
Total current assets ................................. 502 735
PROPERTY, PLANT AND EQUIPMENT:
Land ................................................. 30 31
Electric and steam generating facilities ............. 1,884 2,661
Furniture and office equipment ....................... 14 14
Accumulated depreciation and amortization ............ (282) (318)
Construction in progress ............................. 574 776
----- -----
Property, plant and equipment, net ................... 2,220 3,164
OTHER ASSETS:
Deferred costs, net................................... 47 77
Project development costs ............................ 53 66
Investments in and advances to affiliates ............ 491 1,957
Debt service reserves and other deposits ............. 175 174
Goodwill and other intangible assets, net ............ 52 56
Other assets ......................................... 82 103
----- -----
Total other assets ................................... 900 2,433
----- -----
TOTAL ................................................ $ 3,622 $ 6,332
======= =======
See Notes to Consolidated Financial Statements
3
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
- --------------------------------------------------------------------------------
(Unaudited)
12/31/96 06/30/97
- --------------------------------------------------------------------------------
($ in millions)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 64 $ 75
Income taxes payable ................................... -- 4
Accrued interest ....................................... 25 47
Accrued and other liabilities .......................... 95 184
Other notes payable - current portion .................. 88 108
Project financing debt - current portion ............... 110 589
------ ------
Total current liabilities .............................. 382 1,007
LONG-TERM LIABILITIES:
Project financing debt ................................. 1,558 2,716
Revolving bank loan .................................... 125 125
Other notes payable .................................... 325 525
Deferred income taxes .................................. 243 221
Other long-term liabilities ............................ 55 42
------ ------
Total long-term liabilities ............................ 2,306 3,629
MINORITY INTEREST ...................................... 213 373
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES ....... -- 250
STOCKHOLDERS' EQUITY:
Common stock ........................................... 1 1
Additional paid-in capital ............................. 360 668
Retained earnings ...................................... 396 478
Cumulative foreign currency translation adjustment ..... (33) (73)
Less treasury stock at cost ............................ (3) (1)
------- -------
Total stockholders' equity ............................. 721 1,073
------- -------
TOTAL .................................................. $ 3,622 $ 6,332
======== ========
See Notes to Consolidated Financial Statements
4
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THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
- --------------------------------------------------------------------------------
(Unaudited) Six Six
Months Months
Ended Ended
06/30/96 06/30/97
- --------------------------------------------------------------------------------
($ in millions)
OPERATING ACTIVITIES:
Net Income ............................................... $ 57 $ 82
Adjustments to net income:
Depreciation, depletion and amortization ............. 29 34
Provision for deferred taxes ......................... 22 12
Undistributed earnings of affiliates ................. -- (12)
Other ................................................ (8) (1)
Change in working capital ................................ (32) (20)
---- ----
Net cash provided/(used) by operating activities ......... 68 95
INVESTING ACTIVITIES:
Property additions ..................................... (205) (206)
Acquisitions, net of cash acquired ..................... (20) (1,066)
Sale/(purchase) of short-term investments .............. 22 1
Affiliate advances and investments ..................... (393) (643)
Project development costs .............................. (8) (13)
Debt service reserves and other assets ................. (12) (17)
---- ----
Net cash used in investing activities .................... (616) (1,944)
FINANCING ACTIVITIES:
Borrowings under the revolver .......................... 155 19
Issuance of company - obligated mandatorily redeemable
preferred securities ("TECONS") .................... -- 244
Issuance of project financing debt ..................... 390 1,167
Issuance of senior subordinated notes .................. -- 200
Repayments of project financing debt ................... (21) (50)
Minority partner payments .............................. 4 258
Issuance of common stock ............................... 1 149
---- ----
Net cash provided/(used) by financing activities ......... 529 1,987
Increase/(decrease) in cash and cash equivalents ......... (19) 138
Cash and cash equivalents, beginning ..................... 239 185
---- ----
Cash and cash equivalents, ending ........................ $ 220 $ 323
===== =====
Supplemental interest and income taxes disclosures:
Cash payments for interest ............................... $ 57 $ 70
Cash payments for income taxes ........................... 9 22
Supplemental noncash disclosures:
Deferred purchase price of CEMIG shares .................. -- $ 528
Common stock issued for amalgamation of AES Chigen ....... -- 157
See notes to consolidated financial statements
5
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PART I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of AES, its
subsidiaries, and controlled affiliates. Intercompany transactions and balances
have been eliminated. Investments in 50% or less owned affiliates over which the
Company has the ability to exercise significant influence, but not control, are
accounted for using the equity method. Under the equity method, the Company's
investment is recorded at cost and is adjusted to recognize its proportional
share of all earnings or losses of the entity. Distributions received reduce the
carrying amount of the Company's investment.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the three and six months
ended June 30, 1996 and 1997, respectively, are included. All such adjustments
are accruals of a normal and recurring nature. The results of operations for the
three months ended June 30, 1997 are not necessarily indicative of the results
of operations to be expected for the full year. The financial statements are
unaudited and should be read in conjunction with the financial statements which
are incorporated herein by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
2. Net Income Per Share
Net income per share is based on the weighted average number of common
stock and common stock equivalents outstanding, after giving effect to stock
splits. Common stock equivalents include dilutive stock options, warrants, and
deferred compensation arrangements. The effect of such common stock equivalents
on net income per share is computed using the treasury stock method. The shares
used in computing net income per share were 76.2 million and 84.1 million for
the quarters ended June 30, 1996 and 1997, respectively, and 76.1 million and
82.1 million for the six months ended June 30, 1996 and 1997, respectively.
SFAS No. 128, "Earnings per Share" becomes effective December 15, 1997,
and will be adopted by the Company at December 31, 1997. Early adoption is not
permitted, however, pro forma basic and diluted earnings per share as computed
in accordance with SFAS No. 128 would have been as follows:
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, 1996 June 30, 1997 June 30, 1996 June 30, 1997
Basic earnings per share $0.37 $0.51 $0.76 $1.03
Diluted earnings per share $0.37 $0.49 $0.74 $0.99
6
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3. Financing
In a combined public offering in March, the Company issued
approximately $150 million of its common stock at a price of $58.625 per share
concurrently with approximately $250 million of Company-obligated mandatorily
redeemable preferred securities (the "TECONS") of a wholly owned subsidiary
trust (the "Trust") whose sole asset is $257,732,000 aggregate principal amount
of 5.375% junior subordinated debentures of the Company due March 31, 2027 with
a 23.5% conversion premium (the "Junior Subordinated Debentures"). A guarantee
issued in the TECONS offering, when taken together with the Company's
obligations under the Junior Subordinated Debentures, the indenture pursuant to
which the Junior Subordinated Debentures were issued and the Amended and
Restated Declaration of Trust governing the Trust, provides a full and
unconditional guarantee by the Company of the Trust's obligations regarding the
TECONS. The Company used cash on hand and the net proceeds of the combined
offerings of approximately $387 million, after temporarily using a portion of
the proceeds to repay borrowings under its $425 million revolving credit
facility (the "Revolver"), to fund the Company's purchase of the international
assets of Destec Energy, Inc.
AES financed its acquisitions of CEMIG and ESEBA (as described more
fully in Footnote 5 below) through: (i) $450 million in non-recourse bridge
financing, comprised of a $250 million bridge loan (the "CEMIG Bridge") to AES
CEMIG Funding Corporation, a wholly-owned subsidiary of AES, and a $200 million
bridge loan (the "ESEBA Bridge") to AESEBA Funding Corporation, a wholly-owned
subsidiary of AES; (ii) a $200 million subordinated bridge loan to AES (the "AES
Bridge Loan"); (iii) non-recourse project debt; (iv) borrowings under the
Revolver and (v) cash on hand.
4. Inventory
Inventory, valued at the lower of cost (principally first in, first out
method) or market, consists of coal and other raw materials used in generating
electricity and steam, and spare parts, materials and supplies. Inventory at
December 31, 1996 and June 30, 1997 consisted of the following (in millions):
1996 1997
---- ----
Coal, oil and other raw materials $ 57 $ 48
Spare parts, materials and supplies 24 23
-- --
Total $ 81 $ 71
==== ====
5. Acquisitions
In June 1997, AES together with The Southern Company and The
Opportunity Fund, a Brazilian investment fund (collectively, the "AES
Consortium"), acquired 14.41% of Companhia Energetica de Minas Gerais ("CEMIG"),
an integrated electric utility serving the State of Minas Gerais in Brazil, for
a total purchase price of approximately $1.056 billion. $654 million of the
purchase price was in the form of non-recourse financing provided by Banco
Nacional de Desevolvimento Economico e Social ("BNDES"). AES's portion of the
purchase price was approximately $364 million after consideration of the BNDES
facility. Pursuant to a shareholders agreement between the AES Consortium and
the State of Minas Gerais, AES will have significant operating influence and is
accounting for the acquisition using the equity method. CEMIG owns approximately
5,000 MW of generating plants and serves approximately 4 million customers.
7
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In June 1997, AES completed its acquisition of the international
assets of Destec Energy, Inc. ("Destec"), a large independent energy producer
with headquarters in Houston, Texas, at a total price to AES of approximately
$436 million, which is subject to net cash flow adjustments. Destec's
international assets acquired by AES include ownership interests in the
following five electric generating plants (with ownership percentages in
parentheses): (i) a 110 MW gas-fired combined cycle plant in Kingston, Canada
(50 percent); (ii) a 405 MW gas-fired combined cycle plant in Terneuzen,
Netherlands (50 percent); (iii) a 140 MW gas-fired simple cycle plant in
Cornwall, England (100 percent); (iv) a 235 MW oil-fired simple cycle plant in
Santo Domingo, Dominican Republic (99 percent); and (v) a 1,600 MW coal-fired
plant in Victoria, Australia (20 percent) (collectively referred to as the
"Destec Projects"). Each of such plants is currently in operation, except for
the plant in Terneuzen which is under construction. The acquisition by AES of
Destec's international assets also includes Destec's non-U.S. developmental
stage power projects, including projects in Taiwan, the Philippines, Australia
and Argentina.
In May 1997, a subsidiary of AES, and its partner, Community Energy
Alternatives ("CEA"), acquired an aggregate of 90% of two electricity
distribution companies of Empresa Social de Energia de Buenos Aires S.A.,
("ESEBA") (AES acquired 60% and CEA acquired 30%) serving certain portions of
the Province of Buenos Aires, Argentina for an aggregate purchase price of $565
million. AES's portion of the purchase price after consideration of non-recourse
debt was $244 million. The remaining 10% will be owned by the employees of each
of the two acquired companies.
Also in May 1997, AES completed its amalgamation with AES China
Generating Co. Ltd. ("AES Chigen") by issuing approximately 2.4 million shares
of AES Common Stock, par value $.01 per share, in exchange for all of the issued
and outstanding shares of Class A Common Stock of AES Chigen. The total purchase
price was valued at approximately $157 million.
In January 1997, AES, through certain subsidiaries, acquired for
approximately $82 million an additional 2.4% of Light-Servicos de Electricidade
("Light"), the integrated electric utility that serves Rio de Janeiro, Brazil.
In May 1996, a subsidiary of AES participated in a consortium which acquired a
50.44% controlling interest in Light. The January investment increased AES's
holdings in Light to 13.75%.
The acquisitions were accounted for as purchases. The purchase price
allocations for the Destec Projects, ESEBA, CEMIG, AES Chigen, and previously
reported acquisitions in AES Tiszai (Hungary) and AES Ekibastuz (Kazakstan) have
been completed on a preliminary basis, subject to adjustments resulting from new
and additional facts that may come to light when the engineering, environmental,
and legal analyses are completed during the allocation period.
The accompanying statements of operations include the operating
results for ESEBA, AES Chigen, AES Tiszai, AES Ekibastuz and the Destec Projects
and equity earnings from CEMIG and Light from the dates of those acquisitions
and investments. The Destec Projects were acquired on the last day of the second
quarter. The results of operations of those assets will be included in the
Company's statement of operations beginning in the third quarter. The following
table presents supplemental unaudited pro forma operating results as if all of
the acquisitions had occurred at the beginning of the periods presented (in
millions, except per share amounts):
Six months Six months
06/30/96 06/30/97
-------- --------
Revenues $789(a) $649
Net Income 48 77
Net Income Per Share $0.63 $0.94
(a) Includes $192 million of revenues for the six months
ended June 30, 1996, related to services performed under
construction contracts from certain of the Destec Projects.
Most of these projects were significantly completed by the
end of 1996, and as a result, revenues for services
performed under these construction contracts were
approximately $18 million for the first six months ending
June 30, 1997.
8
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6. Investments in and Advances to Affiliates
The following table presents summarized financial information (in
millions) for equity method affiliates on a combined 100% basis. Amounts
presented include the condensed income statement accounts of NIGEN, Ltd. (a 47%
owned UK affiliate), Medway Power Ltd. (a 25% owned UK affiliate) and Light (a
13.75% owned Brazilian affiliate) for the six months ended June 30, 1996 and the
condensed income statement accounts for NIGEN, Ltd., Medway Power Ltd., Light
and CEMIG (a 13.06% owned Brazilian affiliate) for the six months ended June 30,
1997.
June 30, 1996 June 30, 1997
------------- -------------
Sales $270 $1,201
Operating Income 95 282
Net Income 34 188
7. Litigation
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. In addition, the Company has settled all claims with respect to
the remaining plaintiffs for approximately $12,000. This matter is now
concluded.
The Company is involved in certain other legal proceedings in the
normal course of business. It is the opinion of the Company that none of the
pending litigation is expected to have a material adverse effect on its results
of operations or financial position.
8. Subsequent Events
In July 1997, the Company announced a two for one stock split, in the
form of a dividend, for holders of record on July 28, 1997 of its Common Stock,
par value $.01 per share, payable on August 28, 1997.
9
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In July 1997, the Company issued approximately $325 million of senior
subordinated notes due 2007 with an 8 3/8% interest rate per annum in a private
placement. The Company used the net proceeds of approximately $315 million to
repay amounts outstanding under the AES Bridge Loan, to redeem the Company's $75
million 9 3/4% senior subordinated notes due 2000 and to repay pro rata a
portion of the amounts outstanding under the ESEBA Bridge and the CEMIG Bridge.
In July 1997, the Company sold 4.5 million shares of its common stock
from its shelf registration statement for gross proceeds of approximately $359
million or $79.75 per share. The Company used the net proceeds of approximately
$350 million to repay pro rata a portion of the amounts outstanding under the
ESEBA Bridge and the CEMIG Bridge.
In August 1997, two of the Company's subsidiaries entered into an
agreement with a commercial bank to underwrite two borrowings aggregating $350
million. Approximately $280 million of the proceeds of the borrowings will be
used to repay current obligations under the Revolver and for general corporate
purposes.
10
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ITEM 2.
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
AES is a global power company committed to supplying electricity to
customers worldwide 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 generating plants and distribution companies, through competitively bid
privatization initiatives outside of the United States or negotiated
acquisitions.
AES operates and owns (entirely or in part), through subsidiaries and
affiliates, power plants in ten countries with a capacity of approximately
17,068 MW (including 4,000 MW attributable to Ekibastuz which currently has a
capacity factor of up to approximately 20%). AES is also constructing nine
additional power plants in five countries with a capacity of approximately 3,889
MW. The Company's total ownership in plants in operation and under construction
aggregates approximately 20,957 MW and its net equity ownership in such plants
is approximately 9,831 MW. In addition, AES has numerous projects in advanced
stages of development, including seven projects with design capacity of
approximately 3,206 MW that have executed or been awarded power sales
agreements.
The Company is also engaged (entirely or in part) in electric power
distribution businesses in Latin America through its subsidiaries and
affiliates. These subsidiaries and affiliates serve approximately 7 million
commercial, industrial and residential customers using approximately 62,000
gigawatt hours of electric power per year.
As a result of the Company's significant growth in recent years, the
Company's operations have become more diverse with regard to both geography and
fuel source and it has reduced its dependence upon any single project or
customer. During 1996, four of the Company's projects individually contributed
more than 10% of the Company's total revenues; Shady Point which represented
approximately 20%, San Nicolas which represented approximately 16%, Thames which
represented approximately 16% and Barbers Point which represented approximately
15%.
Certain subsidiaries and affiliates of the Company (domestic and
non-U.S.) have signed long-term contracts for the sale of electricity and are in
various stages of developing the related greenfield projects. Because these
potential projects have yet to begin construction or procure committed long-term
financing, there exist substantial risks to their successful completion,
including, but not limited to, those relating to failures of siting, financing,
construction, permitting, governmental approvals or termination of the power
sales contract as a result of a failure to meet milestones. As of June 30, 1997,
capitalized costs for projects under development were $66 million. The Company
believes that the costs are recoverable; however, no assurance can be given that
changes in circumstances related to individual projects will not occur or that
any of these projects will be completed and reach commercial operation.
11
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The Company's 4,000 megawatt mine-mouth, coal-fired power facility in
Kazakstan sells electricity to the government-owned distribution company under a
35-year power sales contract. Through June 30, 1997, approximately $67 million
(excluding VAT) was billed under the power sales contract for electricity, of
which the purchaser has paid approximately $11 million. The Company recorded a
provision of approximately $20 million at December 31, 1996 and an additional
provision of approximately $10 million during the first six months of 1997 to
reduce the carrying value of the contract receivable as of June 30, 1997 to $26
million. As of June 30, 1997, the net assets of this project were $37 million, a
portion of which was represented by the contract receivable referred to above.
There can be no assurance as to the ultimate collectability of amounts owed to
AES as of June 30, 1997 or additional amounts related to future deliveries of
electricity under the power sales contract or the recoverability of the
Company's investment or additional amounts the company may invest in the
project.
Acquisitions
In June 1997, AES together with The Southern Company and The
Opportunity Fund, a Brazilian investment fund (collectively, the "AES
Consortium"), acquired 14.41% of Companhia Energetica de Minas Gerais ("CEMIG"),
an integrated electric utility serving the State of Minas Gerais in Brazil, for
a total purchase price of approximately $1.056 billion. $654 million of the
purchase price was in the form of non-recourse financing provided by Banco
Nacional de Desevolvimento Economico e Social ("BNDES"). AES's portion of the
purchase price was approximately $364 million after consideration of the BNDES
facility. The shares of CEMIG, which represent approximately 33% of the voting
interest, have been purchased from the State of Minas Gerais in a partial
privatization of CEMIG. Initially, AES and The Opportunity Fund will have a
90.6% and a 9.4% economic interest in the AES Consortium, respectively. The
Southern Company has an option until January 9, 1998 to purchase up to a 25%
interest in the AES Consortium from AES. Pursuant to a shareholders agreement
between the AES Consortium and the State of Minas Gerais, AES will have
significant operating influence. CEMIG owns approximately 5,000 MW of generating
plants and serves approximately 4 million customers.
12
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In June 1997, AES acquired the international assets of Destec Energy,
Inc. ("Destec"), a large independent energy producer with headquarters in
Houston, Texas, at a total price to AES of approximately $436 million, which is
subject to net cash flow adjustments. 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 acquired the
international assets of Destec immediately following NGC's acquisition of
Destec. Destec's international assets acquired by AES include ownership
interests in the following five electric generating plants (with ownership
percentages in parentheses): (i) a 110 MW gas-fired combined cycle plant in
Kingston, Canada (50 percent); (ii) a 405 MW gas-fired combined cycle plant in
Terneuzen, Netherlands (50 percent); (iii) a 140 MW gas-fired simple cycle plant
in Cornwall, England (100 percent); (iv) a 235 MW oil-fired simple cycle plant
in Santo Domingo, Dominican Republic (99 percent); and (v) a 1,600 MW coal-fired
plant in Victoria, Australia (20 percent) (collectively referred to as the
"Destec Projects"). Each of such plants is currently in operation, except for
the plant in Terneuzen, which is under construction. The acquisition by AES of
Destec's international assets also includes Destec's non-U.S. developmental
stage power projects, including projects in Taiwan, the Philippines, Australia
and Argentina.
In June 1997, AES initially funded its portion of the Yangcheng
International Power Company ("Yangcheng"), a $1.6 billion joint venture formed
to build, own and operate a 2,100 MW mine-mouth, coal-fired power plant in
Shanxi Province in the People's Republic of China. AES, through a subsidiary,
will be responsible for overseeing the management of the construction and
operations of the plant. The project will be funded with $1.21 billion of debt
and $393 million of equity. AES, which will own 25% of Yangcheng, has committed
to provide up to $98 million of equity. Substantial risks to the successful
completion of this project exist, including local and central governmental
approvals, financing, construction, permitting, expropriation and currency
inconvertibility. There can be no assurance that this project will be completed.
In May 1997, a subsidiary of AES, and its partner, Community Energy
Alternatives ("CEA"), acquired an aggregate of 90% of two distribution companies
of Empresa Social de Energia de Buenos Aires S.A. ("ESEBA") (AES acquired 60%
and CEA acquired 30% ) serving certain portions of the Province of Buenos Aires,
Argentina for an aggregate purchase price of $565 million. AES's portion of the
purchase price after consideration of non-recourse debt was $244 million. The
remaining 10% will be owned by the employees of each of the two acquired
companies.
In May 1997, AES completed its amalgamation with AES China Generating
Co. Ltd. ("AES Chigen") by issuing approximately 2.4 million shares of AES
Common Stock, par value $.01 per share, in exchange for all of the issued and
outstanding shares of Class A Common Stock of AES Chigen. The total purchase
price was valued at approximately $157 million.
Second Quarter 1997 and 1996 Results of Operations
Revenues increased 50% or approximately $87 million, to $261 million
from the second quarter of 1996 to the second quarter of 1997. The increase in
revenues was primarily due to the acquisition of AES Tiszai and AES Ekibastuz in
August 1996 and ESEBA in May 1997. Revenues were also higher due to higher
electricity billing rates at AES Beaver Valley, higher availability and
operating capacity at AES Barbers Point, and higher water levels allowing
greater electrical generation at the Rio Juramento facility. These increases
were partially offset by decreased revenues at AES Deepwater due to lower gas
prices and steam volume and lower water levels at the San Juan facility. Cost of
sales and services increased 66% or approximately $65 million, to $163 million
from the second quarter of 1996 to the second quarter of 1997. The increase in
costs of sales and services was also primarily due to the acquisition of AES
Tiszai and AES Ekibastuz in August 1996 and ESEBA in May 1997. Higher costs at
13
<PAGE>
AES Barbers Point were due to higher availability and operating capacity, which
was offset by lower costs at AES Shady Point due to lower operating capacity and
two scheduled outages. Gross margin, which represents total revenues reduced by
cost of sales and services (prior to consideration of the provision to reduce
contract receivable), increased 29%, or approximately $22 million, to $98
million during the same period. The increase in gross margin was primarily due
to the acquisition of controlling interests in AES Tiszai, AES Ekibastuz and
ESEBA. Gross margin as a percentage of total revenues decreased to 38% for the
second quarter of 1997 from 44% for the same period of 1996 primarily due to
lower gross margin percentages at AES Tiszai and AES Ekibastuz, offset in part
by improved gross margin percentages at AES Beaver Valley, AES Shady Point and
Rio Juramento.
Revenues increased 51%, or approximately $176 million to $522 million
from the first half of 1996 to the first half of 1997. Costs of sales and
services increased 68%, or approximately $134 million to $330 million from the
first six months of 1996 to the same period of 1997. Gross margin increased 28%,
or approximately $42 million to $192 million from the first six months of 1996
to the same period of 1997. These increases were almost entirely due to the
acquisition of controlling interests in AES Tiszai and AES Ekibastuz in August
1996 and ESEBA in May 1997. Gross margin as a percentage of total revenues
decreased to 37% for the first six months of 1997 from 43% for the same period
of 1996 primarily due to lower gross margin percentages at AES Tiszai and AES
Ekibastuz.
Selling, general and administrative expenses were approximately $6
million for both the second quarter of 1996 and 1997, and as a percentage of
total revenue, were 3% in 1996 and 2% in 1997. For the first six months of both
1996 and 1997, selling, general and administrative expenses were approximately
$15 million, and as a percentage of total revenue, were 4% in 1996 and 3% of
revenues in 1997. The Company's selling, general and administrative costs do not
necessarily vary with changes in revenues.
Operating income increased 27%, or approximately $19 million, to $89
million from the second quarter of 1996 to the second quarter of 1997, and
increased 24%, or approximately $32 million, to $167 million from the first six
months of 1996 to the same period of 1997. This increase was the result of the
factors discussed above.
Interest expense increased 50%, or approximately $16 million, to $48
million from the second quarter of 1996 to the second quarter of 1997, and
increased 48%, or approximately $30 million, to $92 million from the first six
months of 1996 to the same period of 1997. These increases resulted from the
additional interest expense associated with the $250 million 10 1/4% Senior
Subordinated Notes, the $250 million 5 3/8% TECONS, the project financing debt
associated with the Company's equity investments in Light and CEMIG, additional
project financing debt associated with the acquisition of AES Tiszai and ESEBA,
and bridge loans associated with the acquisition of ESEBA and CEMIG, offset
slightly by declining balances related to other project financing debt of
existing projects and the redemption of the $50 million, 6 1/2% Convertible
Debentures in August 1996.
Interest income increased 100%, or approximately $5 million, to $10
million from the second quarter of 1996 to the second quarter of 1997, and
increased 80%, or approximately $8 million, to $18 million from the first six
months of 1996 to the same period of 1997. These increases were primarily due to
the short-term investment of proceeds from the Company's offering of
approximately 2.55 million shares of common stock in March 1997 and from the 10
1/8% Notes due 2006, issued by AES Chigen in December 1996. Additional interest
income was recorded from debt service reserves established as part of the
project financing arrangement associated with the Company's equity investment in
Light.
14
<PAGE>
Equity in earnings of affiliates (after income taxes) increased 600% or
approximately $12 million, to $14 million from the second quarter of 1996 to the
same period of 1997, and increased 329% or approximately $23 million, to $30
million from the first six months of 1996 to the same period of 1997. These
increases were almost entirely due to the Company's equity in earnings from its
initial acquisition of 11.35% of Light in June 1996 and the additional 2.4% in
January 1997.
Income taxes increased 19% or approximately $3 million, to $19 million
from the second quarter of 1996 to the second quarter of 1997, and increased 13%
or approximately $4 million, to $35 million from the first six months of 1996 to
the same period of 1997. These increases resulted primarily from an increase in
the Company's estimated effective income tax rate from approximately 39% in 1996
to 40% in 1997 and higher income before taxes.
Cash Flows, Liquidity and Capital Resources
At June 30, 1997 cash and cash equivalents totaled approximately $323
million, as compared to $185 million at the beginning of the year. The $138
million increase in cash resulted from a use of $1,944 million for investing
activities which were funded by $1,987 million from financing activities and $95
million provided by operating activities. Significant investing activities
included project construction at AES Barry, AES Lal Pir, AES Pak Gen and AES
Warrior Run; an additional purchase of Light shares (2.4%); acquisition of 60%
interest in two distribution companies of ESEBA; acquisition of 14.41% interest
in CEMIG collectively with the The Southern Company and The Opportunity Fund, a
Brazilian investment fund; funding the acquisition of Destec's international
assets and certain international development projects; and the funding of
reserves related to AES Chigen. Futhermore, the net source of cash from
financing activities was primarily the result of issuing TECONS and common stock
with net proceeds of $387 million excluding stock option exercises, borrowing
$1,167 million in funded project financing debt, issuing $200 million of senior
subordinated notes, contributions from our minority partners, and $19 million of
net borrowings under the Revolver, offset by repayments of $50 million of other
project financing debt related to scheduled amortization. Unrestricted net cash
flow of the parent company totaled approximately $178 million for the four
quarters ended June 30, 1997.
The increase in Electric and steam generating facilities of $777
million, to $2,661 million from December 31, 1996 to June 30, 1997 was due
primarily to the acquisitions of 60% interest in two distribution companies of
ESEBA, controlling interest in Destec's international assets, and purchase price
allocations made for the amalgamation of AES Chigen. The increase in
Construction in progress of $202 million, to $776 million from December 31, 1996
to June 30, 1997 was primarily due to continued construction of the AES Warrior
Run, AES Lal Pir, AES Pak Gen facilities and several facilities at AES Chigen.
The increase in Investments in and advances to affiliates of $1,466 million, to
$1,957 million was primarily due to the acquisition of 14.41% interest in CEMIG,
the acquisition of non-controlling interest in Destec's international assets,
purchase price allocations made for the amalgamation of AES Chigen, and the
additional purchase of Light shares, or 2.4% interest.
The increase in both the current portion of project financing debt of
$479 million, to $589 million and long-term portion of project financing debt of
$1,158 million, to $2,716 million from December 31, 1996 to June 30, 1997 was
primarily due to the financing of the ESEBA, CEMIG (including the BNDES
facility), and Destec acquisitions (See financing footnote 3). The long-term
portion of Project financing debt was further increased by the borrowing of
approximately $180 million at AES Chigen.
15
<PAGE>
The increase in additional paid-in capital of $308 million, to $668
million from December 31, 1996 to June 30, 1997 was primarily due to the
issuance of 2.55 million shares of AES Common Stock at a price of
$58.625 per share as part of the combined public offering in March 1997 and the
issuance of approximately 2.4 million shares of AES Common Stock in completing
the amalgamation of AES Chigen in May 1997.
In July 1997, the Company issued approximately $325 million of Senior
Subordinated Notes due 2007 with an 8 3/8% interest rate per annum in a private
placement, and approximately $359 million of its common stock at a price of
$79.75 per share in a public offering.
In March 1997, the Company issued 2.55 million shares of common stock
at a price of $58.625 per share, and $250 million principal amount, 5 3/8%
TECONS with a conversion premium of 23.5%. The net proceeds to the Company of
the combined offerings were approximately $387 million. The proceeds were used
to fund the Company's purchase of the international assets of Destec.
Foreign Currency Exchange Rate Adjustments
Through its equity investments in foreign affiliates and subsidiaries,
AES operates in jurisdictions dealing in currencies other than the Company's
functional currency, the U.S. dollar. Such investments and advances were made to
fund equity requirements and to provide collateral for contingent obligations.
The Company accounts for any adjustments resulting from translation of the
financial statements of its foreign investments as a charge or credit directly
to a separate component of stockholders' equity until such time as the Company
realizes such charge or credit. At that time, any differences would be
recognized in the statement of operations as gains or losses.
In addition, certain of the Company's foreign subsidiaries have entered
into obligations in currencies other than their own functional currencies or the
U.S. dollar. These subsidiaries have attempted to limit potential foreign
exchange exposure by entering into revenue contracts that adjust to changes in
the foreign exchange rates. Certain foreign affiliates and subsidiaries operate
in countries where the local inflation rates are greater than U.S. inflation
rates. In such cases the foreign currency tends to devalue relative to the U.S.
dollar over time. The Company's subsidiaries and affiliates have entered into
revenue contracts which attempt to adjust for these differences; however, there
can be no assurance that such adjustments will compensate for the full effect of
currency devaluation, if any.
The Company had approximately $73 million in cumulative foreign
currency translation adjustment losses at June 30, 1997.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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. In addition, the Company has settled all claims with respect to
the remaining plaintiffs for approximately $12,000. This matter is now
concluded.
The Company is involved in certain other legal proceedings in the
normal course of business. It is the opinion of the Company that none of the
pending litigation is expected to have a material adverse effect on its results
of operations or financial position.
Item 2. Changes in Securities
In July 1997, the Company issued approximately $325 million of senior
subordinated notes due 2007 with an 8 3/8% interest rate per annum in a private
placement, and approximately $359 million of its common stock at a price of
$79.75 per share in a public offering.
In May 1997, AES completed its amalgamation with AES China Generating
Co. Ltd. ("AES Chigen") by issuing approximately 2.4 million shares of AES
Common Stock, par value $.01 per share, in exchange for all of the issued and
outstanding shares of Class A Common Stock of AES Chigen. The total purchase
price was approximately $157 million.
In July 1997, the Company announced a two for one stock split, in the
form of a dividend, for holders of record on July 28, 1997 of its Common Stock,
par value $.01 per share, payable on August 28, 1997.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April
15, 1997 at which the following matters were voted upon:
Election of Directors
Nominee For Against Abstain
------- --- ------- -------
Roger W. Sant 50,539,853 67,179
Dennis W. Bakke 50,539,888 67,144
Vicki Ann Assevero 50,539,376 67,656
Dr. Alice F. Emerson 50,538,547 68,485
Robert Hemphill 50,539,918 67,114
Frank Jungers 50,538,337 68,695
Dr. Henry R. Linden 50,540,018 67,014
John McArthur 49,746,645 860,387
Hazel O'Leary 49,744,766 862,266
Thomas I. Unterberg 50,539,618 67,414
Robert H. Waterman 50,539,272 67,760
17
<PAGE>
Election of Auditors
For Against Abstain
50,562,799 37,089 7,144
Amend the Restated Certificate of Incorporation
For Against Abstain
40,852,053 9,690,517 64,462
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Document
11 Consolidated Statements Regarding Computation
of Earnings Per Share
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Company
filed the following:
(i) Form 8-K, (Item 2, Acquisition or Disposition of
Assets, Item 5, Other Events, and Item 7, Financial
Statements and Exhibits) dated June 18, 1997 with
respect to certain acquisitions by the Company.
(ii) Form 8-K, (Item 2, Acquisition or Disposition of
Assets, and Item 7, Financial Statement and Exhibits)
dated June 18, 1997 with respect to the Company's
acquisition, with partners, of 14.41% of Companhia
Energetica de Minas Gerais.
(iii) Form 8-K, (Item 2, Acquisition or Disposition of
Assets) dated June 30, 1997 relating to the Company's
acquisition of the international business of Destec
Energy, Inc.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The AES Corporation (Registrant)
By/s/ BARRY J. SHARP
- -----------------------------
BARRY J. SHARP
Vice President and Chief Financial Officer
Dated: August 14, 1997
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 .... Consolidated Statements Regarding Computation of
Earnings Per Share
27 .....Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
THE AES CORPORATION Exhibit 11
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIODS ENDED JUNE 30, 1996 AND 1997
- --------------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
6/30/96 6/30/97 6/30/96 6/30/97
- --------------------------------------------------------------------------------
($ in millions, except per share amounts)
PRIMARY
Weighted Average Number of Shares
of Common Stock Outstanding 75.0 81.7 74.9 79.7
Net effect of Dilutive Stock Options
and Warrants Based on the Treasury
Stock Method Using Average Market Price 0.9 2.1 0.9 2.1
Stock Units Allocated to the Deferred
Compensation Plans for Executives
and Directors 0.3 0.3 0.3 0.3
--- --- --- ---
Weighted average shares outstanding 76.2 84.1 76.1 82.1
==== ==== ==== ====
Net Income $ 28 $ 42 $ 57 $ 82
===== ===== ===== =====
Per Share Amount $0.37 $0.50 $0.75 $1.00
===== ===== ===== =====
FULLY DILUTED
Weighted Average Number of Shares
of Common Stock Outstanding 75.0 81.7 74.9 79.7
Net effect of Dilutive Stock Options
and Warrants Based on the Treasury
Stock Method Using Ending Market Price 1.2 2.2 1.2 2.2
Stock Units Allocated to the Deferred
Compensation Plans for Executives and
Directors 0.3 0.3 0.3 0.3
Effect of Convertible Debt - Based on
the If-Converted Method 1.9 3.5 1.9 1.9
---- ---- ---- ----
Weighted average shares
outstanding 78.4 87.7 78.3 84.1
==== ==== ==== ====
Net Income $ 28 $ 42 $ 57 $ 82
Additional Contribution to Net Income if
Convertible Debt is fully converted 1 1 1 1
---- ---- ---- ----
Adjusted Net Income $ 29 $ 43 $ 58 $ 83
====== ===== ===== =====
Per Share Amount $ 0.37 $0.49 $0.74 $0.99
====== ===== ===== =====
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