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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 54-1163725
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209
(Address of Principal Executive Offices) (Zip Code)
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(703) 522-1315
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(Registrant's Telephone Number, Including Area Code)
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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 [ ]
The number of shares outstanding of Registrant's Common Stock, par value
$0.01 per share, at April 30, 1999, was 190,839,529.
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<PAGE>
THE AES CORPORATION
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements:
Consolidated Statements of Operations 1
Consolidated Balance Sheets 2
Consolidated Statements of Cash Flow 4
Notes to Consolidated Financial Statements 5
Item 2. Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
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- ------------------------------------------------ -------------- --------------
(UNAUDITED) THREE THREE
MONTHS MONTHS
ENDED ENDED
3/31/98 3/31/99
- ------------------------------------------------ -------------- --------------
(in millions, except per share amounts)
<S> <C> <C>
REVENUES:
Sales and services $ 575 $ 638
OPERATING COSTS AND EXPENSES:
Cost of sales and services 397 409
Selling, general and administrative expenses 15 16
Provision to reduce contract receivables 15 9
------ ------
TOTAL OPERATING COSTS AND EXPENSES 427 434
------ ------
OPERATING INCOME 148 204
OTHER INCOME AND (EXPENSE):
Interest expense (101) (133)
Interest income 14 16
Foreign currency exchange (loss)/gain (2) 3
Equity in earnings/(loss) before income tax 57 (91)
------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 116 (1)
Income (benefit) provision 33 (6)
Minority interest 18 18
------ ------
NET INCOME/(LOSS) $ 65 $ (13)
====== ======
BASIC EARNINGS/(LOSS) PER SHARE $ 0.37 $(0.07)
====== ======
DILUTED EARNINGS/(LOSS) PER SHARE: $ 0.37 $(0.07)
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
1
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
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- ----------------------------------------------------------------------------------------------
(UNAUDITED)
12/31/98 3/31/99
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $491 $437
Short-term investments 35 42
Accounts receivable, less provision to reduce contract
receivables (1998, $59 and 1999, $68) 365 431
Inventory 119 116
Receivable from affiliates 18 11
Deferred income taxes 71 71
Prepaid expenses and other current assets 155 176
------ ------
Total current assets 1,254 1,284
PROPERTY, PLANT AND EQUIPMENT:
Land 135 137
Electric generation and distribution assets 5,301 5,365
Accumulated depreciation and amortization (525) (578)
Construction in progress 634 764
------ ------
Property, plant and equipment, net 5,545 5,688
OTHER ASSETS:
Deferred financing costs, net 167 159
Project development costs 103 86
Investments in and advances to affiliates 1,933 1,470
Debt service reserves and other deposits 205 170
Electricity sales concessions and contracts 1,280 1,026
Goodwill 66 66
Other assets 228 216
------ ------
Total other assets 3,982 3,193
------ ------
TOTAL $10,781 $10,165
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
2
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THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND MARCH 31, 1999
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<CAPTION>
- -------------------------------------------------------------------------------------------
(Unaudited)
12/31/98 3/31/99
- -------------------------------------------------------------------------------------------
($ in millions)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 215 $ 249
Accrued interest 113 136
Accrued and other liabilities 235 211
Other notes payable - current portion 8 192
Project financing debt - current portion 1,405 1,322
-------- --------
Total current liabilities 1,976 2,110
LONG-TERM LIABILITIES:
Project financing debt 3,597 3,642
Other notes payable 1,644 1,644
Deferred income taxes 268 247
Other long-term liabilities 220 168
-------- --------
Total long-term liabilities 5,729 5,701
MINORITY INTEREST 732 758
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES 550 550
STOCKHOLDERS' EQUITY:
Common stock 2 2
Additional paid-in capital 1,243 1,250
Retained earnings 892 879
Accumulated other comprehensive loss (343) (1,085)
-------- --------
Total stockholders' equity 1,794 1,046
-------- --------
TOTAL $ 10,781 $ 10,165
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</TABLE>
See Notes to Consolidated Financial Statements.
3
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THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
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(Unaudited) THREE THREE
MONTHS MONTHS
ENDED ENDED
3/31/98 3/31/99
- ----------------------------------------------------------------------------------------------------------------
($ in millions)
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OPERATING ACTIVITIES:
Net income/(loss) $ 65 $(13)
Adjustments to net income/(loss):
Depreciation and amortization 45 60
Provision for deferred taxes 20 (21)
Undistributed earnings of affiliates (48) (75)
Other 15 24
Change in working capital (89) 33
-------- --------
Net cash provided by operating activities 8 8
INVESTING ACTIVITIES:
Property additions (156) (63)
Acquisitions, net of cash acquired (76) (115)
Proceeds from the sales of assets 254 --
Sale/(purchase) of short-term investments 28 (7)
Affiliate advances and equity investments (1) (1)
Project development costs (5) (19)
Debt service reserves and other assets 56 35
-------- --------
Net cash provided by/(used in) investing activities 100 (170)
FINANCING ACTIVITIES:
Borrowings under the revolver 221 184
Issuance of project financing debt and other coupon bearing securities 140 111
Repayments of project financing debt and other coupon bearing securities (441) (144)
Payments for deferred financing costs (5) 3
Other liabilities (15) (41)
Sales of common stock 7 7
Minority interest payments -- (12)
-------- --------
Net cash (used in)/provided by financing activities (93) 108
Increase in cash and cash equivalents 15 (54)
Cash and cash equivalents, beginning 302 491
-------- --------
Cash and cash equivalents, ending $ 317 $ 437
======== ========
SUPPLEMENTAL INTEREST AND INCOME TAXES DISCLOSURES:
Cash payments for interest, net of amounts capitalized $ 97 $ 98
======== ========
Cash payments for income taxes $ 13 $ 2
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of The AES
Corporation, its subsidiaries and controlled affiliates (the "Company" or
"AES"). 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.
In the Company's opinion, all adjustments necessary for a fair presentation
of the unaudited results of operations for the three months ended March 31, 1998
and 1999, respectively, are included. All such adjustments are accruals of a
normal and recurring nature. The results of operations for the period ended
March 31, 1999 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 company's consolidated financial statements for the
year ended December 31, 1998.
2. Foreign Currency Translation
During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S. Dollar, declining from 1.21 Reais to the Dollar at December
31, 1998 to an average of 1.76 Reais to the Dollar for the quarter ended March
31, 1999 and 1.72 Reais to the Dollar at March 31, 1999. This devaluation
resulted in significant foreign currency translation and transaction losses for
the Company for the quarter ended March 31, 1999 with a non-cash charge during
the first quarter of approximately $129 million before income taxes or
approximately $87 million after considering income taxes at the 1999 first
quarter effective tax rate of 32%. Such transaction loss resulted in a reported
net loss for the first quarter of $13 million and a diluted net loss per share
of $0.07. Excluding the effects of foreign currency transaction losses, the
Company would have incurred net income of $74 million and earnings per share of
$0.39 for the quarter ended March 31, 1999.
3. Earnings/(Loss) Per Share
Basic and diluted earnings/(loss) per share computations are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits. Potential
common stock, for purposes of determining diluted earnings per share, includes
the dilutive effects of stock options, warrants, deferred compensation
arrangements and convertible securities. The effect of such potential common
stock is computed using the treasury stock method or the if-converted method
(see exhibit 11).
5
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4. Investments in and Advances to Affiliates
The Company is a party to joint venture/consortium agreements through which
the Company has equity investments in several operating companies. The joint
venture/consortium parties generally share operational control of the investee.
The agreements prescribe ownership and voting percentages as well as other
matters. The Company records its share of earnings from its equity investees on
a pre-tax basis. The Company's share of the investee's income taxes is recorded
in income tax expense.
The following table presents summarized financial information (in millions)
for equity method affiliates on a combined 100% basis. Amounts presented include
condensed income statement information of Northern/AES Energy (45% owned U.S.
affiliate), NIGEN Ltd. (47% owned UK Affiliate), Medway Power Ltd. (25% owned UK
affiliate), Light (13.75% owned Brazilian affiliate), CEMIG (9.45%% owned
Brazilian affiliate), affiliates of AES China Generating Co Ltd., and Kingston
(50% owned Canadian affiliate) for the three months ended March 31, 1998. In
addition to the affiliates owned as of March 31, 1998, the Company purchased
OPGC (49% owned Indian affiliate) in late December 1998 which is included in the
table below for the three months ended March 31, 1999.
3/31/98 3/31/99
------- -------
Revenues $1,200 970
Operating Income 358 366
Net Income 274 (521)
5. Litigation
The Company is involved in certain 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.
6. Acquisitions
In late December 1998, a subsidiary of the Company acquired a 49% share of
the Orissa Power Generation Corporation (OPGC), a state government-owned company
in India, for approximately $144 million. OPGC owns and operates a 420 MW
minemouth coal-fired power station.
Also, in December 1998, a subsidiary of the Company acquired a 75% interest
in Telasi, the electricity distribution company of Tbilisi, Republic of Georgia,
for approximately $26 million.
In January 1999, a subsidiary of the Company acquired 49% of Empresa de
Generacion Chiriqui S.A. (EGE Chiriqui) and 49% of Empresa de Generacion Bayano
(EGE Bayano), two hydroelectric generation companies in Panama, for
approximately $91 million. The acquisitions of EGE Chiriqui and EGE Bayano,
which are included in the accompanying financial statements for the three months
ended March 31, 1999, have been consolidated because the Company has effective
control of these entities.
All of the acquisitions were accounted for as purchases. The purchase price
allocations have been prepared on a preliminary basis subject to adjustments
resulting from additional facts that may come to light when the engineering,
environmental, and legal analysis are completed during the respective allocation
period.
6
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Subsequent to the first quarter of 1998, a subsidiary of the Company
entered into an agreement to refurbish Caracoles and build the Punta Negra
facility (April 1998). In addition, the Company's affiliate, Light, purchased
Metropolitana (April 1998), and another subsidiary of the Company acquired
Southland (May 1998). Also during the year, another subsidiary purchased Edelap
(June 1998) and subsequently sold one-third of its interest (November 1998).
The accompanying statements of operations include the operating results and
equity earnings for all of the acquired companies from the dates of the
acquisitions and investments. The following table presents supplemental
unaudited pro forma operating information as if each of the acquisitions and
investments had occurred at the beginning of the periods presented (in millions,
except per share amounts):
Quarter Ended Quarter Ended
3/31/98 3/31/99
------- -------
Revenues $650 $ 638
Net Income/(Loss) 68 (13)
Basic Earnings/(Loss) Per Share 0.39 (0.07)
Diluted Earnings/(Loss) Per Share 0.38 (0.07)
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, 1998, nor are they intended to be a
projection of future results.
7. Comprehensive Income/(Loss)
The components of other comprehensive income/(loss) include $40 million and
$742 million of foreign currency translation adjustment losses for the quarters
ended March 31, 1998 and 1999, respectively. Comprehensive income is $25 million
for the quarters ended March 31, 1998 and comprehensive loss is $755 million for
the quarter ended March 31, 1999.
8. Segments
Information about the Company's operations by segment are as follows (in
millions):
Equity
Operating Earnings
Quarter Ended March 31, 1998 Revenue (1) Income /(Loss)
- ---------------------------- ------- ------ ------
Generation $325 $112 $ 14
Distribution 246 52 43
Corporate and services 4 (16) --
---- ---- ----
Total $575 $148 $ 57
==== ==== ====
Quarter Ended March 31, 1999
- ----------------------------
Generation $385 $177 $(106)
Distribution 247 44 15
Corporate and services 6 (17) --
---- ---- ----
Total $638 $204 $(91)
==== ==== ====
(1) Intersegment revenues for the quarter ended March 31, 1998 and 1999 were
$14 and $24, respectively.
There have been no changes in the basis of segmetation since December 31,
1998.
9. Subsequent Events
In May 1999, the Company acquired the assets of Ecogen Energy, which
consists of two gas-fired power stations in Victoria, Australia for
approximately $100 million. The power stations, Newport and Jeeralang, have a
total installed capacity of 966 MW. Also in May 1999, a subsidiary of the
Company acquired six coal-fired electric generating stations from NGE
Generation, Inc., for approximately $950 million. The coal-fired power stations
have a total capacity of 1,424 MW. Concurrently, the subsidiary sold two of the
plants to an unrelated third party for approximately $670 million and
simultaneously entered into a leasing agreement with the unrelated party. This
part of the transaction will be accounted for as a sale-leaseback. Also in May
1999 a subsidiary of the Company agreed to increase its holding in two Brazilian
utilities, Light Servicos Eletridade S.A. and Eletropaulo S.A. by acquiring new
shares of capital stock of each company for approximately $129 milion in
aggregate.
7
<PAGE>
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The AES Corporation (AES or the Company) is a global power Company
committed to serving the world's needs for electricity in a socially responsible
way.
The majority of the Company's revenues represent sales of electricity to
customers (generally electric utilities or regional electric companies) for
further resale to end users. This is referred to as the electricity "generation"
business. Sales by these generation companies are usually made under long-term
contracts from power plants owned by the Company's subsidiaries and affiliates,
although in certain instances, the Company sells directly into regional
wholesale electricity markets without a contract. The Company owns new plants
constructed for such purposes ("greenfield" plants) as well as existing power
plants acquired through competitively bid privatization initiatives or
negotiated acquisitions.
Because of the significant complexities associated with building new
electric generating plants, construction periods often range from two to five
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 the year 2002. The completion of each
plant in a timely
8
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manner is generally supported by a guarantee from the plant's construction
contractor, although in certain cases, AES has assumed the risk of satisfactory
construction completion. However, it remains possible, due to changes in the
economic, political, technological, regulatory or logistical circumstances
involving each individual plant, those commercial operations may be delayed in
certain cases.
AES also sells electricity directly to end users such as commercial,
industrial, governmental and residential customers. This is referred to as the
electricity "distribution" business. Electricity sales by AES's distribution
businesses are generally made pursuant to the provisions of long-term
electricity sale concessions granted by the appropriate governmental authority
as part of the original privatization of each distribution company. In certain
cases, these distribution companies are "integrated", in that they also own
electric power plants for the purpose of generating a portion of the electricity
they sell. Each distribution company also purchases, in varying proportions,
electricity from third party wholesale Suppliers, including in certain cases,
other subsidiaries of the Company.
AES continues to believe that there is significant demand for more
efficiently operated electricity generation and distribution businesses. As a
result, and guided by its commitment to serve the world's needs for electricity,
AES is pursuing additional greenfield development projects and acquisitions in
many countries. Several of these, if consummated, would require the Company to
obtain substantial additional financing, including both debt and equity
financing.
AES is also currently in the process of completing several acquisitions,
including its agreement to purchase the outstanding shares of Cilcorp, Inc. an
integrated distribution company in Illinois, and 50% of the outstanding shares
of Empresa Distribudora Electrica Este, a distribution company serving eastern
Dominican Republic.
Certain subsidiaries and affiliates of the Company (domestic and non-U.S.)
have signed long-term contracts or made similar arrangements for the sale of
electricity and are in various stages of developing the related greenfield power
plants. 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 certain milestones. As of March
31, 1999, capitalized costs for projects under development and in early stage
construction were approximately $163 million. The Company believes that these
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.
9
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The Company wishes to caution readers that there are important factors and
areas affecting the Company which involve risk and uncertainty. These factors
are set forth in the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 1998 under the heading "Cautionary
Statement and Risk Factors", and should be considered when reviewing the
Company's business. Such factors are relied upon by AES in issuing any
forward-looking statements and could affect AES's actual reults and cause such
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, AES. Some or all of these factors may apply
to the Company's businesses as currently maintained or to be maintained.
10
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FIRST QUARTER 1999 AND 1998 RESULTS OF OPERATIONS
Revenues increased 11% or approximately $63 million, to $638 million from
the first quarter of 1998 to the first quarter of 1999. The increase in revenue
was primarily due to the acquisition of new businesses including, EGE Chiriqui,
EGE Bayano, and Telasi, the start of commercial operation at Mt. Stuart, and a
full quarter of operations at Southland, Edelap, Clesa, Barry, Jiazou, Hefei and
PakGen, offset by lower sales at Ekibastuz, Altai and Lal Pir, contract rate
reductions at Beaver Valley, reduced revenues at Sul due primarily to the
effects of the devaluation of the Brazilian Real and reduced revenues at Los
Mina due to dispatching by the utility.
Cost of sales and services increased 3%, or approximately $12 million to
$409 million from the first quarter of 1998 to the first quarter of 1999. The
increase in cost of sales and services was primarily due to the acquisition of
new businesses and the start of commercial operations, offset by lower
production at Ekibastuz, Altai, Lal Pir and Los Mina, as discussed above, as
well as the effects of the devaluation of the Brazilian Real on Sul.
Gross Margin, which represents total revenues reduced by cost of sales and
services (before consideration of the provision to reduce contract receivables),
increased 29%, or approximately $51 million, from the first quarter of 1998 to
the first quarter of 1999. The increase in gross margin was primarily due to the
factors discussed above. Gross margin as a percentage of revenues (net of the
provision to reduce contract receivables) improved to 34% up from 28% in the
first quarter of 1998, primarily due to higher relative gross margin percentages
of recently acquired businesses including Southland, EGE Chiriqui, and EGE
Bayano, and commerical operations of recently completed greenfield projects
including Barry and PakGen.
Selling, general and administrative expenses increased 7%, or approximately
$1 million to $16 million from the first quarter of 1998 to the first quarter of
1999, and as a percentage of total revenue, were less than 3% for both quarters.
The slight increase was primarily due to increased administrative costs. The
Company's selling, general and administrative costs do not necessarily vary with
changes in revenues.
Operating income increased 38%, or approximately $56 million, to $204
million from the first quarter of 1998 to the first quarter of 1999. The
increase was the result of the factors discussed above.
Interest expense increased 32%, or approximately $32 million, to $133
million from the first quarter of 1998 to the first quarter of 1999. The
increase was primarily due to interest on project financing debt associated with
new businesses including Southland, Edelap and OPGC and the start of commercial
operations at Barry, additional project financing debt at Cemig, as well as
additional corporate interest costs associated with the senior subordinated debt
and convertible subordinated debt issued during the third and fourth quarters of
1998.
11
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Interest income increased 14%, or approximately $2 million, to $16 million
from the first quarter of 1998 to the first quarter of 1999. The increase was
due primarily to higher cash balances in debt service reserve accounts at Lal
Pir and PakGen.
Equity in earnings of affiliates (before income taxes) decreased 260%, or
approximately $148 million, to a loss of $91 million from the first quarter of
1998 to the same period of 1999. The decrease was due primarily to transaction
losses at Light (including Metropolitana) and Cemig resulting from the
devaluation of the Brazilian Real. Excluding the foreign currency losses, equity
earnings of affiliates decreased 28% or approximately $16 million, to $41
million from the first quarter of 1998 to the same period of 1999. The decrease
was due primarily to reductions in contributions from Light(including
Metropolitana) and Cemig, and small losses from Northern/AES, as well as a
decrease from NIGEN, offset in part by new or additional contributions from
Elsta, OPGC and Medway.
Income taxes decreased 118%, or approximately $39 million, to a benefit of
$6 million from the first quarter of 1998 to the first quater of 1999. The
decrease was primarily due to lower pretax income resulting from foreign
currency transaction losses resulting from the devaluation of the Brazilian
Real. Excluding the effects of the foreign currency transaction losses, income
taxes increased 9%, or approximately $3 million, to $36 million from the first
quarter of 1998 to the first quarter of 1999. The increase for the quarter was
due primarily to higher pretax income, offset by a reduction in the tax rate
from 33.5% in 1998 to 32% in 1999.
FINANCIAL POSITION, CASH FLOWS AND FOREIGN CURRENCY EXCHANGE RATES
At March 31, 1999, cash and cash equivalents totaled approximately $437
million, as compared to $491 million at December 31, 1998. The $54 million
decrease in cash, along with $108 million from financing activities and $8
million from operating activities were used to fund $170 million of investing
activities. Significant investing activities included the acquisitions of the
two generation companies in Panama as well as continued construction activities
at various projects. The net source of cash from financing activities was
primarily the result of project finance borrowings of approximately $111 million
and borrowings under the revolver of approximately $184 million which were
offset, in part, by repayment of approximately $144 million project financing
debt. Unrestricted net cash flow of the parent company for the four quarters
ended March 31, 1999 totaled approximately $360 million.
Through its equity investments in foreign affiliates and subsidiaries, AES
operates in jurisdictions with 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. Due
primarily to the long-term nature of the investments and advances, 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
12
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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 $1,085 million in
cumulative foreign currency translation adjustment losses at March 31, 1999.
13
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YEAR 2000. There are three main elements in the provision of electricity:
generation, transmission and distribution, all of which form a tightly
integrated "supplier chain." In addition, the Company's businesses are also
dependent on various industries supplying water, fuel and other utility
services. AES, through its subsidiaries and affiliates, is involved in each
aspect of the supplier chain in various countries throughout the world. Set
forth below is information regarding AES's efforts to be prepared for problems
associated with the potential inability of many existing computer programs
and/or embedded computer chips to recognize the year 2000, both those in AES's
businesses as well as those that AES's businesses depend upon.
Certain of these statements may constitute forward-looking information as
contemplated by the Private Securities Litigation Reform Act of 1995, including
those regarding AES's expected readiness to handle Year 2000 problems, expected
capital expenditures in the areas of remediation and testing, the future costs
associated with business disruption caused by supplier or customer Year 2000
problems and the success of any contingency plans. AES cautions that its
predictions of the extent of potential problems and the effectiveness of
measures designed to address them are based on numerous assumptions, like those
regarding the accuracy of statements or certifications from critical third
parties and vendors, the ability to identify and remediate or replace embedded
computer chips in affected equipment, and resource availability, among other
things, and readers should be aware that actual results might differ materially
from those discussed below.
AES's approach to analyzing Year 2000 issues is to (1) inventory all
systems and equipment likely to be affected, (2) perform an inventory
assessment, (3) conduct remediations, (4) test all equipment and systems, and
(5) develop contingency plans to aid in business continuity.
AES's State of Readiness. In 1998, AES established a readiness program, led
by a senior executive and consisting of a team of AES people with extensive
knowledge of AES's businesses and processes, as well as outside consultants
experienced in these areas who are being used as advisors to assist with third
party analysis and contingency planning.
AES estimates that it has identified the potential issues at substantially
all of its generating facilities. These issues consist of potential problems in
non_information technology (IT) areas like AES's distributed control systems,
programmable logic control systems, gas and electricity metering systems,
environmental emissions monitoring equipment, backup power systems and telephone
and security systems, as well as more traditional IT areas like computer
hardware and software programs for accounting, payroll and billing services,
among others.
14
<PAGE>
The Company's generation plants are also significantly dependent on
transmission and distribution systems to carry the electricity to the ultimate
end users.
The Company also believes that it has identified the potential issues at
substantially all of its distribution companies. These issues consist of
potential problems in the digital relays and meters, its radio systems, energy
management systems, system control and data management, and billing systems,
among others.
Due to the interdependent nature of the supply chain, the Company has
extended its evaluation of Year 2000 issues to include key suppliers,
transmission companies, customers and vendors, and has sought written assurance
from these parties as to their Year 2000 readiness. The Company expects to
complete steps one through four referred to above by the end of the second
quarter of 1999.
The Company's businesses are currently working through planned programs in
order to achieve Year 2000 readiness. These programs include, where possible,
actual simulations of the Year 2000, focusing on the key dates that have been
identified as potential problems. A number of simulations have already been
conducted with no adverse impacts on those AES businesses.
Costs of Addressing Year 2000 Issues. Based on internal analysis, AES
expects to spend a total of $15 million to $18 million to achieve full Year 2000
readiness company_wide. These amounts reflect AES's portion of expected costs to
make its businesses Year 2000 ready, but not necessarily the costs associated
with post_Year 2000 corrective actions or damage, if any. The Company expects to
fund these expenditures through internal sources.
Risks of Year 2000 Failures. Failures by each of the Company's generation
and distribution companies to address Year 2000 issues may lead to numerical
errors that, if not addressed or mitigated, may cause system malfunctions
resulting in the inability to deliver electricity or the inability to collect
data necessary for proper billing and tariff calculations, among other things.
The Company's generating businesses may also be unable to deliver
electricity because of the failure of the interconnected distribution companies
to receive or transmit the electricity. Conversely, the Company's distribution
companies may not receive sufficient electricity to deliver to their customers
because of failures by supplying generators. In such instances of business
interruption due to supplier or customer default, the Company will pursue all
contractual remedies available to it to minimize the impact on its results of
operations; however, there can be no assurance that, in all instances, the
Company will be able to legally protect itself from damages arising from third
party Year 2000 failures. Because of the significant interdependency of the
supplier chain, the Company cannot guarantee that services will be uninterrupted
nor can it adequately predict a reasonably likely worst case scenario until
substantially all of the testing phase is completed.
Contingency Plans. The Company (together with appropriate interested
parties like transmission companies, independent system operators and government
agencies) is still in the process of identifying and testing appropriate
contingency plans addressing emergency operations, disaster recovery, data
preservation and business continuation plans, and intends to have them in place
by the fourth quarter of 1999. The plans will be continuously refined as new
information becomes available.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The company believes that there have been no material changes in exposure
to market risks during the first quarter of 1999 from those set forth in the
Company's Annual Report filed with the Commission on Form 10-K for the year
ended December 31, 1998.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain 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 AND USE OF PROCEEDS.
In April 1999, the Company sold 10 million shares of its common stock for
net proceeds of approximately $502 million. The Company intends to use the
proceeds to meet short-term liquidity needs relating to recent acquisitions,
make equity investments or provide other credit support to assist in certain
project refinancings, finance ongoing investments in projects, repay certain
indebtedness or for general corporate purposes, or any combination therof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
In April, AES Thames, Inc., a subsidiary of the Company, agreed to a
partial pre-payment of electricity by its customer, Connecticut Light and Power
Company. The pre-payment of approximately $549 million is expected to be paid in
January 2000. Completion of this transaction is subject to a number of
conditions, including the approval of the Connecticut Department of Public
Utilities Commission.
In April, a subsidiary of the Company won a bid to acquire 50% of Empresa
Distribudora Electrica Esta, a distribution company serving the eastern region
of the Dominican Republic, for approximately $109 million.
In May, a subsidiary of the Company completed the $202 million financing
for the refurbishment, upgrade and environmental improvement of Fifoots Point, a
393 MW coal plant in South Wales, England. In addition, another subsidiary of
the Company acquired two gas-fired power plants aggregating 966 MW in Victoria,
Australia, for approximately $100 million.
Also in May, a subsidiary of AES agree to increase its holdings in two
Brazilian utilities, Light Servicos Eletridade S.A. and Eletropaulo S.A. by
acquiring new shares of capital stock of each company for approximately $129
million in aggregate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Fifth Amended and Restated Certificate of Incorporation of The
AES Corporation is incorporated here in by reference to Exhibit
3.1 to the Quarterly Report on Form 10-Q of the Registrant for
the quarterly period ended June 30, 1998 filed August 14, 1998.
3.2 By-Laws of The AES Corporation, as amended is incorporated here
in by reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q of the Registrant for the quarterly period ended June 30,
1998 filed August 14, 1998.
4.1 Amended and Restated Declaration of Trust of AES Trust I, among
The AES Corporation, The First National Bank of Chicago and
First Chicago Delaware, Inc., to provide for the issuance of the
$2.6875 Term Convertible Securities, Series A is incorporated
herein by reference to Exhibit 4.1 to Annual Report on Form 10-K
of the Registrant for the year ended December 31, 1997 filed
March 30, 1998.
4.2 Junior Subordinated Indenture, between The AES Corporation and
The First National Bank of Chicago, to provide for the issuance
of the $2.6875 Term Convertible
17
<PAGE>
Securities, Series A is incorporated herein by reference to
Exhibit 4.1 to Annual Report on Form 10-K of the Registrant for
the year ended December 31, 1997 filed March 30, 1998.
4.3 First Supplemental Indenture to Junior Subordinated Indenture,
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance of the $2.6875
Term Convertible Securities, Series A is incorporated herein by
reference to Exhibit 4.1 to Annual Report on Form 10-K of the
Registrant for the year ended December 31, 1997 filed March 30,
1998.
4.4 Guarantee Agreement, between The AES Corporation and The First
National Bank of Chicago, as initial guarantee trustee, to
provide for the issuance of the $2.6875 Term Convertible
Securities, Series A is incorporated herein by reference to
Exhibit 4.1 to Annual Report on Form 10-K of the Registrant for
the year ended December 31, 1997 filed March 30, 1998.
4.5 Second Supplemental Indenture dated as of October 13, 1997
between the Company and the First National Bank of Chicago, as
trustee, to provide for the issuance from time to time of the
10.25% Senior Subordinated Notes Due 2006, is incorporated
herein by reference to Exhibit 4.2.1 of the Registration
Statement on Form S-3/A (Registration No. 333-39857) filed
November 19, 1997.
4.6 Indenture dated as of October 29, 1997 between The AES
Corporation and The First National Bank of Chicago, as trustee,
to provide for the issuance from time to time of the 8.50%
Senior Subordinated Notes due 2007 of the Company and the 8.875%
Senior Subordinated Debentures due 2027, is incorporated herein
by reference to Exhibit 4.1 to the Registration Statement on
Form S-4 (Registration No. 333-44845) filed January 23, 1998.
4.7 First Supplemental Indenture dated as of November 21, 1997
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance from time to
time of the 8.50% Senior Subordinated Notes due 2007 of the
Company and the 8.875% Senior Subordinated Debentures due 2027,
is incorporated herein by reference to Exhibit 4.1.2 to the
Registration Statement on Form S-4 (Registration No. 333-44845)
filed January 23, 1998.
4.8 Junior Subordinated Debt Trust Securities Indenture dated as of
March 1, 1997 between the Company and The First National Bank of
Chicago, to provide for the issuance of the $2.75 Term
Convertible Securities, Series B, is incorporated herein by
reference to Exhibit 4.1 to the Registration Statement on Form
S-3 (Registration No. 333-46189) filed February 12, 1998.
4.9 Second Supplemental Indenture dated as of October 29, 1997
between the Company and The First National Bank of Chicago, to
provide for the issuance of the $2.75 Term Convertible
Securities, Series B, is incorporated herein by reference to
Exhibit 4.1.1 to the Registration Statement on Form S-3
(Registration No. 333-46189) filed February 12, 1998.
4.10 Amended and Restated Declaration of Trust of AES Trust II, to
provide for the issuance of the $2.75 Term Convertible
Securities, Series B, is incorporated herein by reference to
Exhibit 4.3 to the Registration Statement on Form S-3
(Registration No. 333-46189) filed February 12, 1998.
4.11 Restated Certificate of Trust of AES Trust II, to provide for
the issuance of the $2.75 Term Convertible Securities, Series B,
is incorporated herein by reference to Exhibit 4.4 to the
Registration Statement on Form S-3 (Registration No. 333-46189)
filed February 12, 1998.
18
<PAGE>
4.12 Form of Preferred Security, to provide for the issuance of the
$2.75 Term Convertible Securities, Series B, is incorporated
herein by reference to Exhibit 4.5 to the Registration Statement
on Form S-3 (Registration No. 333-46189) filed February 12,
1998.
4.13 Form of Junior Subordinated Debt Trust Security, to provide for
the issuance of the $2.75 Term Convertible Securities, Series B,
is incorporated herein by reference to Exhibit 4.6 to the
Registration Statement on Form S-3 (Registration No. 333-46189)
filed February 12, 1998.
4.14 Preferred Securities Guarantee with respect to Preferred
Securities, to provide for the issuance of the $2.75 Term
Convertible Securities, Series B, is incorporated herein by
reference to Exhibit 4.7 to the Registration Statement on Form
S-3 (Registration No. 333-46189) filed February 12, 1998.
4.15 Junior Subordinated Indenture dated as of August 10, 1998,
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance of the 4.5%
Convertible Junior Subordinated Debentures due 2005 is
incorporated here in by reference to Exhibit 4.15 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarterly period ended June 30, 1998 filed August 14, 1998.
4.16 First Supplemental Indenture dated as of August 10, 1998, to the
Junior Subordinated Indenture dated as of August 10, 1998,
between The AES Corporation and The First National Bank of
Chicago, as trustee, to provide for the issuance of the 4.5%
Convertible Junior Subordinated Debentures due 2005 is
incorporated here in by reference to Exhibit 4.16 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarterly period ended June 30, 1998 filed August 14, 1998.
4.17 Senior Indenture dated December 8, 1998 between the Registrant
and the First National Bank of Chicago to provide for the
issuance of $200 million of 8% Senior Note due 2008 is
incorporated herein by reference to Exhibit 4.01 to the Current
Report on Form 8-K of the Registrant filed December 11, 1998.
4.18 First Supplemental Indenture dated December 8, 1998 to the
Senior Indenture between the Registrant and the First National
Bank of Chicago to provide for the issuance of $200 million of
8% Senior Note due 2008 is incorporated herein by reference to
Exhibit 4.02 to the Current Report on Form 8-K of the Registrant
filed December 11, 1998.
4.19 Other instruments defining the rights of holders of long-term
indebtedness of the Registrant and its consolidated subsidiaries
is incorporated here in by reference to Exhibit 4.17 to the
Quarterly Report on Form 10-Q of the Registrant for the
quarterly period ended June 30, 1998 filed August 14, 1998.
10.1 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).
10.2 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).
10.3 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).
19
<PAGE>
10.4 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).
10.5 The AES Corporation Profit Sharing and Stock Ownership Plan is
incorporated herein by reference to Exhibit 4(c)(1) to the
Registration Statement on Form S-8 (Registration No. 33-49262).
10.6 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.
10.7 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).
10.8 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).
10.9 Deferred Compensation Plan for Directors is incorporated herein
by reference to Exhibit 10.9 to the Quarterly Report on Form
10-Q of the Registrant for the quarter ended March 31, 1998,
filed May 15, 1998.
10.10 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.
10.11 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.
11 Statement of computation of earnings per share.
12 Statement of computation of ratio of earnings to fixed charges.
27 Financial Data Schedule (Article 5).
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated March 18, 1999
containing the Registrant's Discussion and Analysis of Financial Condition and
Results of Operation for the year ended December 31, 1998.
20
<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 thereunto duly authorized.
THE AES CORPORATION
(Registrant)
Date: May 17, 1999 By: /s/ Barry J. Sharp
-----------------------------
Name: Barry J. Sharp
Title: Senior Vice President and
Chief Financial Officer
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Description of Exhibit Numbered Page
- ------- ---------------------- -------------
<S> <C>
11 Statement of Computation of Earnings Per Share.
27 Financial Data Schedule.
</TABLE>
22
THE AES CORPORATION EXHIBIT 11
STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIODS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
THREE THREE
MONTHS MONTHS
ENDED ENDED
3/31/98 3/31/99
- --------------------------------------------------------------------------------------------
($ in millions, except per share amounts)
<S> <C> <C>
BASIC
WEIGHTED AVERAGE SHARES
OUTSTANDING 175.1 180.6
------- -------
NET INCOME/(LOSS) $ 65 $ (13)
======= =======
PER SHARE AMOUNT $ 0.37 $ (0.07)
======= =======
DILUTED
Weighted Average Number of Shares
of Common Stock Outstanding 175.1 180.6
Net effect of Dilutive Stock Options and
Warrants Based on the Treasury Stock
Method Using Ending Market Price 4.1 --
Stock Units Allocated to the Deferred
Compensation Plans for
Executives and Directors 0.2 --
Effect of Tecons - Based on
the If-Converted Method 6.9 --
------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING 186.3 180.6
======= =======
NET INCOME/(LOSS) $ 65 $ (13)
Additional Contribution to Net Income if
Tecons is fully converted 3 --
------- -------
ADJUSTED NET INCOME/(LOSS) $ 68 $ (13)
======= =======
PER SHARE AMOUNT $ 0.37 $ (0.07)
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 437
<SECURITIES> 42
<RECEIVABLES> 499
<ALLOWANCES> (68)
<INVENTORY> 116
<CURRENT-ASSETS> 1,284
<PP&E> 6266
<DEPRECIATION> (578)
<TOTAL-ASSETS> 10,165
<CURRENT-LIABILITIES> 2,110
<BONDS> 6,800
550
0
<COMMON> 2
<OTHER-SE> 1,044
<TOTAL-LIABILITY-AND-EQUITY> 10,165
<SALES> 632
<TOTAL-REVENUES> 638
<CGS> 409
<TOTAL-COSTS> 434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> (19)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (13)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
