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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 18, 1999
THE AES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 0-19281 54-1163725
(State of incorporation (Commission File Number) (IRS Employer
or organization) Identification No.)
1001 NORTH 19TH STREET
ARLINGTON, VA 22209
(Address, including zip code of Registrant's principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (703) 522-1315
NOT APPLICABLE
(Former Name or Former Address, if changed since last report)
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ITEM 5. OTHER EVENTS
This Current Report on Form 8-K includes the Discussion and Analysis of
Financial Condition and Results of Operations filed under Item 5 and the 1998
consolidated financial statements of The AES Corporation filed under Item 7.
<PAGE>
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. Electricity sales accounted for 97% of total revenues during 1998 and 94%
during 1997. Other sales arise from the sale of steam and other commodities
related to the Company's cogeneration operations. Service revenues represent
fees earned in connection with wholesale power services, and operating and
construction services provided by AES to its affiliates.
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. AES's generation business represented 58% of total revenues for 1998
compared to 74% for 1997. 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.
In its generation business, AES now operates and owns (entirely or in part)
a diverse portfolio of electric power plants (including those within the
integrated distribution companies discussed below) with a total capacity of
24,076 megawatts (MW). Of that total, 29% are fueled by coal or petroleum coke,
24% are fueled by natural gas, 33% are hydroelectric facilities, 6% are fueled
by oil, and the remaining 8% are capable of using multiple fossil fuels. Of the
total MW, 5,025 (nine plants) are located in the United States, 817 (eight
plants) are in China, 1,281 (three plants) are in Hungary, 6,456 (forty-one
plants) are in Brazil, 1,818 (five plants) are in the UK, 885 (six plants) are
in Argentina, 5,384 (seven plants) are in Kazakhstan (including 4,000 MW
attributable to Ekibastuz which currently has a reliable capacity of
approximately 25%), 210 (one plant) are in the Dominican Republic, 110 (one
plant) are in Canada, 695 (two plants) are in Pakistan, 405 (one plant) are in
the Netherlands, 288 (one plant) are in Australia, 420 (one plant) are in India
(operational control in 1999) and 282 (three plants) are in Panama (acquired in
1999).
AES is also currently in the process of adding approximately 5,254 MW to
its operating portfolio by constructing several new plants. These include a 180
MW coal-fired plant and a 700 MW natural gas-fired plant in the United States, a
600 MW natural gas-fired plant in Brazil, a 2,100 MW coal-fired plant in China,
an 830 MW natural gas-fired plant in Argentina, a 360 MW coal-fired plant in
England and a 484 MW natural gas-fired plant in Mexico.
As a result, AES's total MW of the 96 power plants in operation or under
construction is approximately 29,330 MW and net equity ownership (total MW
adjusted for the Company's ownership percentage) represents approximately 19,819
MW.
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 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, that 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. AES's distribution business represented 39%
of total revenues for 1998 compared to 20% for 1997. 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
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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 has majority ownership in three distribution companies in Argentina,
one in Brazil and one in El Salvador, a heat and electricity distribution
business in Kazakhstan, one in the Republic of Georgia (operational control in
1999), and less than majority ownership in three additional distribution
companies in Brazil. These ten companies serve a total of approximately 13.2
million customers with sales exceeding 63,000 gigawatt hours. On a net equity
basis, AES's ownership represents approximately 3 million customers and sales
exceeding 22,000 gigawatt hours.
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 acquire six coal-fired generating plants totaling
approximately 1,400 MW from NGE Generation, Inc., an affiliate of New York State
Electric and Gas Corporation, and its agreement to acquire the outstanding
shares of Cilcorp, Inc. an integrated distribution company in Illinois.
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
December 31, 1998, capitalized costs for projects under development and in early
stage construction were approximately $144 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.
AES has been successful in growing its business and serving additional
customers by participating in competitive bidding under privatization
initiatives and other asset sales and has been particularly interested in
acquiring existing businesses or assets in electricity markets that are
promoting competition and eliminating rate of return regulation. In such
privatizations, sellers generally seek to complete competitive solicitations in
less than one year, much quicker than the time periods associated with
greenfield development and construction, and require payment in full on
transfer. AES believes that its experience in competitive markets and its
worldwide integrated group structure (with its significant geographic coverage
and presence) enable it to react quickly and creatively in such situations.
Because of this relatively quick process or other considerations, it may
not always be possible to arrange "project financing" (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk") for specific potential
acquisitions. Additionally, as in the past, certain acquisitions or the
commencement of construction on several greenfield developments would
potentially require the Company to obtain substantial additional financing
including both debt and equity. As a result, and in order to enhance its
financial capabilities to respond to these more accelerated opportunities, the
Company maintains a $600 million revolving line and letter of credit facility
(the Revolver). AES also maintains a "universal shelf" registration statement
with the SEC which allows for the public issuance of various additional debt and
preferred or common equity securities, either individually or in combination,
and which currently represents approximately $900 million in unused potential
proceeds from the issuance of public securities.
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RESULTS OF OPERATIONS
REVENUES. Total revenues increased $987 million (70%) to $2,398 million from
1997 to 1998 after increasing $576 million (69%) to $1,411 million from 1996 to
1997. The increase in 1998 primarily reflects the acquisition of controlling
interests in two distribution companies, Clesa and Edelap, three electricity
generating plants at Southland, a full year of operations at Eden, Edes, Sul,
Los Mina, Altai and Lal Pir, and the commencement of commercial operations at
Pak Gen, Barry, Hefei, and Jiaozou, offset in part by lower revenues at
Ekibastuz. The increase in 1997 primarily reflects the acquisition of
controlling interests in the distribution companies Eden, Edes, and Sul and
electricity generating plants at Altai and Los Mina, a full year of operations
at Tisza and Ekibastuz, service revenue associated with construction at Elsta,
and the start of commercial operations at Lal Pir.
The nature of most of the Company's generating businesses is such that each
power plant generally relies on one power sales contract with a single electric
customer for the majority, if not all, of its revenues. The prolonged failure of
any significant customer to fulfill its contractual payment obligations in the
future could have a substantial negative impact on AES's results of operations.
The Company has sought to reduce this risk, where possible, by entering into
power sales contracts with customers who have their debt or preferred securities
rated "investment grade", or by obtaining sovereign government guarantees of the
purchaser's obligations, as well as by locating its plants in different
geographic areas in order to mitigate the effects of regional economic
downturns.
However, AES does not limit its business solely to the most developed
countries or economies, nor only to those countries with investment grade
sovereign credit ratings. In certain locations, particularly developing
countries or countries that are in a transition from centrally planned to market
oriented economies, the electricity purchasers, both wholesale and retail, may
experience difficulty in meeting contractual payment obligations. AES has
recorded a provision for uncollectible amounts of $22 million for 1998
associated with receivables arising from the Company's operations in the
Dominican Republic and Kazakhstan, and $17 million and $20 million for 1997 and
1996, respectively, associated with receivables arising from the Company's
operations in Kazakhstan. There can be no assurance of the ultimate
collectibility of these amounts owed to the Company.
A portion, and in certain cases all, of the electricity sales from several
plants is not subject to a contract and is available for sale, when economically
advantageous, in the relevant spot electricity market. The prices paid for
electricity in the spot markets may be volatile and are dependent on the
behavior of the local economy, including the demand for, and retail price of,
electricity and the competitive price and availability of power from other
suppliers.
Electricity sales by AES's distribution businesses are made pursuant to
provisions of long-term electricity sales concession agreements ranging in
remaining length from 18 to 93 years. Each business is generally authorized to
charge its customers a tariff for electric services which consists of two
components: an energy expense pass-through component and an operating cost
component. Both components are established as part of the original grant of the
concession for certain initial periods (ranging from four to eight years
remaining). Beginning subsequent to the initial periods, and at regular
intervals thereafter, the concession grantor has the authority to review the
costs of the relevant business to determine the inflation adjustment (or other
similar adjustment factor), if any, to the operating cost component (the
"Adjustment Escalator") for the subsequent regular interval. This review can
result in an Adjustment Escalator that has a positive, zero or negative value.
To date, the Company has not reached the end of the initial tariff periods in
any of its distribution businesses. As a result, there can be no assurance as to
the effects, if any, on its future results of operations of potential changes to
the Adjustment Escalator.
As stated above, the electricity sales concessions provide for an annual
adjustment to the tariff, resulting in adjustments based on several factors
including inflation increases as measured by different agreed upon indices. In
certain situations, there is also an
<PAGE>
explicit adjustment to a portion of the tariff that reflects changes, either
entirely or in part, in exchange rates between the local currency and the U.S.
Dollar. Such adjustments are made in arrears at various regular intervals, and
in certain cases, requests for interim adjustments are permitted.
However, if the relevant foreign currency were to experience a sudden or
severe devaluation relative to the U.S. Dollar (the Company's reporting
currency), such as occurred to the Brazilian Real in January 1999, because of
the in arrears nature of the respective adjustment in the tariff or because of
the potential delays or magnitude of the resulting local currency inflation of
the tariff, the future results of operations of AES's distribution companies in
that country could be adversely affected. Depending on the duration or severity
of such devaluation, the future results of operations of AES may also be
adversely affected.
In Brazil, AES has interests in four distribution companies or integrated
utilities (the Brazilian Businesses). These distribution companies have
long-term concession agreements which, although varying in term, have
substantially similar clauses providing for tariff adjustments based on certain
specific events or circumstances. These adjustments occur annually (at different
times) for each Brazilian Business and, in certain instances, in response to
specific requests for adjustment. Adjustments to the tariff rates during the
annual proceedings are designed to reflect, among others, (i) increases in the
inflation rate as represented by a Brazilian inflation index (IGPM), and (ii)
increases in specified operating costs (including purchased power costs), in
each case as measured over the preceding twelve months. The specific tariff
adjustment mechanism provides each Brazilian Business the option to request
additional rate adjustments arising from unusual or significant events which
disrupt the economic and financial equilibrium of such business. Such events may
include significant increases in purchased power costs or local inflation, or
significant currency devaluation. The Brazilian Business requesting relief has
the burden to prove the impact on its financial or economic equilibrium,
however, there can be no assurance that such adjustments will be granted.
During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S. Dollar, declining from 1.21 Brazilian Reais to the Dollar
at December 31, 1998 to 1.79 Reais to the Dollar at February 3, 1999. As a
result, there will likely be a negative and potentially material impact on AES's
results of operations because of the effect of this and any further devaluation
on the operating results of the Brazilian Businesses. Each Brazilian Business
has or intends to recover the specific rate adjustments as discussed in the
preceding paragraphs; however, the resulting effects of the devaluation on the
local Brazilian inflation rate and the certainty, timing, and amounts of these
rate increases at each business, and therefore, the future impact on AES's
earnings cannot be predicted. See also "Capital Resources, Liquidity and Market
Risks" for additional effects associated with the devaluation of the Brazilian
Real.
COSTS OF SALES AND SERVICES. Total costs of sales and services increased $606
million (62%) to $1,587 million in 1998 after increasing $479 million (95%) to
$981 million in 1997. The increase in 1998 was primarily caused by the costs of
electricity sales associated with the acquisition of controlling interests in
two distribution companies, Clesa and Edelap, three electricity generating
plants at Southland, a full year of operations at Eden, Edes, Sul, Los Mina,
Altai and Lal Pir, and the start of commercial operations at Pak Gen, Barry,
Hefei, and Jiaozou. The increase in 1997 was caused primarily by the costs of
electricity sales associated with the acquisition of controlling interests in
Eden, Edes, Sul, Los Mina and Altai, a full year of operations at Tisza and
Ekibastuz, construction costs at Elsta, and the start of commercial operations
at Lal Pir, offset in part, by lower costs at San Nicolas due to lower fuel
prices.
<PAGE>
GROSS MARGIN. Gross margin (revenues less costs of sales and services) increased
$381 million (89%) to $811 million from 1997 to 1998 after increasing $97
million (29%) to $430 million from 1996 to 1997. The improvement in 1998
primarily reflects the additional gross margin contributed by the operations
from the acquisitions of Clesa, Edelap, and Southland, as well as a full year of
oper ations at Altai, Los Mina, Eden, Edes, Sul, and Lal Pir, the commencement
of commercial operations at Pak Gen, Barry, Hefei, and Jiaozou in addition to
improved performance at Tisza, offset slightly by lower margins at Ekibastuz.
The improvement in 1997 primarily reflects the additional gross margin
contributed by the operations of Eden, Edes, Sul, Los Mina, Altai, Tisza and Lal
Pir, and improved operations at San Nicolas and Thames. Gross margin as a
percentage of total revenues (net of the provision to reduce contract
receivables) increased from 29% in 1997 to 33% in 1998, primarily due to higher
relative gross margin percentages of newly operating or acquired businesses at
Lal Pir, Pak Gen, Southland, and Barry, improved gross margin percentages at
Tisza, Eden, Edes and Sul, offset in part, by a lower gross margin percentage at
Ekibastuz. Gross margin as a percentage of total revenues (net of the provision
to reduce contract receivable) decreased from 37% in 1996 to 29% in 1997
primarily due to lower relative gross margin percentages of businesses acquired
in 1996 and 1997 including Tisza, Ekibastuz, Eden, Edes, Los Mina, Sul and
Altai, offset in part, by an improved gross margin percentage at San Nicolas.
The Company's operations are located in several different geographical
areas. Seasonal variations or unusual weather conditions in certain regions,
including in particular, Argentina and Brazil, or the specific needs of
individual power plants to perform routine or unanticipated maintenance that may
require an outage, could significantly affect comparable quarterly financial
results. In addition, some power sales contracts permit the customer to dispatch
the related plant (i.e., direct the plant to deliver a reduced amount of
electrical output) within certain specified parameters. Such dispatching,
however, does not have a material impact on the results of operations of the
related subsidiary because, even when dispatched, the plant's capacity payments
generally are not reduced.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11 million (24%) to $56 million from 1997 to
1998 after increasing $10 million (29%) to $45 million from 1996 to 1997. The
1998 increase is attributable to expenses associated with the development of new
business opportunities. The 1997 increase is attributable to administrative
costs. As a percentage of total revenue, selling, general and administrative
expenses decreased to 2% in 1998, down from 3% in 1997 and down from 4% in 1996.
The Company's general and administrative costs do not necessarily vary with
changes in revenue.
OPERATING INCOME. Operating income improved $365 million (99%) to $733 million
from 1997 to 1998 after increasing $90 million (32%) to $368 million from 1996
to 1997. The increases are the result of the factors discussed in the preceding
paragraphs.
OTHER INCOME/(EXPENSE). Other income and expense, on a net basis, increased $103
million (123%) to $187 million from 1997 to 1998 after increasing $13 million
(18%) to $84 million from 1996 to 1997. Interest expense increased 99% in 1998
and increased 69% in 1997. The increase in 1998 reflects a full year of interest
expense associated with the senior subordinated notes and Tecons issued in 1997,
project financing debt relating to the 1997 and 1998 acquisitions and greenfield
projects that commenced operations, offset in part by lower interest expense
resulting from declining balances related to other project financing debt. The
increase in 1997 reflects a full year of interest expense associated with the
senior subordinated notes issued in 1996 and 1997, project financing debt
relating to the 1996 and 1997 acquisitions, interest expense associated with the
senior subordinated notes and Tecons issued in 1997, offset in part by lower
interest expense resulting from declining balances related to other project
financing debt.
Interest income increased 63% in 1998 and 71% in 1997. The 1998 increase
results primarily from interest income associated with late payments on customer
accounts at the distribution businesses, offset by lower interest income at
Shady Point and Chigen
<PAGE>
due to lower invested funds. The 1997 increase results primarily from higher
cash balances as a result of the issuances of debt, common stock and Tecons,
higher cash balances at Chigen due to the issuance of the $180 million notes in
December 1996, interest income at Eden and Edes associated with the late
payments on customer accounts, and interest on debt service reserves at Indian
Queens and Coral Reef (Light).
Equity in pre-tax earnings of affiliates increased 84% in 1998 and 157% in
1997. The increase in 1998 was primarily due to a full year of equity in
earnings from Cemig. The increase in 1997 results primarily from the acquisition
of an approximate 13.1% equity interest in Cemig (of which approximately 3.7%
was sold to a partner in January 1998), and a full year of equity in earnings
from a 2.4% increase (to an aggregate of 13.75%) in the Company's ownership
interest in Light.
INCOME TAXES. The Company's effective tax rate was 32% for 1998 as compared to
29% for 1997 and 37% for 1996. The lower rate in 1997 was due primarily to a
one-time tax benefit realized as a result of a reduction in the statutory tax
rate of certain foreign countries.
EXTRAORDINARY ITEM. During 1998, Chigen redeemed $18 million of its 10.125%
notes resulting in an extraordinary gain of $4 million, net of taxes. During
1997, the Company redeemed its $75 million 9.75% Senior Subordinated Notes due
2000 resulting in an extraordinary loss of $3 million, net of taxes.
OUTLOOK. Global electricity markets continue restructuring and are shifting away
from government-owned and government-regulated electricity systems toward
deregulated, competitive market structures. Many countries have rewritten their
laws and regulations to allow foreign investment and private ownership of
electricity generation, transmission or distribution companies. Some countries
(for example Hungary, Brazil and some of those of the former Soviet Union, among
others) have or are in the process of "privatizing" their electricity systems by
selling all or part of such to private investors. This global trend of
electricity market restructuring provides significant new business opportunities
for companies like AES.
Several states in the U.S. are also beginning to follow this trend. In
particular, many regulated U.S. public utilities have begun to sell or auction
their generation capacity. Substantially all of the transmission and
distribution services in the U.S. continue however to be regulated under a state
and Federal regulatory framework. In addition, many states have passed or are
considering new legislation that would permit utility customers to choose their
electricity supplier in a competitive electricity market (so-called "retail
access" or "customer choice" laws). While each state's plan differs in details,
there are certain consistent elements, including allowing customers to choose
their electricity suppliers by a certain date (the dates in the existing or
proposed legislation vary between 1999 and 2003), allowing utilities to recover
"stranded assets" (the remaining costs of uneconomic generating or regulatory
assets) and a reaffirmation of the validity of contracts like the Company's U.S.
contracts.
In addition to the potential for state restructuring legislation, the U.S.
Congress has proposed new Federal legislation to encourage customer choice and
recovery of stranded assets. Federal legislation might be needed to avoid the
conflicting effect of each state acting separately to pass restructuring
legislation (with the likely result of uneven market structures in neighboring
states). While it is uncertain whether or when Federal legislation dealing with
electricity restructuring might be passed, the Company believes that such
legislation would not likely have a negative effect on the Company's U.S.
business, and may create opportunities.
There is also legislation currently before the U.S. Congress to repeal part
or all of the current provisions of the Public Utility Regulatory Policies Act
of 1978 ("PURPA") and of the Public Utility Holding Company Act of 1935
("PUHCA"). The Company believes that if such legislation is adopted, competition
in the U.S. for new generation capacity from vertically integrated utilities
would increase. However, independents like AES would also be free to acquire
retail utilities.
As consumers, regulators and suppliers continue the debate about how to
further decrease the regulatory aspects of providing electricity services, the
Company believes in and is encouraging
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the continued orderly transition to a more competitive electricity market.
Inherent in any significant transition to competitive markets are risks
associated with the competitiveness of existing regulated enterprises, and as a
result, their ability to perform under long-term contracts such as the Company's
electricity sale contracts. Although AES strongly believes that its contracts
will be honored, there can be no assurance that each of its customers, in a
restructured and competitive environment, will be capable in all circumstances
of fulfilling their financial and legal obligations.
AES's investments and involvement in the development of new projects and
the acquisition of existing power plants and distribution companies in locations
outside the U.S. are increasing. The financing, development and operation of
such businesses may entail significant political and financial uncertainties and
other structuring issues (including uncertainties associated with the legal
environments, with first-time privatization efforts in the countries involved,
currency exchange rate fluctuations, currency repatriation restrictions,
currency inconvertibility, political instability, civil unrest and, in severe
cases, possible expropriation). Although AES attempts to minimize these risks,
these issues have the potential to cause substantial delays or material
impairment to the value of the project being developed or business being
operated.
It is also possible that as more of the world's markets move toward
competition, an increasing proportion of the Company's revenues may be dependent
on prices determined in electricity spot markets. In order to capture a portion
of the market share in competitive generation markets, AES is considering and
may elect to invest in and construct low-cost "merchant" plants (plants without
long-term electricity sale contracts) in those markets. Such an investment may
require the Company (as well as its competitors) to make larger equity
contributions (as a percentage of the total capital cost) than the more
traditional contract-based investments.
In addition, to the extent that markets allow for retail access or customer
choice, the Company may enter this new market segment, either as extensions of
its generation or distribution businesses, or as a separate business enterprise.
Because of the nature of AES's operations, its activities are subject to
stringent environmental regulation by relevant authorities at each location. If
environmental laws or regulations were to change in the future, there can be no
assurance that AES would be able to recover all or any increased costs from its
customers or that its business and financial condition would not be materially
and adversely affected. In addition, the Company or its subsidiaries and
affiliates may be required to make significant capital expenditures in
connection with environmental matters. AES is committed to operating its
businesses cleanly, safely and reliably and strives to comply with all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times has been in non-compliance, although no such instance has resulted in
revocation of any permit or license.
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
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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.
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.
<PAGE>
FINANCIAL POSITION AND CASH FLOWS
At December 31, 1998, AES had negative consolidated working capital of $722
million as compared to $14 million at the end of 1997. The increase was
primarily due to increases in the current portion of project financing debt
discussed later under "Capital Resources and Liquidity."
Property, plant and equipment, net of accumulated depreciation, was $5,504
million at December 31, 1998, up from $4,149 million at the end of 1997. The net
increase of $1,355 million (33%) is primarily attributable to the acquisitions
during 1998 and the continuation of construction activities at Warrior Run, Mt.
Stuart and Uruguaiana and the commencement of construction at Merida.
Other assets increased $453 million (13%) to $4,023 million primarily due
to payments for deferred financing costs associated with debt issued during the
year, additional capitalized amounts associated with projects in development and
early stage construction, the acquisition of a 49% share of the Orissa Power
Generation Corporation (OPGC) and undistributed earnings from Cemig, deferred
foreign currency losses that will be recovered through tariff adjustments as
provided for in certain power sales contracts, the purchase of a concession
contract associated with the acquisition of Edelap, and goodwill from the
purchase of Southland, offset by reductions in the carrying values of Cemig and
Light and the concession contract at Sul due to the devaluation of the Brazilian
Real.
Project financing debt, net of repayments, increased as a result of
additional borrowings associated with the acquisitions of Clesa, Southland and
Edelap and additional borrowings associated with construction at Warrior Run,
Barry, Mt. Stuart, Uruguaiana and Merida.
Other notes payable (non-current) increased $548 million (50%) to $1,644
million as a result of the issuances of additional debt to finance current year
acquisitions.
OPERATING ACTIVITIES. Cash flows provided by operating activities totaled $528
million during 1998 as compared to $193 million during 1997 and $195 million
during 1996. The 1998 increase was caused primarily by a significant increase in
net income, an increase in distributions from affiliates, and changes in
consolidated working capital. The decrease in 1997 was primarily due to a larger
portion of net income being derived from undistributed earnings from affiliates
and increased net working capital (excluding project financing debt) necessary
to support electricity sales at AES's distribution businesses. Unrestricted net
cash flow to the parent company, after cash paid for general and administrative
costs and project development expenses but before investments and debt service,
amounted to approximately $360 million, $259 million and $165 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTING ACTIVITIES. Net cash used in investing activities totaled $1,842
million in 1998 compared to $3,799 million during 1997 and $1,135 million during
1996. The 1998 amount was caused primarily by construction activities at various
projects and the acquisitions of Clesa, Southland, Edelap, OPGC, Telasi and an
additional 5.6% of Sul. These investing uses were offset, in part, by the sales
of Hazelwood, approximately 3.7% of the Company's investment in Cemig and a
minority interest of 30% of Edelap. The 1997 amount primarily reflects
construction activity at Barry, Lal Pir, Pak Gen, Warrior Run, and Mt. Stuart,
an additional purchase of Light shares (2.4%), acquisition of a 60% interest in
each of Eden and Edes, the acquisition of an approximate 13.1% interest in
Cemig, acquisition of Destec's international assets, the acquisition of 90% of
Sul, acquisition of an 85% interest in Altai, and the funding of debt service
reserves related to Chigen. The 1996 amount primarily reflects the acquisitions
of San Juan, Tisza and Ekibastuz, the Light investment construction progress at
Lal Pir, Pak Gen, Warrior Run and Barry, Chigen's investments in various
projects, reimbursable payments for contracts related to a project in
development; and the funding of debt service reserves for the project financing
of the Light investment.
FINANCING ACTIVITIES. Net cash provided by financing activities aggregated
$1,503 million during 1998 compared to $3,723 million during 1997 and $886
million during 1996. The 1998 activity was caused primarily by the borrowing of
bank and other project debt associated with the acquisitions, issuance of $350
million of corporate long-term debt and $200 million of common stock and
borrowings under the Revolver. These financing sources were partially offset by
repayments of acquisition related bridge loans and scheduled debt repayments.
The 1997 increase was primarily due to the issuance of project financing debt
drawn under construction financing commitments or associated with acquisition
financings, the issuance of senior subordinated notes, the issuance of Tecons
and common stock, and contributions from minority partners. These financing
inflows were offset by project financing debt amortization payments and
refinancing and repayments under the Company's revolving line of credit. The
significant cash financing inflows in 1996 were the result of construction loan
borrowings for Lal Pir, Pak Gen and Warrior Run, project acquisition financing
of the Light investment, issuance of $250 million of 10.25% Notes, initial
project financing at San Nicolas, and net borrowings under the Company's
revolving line of credit. Significant cash financing outflows were due to
scheduled debt amortization of the project financings.
<PAGE>
CAPITAL RESOURCES, LIQUIDITY AND MARKET RISKS
CAPITAL RESOURCES AND LIQUIDITY
AES's business is capital intensive and requires significant investments to
develop or acquire new operations. Occasionally, AES will also seek to refinance
certain outstanding project financing loans or other notes payable. Continued
access to capital on competitive and acceptable terms is therefore a significant
factor in the Company's ability to expand further. AES has, to the extent
practicable, utilized project financing loans to fund the capital expenditures
and investments required to construct and acquire its electric power plants,
distribution companies and related assets. Project financing borrowings are
substantially non-recourse to other subsidiaries and affiliates and to AES as
the parent company and are generally secured by the capital stock, physical
assets, contracts and cash flow of the related subsidiary or affiliate.
The Company intends to continue to seek, where possible, such non-recourse
project financing in connection with the assets or businesses which the Company
or its affiliates may develop, construct or acquire. However, depending on
market conditions and the unique characteristics of individual businesses, the
Company's providers of project financing, particularly multinational commercial
banks or public market bond investors, may seek higher borrowing spreads and
increased equity contributions.
Furthermore, because of the reluctance of commercial lending institutions
to provide non-recourse project financing (including financial guarantees) for
businesses in certain less developed economies, the Company, in such locations,
has and will continue to seek direct or indirect (through credit support or
guarantees) project financing from a limited number of government sponsored,
multilateral or bilateral international financial institutions or agencies. As a
precondition to making such project financing available, these institutions may
also require governmental guarantees of certain project and sovereign related
risks. Depending on the policies of specific governments, such guarantees may
not be offered, and as a result, AES may determine that sufficient financing
will ultimately not be available to fund the related business, and may cease
development or acquisition of such business.
In addition to the project financing loans, if available, AES as the parent
company provides a portion, or in certain instances all, of the remaining
long-term financing required to fund development, construction or acquisition.
These investments have generally taken the form of equity investments or loans,
which are subordinated to the project financing loans. The funds for these
investments have been provided by cash flows from operations and by the proceeds
from issuances of debt, common stock and other securities issued by the Company.
At December 31, 1998, the current portion of project financing debt
included $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729 million) in Brazil and Eden, Edes and Edelap ($324 million) in
Argentina. The Company's intention is to replace such loans with long-term
project financing loans with terms that more appropriately reflect the
underlying long-term concessions. As a result of the current economic conditions
in those countries, including the significant devaluation of the Brazilian Real,
the Company expects that it will not be able to refinance certain of such
project financing loans on terms (interest rates, maturity or amounts) that AES
would consider acceptable without making significant additional investments. In
such circumstances, AES, as the parent company, would provide additional amounts
in the form of equity investments, or intercompany loans or additional credit
support to repay some or all of the existing short-term acquisition loans.
Depending on the magnitude of such additional investments or loans, the Company
may also need to issue additional debt, common stock or other similar securities
to fund such additional contributions.
Interim needs for shorter-term and working capital financing at the parent
company have been met with borrowings under AES's Revolver. Over the past
several years, the Company has continued to increase the amount of available
financing under the Revolver. The Company currently maintains a $600 million
credit limit under the Revolver. Under the terms of the Revolver, the Company is
required to reduce its direct borrowings to $225 million for 30 consecutive days
during each twelve month period. The Revolver also includes financial covenants
related to net worth, cash flow, investments, financial leverage and certain
other obligations and limitations on cash dividends. At December 31, 1998, cash
borrowings and letters of credit outstanding under the Revolver amounted to $233
million and $194 million, respectively. The Company may also seek from time to
time to meet some of its short-term and interim funding needs with additional
commitments from banks and other financial institutions at the parent or
subsidiary level.
The ability of AES's subsidiaries and affiliates to declare and pay
dividends to AES is restricted under the terms of existing project financing
debt agreements. See Note 5 to the consolidated financial statements for
additional information. In connection with its project financings and related
contracts, AES has expressly undertaken certain limited obligations and
contingent liabilities, most of which will only be effective or will be
terminated upon the occurrence of future events. AES's obligations and
contingent liabilities in certain cases take the form of, or are supported by,
letters of credit. These obligations and contingent liabilities, excluding
future commitments to invest and those collateralized with letter of credit
obligations under the Revolver, were limited by their terms as of December 31,
1998 to an
<PAGE>
aggregate of approximately $399 million. The Company is obligated under other
contingent liabilities which are limited to amounts, or percentages of amounts,
received by AES as distributions from its project subsidiaries. These contingent
liabilities aggregated $33 million as of December 31, 1998. In addition, AES has
expressly undertaken certain other contingent obligations which the Company does
not expect to have a material adverse effect on its results of operations or
financial position, but which by their terms are not capped at a dollar amount.
Because each of the Company's businesses are distinct entities and
geographically diverse and because the obligations related to a single business
are based on contingencies of varying types, the Company believes it is unlikely
that it will be called upon to perform under several of such obligations at any
one time.
At December 31, 1998, the Company has future commitments to fund
investments in its projects under construction and in development of $37
million. Of this amount, $18 million in letters of credit under the Revolver
have been issued to support a portion of these obligations. The remaining future
capital commitments are expected to be funded by internally-generated cash flows
and by external financings as may be necessary.
MARKET RISKS
The Company attempts, whenever possible, to hedge certain aspects of its
projects against the effects of fluctuations in inflation, interest rates,
exchange rates and energy prices. Because of the complexity of hedging
strategies and the diverse nature of AES's operations, its results, although
significantly hedged, will likely be somewhat and in certain cases, such as
Brazil, materially affected by fluctuations in these variables and such
fluctuations may result in material improvement or deterioration of operating
results. Results of operations would generally improve with higher oil and
natural gas prices and with lower interest rates. Operating results are also
sensitive to the difference between inflation and interest rates, and would
generally improve when increases in inflation are higher than increases in
interest rates. As discussed under "Results of Operations" and below, the recent
devaluation of the Brazilian Real will have a material negative impact on AES's
results of operations in 1999.
AES has generally structured the energy payments under its power generation
sales contracts to adjust with similar price indices as do its contracts with
the fuel suppliers for the corresponding power plants. In some cases a portion
of revenues is associated with operations and maintenance costs, and as such is
usually indexed to adjust with inflation.
AES primarily consists of businesses with long-term contracts or retail
sales concessions. While the contract-based portfolio is expected to be an
effective hedge against future energy and electricity market price risks, it is
worth noting that a portion of AES's current and expected future revenues
(particularly those related to certain portions of its generation businesses in
Kazakhstan, the UK, Argentina, Hungary and Texas) are derived from businesses
without significant long-term revenue contracts. In some of these businesses,
AES has taken additional steps to improve their predictability, in the Company's
opinion, by using other contractual hedging provisions such as entering into
fuel supply contracts that absorb a significant portion of the variability in
electricity sales prices. Despite these mitigating factors, increasing reliance
on non-contract businesses in AES's portfolio does subject the Company to
potentially increasing electricity market price volatility.
The hedging approaches and methodologies utilized by the Company are
implemented through contractual provisions with fuel suppliers, international
financial institutions and several of the Company's customers. As a result,
their effectiveness is dependent, in part, on each counterparty's ability to
perform in accordance with the provisions of the relevant contract. The Company
has sought to reduce this credit risk in part by entering into contracts, where
possible, with creditworthy organizations. In certain instances, where the
Company determines that additional credit support is necessary, AES will seek to
execute (either concurrently or subsequently) standby, guarantee or option
agreements with creditworthy third parties. In particular, AES has executed and
is the beneficiary of fuel purchase option agreements, corporate and
governmental guarantees to support the obligations of local fuel suppliers in
several locations and sovereign governmental guarantees supporting the
electricity purchase obligation of government-owned power authorities, such as
in the Dominican Republic and Pakistan.
AES has also used a hedging strategy in an attempt to insulate each plant's
financial performance, where appropriate, against the risk of fluctuations in
interest rates. Depending on whether capacity payments are fixed or vary with
inflation, the Company generally attempts to hedge against interest rate
fluctuations by arranging fixed rate or variable rate financing, respectively.
In certain cases, the Company executes interest rate swap, cap and floor
agreements to effectively fix or limit the interest rate exposure on the
underlying variable rate financing. At December 31, 1998, the Company and its
subsidiaries had approximately $2,505 million of fixed rate debt obligations. In
addition, the Company had entered into interest rate swap agreements and forward
interest rate swap agreements aggregating approximately $1,366 million at
December 31, 1998, which the Company used to hedge its interest rate exposure on
variable rate debt.
Through its equity investments in foreign subsidiaries and affiliates, AES
operates in jurisdictions dealing in currencies other than the Company's
consolidated reporting currency, the U.S. Dollar. Such investments and advances
were made to fund capital investment or acquisition requirements, to provide
working capital, or to provide collateral for contingent obligations. Due
primarily to the long-term nature of certain investments
<PAGE>
and advances, the Company accounts for any adjustments resulting from
translation as a charge or credit directly to a separate component of
stockholders' equity until such time as the Company realizes such charge or
credit. At that time, differences may be recognized in the statement of
operations as gains or losses.
In addition, certain of the Company's foreign subsidiaries and affiliates
have entered into monetary obligations in U. S. Dollars or currencies other than
their own functional currencies. When monetary assets or obligations are
incurred in a currency other than a foreign subsidiary's or affiliate's
functional currency, that entity may be exposed to reporting foreign currency
transaction gains or losses based on fluctuations between the relative value of
that entity's functional currency and the currency of the monetary asset or
liability. Whenever possible, these subsidiaries have attempted to limit
potential foreign exchange exposure by entering into revenue contracts which
adjust to changes in the foreign exchange rates. Certain foreign affiliates and
subsidiaries operate in countries where the local inflation rates are greater
than U.S. inflation rates. In such cases the foreign currency tends to devalue
relative to the U.S. Dollar over time. The Company's subsidiaries and affiliates
have entered into revenue contracts which attempt to adjust for these
differences; however, there can be no assurance that such adjustments will
compensate for the full effects of currency devaluation, if any.
At December 31, 1998, the Company, and its subsidiaries had approximately
$613 million in outstanding debt that was denominated in currencies other than
the U.S. Dollar and approximately $574 million in outstanding debt that was
denominated in currencies other than the relevant subsidiary's functional
currency. In addition, certain Brazilian Businesses whose functional currency is
the Brazilian Real have (after adjusting for AES's ownership percentages) U.S.
Dollar demoninated debt that amounts to $439 million.
As discussed in "Results of Operations," the Brazilian Real experienced a
significant devaluation in early 1999. As a result, the Brazilian Businesses
will also experience noncash, foreign currency transaction losses associated
with the impact of changes in the value of the Brazilian Real on the foreign
currency (non-functional currency) denominated debt (primarily U.S. Dollars)
within the Brazilian Businesses. If the exchange rate of 1.79 Brazilian Reais to
the dollar (the closing exchange rate on February 3, 1999) were to prevail until
the end of 1999, the Company estimates that its proportionate share of the
after-tax foreign currency transaction loss would be approximately $105 million.
In addition, such devaluation would result in a related increase of
approximately $760 million in the balance of the cumulative foreign currency
translation adjustment reflected as a reduction of stockholders' equity; as well
as a corresponding reduction in the carrying value of the related assets. These
estimates do not reflect the likelihood of additional fluctuations in the
exchange rates.
The table on the next page provides information about the Company's
financial instruments and derivative financial instruments that are sensitive to
changes in interest rates, in particular, debt obligations, Tecons, and interest
rate swaps. AES does not trade in these financial instruments and derivatives
and therefore has classified them as other than trading. For debt obligations
and Tecons, the table presents principal cash flows and related weighted average
interest rates by expected matur ity dates over the next five years and
thereafter. For interest rate swaps, the table presents aggregate contractual
notional amounts and weighted average interest rates over the next five years.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average variable rates are based on implied forward
rates in the yield curve at December 31, 1998. The information is presented in
U.S. Dollar equivalents, which is the Company's reporting currency. The
instruments' actual cash flows are denominated in U.S. Dollars (USD), Japanese
Yen (JPY), Australian Dollars (AUD), Chinese Renminbi Yuan (CHY), UK Pounds
Sterling (GBP), Indian Rupees (INR), Hungarian Forints (HUF), and German Marks
(DEM) as indicated in parentheses as of December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS THERE- 1998 1997 1998
By expected maturity date 1999 2000 2001 2002 2003 AFTER TOTAL TOTAL FAIR VALUE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt (USD equivalents in millions,
except interest rates)
Long-term debt:
Fixed rate (USD) 75 52 54 19 23 2,173 2,396 2,077 2,410
Average interest rate 9.6% 9.7% 10.1% 10.7% 11.2% 8.8% 8.9% 9.4% --
Variable rate (USD) 1,268 448 199 200 177 1,217 3,509 2,516 3,509
Average interest rate 8.0% 7.4% 7.5% 7.5% 7.3% 6.5% 7.3% 7.8% --
Fixed rate (JPY) 7 7 7 7 7 23 58 54 59
Average interest rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% --
Variable rate (JPY) 28 28 28 28 28 96 236 213 236
Average interest rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.8% --
Variable rate (GBP) 4 7 7 12 16 137 183 176 183
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.2% 7.2% 8.9% --
Variable rate (AUD) 3 4 4 5 5 36 57 5 57
Average interest rate 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.7% --
Fixed rate (CHY) 3 -- -- -- -- -- 3 2 3
Average interest rate 7.5% -- -- -- -- -- 7.5% 11.1% --
Fixed rate (INR) -- -- 48 -- -- -- 48 -- 48
Average interest rate -- -- 13.9% -- -- -- 13.9% -- --
Variable rate (HUF) 2 -- -- -- -- -- 2 -- 2
Average interest rate 17.5% -- -- -- -- -- 17.5% -- --
Variable rate (DEM) 15 11 -- -- -- -- 26 -- 26
Average interest rate 4.6% 4.6% -- -- -- -- 4.6% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT 1,405 557 347 271 256 3,682 6,518 5,043 6,533
- ------------------------------------------------------------------------------------------------------------------------------------
TECONS
Fixed rate (USD) -- -- -- -- -- 550 550 550 657
Average interest rate -- -- -- -- -- 5.4% 5.4% 5.4% --
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
=================================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS 1998
By aggregate notional amounts outstanding at December 31 1998 1999 2000 2001 2002 2003 FAIR VALUE
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS (USD equivalents in millions,
except interest rates)
Variable rate (USD) 944 715 762 708 646 587 101
Average pay rate 8.04% 7.80% 7.66% 7.62% 7.61% 7.56% --
Average receive rate 5.07% 5.00 5.21% 5.28% 5.40% 5.40% --
Variable to fixed (GPB) 182 182 182 182 182 182 11
Average pay rate 6.15% 6.17% 6.17% 6.17% 6.17% 6.17% --
Average receive rate 5.95% 5.17% 5.47% 5.39% 5.27% 5.20% --
Variable to fixed (AUD) 54 52 48 35 31 28 8
Average pay rate 7.38% 7.38% 7.38% 7.38% 7.38% 7.38% --
Average receive rate 4.80% 5.02% 5.43% 4.97% 5.63% 6.60% --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 1,180 949 992 925 859 797 120
=================================================================================================================================
</TABLE>
<PAGE>
The table below provides information about the Company's financial
instruments by functional currency and presents such information in U.S. Dollar
equivalents. The table summarizes information on instruments that are sensitive
to foreign currency exchange rates.
These instruments are debt obligations of the Company's subsidiaries which
are denominated in currencies other than that subsidiary's functional currency.
AES does not trade in these financial instruments and therefore has classified
them as other than trading. Such functional currencies include the Argentine
Peso (ARS), the Pakistan rupee (PKR), and the U.S. Dollar (USD). For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates for the next five years and
thereafter.
<TABLE>
<CAPTION>
December 31, 1998
====================================================================================================================================
FINANCIAL INSTRUMENTS THERE- 1998 1997 1998
By expected maturity date 1999 2000 2001 2002 2003 AFTER TOTAL TOTAL FAIR VALUE
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES (USD equivalents in millions,
except interest rates)
LONG-TERM DEBT:
ARS Functional Currency:
Fixed rate (USD) 61 34 10 -- -- -- 105 67 101
Average interest rate 9.4% 9.2% 10.2% -- -- -- 9.4% 10.3% --
Variable Rate (USD) 3 3 1 -- -- -- 7 9 7
Average interest rate 10.1% 10.1% 10.1% -- -- -- 10.1% 10.6% --
PKR Functional Currency:
Fixed rate (USD) 7 7 7 8 8 41 78 78 78
Average interest rate 8.7% 8.8% 8.9% 9.0% 9.0% 10.0% 9.5% 9.2% --
Variable rate (USD) 6 6 7 7 7 32 65 56 65
Average interest rate 8.4% 8.4% 8.4% 8.5% 8.5% 8.6% 8.5% 8.8% --
Fixed rate (JPY) 7 7 7 7 7 22 57 54 59
Average interest rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% --
Variable rate (JPY) 28 28 28 28 28 96 236 213 236
Average interest rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.8% --
USD Functional Currency:
Variable rate (DEM) 15 11 -- -- -- -- 26 -- 26
Average interest rate 4.6% 4.6% -- -- -- -- 4.6% -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 127 96 60 50 50 191 574 477 572
====================================================================================================================================
</TABLE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
The Company's consolidated balance sheets as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF THE AES CORPORATION:
We have audited the accompanying consolidated balance sheets of The AES
Corporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The AES Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, DC
February 4, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Sales $ 2,382 $ 1,361 $ 824
Services 16 50 11
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 2,398 1,411 835
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 1,579 940 495
Cost of services 8 41 7
Selling, general and administrative expenses 56 45 35
Provision to reduce contract receivables 22 17 20
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,665 1,043 557
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 733 368 278
OTHER INCOME/(EXPENSE):
Interest expense (485) (244) (144)
Interest income 67 41 24
Foreign currency exchange loss (1) (7) --
Equity in pre-tax earnings of affiliates 232 126 49
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY ITEM 546 284 207
INCOME TAXES 145 77 74
MINORITY INTEREST 94 19 8
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 307 188 125
Extraordinary item - gain/(loss) on extinguishment
of debt - net of applicable income taxes/(benefit) 4 (3) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 311 $ 185 $ 125
====================================================================================================================================
BASIC EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 1.73 $ 1.13 $ 0.83
EXTRAORDINARY ITEM 0.02 (0.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.75 $ 1.11 $ 0.83
====================================================================================================================================
DILUTED EARNINGS PER SHARE:
BEFORE EXTRAORDINARY ITEM $ 1.67 $ 1.11 $ 0.80
EXTRAORDINARY ITEM 0.02 (0.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.69 $ 1.09 $ 0.80
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in millions)
================================================================================
DECEMBER 31 1998 1997
================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 491 $ 302
Short-term investments 35 127
Accounts receivable, net 365 323
Inventory 119 95
Asset held for sale -- 139
Receivable from affiliates 18 23
Deferred income taxes 71 47
Prepaid expenses and other current assets 155 134
- -------------------------------------------------------------------------------
Total current assets 1,254 1,190
PROPERTY, PLANT AND EQUIPMENT:
Land 135 29
Electric generation and distribution assets 5,301 3,809
Accumulated depreciation and amortization (525) (373)
Construction in progress 593 684
- -------------------------------------------------------------------------------
Property, plant and equipment, net 5,504 4,149
OTHER ASSETS:
Deferred financing costs, net 167 122
Project development costs 144 87
Investments in and advances to affiliates 1,933 1,863
Debt service reserves and other deposits 205 236
Electricity sales concessions and contracts 1,280 1,179
Goodwill 66 23
Other assets 228 60
- -------------------------------------------------------------------------------
Total other assets 4,023 3,570
- -------------------------------------------------------------------------------
TOTAL $ 10,781 $ 8,909
================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
(in millions, except par value)
=======================================================================================================================
December 31 1998 1997
=======================================================================================================================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 215 $ 205
Accrued interest 113 68
Accrued and other liabilities 235 335
Other notes payable - current portion 8 --
Project financing debt - current portion 1,405 596
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,976 1,204
LONG-TERM LIABILITIES:
Project financing debt 3,597 3,489
Other notes payable 1,644 1,096
Deferred income taxes 268 273
Other long-term liabilities 220 291
- -----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 5,729 5,149
MINORITY INTEREST 732 525
COMMITMENTS AND CONTINGENCIES (NOTE 6) -- --
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES 550 550
STOCKHOLDERS' EQUITY:
Preferred stock (no par value; 2 million shares authorized; none issued) -- --
Common stock ($.01 par value; 500 million shares authorized;
shares issued and outstanding: 1998 - 180.4 million;
1997 - 175.0 million) 2 2
Additional paid-in capital 1,243 1,030
Retained earnings 892 581
Accumulated other comprehensive loss (343) (131)
Treasury stock at cost (1997 - .2 million shares) -- (1)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,794 1,481
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $10,781 $ 8,909
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, except per share amounts)
=======================================================================================================================
For the Years Ended December 31 1998 1997 1996
=======================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $311 $185 $125
Adjustments to net income:
Depreciation and amortization 196 114 65
Provision for deferred taxes, net of equity investee taxes 67 20 26
Undistributed earnings of affiliates, net of tax (50) (57) (20)
Other (6) 22 6
Changes in consolidated working capital 10 (91) (7)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 528 193 195
INVESTING ACTIVITIES:
Property additions (517) (511) (506)
Acquisitions, net of cash acquired (1,623) (2,454) (148)
Proceeds from the sales of assets 301 -- --
Sale of short-term investments 94 77 103
Purchase of short-term investments (2) (184) (66)
Affiliate advances and equity investments (69) (649) (430)
Project development costs (57) (34) (16)
Debt service reserves and other assets 31 (44) (72)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,842) (3,799) (1,135)
FINANCING ACTIVITIES:
Borrowings/(repayments) under the revolver, net 206 (186) 163
Issuance of project financing debt and other coupon bearing securities 1,843 3,926 802
Repayments of project financing debt and other coupon bearing securities (668) (749) (75)
Payments for deferred financing costs (47) (34) (13)
Repayments of other liabilities (71) (6) (3)
Contributions by minority interests 40 269 10
Sale of common stock 200 503 2
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,503 3,723 886
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 189 117 (54)
CASH AND CASH EQUIVALENTS, BEGINNING 302 185 239
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ENDING $491 $302 $185
=======================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of amounts capitalized $415 $201 $134
Cash payments for income taxes, net of refunds 24 31 32
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred purchase price of Cemig shares $-- $528 $ --
Common stock issued for amalgamation of AES Chigen -- 157 --
Conversion of subordinated debentures to common stock -- -- 50
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
- -----------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance at January 1 and December 31 $ 2 $ 2 $ 2
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1 $1,030 $ 359 $ 292
Issuance of common stock 184 494 --
Issuance of common stock pursuant to Chigen amalgamation -- 157 --
Issuance of common stock under benefit plans
and exercise of stock options and warrants 16 12 3
Tax benefit associated with the exercise of options 13 8 15
Issuance of common stock on conversion of 6.5% subordinated
debentures, net ($13.08 per share) -- -- 49
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31 $1,243 $1,030 $ 359
- -----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at January 1 $ 581 $ 396 $ 271
Net income for the year 311 185 125
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 892 $ 581 $ 396
=======================================================================================================================
ACCUMULATED OTHER COMPREHENSIVE LOSS (cumulative foreign currency translation adjustment)
Balance at January 1 $ (131) $ (33) $ (10)
Foreign currency translation adjustment (212) (98) (23)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ (343) $ (131) $ (33)
=======================================================================================================================
TREASURY STOCK
Balance at January 1 and December 31 $ -- $ (1) $ (3)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,794 $1,481 $ 721
- -----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income for the year $ 311 $ 185 $ 125
Foreign currency translation adjustment (212) (98) (23)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 99 $ 87 $ 102
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The AES Corporation and its subsidiaries and affiliates, (collectively
"AES" or the "Company") is a global power company primarily engaged in owning
and operating electric power generation and distribution businesses in many
countries around the world.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the
Company include the accounts of AES, its subsidiaries and controlled affiliates.
Investments in 50% or less owned affiliates over which the Company has the
ability to exercise significant influence, but not control, are accounted for
using the equity method. Intercompany transactions and balances have been
eliminated.
CASH AND CASH EQUIVALENTS -- The Company considers cash on hand, deposits
in banks, certificates of deposit and short-term marketable securities with an
original maturity of three months or less to be cash and cash equivalents.
INVESTMENTS -- Securities that the Company has both the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at historical cost. Other investments that the Company does not intend to hold
to maturity are classified as available-for-sale, and any significant unrealized
gains or losses are recorded as a separate component of stockholders' equity.
Interest and dividends on investments are reported in interest income. Gains and
losses on sales of investments are recorded using the specific identification
method. Short-term investments consist of investments with original maturities
in excess of three months but less than one year. Debt service reserves and
other deposits, which might otherwise be considered cash and cash equivalents,
are treated as noncurrent assets (see Note 3).
ACCOUNTS RECEIVABLE -- Accounts receivable include a provision for
uncollectible amounts of $59 million at December 31, 1998 associated with
receivables arising from the Company's operations in the Dominican Republic and
Kazakhstan, and $37 million at December 31, 1997 associated with receivables
arising from the Company's operations in Kazakhstan.
INVENTORY -- Inventory, valued at the lower of cost or market (first in,
first out method), consists of coal, fuel oil, raw materials, spare parts, and
supplies. Inventory consists of the following (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------
DECEMBER 31 1998 1997
- ---------------------------------------------
<S> <C> <C>
Coal, fuel oil and
other raw materials $ 63 $ 58
Spare parts, materials
and supplies 56 37
- ---------------------------------------------
Total $119 $ 95
- ---------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, including
improvements, is stated at cost. Depreciation, after consideration of salvage
value, is computed using the straight-line method over the estimated composite
lives of the assets, which range from 3 to 40 years. Maintenance and repairs are
charged to expense as incurred. Emergency and rotable spare parts inventories
are included in electric generation and distribution assets and are depreciated
over the useful life of the related components.
CONSTRUCTION IN PROGRESS -- Construction progress payments, engineering
costs, insurance costs, wages, interest and other costs relating to construction
in progress are capitalized. Construction in progress balances are transferred
to electric generation and distribution assets when the assets are ready for
their intended use. Interest capitalized during development and construction
totaled $79 million, $67 million and $27 million in 1998, 1997 and 1996,
respectively.
INTANGIBLE ASSETS -- Goodwill and electricity sales concessions and
contracts are amortized on a straight-line basis over their estimated periods of
benefit which range from 15 to 40 years. Intangible assets at December 31, 1998
and 1997 are shown net of accumulated amortization of $39 million and $13
million, respectively.
LONG-LIVED ASSETS -- The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of such assets may not be recoverable.
DEFERRED FINANCING COSTS -- Financing costs are deferred and amortized
using the straight-line method over the related financing period, which does not
differ materially from the effective
<PAGE>
interest method of amortization. Deferred financing costs are shown net of
accumulated amortization of $70 million and $52 million as of December 31, 1998
and 1997, respectively.
PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of
developing new projects after achieving certain project related milestones which
indicates that the project is probable. These costs represent amounts incurred
for professional services, salaries, permits, options, capitalized interest and
other related direct costs. These costs are included in property when financing
is obtained, or expensed at the time the Company determines that a particular
project will no longer be developed. The continued capitalization is subject to
on-going risks related to successful completion, including those related to
government approvals, siting, financing, construction, permitting and contract
compliance. Certain reimbursable costs related to a project were classified as
other assets at December 31, 1997 and were recovered in 1998.
INCOME TAXES -- The Company follows Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of the existing assets and liabilities
and their respective income tax bases.
FOREIGN CURRENCY TRANSLATION -- Foreign subsidiaries and affiliates
translate their assets and liabilities into U.S. Dollars at the current exchange
rates in effect at the end of the fiscal period. The revenue and expense
accounts of foreign subsidiaries and affiliates are translated into U.S. Dollars
at the average exchange rates that prevailed during the period. The gains or
losses that result from this process, and gains and losses on intercompany
transactions which are long-term in nature, and which the Company does not
intend to repatriate, are shown in accumulated other comprehensive loss in the
stockholders' equity section of the balance sheet. For subsidiaries operating in
highly inflationary economies, the U.S. Dollar is considered to be the
functional currency, and transaction gains and losses are included in
determining net income. Gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency, except those that are hedged, are included in determining net income.
Foreign currency gains and losses that will be recovered through tariff
adjustments as provided for in power sales contracts are deferred and recognized
as they are recovered under contract terms.
During early 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S. Dollar, declining from 1.21 Brazilian Reais to the Dollar
at December 31, 1998 to 1.79 Reais to the Dollar at February 3, 1999. This
devaluation will likely result in significant foreign currency translation and
transaction losses for the Company in 1999.
DEFINED BENEFIT PLANS -- In 1998, the Company adopted SFAS No. 132,
Employers' Disclosures about Pensions and Other Retirement Benefits. SFAS No.
132 revises disclosures about pension and other postretirement benefit plans by
providing guidance for a standard practical disclosure format. It does not
change the measurement or recognition of costs relating to these plans.
REVENUE RECOGNITION AND CONCENTRATION -- Revenues from the sale of
electricity and steam are recorded based upon output delivered and capacity
provided at rates as specified under contract terms. Electricity distribution
revenues are recognized when power is provided. Most of the Company's power
plants rely primarily on one power sales contract with a single customer for the
majority of revenues. There were no single customers which accounted for at
least 10% of revenues in 1998, three customers accounted for 14%, 12%, and 10%
of revenues in 1997 and five customers accounted for 20%, 16%, 16%, 11% and 10%
of revenues in 1996. The prolonged failure of any of these customers to fulfill
contractual obligations or make required payments could have a substantial
negative impact on AES's revenues and profits. The Company does not anticipate
non-performance by the customers under these contracts.
HEDGING ARRANGEMENTS -- The Company enters into various derivative
transactions in order to hedge its exposure to certain market risks. The Company
currently has outstanding interest rate swap, cap and floor agreements which
hedge against interest rate exposure on floating rate project financing debt.
These transactions, which are classified as other than trading, are accounted
for as hedges, and interest is expensed or capitalized, as appropriate, using
effective interest rates. Any fees are amortized as yield adjustments.
NET INCOME PER SHARE -- Basic and diluted net income per share 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 (see Note 8).
Potential common stock, for purposes of determining diluted earnings per share,
includes the effects of dilutive 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, as
applicable.
COMPREHENSIVE INCOME -- In 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes rules for the reporting
of comprehensive income and its components. Comprehensive income consists of net
income and foreign currency translation adjustments and is presented in the
Consolidated Statements of Changes in Stockholders' Equity for all periods. The
adoption of SFAS No. 130 had no impact on the previously reported balances of
stockholders' equity.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company to make
estimates and assumptions that affect reported
<PAGE>
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior
period amounts to conform with the 1998 presentation. In 1998, the Company
changed its method of reporting earnings from its equity affiliates to a pre-tax
basis. The Company's share of the investee's income taxes is recorded in income
tax expense. Amounts for 1997 and 1996 have been reclassified to conform to this
presentation (see Note 4).
2. ACQUISITIONS
In January 1998, a subsidiary of AES acquired an additional 5.6% ownership
interest in the former Companhia Centro-Oeste de Distribuicao de Energia
Electrica (Sul), an electric distribution company in the state of Rio Grande do
Sul, Brazil. Previously, in October 1997, AES had acquired 90% of Sul for
approximately $1.4 billion. The additional investment in 1998 of approximately
$116 million increased AES's ownership interest in Sul to 95.6%. Approximately
$884 million of the acquisition cost represents the value of the 60 year
electricity sales concession granted to Sul, which is being amortized over 40
years. Included in current liabilities at December 31, 1997 is $34 million
associated with severance costs related to the acquisition.
Also in January 1998, a subsidiary of AES sold approximately 3.7% of its
equity investment in Companhia Energetica de Minas Gerais (Cemig), an integrated
electric utility serving the State of Minas Gerais in Brazil for approximately
$102 million. Cemig owns approximately 5,000 MW of generating capacity and
serves approximately 4 million customers. In June 1997, AES, through a
consortium, acquired, for approximately $1 billion, a 14.41% interest in Cemig.
This investment represents a 33% voting interest. Through the consortium, the
Company has the ability to exercise significant influence over the operations of
Cemig and records the investment using the equity method. After the January 1998
sale of a portion of its equity investment, AES's net investment represents a
9.4% ownership interest in Cemig.
In February 1998, a subsidiary of the Company acquired, for approximately
$97 million, 80% of Compania de Luz Electrica de Santa Ana (Clesa), an
electricity distribution company in El Salvador, and subsequently sold 16% of
its interest for approximately $15 million. At December 31, 1998, the Company's
ownership interest was 64%. Approximately $32 million of the acquisition cost
represents the value of the electricity sales concession granted to Clesa, which
has no expiration date, and is being amortized over 40 years.
In April 1998, a subsidiary of AES acquired for no consideration a 45 MW
hydroelectric plant (Caracoles) from the government of the San Juan Province in
Argentina. The project represents the operation, under a 30 year concession
agreement, and refurbishment, of the hydroelectric plant as well as the
construction of a new 230 MW plant (Punta Negra) at the same site. The
construction of Punta Negra will be funded with cash flows from Caracoles as
well as a contribution of approximately $139 million from the government of San
Juan. AES will operate the Punta Negra facility under a 30 year concession
agreement, at which time the facility will revert to the government of San Juan.
In May 1998, a subsidiary of AES acquired three natural gas-fired electric
generating stations (Southland) from Southern California Edison for
approximately $786 million. Approximately $45 million of the purchase price
represents goodwill and is being amortized over 40 years.
In June 1998, a subsidiary of AES acquired approximately 90% of Empresa
Distribuidora de La Plata S.A. (Edelap), an electric distribution company in the
province of Buenos Aires, Argentina for approximately $355 million. In November
1998, the subsidiary sold one-third of its 90% interest for approximately $61
million and a proportionate percentage of related project debt (approximately
$64 million). At December 31, 1998, the Company's ownership interest is 60%.
Approximately $129 million of the acquisition cost represents the value of the
90 year electricity sales concession agreement, which is being amortized over 40
years.
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. The remaining interest is owned by the
Orissa state government. OPGC owns and operates a 420 MW mine-mouth coal-fired
power station. Also in late December, the Company acquired a 75% interest in
Telasi, the electricity distribution company of Tbilisi, Republic of Georgia,
for approximately $26 million. The Company has not recorded any income or
earnings from these two acquisitions during 1998 because it took over operating
control of both companies in January 1999.
In January 1997, the Company acquired an additional 2.4% interest in
Light-Servicos de Electricidade S.A. (Light), a publicly-held Brazilian
corporation that operates as the concessionaire of an integrated electric power
generation, transmission and distribution system which serves Rio de Janeiro,
Brazil. In June 1996, AES and three other partners participated in a consortium
which acquired a 50.44% controlling interest. The additional investment in 1997
of approximately $82 million, increased AES's holdings in Light to 13.75%.
Through the consortium, the Company has the ability to exercise significant
influence over the operations of Light and records the investment using the
equity method.
In May 1997, AES completed its amalgamation with AES China Generating Co.,
Ltd. (Chigen). As a result of the amalgamation, the Company issued approximately
5 million shares of AES Common Stock, valued at $157 million, in exchange for
all of the out-
<PAGE>
standing Chigen Class A Common Stock. Approx imately $29 million of the
transaction cost represents values assigned to power purchase contracts which
are being amortized over their respective lives, which range from 16 to 25
years.
Also in May 1997, a subsidiary of the Company acquired 60% of two electric
distribution companies sold as part of the Argentine government privatization
program. The companies purchased were Empresa Distribudora Energia Norte (Eden),
which serves the northern part of the Buenos Aires province, and Empresa
Distribudora Energia Sur (Edes), which serves the southern part of the province.
The Company, together with its partner, invested approximately $565 million to
acquire a 90% ownership interest in each company. Approximately $204 million of
the acquisition cost represents the value of the 95 year electricity sales
concessions granted to Eden and Edes, and is being amortized over 40 years.
In June 1997, AES acquired the international assets of Destec Energy, Inc.
for approximately $439 million. The purchase included five electric generating
plants in construction or operation and a number of power projects in
development. The plants acquired by AES (with ownership percentages in
parenthesis) include a 110 MW gas-fired combined cycle plant in Kingston, Canada
(Kingston) (50%); a 405 MW gas-fired combined cycle plant under construction in
Terneuzen, Netherlands (Elsta) (50%); a 140 MW gas-fired simple cycle plant in
Cornwall, England (Indian Queens) (100%); a 235 MW oil-fired simple cycle plant
in Santo Domingo, Dominican Republic (Los Mina) (100%); and a 1,600 MW
coal-fired plant in Victoria, Australia (Hazelwood) (20%). Approximately $172
million of the acquisition cost represents the value of various contracts which
are being amortized over the respective lives which range from 14 to 34 years,
and a $67 million liability was accrued related to the completion of
construction at Elsta. Construction at Elsta was completed in September 1998.
The Hazelwood investment was classified as held for sale at December 31,
1997, and was subsequently sold in February 1998. The Company recognized a
foreign currency transaction loss of $5 million in 1997 related to this
investment.
In October 1997, a subsidiary of the Company acquired an 85% interest in
two hydro-electric stations (GES) and four combined heat and power stations
(TETS) in eastern Kazakhstan (Altai). Altai has a total electric capacity of
1,384 MW with an additional equivalent thermal capacity of approximately 1,000
MW. The purchase price was approximately $24 million for the 20 year GES
concession and the TETS shares.
These acquisitions were all accounted for as purchases. The purchase price
allocations for Clesa, Caracoles, Southland, Edelap, Telasi and OPGC have been
completed on a preliminary basis, subject to adjustments resulting from
additional facts that may come to light when the engineering, environmental, and
legal analyses are completed during the respective allocation periods. The
accompanying financial statements include the operating results of Clesa from
February 1998, Caracoles from April 1998, Southland from May 1998, Edelap from
June 1998, Eden and Edes from May 1997, equity in earnings of Cemig and Kingston
from June 1997, and the operating results of Los Mina and Indian Queens from
June 1997, and Sul and Altai from October 1997.
The table below presents supplemental unaudited proforma operating results
as if all of the acquisitions had occurred at the beginning of 1997 (in
millions, except per share amounts):
<TABLE>
<CAPTION>
- ---------------------------------------
For the year ended 1998 1997
- ---------------------------------------
<S> <C> <C>
Revenues $2,498 $ 2,100
Income before
extraordinary item 304 151
Net income 308 148
Basic earnings
per share $ 1.74 $ 0.89
Diluted earnings
per share $ 1.68 $ 0.87
- ---------------------------------------
</TABLE>
The proforma results are based upon assumptions and estimates which the
Company believes are reasonable. The proforma results do not purport to be
indicative of the results that actually would have been obtained had the
acquisitions occurred on January 1, 1997, nor are they intended to be a
projection of future results.
In January 1999, a subsidiary of the Company acquired a 49% interest in
three hydro-electric generating facilities in Panama for approximately $91
million.
<PAGE>
3. INVESTMENTS
The short-term investments and debt service reserves and other deposits were
invested as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31 1998 1997
================================================================================
RESTRICTED CASH AND CASH EQUIVALENTS (1) $ 108 $ 130
- --------------------------------------------------------------------------------
<S> <C> <C>
HELD-TO-MATURITY
U.S. treasury and government agency securities 15 37
Foreign certificates of deposit 1 95
Commercial paper 95 66
- --------------------------------------------------------------------------------
Subtotal 111 198
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. treasury and government agency securities - 15
Certificates of deposit - 2
Commercial paper 21 15
Floating rate notes - 3
- --------------------------------------------------------------------------------
Subtotal 21 35
- --------------------------------------------------------------------------------
TOTAL $ 240 $ 363
================================================================================
</TABLE>
(1) amounts required to be maintained in cash in accordance with certain
covenants of various project financing agreements.
At December 31, 1998 and 1997, the Company's investments were classified as
either held-to-maturity or available-for-sale. The amortized cost and estimated
fair value of the investments at December 31, 1998 and 1997 classified as
held-to-maturity and available-for-sale were approximately the same.
Short-term investments classified as held-to-maturity and available-for-sale
were $16 million and $15 million, respectively, at December 31, 1998, and $111
million and $16 million, respectively, at December 31, 1997. Also included in
short-term investments at December 31, 1998 is restricted cash of approximately
$4 million. There was no restricted cash in short-term investments at December
31, 1997.
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 represents summarized financial
information (in millions) for equity method affiliates on a combined 100% basis.
Amounts presented for 1998 include the accounts of Northern/AES Energy (45%
owned U.S. affiliate) and for both 1998 and 1997 include the accounts of NIGEN,
Ltd. (NIGEN) (47% owned UK affiliate), Medway Power Ltd. (Medway)(25% owned UK
affiliate), Light (13.75% owned Brazilian affiliate), affiliates of Chigen,
Kingston (50% owned Canadian affiliate), Elsta (50% owned Netherlands
affiliate), and Cemig (9.4% and 13.1%, in 1998 and 1997, respectively, owned
Brazilian affiliate). Amounts presented for 1996 include the accounts of NIGEN,
Medway, Light (11.35% owned Brazilian affiliate), and affiliates of Chigen.
<TABLE>
<CAPTION>
================================================================================
AS OF AND FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Revenues $ 8,091 $ 3,991 $ 1,959
Operating income 2,079 984 497
Net income 1,146 670 383
Current assets 2,712 1,698 889
Noncurrent assets 19,025 14,800 4,914
Current liabilities 4,809 1,809 863
Noncurrent liabilities 7,356 4,752 2,108
Stockholders' equity 9,572 9,937 2,832
================================================================================
</TABLE>
The Company's after tax share of undistributed earnings of affiliates
included in consolidated retained earnings was $50 million and $57 million at
December 31, 1998 and 1997, respectively. The Company charged and recognized
construction revenues, management fees and interest on advances to its
affiliates which aggregated $19 million, $42 million, and $9 million for each of
the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
5. DEBT
PROJECT FINANCING DEBT -- Project financing debt at December 31, 1998 and 1997
consisted of the following (in millions):
<TABLE>
<CAPTION>
======================================================================================
INTEREST FINAL DECEMBER 31
RATE(1) MATURITY 1998 1997
======================================================================================
<S> <C> <C> <C> <C>
SENIOR DEBT - VARIABLE RATE
Notes payable to banks 7.3% 2017 $3,011 $1,830
Commercial paper 6.9% 2007 291 598
Debt to (or guaranteed by) multilateral
or export credit agencies 5.8% 2010 452 429
SENIOR DEBT - FIXED RATE
Notes payable to banks 10.0% 2009 689 623
Capital leases 7.6% 2022 135 143
Tax-exempt bonds 7.4% 2019 74 74
Chigen bonds 10.1% 2006 162 180
Debt to (or guaranteed by) multilateral
or export credit agencies 6.5% 2008 135 133
SUBORDINATED DEBT - VARIABLE AND FIXED RATE 12.4% 2014 53 75
- --------------------------------------------------------------------------------------
SUBTOTAL 5,002 4,085
Less current maturities (1,405) (596)
- --------------------------------------------------------------------------------------
TOTAL $3,597 $3,489
======================================================================================
</TABLE>
(1) weighted average interest rate at December 31, 1998
Project financing debt borrowings are primarily collateralized by the
capital stock of the relevant subsidiary and in certain cases, the physical
assets of and all significant agreements associated with such business.
The Company has interest rate swap and forward interest rate swap
agreements in an aggregate notional principal amount of $1,366 million at
December 31, 1998. The swap agreements effectively change the variable interest
rates on the portion of the debt covered by the notional amounts to weighted
average fixed rates ranging from approximately 7.4% to 12.1%. The agreements
expire at various dates from 1999 through 2014. In the event of nonperformance
by the counterparties, the Company may be exposed to increased interest rates,
however, the Company does not anticipate nonper formance by the counterparties,
which are multinational financial institutions. At December 31, 1998,
subsidiaries of the Company have interest rate cap, floor and forward interest
rate cap agreements at various rates with remaining terms ranging from one to 18
years in an aggregate notional amount of $1,365 million.
The commercial paper borrowings are supported by an irrevocable letter of
credit issued by a U.S. financial institution. In the event of nonperformance or
credit deterioration of the institution, the Company may be exposed to the risk
of higher effective interest rates. The Company does not believe that such
nonperformance or credit deterioration is likely.
At December 31, 1998, the current portion of project financing debt
includes $1,053 million of short-term loans incurred to finance the acquisitions
of Sul ($729 million) in Brazil, and Eden, Edes and Edelap ($324 million) in
Argentina. The Company's intention is to replace some or all of such loans with
long-term project financing.
<PAGE>
OTHER NOTES PAYABLE -- Other notes payable at December 31, 1998 and 1997
consisted of the following (in millions):
<TABLE>
<CAPTION>
=======================================================================================================================
Interest Final First Call
Rate (1) Maturity Date 1998 1997
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Corporate revolving bank loan (1) 7.21% 2000 -- $ 233 $ 27
Senior notes 8.00% 2008 2000 200 --
Senior subordinated notes 10.25% 2006 2001 250 250
Senior subordinated notes 8.38% 2007 2002 325 325
Senior subordinated notes 8.50% 2007 2002 375 375
Senior subordinated debentures 8.88% 2027 2004 125 125
Convertible junior subordinated notes 4.50% 2005 2001 150 __
Unamortized discounts (6) (6)
- -----------------------------------------------------------------------------------------------------------------------
SUBTOTAL 1,652 1,096
Less current maturities (8) --
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $1,644 $1,096
=======================================================================================================================
</TABLE>
(1) weighted average interest rate at December 31, 1998 on floating rate loan.
Under the terms of the $600 million corporate revolving bank loan and
letter of credit facility (Revolver), the Company must reduce its direct
borrowings to $225 million for 30 consecutive days annually to obtain additional
loans. Commitment fees on the unused portion at December 31, 1998 are .38% per
annum, and as of that date $173 million was available. The Company's senior
subordinated notes are general unsecured obligations of the Company.
The Company's 9.75% senior subordinated notes due 2000 were refinanced in
August 1997. As a result, the Company recorded an extraordinary loss of $3
million, which is net of a $2 million tax benefit.
Chigen bonds in the amount of $18 million, were redeemed in 1998 prior to
maturity. As a result, the Company has recorded an extraordinary gain of $4
million, net of income tax of $2 million.
FUTURE MATURITIES OF DEBT -- Scheduled maturities of total debt at December
31, 1998 are (in millions):
=====================================
1999 $1,413
2000 566
2001 358
2002 282
2003 268
Thereafter 3,767
- -------------------------------------
TOTAL $6,654
=====================================
COVENANTS -- The terms of the Company's Revolver, senior and junior
subordinated notes and project financing debt agreements contain certain
restrictive covenants. The covenants provide for, among other items, maintenance
of certain reserves, and require that minimum levels of working capital, net
worth and certain financial ratio tests are met. The most restrictive of these
covenants include limitations on incurring additional debt and on the payment of
dividends to stockholders.
The project financing debt limitations of AES's subsidiaries permit the
payment of dividends to the parent company out of current cash flow for
quarterly, semi-annual or annual periods only at the end of such periods and
only after payment of principal and interest on project loans due at the end of
such periods. As of December 31, 1998, approximately $57 million was available
under project loan documents for distribution by U.S. subsidiaries.
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES-- As of December 31, 1998, the Company and its consolidated
subsidiaries were obligated under long-term non-cancelable operating leases,
primarily for office rental and site leases. Rental expense for operating leases
was $4 million, $6 million and $4 million in the years ended December 31, 1998,
1997 and 1996, respectively. The future minimum lease commitments under these
leases are $4 million for 1999 and 2000, $3 million for 2001 and 2002, $6
million for 2003, and a total of $71 million for the years thereafter.
CONTRACTS -- A subsidiary of the Company has entered into "take-or-pay"
contracts for the purchase of electricity with a term of up to thirteen years.
Purchases in 1998 were approximately $214 million. The future commitments under
these contracts are $228 million for 1999, $229 million for 2000, $237 million
for 2001, $253 million for 2002, $231 million for 2003 and a total of $1,229
million for the years thereafter.
Operating subsidiaries of the Company enter into various long-term
contracts for the purchase of fuel subject to termination only in certain
limited circumstances. These contracts have remaining terms of 1 to 28 years.
One subsidiary has entered into a "take-or-pay" contract for the purchase of
natural gas. Purchases in 1998 were approximately $12 million. The future
commitments under this contract are $27 million for 1999 through 2002, $28
million for 2003 and $136 million thereafter.
In December 1998, the Company entered into an agreement with one of its
electricity customers for one of its plants whereby the customer will buy out
the remaining term of the contract. The agreement is subject to regulatory
approval. Related to this agreement, the Company has either entered into
agreements or is negotiating agreements to terminate its other long-term
commitments related to the operation of this plant.
ACQUISITIONS -- In August 1998, AES won a bid to acquire six coal-fired,
electric generating stations from NGE Generation, Inc., an affiliate of New York
State Electric and Gas Corporation, for approximately $950 million. In November
1998, AES agreed to acquire the outstanding shares of Cilcorp, Inc., an
integrated distribution company in Illinois for approximately $885 million. The
Company anticipates completion of both of these acquisitions in 1999, pending
regulatory and other approvals.
ENVIRONMENTAL -- The Company reviews its obligations as it relates to
compliance with environmental laws, including site restoration and remediation.
Because of the uncertainties associated with environmental assessment and
remediation activities, future costs of compliance or remediation could be
higher or lower than the amount currently accrued. Based on currently available
information, the Company does not believe that any costs incurred in excess of
those currently accrued will have a material effect on the financial condition
of the Company.
TRADING ACTIVITY COMMITMENTS -- A subsidiary and an affiliate of the
Company participate in the trading of electricity forward contracts with various
counterparties and as a result, the Company is exposed to the risk of trading
losses by its subsidiary or affiliate, and the risk of nonperformance by its
subsidiary, affiliate or counterparties. The Company has provided limited
guarantees aggregating $38 million which are included in the amounts disclosed
below. The Company does not anticipate nonperformance by its subsidiary,
affiliate or the counterparties.
GUARANTEES -- In connection with certain of its project financing,
acquisition and power purchase agreements, AES has expressly undertaken limited
obligations and commitments, most of which will only be effective or will be
terminated upon the occurrence of future events. These obligations and
commitments, excluding those collateralized by letter of credit obligations
discussed below, were limited as of December 31, 1998, by the terms of the
agreements, to an aggregate of approximately $399 million. The Company is also
obligated under other commitments which are limited to amounts, or percentages
of amounts, received by AES as distributions from its project subsidiaries.
These amounts aggregated $33 million as of December 31, 1998. In addition, the
Company has commitments to fund its equity in projects currently under
development or in construction. At December 31, 1998 such commitments to invest
amounted to approximately $19 million.
LETTERS OF CREDIT -- At December 31, 1998, the Company had $194 million in
letters of credit outstanding under its Revolver which operate to guarantee
performance relating to certain project development activities and subsidiary
operations. The Company pays a letter of credit fee ranging from 0.75% to 1.50%
on the outstanding amounts. In addition, the Company had $29 million in surety
bonds outstanding at December 31, 1998.
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 will have a material adverse effect on its results of
operations, financial position, or cash flows.
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
During 1997, two wholly-owned special purpose business trusts (individually, AES
Trust I and AES Trust II and collectively, the Trusts) issued Term Convertible
Securities (Tecons). On March 31, AES Trust I issued 5 million of $2.6875 Tecons
(liquidation value $50) for total proceeds of $250 million and concurrently
purchased $250 million of 5.375% junior subordinated convertible debentures due
2027 of AES (individually the 5.375% Debentures). On October 29, AES Trust II
issued 6 million of $2.75 Tecons (liquidation value $50) for total proceeds of
$300 million and concurrently purchased $300 million of 5.5% junior subordinated
convertible debentures due 2012 of AES (individually the 5.5% Debentures and
collectively with the 5.375% Debentures the Junior Debentures). The sole assets
of AES Trust I
<PAGE>
are the 5.375% Debentures and the sole assets of AES Trust II are the 5.5%
Debentures. The obligations of the Trusts, as provided under the terms of the
Tecons, are fully and unconditionally guaranteed by AES.
Dividends on the Tecons are payable quarterly at an annual rate of 5.375%
by AES Trust I and 5.5% for AES Trust II. The Trusts are each permitted to defer
payment of dividends for up to 20 consecutive quarters, provided that AES has
exercised its right to defer interest payments under the corresponding Junior
Debentures. During such deferral periods, dividends on the Tecons will
accumulate quarterly and accrue interest and AES may not declare or pay
dividends on its common stock. The Tecons are convertible into the common stock
of AES at each holder's option prior to March 31, 2027 for AES Trust I and
September 30, 2012 for AES Trust II at the rate of 1.3812 and .8914 shares,
respectively, representing a conversion price equivalent to $36.20 and $56.09
per share respectively.
AES, at its option, can redeem the 5.375% Debentures after March 31, 2000
which would result in the required redemption of the Tecons issued by AES Trust
I, for $51.68 per Tecon, reduced annually by $0.336 to a minimum of $50 per
Tecon and can redeem the 5.5% Debentures after September 30, 2000 which would
result in the required redemption of the Tecons issued by AES Trust II, for
$51.72 per Tecon, reduced annually by $0.344 to a minimum of $50 per Tecon.
Interest expense for the year ended December 31, 1998 and 1997 includes $ 14
million and $10 million, respectively related to the dividends accrued on the
Tecons of AES Trust I and $17 million and $3 million related to AES Trust II,
respectively.
8. STOCKHOLDERS' EQUITY
SALE OF STOCK -- In August 1998, the Company sold 4.3 million shares of common
stock at $44.625 per share. Net proceeds from the offering were $184 million.
STOCK SPLIT AND STOCK DIVIDEND -- On July 15, 1997 the Board of Directors
authorized a two-for-one split, effected in the form of a stock dividend,
payable to stockholders of record on August 28, 1997. Accordingly, all
outstanding share, per share and stock option data in all periods presented have
been restated to reflect the split.
STOCK CONVERSION -- On July 30, 1996, $49 million of convertible
debentures, net of conversion costs, were converted into 3.8 million shares of
AES common stock at a conversion price of $13.08 per share.
STOCK OPTIONS AND WARRANTS -- The Company has granted options to purchase
shares of common stock under its stock option plans. Under the terms of the
plans, the Company may issue options to purchase shares of the Company's common
stock at a price equal to 100% of the market price at the date the option is
granted. The options become eligible for exercise under various schedules. At
December 31, 1998, there were approximately 3.4 million shares reserved for
future grants under the plans.
<TABLE>
<CAPTION>
A summary of the option activity follows (in thousands of shares):
========================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
========================================================================================================================
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 8,896 $13.29 8,020 $ 9.30 8,126 $ 7.28
Exercised during the year (1,043) 8.60 (941) 7.78 (960) 5.35
Forfeitures during the year (10) 31.99 (58) 11.23 (432) 10.28
Granted during the year 83(1) 34.36 999 34.42 1,286 19.39
Conversion of Chigen options -- -- 876 19.67 -- --
- ------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 7,926 $14.10 8,896 $13.29 8,020 $ 9.30
========================================================================================================================
Eligible for exercise - end of year 6,855 $12.54 6,163 $ 9.37 4,264 $ 6.43
========================================================================================================================
</TABLE>
(1) Additional stock options for 1998 performance were granted in February 1999.
The Company issued approximately one million options to purchase shares at a
price of $34.25 per share.
The following table summarizes information about stock options outstanding at
December 31, 1998 (in thousands of shares):
<TABLE>
<CAPTION>
==================================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
==================================================================================================================
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
RANGE OF TOTAL REMAINING LIFE AVERAGE TOTAL AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.78 - $3.24 1,400 1.8 $ 2.97 1,400 $ 2.97
$3.25 - $9.88 1,849 5.1 8.88 1,475 8.76
$9.89 - $14.40 2,045 6.3 10.42 2,029 10.42
$14.41 - $22.85 1,540 7.3 20.11 1,408 20.30
$22.86 - $58.00 1,092 8.3 35.65 543 35.22
- -----------------------------------------------------------------------------------------------------------------
TOTAL 7,926 $ 14.10 6,855 $ 12.54
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company accounts for its stock-based compensation plans under APB No.
25, and has adopted SFAS No. 123, Accounting For Stock-Based Compensation, for
disclosure purposes. No compensation expense has been recognized in connection
with the options, as all options have been granted only to AES people, including
Directors, with an exercise price equal to the market price of the Company's
common stock on the date of grant. For SFAS No. 123 disclosure purposes, the
weighted average fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
==================================================
1998 1997 1996
==================================================
Interest rate (risk-free) 4.7% 5.9% 6.5%
Volatility 47% 37% 28%
==================================================
Using these assumptions, an expected option life of 7 years and a dividend
yield of zero, the weighted average fair value of each stock option granted was
$19.02, $17.86 and $8.81, for the years ended December 31, 1998, 1997 and 1996,
respectively.
Had compensation expense been determined under the provisions of SFAS No.
123, utilizing the assumptions detailed in the preceding paragraph, the
Company's net income and earnings per share for the years ended December 31,
1998, 1997 and 1996 would have been reduced to the following pro forma amounts
(in millions):
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
================================================================================
NET INCOME:
<S> <C> <C> <C>
As reported $ 311 $185 $ 125
Pro forma 301 174 123
BASIC EARNINGS PER SHARE:
As Reported $1.75 $1.11 $0.83
Pro forma 1.70 1.04 0.81
DILUTED EARNINGS PER SHARE:
As reported $1.69 $1.09 $0.80
Pro forma 1.64 1.00 0.78
================================================================================
</TABLE>
The disclosures of such amounts and assumptions are not intended to forecast
any possible future appreciation of the Company's stock or change in dividend
policy.
In addition to the options, the Company has outstanding warrants to
purchase up to 1.3 million shares of its common stock at $14.72 per share
through July 2000.
CHIGEN -- In May 1997, the Company acquired all of the outstanding Class A
shares of Chigen by amalgamating Chigen with a wholly-owned subsidiary of the
Company. As a result of this transaction, the Company issued approximately 5
million shares of its common stock. As part of the amalgamation, the Company
also converted the outstanding options of the Chigen stock option plan to AES
stock options at the ratio of .29 to 1.
9. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computations for income before
extraordinary item. In the table below Income represents the numerator (in
millions) and Shares represent the denominator (in thousands):
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
=======================================================================================================================
$ PER $ PER $ PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
- -----------------------------------------------------------------------------------------------------------------------
BASIC EPS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $307 177.5 $1.73 $188 166.6 $1.13 $125 151.5 $0.83
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants -- 4.3 -- 4.4 -- 2.7
Stock units allocated to deferred
compensation plans -- 0.3 -- 0.5 -- 0.5
Tecons and other convertible debt,
net of tax 9 6.9 10 6.3 1 2.5
- -----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $316 189.0 $1.67 $198 177.8 $1.11 $126 157.2 $0.80
=======================================================================================================================
</TABLE>
<PAGE>
10. INCOME TAXES
INCOME TAX PROVISION -- The provision for income taxes consists of the following
(in millions):
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Federal
Current $ (9) $ 7 $ 19
Deferred 61 22 27
State
Current 3 19 12
Deferred (5) (6) (2)
Foreign
Current 82 18 10
Deferred 13 17 8
- --------------------------------------------------------------------------------
Total $ 145 $ 77 $ 74
================================================================================
</TABLE>
The Company records its share of earnings of its equity investees on a
pre-tax basis. The Company's share of the investee's income taxes is recorded in
income tax expense; amounts for prior years have been reclassified as such.
EFFECTIVE AND STATUTORY RATE RECONCILIATION -- A reconciliation of the U.S.
statutory Federal income tax rate to the Company's effective tax rate as a
percentage of income before taxes (after minority interest) is as follows:
<TABLE>
<CAPTION>
================================================================================
For the Years Ended December 31 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Statutory Federal tax rate 35% 35% 35%
Change in valuation allowance -- (1) (1)
State taxes, net of Federal tax benefit (1) 3 3
Taxes on foreign earnings (1) (7) --
Other - net (1) (1) --
- --------------------------------------------------------------------------------
Effective tax rate 32% 29% 37%
================================================================================
</TABLE>
DEFERRED INCOME TAXES -- Deferred income taxes relate principally to
accelerated depreciation methods used for tax purposes and certain other
expenses which are deducted for income tax purposes in different periods than
for financial reporting purposes. Deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. These items are
stated at the enacted tax rates that are expected to be in effect when taxes are
actually paid or recovered.
As of December 31, 1998, the Company had Federal net operating loss
carryforwards for tax purposes of approximately $85 million expiring from 2008
through 2018, Federal investment tax credit carryforwards for tax purposes of
approximately $51 million expiring in years 2002 through 2006, and Federal
alternative minimum tax credits of approximately $44 million which carryforward
without expiration. As of December 31, 1998, the Company had foreign net
operating loss carryforwards of approximately $100 million which expire at
various times beginning in 2001, and some of which carryforward without
expiration. The Company had state net operating loss carryforwards as of
December 31, 1998 of approximately $215 million expiring in years 1999 through
2018, and state tax credit carryforwards of approximately $11 million expiring
in years 2001 through 2008.
The valuation allowance increased by $2 million during 1998 to $33 million
at December 31, 1998. This increase was the result of increased foreign net
operating loss carryforwards, the ultimate realization of which is uncertain.
The Company believes that it is more likely than not that the remaining deferred
tax assets will be realized.
<PAGE>
Deferred tax assets and liabilities are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997
================================================================================
<S> <C> <C>
Differences between book and tax basis of
property and total deferred tax liability $ 469 $ 476
- --------------------------------------------------------------------------------
Operating loss carryforwards (69) (75)
Bad debt and other book provisions (48) (47)
Retirement costs (26) (31)
Tax credit carryforwards (107) (104)
Other deductible temporary differences (55) (24)
- --------------------------------------------------------------------------------
Total gross deferred tax asset (305) (281)
Less: valuation allowance 33 31
- --------------------------------------------------------------------------------
Total net deferred tax asset (272) (250)
- --------------------------------------------------------------------------------
Net deferred tax liability $ 197 $ 226
================================================================================
</TABLE>
Undistributed earnings of certain foreign affiliates aggregated $257
million on December 31, 1998. The Company considers these earnings to be
indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred
taxes have been recorded with respect to such earnings. Should the earnings be
remitted as dividends, the Company may be subject to additional U.S. taxes, net
of allowable foreign tax credits. It is not practicable to estimate the amount
of any additional taxes which may be payable on the undistributed earnings. A
deferred tax asset of $35 million has been recorded as of December 31, 1998 for
the cumulative effects of certain foreign currency translation losses.
Income from continuing operations before income taxes and extraordinary
items consisted of the following:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
================================================================================
<S> <C> <C> <C>
United States $211 $199 $175
Foreign 241 66 24
- --------------------------------------------------------------------------------
Total $452 $265 $199
================================================================================
</TABLE>
<PAGE>
11. PROFIT SHARING AND DEFERRED
COMPENSATION PLANS
PROFIT SHARING AND STOCK OWNERSHIP PLANS -- The Company sponsors two profit
sharing and stock ownership plans, qualified under section 401 of the Internal
Revenue Code, which are available to eligible AES people. The plans provide for
Company matching contributions, other Company contributions at the discretion of
the Compensation Committee of the Board of Directors, and discretionary tax
deferred contributions from the participants. Participants are fully vested in
their own contributions and the Company's matching contributions. Participants
vest in other Company contributions over a five-year period. Company
contributions to the plans were approximately $5 million for the years ended
December 31, 1998 and 1997 and $4 million for the year ended December 31, 1996.
DEFERRED COMPENSATION PLANS -- The Company sponsors a deferred compensation
plan under which directors of the Company may elect to have a portion, or all,
of their compensation deferred. The amounts allocated to each participant's
deferred compensation account may be converted into common stock units. Upon
termination or death of a participant, the Company is required to distribute,
under various methods, cash or the number of shares of common stock accumulated
within the participant's deferred compensation account. Distribution of stock is
to be made from common stock held in treasury or from authorized but previously
unissued shares. The plan terminates and full distribution is required to be
made to all participants upon any change of control of the Company (as defined
in the plan document).
In addition, the Company sponsors an executive officers' deferred
compensation plan. At the election of an executive officer, the Company will
establish an unfunded, non-qualified compensation arrangement for each officer
who chooses to terminate participation in the Company's profit sharing and
employee stock ownership plans. The participant may elect to forego payment of
any portion of his or her compensation and have an equal amount allocated to a
contribution account. In addition, the Company will credit the participant's
account with an amount equal to the Company's contributions (both matching and
profit sharing) that would have been made on such officer's behalf if he or she
had been a participant in the profit sharing plan. The participant may elect to
have all or a portion of the Company's contributions converted into stock units.
Dividends paid on common stock are allocated to the participant's account in the
form of stock units. The participant's account balances are distributable upon
termination of employment or death.
The Company also sponsors a supplemental retirement plan covering certain
highly-compensated AES people. The plan provides incremental profit sharing and
matching contributions to participants that would have been paid to their
accounts in the Company's profit sharing plan if it were not for limitations
imposed by income tax regulations. All contributions to the plan are vested in
the manner provided in the Company's profit sharing plan, and once vested are
nonforfeitable. The participant's account balances are distributable upon
termination of employment or death.
DEFINED BENEFIT PLANS -- Two of the Company's subsidiaries, Sul and Clesa,
have defined benefit pension plans covering substantially all of their
respective employees. Pension benefits are based on years of credited service,
age of the participant and average earnings. Sul's plan assets are comprised of
Brazilian government securities and bonds, stocks of publicly-traded Brazilian
companies and real estate holdings. Clesa's pension plan is unfunded.
<PAGE>
Significant assumptions used in the calculation of pension expense and
obligation are as follows:
<TABLE>
<CAPTION>
================================================================================
1998 1997(1)
Sul Clesa
================================================================================
<S> <C> <C> <C>
Discount rate 6% 11% 6%
Rate of compensation increase 2% 7% 2%
Long-term rate of return on plan assets 6% -- 6%
================================================================================
</TABLE>
Net benefit cost for the year ended December 31, 1998 and the two months
ended December 31, 1997 (subsequent to the date of the Sul acquisition) includes
the following components (in millions):
<TABLE>
<CAPTION>
================================================================================
December 31 1998 1997(1)
================================================================================
<S> <C> <C>
Service cost $ 2 $ .3
Interest cost on projected benefit obligation 3 .1
Expected return on plan assets (1) .3
Recognized actuarial gain -- .1
- --------------------------------------------------------------------------------
Net benefit cost $ 4 $ .8
================================================================================
</TABLE>
The changes in the benefit obligations of the two plans combined for the years
ended December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
CHANGES IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $ 72 $--
Effect of foreign currency exchange rate change
on beginning balance (5) --
Service cost 2 --
Interest cost 3 --
Plan participant contributions -- 1
Actuarial loss/(gain) 6 (2)
Acquisition 3 73
Benefits paid (1) --
- --------------------------------------------------------------------------------
Benefit obligation as of December 31 $ 80 $ 72
================================================================================
</TABLE>
The changes in the plan assets of the two plans combined for the years ended
December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
1998 1997(1)
================================================================================
CHANGES IN PLAN ASSETS:
<S> <C> <C>
Fair value of plan assets at beginning of year $ 31 $--
Effect of foreign currency exchange rate change
on beginning balance (2) --
Actual return on plan assets 3 1
Acquisition -- 28
Employer contribution 2 1
Plan participant contributions -- 1
Benefits paid (1) --
- --------------------------------------------------------------------------------
Fair value of plan assets as of December 31 33 31
================================================================================
</TABLE>
The funded status of the two plans combined for the years ended as of December
31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
1998 1997(1)
================================================================================
<S> <C> <C>
Funded status (47) (41)
Unrecognized net actuarial loss/(gain) 5 (3)
- --------------------------------------------------------------------------------
Accrued benefit obligation cost as of December 31 $ (42) $ (44)
================================================================================
</TABLE>
(1) Sul only, as Clesa was acquired during 1998 (see Note 2).
The Company is not obligated under any other material post-retirement plans
other than the profit sharing, deferred compensation plans and defined benefit
plans described in this Note.
<PAGE>
12. SEGMENTS
The Company considers its reportable segments to be generation and distribution.
Information about the Company's operations and assets by segment is as follows
(in millions):
<TABLE>
<CAPTION>
========================================================================================================================
PRE-TAX INVESTMENT IN
DEPRECIATION OPERATING EQUITY IN TOTAL AND ADVANCES PROPERTY
REVENUES(1) AND AMORTIZATION INCOME EARNINGS ASSETS TO AFFILIATES ADDITIONS
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Generation $1,443 $ 126 $ 563 $ 33 $ 5,682 $ 495 $ 369
Distribution 939 70 218 199 4,687 1,438 148
Corporate and services 16 -- (48) -- 412 -- --
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $2,398 $ 196 $ 733 $ 232 $10,781 $1,933 $ 517
========================================================================================================================
YEAR ENDED DECEMBER 31, 1997
Generation $1,081 $ 93 $ 380 $ 21 $ 4,404 $ 315 $ 483
Distribution 280 21 24 105 4,269 1,548 28
Corporate and services 50 -- (36) -- 236 -- --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $1,411 $ 114 $ 368 $ 126 $ 8,909 $1,863 $ 511
========================================================================================================================
YEAR ENDED DECEMBER 31, 1996
Generation $ 824 $ 65 $ 309 $ 21 $ 3,002 $ 82 $ 506
Distribution -- -- -- 28 433 409 --
Corporate and services 11 -- (31) -- 187 -- --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 835 $ 65 $ 278 $ 49 $ 3,622 $ 491 $ 506
========================================================================================================================
</TABLE>
(1) Intersegment revenues for the years ended December 31, 1998 and 1997 were
$69 million and $34 million, respectively.
Information about the Company's operations and long-lived assets by country are
as follows (in millions):
<TABLE>
<CAPTION>
========================================================================================================================
US ARGENTINA BRAZIL HUNGARY PAKISTAN OTHER TOTAL FOREIGN TOTAL
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
1998 $ 655 $423 $478 $227 $213 $402 $1,743 $2,398
1997 577 291 74 220 23 226 834 1,411
1996 554 146 -- 85 -- 50 281 835
========================================================================================================================
LONG-LIVED ASSETS
1998 $2,329 $1,017 $848 $154 $505 $980 $3,504 $5,833
1997 1,424 587 875 172 490 726 2,850 4,274
1996 1,281 203 6 202 393 182 986 2,267
========================================================================================================================
</TABLE>
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's assets and liabilities have been
determined using available market information. The estimates are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value of current financial assets, current financial liabilities,
and debt service reserves and other deposits, are estimated to be equal to their
reported carrying amounts. The fair value of project financing debt, excluding
capital leases, is estimated differently based upon the type of loan. For
variable rate loans, carrying value approximates fair value. For fixed rate
loans, the fair value is estimated using discounted cash flow analyses based on
the Company's current incremental borrowing rates. The fair value of interest
rate swap, cap and floor agreements is the estimated net amount that the Company
would pay to terminate the agreements as of the balance sheet date. The
estimated fair values of the tax exempt bonds and Chigen bonds (both included in
project financing debt), certain of the other notes payable and Tecons are based
on quoted market prices.
The estimated fair values of the Company's debt and derivative financial
instruments as of December 31, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31 1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
================================================================================
<S> <C> <C> <C> <C>
Project financing debt $4,867 $4,847 $3,942 $3,953
Other notes payable 1,652 1,687 1,096 1,116
Tecons 550 657 550 661
Interest rate swaps -- 101 -- 81
Interest rate caps and floors, net -- (5) -- --
================================================================================
</TABLE>
The fair value estimates presented herein are based on pertinent information as
of December 31, 1998 and 1997. The Company is not aware of any factors that
would significantly affect the estimated fair value amounts since December 31,
1998.
14. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of
start-up and organization costs. The effect of adopting this Statement in 1999
is not expected to be material to the Company.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 established standards for the accounting and reporting of derivative
instruments and hedging activities and will be adopted by the Company during
fiscal year 2000. The Company is currently evaluating the impact of the adoption
of SFAS No. 133.
<PAGE>
15. QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of operations
(in millions, except per share amounts):
<TABLE>
<CAPTION>
=======================================================================================================================
QUARTERS ENDED 1998 MAR 31 JUN 30 SEP 30 DEC 31
=======================================================================================================================
<S> <C> <C> <C> <C>
Sales and services $ 575 $ 565 $ 612 $ 646
Gross margin 178 180 212 241
Income before extraordinary item 65 71 79 92
Extraordinary item, net of taxes -- -- 2 2
Net income 65 71 81 94
Basic earnings per share:
Before extraordinary item $0.37 $0.41 $0.44 $0.51
Extraordinary item -- -- 0.01 0.01
Basic earnings per share $0.37 $0.41 $0.45 $0.52
Diluted earnings per share:
Before extraordinary item $0.37 $0.39 $0.43 $0.49
Extraordinary item -- -- 0.01 0.01
Diluted earnings per share $0.37 $0.39 $0.44 $0.50
=======================================================================================================================
QUARTERS ENDED 1997 MAR 31 JUN 30 SEP 30 DEC 31
=======================================================================================================================
Sales and services $ 261 $ 261 $ 358 $ 531
Gross margin 94 98 112 126
Income before extraordinary item 40 42 50 56
Extraordinary item, net of tax benefit -- -- (3) --
Net income 40 42 47 56
Basic earnings per share:
Before extraordinary item $0.26 $0.26 $0.29 $0.32
Extraordinary item -- -- (0.02) --
Basic earnings per share $0.26 $0.26 $0.27 $0.32
Diluted earnings per share:
Before extraordinary item $0.25 $0.25 $0.28 $0.32
Extraordinary item -- -- (0.02) --
Diluted earnings per share $0.25 $0.25 $0.26 $0.32
=======================================================================================================================
</TABLE>
<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 hereto duly authorized.
THE AES CORPORATION
By: /s/ William R. Luraschi
------------------------
Name: William R. Luraschi
Title: Vice President and
General Counsel
Date: March 18, 1999
<PAGE>
EXHIBIT INDEX
EX-23 INDEPENDENT AUDITORS' CONSENT
EX-27 FDS
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in The AES Corporation's
Registration Statement No. 33-44498 on Form S-8, Registration Statement No.
33-49262 on Form S-8, Registration Statement No. 333-26225 on Form S-8,
Registration Statement No. 333-28883 on Form S-8, Registration Statement No.
333-28885 on Form S-8, Registration Statement No. 333-38535 on Form S-8,
Registration Statement No. 33-95046 on Form S-3, and Registration Statement No.
333-39857 on Form S-3, of our report dated February 4, 1999 appearing in this
Current Report on Form 8-K of The AES Corporation dated March 18, 1999.
DELOITTE & TOUCHE LLP
Washington, DC
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 491
<SECURITIES> 35
<RECEIVABLES> 424
<ALLOWANCES> (59)
<INVENTORY> 119
<CURRENT-ASSETS> 1,254
<PP&E> 6,029
<DEPRECIATION> (525)
<TOTAL-ASSETS> 10,781
<CURRENT-LIABILITIES> 1,976
<BONDS> 5,241
550
0
<COMMON> 2
<OTHER-SE> 1,792
<TOTAL-LIABILITY-AND-EQUITY> 10,781
<SALES> 2,382
<TOTAL-REVENUES> 2,398
<CGS> 1,579
<TOTAL-COSTS> 1,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 485
<INCOME-PRETAX> 546
<INCOME-TAX> 145
<INCOME-CONTINUING> 307
<DISCONTINUED> 0
<EXTRAORDINARY> 4
<CHANGES> 0
<NET-INCOME> 311
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.69
</TABLE>
