<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-5798
PROSPECTUS
US$180,000,000
AES China Generating Co. Ltd.
10 1/8% NOTES DUE 2006
------------------------
Interest payable June 15 and December 15
------------------------
The Notes are redeemable at the option of the Company (i) on or after
December 15, 2001, in whole or in part, at the redemption prices set forth
herein, plus accrued interest and (ii) at any time, in whole but not in part,
at the option of the Company at 100% of the principal amount at maturity
thereof, together with interest accrued thereon to the redemption date, if the
Company has become or would become obligated to pay, on the next date on which
any amount would be payable with respect to the Notes, any Additional Amounts.
Upon a Change of Control Triggering Event, the Company will be obligated to
make an offer to purchase all outstanding Notes at a price of not less than
101% of their principal amount, plus interest accrued thereon, if any, to the
date of purchase. The Company will be obligated to make an offer to purchase
the Notes with the Excess Proceeds of an Asset Sale (other than an Asset Sale
of the assets, property or Capital Stock of any Existing Subsidiary or Existing
Joint Venture), under certain circumstances, at not less than 100% of their
principal amount, plus interest accrued thereon to the date of purchase. The
Company will also be obligated, under certain circumstances, to make an offer
to purchase the Notes at a price of not less than 101% of their principal
amount, plus interest accrued thereon, to the date of purchase, with certain
proceeds of (i) Asset Sales of the assets, property or Capital Stock of any
Existing Subsidiary or Existing Joint Venture, (ii) Designated Financings or
(iii) Restricted Designation Events.
Upon issuance of the Notes, the Company will deposit with the Collateral
Agent in the Debt Service Reserve Account US$27,135,000 as the Interim Reserve
and US$9,112,500 as the Debt Payment Reserve. The Interim Reserve will be used
to make interest payments due on or prior to June 15, 1998. The Debt Payment
Reserve will be maintained in the Debt Service Reserve Account for so long as
the Notes remain outstanding. Amounts in the Debt Service Reserve Account may be
comprised of cash or Dollar Permitted Investments.
The Notes will be represented by a single Global Note, in registered form,
without coupons, which will be deposited with a custodian for, and registered in
the name of a nominee of, The Depository Trust Company ("DTC") for persons
holding beneficial interests in the Global Note directly or indirectly through
DTC participants. Beneficial interests in the Global Note will be represented
by, and transfers thereof will be effected only through, book-entry accounts
maintained by DTC and its participants (including Euroclear and Cedel). Except
in limited circumstances, definitive Notes will not be issued in exchange for
beneficial interests in the Global Note. See "Description of the Notes."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE 99.904% AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
---------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................... 99.904% 2.500% 97.404%
Total....................................... $179,827,200 $4,500,000 $175,327,200
</TABLE>
- ------------
(1) Plus accrued interest, if any, from December 19, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses payable by the Company estimated at
$1,391,000, including $275,000 as partial reimbursement of the
Underwriters' expenses.
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that the
delivery of the Notes will be made on or about December 19, 1996 through the
book-entry facilities of DTC, against payment therefor in immediately available
funds.
------------------------
<TABLE>
<S> <C>
MORGAN STANLEY & CO. DONALDSON, LUFKIN & JENRETTE
Incorporated Corporation Securities
</TABLE>
December 12, 1996
<PAGE> 2
[MAP]
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY AES CHINA GENERATING CO. LTD. (THE "COMPANY")
OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
AVAILABLE INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (the
"Registration Statement") under the United States Securities Act of 1933, as
amended (the "Securities Act"), for the registration of the Notes. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Notes, reference is made
to the Registration Statement, including the exhibits thereto and financial
statements, schedules and notes filed as a part thereof. Statements made in this
Prospectus concerning the contents of any contract, agreement or other document
are not necessarily complete. With respect to each such contract, agreement or
other document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files periodic and current reports and other information with the
Commission. Information concerning directors and officers, their remuneration,
the principal holders of securities of the Company and any material interest of
such persons in transactions with the Company, as of particular dates, is
disclosed in proxy statements distributed to shareholders of the Company and
filed with the Commission. Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Certain such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov. The Company's Class A Common Stock, par value $.01 (the
"Class A Common Stock"), is quoted on the National Association of Securities
Dealers Automated Quotation National Market System. Such reports, proxy
statements and other information concerning the Company may also be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
2
<PAGE> 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-23148) pursuant to the Exchange Act are incorporated herein by reference as of
their respective dates of filing and shall be deemed to be a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended November 30,
1995.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
February 29, 1996, May 31, 1996 and August 31, 1996.
3. The Company's Current Report on Form 8-K dated November 12, 1996.
4. The Company's Current Report on Form 8-K dated October 2, 1996.
5. The Company's Proxy Statement dated March 1, 1996 for the Annual Meeting
held April 3, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this Offering shall also be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document which also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. The making of a modifying or superseding statement will not be deemed
an admission for any purposes that the modified or superseded statement, when
made, constituted a misrepresentation, an untrue statement of a material fact or
an omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made. Any statements so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, on the request of any such person, a copy of any or all documents
referred to above which have been or may be incorporated by reference in this
Prospectus (not including exhibits to such incorporated information that are not
specifically incorporated by reference into such information). Requests for such
copies should be directed to AES China Generating Co. Ltd., at 9/F, Allied
Capital Resources Building, 32-38 Ice House Street, Central, Hong Kong,
Telephone (852) 2842-5111, Attention: Jeffery A. Safford.
------------------------
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Bermuda company, and substantially all of its assets are
located outside the United States. The Company has appointed The Prentice-Hall
Corporation System, Inc., 375 Hudson Street, New York, New York 10014-3660, as
its agent to receive service of process with respect to any action brought
against it in the United States District Court for the Southern District of New
York under the securities laws of the United States or any state thereof, or any
action brought against it in the Supreme Court of the State of New York in the
County of New York under the securities laws of New York State. However, it may
be difficult for investors to enforce outside the United States judgments
against the Company obtained in the United States in any such actions, including
actions predicated upon the civil liability provisions of the United States
federal securities laws. In addition, certain of the directors and officers of
the Company are or may be residents of Bermuda or the People's Republic of China
and all or a substantial portion of the assets of such persons are or may be
located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon such
persons, or to enforce against them judgments obtained in the United States
courts, including judgments predicated upon the civil liability provisions of
the United States federal securities laws. The Company has been advised by its
Bermuda counsel, Conyers, Dill & Pearman, and its China counsel, Commerce &
Finance Law Office, that the United States does not currently have treaties
providing for reciprocal recognition and enforcement of judgments in civil and
commercial matters with Bermuda or China and that there is doubt (i) whether a
final judgment for the payment of money rendered by a federal or state court in
the United States based on civil liability, whether or not
3
<PAGE> 5
predicated solely upon the civil liability provisions of the United States
federal securities laws, would be enforceable in Bermuda or China against the
Company or the Company's officers and directors and (ii) whether an action could
be brought in Bermuda or China against the Company or the Company's officers and
directors in the first instance on the basis of liability predicated solely upon
the provisions of the United States federal securities laws.
------------------------
EXCHANGE RATES
References in this Prospectus to "Renminbi," "Y" and "RMBY" are to Renminbi
yuan, the lawful currency of the PRC and references to "US dollars," "$" and
"US$" are to United States dollars. Translations of amounts from Renminbi to US
dollars are solely for the convenience of the reader. Unless otherwise
indicated, any amounts translated from Renminbi to US dollars in this Prospectus
are translated at the rate of US$1.00 to RMBY 8.3317, the noon buying rate in
The City of New York for cable transfers of Renminbi yuan per US$1.00 as
certified for customs purposes by the Federal Reserve Bank of New York ("Noon
Buying Rate") on September 30, 1996. Such translations may differ from
translations of amounts which appear in other disclosure documents of the
Company which used amounts translated at a different exchange rate. No
representation is made that the Renminbi or US dollar amounts referred to herein
could have been or could be converted into US dollars or Renminbi, as the case
may be, at any particular rate or at all. See "Risk Factors -- Risks Pertaining
to the PRC -- Restrictions on Foreign Currency Convertibility and Remittance
Abroad" and "Appendix A -- The People's Republic of China."
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance and achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: political and economic considerations,
restrictions on foreign currency convertibility and remittance abroad, exchange
rate fluctuations and developing legal system, in each case pertaining to the
PRC; limited operating history and deficiency of earnings to cover fixed charges
of the Company; limited security applicable to the Notes; holding company
structure of the Company; absence of an established market for the Notes;
regulation and restrictions; tariffs; governmental approval processes;
environmental matters; construction, operating and fuel risks; load growth,
dispatch and transmission constraints; reliance on and creditworthiness of PRC
counterparties; conflict of interest of contracting parties; control by The AES
Corporation; limitations resulting from the Amalgamation (as defined below) and
adherence to the AES principles; and other factors referenced in this
Prospectus. See "Risk Factors."
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Certain Definitions................... 5
Prospectus Summary.................... 7
Risk Factors.......................... 16
The Company........................... 24
Use of Proceeds....................... 26
Capitalization........................ 27
Selected Consolidated Financial and
Other Data.......................... 28
Discussion and Analysis of Financial
Condition and Results of
Operations.......................... 30
The PRC Electric Power Industry....... 34
Business.............................. 41
Management............................ 63
Relationship with AES................. 68
<CAPTION>
PAGE
-----
<S> <C>
The Amalgamation...................... 70
Description of the Notes.............. 73
Taxation.............................. 107
Certain Foreign Issuer
Considerations...................... 109
Underwriters.......................... 110
Legal Matters......................... 110
Experts............................... 111
Index to Consolidated Financial
Statements.......................... F-1
Appendix A -- The People's Republic of
China............................... A-1
Appendix B -- Glossary of Power
Industry Terms...................... B-1
</TABLE>
4
<PAGE> 6
CERTAIN DEFINITIONS
Certain definitions are set forth below. Other definitions may be found in
the text of this Prospectus. For definitions of certain power industry terms
used in this Prospectus, see "Appendix B -- Glossary of Power Industry Terms."
For certain additional definitions with respect to the Notes, see "Description
of the Notes."
"Aixi Heart River" means the 50 MW coal-fired power plant in Nanchuan,
Sichuan Province, owned by Sichuan Fuling Aixi Power Company Ltd. ("Fuling
Aixi"), a Company Joint Venture.
"Central Government" means the national government of the PRC and its
various ministries, agencies and commissions.
"Chengdu Lotus City" means the 48 MW natural gas-fired power plant in
Chengdu, Sichuan Province, owned by Chengdu-AES-Kaihua Gas Turbine Power Co.
Ltd. ("Chengdu-AES-Kaihua"), a Company Joint Venture.
"Cili Misty Mountain" means the 26.2 MW hydroelectric power plant in Cili
County, Hunan Province, owned by Hunan Xiangci-AES Hydro Power Company Ltd.
("Xiangci-AES"), a Company Joint Venture.
"Current Projects" means Aixi Heart River, Chengdu Lotus City, Cili Misty
Mountain, Hefei Prosperity Lake, Jiaozuo Aluminum Power, Wuhu Grassy Lake, Wuxi
Tin Hill and Yangchun Sun Spring.
"Hefei Prosperity Lake" means the 115.2 MW oil-fired combined cycle power
plant in Hefei, Anhui Province, owned by Anhui Liyuan AES Power Company Ltd.
("Liyuan-AES") and Hefei Zhongli Energy Company Ltd. ("Zhongli Energy"), two
Company Joint Ventures.
"Jiaozuo Aluminum Power" means the 250 MW coal-fired power plant in
Jiaozuo, Henan Province, owned by Jiaozuo Wan Fang Power Company Ltd. ("Jiaozuo
Wan Fang"), a Company Joint Venture.
"Jinhua Golden China" means the 106 MW oil-fired combined cycle power plant
to be located in Jinhua, Zhejiang Province, owned by Jinhua Longhua Heat
Recovery Generating Co. Ltd. ("Jinhua Longhua") and Jinhua Jinlong Gas Turbine
Generating Co. Ltd. ("Jinhua Jinlong"), two Company Joint Ventures.
"Joint Ventures" means the PRC joint venture limited liability companies
formed to develop, construct, own and operate the Current Projects with respect
to which the Company, or one of its wholly-owned subsidiaries, has made a
contribution to the registered capital (equity). "Joint Venture" refers to any
one of them.
"local governments" means governments in the PRC at all administrative
levels below the Central Government, including provincial governments,
governments of municipalities directly under the Central Government, municipal
governments, county governments and township governments. "local government"
refers to any one of them.
"Ministry of Electric Power" or "MOEP" means the Ministry of Electric Power
of the Central Government.
"Ministry of Foreign Trade and Economic Cooperation" or "MOFTEC" means the
Ministry of Foreign Trade and Economic Cooperation of the Central Government.
"Nanpu Southern Delta" means the 700 MW coal-fired power plant to be
located in Huian County, Fujian Province, and owned by Fujian Nanpu Power
Company Ltd., a Company Joint Venture.
"Potential Projects" means Jinhua Golden China, Tianjin TEDA, Nanpu
Southern Delta and Yangcheng Sun City.
"PRC" or "China" means the People's Republic of China and includes all
territory under the control of the Central Government.
"PRC Government" means the Central Government and local governments.
"provinces" means provinces, autonomous regions and municipalities directly
under the Central Government.
5
<PAGE> 7
"State Administration of Exchange Control" or "SAEC" means the State
Administration of Exchange Control of the Central Government.
"State Council" means the State Council of the PRC, the highest
administrative organ of the Central Government.
"State-owned" means under the ownership or administrative control of the
Central Government.
"State Plan" means the plans devised and implemented by the PRC Government
in relation to the economic and social development of the PRC.
"State Planning Commission" or "SPC" means the State Planning Commission of
the Central Government.
"Tianjin TEDA" means the 100 MW coal-fired cogeneration power plant to be
located near Tianjin, and owned by Tianjin TEDA-AES Power Co. Ltd., a Company
Joint Venture.
"tons" means metric tons.
"Wuhu Grassy Lake" means the 250 MW coal-fired power plant near Wuhu, Anhui
Province, owned by Wuhu Shaoda Electric Power Development Company Ltd. ("Wuhu
Shaoda"), a Company Joint Venture.
"Wuxi Tin Hill" means the 63 MW oil-fired combined cycle power plant owned
by Wuxi-AES-CAREC Gas Turbine Power Company Ltd. ("Wuxi-AES-CAREC") and
Wuxi-AES-Zhonghang Power Co. Ltd. ("Wuxi-AES-Zhonghang"), two Company Joint
Ventures located in Xishan (previously known as Wuxi County), Jiangsu Province.
"Yangcheng Sun City" means the 2,100 MW coal-fired power plant to be
located near Yangcheng, Shanxi Province, owned by Yangcheng International Power
Generating Company Ltd. ("Yangcheng International Power"), a Company Joint
Venture.
"Yangchun Sun Spring" means the 15.1 MW diesel engine power plant in
Yangchun, Guangdong Province, owned by Yangchun Fuyang Diesel Engine Power Co.
Ltd. ("Yangchun Fuyang"), a Company Joint Venture.
6
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto contained elsewhere in this Prospectus. Certain statements set
forth below constitute "forward-looking statements" within the meaning of the
Reform Act. See "Special Note Regarding Forward-Looking Statements" on page 4 of
this Prospectus and "Risk Factors" for additional factors relating to such
forward-looking statements.
THE COMPANY
AES China Generating Co. Ltd (the "Company") is a leading independent power
generation company in China and one of the few international developers that has
successfully completed the development of electric power projects in the
country. The Company was founded in December 1993 by The AES Corporation
("AES"), a Delaware corporation, and currently serves as the exclusive vehicle
for AES to develop, acquire, finance, construct, own and operate electric power
generation facilities in the PRC. AES is one of the largest independent power
producers in the world. AES currently holds a substantial equity interest in the
Company. AES and the Company have entered into an Amalgamation Agreement (as
defined below) providing for the acquisition by AES of the remaining equity in
the Company.
Since commencing business, the Company has committed $259.6 million and as
of October 7, 1996 has invested $130.4 million in eight power projects, the
Current Projects, in operation or under construction in the PRC having an
aggregate nameplate capacity of approximately 818 MW (approximately 422 MW of
which is attributable to the Company's interests in the Joint Ventures). The
Current Projects include coal, oil, natural gas and hydro power plants located
in six different provinces in China.
The Company has signed joint venture contracts and is in various stages of
negotiation to develop four additional power projects in the PRC, the Potential
Projects, with an aggregate nameplate capacity of approximately 3,006 MW
(approximately 869 MW of which would be attributable to the Company's interests
in the proposed project companies).
The purpose of this Offering is to raise additional funds for the Company
to finance the requirements of the Current Projects and, to the extent funds are
available and subject to the AES Debt Covenants (as defined elsewhere in this
Prospectus), to finance investments in the Potential Projects or other future
electric power projects. See "Use of Proceeds." The Company does not currently
have any long-term debt other than shareholder loans incurred by certain of its
Joint Ventures.
RELATIONSHIP WITH AES
AES is a global power company supplying electricity, either directly, or
through affiliates like the Company, to customers in eight countries, including
the PRC. AES was one of the original entrants in the independent power market.
In addition to the Company's power plants, AES has ownership interests in, and
operating responsibility for, 22 power plants world-wide, representing
approximately 9,398 MW in operation and approximately 1,084 MW under
construction. In the 15 years since its inception, AES's total assets have grown
to more than $3.2 billion and it is currently one of the largest companies in
this market. AES prides itself on being a market leader in the operation of
power plants. In 1995, AES's power plants maintained an average availability of
94%. AES's position in the market and record of operations have allowed it to
successfully finance its projects at competitive rates.
AES currently owns all of the outstanding shares of Class B Common Stock,
par value $.01 per share, of the Company (the "Class B Common Stock"), and is
entitled to elect one-half of the members of the Board of Directors. The
outstanding shares of Class A Common Stock, par value $.01 per share, of the
Company (the "Class A Common Stock") represent approximately 52% of the
outstanding capital stock of the Company.
7
<PAGE> 9
THE AMALGAMATION
The Company and AES have entered into an Agreement and Plan of
Amalgamation, dated as of November 12, 1996 (the "Amalgamation Agreement"),
providing among other things for the Company to become a wholly owned subsidiary
of AES (the "Amalgamation"). The Amalgamation is subject to various conditions,
including the approval of the holders of the Class A Common Stock, and there can
be no assurance that the Amalgamation will be consummated.
The Company is not currently affected by the covenants contained in various
AES debt agreements because it is not a subsidiary of AES. As a result of the
Amalgamation, the Company will become a subsidiary of AES and intends to comply
with the limitations contained in the AES Debt Covenants applicable to
subsidiaries of AES. Among other things, the AES Debt Covenants would
effectively limit any further investment in power plant projects by the Company
to the funds currently held by the Company, plus the net proceeds of the Notes
remaining after the funding of the Debt Service Reserve Account (as defined
elsewhere in the Prospectus). Assuming the Company makes investments equal to
the full amount of its existing investment commitments to the Current Projects,
upon consummation of the Amalgamation, a maximum amount of approximately $95.0
million would be available to fund the Potential Projects and other future
projects, as well as any additional investment required in the Current Projects.
After the Amalgamation, no dividends paid to the Company by its subsidiaries or
funds thereafter raised by the Company could be invested in Current Projects or
the Potential Projects or other future projects. Any additional investment in
the Potential Projects or other future power projects could only be made by
other investors, including AES. The Company's business requires a long period of
investment in development and construction before any revenues are generated by
a new project. Accordingly, although the AES Debt Covenants impose significant
limitations on investment in projects, it is not anticipated that the Company's
ability to satisfy its obligations under the Notes will be adversely affected by
the application of the AES Debt Covenants following the Amalgamation.
In connection with the Amalgamation, the Non-Competition Agreement (as
defined elsewhere in the Prospectus) will be terminated, which would allow AES
to invest directly in PRC power projects and the Company to invest in projects
outside the PRC. The Company is not currently exploring any opportunities to
invest outside the PRC. Whether or not the Amalgamation occurs, the Notes are
solely the obligations of the Company and do not benefit from a guarantee or
other credit support of AES.
A lawsuit has been filed in the Court of Chancery of the State of Delaware
against AES alleging, among other things, a breach of fiduciary duty to public
stockholders of the Company and seeking to enjoin AES from consummating the
Amalgamation. The Company is not a defendant in the lawsuit, and AES has
informed the Company that it believes that it has meritorious defenses to the
lawsuit and intends to defend against it vigorously.
COMPANY STRATEGY
The Company's mission is to help meet China's need for electricity in a
socially responsible manner, balancing the interests of customers, partners,
communities, suppliers, investors and its people. After the Amalgamation, the
Company's operations will be subject to certain limitations under the AES Debt
Covenants. The Company's business strategy focuses on:
Experience in the China Market. The Company currently employs 43 people in
the PRC with 30 people in Beijing and 13 people in other parts of the
country. The Company's principal office is in Beijing and its president and
chief executive officer resides in Beijing. The Company also maintains an
office in Hong Kong with 26 people. This commitment to the PRC has enabled
the Company to build an expertise in the China power market.
Diversified Project Portfolio. The Company believes that national
diversification of projects in different provinces reduces the risk of
being overly dependent on a single power purchaser or the demand for power
in a single region. The Company's Current Projects are located in six
provinces. Certain of the Company's Current Projects include smaller
projects that have been developed on a rapid time schedule. These projects
have enabled the Company to establish its position in the market, develop
strategic relationships and generate immediate cash flow. Certain other of
the Current Projects and the Potential Projects have high visibility and
the support of the Central Government. These projects are expected to
generate substantial cash flow following the commencement of their
operation.
Strategic Relationships with Strong Partners. The Company believes that
its presence in China, its available capital and the well-regarded
reputation of AES have allowed the Company to develop strategic
relationships with key Chinese partners. The Company has included ministry
level companies and
8
<PAGE> 10
affiliates of provincial and local economic commissions as well as
affiliates of regional, provincial and local power bureaus as partners in
its Joint Ventures. These partners participate in the construction and
operation of the Company's Current Projects, expedite the approval process
and mitigate project construction, operation and tariff adjustment risks.
Similarly, the Company will seek to develop the Potential Projects and
other future projects in the PRC in cooperation with strong Chinese
business partners that have comparable economic interests and a variety of
complementary strengths, including business experience and political
relationships.
Location in Regions of High Power Demand. The Company believes that its
Current Projects and the Potential Projects are located in regions of high
power demand. In the course of developing its projects, the Company
carefully reviews the regional and local demand and supply for power. In
addition, in the course of project development, the Company evaluates the
proposed power purchaser, usually a provincial or local government power
bureau, to determine its economic resources and credit profile. One
important criterion for any project developed by the Company is that the
tariff to be charged by the proposed project must be affordable in light of
the overall rates charged in the region, while also being competitive with
the cost of new electric power.
Significant Participation in Operational Management. The Company seeks to
obtain, and has obtained in the case of the Current Projects and the
Potential Projects, significant rights to participate in major decisions of
the project company that owns the power plant. The Company typically exerts
its influence through directors appointed to the board of directors of the
project company and by appointing either the general manager of the power
plant and/or a deputy general manager in charge of finance or operations
for the power plant. Several of the Company's officers have significant
prior experience with AES in the development and operation of power plants
in other countries. The Company is also developing a core group of local
managers who will be focused on constructing and operating projects in
China.
AES's Capabilities. The Company draws on AES's people and expertise in
development, construction oversight and operation of independent electric
power generation projects. In particular, the Company draws on AES's
extensive experience operating coal-fired power plants around the world.
The Company believes this relationship has provided it with a competitive
advantage in the China power market, which relies primarily on coal-fired
power plants.
CHINA'S ECONOMY AND POWER MARKET
Since 1978, the PRC Government has been implementing market oriented
economic reforms in an effort to revitalize the PRC's economy and improve its
citizens' standard of living. The reforms have marked a shift from a more rigid,
centrally-planned economy to a more mixed economy in which market forces play an
increased role and the government has a reduced role. State-owned enterprises
still constitute the largest sector of the economy, but implementation of the
economic reforms has led to, among other things, the delegation to managers of
enterprises of more decision-making powers and responsibilities regarding
matters such as production, marketing, use of funds and employment of people.
Other reform measures have included the conversion of selected State-owned
enterprises into joint stock limited companies which have issued shares to the
public and private investors (including their employees); the gradual reduction
of PRC Government control over producer prices; and the designation of certain
coastal areas and cities as special economic development zones with greater
local autonomy. The PRC Government has also implemented policies designed to
attract foreign investment and technology. The PRC Government's reforms have
resulted in significant economic growth. The gross domestic product of China
increased at an average annual rate of 12.1% during the period from 1991 to
1995. The growth rate of gross domestic product is projected by the Asian
Development Bank to be 8.9% in 1996.
Because investments in and construction of electric power generation
facilities in the PRC have not been able to keep pace with the demand associated
with this economic growth, foreign investment in the China power market is now
actively encouraged. Based on statements by the Ministry of Electric Power
("MOEP"), China will need an average of approximately 16,000 MW of new electric
generating capacity annually through the year 2000. In 1995, approximately
17,323 MW of installed electric generating capacity was added in the PRC, making
China's electric power industry one of the fastest growing in the world. Since
domestic investment is insufficient to meet the PRC's requirements, MOEP
estimates that approximately 20% of the capital required for PRC electric power
development through the year 2000 will need to come from foreign sources. MOEP
estimates that approximately $20.0 billion of foreign investment will be needed
to reach its target of increasing installed capacity to 290,000 MW by the year
2000. See "The PRC Electric Power Industry."
9
<PAGE> 11
THE OFFERING
The following summary of certain provisions of the Notes and the Indenture
does not purport to be complete and is qualified in its entirety by reference to
the detailed provisions thereof. Capitalized terms used herein but not defined
have the meanings set forth under "Description of the Notes."
The Offering........................ US$180,000,000 aggregate principal
amount of the Company's Notes due 2006
(the "Notes"). See "Description of the
Notes" and "Underwriters."
Interest Rate....................... 10 1/8% per annum. Interest will accrue
from December 19, 1996 and will be
computed on the basis of a 360-day year
consisting of twelve 30-day months.
Interest Payment Dates.............. June 15 and December 15 of each year,
commencing June 15, 1997 to holders of
record at the close of business on June
1 and December 1 (whether or not a
Business Day).
Maturity Date....................... December 15, 2006.
Issue Price......................... 99.904% of the principal amount.
Ranking............................. The Notes will rank at least pari passu
in right of payment with all existing
and future senior unsecured
Indebtedness of the Company. The
holders of the Notes will have a claim
on the amounts on deposit in the
Collateral Accounts that is prior to
the claims of other creditors of the
Company. See "Description of the Notes
-- Security Agreement."
Debt Service Reserve Account;
Special Proceeds Account............ Upon issuance of the Notes, the Company
will deposit with the Collateral Agent
in the Debt Service Reserve Account
US$27,135,000 as the Interim Reserve
and US$9,112,500 as the Debt Payment
Reserve. The Interim Reserve will be
used to make interest payments due on
or prior to June 15, 1998. The Debt
Payment Reserve will be maintained in
the Debt Service Reserve Account for so
long as the Notes remain outstanding.
Following the occurrence of any Special
Proceeds Event the Issuer is required
to deposit all Special Proceeds in the
Special Proceeds Account. Amounts on
deposit in the Special Proceeds Account
will be withdrawn by the Collateral
Agent and delivered to the Trustee to
pay the aggregate purchase price of
Notes properly tendered by Holders
pursuant to a Special Proceeds Offer.
Amounts in the Debt Service Reserve
Account and the Special Proceeds
Account may be comprised of cash or
Dollar Permitted Investments. See
"Description of the Notes -- Security
Agreement."
Maintenance of Certain Cash
Amounts............................. At all times prior to January 1, 2000
and in certain circumstances
thereafter, the Company will be
required to maintain a balance of cash
and Permitted Investments of the type
referred to in clauses (vi) and (vii)
of the definition thereof in an amount
equal to or greater than a defined
amount of cash flow from
10
<PAGE> 12
Existing Joint Ventures and Existing
Subsidiaries less a defined amount of
costs, interest expense and amounts
used to repurchase Notes. See
"Description of the
Notes -- Covenants -- Maintenance of
Certain Cash Amounts."
Withholding Taxes................... Principal of, and interest on, the
Notes are payable by the Company free
and clear of, and without withholding
or deduction for Bermuda taxes. In the
event that the Company is required by
law to deduct or withhold Bermuda taxes
with respect to payments on the Notes,
the Company will be obligated to pay to
the holders of the Notes such
Additional Amounts in respect of such
withholding taxes on such payments. See
"Description of the Notes -- Additional
Amounts."
Tax Redemption...................... Subject to certain exceptions and as
more fully described herein, the Notes
may be redeemed, in whole but not in
part, at the option of the Company at
any time, at 100% of the principal
amount at maturity thereof, together
with interest accrued thereon to the
redemption date, if the Company has
become or would become obligated to
pay, on the next date on which any
amount would be payable with respect to
the Notes, any Additional Amounts. See
"Description of the
Notes -- Redemption -- Optional
Redemption for Changes in Withholding
Taxes."
Optional Redemption by the
Company............................. The Notes will be redeemable at the
option of the Company, in whole or in
part, on or after December 15, 2001, at
the redemption prices set forth herein,
plus accrued interest. See "Description
of the Notes -- Redemption -- Optional
Redemption."
Change of Control................... Upon a Change of Control Triggering
Event, the Company will be obligated to
make an offer to purchase all
outstanding Notes at a price of not
less than 101% of their principal
amount, plus interest accrued thereon,
if any, to the date of purchase. See
"Description of the Notes -- Covenants
-- Change of Control."
Excess Proceeds Offer; Special
Proceeds Offer...................... The Company will be obligated to make
an offer to purchase the Notes with the
Excess Proceeds of an Asset Sale (other
than an Asset Sale of the assets,
property or Capital Stock of any
Existing Subsidiary or Existing Joint
Venture), under certain circumstances,
at a price of not less than 100% of
their principal amount, plus interest
accrued thereon to the date of
purchase. The Company will also be
obligated, under certain circumstances,
to make an offer to purchase the Notes
at a price of not less than 101% of
their principal amount, plus interest
accrued thereon to the date of
purchase, with certain proceeds of (i)
Asset Sales of the assets, property or
Capital Stock of any Existing
Subsidiary or Existing Joint Venture,
(ii) Designated
11
<PAGE> 13
Financings, (iii) or Restricted
Designation Events. See "Description of
the Notes -- Covenants -- Limitation on
Sales of Assets and Refinancings."
Certain Covenants................... The Indenture will limit, among other
things, (i) the payment of dividends on
and redemptions of Equity Interests by
the Company and the Project Companies;
(ii) the redemption of Subordinated
Indebtedness; (iii) the making of
Investments, other than Permitted
Investments; (iv) the incurrence by the
Company and the Project Companies of
certain Indebtedness; (v) the
imposition by the Company or any
Project Company of restrictions on the
payment of dividends, the payment on
certain obligations owed to the Company
or any other Project Company or the
transfer of property or assets to the
Company or any other Project Company;
(vi) the creation by the Company or any
Project Company of certain Liens; (vii)
certain transactions with affiliates of
the Company; (viii) Asset Sales and
Refinancing Indebtedness; (ix) issuance
of stock by Restricted Subsidiaries;
(x) change of the nature of the
Company's business; and (xi) merger and
consolidation of the Company and the
Project Companies with other entities.
The Indenture will also obligate the
Company and the Project Companies to
maintain certain insurance, obtain
required government approvals, maintain
good title to their properties and
operate and maintain their power
generation facilities in accordance
with prudent industry operating and
maintenance practices. See "Description
of the Notes."
Events of Default................... Payment of the principal amount of the
Notes, together with all interest
accrued thereon, may be accelerated
upon the occurrence of certain Events
of Default, including, among other
things, (i) failure to pay interest
within 30 days or failure to pay
principal at maturity or upon
redemption or repurchase of the Notes;
(ii) a default in the performance of
the covenants contained in the
Indenture; (iii) a default under any
evidence of indebtedness of the Company
or any Project Company in the amount of
US$5,000,000 or more (other than under
the Notes or any Non-Recourse Debt);
and (iv) the rendering of a judgment
against the Company or any Project
Company in an amount in excess of
US$5,000,000. See "Description of the
Notes -- Events of Default."
Ratings of the Notes................ The Notes have been rated BB- by
Standard & Poor's Rating Group and Ba3
by Moody's Investors Service. Such
ratings of the Notes do not constitute
a recommendation to buy, sell or hold
the Notes and may be subject to
revision or withdrawal at any time by
such ratings organizations. Each such
rating should be evaluated
independently of any other rating of
the
12
<PAGE> 14
Notes, other securities of the Company
or of the Company.
Form, Denominations and
Registration........................ The Notes will be issued in fully
registered form in minimum
denominations of US$1,000 and integral
multiples thereof. The Notes will be
represented by a single Global Note,
registered in the name of Cede & Co.,
as nominee of DTC. Beneficial interests
in the Global Note will be shown on,
and the transfer thereof will be
effected only through, records
maintained by DTC and its direct and
indirect participants (including
Euroclear and Cedel). Settlement of all
secondary market trading activity in
the Notes will be made in immediately
available funds. See "Description of
the Notes -- Form, Denomination and
Registration."
Use of Proceeds..................... The net proceeds to the Company from
the issuance of the Notes will be
approximately US$173,936,200. Of the
total net proceeds, US$36,247,500 will
be deposited upon completion of the
Offering with the Trustee in the Debt
Service Reserve Account, of which
US$27,135,000 will fund the Interim
Reserve and US$9,112,500 will fund the
Debt Payment Reserve. See "Description
of the Notes -- Security
Agreement -- Debt Service Reserve
Account." The Company intends to use
the remaining US$137,688,700 of the
proceeds of the issuance of the Notes
to fund investment commitments to the
Current Projects, for general corporate
purposes and, to the extent funds are
available and subject to the AES Debt
Covenants, for the Potential Projects
and other future projects. Pending such
use, the Company will invest such
proceeds in marketable securities that
are Permitted Investments (as defined
below under "Description of the Notes
-- Certain Definitions").
Risk Factors........................ Investment in the Notes involves
certain risks which should be carefully
considered by potential investors. See
"Risk Factors."
Governing Law....................... The Indenture, the Notes and the
Security Agreement will be governed by,
and construed in accordance with, the
laws of the State of New York.
For a more detailed description of the Notes, see "Description of the
Notes."
13
<PAGE> 15
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and operating data for the
period ended November 30, 1994 and the fiscal year ended November 30, 1995 and
for the nine months ended August 31, 1995 and August 31, 1996. The table should
be read in conjunction with the Consolidated Financial Statements, the
"Discussion and Analysis of Financial Condition and Results of Operations" and
the unaudited consolidated financial statements of the Company for the nine
months ended August 31, 1995 and August 31, 1996 which are included elsewhere in
this Prospectus. The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the United States
("U.S. GAAP"). In the opinion of management, the unaudited consolidated
financial statements for the nine months ended August 31, 1995 and August 31,
1996 contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position and consolidated
results of operations of the Company for those periods. Results of operations
for the nine months ended August 31, 1996 are not necessarily indicative of the
results of operations for the full fiscal year ending November 30, 1996.
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED NINE MONTHS ENDED
NOVEMBER 30, AUGUST 31,
--------------------- ---------------------
1994 1995 1995 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Electricity sales........................... $ 38 $ 702 $ 916 $ 6,553
Construction delay fee...................... -- 680 -- 400
-------- -------- -------- --------
Total revenues...................... 38 1,382 916 6,953
Operating costs and expenses:
Costs of sales.............................. 68 635 496 3,867
Development, selling, general and
administrative expenses.................. 6,927 9,259 6,920 5,229
-------- -------- -------- --------
Total operating costs and
expenses.......................... 6,995 9,894 7,416 9,096
-------- -------- -------- --------
Operating loss................................ (6,957) (8,512) (6,500) (2,143)
Other income/(expense):
Interest income............................. 6,589 10,529 8,060 5,001
Interest expense............................ -- -- -- (679)
Equity in earnings of affiliates............ -- 206 102 441
-------- -------- -------- --------
Income/(loss) before income taxes and minority
interest.................................... (368) 2,223 1,662 2,620
Income taxes................................ -- -- -- 455
Minority interest........................... 3 85 93 218
-------- -------- -------- --------
Net income/(loss)............................. $ (371) $ 2,138 $ 1,569 $ 1,947
-------- -------- -------- --------
Net income/(loss) per share................... $ (0.03) $ 0.12 $ 0.09 $ 0.12
======== ======== ======== ========
Weighted average shares outstanding........... 14,817 17,391 17,487 15,649
======== ======== ======== ========
OTHER FINANCIAL DATA:
Ratio of Earnings to Fixed Charges(1)......... -- 4.42x 11.26x 1.18x
Adjusted Cash Flow(2)......................... $ (4,355) $ (6,569) $ (4,081) $ (4,224)
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF
--------------------- AUGUST 31,
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.......................................... $186,467 $154,959 $ 97,015
Total assets............................................. 210,870 229,871 270,302
Long-term debt (including current portion)(3)............ -- 7,017 35,347
Minority interest........................................ 7,219 19,082 33,345
Shareholders' equity..................................... 201,584 187,585 188,120
</TABLE>
- ---------------
(1) In calculating this ratio, earnings consist of income before income taxes
plus fixed charges. Fixed charges consist of interest expense and
amortization of deferred financing fees, whether expensed or capitalized,
plus one-third of rental expenses under operating leases. For the fiscal
period ended November 30, 1994, earnings were inadequate to cover fixed
charges, and the coverage deficiency was approximately $.4 million.
(2) Adjusted Cash Flow is calculated as defined under "Description of the
Notes -- Certain Definitions." Of the total net proceeds of the Offering,
$36,247,500 will be deposited in the Debt Service Reserve Account, of which
$27,135,000 will fund the Interim Reserve and $9,112,500 will fund the Debt
Payment Reserve. The Interim Reserve will be used to make interest payments
due on the Notes on or prior to June 15, 1998. The Debt Payment Reserve
will be maintained in the Debt Service Reserve Account for so long as the
Notes remain outstanding. See "Description of the Notes -- Security
Agreement -- Debt Service Reserve Account."
(3) Long-term debt consists of loans from minority shareholders in the Company's
subsidiaries.
15
<PAGE> 17
RISK FACTORS
Prospective purchasers of the Notes should consider carefully all of the
information contained in this Prospectus and, in particular, should evaluate the
risks and special considerations set forth below. Certain statements set forth
below constitute "forward-looking statements" within the meaning of the Reform
Act. See "Special Note Regarding Forward-Looking Statements" on page 4 of this
Prospectus for additional factors relating to such forward-looking statements.
RISKS PERTAINING TO THE PRC
The Company has substantially all of its assets in, and derives
substantially all of its revenues from, power plants owned by its Joint Ventures
located in the PRC. Therefore, the Company and its operations are affected
generally by developments in or affecting the PRC.
POLITICAL AND ECONOMIC CONSIDERATIONS
General economic conditions in the PRC could have a significant impact on
the business prospects of the Company. The economy of the PRC differs from the
economies of most countries belonging to the Organization for Economic
Co-operation and Development in such respects as structure, government
involvement, level of development, growth rate, capital reinvestment, allocation
of resources, self-sufficiency, rate of inflation and balance of payments
position, among others. For over 40 years, the economy of the PRC has been
primarily a planned economy characterized by state ownership and control of
productive assets and the management of such assets through a series of economic
and social development plans. Although the majority of the PRC's productive
assets are still owned by the PRC Government, the adoption of economic reform
policies since 1978 has resulted in a gradual reduction in the role of state
economic plans in the allocation of resources, pricing and management of such
assets, an increased emphasis on the utilization of market forces, and rapid
growth in the PRC economy. However, such growth has been uneven among various
regions of the country and among various sectors of the economy. The success of
the Company depends in part on the continued economic growth of the regions
where the Joint Ventures are located. At times, the economic reform measures
adopted by the PRC Government may be inconsistent or ineffectual, and therefore
the Joint Ventures may not be able to enjoy the potential benefits of such
reforms. Further, these measures may be adjusted or modified in particular ways
in particular areas, possibly resulting in such economic liberalization measures
being inconsistent from time to time or from industry to industry or across
different regions of the PRC.
The Company may also be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, methods to address inflation, currency
conversion, rates and methods of taxation, or the method by which electricity
tariffs are set and approved, among other things. While the PRC Government is
expected to continue its economic reform policies, many of the reforms are new
or experimental and may be refined or changed. It is also possible that a change
in the PRC Government leadership could lead to changes in economic policy.
The PRC economy has experienced rapid growth in the past five years. This
growth has also been accompanied by rising inflation, which reached an annual
rate of 21.7% in 1994. The PRC Government has implemented policies from time to
time to restrain the rate of such economic growth and control inflation in order
to achieve coordinated economic development. In July 1993, the Central
Government began implementation of a number of austerity measures to control
economic growth and curb inflation, including increasing interest rates on bank
loans and deposits and postponing certain planned price reforms. While inflation
has since moderated to 8.6% for the first ten months of 1996, there can be no
assurance that such austerity measures will not be strengthened or result in
future severe dislocations in the PRC economy. Austerity measures intended to
slow economic growth may affect the demand for electricity and the prospects for
the financing of some of the Joint Ventures. Depending on the nature and
implementation of such additional measures, the Joint Ventures' economic
prospects at times may be adversely affected through, among other possible
measures, placing additional controls on the increase of electric power rates.
Any such development could also adversely affect the Joint Ventures' operations
or the ability of the Joint Ventures' customers to
16
<PAGE> 18
honor their obligations under their power purchase contracts, which could
adversely affect the Company. See "Appendix A -- The People's Republic of
China."
A significant portion of the economic activity in the PRC is related to
exports and may therefore be affected by developments in the economies of the
PRC's principal trading partners. Trade sanctions imposed by the PRC's main
trading partners, including the revocation or conditional extension by the
United States of China's Most Favored Nation ("MFN") trading status, could
adversely affect the trade and economic development of the PRC and the ability
of the Joint Ventures' customers to honor their obligations under their power
purchase contracts with the Joint Ventures. In addition, current or future
disputes between the PRC and its main trading partners over specific trade
issues, such as intellectual property, the balance of trade or other political
issues, such as regional affairs or arms sales policies, could lead to the
imposition of trade or other sanctions which could adversely affect the demand
for power in the PRC.
RESTRICTIONS ON FOREIGN CURRENCY CONVERTIBILITY AND REMITTANCE ABROAD
The Joint Ventures will receive nearly all of their revenues in Renminbi. A
significant portion of this revenue will need to be converted to other
currencies, primarily US dollars, and remitted outside of the PRC to meet
foreign currency obligations to equipment suppliers, to repay borrowings from
foreign third party lenders and to make payments to the Company in respect of
equity distributions and shareholder loans, which will permit the Company to
make payment of interest and principal on the Notes. The Renminbi is not freely
convertible into US dollars. Although the receipt of approvals to convert
Renminbi into foreign currencies and to remit foreign currencies outside of the
PRC is routine for approved foreign investment enterprises such as the Joint
Ventures, there can be no assurance that the PRC Government will continue to
provide such approvals. Moreover, while in the last two years foreign currency
has been readily available, no assurance can be given that the Joint Ventures
will in the future be able to convert sufficient amounts of Renminbi to foreign
currency in China's foreign exchange markets to meet their foreign currency
obligations, or that the Joint Ventures will freely be able to remit foreign
currency abroad. For additional information on Renminbi convertibility, see
"Appendix A -- The People's Republic of China -- Foreign Exchange Controls and
Exchange Rate Information."
EXCHANGE RATE FLUCTUATIONS
Prior to 1994, the Renminbi had experienced a significant net devaluation
against most major currencies, and during certain periods, significant
volatility in the market-based exchange rate. Since the beginning of 1994, the
Renminbi to US dollar exchange rate has largely stabilized. While the Joint
Ventures will receive nearly all of their revenues in Renminbi, the Company
expects its Joint Ventures to have significant US dollar obligations with
respect to distributions to the Company. Under the terms of all of their power
purchase contracts, the Company's Joint Ventures are entitled to obtain tariff
adjustments for future Renminbi devaluation. While the Company expects that its
Joint Ventures will be able to pass on increased costs resulting from a
devaluation of the Renminbi by means of such tariff adjustments, no assurance
can be given that the Joint Ventures will be able to obtain approval for a
sufficient tariff adjustment.
DEVELOPING LEGAL SYSTEM
China's legal system is relatively new, and the government is still in the
process of developing a comprehensive system of laws, a process that has been
ongoing since 1979. Considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
Such legislation has significantly enhanced the protection afforded to foreign
investors. However, foreign investors may be adversely affected by new laws,
changes to existing laws (or interpretations thereof) and preemption of
provincial or local regulations by national laws or regulations. Moreover,
experience with respect to the implementation, interpretation and enforcement of
such laws and regulations is limited. Such administrative and judicial
interpretation and implementation and the enforcement of commercial claims and
resolution of commercial disputes may be subject to the exercise of considerable
discretion by both administrative and judicial organs and may be influenced by
external forces unrelated to the legal merits of a particular matter or
17
<PAGE> 19
dispute. Even where adequate laws exist and contractual terms are clearly
stated, there can be no assurance that the Company or a Joint Venture will
obtain swift and equitable enforcement of its rights.
RISKS ASSOCIATED WITH THE NOTES
LIMITED OPERATING HISTORY; DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES.
The Company's Joint Ventures have little or no operating history or
experience. Approximately 204 MW of electric power generating capacity has been
brought on line by the Joint Ventures since the formation of the Company. In
addition, the Joint Ventures currently have approximately 614 MW of electric
power under construction and targeted to begin commercial operation over the
course of 1997 and 1998. Accordingly, purchasers of the Notes do not at present
have a substantial operating history of the Company upon which to rely in
forming an investment decision.
The Company expects that it will have a deficiency of earnings to cover
fixed charges over the course of the fiscal year ending November 30, 1997, given
the expected limited commercial operations of its Joint Ventures during such
period and the incurrence of indebtedness pursuant to this Offering. The
successful completion of the power plants under construction by the Joint
Ventures is necessary for the Company to meet its debt service requirements. A
portion of the proceeds of the Offering will be deposited in the Company's Debt
Service Reserve Account in order to meet the debt service requirements of the
Company for the period from the date of the Offering through June 15, 1998.
LIMITED SECURITY; HOLDING COMPANY STRUCTURE
Other than a security interest to be granted in the Debt Service Reserve
Account and Special Proceeds Account, the Notes are unsecured obligations of the
Company, and AES is not guaranteeing payment with respect to the Notes. The
Company's primary assets are its loans to and ownership interests in the Joint
Ventures in China. Accordingly, the Company's ability to pay its expenses and
meet its obligations under the Notes will depend upon its receipt of principal
and interest payments on the shareholder loans made by the Company to the Joint
Ventures and equity distributions from the Joint Ventures. See "Business --
Description of the Current Projects."
The Company conducts substantially all of its operations through the Joint
Ventures. Creditors of such entities, including trade creditors, would have a
claim on the Joint Ventures' assets that would be prior to the claims of the
holders of the Notes. As of August 31, 1996, the debt (excluding trade debt) of
the Joint Ventures included on the consolidated balance sheet of the Company was
$35.8 million.
ABSENCE OF AN ESTABLISHED MARKET FOR THE NOTES
The Notes constitute a new issue of securities for which there is currently
no public market. The Company does not intend to apply for listing of the Notes
on any securities exchange. Although the Underwriters intend to make a market in
the Notes, they are not obligated to do so and may discontinue any market-making
at any time without notice. There can be no assurance that a market for the
Notes will develop, or if it does develop, that it will continue. Moreover, if a
market for the Notes does develop, the Notes could trade at a substantial
discount from their face amount, depending on many factors including prevailing
interest rates, the Company's operating results and the market for similar
securities. There can be no assurance regarding the ability of the holders of
the Notes to sell their Notes or the price at which such holders may be able to
sell their Notes.
RISKS RELATED TO THE COMPANY'S BUSINESS
REGULATION AND RESTRICTIONS; TARIFFS
Similar to electric power companies in other countries, the Company's Joint
Ventures are subject to governmental and electric power regulation in virtually
all aspects of their operations, including the amount and timing of electricity
generation, the setting of electric power tariffs, performance of scheduled
maintenance and compliance with power grid control and dispatch directives.
Foreign ownership of electric power
18
<PAGE> 20
plants in China is also restricted or controlled in varying degrees. There can
be no assurance that these regulations and restrictions will not change in the
future in a manner which could adversely affect the operations of the Company's
Joint Ventures.
For power plants with foreign investment such as the Company's Joint
Ventures, tariffs payable under power purchase contracts entered into by the
Joint Ventures are established on the basis of tariff formulas which are agreed
upon after discussions among the Company, its partners, the prospective power
purchasers, the relevant local governments, the relevant pricing bureaus and the
relevant planning commissions. Once established, the tariffs are subject to
annual review by the relevant local government pricing bureau and adjustment in
accordance with the formulas. The tariff formulas contained in the power
purchase contracts entered into by the Company's Joint Ventures are structured
to permit the Joint Ventures to pay the operating expenses of the plant, the
financing costs of each particular project and to enable the Company to realize
a return on its investment. While the relevant PRC pricing bureaus have
committed to utilize the Joint Ventures' formulas in establishing and adjusting
tariffs, there can be no assurance that the relevant pricing bureaus will
calculate and adjust tariffs in accordance with these tariff formulas. On April
1, 1996, a new law governing the electric power sector in the PRC came into
effect. See "The PRC Electric Power Industry -- Electric Power Law." The law
establishes, among other things, broad principles with respect to the
methodology of calculating and setting electric power tariffs. Detailed
regulations with respect to tariff calculation and tariff setting are expected
to be promulgated in the near future by the Central Government. There can be no
assurance that such regulations, when promulgated, will not adversely affect the
tariff structures which the Company's Joint Ventures have adopted.
GOVERNMENT APPROVAL PROCESSES
China's electric power industry is highly regulated, both in terms of
operating existing power plants and developing new power projects. All electric
power projects in China and all foreign investments are required to obtain
approvals from one or more central, provincial or local government authorities.
While the regulations governing and the procedures for obtaining approvals for
foreign investment projects are generally well-understood, the specific
regulations and procedures for the approval of electric power projects with
foreign investment in the PRC and associated foreign investment enterprises are
not entirely transparent. Project approvals and foreign investment approvals are
required, but follow separate procedures. At the highest level, the right to
approve projects in the PRC is vested in the State Council. The State Council
has reserved to itself the authority to approve any project with a total
investment which exceeds $100 million. Pursuant to various internal PRC
Government notices, the State Council has delegated the authority to approve any
project with a total investment of less than $100 million to various ministries
and ministry level entities, including the SPC. The SPC and certain ministries
and other ministry level entities have, in turn, adopted a policy, also by
internal directives, of further delegating authority to approve projects with a
total investment of less than $30 million to provincial governments, provincial
level bureaus of the Central Government and certain municipalities. The project
approval authority of local governments is, therefore, generally limited to not
more than $30 million. Separate from project approval, foreign investment must
be approved by MOFTEC, or one of its departments at the provincial or local
government level, should the total investment amount be below $30 million.
Accordingly, foreign investment enterprises proposing to undertake projects must
obtain approvals for the projects from the appropriate government level planning
authorities and approvals for the foreign investment from a similar level
department of MOFTEC.
Two of the Company's power plants have been structured as multiple projects
and joint ventures, each project and joint venture with a total investment below
the $30 million threshold, and have obtained local government approvals on this
basis. It is possible that projects structured in this fashion could be viewed
by the Central Government approval authorities as a single project. In several
other cases, the Company's projects and Joint Ventures have obtained local
government approvals on the basis of anticipated total investments which were
less than $30 million at the time the approvals were obtained, but will, when
construction is completed, exceed the $30 million approval threshold. While it
is common in the PRC for projects and joint ventures such as these to obtain and
rely on only local government approvals, it is unclear whether such
19
<PAGE> 21
approvals are sufficient. There can be no assurance, therefore, that the absence
of Central Government approvals will not adversely affect the Joint Ventures and
their projects in any of such cases.
ENVIRONMENTAL MATTERS
The Company's Joint Ventures with power plants in operation have received
the environmental approvals from the PRC Government environmental authorities
required for them to operate their respective electric power plants. In as much
as the Joint Ventures' electric power plants currently under construction are
typically among the most modern in the areas in which they are located, the
Company believes that these plants will also receive all required environmental
approvals. There can be no assurance, however, that the requirements to obtain
such approvals may not be made more stringent in the future. If such a change in
policy occurs, there can be no assurance that all such requirements will be met
and that future approvals for existing or potential projects will be granted. If
a change in environmental requirements leads to an increase in costs, an
affected Joint Venture is able to receive an adjustment in the tariff it charges
for electric power pursuant to its power purchase contract.
The PRC is a party to the Framework Convention on Climate Change ("Climate
Change Convention"), which is intended to limit or capture emissions of
"greenhouse" gases, such as carbon dioxide. At present, ceilings on such
emissions could limit the production of electricity from fossil fuels,
particularly coal, or increase the costs of such production. At present,
ceilings on the emissions of "greenhouse" gases have not been assigned to
developing countries such as the PRC under the Climate Change Convention, and
the PRC has objected to any imposition of such ceilings. If the PRC were to
agree to such ceilings, or otherwise reduce its reliance on coal-fired power
plants, the business prospects of the Company could be adversely affected.
CONSTRUCTION RISKS
The construction of an electric power generation plant, including its
ancillary facilities such as a transmission line or substation, may be adversely
affected by many factors commonly associated with the construction of
infrastructure projects, including shortages of equipment, materials and labor,
as well as, labor disputes, adverse weather conditions, natural disasters,
accidents and other unforeseen circumstances and problems. Any of these could
cause completion delays and cost overruns. Delays in obtaining requisite
licenses, permits or approvals from government agencies or authorities could
also increase the cost or delay or prevent the commercial operation of a
project. Construction delays can result in the loss or delayed receipt of
revenues and, if completion is delayed beyond the completion date specified in
the power purchase contract, the payment of penalties. Additionally, the failure
to complete construction according to specifications can result in reduced plant
efficiency, higher operating costs and reduced or delayed earnings.
The Company's Joint Ventures all rely on PRC contractors for the
construction of their electric power plants. While there are a number of PRC
contractors with substantial construction experience, there are only a limited
number that have experience constructing plants on a turnkey basis. In only a
few cases has the Company been able to enter into a turnkey contract with a
Chinese contractor which includes a guaranteed fixed price and/or contractor
obligations to pay liquidated damages for delays in completion or for shortfalls
in performance. In the case of one project, the Company's Joint Venture has
experienced delays in installation and defects in the quality of equipment. The
delays have been mitigated by the payment of damages by the contractor. The
Company seeks to mitigate construction risk in a number of ways: carefully
choosing its contractors; closely supervising the construction of its projects
or retaining internationally recognized construction managers to supervise
construction; and, in some cases, by utilizing established foreign equipment
manufacturers and vendors who are able to directly pass through to the Joint
Ventures their equipment and performance warranties or, where appropriate, by
utilizing proven Chinese equipment and technology. Despite such mitigation
efforts, no assurance can be given that the Company's Joint Ventures will not
experience construction delays or difficulties, or that any such delays or
difficulties will not have a material adverse effect on the operations of the
Company's Joint Ventures.
20
<PAGE> 22
OPERATING RISKS
The operation of an electric power generation plant may be adversely
affected by many factors such as the breakdown or failure of equipment or
processes, performance below expected levels of output or efficiency, labor
disputes, operational errors, natural disasters, and the need to comply with the
directions of the relevant government authorities, the dispatcher and power
purchaser of a power plant. In addition, such operation may be hampered by
insufficient or poor quality fuel caused by either inadequate supply or
transportation or arrangements therefor.
The Company is not the operator of any of its power plants either directly
or by means of traditional operation and maintenance agreements with
internationally recognized power plant operators. In some cases, the Company's
Joint Ventures have contracted with the power purchaser to operate a power
plant. In such instances, the power purchaser is obligated under the power
purchase contract to purchase the annual minimum quantity of electric power
regardless of the power plant being unavailable due to the fault of the
operator. In other cases, the Joint Ventures themselves are operating the plant.
In these instances, the Company may affect the operation of a power plant
through the appointment of a general manager and/or deputy general manager of
the plant.
FUEL RISKS
Most of the Joint Ventures' power projects utilize coal, fuel oils or
natural gas for the generation of electricity. The power purchase contracts
which have been entered into by the Joint Ventures provide for a pass-through to
the power purchasers of increases in the cost of fuel. In the case of most of
the Joint Ventures, under normal circumstances, the procedures of the local
government pricing bureaus allow tariff adjustments reflecting fuel cost changes
to be made only once a year. As a result, in these cases the Company's Joint
Ventures may not be able to receive compensation for increased fuel costs until
sometime after the date they are incurred.
For coal projects which are not "mine mouth" projects, coal must be
supplied to the project site from the interior provinces of China. The affected
Joint Ventures seek to mitigate this transportation risk by entering into long
term contracts for the transportation of coal. However, where rail is utilized
as the means of coal transportation, the coal transporters may experience
significant delays due to the limited capacity of the PRC's rail system. Because
of this lack of capacity, the Central Government rations the allocation of rail
cars. In one project which requires the transportation of coal by rail, the
Company's Joint Venture has obtained an administrative allocation of rail cars
from the Central Government. However, there can be no assurance that a
satisfactory allocation of rail cars will be available in all future cases to
ensure that the coal supply requirements of the affected projects will be timely
met.
LOAD GROWTH; DISPATCH; TRANSMISSION CONSTRAINTS
Some regions or cities in the PRC have experienced slower economic
development in recent years. As a consequence, load growth in the PRC, while
generally increasing in the country overall, has exhibited uneven development.
Some of the Joint Ventures' power plants are designed to provide peaking power.
Such plants are dispatched only after base load power stations have been brought
on-line and reached maximum capacity. If electric power demand proves less than
expected in an area, additional peak or base load power may not be required in
the area or may be required at lower than expected levels. The Company's Joint
Ventures seek to mitigate this risk by entering into take-or-pay power purchase
arrangements and by entering into dispatch contracts with PRC electric power
dispatching authorities which obligate the dispatchers to dispatch the power
plants at their full capacity for a minimum number of hours each year. There can
be no assurance, however, that the Joint Ventures will not experience difficulty
in enforcing take or pay contract obligations or such dispatch contract
obligations if electric power in an area proves not to be needed by the affected
power purchaser and dispatcher.
Additionally, the Chinese electric power transmission system is not fully
interconnected. Some parts of the transmission system contain isolated grids.
Three of the Company's Joint Ventures are located in areas served by isolated
transmission grids. As a result, if demand in these areas is less than forecast,
it may be
21
<PAGE> 23
difficult or impossible for the affected Joint Venture to transmit the project's
available power to a region which has a demand for it. In order to take
advantage of a broader market and an additional power purchaser, one of these
Joint Ventures is planning to incur additional costs to build a low-voltage
local transmission line to interconnect its power plant with a larger grid.
RELIANCE ON AND CREDITWORTHINESS OF PRC COUNTERPARTIES
In all of its projects, the Company and its Joint Ventures are relying on
the reliability and creditworthiness of PRC entities such as its partners,
contractors, customers, suppliers, operators, guarantors, lenders and others who
are parties to agreements with the Company or its Joint Ventures. While the
Company believes that these counterparties have the ability to perform and will
perform their obligations, the reliability and creditworthiness of PRC entities
are difficult to ascertain. In most cases, the Company, in assessing the
reliability and credit standing of counterparties, is relying on financial or
other information provided to the Company or its Joint Ventures by such parties
or others, or from information and sources publicly available in the PRC. The
Company can offer no assurance that this information is accurate or that these
counterparties will meet their contractual obligations. The failure of any one
of these counterparties to fulfil its obligations to a Joint Venture could have
a substantial negative impact on such Joint Venture's operations.
CONFLICTS OF INTEREST OF CONTRACTING PARTIES
In a number of cases, the Company's partner in a Joint Venture controls or
is affiliated with the power purchaser, contractor, operator and/or fuel
supplier of the project. It is possible, in these cases, that such arrangements
may result in one or more of these parties having a conflict of interest in a
project, which could have an adverse effect on the Joint Ventures' operations.
CONTROL BY AND RELIANCE ON AES
AES currently holds all of the outstanding shares of the Company's Class B
Common Stock and is entitled, voting as a class, to elect one-half of the Board
of Directors of the Company. Most of the Company's executive officers are also
senior executives, officers and project personnel employed by AES. As a result,
AES and its officers and directors have a significant day-to-day influence over
the operations of the Company. Following the Amalgamation, the Company would
become a subsidiary of AES, and AES would be entitled to elect the entire board
of directors of the Company. The Company's success in project development and
the quality of construction management and operations and maintenance services
provided by the Company in many cases will depend to a large extent on the
capabilities and expertise of AES.
LIMITATIONS RESULTING FROM THE AMALGAMATION
The Company is not currently affected by the covenants contained in various
AES debt agreements because it is not a subsidiary of AES. As a result of the
Amalgamation, the Company will become a subsidiary of AES and intends to comply
with the AES Debt Covenants (as defined elsewhere in this Prospectus) applicable
to subsidiaries of AES which, among other things, place substantial limitations
on the ability of the Company to invest in projects other than the Current
Projects. As a consequence, the opportunities for investment, along with the
associated risks, that would otherwise be available to the Company may instead
be taken by other investors, including AES.
Assuming the Company uses existing funds and the net proceeds of the
Offering (less amounts deposited in the Debt Service Reserve Account) to fund
outstanding investment commitments to the Current Projects, upon consummation of
the Amalgamation, an additional maximum amount of approximately $95.0 million
would be available to fund investments in the Potential Projects or other future
projects, or as well as additional investment required in the Current Projects.
The Company's business requires a long period of investment in development and
construction before any revenues are generated by a new project. Accordingly,
although the AES Debt Covenants impose significant limitations on investment in
projects, it is not anticipated that the Company's ability to satisfy its
obligations under the Notes will be adversely affected by the application of the
AES Debt Covenants following the Amalgamation. After exhaustion of this amount,
as
22
<PAGE> 24
a result of application of the AES Debt Covenants, no additional Company funds
would be available to satisfy the capital requirements of such projects,
including working capital requirements and construction cost overruns. As a
result, unless such amounts, if necessary, could be funded at the project level,
there can be no assurance that the Company's projects could be completed as
planned. Any additional third party equity financing of such capital
requirements would result in a dilution of the Company's interests in such
projects. Whether or not the Amalgamation occurs, the Notes are solely the
obligations of the Company and do not benefit from a guarantee or other credit
support of AES.
In addition, over time a substantial amount of cash flow may be generated
by the Company's projects which could not be invested in the Current Projects or
other future projects. As a result, to the extent these funds are neither
required to pay expenses incurred by the Company nor paid to AES as a dividend
(subject to the restriction described under "Description of the Notes --
Covenants -- Limitation on Restricted Payments"), the funds will accumulate over
time at the Company or its subsidiaries. See "The Amalgamation -- Certain
Effects of the Amalgamation."
Following the Amalgamation, under the AES Debt Covenants, investments could
not be made in a project directly by the Company. Accordingly, prior to the
Amalgamation, the Company intends to transfer its direct ownership interests in
certain of the Potential Projects to wholly owned subsidiaries, each of which,
after the transfer, will be the ownership vehicle for the Company's investment
in these projects. See "The Amalgamation -- Certain Effects of the
Amalgamation." In the case of each of these projects, the consent of the
Company's partners in such project and the approval of the relevant PRC
Government authorities are required to effect the transfers of the Company's
interests. Although the Company has no reasons to believe that such consents and
approvals cannot be obtained, there is no assurance that such consents and
approvals can be obtained in order to permit investments in these projects to be
made following the Amalgamation.
ADHERENCE TO THE AES PRINCIPLES
A core part of AES's corporate culture is a commitment to "shared
principles" -- to act with integrity, to be fair, to have fun and to be socially
responsible. The Company has adopted a similar corporate culture and tries to
adhere to these principles, like AES, not as a means to achieve economic
success, but because adherence is a worthwhile goal in and of itself. However,
if the Company or AES perceives a conflict between these principles and profits,
the Company and AES will try to adhere to these principles -- even though doing
so might result in diminished or foregone opportunities.
23
<PAGE> 25
THE COMPANY
The Company is a leading independent power generation company in China and
one of the few international developers that has successfully completed the
development of electric power projects in the country. The Company was founded
in December 1993 by AES and currently serves as the exclusive vehicle for AES to
develop, acquire, finance, construct, own and operate electric power generation
facilities in the PRC. AES is one of the largest independent power producers in
the world. AES currently holds a substantial equity interest in the Company. AES
and the Company have entered into an Amalgamation Agreement providing for the
acquisition by AES of the remaining equity in the Company.
Since commencing business, the Company has committed $259.6 million and as
of October 7, 1996 has invested $130.4 million in eight power projects, the
Current Projects, in operation or under construction in the PRC having an
aggregate nameplate capacity of approximately 818 MW (approximately 422 MW of
which is attributable to the Company's interests in the Joint Ventures). The
Current Projects include coal, oil, natural gas and hydro power plants located
in six different provinces in China.
The Company has signed joint venture contracts and is in various stages of
negotiation to develop four additional power projects in the PRC, the Potential
Projects, with an aggregate nameplate capacity of approximately 3,006 MW
(approximately 869 MW of which would be attributable to the Company's interests
in the proposed project companies).
The purpose of this Offering is to raise additional funds for the Company
to finance the capital requirements of the Current Projects and, to the extent
funds are available and subject to the AES Debt Covenants to finance investments
in the Potential Projects or other future electric power projects. See "Use of
Proceeds." The Company does not currently have any long-term debt other than
shareholder loans incurred by certain of its Joint Ventures.
The principal executive office of the Company is located at 3/F(W), Golden
Bridge Plaza, No. 1(A) Jianguomenwai Avenue, Beijing, 100020, People's Republic
of China, and its telephone number is (8610) 6508-9619.
RELATIONSHIP WITH AES
AES is a global power company supplying electricity, either directly, or
through affiliates like the Company, to customers in eight countries, including
the PRC. AES was one of the original entrants in the independent power market.
In addition to the Company's power plants, AES has ownership interests in, and
operating responsibility for, 22 power plants world-wide, representing
approximately 9,398 MW in operation and approximately 1,084 MW under
construction. In the 15 years since its inception, AES's total assets have grown
to more than $3.2 billion and it is currently one of the largest companies in
this market. AES prides itself on being a market leader in the operation of
power plants. In 1995, AES's power plants maintained an average availability of
94%. AES's position in the market and record of operations have allowed it to
successfully finance its projects at competitive rates.
AES currently owns all of the outstanding shares of the Class B Common
Stock and is entitled to elect one-half of the members of the Board of Directors
of the Company. The outstanding shares of Class A Common Stock represent
approximately 52% of the outstanding capital stock of the Company.
THE AMALGAMATION
The Company and AES have entered into an Amalgamation Agreement, providing
for among other things the Company to become a wholly owned subsidiary of AES.
The Amalgamation is subject to various conditions, including the approval of the
holders of the Class A Common Stock, and there can be no assurance that the
Amalgamation will be consummated.
The Company is not currently affected by the covenants contained in various
AES debt agreements because it is not a subsidiary of AES. As a result of the
Amalgamation, the Company will become a subsidiary of AES and intends to comply
with the limitations contained in the AES Debt Covenants applicable
24
<PAGE> 26
to subsidiaries of AES. Among other things, the AES Debt Covenants will
effectively limit any further investment in power plant projects by the Company
to the funds currently held by the Company, plus the net proceeds of the Notes
remaining after the funding of the Debt Service Reserve Account. Assuming the
Company makes investments equal to the full amount of its existing investment
commitments to the Current Projects, upon consummation of the Amalgamation, a
maximum amount of approximately $95.0 million would be available to fund the
Potential Projects and other future projects, as well as any additional
investment required in the Current Projects. After the Amalgamation, no
dividends paid to the Company by its subsidiaries or funds thereafter raised by
the Company could be invested in the Current Projects or the Potential Projects
or other future projects. Any additional investment in the Potential Projects or
other future power projects could only be made by other investors, including
AES. The Company's business requires a long period of investment in development
and construction before any revenues are generated by a new project.
Accordingly, although the AES Debt Covenants impose significant limitations on
investment in projects, it is not anticipated that the Company's ability to
satisfy its obligations under the Notes will be adversely affected by the
application of the AES Debt Covenants following the Amalgamation.
In connection with the Amalgamation, the Non-Competition Agreement will be
terminated, which would allow AES to invest directly in PRC power projects and
the Company to invest in projects outside the PRC. The Company is not currently
exploring any opportunities to invest outside the PRC. Whether or not the
Amalgamation occurs, the Notes are solely the obligations of the Company and do
not benefit from a guarantee or other credit support of AES.
A lawsuit has been filed in the Court of Chancery of the State of Delaware
against AES alleging, among other things, a breach of fiduciary duty to public
stockholders of the Company and seeking to enjoin AES from consummating the
Amalgamation. The Company is not a defendant in the lawsuit, and AES has
informed the Company that it believes that it has meritorious defenses to the
lawsuit and intends to defend against it vigorously.
25
<PAGE> 27
USE OF PROCEEDS
The net proceeds to the Company from the issuance of the Notes will be
approximately $173,936,200. Of the total net proceeds, $36,247,500 will be
deposited upon completion of the Offering with the Trustee in the Debt Service
Reserve Account, of which $27,135,000 will fund the Interim Reserve and
$9,112,500 will fund the Debt Payment Reserve. See "Description of the
Notes -- Security Agreement -- Debt Service Reserve Account." The Company
intends to use the remaining $137,688,700 of the proceeds of the issuance of the
Notes to fund investment commitments to the Current Projects, for general
corporate purposes and, to the extent funds are available and subject to the AES
Debt Covenants, for the Potential Projects and other future projects. Pending
such use, the Company and its subsidiaries will invest such proceeds in
marketable securities that are Permitted Investments (as defined below under
"Description of the Notes -- Certain Definitions").
26
<PAGE> 28
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of August 31, 1996, and such capitalization as adjusted for the issuance of the
Notes in this Offering and the application of the estimated net proceeds of this
Offering as described under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Short-term debt:
Loans from minority shareholders -- current portion............... $ 1,365 $ 1,365
Notes payable..................................................... 481 481
-------- --------
Total short-term debt..................................... $ 1,846 $ 1,846
======== ========
Long-term debt:
10 1/8% Notes due 2006............................................ $ -- $ 180,000
Loans from minority shareholders, less current portion............ 33,982 33,982
-------- --------
Total long-term debt...................................... 33,982 213,982
Minority interest................................................... 33,345 33,345
Shareholders' equity(1):
Class A common stock, $0.01 par value; 50,000,000 shares
authorized; 8,134,100 shares issued and outstanding............ 81 81
Class B common stock, $0.01 par value; 50,000,000 shares
authorized; 7,500,000 shares issued and outstanding............ 75 75
Additional paid-in capital........................................ 183,980 183,980
Retained earnings................................................. 3,714 3,714
Cumulative translation adjustment................................. 270 270
-------- --------
Total shareholders' equity................................ 188,120 188,120
-------- --------
Total capitalization...................................... $255,447 $ 435,447
======== ========
</TABLE>
- ---------------
(1) Upon the consummation of the proposed Amalgamation, shareholders' equity of
the Company will consist of 12,000 shares of common stock, $1.00 par value,
with 12,000 shares authorized, issued and outstanding and additional
paid-in capital of $184,124,000. There will be no change to total
shareholders' equity or total capitalization.
27
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and operating data for the
period ended November 30, 1994 and the fiscal year ended November 30, 1995 and
for the nine months ended August 31, 1995 and August 31, 1996. The table should
be read in conjunction with the Consolidated Financial Statements. See
"Discussion and Analysis of Financial Condition and Results of Operations" and
the unaudited consolidated financial statements of the Company for the nine
months ended August 31, 1995 and August 31, 1996 which are included elsewhere in
this Prospectus. The Company prepares its consolidated financial statements in
accordance with U.S. GAAP. In the opinion of management, the unaudited
consolidated financial statements for the nine months ended August 31, 1995 and
August 31, 1996 contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position and
consolidated results of operations of the Company for those periods. Results of
operations for the nine months ended August 31, 1996 are not necessarily
indicative of the results of operations for the full fiscal year ending November
30, 1996.
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED NINE MONTHS ENDED
NOVEMBER 30, AUGUST 31,
--------------------- ---------------------
1994 1995 1995 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Electricity sales............................. $ 38 $ 702 $ 916 $ 6,553
Construction delay fee........................ -- 680 -- 400
------ ------ ------ ------
Total revenues........................ 38 1,382 916 6,953
Operating costs and expenses:
Costs of sales................................ 68 635 496 3,867
Development, selling, general and
administrative expenses.................... 6,927 9,259 6,920 5,229
------ ------ ------ ------
Total operating costs and expenses.... 6,995 9,894 7,416 9,096
------ ------ ------ ------
Operating loss.................................. (6,957) (8,512) (6,500) (2,143)
Other income/(expense):
Interest income............................... 6,589 10,529 8,060 5,001
Interest expense.............................. -- -- -- (679)
Equity in earnings of affiliates.............. -- 206 102 441
------ ------ ------ ------
Income/(loss) before income taxes and minority
interest...................................... (368) 2,223 1,662 2,620
Income taxes.................................. -- -- -- 455
Minority interest............................. 3 85 93 218
------ ------ ------ ------
Net income/(loss)............................... $ (371) $ 2,138 $ 1,569 $ 1,947
------ ------ ------ ------
Net income/(loss) per share..................... $ (0.03) $ 0.12 $ 0.09 $ 0.12
====== ====== ====== ======
Weighted average shares outstanding............. 14,817 17,391 17,487 15,649
====== ====== ====== ======
OTHER FINANCIAL DATA:
Ratio of Earnings to Fixed Charges(1)........... -- 4.42x 11.26x 1.18x
Adjusted Cash Flow(2)........................... $ (4,355) $ (6,569) $ (4,081) $ (4,224)
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF
--------------------- AUGUST 31,
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.......................................... $186,467 $154,959 $ 97,015
Total assets............................................. 210,870 229,871 270,302
Long-term debt (including current portion)(3)............ -- 7,017 35,347
Minority interest........................................ 7,219 19,082 33,345
Shareholders' equity..................................... 201,584 187,585 188,120
</TABLE>
- ---------------
(1) In calculating this ratio, earnings consist of income before income taxes
plus fixed charges. Fixed charges consist of interest expense and
amortization of deferred financing fees, whether expensed or capitalized,
plus one-third of rental expenses under operating leases. For the fiscal
period ended November 30, 1994, earnings were inadequate to cover fixed
charges, and the coverage deficiency was approximately $.4 million.
(2) Adjusted Cash Flow is calculated as defined under "Description of the
Notes -- Certain Definitions." Of the total net proceeds of the Offering,
$36,247,500 will be deposited in the Debt Service Reserve Account, of which
$27,135,000 will fund the Interim Reserve and $9,112,500 will fund the Debt
Payment Reserve. The Interim Reserve will be used to make interest payments
due on the Notes on or prior to June 15, 1998. The Debt Payment Reserve
will be maintained in the Debt Service Reserve Account for so long as the
Notes remain outstanding. See "Description of the Notes -- Security
Agreement -- Debt Service Reserve Account."
(3) Long-term debt consists of loans from minority shareholders in the Company's
subsidiaries.
29
<PAGE> 31
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company, directly and through its wholly-owned offshore subsidiaries,
engages in the development, construction, operation and ownership of electric
power generating facilities in the PRC by means of its participation in the
Joint Ventures. The Company currently owns interests in eight power plants with
an aggregate nameplate capacity of approximately 818 MW. See
"Business -- Description of the Current Projects." The Company is considering an
investment in Yangcheng Sun City, a project with an aggregate nameplate capacity
of 2,100 MW, and is considering investments in three other power projects. See
"Business -- Description of the Potential Projects." After the Amalgamation, the
Company's ability to invest in projects will be substantially limited by the AES
Debt Covenants. See "The Amalgamation -- Certain Effects of the Amalgamation."
The economics of any electric power project, once in commercial operation,
are primarily a function of the tariffs to be paid and the quantity of
electricity which is purchased. The Company shares in the net income of the
Joint Ventures for the duration of their terms. The Joint Ventures generate
revenues through the sale of electricity to power purchasers pursuant to long
term power purchase contracts. These contracts require the power purchaser to
purchase and pay for minimum quantities of electricity annually or to pay for
such quantities if not purchased, in either case at prices determined according
to tariff formulas set forth in the power purchase contracts. These tariff
formulas are designed, based on the minimum take obligation of the power
purchaser, to be sufficient to pay the operating costs and financing costs of
the project and to enable the Company to realize a return on its investment.
Demand for power produced by a plant is determined by the demand for
electric power in the area served by the plant and the degree to which the plant
is dispatched. If the plant is dispatched above the minimum quantity required to
be purchased under the power purchase contract, these sales will generate
additional income for the Joint Venture and enhance its profitability. If demand
is significantly below the minimum level, the Joint Venture can look only to the
credit of the power purchaser to pay the required amount. The Company focuses
its development efforts on plants that will provide power to areas of high
demand relative to existing and planned capacity.
The Company receives cash from the Joint Ventures in the form of equity
distributions and payments of principal and interest on shareholder loans made
by the Company or its wholly-owned subsidiaries to the Joint Ventures. In a
number of cases, the Company has, or anticipates having, priority in the payment
of dividends over the Chinese partners to the Joint Venture. The Company's
shareholder loans rank as general obligations of the Joint Ventures, except in
some instances in which third party financing has been secured or will be
secured for the Joint Venture, in which case the shareholder loans generally
are, or will be, subordinated to such third party debt.
Because of the significant magnitude and complexity of constructing
electric power plants, construction periods generally range from one to five
years, depending on the size of the power plant, the technology utilized and the
location. A power plant does not produce revenues until it is completed. If
construction is delayed, revenues from the power plant will be similarly delayed
and perhaps, if the delay is extended, lost. Additionally, the cost of
developing power plants is substantial. The Company capitalizes its development
costs and seeks to recover them at the financial closing of a power plant and by
amortizing them over the life of the Joint Venture. However, if a power plant
under development is abandoned or not financed and completed, such development
costs may be unrecoverable.
The Company's revenue growth will depend in large part on the Company's
ability to bring the Joint Ventures' power plants which are currently under
construction into commercial operation. The Company's revenue growth will also
depend on its ability to secure financing and achieve financial closing,
construction completion and commercial operation of the Potential Projects and
other future project opportunities, subject to the limitations that would be
imposed by the AES Debt Covenants following the Amalgamation.
30
<PAGE> 32
RESULTS OF OPERATIONS
The discussion set forth below relates to the results of operations and
financial condition of the Company for, and as of the end of, the nine month
period ended August 31, 1996 and August 31, 1995 and the year ended November 30,
1995 and the period from December 7, 1993 (the date of the Company's
establishment) to November 30, 1994, and the following should be read in
conjunction with the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
NINE MONTHS ENDED AUGUST 31, 1996 AND 1995
Revenues and Costs of Sales. Total revenues increased from approximately
$900,000 to $7.0 million from the nine months ended August 31, 1995 to the nine
months ended August 31, 1996. Costs of sales, which include fuel, operations and
maintenance expenses, depreciation and amortization, increased from
approximately $500,000 to $3.9 million from the first nine months of 1995 to the
same period of 1996. The increases in revenues and costs of sales were due
primarily to the commencement of operations of the Wuxi Tin Hill project.
Development, Selling, General and Administrative Expenses. For the nine
months ended August 31, 1996, development, selling, general and administrative
expenses decreased $1.7 million from $6.9 million to $5.2 million compared with
the same period in 1995. The decrease was primarily due to the capitalization of
a higher proportion of development costs associated with projects which have
achieved financial closing.
Interest Income. Interest income for the nine months ended August 31, 1996
and 1995 was primarily generated by income from marketable securities purchased
with the proceeds received from the Company's 1994 initial public offering.
Interest income for the nine months ended August 31, 1996 decreased $3.1 million
from $8.1 million to $5.0 million compared with the corresponding period of
1995. The decreases in interest income for the nine months ended August 31, 1996
were primarily due to a lower average amount of funds available for investment
due to investments in Joint Ventures, as well as the repurchase of a portion of
the outstanding shares of the Company's Class A Common Stock.
Interest Expense. During the nine months ended August 31, 1996, interest
expense of approximately $700,000 related solely to the interest on two minority
shareholder loans to Wuxi-AES-CAREC. For the corresponding period in 1995, the
Company had no outstanding loans.
YEAR ENDED NOVEMBER 30, 1995 AND THE PERIOD FROM DECEMBER 7, 1993
(THE DATE OF THE COMPANY'S ESTABLISHMENT) TO NOVEMBER 30, 1994
Revenues and Costs of Sales. Total revenues increased from approximately
$40,000 to $1.4 million from 1994 to 1995. There were two components to revenues
generated in 1995: (i) revenue generated by electricity sales from the Cili
Misty Mountain project, which increased from approximately $40,000 to $700,000
from 1994 to 1995, and (ii) revenue generated pursuant to the payment of
construction delay fees of approximately $700,000 paid by the contractor of the
Cili Misty Mountain project. Costs of sales increased from approximately $68,000
to $635,000 in 1995. The significant increases in revenues generated and costs
of sales in 1995 were primarily attributable to a full year of operations for
the Cili Misty Mountain project, commencing in November 1994.
Development, Selling, General and Administrative Expenses. Development,
selling, general and administrative expenses increased by $2.3 million from $6.9
million in 1994 to $9.2 million in 1995. The increase in development, selling,
general and administrative expenses was primarily due to the hiring of
additional employees in 1994 and 1995 for the development of power plants and
the financial management of the Joint Ventures in China. The increase was offset
in part by capitalization of development costs associated with projects which
achieved certain project related milestones.
Interest Income. Interest income increased approximately $3.9 million from
$6.6 million to $10.5 million from 1994 to 1995. The increase was due primarily
to proceeds received from the Company's initial public offering being available
for investment in marketable securities for all of 1995, while such proceeds
were only available the previous year beginning in the second quarter of 1994.
In addition, interest rates on the
31
<PAGE> 33
Company's marketable securities were somewhat higher during 1995. These factors
were offset in part by the Company's investment in Yangchun Fuyang in March and
September 1995 and Wuxi-AES-CAREC and Wuxi-AES-Zhonghang beginning in May 1995
and due to the repurchase by the Company during 1995 of a portion of the
outstanding shares of Class A Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business has required substantial investment associated with
the development, acquisition and construction of electric power plants and
related facilities through its Joint Ventures. As of August 31, 1996, the
Company had entered into commitments to invest a total of approximately $204.6
million in the form of equity contributions and loans to its Joint Ventures, of
which $91.8 million had been invested as of August 31, 1996. After September 1,
1996, the Company entered into commitments to provide an additional amount of
approximately $55.0 million in equity contributions and shareholder loans to
Chengdu AES-Kaihua, Liyuan-AES and Zhongli Energy. See "Business -- Description
of the Current Projects." If the Amalgamation is not consummated or the AES Debt
Covenants otherwise do not apply, the Company would expect to incur additional
commitments in the future in connection with the development, acquisition,
construction, ownership and operation of additional electric power plant and
related facilities in China.
The Company has financed its investments to date out of the proceeds of its
initial public offering in 1994. At August 31, 1996, cash and cash equivalents
of the Company totaled $92.0 million. Following the completion of the Offering,
the proceeds of the Offering together with the Company's existing cash and cash
equivalents are expected to be sufficient to enable it to fund its commitments
to existing Joint Ventures together with its investment in a portion of one or
more of its projects under development. See "Business -- Description of the
Potential Projects." In addition, the Company expects to obtain additional funds
from operating activities as more of its electric power plants become
operational. If the Amalgamation is not consummated or the AES Debt Covenants
otherwise do not apply, the Company may raise additional equity or debt, if
needed, to fund future investment opportunities subject to its ability to raise
debt financing under certain covenants governing the Notes. See "Description of
the Notes -- Covenants -- Limitation of Incurrence of Indebtedness."
The Company and its Joint Venture partners will need to raise
limited-recourse or non-recourse financing from third parties for certain large
projects. The Company believes such projects will be successfully developed only
if such debt is obtained. The Company's Nanpu Southern Delta project is one
example of a potential project that is likely to be completed only with
substantial third party financing. See "Business -- Description of the Potential
Projects -- Other Power Projects Under Development."
The ability of one of the Joint Ventures, Wuhu Shaoda, to pay dividends or
distribute earnings to the Company is restricted by the terms of a bank facility
which has been entered into by the Joint Venture. See "Business -- Description
of the Current Projects -- Wuhu Grassy Lake." The declaration of equity
distributions by certain Joint Ventures in which the Company is not entitled to
appoint a majority of the board of directors may depend on the assent of the
other directors. The Company believes that neither of these restrictions is
likely to have a material adverse effect on its liquidity. Also, the ability of
the Joint Ventures to make payment in US dollars to lenders with respect to
third party debt, to make payment in US dollars to the Company with respect to
its shareholder loans to the Joint Ventures and to make equity distributions in
US dollars may be subject to certain constraints. See "Risk Factors -- Risks
Pertaining to the PRC -- Restrictions on Foreign Currency Convertibility and
Remittance Abroad."
In the event that the Amalgamation is consummated, and any holder of shares
of Class A Common Stock exercises dissenter's rights under Bermuda law, the
Company would be obligated to pay any amounts awarded by a Bermuda court, which
would reduce the amounts available for investment in the Current Projects or the
Potential Projects. See "The Amalgamation."
32
<PAGE> 34
NINE MONTHS ENDED AUGUST 31, 1996 AND 1995
Cash from Operations. Operating cash flows for the nine months ended
August 31, 1996 were $1.6 million as compared with $1.4 million in the same
period in 1995, and were primarily attributable to the commencement of
operations of Wuxi Tin Hill, together with revenues attributable to the
operations of Cili Misty Mountain.
Cash from Investing Activities. Cash used for investing activities of
$24.4 million in the nine months ended August 31, 1996 reflects $53.4 million of
cash used to purchase property, plant and equipment and other project related
investments which was partially offset by cash of $29.0 million provided by
short-term investments (net of purchases). In the same period of 1995, cash used
for investing activities of $20.7 million reflects $14.0 million of cash used to
invest in the projects, and $34.8 million of cash provided by short-term
investments (net of purchases).
Cash from Financing Activities. During the nine months ended August 31,
1996, $10.8 million in cash was used in financing activities, which was
attributable to the repurchase by the Company of shares of its Class A Common
Stock and the repayment of notes payable, partially offset by loans and
contributions made to subsidiaries by minority shareholders. In the same period
of 1995, approximately $207,000 in cash was provided by financing activities,
which was attributable to $4.0 million of cash contributed by minority
shareholder loans offset by $3.8 million of cash used to purchase Class A Common
Stock.
YEAR ENDED NOVEMBER 30, 1995 AND THE PERIOD FROM DECEMBER 7, 1993
(THE DATE OF THE COMPANY'S ESTABLISHMENT) TO NOVEMBER 30, 1994
Cash from Operations. Cash flows provided by operating activities totaled
$2.7 million during fiscal year 1995 as compared to approximately $100,000
during 1994. The increase in 1995 was primarily due to the commencement of
operations of Cili Misty Mountain.
Cash from Investing Activities. Net cash provided by investing activities
totaled $19.3 million during fiscal year 1995, as compared to $106.5 million
used in investing activities during 1994. The 1995 amount primarily reflects
proceeds from the maturity of short-term investments (net of purchases of
short-term investments) of $61.0 million. This amount was partially offset by
the cash used in purchases of property, plant and equipment and other project
related investments of $41.7 million. The 1994 amount primarily reflects $102.6
million purchase of short-term investments (net of proceeds) and $4.0 million of
cash used with respect to development costs and additions to property and
construction in progress.
Cash from Financing Activities. Net cash provided by financing activities
aggregated $8.2 million during 1995 as compared to $201.9 million during 1994.
The 1995 amount reflects cash of $13.5 million provided to the Company's
subsidiaries by minority shareholders and $1.0 million from notes payable, less
$6.4 million in cash used for the repurchase of shares of Class A Common Stock.
During 1994, the Company raised $201.9 million (net of issuance costs) through
an initial public offering of Class A Common Stock and the sale to AES of Class
B Common Stock.
INFLATION
Over the last few years, the PRC economy has registered high growth rates
and high rates of inflation. In response, the PRC Government has taken measures
to curb inflation. These measures, along with other factors, have reduced
inflation in the PRC in 1996. See "Appendix A -- People's Republic of China."
However, there can be no assurance that these austerity measures alone will
succeed in controlling inflation, nor that they will not result in severe
dislocations in the PRC economy in general.
The Company will attempt, whenever possible, to take measures to hedge its
projects against the effects of inflation. Generally, this will be done by
structuring the tariff formulas in its power purchase contracts to pass through
increased costs resulting from inflation.
33
<PAGE> 35
THE PRC ELECTRIC POWER INDUSTRY
The statistics set out in this section have been extracted from various
international organization, government and private publications. The Company
makes no representation as to the accuracy of the information contained in this
section. Furthermore, no representation is made that any correlation exists
between China or its economy in general and the performance of the Company or
the Company's Joint Ventures. Although statistics with respect to the economy of
China generally accord with observed economic trends, some statistics may not
correspond to Western measures, or may be flawed by ineffective collection
methods or other problems. Due to such factors, statistical information
regarding the economy of China may be inaccurate or not comparable to
statistical information with respect to other economies. See "Appendix A -- The
People's Republic of China," for a more detailed description of the PRC.
THE CHINA POWER MARKET
At the end of 1995, China had an aggregate installed electric power
generation capacity of approximately 217,220 MW, making China's electric power
generation capacity the second largest in the world. In 1995, about 17,323 MW of
installed capacity was added. China's electric power industry produced
approximately 1,007 TWh of electricity in 1995. This represents an addition of
nearly 80 TWh from 1994, making China's electricity industry one of the fastest
growing in the world. Despite its size, China's electric power system is
inadequate to meet current and expected demand, and the consequent shortage is
one of the major obstacles to economic growth in the PRC. In addition,
approximately 110 million people do not yet have access to electricity. The
following table highlights this situation on a comparative basis, indicating
with respect to the PRC that, while its economic growth rate is among the
highest of the countries mentioned, the PRC is considerably below average in
installed capacity and consumption of electricity.
<TABLE>
<CAPTION>
1994 1994 1994
PER CAPITA PER CAPITA PER CAPITA
INSTALLED ELECTRICITY GDP -- REAL GDP GROWTH RATE% (3)
CAPACITY(1) CONSUMPTION(1) NOMINAL ----------------------------------------------
(WATTS) (KWH) US$(2) 1991 1992 1993 1994 1995 1996
----------- -------------- ---------- ---- ---- ---- ---- ---- -----------
(PROJECTED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.................. 2,812 11,256 25,850 (1.0) 2.7 2.7 3.5 2.0 2.4
Japan................ 1,552 6,837 36,845 4.0 1.1 1.1 0.5 0.9 3.5
Singapore............ 1,222 5,696 16,700 6.7 6.0 10.1 10.1 8.9 7.5
Hong Kong............ 1,492 4,546 21,750 5.1 6.3 6.4 5.4 5.0 5.0
South Korea.......... 687 3,261 8,528 9.1 5.1 5.8 8.6 9.0 7.2
Malaysia............. 352 1,669 3,627 8.6 7.8 8.3 9.2 9.5 8.8
Thailand............. 233 1,080 2,423 8.1 8.1 8.3 8.8 8.7 8.3
PRC.................. 153 671 430 9.3 14.2 13.5 12.6 10.2 9.0
Philippines.......... 101 290 937 (0.6) 0.3 2.1 4.4 4.8 5.9
Indonesia............ 83 278 874 8.9 7.2 7.3 7.5 8.1 7.8
</TABLE>
- ---------------
Sources:
(1) U.S. Department of Energy, Energy Information Administration, Office of
Energy Markets and End Use, International Database (August 1996).
(2) U.S. Department of Commerce, Economics and Statistics Administration, Office
of Business Analysis, National Data Bank (August 1996).
(3) International Monetary Fund, World Economic Outlook (October 1996).
DEVELOPMENTS IN THE PRC'S POWER INDUSTRY
Under the PRC's Eighth Five-Year Plan (1991-1995), increasing demands for
electricity resulted in the rapid increase in the PRC's total annual electricity
generation. A total of 65,747 MW of electric power generating capacity was
installed during the five-year period from 1991-1995, representing an average
annual
34
<PAGE> 36
increase of more than 16,000 MW. Notwithstanding such increase, the PRC's
average annual growth rate for electricity generation between 1991 and 1995
(approximately 10.4%) did not keep pace with the average annual growth rate of
the PRC's GDP (approximately 12.1%) during such time. The following table sets
forth figures for installed capacity, increases in installed capacity,
electricity generation and percentage increases in electric power generation in
China for the years 1986 to 1995.
<TABLE>
<CAPTION>
INCREASE IN INCREASE IN
INSTALLED INSTALLED ELECTRICITY ELECTRICITY
CAPACITY CAPACITY GENERATION GENERATION
YEAR (MW) (MW) (TWH) (%)
- -------------------------------------------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1986........................................ 93,818.5 6,795.3 449.6 9.5%
1987........................................ 102,897.0 9,078.5 497.3 10.6
1988........................................ 115,497.1 12,600.1 545.2 9.6
1989........................................ 126,638.6 11,141.5 584.8 7.3
1990........................................ 137,890.0 11,251.4 621.2 6.3
1991........................................ 151,473.1 13,583.1 677.5 9.0
1992........................................ 166,532.4 15,059.3 754.2 11.3
1993........................................ 182,910.7 16,378.3 836.4 10.9
1994........................................ 199,897.2 16,986.5 927.9 10.9
1995 (estimated)(1)......................... 217,220.0 17,322.8 1,007.0 8.5
</TABLE>
- ---------------
Source: Ministry of Electric Power, Electric Power Industry in China (1996).
(1) Based on various published statements from MOEP officials.
Based on statements by the Ministry of Electric Power, China will need an
average of approximately 16,000 MW of new electric generating capacity annually
through the year 2000 (or an aggregate of approximately 80,000 MW of new
electric generating capacity in the Ninth Five-Year Plan period ending 2000).
Since domestic savings are insufficient to fund the PRC's requirements, the
Ministry of Electric Power has adopted plans to attract foreign capital and
projects that 20% of the capital for power industry development will come from
foreign investors, 40% from local governments and enterprises and the remaining
40% from the Central Government during the five-year period ending December 31,
2000. MOEP estimates that approximately $20 billion of overseas investment will
be needed to reach the MOEP's target of increasing installed capacity to 290,000
MW by 2000.
ENERGY RESOURCES
China's main energy resources for power generation, coal and hydropower,
are not evenly dispersed geographically. Two-thirds of China's coal reserves are
located in the northern provinces of Shanxi, Shaanxi and the Inner Mongolia
Autonomous Region, and more than 90% of the PRC's hydropower resources are
concentrated in the western part of the country. Because China's economically
developed regions are principally located in the eastern and southern coastal
areas, the Ministry of Electric Power plans to expand the interconnected power
networks by installing high voltage transmission lines to facilitate the
transmission of power from the west to the east, as well as from the north to
the south. The Ministry of Electric Power has also indicated that an increased
focus should be placed on coal-fired electric power generating projects which
are located in close proximity to coal mines. The Company's proposed Yangcheng
Sun City power plant is an example of such a project. See
"Business -- Description of the Potential Projects -- Yangcheng Sun City."
China is rich in coal resources, with proven coal reserves of 966.7 billion
tons. The PRC leads the world in coal production, with 1995 production of
approximately 1.3 billion tons. Coal accounted for approximately 75% of
electricity production in 1995, and approximately 77% of aggregate domestic
commercial energy consumption. The PRC intends to continue to rely on coal as
its primary fuel resource for electric power generation. However, the PRC is
also increasing its utilization of other fuels. Of the 16,987 MW of electric
power generation capacity added in 1994, hydropower accounted for approximately
24.0%, nuclear power accounted for approximately 14.0% and fossil fuels
accounted for approximately 61.0%.
35
<PAGE> 37
ORGANIZATION OF THE PRC'S ELECTRIC POWER INDUSTRY
The PRC's electricity industry is controlled by the Ministry of Electric
Power, which was established by the Eighth National People's Congress at its
first session held in March 1993. Prior to March 1993, the electric power
industry was under the jurisdiction of the Ministry of Energy, which itself was
created in 1988 from parts of the former ministries which oversaw the coal
industry, the nuclear industry, the petroleum industry, water resources and
electric power.
The Ministry of Electric Power is responsible for formulating development
strategies and policies, including: investment, technical and production and
consumption policies relating to electric power development; formulating unified
electric power industry planning in collaboration with the State Planning
Commission and other government agencies; overseeing the implementation of such
planning; supervising the implementation of related national policies, decrees
and plans; and providing services to electric power enterprises.
The Ministry of Electric Power manages five interprovincial power groups
("Regional Power Groups") and six provincial power bureaus. The Regional Power
Groups (i) manage their respective regional power grids, (ii) dispatch, either
directly or indirectly through lower level power bureaus, the power plants
connected to such grids and (iii) supervise the power bureaus at lower
administrative levels (primarily provincial but also certain large
municipalities and other areas). The Regional Power Groups also act through
power companies which develop, construct, own and operate certain power plants
and transmission facilities within their respective jurisdictions.
A similar structure exists for the provincial power bureaus under the
Regional Power Groups and the six provincial power bureaus directly managed by
the Ministry of Electric Power. Each provincial power bureau manages its
provincial power grid and dispatches the power plants connected to such grid to
meet local demand. Many provincial power bureaus also act through power
companies which operate certain power plants and transmission facilities within
their respective provinces. Counties and municipalities directly under the
administration of the provinces may have power bureaus which perform, under the
administration of the power bureau at the next higher level of government,
similar functions within their respective jurisdictions.
The key personnel of the Regional Power Groups are appointed by the
Ministry of Electric Power, and the key personnel of the provincial power
bureaus are appointed by the provincial governments in consultation with the
Ministry of Power Industry.
In January 1996, the China National Power Corporation ("CNPC") and the
China Federation of Power Enterprises ("CFPE") were established pursuant to the
Central Government's policy to separate the regulatory and commercial functions
of the electric power industry. The PRC Government has announced plans that the
Ministry of Electric Power will be dissolved and its functions transferred to
CFPE and CNPC. CFPE will assume the Ministry of Electric Power's regulatory
functions. CNPC will serve as the PRC's principal investor in and/or operator of
wholly or partially State-owned facilities in the electric power industry. CNPC
also will be responsible for the operation of interregional transmission
facilities and the development of a national power grid.
The chart on the following page illustrates the organizational structure of
the commercial entities under MOEP.
36
<PAGE> 38
[Organizational chart of the PRC Ministry of Electric Power and the commercial
entities under the Ministry]
37
<PAGE> 39
INVESTMENT IN THE ELECTRIC POWER INDUSTRY
Prior to 1985, virtually all investment in China's electric power industry
was financed by the Central Government. In 1985, the Central Government began to
implement a policy of using a variety of financing methods to develop the PRC's
electric power industry. Such policies included: (i) allowing local governments
to participate in the development and ownership of power generating facilities
in their areas, (ii) loaning (as opposed to directly allocating) funds to local
and provincial power bureaus for the development and construction of such
projects, and (iii) permitting foreign investment and participation in the
development and operation of power plants in China. Hong Kong investment
companies and developers were the first foreign companies to invest in the
industry. More recently, however, developers and investors from other countries
have begun pursuing investment opportunities in various electric power projects
in China. Between 1979 and 1995, 77 large and medium-sized foreign-invested
power projects were constructed, with a total installed capacity of 49,740 MW,
of which 24,290 MW had been put into operation by the end of 1995. The total
contracted foreign investment in power projects has reached $17.2 billion, of
which $11.5 billion had been invested by the end of 1995. In 1995, China
launched the first Central Government sponsored pilot build, own and transfer
("BOT") program to attract foreign investment in infrastructure projects. The
first project under this competitive bidding program is the proposed $600
million, 700 MW coal-fired Laibin project in Laibin County, Guangxi Zhuang
Autonomous Region.
In 1988, as part of the system of investment reform in power development,
the State Council organized the State Energy Investment Corporation (the "SEIC")
to represent the PRC Government in the development and financing of large power
plants. Also in 1988, the China Huaneng Group was formed primarily as a
developer and operator of power plants. In March 1994, the State Council
announced the absorption of the SEIC into the State Development Bank, as well as
its intention to transfer the SEIC's personnel to various Central Government
enterprises and to the State Development Investment Company under the State
Development Bank.
To finance the expansion of the electric power industry, the State Council,
in 1995, approved the establishment of China Power Investment Corporation
("CPIC") in China and China Power International Holdings Limited ("CPI"), CPIC's
wholly-owned subsidiary, in Hong Kong. CPIC was established by the Ministry of
Electric Power to raise funds in the international capital markets to invest in
PRC power projects. CPIL serves as an overseas funding vehicle of the Ministry
of Electric Power. CPI has been authorized to sell interests in State-owned
power utilities, issue debt, establish investment funds for the electric power
industry and raise foreign funds for investment in the electric power industry.
CPI is one of the Company's Joint Venture partners in the Wuhu Grassy Lake
project and one of the Company's project partners in the Nanpu Southern Delta
project. See "Business -- Description of the Current Projects" and
"-- Description of the Potential Projects."
With appropriate PRC Government approvals, power bureaus may form directly
managed power companies, which may develop, construct, own and operate power
plants in their respective territories.
TARIFF SETTING MECHANISMS
For power plants that the Ministry of Electric Power directly or indirectly
manages, the tariff is generally set under the State Plan. The tariff varies
according to the category and location of the user. Thus, most electricity has
been purchased from power plants at State Plan tariffs. These State Plan tariffs
have been maintained at a low level, due to subsidization by the PRC Government.
One of the stated goals of the Ministry of Electric Power is to reform power
pricing consistent with the development of the market economy in the PRC. The
Ministry of Electric Power has commenced the trial implementation of a pricing
policy which charges consumers higher tariffs for peak load periods and lower
tariffs for off-peak load periods. Allowing the market to influence the setting
of power tariffs is intended to provide incentives for greater efficiency in
energy production, reduction of energy use per unit of industrial output and
promotion of conservation technologies. As of 1994, more than ten power grids
have implemented this pricing policy.
The tariffs of sino-foreign joint venture power projects generally have
been established by negotiations among the sino-foreign joint ventures, the
prospective power purchasers, the relevant local governments,
38
<PAGE> 40
planning commissions, pricing bureaus and power bureaus. The tariffs or tariff
formulas are typically set forth in power purchase contracts. The pricing
bureaus are responsible for approving and adjusting the tariff, usually on an
annual basis.
ELECTRIC POWER LAW
In April 1996, a new national law governing the electric power sector in
the PRC came into effect. The law is intended to protect the legitimate
interests of investors, operators and consumers. It provides a framework within
which the PRC Government intends to guide investment in the electric power
sector. The law also establishes, among other things, broad principles with
respect to the methodology of calculating and setting electric power tariffs.
The principles state that electricity tariffs shall be based on reasonable
compensation for the costs of generation and payment of taxes, the recovery of
reasonable profits and the promotion of the construction of electric power
generating facilities. Detailed regulation with respect to tariff calculation
and tariff setting are expected to be promulgated by the Ministry of Electric
Power in the near future. The impact of the new law will depend on its
implementing regulations and the manner in which the law is interpreted.
TRANSMISSION AND DISPATCH
The main system for the dispatch, transmission and distribution of electric
power in China consists of the five interprovincial power grids managed by their
respective Regional Power Groups, one interprovincial power grid, which consists
of four semi-independent provincial grids managed by their respective four
provincial power bureaus, and the six independent provincial power grids managed
by their respective provincial power bureaus. The table below shows the
aggregate installed capacity of the power plants connected to the grids managed
by such power bureaus and the total electricity generated on those grids in
1994.
<TABLE>
<CAPTION>
1994 1994
INSTALLED TOTAL ELECTRICITY
CAPACITY GENERATION
POWER GRIDS (MW) (TWH)
- ----------------------------------------------------------------- -------- -----------------
<S> <C> <C>
East China Power Grid............................................ 31,673.2 164.358
Northeast Power Grid............................................. 26,534.4 124.531
Central China Power Grid......................................... 27,602.2 132.047
North China Power Grid........................................... 27,146.4 140.087
Northwest Power Grid............................................. 11,483.0 60.423
Guangdong Power Grid(1).......................................... 19,009.7 73.916
Shandong Power Grid.............................................. 11,518.2 67.183
Sichuan Power Grid............................................... 10,095.8 47.328
Guangxi Power Grid(1)............................................ 4,230.7 16.854
Fujian Power Grid................................................ 4,960.3 21.605
Yunnan Power Grid(1)............................................. 4,082.9 16.939
Guizhou Power Grid(1)............................................ 3,253.8 15.206
Xinjiang Autonomous Region....................................... 2,865.1 10.617
Hainan Power Grid................................................ 1,057.3 2.869
Tibet Autonomous Region.......................................... 176.6 0.427
</TABLE>
- ---------------
Source: Ministry of Electric Power, Electric Power Industry in China (1996).
(1) Part of the Southern Interconnected Power Grid established in 1993.
In 1994, the PRC had almost 540,000 kilometers of transmission lines with a
capacity of 35 kV or greater. The power grids primarily use 500, 330, 220 and
110 kV transmission lines.
All electricity produced in China is dispatched by the power bureaus,
except for that generated by units not connected to a grid. The grids and the
electric power dispatched to each grid are administered by dispatch
39
<PAGE> 41
centers ("Dispatch Centers") operated by the power bureaus. In November 1993,
the State Council issued the Administrative Regulations Concerning Grid Dispatch
("Dispatch Regulations"), the first nationwide regulations in China governing
the dispatch of electric power. The Dispatch Regulations are intended to help
the PRC achieve a more efficient and rational dispatch of electric power. Under
the Dispatch Regulations, Dispatch Centers were established at each of five
levels: the National Dispatch Center, the Dispatch Centers of the Regional Power
Groups, the Dispatch Centers of the provincial power bureaus, the Dispatch
Centers of the power bureaus of municipalities under provinces and the Dispatch
Centers of the county power bureaus. Pursuant to the principles of unified
dispatch, set forth in the Dispatch Regulations, Dispatch Centers at lower
levels are required to comply with the dispatch instructions of higher level
Dispatch Centers.
Dispatch Centers are charged with setting production levels for the various
power plants connected to the grid. To effect this determination, each power
plant receives daily from its local Dispatch Center an expected hour-by-hour
output schedule for the following day, based on expected demand, the weather and
other factors. The Dispatch Centers must dispatch electric power according to,
among other things, (i) power supply agreements entered into between a power
bureau and certain large or primary electricity customers, where such agreements
take into account the electric power generation and consumption plans formulated
annually by the PRC Government and set forth in the State Plan, (ii) agreements
entered into between a Dispatch Center and each power plant subject to its
dispatch, (iii) interconnection agreements between power bureaus, and (iv) the
actual conditions of the grid, including equipment capabilities and safety
reserve margins.
PEAK AND SEASONAL DEMANDS
The demand for electric power experiences fairly predictable daily and
other periodic cycles. The peak periods of power use in China are in the early
morning and evening when industrial, commercial and residential use is highest.
Peak power is in great demand in many cities which have rapid economic growth.
Because the PRC has a significant shortage of electric generating capacity, the
Dispatch Centers restrict the access to electricity of certain users during peak
periods of demand. As a result, the peak load demand in China does not
accurately reflect the extent of the total demand for power. While power plants
operate at less than full capacity during off-peak periods, virtually all
available power plants operate at or near full capacity during peak periods,
subject to grid-wide safety reserve margins. Four of the Joint Ventures' power
plants currently in operation or under construction -- Chengdu Lotus City, Hefei
Prosperity Lake, Wuxi Tin Hill and Yangchun Sun Spring -- are designed to
provide peaking power. The Company believes that each of these plants will be
able to take advantage of the demand for peak power in its region. However, such
plants are typically dispatched only after base load power plants have been
brought on-line and reached maximum capacity. If electric power demand proves
less than expected in an area, additional peak or base load power may not be
required in the area or may be required at lower than expected levels. See "Risk
Factors -- Risks Related to the Company's Business -- Load Growth; Dispatch;
Transmission Constraints."
Because the combustion of coal provides most of China's space-heating needs
and because air conditioning is not yet prevalent in most regions of China,
seasonal variations in the demand for electricity are less than in many
developed countries.
40
<PAGE> 42
BUSINESS
BUSINESS STRATEGY
The Company's mission is to help meet China's need for electricity in a
socially responsible manner, balancing the interests of customers, partners,
communities, suppliers, investors and its people. After the Amalgamation, the
Company's operations will be subject to certain limitations under the AES Debt
Covenants. The Company's business strategy focuses on:
Experience in the China Market. The Company currently employs 43 people in
the PRC with 30 people in Beijing and 13 people in other parts of the
country. The Company's principal office is in Beijing and its president and
chief executive officer resides in Beijing. The Company also maintains an
office in Hong Kong with 26 people. This commitment to the PRC has enabled
the Company to build an expertise in the China power market.
Diversified Project Portfolio. The Company believes that national
diversification of projects in different provinces reduces the risk of
being overly dependent on a single power purchaser or the demand for power
in a single region. The Company's Current Projects are located in six
provinces. Certain of the Company's Current Projects include smaller
projects that have been developed on a rapid time schedule. These projects
have enabled the Company to establish its position in the market, develop
strategic relationships and generate immediate cash flow. Certain other of
the Current Projects and the Potential Projects have high visibility and
the support of the Central Government. These projects are expected to
generate substantial cash flow following the commencement of their
operation.
Strategic Relationships with Strong Partners. The Company believes that
its presence in China, its available capital and the well-regarded
reputation of AES have allowed the Company to develop strategic
relationships with key Chinese partners. The Company has included ministry
level companies and affiliates of provincial and local economic commissions
as well as affiliates of regional, provincial and local power bureaus as
partners in its Joint Ventures. These partners participate in the
construction and operation of the Company's Current Projects, expedite the
approval process and mitigate project construction, operation and tariff
adjustment risks. Similarly, the Company will seek to develop its Potential
Projects and other future projects in the PRC in cooperation with strong
Chinese business partners that have comparable economic interests and a
variety of complementary strengths, including business experience and
political relationships.
Location in Regions of High Power Demand. The Company believes that its
Current Projects and Potential Projects are located in regions of high
power demand. In the course of developing its projects, the Company
carefully reviews the regional and local demand and supply for power. In
addition, in the course of project development, the Company evaluates the
proposed power purchaser, usually a provincial or local government power
bureau, to determine its economic resources and credit profile. One
important criterion for any project developed by the Company is that the
tariff to be charged by the proposed project must be affordable in light of
the overall rates charged in the region, while also being competitive with
the cost of new electric power.
Significant Participation in Operational Management. The Company seeks to
obtain, and has obtained in the case of the Current Projects and the
Potential Projects, significant rights to participate in major decisions of
the project company that owns the power plant. The Company typically exerts
its influence through directors appointed to the board of directors of the
project company and by appointing either the general manager of the power
plant and/or a deputy general manager in charge of finance or operations
for the power plant. Several of the Company's officers have significant
prior experience with AES in the development and operation of power plants
in other countries. The Company is also developing a core group of local
managers who will be focused on constructing and operating projects in
China.
AES's Capabilities. The Company draws on AES's people and expertise in
development, construction oversight and operation of independent electric
power generation projects. In particular, the Company draws on AES's
extensive experience operating coal-fired power plants around the world.
The Company
41
<PAGE> 43
believes this relationship has provided it with a competitive advantage in
the China power market, which relies primarily on coal-fired power plants.
PRINCIPLES AND PRACTICES
A core part of AES's corporate culture is a commitment to "shared
principles." The Company has adopted a similar corporate culture and tries to
adhere to these principles. These principles are:
Integrity. The Company strives to act with integrity, or "wholeness." The
Company seeks to honor its commitments. The goal is that the things people
say and do in all parts of the Company should fit together with truth and
consistency.
Fairness. The Company wants to treat fairly its people, its customers, its
suppliers, its shareholders, governments and communities in which it
operates. Defining what is fair is often difficult, but the Company
believes it is helpful to routinely question the relative fairness of
alternative courses of action.
Fun. The Company desires that people employed by the Company and those
people with whom the Company interacts have fun in their work. The
Company's goal is to create and maintain an environment in which each
person can flourish in the use of his or her gifts and skills and thereby
enjoy the time spent at the Company.
Social Responsibility. The Company believes that it has a responsibility
to be involved in projects that provide social benefits, such as lower
costs to customers, a high degree of safety and reliability, increased
employment and a cleaner environment.
The Company and AES seek to adhere to these principles not as a means to
achieve economic success, but because adherence is a worthwhile goal in and of
itself. However, if the Company and AES perceive a conflict between these
principles and profits, the Company and AES will try to adhere to these
principles -- even though doing so might result in diminished or foregone
opportunities.
PROJECT SPECIFIC STRATEGIES
Subject to the limitations that would be imposed by the AES Debt Covenants
following the Amalgamation, the Company will continue to seek, when evaluating
or developing project opportunities in the PRC, to utilize project structures
and contractual terms which generally have been proven to be effective in
international independent power projects for reducing risks, obtaining financing
and achieving commercially sound projects. The Company realizes, however, that
projects in China will often differ significantly from the typical project
finance model. In addition, the Company recognizes that, because foreign
investment in PRC power projects is in its early stages, in order to finalize
binding contractual documentation with respect to any project, the Company is
sometimes required or elects to assume certain risks not typically assumed by
project sponsors in an international independent power project. These risks may
be associated with construction (such as completion risk), operations (such as
fuel supply or transportation risks), foreign exchange convertibility and, to
the extent that the Company cannot negotiate contracts that adjust its revenues
for changes in exchange rates, exchange rate fluctuations. Accordingly, while
the Company utilizes, where possible, the strategies summarized below, it also
seeks to maintain flexibility in negotiations and to adopt alternative
strategies where appropriate.
Long-Term Power Purchase. It is planned that each project company in which
the Company invests will sell electricity under one or more long-term power
purchase contracts to regional, provincial, municipal or county electric
power organizations, including power bureaus and electricity management
offices, or industrial customers which the Company believes will be able to
perform their obligations under the power purchase contracts. It is planned
that the power purchaser will be required to purchase a specified minimum
amount of electricity generated by the plant during the term of the power
purchase contract based on an agreed pricing formula. These tariff formulas
are designed, based on the minimum take obligation of the power purchaser,
to be sufficient to pay the operating expenses and the financing costs of
the project and to enable the Company to realize a return on its
investment. The Company attempts to negotiate power purchase contracts that
contain provisions requiring the purchaser to purchase a specified
42
<PAGE> 44
minimum number of kWh or to make specified minimum payments even if the
power is not dispatched. The Company seeks to include in its power purchase
contracts incentives to encourage the purchase of additional kWh over an
agreed minimum amount. The Company attempts, whenever possible, to
structure changes in the revenue component of a power purchase contract to
correspond, as closely as possible, to changes in operating (primarily
fuel) and capital costs of a power plant and fluctuations in foreign
exchange rates.
Construction and Equipment Procurement. The Company seeks to arrange
construction and equipment procurement contracts with experienced,
creditworthy international or Chinese contractors and suppliers. In a
typical international independent power project one contractor assumes
responsibility under a fixed-price, fixed-schedule turnkey contract for the
design, engineering, equipment procurement, construction, installation,
commissioning, staff training and start-up of a project. While the Company
seeks this type of arrangement when possible, such a turnkey arrangement is
often not available for PRC power projects. Therefore, where possible, the
Company seeks to have its project companies enter into arrangements with
construction and equipment procurement consortiums in which the various
major responsibilities typically assumed by one turnkey contractor in the
international model are allocated to individual members of the consortium.
The Company seeks to negotiate contracts pursuant to which equipment
suppliers and contractors agree to pay liquidated damages for delays and
non-performance. The Company also attempts, where appropriate, to utilize
established foreign equipment manufacturers who are able to provide
warranties and service contracts for their equipment as well as to utilize
proven Chinese technology from well-established Chinese equipment
manufacturers. In some cases, the Company may elect to have its joint
ventures manage the construction directly, possibly with the assistance of
reputable Chinese or international engineering companies.
Fuel Supply. Whenever possible, fuel for the Company's operating plants is
purchased under long-term supply contracts with suppliers that have
sufficient, and preferably dedicated, reserves of fuel stock to meet the
project's operating requirements and that have economic interests aligned
with the joint venture partners. In certain circumstances, including where
a plant is located in close proximity to a reliable fuel source, the
Company may deem it advisable for a project company to purchase its fuel on
the spot market in order to take advantage of lower fuel prices. In such
circumstances, the Company may contract with fuel brokers or government
companies with appropriate guarantees or other performance supports. In
other circumstances, the power purchaser may be obligated to supply a
project's fuel requirements. The Company attempts, when possible, to have
its fuel supply contracts set out delivery and testing procedures and
penalties for delays or non-performance. Approval of a project by the State
Planning Commission, which is required for larger projects, ordinarily
includes a provision for the allocation of fuel, which reduces the fuel
supply risk for such projects.
Fuel Transportation. Whenever possible, the Company arranges with a
carrier for transportation of fuel from the fuel source to the Company's
operating plants under long-term transportation contracts or the Company
will obtain satisfactory assurances that transportation services will be
available to the project. Due to the underdeveloped transportation
infrastructure in China, the Company sometimes considers more favorably
projects located in fuel-rich regions, such as projects located near coal
mines. Approval of a project by the State Planning Commission, which is
required for larger projects, ordinarily includes a provision for fuel
transportation, which reduces the fuel transportation risk for such
projects.
Electricity Transmission. The Company does not intend to bear the risk of
the construction of transmission lines. Although PRC law prohibits foreign
investment enterprises from constructing, owning or maintaining a
transmission line, in many cases, it may be necessary for a project company
to finance the construction of the transmission line which is required to
connect the power plant to a nearby grid. In these cases, in addition to
providing financing, the Company will seek to structure its power purchase
contracts in a manner which places the risk of delays and failure to
complete the construction of the transmission line on the power purchaser.
Government Approvals. The Company seeks to ensure that its joint ventures
and joint venture partners obtain and comply with all PRC approvals and
laws and regulations and that project budgets reflect
43
<PAGE> 45
compliance with all then-existing and applicable PRC environmental
protection laws and regulations. In each case prior to funding its equity
portion of the registered capital of a joint venture, the Company seeks to
obtain a legal opinion from counsel qualified to practice PRC law
regarding, among other things, the validity and sufficiency of all
approvals for the project and joint venture. The Company also seeks to
receive letters of support from the local governments in areas in which its
projects are located.
Foreign Exchange. The Company attempts to mitigate its foreign exchange
risks by structuring its joint venture contracts and power purchase
contracts to include hedges which provide for adjustments in equity
distributions to joint venture partners and in electricity payments for
changes in the exchange rate between the Renminbi and the US dollar. In
instances in which the Company seeks State Planning Commission approvals
for a project, the Company will also seek to receive an approval which
includes an allocation of foreign exchange to the project.
Power Plant Management. The Company wants its power plants to be managed
efficiently, as well as in a manner consistent with Company principles and
practices. In pursuit of this goal, the Company seeks to appoint
experienced general managers and/or deputy general managers with
significant decision making authority at the power plants and to install
operating systems at the power plants which are consistent with AES's
operating approach. The Company also seeks to have key members of a plant's
management team, including the general manager and deputy general manager,
acquire specific AES experience by working at AES facilities worldwide.
Insurance. The Company seeks to obtain insurance for its projects from
reputable insurance companies permitted to insure projects in China, for
risks during construction and operation, including business interruption
insurance. The Company typically retains an international insurance
consultant to advise the Company on the insurance coverage and limits which
are appropriate for the relevant hazards. Where appropriate, the Company
may seek to obtain Multilateral Investment Guaranty Agency insurance
coverage of certain political risks associated with the PRC.
Water Usage Rights. The Company seeks to obtain long-term water usage
rights for the Company's operating plants.
JOINT VENTURE COMPANIES
Foreign investment in the PRC may take a number of forms, including joint
ventures, wholly foreign-owned enterprises, branches of foreign companies and
shareholdings in limited liability companies and joint stock limited companies.
The Company currently invests through the joint venture structure. The Company's
current joint venture partners are PRC entities. The Company anticipates that
its future joint venture partners will be PRC entities although non-Chinese
partners may be included as partners, if appropriate. Joint ventures between
Chinese and foreign parties in the PRC take two basic forms: equity joint
ventures and cooperative joint ventures. Equity joint ventures are governed by
the Law of the People's Republic of China on Joint Ventures Using Chinese and
Foreign Investment and the implementing regulations related thereto ("Equity
Joint Venture Law"). Cooperative joint ventures are governed by the Law of the
People's Republic of China on Chinese and Foreign Cooperative Joint Venture
Enterprises and the implementing regulations related thereto ("Cooperative Joint
Venture Law").
A cooperative joint venture may be structured as an entity similar to a
partnership (in which case it will not be separately qualified as a legal person
under Chinese law) or it may be structured as a limited liability company (in
which case it will be qualified as a legal person under Chinese law). In most
cases, cooperative joint ventures are formed as limited liability companies.
Cooperative joint ventures allow more flexibility than equity joint ventures in
structuring the terms of the joint venture arrangement. For example, in a
cooperative joint venture the rights of a party to share in the profits of the
joint venture need not correspond to its contributions to the registered capital
(equity) of the joint venture relative to other parties. In addition, subject to
government approval, the Cooperative Joint Venture Law permits recovery of the
foreign party's registered capital during the venture term. However, the
Cooperative Joint Venture Law requires that the fixed assets of the joint
venture be transferred to the Chinese parties without charge at the end of the
venture term if the foreign party recovers all of its equity capital during the
term of the venture. Cooperative joint ventures are
44
<PAGE> 46
subject to laws and regulations with respect to such matters as the contribution
of registered capital, debt-equity leverage ratios, accounting, taxation,
foreign exchange, labor and liquidation and dissolution. Transfer of an interest
in a cooperative joint venture requires government approval and unanimous
agreement among the parties.
An equity joint venture enterprise is a distinct legal entity established
and registered as a limited liability company. The parties to an equity joint
venture have rights to share in the profits of the joint venture in proportion
to their respective contributions to the registered capital of the joint
venture. The operations of equity joint ventures are subject to many of the same
laws and regulations as cooperative joint ventures. Transfer of an interest in
an equity joint venture requires government approval and unanimous agreement
among the parties. In addition, in an equity joint venture, the parties may not
reduce the amount of their registered capital until the expiration of the term
of the joint venture or its dissolution in accordance with PRC law.
Typically, dividends are paid by a joint venture in accordance with the
profit distribution plan adopted by the joint venture's board of directors.
Except as mentioned above, PRC laws and regulations provide that only accounting
profits (after payment of taxes, provision for losses for prior years and
contributions to special funds for enterprise expansion, employee welfare and
bonuses and a general reserve) are available for dividend distributions to the
parties of a joint venture.
In addition to contributions of registered capital, joint ventures may be
financed by debt, including shareholder loans. Foreign currency loans to a joint
venture, however, must be registered with the branch of the State Administration
of Exchange Control in the location in which the joint venture is situated.
Foreign investment enterprises are permitted under PRC laws and regulations
to convert their Renminbi earnings into foreign exchange for certain purposes,
including to pay their foreign currency obligations, to pay dividends and other
distributions to foreign shareholders and to make payment of interest and
principal with respect to foreign currency loans (both third party and
shareholder debt) incurred by the joint venture. To effect such conversions,
joint ventures must comply with certain procedures required by PRC laws and
regulations.
GOVERNMENT APPROVALS
China's electric power industry is highly regulated, both in terms of
operating existing power plants and developing new power projects. All electric
power projects in China and all foreign investments are required to obtain
approvals from one or more central, provincial or local government authorities.
While the regulations governing and the procedures for obtaining approvals for
foreign investment projects are generally well-understood, the specific
regulations and procedures for the approval of electric power projects with
foreign investment in the PRC and associated foreign investment enterprises are
not entirely transparent. Project approvals and foreign investment approvals are
required, but follow separate procedures. At the highest level, the right to
approve projects in the PRC is vested in the State Council. The State Council
has reserved to itself the authority to approve any project with a total
investment which exceeds $100 million. Pursuant to various internal PRC
Government notices, the State Council has delegated the authority to approve any
project with a total investment of less than $100 million to various ministries
and ministry level entities, including the SPC. The SPC and certain ministries
and other ministry level entities have, in turn, adopted a policy, also by
internal directives, of further delegating authority to approve projects with a
total investment of less than $30 million to provincial governments, provincial
level bureaus of the Central Government and certain municipalities. The project
approval authority of local governments is, therefore, generally limited to not
more than $30 million. Separate from project approval, foreign investment must
be approved by MOFTEC, or one of its departments at the provincial or local
government level, should the total investment amount be below $30 million.
Accordingly, foreign investment enterprises proposing to undertake projects must
obtain approvals for the projects from the appropriate government level planning
authorities and approvals for the foreign investment from a similar level
department of MOFTEC.
Generally, the approval process can be divided into three major stages.
First, following preliminary planning by the Chinese party and, in some
instances, initial negotiations with the foreign party and the
45
<PAGE> 47
execution of a letter of intent by the parties, a project proposal (including a
preliminary feasibility study report and an environmental impact report) is
submitted to the appropriate level planning authorities for approval.
In the second stage, a more detailed joint feasibility study report and a
more detailed environmental impact report will be prepared. During this stage,
the foreign and local parties will negotiate and execute a legally binding joint
venture contract and articles of association. The approval of the local
government authorities for both the project and the foreign investment is
required. Additionally, as stated above, depending on the amount of total
investment in the proposed project and joint venture, the approval of the
Central Government may be required. Approval may also be required from other
central, provincial and local government ministries and agencies, with respect
to, among other matters, foreign exchange plans, allocations of fuel supplies
and related transportation, land use, tax preferences, electricity pricing, grid
access, operations and maintenance arrangements, loan and guarantee arrangements
and design and engineering arrangements.
In the final stage, following approval of the joint venture by the relevant
department of MOFTEC, the joint venture must register with and obtain a
preliminary business license from the State Administration of Industry and
Commerce ("SAIC") or a branch thereof. Following the completion of these
formalities, the parties are required to contribute their agreed upon registered
capital and, upon verification thereof, the joint venture is issued a permanent
business license by the SAIC.
The approval process outlined above could take several years. Therefore, in
some instances, the Company may pursue opportunities for investments in power
projects that are in advanced stages of development or for which significant
approvals have already been obtained or construction has commenced or been
completed.
In addition to such project and foreign investment approvals, the tariff
payable under the relevant power purchase contract is established on the basis
of a tariff formula agreed upon through discussions among the Company, its
partners, the prospective power purchaser, the relevant local government, the
relevant pricing bureaus and the relevant planning commission. Once established,
the tariffs are subject to annual review by the relevant local pricing bureaus
and adjustment in accordance with the formula. See "Risk Factors -- Risk Related
to the Company's Business -- Regulation and Restrictions; Tariffs" and "The PRC
Electric Power Industry -- Tariff Setting Mechanisms."
ENVIRONMENTAL REGULATION
The Joint Ventures are subject to various PRC environmental laws and
regulations which are administered by both Central Government and local
government environmental protection bureaus. Approval or review by the relevant
environmental protection bureaus is required at each of the project proposal,
feasibility study, design and commissioning stages of a project. Filing of an
environmental impact statement or, in some cases, an environmental impact
assessment outline is required before the planning commission for the same level
of government can issue its approval. The filing must demonstrate that the
project conforms to applicable environmental standards. Approvals and permits
generally have been issued for projects utilizing modern pollution control
technology. Pollution sources are also required to report their pollution
discharges in terms of types and amounts of pollutants discharged into the water
and air, and to secure discharge permits for their wastewater discharges,
airborne emissions and, from April 1, 1996, solid waste shipments to ensure
compliance with relevant emissions standards.
The PRC's environmental laws and regulations establish standards for the
discharge of emissions into the air and water. The rules set forth schedules of
base-level discharge fees for various polluting substances and specify that, if
such levels are exceeded, the polluting entity will be required to pay an excess
discharge fee to the local government. The local environmental rules do not make
it a violation to exceed these limits, but rather set forth a set of graduated
scale of fees that are required for each incremental unit of excess discharge.
Up to a certain level, as the discharge levels increase, the fee per unit also
increases. Above a certain limit, local governments may issue orders to cease or
reduce such discharge levels which, if not complied with, will after three years
from the date of the order, result in an annual increase of 5% in the pollution
fees assessed. Where pollution is causing environmental damage, the local
governments also have the authority to issue orders requiring the polluting
entities to cure the problem within a certain period of time. Non-compliance
with such orders may result in the entities being shut down.
46
<PAGE> 48
The PRC is a party to the Climate Change Convention, which is intended to
limit or capture emissions of greenhouse gases, such as carbon dioxide. Ceilings
on such emissions could limit the production of electricity from fossil fuels,
particularly coal, or increase the costs of such production. Ceilings on the
emissions of greenhouse gases have not been assigned to developing countries
such as the PRC under the Climate Change Convention and the PRC has objected to
the possibility of the imposition of such ceilings. Under the Air Pollution
Prevention and Control Law of the PRC, as amended in 1995, regulatory
preferences are given to the use of low sulfur-content, low ash coal, and to
plants in urban areas that generate steam as well as electricity. The SPC also
has stated that it favors the construction of more plants relying on clean
fuels.
MOEP has established technical standards for environmental monitoring and
exercises certain disciplinary functions with regard to environmental compliance
in connection with the construction and operation of power plants. Environmental
protection equipment is required to be designed, installed and commissioned in
tandem with the design, construction and commissioning of the generator or
plant. Before commencing operations, each plant or generator must be tested and
qualified with regard to emissions levels and abatement equipment. The Company
believes the environmental protection systems and facilities of its Current
Projects are in compliance with applicable PRC national and local environmental
protection requirements.
LITIGATION
There is no litigation pending or, to the best of the Company's knowledge,
threatened against the Company or its Joint Ventures.
DESCRIPTION OF THE CURRENT PROJECTS
The following table presents certain summary information on the Company's
Current Projects.
THE CURRENT PROJECTS
<TABLE>
<CAPTION>
COMPANY
COMPANY INVESTMENT
LOCATION CAPACITY INTEREST COMMITMENT
PROJECT (PROVINCE) (MW) (MW) (%) FUEL STATUS
- -------------------- ---------- -------- ------- ---------- ------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jiaozuo Aluminum
Power Henan 250 175 70 Coal Under construction (first unit
scheduled to be in operation by the
second quarter of 1997; second unit
scheduled to be in operation by the
second quarter of 1998)
Wuhu Grassy Lake Anhui 250 62.5 25 Coal First unit in operation (second
unit scheduled to be in operation
by the second quarter of 1997)
Hefei Prosperity
Lake Anhui 115.2 80.6 70 Oil Under construction (simple cycle
unit scheduled to be in operation
by the third quarter of 1997;
combined cycle unit scheduled to be
in operation in the third quarter
of 1998)
Wuxi Tin Hill Jiangsu 63 34.7 55 Oil Simple cycle unit in operation
(combined cycle unit scheduled to
be in operation by the first
quarter of 1997)
Aixi Heart River Sichuan 50 35 70 Coal Under construction (scheduled to be
in operation in February 1998)
Chengdu Lotus City Sichuan 48 16.8 35 Natural Under construction (scheduled to be
Gas in operation in the third quarter
of 1997)
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
COMPANY
COMPANY INVESTMENT
LOCATION CAPACITY INTEREST COMMITMENT
PROJECT (PROVINCE) (MW) (MW) (%) FUEL STATUS
- -------------------- ---------- -------- ------- ---------- ------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cili Misty Mountain Hunan 26.2 13.4 51 Hydro Two of three units in operation
(last unit scheduled to be in
operation in the fourth quarter of
1996)
Yangchun Sun Spring Guangdong 15.1 3.8 25 Oil In operation
----- -----
TOTAL 817.5 421.8
===== =====
</TABLE>
OVERVIEW
The Company, directly or through one of its wholly-owned offshore
subsidiaries, has formed sino-foreign joint ventures, each with one or more
Chinese entities as partners, to develop, construct, own and operate each of the
electric power plants described in this section. Two of the power plants -- Cili
Misty Mountain and Yangchun Sun Spring -- are financed solely with registered
capital (equity). Four of the power plants -- Aixi Heart River, Jiaozuo Aluminum
Power, Chengdu Lotus City and Wuxi Tin Hill -- are financed with a combination
of registered capital and shareholder loans. One of the power plants -- Wuhu
Grassy Lake -- is financed by registered capital, shareholder loans and third
party debt. One other project -- Hefei Prosperity Lake -- which is currently
financed by registered capital and shareholder loans, may also be in the future
financed by third party debt.
All of the Company's power plants are owned by cooperative joint ventures,
except for one of the projects -- Wuhu Grassy Lake -- which is owned by an
equity joint venture. The joint venture contracts for three of the cooperative
joint ventures -- Wuxi Tin Hill, Aixi Heart River and Chengdu Lotus
City -- provide for the liquidation of the project assets at the end of the term
of the Joint Venture. The cooperative joint venture contracts relating to the
remaining four projects provide for the transfer of all of the fixed assets of
the Joint Venture to the Chinese partners without charge at the end of the Joint
Venture term. Three of these four provide for the recovery of the Company's
registered capital during the term of the Joint Venture.
Revenues from the power plants are generally used to pay operating
expenses, taxes and financing costs and allocated to provide reserves for
employee social welfare benefits and other matters as required by law. Repayment
of principal and interest of third party loans (if any) and shareholder loans
(if any) of the Joint Ventures has priority over distributions of profit to the
Joint Venture partners. Dividends are generally distributed to the Company and
its partners by the Joint Ventures pursuant to board resolutions. In a number of
cases with respect to the Joint Ventures described in this section, the Company
has a priority in the payment of dividends over the Chinese partners to the
Joint Venture. In certain cases, where the Company is not entitled to appoint a
majority of the board of directors of a Joint Venture, the declaration of
dividends or other equity distributions by such Joint Venture may depend on the
assent of the other directors of the Joint Venture.
Pursuant to certain shareholder loan contracts, the Company has committed
to provide shareholder loans to several of the Joint Ventures. In each case the
applicable Joint Venture has either registered the shareholder loan with the
relevant branch of the SAEC if the loan has been drawn, or the Joint Venture
will register the shareholder loan with the relevant branch of the SAEC when the
loan is drawn by the Joint Venture. The payment of principal and interest to the
Company with respect to its shareholder loans to the Joint Ventures is made in
accordance with schedules established by the relevant shareholder loan
contracts.
Each of the Joint Ventures described in this section has entered into one
or more power purchase contracts for the sale of the electricity from its power
plant on a minimum take-or-pay basis. The power purchase contracts generally
require that the power purchaser purchase a specified annual minimum amount of
electricity generated by the power plant during the term of the power purchase
contract at a fixed price or pursuant to a tariff formula set forth in the power
purchase contract. In all but two cases -- Cili Misty Mountain and Yangchun Sun
Spring -- the power purchase contracts also contain incentives to encourage the
48
<PAGE> 50
power purchaser to purchase greater than the agreed minimum amount of
electricity. Payments for electricity sold under the power purchase contracts
are generally made to the Joint Ventures on a monthly basis.
All of the power purchase contracts have pricing provisions which are
designed, based on the minimum take obligation of the power purchaser, to be
sufficient to pay the operating costs and financing costs of the project and to
enable the Company to realize a return on its investment. These tariff formulas
are indexed to hedge against US dollar and Renminbi exchange rate fluctuation
risks relating to repayment of principal and interest on debt and the conversion
to US dollars of the Company's profits. In the event of a change in law which
increases the Joint Ventures' costs, the power purchase contracts typically
require an adjustment to the tariff in order to pass through such increased
costs.
The Joint Ventures in all cases except one -- Cili Misty Mountain -- have
entered, or, it is anticipated will enter, into dispatch contracts with the
relevant dispatching entity for its power plant pursuant to which the dispatcher
has agreed or plans to agree to dispatch the power plant at least the annual
minimum amount of hours required under the power purchase contract. For the one
case, the power purchaser, which is also the dispatcher, is responsible for
dispatching the power plant.
Each of the joint venture contracts for the projects described in this
section may be terminated early, including on account of a termination of the
relevant power purchase contract. In all cases except one -- Jiaozuo Aluminum
Power -- in the event of an early termination of a power purchase contract which
results from a default of a power purchaser, the Company is entitled under the
applicable power purchase contract to receive from the power purchaser payment
intended to compensate the Joint Venture for the return it would have received
had the power purchase contract continued to the end of its term.
In two cases -- Yangchun Sun Spring and Wuxi Tin Hill -- projects directly
managed by the Joint Ventures have been successfully constructed on time. For
three of the Company's projects currently under construction -- Jiaozuo Aluminum
Power, Cili Misty Mountain, and Chengdu Lotus City -- the respective Joint
Venture also directly manages the construction of the power plant. In these
instances the Joint Venture has entered into arrangements with various
construction and equipment procurement consortiums, including established
foreign equipment manufacturers, in which certain responsibilities relating to
construction and procurement have been allocated to members of the consortium.
For the remaining three projects currently under construction, each relevant
Joint Venture has entered into a fixed price, fixed schedule construction
contract, one of which is a turnkey arrangement. In all of the projects
described in this section, the electrical transmission and interconnection
facilities are being financed by interest bearing loans from the Joint Venture
to the relevant power purchaser who is responsible for constructing, owning,
operating and maintaining the facilities. In the case of Wuhu Grassy Lake, Hefei
Prosperity Lake and Chengdu Lotus City, the power purchasers have also agreed in
the power purchase contracts to begin making payments under their respective
power purchase contracts on a specified date if the power plant is completed,
but cannot deliver electricity due to a delay in completing the transmission and
interconnection facilities.
Five of the eight power plants are or will be operated directly by the
Joint Ventures -- Cili Misty Mountain, Wuxi Tin Hill, Aixi Heart River, Jiaozuo
Aluminum Power and Chengdu Lotus City -- and three -- Yangchun Sun Spring, Hefei
Prosperity Lake and Wuhu Grassy Lake -- will be operated by the relevant power
purchasers. Fuel for most of the power plants has been contracted for under long
term fuel supply contracts with fuel suppliers or will be supplied by the power
purchasers. In the latter case, the relevant power purchaser is not excused from
its payment obligations under its power purchase contract if it is unable to
provide fuel to the power plant.
The power projects which are currently under construction have obtained
insurance coverage for property loss and damage (including damage arising from
natural calamities) and third party liability. Most force majeure risks which
can be categorized as natural calamities are covered under the insurance
policies. The Joint Ventures are in all cases relieved of their obligation to
deliver electricity under their power purchase contracts for the power plants
described in this section in the event of force majeure, including an event of
force majeure caused by the PRC Government. In the case of all projects, except
Wuhu Grassy Lake and Hefei Prosperity Lake, the power purchaser is not relieved
of its obligations under its applicable power purchase contract, including the
obligation to make payments to the Company in such circumstances. In these
49
<PAGE> 51
two projects, the power purchaser is relieved of its obligation to purchase the
minimum amount of electric power under its respective power purchaser contract
during periods in which the power plant is unable to generate electric power due
to events of force majeure, including events of force majeure caused by the PRC
Government.
In the case of all of the power plants described in this section, the
Company and its Joint Venture partners have applied for and received PRC
approvals for the project and for the establishment of the related foreign
investment enterprise. In the case of two power plants -- Jiaozuo Aluminum Power
and Wuhu Grassy Lake -- the power plants have received project approvals at the
Central Government level from the State Planning Commission and have received
approvals from MOFTEC for the establishment of their related Joint Venture. Each
of the remaining six power plants has received its project approval and foreign
investment approval from provincial and local government entities.
Two of the Company's power plants currently in operation or under
construction -- Wuxi Tin Hill and Hefei Prosperity Lake -- have been structured
as multiple projects and Joint Ventures, with each project and Joint Venture
having a total investment not exceeding the $30 million approval authority
threshold generally applicable to provincial and local governments. In two other
cases -- Aixi Heart River and Chengdu Lotus City -- the Company's projects and
Joint Ventures have obtained local government approvals on the basis of
anticipated total investments which did not exceed $30 million at the time the
approvals were obtained, but will, when construction is completed, exceed the
$30 million approval threshold. See "Risk Factors -- Risks Related to the
Company's Business -- Government Approval Processes."
The tariff formulas set forth in the power purchase contracts of the Joint
Ventures described in this section have been either approved or confirmed by the
relevant provincial and local government pricing bureaus responsible for
reviewing such tariffs.
All of the joint venture contracts and project contracts of the Joint
Ventures are governed by PRC law. Some of the joint venture contracts provide
for arbitration of a dispute arising under the joint venture contracts in
locations outside of the PRC, while some provide for arbitration in the PRC by
PRC arbitration bodies. Most of the project contracts, including the power
purchase contracts, provide for arbitration of disputes in the PRC by PRC
arbitration bodies.
JIAOZUO ALUMINUM POWER
The Power Plant. The Jiaozuo Aluminum Power power plant is a 2 x 125 MW
coal-fired power plant located adjacent to the Jiaozuo Aluminum Mill ("Jiaozuo
Mill") aluminum production mills in Jiaozuo, Henan Province. Construction of the
power plant commenced in the first quarter of 1995. The first unit of the power
plant is scheduled to commence commercial operation by the second quarter of
1997. The second unit is scheduled to commence commercial operation in the
second quarter of 1998.
Joint Venture. The Jiaozuo Aluminum Power power plant is owned by Jiaozuo
Wan Fang, a 23-year cooperative joint venture formed by Jiaozuo Mill and a
wholly-owned subsidiary of the Company. Pursuant to the joint venture contract
the Company is entitled to recover its registered capital (equity) during the
term of the Joint Venture. The Company, as the majority shareholder of Jiaozuo
Wan Fang, is entitled to appoint four of the six members of the board of
directors of the Joint Venture, including the chairman of the board and the
general manager. Pursuant to a co-development agreement, an entity unaffiliated
with the Company is entitled to no more than ten percent of the Company's equity
distributions from Jiaozuo Wan Fang.
Financing. The approved total investment in Jiaozuo Wan Fang is $151.3
million. The Joint Venture's approved registered capital is $53.7 million. As of
August 31, 1996, it is estimated that the total cost of Jiaozuo Aluminum Power
will be approximately $161.3 million. Any difference between the approved total
investment and the actual total cost will be funded by additional equity or
loans to be contributed pro rata by the shareholders of Jiaozuo Wan Fang. The
Company has committed to contribute $37.6 million to the registered capital of
the Joint Venture. Jiaozuo Mill has committed to contribute $16.1 million in
land use rights and certain fixed assets to the registered capital of the Joint
Venture.
50
<PAGE> 52
Power Purchase. Jiaozuo Wan Fang and Jiaozuo Mill have entered into a
23-year power purchase contract effective April 26, 1996. Pursuant to the power
purchase contract, Jiaozuo Mill has agreed to purchase from Jiaozuo Wan Fang at
least 5,500 hours each calendar year at 75 MW up to the amount required to
operate Jiaozuo Mill's aluminum mill. Any remaining electricity from the power
plant, but no less than 5,500 hours at 155 MW, will be purchased by the Henan
Electric Power Corporation ("Henan Power") under a 23-year power purchase
contract between Jiaozuo Wan Fang and Henan Power. Both power purchase contracts
require the purchasers to pay for a minimum amount of electricity generated
every calendar year and to compensate the Joint Venture for any shortfalls in
purchases of such minimum amount based on the most recent approved tariff for
power less fuel costs. If Jiaozuo Mill is unable to purchase the minimum amount,
the Joint Venture is entitled to require Henan Power to purchase such amount.
The Joint Venture is not entitled to the payment of any compensation upon
early termination of either power purchase contract. However, in the case of
early termination due to Henan Power's default, Henan Power is obligated under
the power purchase contract, to the extent permitted by law, to transmit
electricity generated by the Joint Venture's power plant to any entity
designated by the Joint Venture which is interconnected with Henan Power. If
early termination of Jiaozuo Mill's power purchase contract occurs due to
Jiaozuo Mill's default, Henan Power is obligated under its power purchase
contract to purchase Jiaozuo Mill's minimum amount in addition to its own.
Construction. Jiaozuo Wan Fang is directly managing the construction of
the power plant. Jiaozuo Wan Fang has hired the Henan Power Design Institute for
the project design and Henan Provincial No. 1 Power Construction Company and
Henan Provincial No. 2 Power Construction Company as contractors for civil and
installation work. Although no heat rate, output or completion guarantees are
being provided by the contractors, these two contractors have built a number of
similar power plants. In addition, more than 100 of such 125 MW units have been
delivered by their manufacturer, Shanghai Electric Corporation ("Shanghai
Electric"), which is providing a limited two-year warranty of the units. An
independent engineering company, Bechtel Power Corporation, has been retained by
Jiaozuo Wan Fang to manage scheduling and procurement. The construction risk in
the case of this project is also mitigated by the tariff formula set forth in
the power purchase contract which provides for an increase in the tariff payable
by the power purchaser sufficient to compensate the Joint Venture for any
reduction in heat rate and capacity resulting from the contractor's performance
failure.
Interconnection and Dispatch. The interconnection facilities are being
constructed by Henan Power. Jiaozuo Wan Fang has agreed to provide a loan in the
amount of approximately $9.9 million to Henan Power for the design and
construction of the interconnection facilities. When in commercial operation,
the power plant will be dispatched by Henan Power. The Joint Venture is required
under its dispatch contract with Henan Power to cause the power plant to
maintain an annual minimum availability. If this annual minimum availability is
not met, the minimum amount required to be purchased by Henan Power may be
reduced proportionately.
Fuel. Jiaozuo Wan Fang plans to enter into one-year fuel supply contracts
for the purchase of anthracite coal from mines in Jiaozuo and mines located
approximately 120 kilometers from the power plant. The price for coal is to be
negotiated periodically with the mine owners. Jiaozuo Wan Fang will arrange for
the transportation of the coal by truck to the power plant.
Operation. Jiaozuo Wan Fang will operate the power plant.
WUHU GRASSY LAKE
The Power Plant. The Wuhu Grassy Lake power plant is a 2 x 125 MW
coal-fired power plant located near Wuhu, Anhui Province. It is the phase IV
expansion of an existing 325 MW coal-fired power station. The first unit of the
power plant commenced commercial operation in September 1996. The second unit is
scheduled to commence commercial operation in the second quarter of 1997.
Joint Venture. The Wuhu Grassy Lake power plant is owned by Wuhu Shaoda, a
20-year equity joint venture formed by China Power International Holdings
Limited ("CPI"), Anhui Liyuan Electric Power
51
<PAGE> 53
Development Company Limited ("Anhui Liyuan"), Wuhu Energy Development Company
Limited ("Wuhu Energy") and a wholly-owned subsidiary of the Company. The board
of directors of Wuhu Shaoda consists of nine directors, of which two are
appointed by the Company. The Company also appoints one of the two vice chairmen
and the deputy general manager responsible for supervising the operation and
maintenance of the power plant.
Financing. The approved total investment in the Joint Venture is $118.4
million. The Joint Venture's approved registered capital is $30.0 million. The
Joint Venture partners of Wuhu Shaoda have committed to contribute their
registered capital according to their respective ownership interests as follows:
(i) CPI, $13.5 million (45%), (ii) the Company, $7.5 million (25%), (iii) Anhui
Liyuan, $6.0 million (20%) and (iv) Wuhu Energy, $3.0 million (10%). As of
August 31, 1996, the estimated total cost of this project was in line with the
approved total investment. The difference between the total investment and the
registered capital of Wuhu Shaoda has been financed through a bank facility and
shareholder loans arranged by the Joint Venture partners. Wuhu Shaoda has
entered into a $65.0 million term loan facility (the "Term Loan") with a
syndicate of lenders. The first drawdown of the Term Loan took place in August
1996. The Term Loan is to be repaid in 11 successive semi-annual installments
beginning April 22, 1998. In addition to the Term Loan, the Company has
committed to provide an $18.0 million subordinated loan (the "AES Loan") and
Anhui Liyuan has committed to provide up to $4.6 million and Wuhu Energy has
committed to provide up to $2.3 million in subordinated shareholders' loans to
the Joint Venture. The Company has guaranteed to the lenders of the Term Loan
certain obligations of its wholly-owned subsidiary under the joint venture
contract, including with respect to the funding of the AES Loan and certain
other liabilities which, in the aggregate, do not exceed $6.0 million.
Dividend payments are subject to certain restrictions under the Term Loan.
No dividend distributions by the Joint Venture are permitted if certain debt
service coverage ratios are not met.
Power Purchase. The electric power from the power plant will be purchased
by Anhui Provincial Electric Power Corporation ("Anhui Power") pursuant to a
20-year operation and offtake contract dated as of July 5, 1996, between Wuhu
Shaoda and Anhui Power. Under the power purchase contract, Anhui Power has
agreed to purchase a minimum amount of electricity at a price calculated based
upon an agreed tariff formula. In the event that the power plant fails to
generate electricity for a period in excess of that permitted for maintenance
and repair in the operation and offtake contract and such failure is a result of
force majeure or Wuhu Shaoda's failure to perform its obligations under the
operation and offtake contract, the minimum amount required to be purchased by
Anhui Power may be reduced in proportion to such excess shutdown period,
provided that in no event will the electricity payments to be made under the
operation and offtake contract be reduced below the amount necessary to allow
Wuhu Shaoda to pay all applicable financing costs under the Term Loan, the AES
Loan and the other shareholder loans.
Construction. The power plant is being designed, engineered and
constructed pursuant to a fixed price construction contract between Wuhu Shaoda
and Anhui Power. Pursuant to the construction contract, Anhui Power is the
principal contractor and is responsible for the timely and successful completion
of the power plant. Anhui Power has sub-contracted the design, construction,
installation and commissioning work to several of its subsidiaries. Anhui Power
is eligible for a bonus in the event of early completion of a unit. If the power
plant is not completed by August 1997, Anhui Power is required by the operation
and offtake contract nonetheless to commence purchases of the minimum amount of
electricity. The construction contract does not obligate Anhui Power to provide
guarantees of heat rate or capacity. However, in the event that Anhui Power
fails to achieve the design heat rate or nameplate capacity of the power plant,
the tariff formula set forth in the operation and offtake contract increases the
tariff payable by Anhui Power in a manner that compensates Wuhu Shaoda for the
reduction in heat rate and capacity. An independent engineering company, Stone
and Webster Management Consultants, has been retained by the lenders of the Term
Loan to monitor construction.
Interconnection and Dispatch. The power plant is interconnected to the
Anhui power grid and is subject to dispatch by Anhui Power pursuant to an
interconnection contract between Wuhu Shaoda and Anhui Power.
52
<PAGE> 54
Fuel. As part of its obligations under the operation and offtake contract,
Anhui Power is required to supply such fuel as may be necessary to allow the
power plant to generate electricity purchased under the operation and offtake
contract.
Operation. Pursuant to the operation and offtake contract, Anhui Power is
responsible for the operation, maintenance and management of the power plant.
Anhui Power is responsible for ensuring that the power plant generates the
minimum amount of electricity required to be purchased by Anhui Power and is
required to compensate Wuhu Shaoda for any resulting shortfall in such minimum
amount, unless, as indicated above, the shortfall is the result of force majeure
or the failure of Wuhu Shaoda to perform its obligations under the operation and
offtake contract.
HEFEI PROSPERITY LAKE
The Power Plant. The Hefei Prosperity Lake power plant is an oil-fired
combined cycle power plant consisting of 2 x 38.2 MW gas turbines generating
units ("gas turbine unit") and a 1 x 38.8 MW heat recovery steam turbine
generating unit ("steam turbine unit"). It is located within the boundaries of
an existing 325 MW coal fired power plant in Hefei, Anhui Province. Construction
of the power plant will commence in November 1996. The gas turbine unit is
scheduled to commence commercial operation in the third quarter of 1997 and the
steam turbine unit is scheduled to commence commercial operation in the third
quarter of 1998.
Joint Ventures. The Hefei Prosperity Lake power plant is owned by
Liyuan-AES and Zhongli Energy, two 16-year cooperative joint ventures formed
among a wholly-owned subsidiary of the Company, Hefei Municipal Construction and
Investment Company ("Hefei Construction") and Anhui Liyuan. In accordance with
the joint venture contracts, the Company is entitled to appoint four of the
seven members of the board of directors and the general manager of each of the
Joint Ventures.
Financing. The approved total investment in each of Liyuan-AES and Zhongli
Energy is $30.0 million. The approved registered capital of each of Liyuan-AES
and Zhongli Energy is $15.0 million. The Joint Venture partners in Liyuan-AES
and Zhongli Energy have committed to contribute registered capital to each Joint
Venture according to their respective ownership interests as follows: (i) Anhui
Liyuan, $3.0 million (20%), (ii) the Company, $10.5 million (70%) and (iii)
Hefei Construction, $1.5 million (10%). As of August 31, 1996, it is estimated
that the total cost of Hefei Prosperity Lake will be approximately $64.7
million. The difference between the estimated total cost and the registered
capital of each Joint Venture will be financed through shareholder loans or
third party debt arranged by the Joint Venture partners. The Company has entered
into shareholder loan contracts with Liyuan-AES and with Zhongli Energy pursuant
to which the Company has committed to provide loans to the Joint Ventures in an
aggregate amount not to exceed $16.0 million.
Power Purchase. The power generated by the power plant is purchased by
Anhui Power pursuant to a 16-year operation and offtake contract, dated
September 26, 1996, between Liyuan-AES and Zhongli Energy, as the sellers, and
Anhui Power as power purchaser. Under the operation and offtake contract, Anhui
Power has agreed to purchase a minimum amount of electricity at an agreed upon
tariff formula or to compensate the Joint Ventures for any shortfall in
purchases of such minimum amount based on an approved tariff less approved
generation costs. Anhui Power's minimum take obligation under the operation and
offtake contract may be reduced in proportion to periods of power plant shutdown
or curtailment of generation due to events of force majeure or breach of the
operation and offtake contract by the Joint Ventures, provided that in no event
will the payments to be made under the operation and offtake contract be reduced
below the amount necessary to allow the Joint Ventures to pay all applicable
financing costs under the Joint Ventures' loan agreements.
Construction. The power plant is being designed, engineered and
constructed pursuant to a fixed-price construction contract between the Joint
Ventures and Anhui Mingda Power EPC Contract Company ("Mingda"), a wholly owned
subsidiary of Anhui Power. Pursuant to the construction contract, Anhui Power is
the principal contractor and is responsible for the timely and successful
completion of the power plant. Mingda is eligible for a bonus in the event of
early or on-time completion of the gas turbine unit and the steam turbine unit
but must pay penalties in the event of late completion or not meeting
performance guarantees, including heat rate and capacity guarantees. The gas
turbine unit and steam turbine unit have been ordered
53
<PAGE> 55
from GEC Alsthom. GEC Alsthom will also provide the conceptual design as a
subcontractor to Mingda. If Mingda fails to complete the gas turbine unit by
August 1, 1997 and the steam turbine unit by July 1, 1998, Anhui Power's minimum
take or pay obligation for the minimum amount under the operation and offtake
contract nonetheless commences. An independent engineering company, Black &
Veatch International Company, has been retained by the Joint Ventures to monitor
construction.
Interconnection and Dispatch. The power plant is interconnected to the
Anhui power grid and is subject to dispatch by Anhui Power pursuant to an
interconnection contract between the Joint Ventures and Anhui Power. Under the
operation and offtake contract, Anhui Power, as the operator, is required to
indemnify the Joint Ventures for any loss or cost as a result of the breach of
the interconnection contract.
Fuel. As part of its obligations under the operation and offtake contract,
Anhui Power is required to supply such fuel as may be necessary to allow the
power plant to generate electricity to be purchased under the operation and
offtake contract.
Operations. Pursuant to the operation and offtake contract, Anhui Power is
responsible for the operation, maintenance and management of the power plant.
Anhui Power is responsible for ensuring that the power plant generates the
minimum amount and is required to compensate the Joint Ventures for any
resulting shortfall in the minimum amount, unless, as indicated above, the
shortfall is a result of force majeure or the failure of the Joint Ventures to
perform their obligations under the operation and offtake contract.
WUXI TIN HILL
The Power Plant. The Wuxi Tin Hill power plant is an oil-fired combined
cycle power plant which consists of a 2 x 24 MW gas turbine generating plant and
a 15 MW heat recovery steam turbine generating plant located in Xishan
(previously known as Wuxi County), Jiangsu Province. The gas turbine generating
plant was completed and commenced commercial operation in March 1996. The heat
recovery steam turbine generating plant is currently under commissioning and is
expected to commence commercial operation in the first quarter of 1997.
Joint Ventures. The Wuxi Tin Hill power plant is owned by Wuxi-AES-CAREC
and Wuxi-AES-Zhonghang, two 16-year cooperative joint ventures formed among the
Company, China National Aero-Engine Corporation ("CAREC") and Wuxi Power
Industry Company ("Wuxi Power"). In accordance with the joint venture contracts,
the Company is entitled to appoint four of the eight members of the board of
directors, including the chairman of the board, for each of the Joint Ventures,
while CAREC and Wuxi Power each is entitled to appoint two members. The chairman
of the board of directors of each Joint Venture has the right to break any tie
board votes.
Financing. The approved total investment in Wuxi-AES-CAREC is $29.5
million. The approved total investment in Wuxi-AES-Zhonghang is $10.5 million.
The approved registered capital of Wuxi-AES-CAREC is $11.8 million and the
approved registered capital of Wuxi-AES-Zhonghang is $5.0 million. As of August
31, 1996, the estimated total cost of this project was in line with the approved
total investment. The Company has contributed $6.5 million to the registered
capital of Wuxi-AES-CAREC and $2.8 million to the registered capital of Wuxi
AES-Zhonghang. CAREC and Wuxi Power each has contributed $2.7 million to the
registered capital of Wuxi-AES-CAREC and each has contributed $1.1 million to
the registered capital of Wuxi-AES-Zhonghang. The Company, CAREC and Wuxi Power
have entered into shareholder loan agreements with the Joint Ventures pursuant
to which they have provided loans to the two Joint Ventures pro rata in
accordance with their ownership interests.
Power Purchase. Power generated by the power plant is purchased by the
Xishan Electricity Management Office ("Xishan Office") under a 16-year power
purchase contract, effective May 1995, between Wuxi-AES-CAREC and Xishan Office.
Wuxi-AES-CAREC sells the electricity generated by the steam generating plant to
Xishan Office on behalf of Wuxi-AES-Zhonghang under a services agreement with
Wuxi-AES-CAREC.
The power purchase contract requires Xishan Office to purchase a minimum
amount of 186 GWh of electricity per calendar year from the power plant and to
compensate the Joint Ventures for any shortfalls in
54
<PAGE> 56
the purchase of such minimum amount based on the most recent tariff for
electricity less fuel costs. Pursuant to the power purchase contract, the
minimum amount of electricity which Xishan Office is required to purchase from
the Joint Ventures may be reduced by the number of peak time shutdown hours
which exceeds an agreed number of hours permitted for outages related to the
power plant.
Construction. The construction of the power plant has been managed by the
Joint Ventures. The gas turbines were supplied by United Technologies Inc.
("United Technologies"). Pursuant to a maintenance contract with the Joint
Ventures, United Technologies will provide 10 years of service and maintenance
for the gas turbines. The balance of the plant has been provided by Chinese
manufacturers.
Interconnection and Dispatch. The interconnection facilities were
completed in March 1996 and the power plant is connected to the East China Power
Grid. The power plant is currently dispatched under an agreement between Wuxi
AES-CAREC and Xishan Power Supply Bureau. A dispatch contract between the Joint
Ventures and Jiangsu Provincial Power Bureau Dispatch Center for the dispatch of
the power plant is under negotiation.
Fuel. Wuxi-AES-CAREC has signed 16-year fuel oil supply contracts with two
local State-owned oil companies under the administrative control of the Xishan
municipal government. The fuel suppliers are obligated, under the contracts, to
pay damages for any failure to supply the power plant with adequate quantities
of fuel or fuel not meeting certain specifications. The price of fuel oil to be
supplied under these supply contracts is to be negotiated annually. The oil
companies are obligated to arrange for the transportation of the fuel to the
power plant.
Operation. The power plant is operated by Wuxi-AES-CAREC.
AIXI HEART RIVER
The Power Plant. The Aixi Heart River power plant is a 50 MW coal-fired
circulating fluidized bed power plant located in Nanchuan, Sichuan Province.
Construction of the power plant commenced in February 1996, and is expected to
be completed in February 1998.
Joint Venture. The Aixi Heart River power plant is owned by Fuling Aixi, a
25-year cooperative joint venture formed by Sichuan Fuling Banxi Colliery
("Banxi Colliery") and a wholly owned subsidiary of the Company. The Company
appoints three of the five members of the board of directors as well as the
chairman, the general manager and financial controller.
Financing. The approved total investment in the Joint Venture is $30.4
million ($30.0 million based on the Renminbi yuan to US dollar exchange rate at
the time the approval was granted). The Joint Venture's approved registered
capital is $12.1 million. As of August 31, 1996, it is estimated that the total
cost of Aixi Heart River will be approximately $39.1 million. The Company has
committed to contribute $8.5 million to the registered capital of Fuling Aixi
and Banxi Colliery has committed to contribute $3.6 million to the Joint
Venture's registered capital. Pursuant to the construction and term loan
agreement with Fuling Aixi, the Company has committed to provide a loan in the
principal amount of up to $23.5 million to Fuling Aixi. Any difference between
the estimated total cost and the committed shareholder loan and approved
registered capital will be funded by additional equity contributed pro rata by
the shareholders.
Power Purchase. Electricity generated by the power plant will be sold to
Sichuan Fuling Power Company ("Sichuan Power") under a 25-year power purchase
contract. The power purchase contract requires Sichuan Power to purchase a
minimum of 270 GWh of electricity per calendar year. In the event that Sichuan
Power fails in any calendar year to purchase such minimum amount, Sichuan Power
is required by the power purchase contract to make payment for any shortfall at
the then current power price less fuel costs. Pursuant to the power purchase
contract, if Fuling Aixi fails to deliver electricity to Sichuan Power by the
construction completion date specified in the construction contract, it is
obligated to pay a penalty to Sichuan Power for each day of delay.
Construction. Fuling Aixi has entered into a construction contract with
Shanghai Electric to construct the power plant. Certain critical components of
the equipment of the power plant (including the coal fluidized
55
<PAGE> 57
bed boilers and their design) are being supplied by Pyropower, Inc.
("Pyropower") pursuant to a supply contract between Shanghai Electric and
Pyropower. The balance of the plant is being provided by Chinese manufacturers.
Shanghai Electric will provide a one-year warranty of its work. If Shanghai
Electric fails to complete construction of the power plant by the guaranteed
completion date, the contractor will be required to pay liquidated damages to
Fuling Aixi for each day of delay in an amount sufficient to compensate the
Joint Venture for penalties due to Sichuan Power under the power purchase
contract for delayed commercial operation of the power plant. Under the
construction contract, Shanghai Electric has guaranteed all the performance
specifications of the power plant, including output, heat rate and emissions. If
the power plant fails to achieve the performance specifications, Shanghai
Electric will be obligated to pay liquidated performance damages to Fuling Aixi.
Interconnection and Dispatch. Sichuan Power is responsible for
construction, and has guaranteed the completion, of the interconnection facility
by the power plant's performance testing date. If a delay in the completion of
the interconnection facility results in delays in commencement of the commercial
operation of the power plant, Sichuan Power is obligated to pay Fuling Aixi a
penalty for each day of delay. The Sichuan Fuling Grid Management Department,
the dispatcher of the power plant, has agreed to dispatch the power plant at
100% of its operational capacity during peak hours and at 75% of its operational
capacity during off-peak hours.
Fuel. Fuling Aixi has entered into a 25-year coal supply contract with
Banxi Colliery. Any increase in the price of coal to be paid by Fuling Aixi will
only become effective under the coal supply contract when the price of
electricity payable by Sichuan Power has been increased to reflect the increased
coal cost. The occurrence of a force majeure event will not excuse Banxi
Colliery's obligations under the coal supply contract. Banxi Colliery is also
obligated to supply coal to the power plant in the case of non-payment by Fuling
Aixi for such coal if such non-payment was caused by a failure of Sichuan Power
to make a payment to Fuling Aixi under the power purchase contract. If the coal
supply contract is terminated by Fuling Aixi on account of Banxi Colliery's
default, Banxi Colliery is required to pay a termination charge to Fuling Aixi.
Operation. Fuling Aixi will operate the power plant.
CHENGDU LOTUS CITY
The Power Plant. The Chengdu Lotus City power plant is a 2 x 24 MW natural
gas-fired power plant located in Chengdu, Sichuan Province. Construction of the
power plant commenced in September 1996 and is scheduled to take 334 days.
Joint Venture. The Chengdu Lotus City power plant is owned by Chengdu
AES-Kaihua, a 16-year cooperative joint venture formed by the Company, Huaxi
Electric Power Shareholding Company Ltd. (Group) ("Huaxi"), Huachuan Petroleum &
Natural Gas Exploration and Development Company ("Huachuan") and CAREC. The
Company is entitled to appoint three members of the nine-member board of
directors of Chengdu AES-Kaihua and the general manager.
Financing. The approved total investment in the Joint Venture is $29.8
million. The Joint Venture's approved registered capital is $11.9 million. As of
August 31, 1996, it is estimated that the total cost of Chengdu Lotus City will
be approximately $37.4 million. The Company has committed to contribute $4.2
million to the registered capital of Chengdu AES-Kaihua. The Company's joint
venture partners have committed to contribute the following amounts to the
registered capital of the Joint Venture: Huaxi has committed to contribute $3.0
million; Huachuan has committed to contribute $1.2 million; and CAREC has
committed to contribute $3.6 million. The Company, Huaxi, Huachuan and CAREC
have entered into support contracts with Chengdu AES-Kaihua pursuant to which
they have committed to arrange loans for Chengdu AES-Kaihua in the principal
amount of $25.3 million to fund the difference between their registered capital
contributions and the estimated total cost of the Joint Venture.
Power Purchase. Electricity generated by the power plant is to be sold to
Huaxi under a 15-year power purchase contract. The power purchase contract
requires Huaxi to purchase, in each calendar year, 3,000 hours of electric power
based on the net station capacity of the power plant declared by Chengdu AES-
56
<PAGE> 58
Kaihua to be available in such year. If Huaxi fails, for any reason (including
due to the failure of the interconnection facilities or natural gas pipeline to
be completed), to accept electric power which is made available by Chengdu
AES-Kaihua, Huaxi is required by the power purchase contract to pay Chengdu AES-
Kaihua for the electricity made available at the then current power price less
fuel costs.
The tariff payable by Huaxi under the power purchase contract is
established annually by the board of directors of Chengdu AES-Kaihua in
accordance with a budget which estimates the costs of generating the minimum
amount in the following year. The estimated power price becomes the price
payable by Huaxi in such following year after its approval by the Chengdu
pricing bureau. Any differences between the estimated power price and the actual
costs per kWh incurred by Chengdu AES-Kaihua are recovered each year by means of
a true-up mechanism.
Construction. Chengdu AES-Kaihua has entered into a construction contract
with CAREC to construct the power plant. The principal equipment for the power
plant, the gas turbine generator sets, is being provided to Chengdu AES-Kaihua
pursuant to a supply contract between CAREC and United Technologies. All
performance guarantees (including damages for failures to meet heat rate and
output guarantees) and warranties of United Technologies under the supply
contract have been assigned by CAREC to Chengdu AES-Kaihua. The balance of the
plant is being provided by Chinese manufacturers. An independent engineering
company, Duke/Fluor Daniel International, has been retained by the Joint Venture
to manage scheduling and to ensure equipment performance compliance.
Interconnection and Dispatch. The interconnection facility is to be
constructed by Huaxi. Chengdu AES-Kaihua has agreed to provide Huaxi with a loan
of RMBY15.0 million for the construction of the interconnection facilities. The
Joint Venture has entered into a dispatch contract with the Sichuan Dispatch
Center, pursuant to which the dispatcher of the power plant has agreed to
dispatch the power plant.
Fuel. Chengdu AES-Kaihua has entered into a 15-year gas supply contract
with Huachuan for the supply of natural gas to the power plant. The gas supply
contract requires Huachuan to provide a minimum annual quantity of natural gas
to the Chengdu Facility which meets certain specifications at a price set by the
Chengdu municipal pricing bureau. Any increase in the price of gas to be paid by
Chengdu AES-Kaihua will only become effective under the gas supply contract when
the price of electricity payable by Huaxi under its power purchase contract has
been increased to reflect the increased cost. If Huachuan fails, on any
occasion, to deliver gas in the quantities and specifications required by
Chengdu AES-Kaihua, Huachuan is obligated under the gas supply contract to
indemnify Chengdu AES-Kaihua for the total revenue lost by Chengdu AES-Kaihua
due to such failure. Huachuan is also obligated to continue supplying natural
gas to the power plant in the case of non-payment by Chengdu AES-Kaihua for such
natural gas if such non-payment was caused by a failure of Huaxi to make payment
to Chengdu AES-Kaihua under the power purchase contract.
Chengdu AES-Kaihua may terminate the gas supply contract for Huachuan's
breach of contract, including its failure to deliver natural gas. If Chengdu
AES-Kaihua terminates the contract, Huachuan must pay a termination charge
similar to the termination charge payable under the power purchase contract. If
Huachuan pays this termination charge, the termination charge for which Huaxi
would be liable under the power purchase contract as a consequence of Huachuan
default is not applicable. Upon any such payment, Chengdu AES-Kaihua is
obligated to transfer the power plant and related gas interconnection facility
to Huachuan.
Operation. Chengdu AES-Kaihua will operate the power plant.
CILI MISTY MOUNTAIN
The Power Plant. The Cili Misty Mountain power plant, located in Cili
County, Hunan Province, consists of a 5.2 MW hydroelectric generating unit
("unit 1"), a 10.5 MW hydroelectric generating unit ("unit 2") and a third
hydroelectric generating unit of 10.5 MW ("unit 3") that is under construction.
Unit 1, the original power plant, has been in commercial operation since 1979.
Unit 2 went into commercial operation in May 1996. Unit 3 is expected to
commence commercial operation in the fourth quarter of 1996.
57
<PAGE> 59
Joint Venture. The Cili Misty Mountain power plant is owned by
Xiangci-AES, a 25-year joint venture formed by Hunan Cili Electric Power Company
("Cili Electric Power") and the Company. The Company appoints three of the five
members of the Joint Venture's board of directors, and appoints the general
manager.
Financing. The approved total investment and approved registered capital
of Xiangci-AES is $14.7 million. The Company contributed $7.5 million to the
registered capital of Xiangci-AES and Cili Electric Power contributed all of the
assets of the previously existing and operating unit 1 and all of the equipment
and materials purchased for the construction of unit 2 and unit 3 which, at the
time of the Company's equity contribution to Xiangci-AES, were being
incorporated into the project by Cili Electric Power. All liabilities of the
power plant incurred prior to the establishment of Xiangci-AES are the sole
obligation of Cili Electric Power. As of August 31, 1996, the estimated total
cost of this project was in line with the approved total investment.
Power Purchase. Electricity generated by the power plant is sold by
Xiangci-AES to Cili Electric Power pursuant to a 25-year power purchase
contract. Cili Electric Power is required by the terms of the power purchase
contract to purchase all of the electricity generated by the power plant and to
use its best efforts to purchase electricity in excess of 120 GWh. Since the
power plant utilizes hydro power, the extent to which the power plant is able to
generate electric power depends upon the flow of river water. Due to a drought
in the area, the Company does not expect that the power plant will generate 120
GWh in 1996. Additionally, Cili Electric Power has indicated to the Joint
Venture that load growth in Cili County is likely to be less than anticipated in
the near future. Because the power plant is located in an area served by an
isolated transmission grid, the Joint Venture is planning to incur additional
costs to build a 36 kilometer low voltage transmission line to connect the power
plant with the Hunan provincial grid and the larger market it serves. The power
purchase contract provides that payment for electricity purchased by Cili
Electric Power is based on a tariff which is the higher of a minimum rate and a
market rate.
Construction. Pursuant to the terms of the joint venture contract, all of
the capital contributed by the Company to Xiangci-AES is to be used to complete
construction of unit 2 and unit 3. Cili Electric Power was responsible under the
terms of the joint venture contract for completing the construction of unit 2
and unit 3. Work on unit 2 and unit 3 began in September 1991, with completion
originally targeted for June 1995. Construction of unit 2 was completed and it
began commercial operation in May 1996. However, due to problems with
installation and an equipment defect, construction of unit 3 has not yet been
completed. Xiangci-AES has entered into an agreement with Cili Electric Power
pursuant to which the Joint Venture has directly assumed the work of completing
the construction of unit 3. Cili Electric Power has been discharged from any
further obligation to complete the power plant. Accordingly, the Company is now
actively participating in the management of the construction of unit 3. Unit 3
is targeted for completion and the commencement of commercial operation in the
fourth quarter of 1996.
Interconnection and Dispatch. The power plant is interconnected to the
Cili County power grid. The power plant is dispatched by Cili Electric Power.
Operation. Xiangci-AES operates the power plant.
YANGCHUN SUN SPRING
The Power Plant. The Yangchun Sun Spring power plant, located in Yangchun,
Guangdong Province, consists of one existing 8.6 MW diesel engine generating
facility which was constructed prior to the Company's involvement, and another
6.5 MW Stork-Wartsila diesel engine generating facility which commenced
commercial operation in April 1996.
Joint Venture. Yangchun Sun Spring is owned by Yangchun Fuyang, a 12-year
cooperative joint venture formed by Yangchun Municipal Power Supply Company
("Yangchun Power Supply"), Shenzhen Futian Gas Turbine Power Co., Ltd.
("Shenzhen Futian") and a wholly-owned subsidiary of the Company. The Company
has the right to appoint one of the four members of the board of directors of
the Joint Venture.
58
<PAGE> 60
Financing. The Company and Shenzhen Futian each has contributed $2.3
million in cash to Yangchun Fuyang for their respective 25% ownership interests.
Yangchun Power Supply has contributed land use rights, and all the fixed assets
of the existing plant and all the equipment and materials purchased for the unit
then under construction as its registered capital for a 50% ownership interest
in Yangchun Fuyang.
Power Purchase. The electricity generated from the power plant is
purchased by Yangchun Municipal Power Supply Bureau ("Yangchun Power Bureau")
under a 12.5-year power purchase contract. The Yangchun Power Bureau is required
by the power purchase contract to purchase at least 34.4 GWh each year
commencing on January 1, 1995 and at least 58 GWh each year after December 31,
1995. The Yangchun Power Bureau is required to pay for such minimum amounts of
electricity even if it does not or cannot purchase such minimum amounts. The
Yangchun Power Bureau's payment obligation is secured by a pledge of the annual
profit from a 13 MW hydro power plant owned by the Yangchun City People's
Government.
Construction and Management. Yangchun Fuyang and Yangchun Power Supply
have entered into a 12.5-year construction and management contract. The contract
calls for Yangchun Power Supply to assume full responsibility for the operation
and maintenance of the power plant on behalf of Yangchun Fuyang in compliance
with the power purchase contract, and to supply fuel to the power plant. The
construction and management contract provides for scheduled distributions to the
Company and Shenzhen Futian beginning on March 31, 1996 and continuing on a
semi-annual basis for the remainder of the contract term. The amounts are
adjusted if the foreign exchange rate between the U.S. dollar and Renminbi
exceeds or falls below specified thresholds. Yangchun Power Supply has pledged
its registered capital interest in Yangchun Fuyang as security for its
obligations to make scheduled distributions to the Company and Shenzhen Futian
under the construction and management contract.
Interconnection and Dispatch. The power plant is interconnected to the
Yangchun municipal power grid. The power plant is dispatched by the Yangchun
Electric Dispatch Office pursuant to a dispatch contract between the Joint
Venture and the Yangchun Power Bureau.
Fuel. Fuel oil required for the power plant is supplied by Yangchun Power
Supply.
Operation. Yangchun Fuyang operates the power plant.
DESCRIPTION OF THE POTENTIAL PROJECTS
This section contains descriptions of projects, other than the Current
Projects, for which the Company has signed a joint venture contract. However, in
none of the following projects has the Company funded its equity contribution to
the registered capital of the Joint Venture. After the Amalgamation, the ability
of the Company to make investments in the Potential Projects would be
substantially limited by the AES Debt Covenants. See "The
Amalgamation -- Certain Effects of the Amalgamation."
Under PRC law, joint venture contracts only become effective after issuance
of certain required government approvals. Some of the Company's joint venture
contracts and project contracts for projects in development are also subject to
the satisfaction or waiver of certain significant contractual conditions
precedent. The conditions precedent specified in such contracts must be
satisfied before the Company will contribute to the registered capital of the
applicable joint venture. These conditions precedent may include the negotiation
and execution of further substantial project contracts or the receipt of certain
government approvals.
Some of the required government approvals have not been obtained for each
of the projects described in this section and receipt of such approvals is not
certain. In addition, substantial uncertainties exist with regard to the ability
of the parties to the joint venture contracts and other project contracts to
satisfy the conditions precedent in those documents. Certain of these conditions
involve subjective determinations by one or more parties enabling the parties,
by the terms of the contracts, to exercise considerable discretion in making
such determinations. No assurances can be given that governmental approvals will
be received, conditions precedent will be satisfied, or that the joint ventures
described in this section will be funded.
59
<PAGE> 61
The projects described in this section are at various stages of negotiation
and discussion. The Company and PRC Government authorities, including power
bureaus, pricing bureaus, industrial customers and other third parties, must
still reach agreement on a number of commercial and technical issues. There can
be no certainty that the parties to these negotiations will reach agreement with
the Company and that the projects described in this section will be completed.
Moreover, the final terms of the contracts relating to these projects may differ
materially from the terms described below, and the terms may be revised even
after a joint venture contract or other project contract has been signed or
becomes effective. The Company may also decide from time to time to change its
investment strategies regarding development of the projects described in this
section. Among other things, the Company may increase the levels of registered
capital contemplated for such projects. Furthermore, the Company may in the
future be unable to, or elect not to, proceed with one or more, or any, of the
projects described in this section.
YANGCHENG SUN CITY
The Yangcheng Sun City power plant is a 6 x 350 MW coal-fired power plant
to be located near Yangcheng, Shanxi Province. The Yangcheng Sun City power
plant is to be owned by Yangcheng International Power, a 20-year cooperative
joint venture formed by North China Electric Power Group Corporation ("North
China Power"), Jiangsu Province Investment Corporation ("Jiangsu Investment"),
Shanxi Energy Enterprise (Group) Company ("Shanxi Energy"), Shanxi Provincial
Power Company ("Shanxi Power"), Jiangsu Provincial Power Company ("Jiangsu
Power") and the Company.
The approved total investment in Yangcheng International Power is
approximately $1.6 billion. The approved registered capital of Yangcheng
International Power is 25% of the total investment, equal to $392.9 million. The
respective ownership interests of the shareholders in Yangcheng International
Power are as follows: the Company-25%, North China Power-25%, Jiangsu
Investment-20%, Shanxi Energy-16%, Shanxi Power-10% and Jiangsu Power-4%. Hence,
the Company's registered capital contribution will be approximately $98.2
million. The difference between the total investment and the total registered
capital of the joint venture is expected to be financed through debt arranged or
guaranteed by the Chinese parties. It is anticipated that export credit agency
loan guarantees from the United States Export-Import Bank and Hermes
Kreditversicherungs AG of approximately $800 million will be provided to
Yangcheng International Power. The export credit agency loan guarantees are
expected to be supported by guarantees from the Construction Bank of China.
Pursuant to the joint venture contract, the Company is entitled to appoint
two members of the nine-member board of directors of Yangcheng International
Power, one of the three vice chairmen, and a deputy general manager of the power
plant.
Preliminary work on the site has begun. Equipment supply contracts were
executed in Beijing in September 1996 with Siemens Ltd., which will supply the
turbines and generators, and with Foster Wheeler Energy International, which
will supply the boilers. Shanxi Power has been selected as the turnkey
contractor, and negotiations are currently underway with Shanxi Power on the
engineering, procurement and construction contract. It is anticipated that the
power plant will require five years to be completed.
The power plant will primarily utilize local sources of low-cost anthracite
coal. The coal is available from several coal mines owned and operated by Shanxi
provincial government entities located within 30 kilometers of the power plant
site. Long-term fuel supply contract negotiations with Shanxi Provincial Coal
Sales and Transportation Company will commence in the near future. It is
anticipated that the project will also be operated by Yangcheng International
Power.
Electric power from the plant will be transmitted over a 730 kilometer
transmission line to Jiangsu Power in Jiangsu Province, on the eastern coast of
China. The construction of the transmission line is not part of the investment
of the joint venture. It will be constructed and financed by the Chinese
shareholders in Yangcheng International Power pursuant to a separate
arrangement.
Following State Planning Commission approval of the project feasibility
study in March 1996, negotiations commenced on the principal project agreements.
60
<PAGE> 62
The ability of the Company to make an investment in the Yangcheng Sun City
project following the Amalgamation is contingent on, among other things, the
consent of the Company's partners in such project and the approval of the
relevant PRC Government authorities. See "Risk Factors -- Risks Related to the
Company's Business -- Limitations Resulting from the Amalgamation."
OTHER POTENTIAL PROJECTS
Jinhua Golden China. The Jinhua Golden China power plant is a 106 MW
oil-fired combined cycle power plant to be located in Jinhua, Zhejiang Province.
Different components of the Jinhua Golden China power plant are to be owned by
two 18-year cooperative joint venture companies -- Jinhua Longhua and Jinhua
Jinlong -- formed by the Company, Jinhua Power Development Company ("Jinhua
Power") and Zhejiang Power. The Company has a 60% ownership interest, Jinhua
Power has a 30% ownership interest and Zhejiang Power has a 10% ownership
interest in each joint venture. Each joint venture will own one 38 MW simple
cycle oil-fired gas turbine generating facility and one 15 MW heat recovery
steam turbine facility. The approved total investment in Jinhua Jinlong is $26.0
million and its approved registered capital is $10.4 million. The approved total
investment of Jinhua Longhua is $29.8 million and its approved registered
capital is $11.9 million. In accordance with each of the joint venture contracts
the Company is entitled to appoint four of the seven members of the board of
directors as well as the chairman of the board and the deputy general managers
for finance and operations. The engineering procurement and construction
contract for Jinhua Golden China is currently under negotiation with the
Zhejiang Provincial Power Construction Corporation and, it is intended that the
fuel will be supplied by the Zhejiang Provincial Petroleum Corporation -- Jinhua
Company. It is anticipated that the project companies will enter into power
purchase contracts with the Jinhua Power Industry Bureau. Jinhua Longhua's
project has been approved by the State Economic and Trade Commission as a
technological improvement project and has been listed by MOFTEC for import tax
exemption. Jinhua Jinlong's project is awaiting re-examination approval and
listing for import duty exemption by the State Planning Commission and by
MOFTEC. The joint venture contracts and project contracts will become effective
only upon satisfaction of certain conditions precedent.
The ability of the Company to make an investment in the Jinhua Golden China
project following the Amalgamation is contingent on, among other things, the
consent of the Company's partners in such project and the approval of the
relevant PRC Government authorities. See "Risk Factors -- Risks Related to the
Company's Business -- Limitations Resulting from the Amalgamation."
Tianjin TEDA. The Tianjin TEDA power project, to be located in the Tianjin
Economic-Technological Development Area near Tianjin, is a 100 MW coal-fired
cogeneration project consisting of 3 x 220 ton circulating fluidized bed boilers
and 2 x 50 MW steam turbine units. The first phase will consist of one boiler
and one steam turbine. The Tianjin TEDA power plant is to be owned by the
Tianjin TEDA AES Power Company, a 20-year cooperative joint venture formed by a
wholly owned subsidiary of the Company and the Tianjin Economic Development
Corporation ("Tianjin Development"). Total investment in the joint venture is
expected to be approximately $95 million. Registered capital of the joint
venture is expected to be 40% of the total investment. Unless third-party debt
can be arranged, the parties will contribute shareholder loans representing 60%
of the total investment. The Company has a 70% ownership interest and Tianjin
Development has a 30% ownership interest in the joint venture. Applications for
approval of the project have been made to the State Planning Commission and
MOFTEC. The joint venture contract will become effective upon satisfaction of
certain conditions precedent.
Nanpu Southern Delta. The Nanpu Southern Delta power plant, to be located
in Huian County Fujian Province, is a 700 MW coal-fired power plant consisting
of 2 x 350 units. The Nanpu Southern Delta power plant is to be owned by the
Fujian Nanpu Power Company Limited, a 19-year cooperative joint venture formed
by the Company, the Fujian Provincial Power Bureau ("Fujian Power") and CPI. The
total investment in the joint venture is expected to be approximately $600
million and the registered capital is expected to be approximately $150 million.
The project costs in excess of the registered capital are expected to be
financed through limited-recourse project financing. CPI and Fujian Power have
committed to obtain, on behalf of the project company, all necessary approvals,
including those from the State Planning Commission, MOFTEC and SAEC. Negotiation
of the power purchase contract and other project documents has
61
<PAGE> 63
commenced. The project has received its initial project approval from the State
Planning Commission, and Fujian Power has commenced the preliminary design work
for the power plant at its own cost.
The ability of the Company to make an investment in the Nanpu Southern
Delta project following the Amalgamation is contingent on, among other things,
the consent of the Company's partners in such project and the approval of the
relevant PRC Government authorities. See "Risk Factors -- Risks Related to the
Company's Business -- Limitations Resulting from the Amalgamation."
62
<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are listed
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- -----------------------------------------------------
<S> <C> <C>
Roger W. Sant*................ 65 Chairman of the Board and Director
Dennis W. Bakke*.............. 51 Vice Chairman and Director
Robert F. Hemphill, Jr.*...... 53 Vice Chairman and Director
Thomas Tribone*............... 44 Director
Thomas I. Unterberg*.......... 65 Director
Paul T. Hanrahan.............. 38 President, Chief Executive Officer
Edward C. Hall III............ 36 Executive Vice President
Jeffery A. Safford............ 38 Vice President, Chief Financial Officer and Secretary
James R. Reiney, Jr........... 55 Vice President
Thomas Wu..................... 35 Vice President
Kerry Yeager.................. 45 Vice President
William Dykes................. 64 Director
Xiliang Feng.................. 76 Director
Dr. Victor Hao Li............. 54 Director
William H. Taft IV............ 50 Director
</TABLE>
- ---------------
*Class B Director.
Roger W. Sant has been the Chairman of the Board and a Class B Director of
the Company since December 1993. He co-founded AES with Dennis W. Bakke in 1981.
He has been Chairman of the Board and a Director of AES since its inception and
held the additional office of Chief Executive Officer through 1993. He is
currently Chairman of the Board of Directors of The World Wildlife Fund U.S. and
serves on the Boards of Directors of Marriott International Inc., The World
Resources Institute, and The World Wide Fund for Nature, as well as serving on
the National Council for The Environmental Defense Fund. He was Assistant
Administrator for Energy Conservation and the Environment of the Federal Energy
Administration ("FEA") from 1974 to 1976 and the Director of the Energy
Productivity Center, an energy research organization affiliated with The Mellon
Institute at Carnegie Mellon University, from 1977 to 1981.
Dennis W. Bakke has been a Vice Chairman and a Class B Director of the
Company since December 1993. He co-founded AES with Roger W. Sant in 1981 and
has been a Director of AES since 1986. He was named President and Chief
Executive Officer of AES in January 1994, and from 1987 through 1993 he held the
office of President and Chief Operating Officer of AES. From 1982 to 1986, he
served as Executive Vice President of AES and from 1985 to 1986 he also served
as Treasurer of AES. He served with Mr. Sant as Deputy Assistant Administrator
of FEA from 1974 to 1976 and as Deputy Director of the Energy Productivity
Center from 1978 to 1981. He is a trustee of Geneva College.
Robert F. Hemphill, Jr. has been a Vice-Chairman of the Company since
February 1995 and has been a Class B Director of the Company since December
1993. From December 1993 to February 1995, Mr. Hemphill was President and Chief
Executive Officer of the Company. Mr. Hemphill was named a Director of AES in
June 1996. From 1987 to such appointment, Mr. Hemphill served as Executive Vice
President of AES. From 1984 to 1987, he was Senior Vice President and from 1982
to 1984 he served as a Vice President for project development. He also has
served as President and Chief Executive Officer of AES Transpower Pvt. Ltd.
("Transpower"), a subsidiary of AES, since 1989. Prior to joining AES, he was
the Deputy Manager of Power of the Tennessee Valley Authority, the largest
electric utility in the United States. He also served with the U.S. Department
of Energy as Deputy Assistant Secretary for Planning and Evaluation, and with
the FEA where he assisted in drafting several major energy statutes, including
the
63
<PAGE> 65
National Energy Act. He serves on the Board of Directors of the Friends of the
U.S. National Arboretum and is a member of the Arlington County Transportation
Commission.
Thomas Tribone has been a Class B Director of the Company since March 1995.
Mr. Tribone has been Senior Vice President of AES since 1990. He is President of
the AES Americas Division of AES with responsibility for business in Latin
America and parts of the United States. He is Vice Chairman of the Interregional
Transmission Coordination Forum, an organization of 45 electric utilities which
coordinates power transmission in the eastern half of North America.
Thomas I. Unterberg has been a Class B Director of the Company since
December 1993. He has been a Director of AES since 1984 and was a Director of
AES from 1982 to 1983. He has been a Managing Director of Unterberg Harris, L.P.
since 1989, having been a Managing Director of Shearson Lehman Brothers Inc.
from 1987 through 1988. Prior to 1986, he was a Managing Director and Chairman
of L.F. Rothschild Unterberg Towbin, Inc. He currently serves on the Boards of
Directors of Electronics for Imaging, Inc., Fractal Design Corporation, and
Systems and Computer Technology Corp.
Paul T. Hanrahan is President and Chief Executive Officer of the Company.
From December 1993 until Mr. Hanrahan's appointment as President and Chief
Executive Officer in February 1995, he was Executive Vice President and Chief
Operating Officer of the Company. From December 1993 until April 1994, he was
Secretary of the Company. He has been a Vice President of AES since December
1993. Prior to December 1993, he was the general manager of Transpower, leading
development efforts in China, India, the Philippines and Eastern Europe. He has
also played a leading role in the development of several AES projects, including
the Belfast West and Kilroot projects in Northern Ireland, the AES Barbers Point
project in Hawaii and the AES Thames project in Connecticut. He graduated with a
mechanical engineering degree from the U.S. Naval Academy and with a Master of
Business Administration from Harvard Business School.
Edward C. Hall III is the Executive Vice President of the Company. From
April 1994 until Mr. Hall's appointment as Executive Vice President, he was a
Vice President of the Company. From December 1993 until April 1994, Mr. Hall
served as Chief Financial Officer of the Company. He has been a Vice President
of Transpower since July 1993. From 1990 through 1992 he served as Project
Director for the AES Warrior Run project, and from 1988 through 1989 he served
as a Project Development Manager working on the AES Thames project refinancing,
the AES Barbers Point project financing and the AES Medway project in England.
His experience includes over ten years of engineering, operations and project
management in the power industry. He is registered as a professional engineer in
the Commonwealth of Massachusetts. He graduated with a Master of Science degree
from the Massachusetts Institute of Technology Sloan School of Management and
with a mechanical engineering degree from Tufts University.
Jeffery A. Safford is the Vice President, Chief Financial Officer and
Secretary of the Company. From February 1994 until his appointment to such
offices in April 1994, he was Assistant Secretary of the Company and performed
the function of principal accounting officer. He was Director of Finance and
Administration of AES prior to April 1994. Prior to joining AES, he worked as a
Senior Auditor for Touche Ross & Co., an accounting firm, with responsibility
for several large publicly held clients. He graduated from Pennsylvania State
University with a degree in accounting and is a Certified Public Accountant.
James R. Reiney, Jr. is a Vice President of the Company. Prior to joining
the Company in September 1995, he was a Vice President and Manager of
Construction for Bechtel Corporation (construction and engineering), with
responsibilities for Bechtel's worldwide power construction projects. After
Bechtel's corporate restructuring, Mr. Reiney was appointed as Vice President
and Manager of Construction for the San Francisco Regional Office with
responsibilities for 44 projects worldwide. Mr. Reiney graduated from The
Citadel with a Bachelor of Science degree in Civil Engineering.
Thomas Wu is a Vice President of the Company. From January 1995 until his
appointment to such office in March 1995, he was a project director for the
Company. From February 1993 until January 1995, he was Chief Executive Officer
of Health Secrets, Inc. (health care products) and from January 1994 until
January 1995, he also acted as a part-time consultant to the Company. Prior to
February 1993, he was Director of Product Marketing for the Language Business
Unit of Borland International, Inc. (software).
64
<PAGE> 66
Mr. Wu graduated with a Master of Science degree in management from the
Massachusetts Institute of Technology Sloan School of Management.
Kerry Yeager has been a Vice President of the Company since April 1996.
From 1994 until his appointment, he was a project director for the Company. From
1989 to 1994, he served as a project manager for AES. Prior to joining AES, Mr.
Yeager worked for the Lower Colorado River Authority from 1973, with experience
in distribution and transmission lines, as well as power design and management.
Mr. Yeager graduated from the University of Texas with a Bachelor of Business
Administration degree.
William Dykes has been a Class A Director of the Company since February
1994. Mr. Dykes retired from Citibank N.A. in 1992 after 36 years of service.
Since his retirement, Mr. Dykes has provided financial advisory services for
international projects. Prior to his retirement, he spent 11 years as Managing
Director of Citicorp International Limited in Hong Kong where he was responsible
for providing financial advisory services and structuring major term loans to
governments, corporations and projects in the Pacific basin. During that time he
was responsible for Citibank's involvement in a number of major PRC-related
financings, including the 700 MW Shajiao B project constructed by Hopewell
Holdings Limited in Guangdong Province.
Xiliang Feng has been a Class A Director of the Company since March 1995.
Since 1991, Mr. Feng has been Editor-in-Chief Emeritus and Special Advisor to
the China Daily newspaper and Chairman of the China Daily Distribution
Corporation in New York. Mr. Feng has also been Senior Consultant to "WINDOW"
newsmagazine of Hong Kong since 1991. Born in Shanghai in 1920, Mr. Feng
received a bachelor's degree in journalism from St. John's University in
Shanghai, a master's degree in journalism from the University of Missouri and
was a Professional Journalism Fellow at Stanford University in 1983. He was
awarded The Missouri Medal of Honor for Distinguished Service in Journalism
awarded by the University of Missouri in 1984. He has been a Member of the
National Committee of the Chinese People's Political Consultative Conference
since 1987. Mr. Feng is a trustee of the International Center for Communications
at San Diego State University and a member of the Pacific Communications
Research Council.
Dr. Victor Hao Li has been a Class A Director of the Company since February
1994. Since 1991, Dr. Li has been Co-Chairman of the Asia Pacific Consulting
Group of Watanabe Ing & Kawashima in Honolulu, Hawaii and is a specialist in
Asian law. From 1981 to 1990, he served as President of the East-West Center, a
federally supported research center. He currently serves on the Board of
Directors of Hawaiian Electric Industries, Inc., a utility customer of AES
Barbers Point, Inc., a subsidiary of AES. Born in China, Dr. Li graduated from
Columbia College and Columbia Law School and holds two post-graduate degrees
from Harvard Law School.
William H. Taft IV has been a Class A Director since April 1994. Mr. Taft
joined the law firm of Fried, Frank, Harris, Shriver and Jacobson in September
1992 and is a partner in the firm's Washington, D.C. office. From 1989 until
1992 he was U.S. Permanent Representative of NATO. Prior to coming to NATO, Mr.
Taft served as Deputy Secretary of Defense from January 1984 until April 1989
and as Acting Secretary of Defense from January to March 1989. From 1981 until
1984, Mr. Taft served as Department of Defense General Counsel. Prior to his
initial appointment to the Department of Defense, Mr. Taft was engaged in the
practice of law in Washington, D.C. from 1977 to 1981. Before entering private
practice, he served in various positions at the Federal Trade Commission, the
Office of Management and Budget, and the Department of Health, Education and
Welfare ("HEW"), highlighted by his appointment by President Ford in 1976 to
serve as General Counsel of HEW.
The occupations listed above were the principal occupation and employment
of each executive officer during the period indicated. None of the above listed
executive officers is related to any other such executive officer and none was
selected pursuant to any arrangement or understanding between such executive
officer and any other person. All executive officers are elected by the Board of
Directors annually.
Upon the consummation of the Amalgamation, the Board of Directors of the
Company is expected to consist of three Directors, Roger W. Sant, Dennis W.
Bakke and Robert F. Hemphill, Jr.
65
<PAGE> 67
ACTION BY THE BOARD OF DIRECTORS
Action can be taken by the affirmative vote of a majority of the directors
attending a Board meeting at which a quorum is present, except that the
affirmative vote of at least one Class A Director and one Class B Director is
also required to authorize (i) the entry of the Company into an initial
commitment to invest in an electric power generation project or, following such
initial commitment, the entry into any binding contract or agreement that could
reasonably be expected, at the time such contract or commitment is entered into,
to obligate the Company to make, or entitle the Company to receive, payments or
other consideration aggregating $10 million or more over the life of such
contract or agreement and (ii) certain matters requiring separate class votes of
the Class A Common Stock and the Class B Common Stock. The Company's Bye-laws
provide that a quorum for the transaction of business at a meeting of the Board
of Directors requires the presence of a majority of the directors then in
office, but in no event fewer than two directors. While the Board of Directors
is divided into classes, the presence of at least one member of each class is
required for the transaction of business. The Bye-laws also provide that if the
number of incumbent directors in each of the two classes is not equal, with
respect to any matter submitted for the vote of the entire Board of Directors,
the vote of each director of the more numerous class will be reduced so that the
aggregate votes of members of each class are equal. There are five Class B
Directors and four Class A Directors. The Bye-laws of the Company provide that
the Chairman, the Vice Chairman, the President or any two directors may call a
Board of Directors meeting.
DUAL STATUS OF OFFICERS
It is anticipated that Messrs. Sant and Bakke, in addition to serving as
Chairman and Vice Chairman of the Company, respectively, will continue to serve
as full-time executive officers of AES. Mr. Hanrahan will devote substantially
all of his time serving as President and Chief Executive Officer of the Company,
but also will continue as a Vice President of AES and will devote some of his
time to AES's activities in Asia. Mr. Safford will devote substantially all of
his time serving as Vice President, Chief Financial Officer and Secretary of the
Company but also will continue to work for AES, which may, from time to time,
require him to devote a portion of his time to other AES matters. Messrs. Hall
and Yeager will devote substantially all of their time serving as Executive Vice
President and Vice President of the Company, respectively, but also will
continue to work for AES, which may, from time to time, require them to devote a
portion of their time to other AES matters. Following the Amalgamation, Messrs.
Hanrahan, Safford, Hall and Yeager are expected to retain their positions with
AES. While Messrs. Hanrahan, Safford, Yeager and Hall are expected to devote
substantially all of their time to the Company's business, the Company and AES
have not established any fixed allocation of their time. Insofar as the AES Debt
Covenants limit the scope of the Company's development activities and AES's
potential investments in the PRC, it is possible that such individuals, as well
as other Company people, will devote a relatively greater portion of their time
to AES matters. The Company and AES acknowledge that services by Company people
of both the Company and AES may, from time to time, require attention by an
individual or individuals to matters for AES rather than the Company's business.
In the event that such circumstances arise, the Company intends to shift
responsibilities of other officers, or to appoint additional officers, and to
take such other action as may be necessary to avoid an adverse effect on the
Company's business. Furthermore, AES has agreed that it will adopt similar
staffing strategies to avoid, to the extent possible, conflicting demands on
such officers.
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation (including salary and other annual
compensation, such as allowances for housing and cost-of-living expenses, but
excluding options to purchase Class B Common Stock pursuant to the Stock Option
Plan referred to below) paid by the Company to all executive officers as a
group, on an annual basis for services to the Company in all capacities, was
approximately $1.6 million for the fiscal year ended November 30, 1995.
Each Class A Director receives an annual fee of $18,000. Each Class B
Director who is an officer of the Company or an officer of AES receives no
additional compensation for serving as a director. Each other Class B Director
receives a fee of $2,000 for each meeting he attends. However, fees shall not be
paid for
66
<PAGE> 68
meetings held by telephonic conference calls. Each director is reimbursed for
expenses in connection with attending meetings of the Board of Directors or such
other meetings related to the Company's business. After the Amalgamation, it is
expected that the directors will be compensated in the same manner as Class B
Directors are currently compensated.
The officers of the Company are entitled to bonuses from the Company based
on performance criteria, including the market price of the Class A Common Stock,
established by the Board of Directors of the Company. The Board of Directors of
the Company and AES, as the sole shareholder of the Company at that time,
adopted an AES China Generating Co. Ltd. Incentive Stock Option Plan (the "Stock
Option Plan") on February 1, 1994. All people employed by the Company are
eligible to receive options to purchase Class B Common Stock under the Stock
Option Plan. Options may be granted for a total of 2,000,000 shares of Class B
Common Stock under the Stock Option Plan. The Human Resources Committee has the
sole authority to determine which officers of the Company are eligible for
grants under the Stock Option Plan and the amount of such grants. Options may be
granted subject to vesting periods; vesting for officers may not be earlier than
six months and one day after the date of grant.
All officers of the Company who also serve as officers or employees of AES
will continue to participate in employee benefit plans and arrangements
sponsored by AES, including The AES Corporation Incentive Stock Option Plan, The
AES Corporation Profit Sharing and Stock Ownership Plan, The AES Corporation
Deferred Compensation Plan for Executive Officers, health and life insurance
plans and other plans which may be established in the future. The Company will
reimburse AES for the costs of health and life insurance based on the proportion
of time spent by each such person in attending to the Company's business. The
Company will not reimburse AES for the costs of providing benefits to such
persons under any other of the existing plans.
SERVICES AGREEMENT WITH AES
The officers of the Company have responsibility for the day-to-day
development and other activities of the Company in China, subject to the overall
direction of the Board of Directors of the Company. To assure itself of the
availability of the experience and technological expertise of AES employees, the
Company has entered into a Services Agreement, dated as of December 29, 1993,
with AES. See "Relationship with AES -- Services Agreement." In addition to the
services performed by AES, the Company anticipates that its employees, and
employees of its project companies, will also provide certain construction
management and operations and maintenance services. The officers of the Company
are not covered under the Company's Services Agreement with AES.
67
<PAGE> 69
RELATIONSHIP WITH AES
AES currently owns 7,500,000 shares of Class B Common Stock, representing
approximately 48% of the Company's outstanding shares. As a result of such
ownership, AES has the right to elect one-half of the Company's Board of
Directors. See "Management -- Action by the Board of Directors." In addition,
the Company and AES have entered into a number of agreements, which are
described below. These agreements were not negotiated on an arm's-length basis.
Any amendment of these agreements or waiver by the Company of its rights under
these agreements would have to be approved by a majority of the Class A
Directors. Upon the consummation of the Amalgamation, the Company will become a
wholly owned subsidiary of AES and as a consequence certain of the agreements
described below would be terminated or substantially modified.
SERVICES AGREEMENT
Pursuant to the Services Agreement, AES will provide to the Company project
development services, construction management services and operations and
maintenance services necessary for the Company to perform its obligations in
connection with the development, construction, ownership, acquisition,
maintenance and operation of electric power generation projects in the PRC.
As compensation for its services under the Services Agreement, AES will
receive a payment equal to the salaries and benefits (other than benefits under
certain plans identified under "Management -- Compensation of Directors and
Officers") of persons performing services on behalf of AES under the Services
Agreement, plus 45% thereof to cover corporate overhead and similar indirect
costs. AES also will receive 50% of any development fee, construction success
fee or operations and maintenance performance fee received by the Company in
respect of projects for which AES has performed services. Because these
arrangements were not negotiated on an arm's-length basis, it is possible that
the Company could obtain similar services on more favorable terms from third
parties.
The Services Agreement has an initial term of five years. The Services
Agreement will be automatically renewed for three additional five-year terms
unless the Company elects not to renew the Services Agreement by written notice
to AES given not less than three months prior to the end of the initial term or
either of the first two renewal terms.
STOCK PURCHASE AND SHAREHOLDER'S AGREEMENT
The Company and AES entered into a Stock Purchase and Shareholder's
Agreement, dated as of December 29, 1993 (the "Stock Purchase Agreement"),
pursuant to which the Company issued to AES 7,500,000 shares of Class B Common
Stock in consideration of: (i) the investment by AES of $50.0 million in the
Company; (ii) the assignment (subject to obtaining necessary third-party
consents) to the Company of AES's direct or indirect interests in all letters of
intent and preliminary agreements with PRC Government entities and other third
parties in respect of the development of electric power generation projects in
China; and (iii) AES's agreement not to compete, and to cause each of its
controlled subsidiaries not to compete, with the Company in China for at least
ten years. The Stock Purchase Agreement also provides that until the fifth
anniversary of the date of the Services Agreement, AES will apply the after-tax
proceeds of all performance fees received by AES with respect to the Company's
projects to the purchase of additional shares of Class B Common Stock, subject
to certain exceptions. See "-- Services Agreement." The Stock Purchase Agreement
would be terminated upon the consummation of the Amalgamation.
NON-COMPETITION AND NON-DISCLOSURE AGREEMENT
As part of the consideration for issuance to AES of 7,500,000 shares of
Class B Common Stock, AES entered into a Non-Competition and Non-Disclosure
Agreement, dated as of December 29, 1993 and amended and restated as of February
1, 1994 (the "Non-Competition Agreement"). The Non-Competition Agreement
provides, effective upon commencement of this Offering, that AES will not, and
will not permit any subsidiary to, develop, construct, own, manage, operate,
control, invest in, lend to, or acquire an interest in, or otherwise engage or
participate in any electric power generation project in China, for a period
equal to the greater of (i) ten years and (ii) three years after the earlier of
(a) termination or non-renewal of the Services
68
<PAGE> 70
Agreement for any reason and (b) the permitted sale, conveyance or transfer by
AES of all of its shares of Class B Common Stock to an unaffiliated party or
parties. The Non-Competition Agreement would be terminated upon the consummation
of the Amalgamation.
AES AFFILIATES' AGREEMENTS
Roger W. Sant, Chairman of the Board and a director of AES, and Dennis W.
Bakke, Vice Chairman and a director of AES, and each other director and
executive officer of AES (the "AES Affiliates"), have entered into agreements
with the Company (the "AES Affiliates' Agreements") pursuant to which each AES
Affiliate has agreed that until such date as all of the shares of Class B Common
Stock have been converted to shares of Class A Common Stock, such AES Affiliate
will not acquire, offer to acquire, or agree to acquire any shares of Class A
Common Stock or rights or options to acquire any shares of Class A Common Stock,
or make or in any way participate in any solicitation of proxies to vote or seek
to advise, encourage or influence any person or entity with respect to the
voting of any Class A Common Stock. This restriction does not apply to any such
action if any person (other than such AES Affiliate, AES or a subsidiary of AES)
publicly announces or proposes to the Board of Directors or management of the
Company any tender or exchange offer, merger, consolidation, solicitation of
proxies or similar transaction involving the Class A Common Stock, or any sale,
lease, exchange, mortgage, pledge, transfer or other disposition (in one
transaction or series of transactions) by the Company, any subsidiary of the
Company or any Joint Venture in which the Company or any subsidiary invests
which involves aggregate consideration equal to 50% or more of the aggregate
book value of all the assets of the Company determined on a consolidated basis.
The AES Affiliate's Agreement of Thomas I. Unterberg, a Director of AES and of
the Company, provides that the foregoing restrictions will not restrict any
market-making or investment banking activities of Unterberg Harris, of which he
is a Managing Director.
69
<PAGE> 71
THE AMALGAMATION
THE AMALGAMATION AGREEMENT
Pursuant to the Amalgamation Agreement, a wholly owned subsidiary of AES
will amalgamate with the Company, upon which the Company will become a wholly
owned subsidiary of AES. After the Amalgamation, each share of Class A Common
Stock will represent the right to receive shares of AES common stock in the
ratio of .29 of a share if the price of AES common stock is within a price range
of $45 to $50. If AES common stock trades above $50 per share, the ratio will be
adjusted to yield shares of AES common stock valued at $14.50 for each share of
Class A Common Stock. If AES common stock trades below $45 per share, the
exchange ratio will be adjusted to yield shares of AES common stock valued at
$13.05 for each share of Class A Common Stock. For purposes of determining the
exchange ratio, the price of AES common stock shall be calculated as an average
closing price over the 15 trading days ending three days prior to the special
meeting to vote on the Amalgamation. If the exchange ratio would be adjusted to
be greater than .31, AES would not be required to consummate the Amalgamation.
If the exchange ratio would be adjusted to be less than .28, the Company would
not be required to consummate the Amalgamation.
The Amalgamation is subject to various other conditions, including the
approval of the holders of the Class A Common Stock of the Company. Accordingly,
there can be no assurance that the Amalgamation will be consummated or of the
timing of the Amalgamation. The Amalgamation Agreement may be terminated by the
Company or AES if, among other reasons, the Amalgamation does not occur on or
before March 31, 1997.
Pursuant to Bermuda law, if the Amalgamation is consummated any holder of
shares of Class A Common Stock who does not vote in favor of the Amalgamation
and who is not satisfied that he has been offered fair value for his shares may
within one month of the giving of the notice of the special general meeting to
be held to vote upon approval of the Amalgamation Agreement apply to the Supreme
Court of Bermuda to appraise the fair value of his shares. The Company has
agreed in the Amalgamation Agreement that it shall not, without the prior
written consent of AES, make any payment with respect to, or settle, offer to
settle or otherwise negotiate any such appraisal demand. Under Bermuda law, the
Company is obligated to pay any amounts awarded by the Bermuda court. Since
these payments would constitute Restricted Payments for purposes of the
covenants applicable under the Notes, any payment by the Company of an award by
a Bermuda court in an aggregate amount greater than $10 million, or the amount
otherwise applicable under "Covenants -- Limitation on Restricted Payments,"
would result in a default under the Notes. If AES elects to pay any such excess
on behalf of the Company, the Company would not be in default, but there is no
assurance that AES will decide to do so.
CERTAIN EFFECTS OF THE AMALGAMATION
In connection with the Amalgamation, the Non-Competition Agreement that
currently prohibits AES from investing in PRC projects, and the Company from
investing in projects outside the PRC, will be terminated.
The Company is not currently affected by the covenants contained in various
AES debt agreements because it is not a subsidiary of AES. As a result of the
Amalgamation, the Company will become a subsidiary of AES and intends to comply
with the covenants (the "AES Debt Covenants") contained in AES's debt
instruments applicable to its subsidiaries, including the documents governing
its 10 1/4% Subordinated Notes due 2006, 9 3/4% Senior Subordinated Notes due
2000 and $425 million credit facility due 1999. If the Amalgamation occurs and
the AES Debt Covenants remain outstanding, the limitations that become
applicable to the Company will include, among others, those described below.
Whether or not the Amalgamation occurs, the Notes are solely the obligations of
the Company and do not benefit from a guarantee or other credit support of AES.
Limitation on Subsidiary Investments and Mergers. Under the AES Debt
Covenants, AES may not permit any subsidiary with a direct or indirect interest
in a power generation facility (as defined in the relevant agreements) to make
any investment in, or to consolidate or merge with, any other entity with a
direct or indirect interest in any other power generation facility or other
business.
Immediately prior to the expected consummation of the Amalgamation, the
Company intends to contribute the net proceeds of the Notes remaining after the
funding of the Debt Service Reserve Account,
70
<PAGE> 72
along with certain of its existing funds, to certain of its subsidiaries to
provide funding for the Potential Projects and other future projects, as well as
additional funding for the Current Projects. It is anticipated that these
amounts will not in the aggregate be more than approximately $95.0 million. The
Company's business requires a long period of investment in development and
construction before any revenues are generated by a new project. Accordingly,
although the AES Debt Covenants impose significant limitations on investment in
projects, it is not anticipated that the Company's ability to satisfy its
obligations under the Notes will be adversely affected by the application of the
AES Debt Covenants following the Amalgamation. Under the AES Debt Covenants, as
a general matter, after exhaustion of these amounts, no additional Company funds
would be available to fund investment in additional power projects or to fund
the capital requirements of projects in which an investment has been made,
including working capital requirements and construction cost overruns. As a
consequence, opportunities for investment along with the associated risks, that
would otherwise be available to the Company may instead be taken by other
investors, including AES. Additional capital requirements for Company-invested
projects would have to be funded by other parties, including AES, which would
result in a dilution of the Company's interest in the project. In addition, due
to the application of the AES Debt Covenants, cash flow generated from projects
would not be permitted to be invested in any other project. As a result, to the
extent these funds are not required to pay expenses incurred by the Company,
they may accumulate over time.
In addition, under the AES Debt Covenants, after the Amalgamation,
investments could not be made in a project directly by the Company (as opposed
to through one of its subsidiaries). Accordingly, prior to the Amalgamation, the
Company intends to transfer its interests in Yangcheng Sun City, Jinhua Golden
China and Nanpu Southern Delta to wholly owned subsidiaries of the Company. In
the case of each of these projects, the consent of the Company's partners in
such project and the approval of the relevant PRC Government authorities are
required to effect the transfers of the Company's interest. There can be no
assurance that such consents and approvals will be obtained in order to permit
investments to be made in these projects following the Amalgamation.
Limitation on Indebtedness. Under the AES Debt Covenants, the Company and
its subsidiaries would be effectively prohibited from incurring additional
indebtedness (as defined in the relevant instruments), except that a subsidiary
would under some circumstances be permitted to incur indebtedness for the
purpose of financing a power project as long as such indebtedness did not have
recourse to AES, the Company or another subsidiary.
Asset Sales. Both the AES Debt Covenants and the covenant described under
"Description of the Notes -- Covenants -- Limitation on Sales of Assets and
Refinancings" applicable to the Company require repayment or purchase of
indebtedness under specified circumstances involving asset dispositions. Insofar
as separate repayments are required at the AES and Company levels with respect
to a single asset sale, this covenant may tend to cause the Company not to make
an asset sale under circumstances where it otherwise would.
Limitation on Investment Following Project Default. Under the AES Debt
Covenants, an AES subsidiary is not permitted to make an investment in a project
company following the occurrence of a condition permitting the acceleration of
indebtedness relating to the project or any failure to pay such indebtedness at
its final maturity.
DEVELOPMENT OF THE POTENTIAL PROJECTS
Following the Amalgamation, the Company expects to bear the costs of
project development to the extent that the Company plans to invest in a project.
Insofar as the AES Debt Covenants limit the Company's future development
activities, there may be a cost saving.
CERTAIN LITIGATION INVOLVING AES
In November 1996, a complaint (Civil Action No. 15376) (the "Complaint")
was filed in the Court of Chancery of the State of Delaware by Victor Para
against AES. The Company is not a defendant in the lawsuit. The lawsuit is a
purported class action on behalf of the individual named plaintiff and all
similarly
71
<PAGE> 73
situated public stockholders of the Company. The Complaint alleges, among other
things, that AES "has breached and is breaching its fiduciary duty to treat the
class with entire fairness." The Complaint seeks, among other things,
preliminary and permanent injunctive relief to enjoin "AES from acquiring the
outstanding shares of [the Company]," compensatory damages in an unspecified
amount, and an award of attorneys' fees and costs incurred. AES has informed the
Company that it believes that it has meritorious defenses to the lawsuit and
intends to defend against it vigorously.
72
<PAGE> 74
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture (the "Indenture") to be dated
as of December 19, 1996, between the Company and Bankers Trust Company, as
trustee (the "Trustee"). A copy of the proposed form of the Indenture has been
filed as an exhibit to the Registration Statement, of which this Prospectus is a
part. See "Available Information."
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended (the "TIA"). Capitalized terms used in this Section of
the Prospectus are defined below. Whenever particular defined terms of the
Indenture or the Security Agreement not otherwise defined herein are referred
to, such defined terms are incorporated herein by reference.
The Notes will be issued in the form of a single fully registered global
note (the "Global Note") and will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of a
nominee of the Depositary. Except as set forth in "-- Form, Denomination and
Registration" below, owners of beneficial interests in the Global Note will not
be entitled to have Notes registered in their names, will not receive or be
entitled to receive physical delivery of Notes in definitive form and will not
be considered the owners or Holders thereof under the Indenture. See "-- Form,
Denomination and Registration." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be the senior obligations of the Company, issued in an
aggregate principal amount of $180 million and will mature on December 15, 2006.
At maturity, the Company will pay the aggregate principal amount of the Notes
then outstanding. The Notes will bear interest at the rate per annum shown on
the front cover of this Prospectus from December 19, 1996 or from the most
recent interest payment date to which interest has been paid or provided for,
payable semiannually (to Holders of record at the close of business on the June
1 or December 1 immediately preceding the interest payment date) on June 15 and
December 15 of each year, commencing June 15, 1997.
RANKING
The Indebtedness evidenced by the Notes will rank at least pari passu in
right of payment with all existing and future senior unsecured Indebtedness of
the Company. The Company will grant a security interest to the Trustee for the
benefit of the Holders of the Notes in the Debt Service Reserve Account and all
amounts deposited therein as required under the Indenture. The Holders of the
Notes will have a claim on the amounts on deposit in the Debt Service Reserve
Account that is prior to the claims of other creditors of the Company.
The Company conducts substantially all of its operations through Project
Companies (as defined below). Creditors of such entities, including trade
creditors, would have a claim on the Project Companies' assets that would be
prior to the claims of the Holders of the Notes. As of August 31, 1996, the debt
(excluding trade debt) of the Project Companies included on the consolidated
balance sheet of the Company was $35.8 million. See "Risk Factors -- Risks
Associated with the Notes -- Limited Security; Holding Company Structure."
73
<PAGE> 75
REDEMPTION
OPTIONAL REDEMPTION
Except as set forth in the following paragraphs, the Company may not redeem
the Notes prior to December 15, 2001. On and after such date, the Company may
redeem the Notes at any time in whole, or from time to time in part, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date, if redeemed during the 12-month period
beginning December 15:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------- ----------
<S> <C>
2001.............................................. 105.063%
2002.............................................. 102.531%
2003 and thereafter............................... 100.000%
</TABLE>
OPTIONAL REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The Notes may be redeemed, in whole but not in part, at the option of the
Company, at any time, at a redemption price equal to 100% of the principal
amount at maturity thereof, together with accrued and unpaid interest to the
redemption date, if as a result of any change in, or amendment to, the laws or
treaties (including any regulations or rulings promulgated thereunder) of
Bermuda or such other jurisdiction in which the Company is then organized, as
the case may be (or any political subdivision or taxing authority thereof or
therein), affecting taxation, or any change in official position regarding the
application, interpretation or administration of such laws, treaties,
regulations or rulings (including a holding, judgment or order by a court of
competent jurisdiction), which change, amendment, application, interpretation or
administration is announced or becomes effective on or after the Issue Date with
respect to any payment due or to become due under the Notes or the Indenture,
the Company is, or on the next interest payment date would be, required to pay
Additional Amounts (as defined below) on or in respect thereof and such
obligation to pay Additional Amounts cannot be avoided by the taking of
reasonable measures by the Company.
Any such redemption is subject to the provision of prior written notice to
the Noteholders in accordance with the Indenture. Prior to the giving of any
such redemption notice, the Company will deliver to the Trustee an Opinion of
Counsel or written advice of a qualified tax expert, such counsel or tax expert
being reasonably acceptable to the Trustee, that the Company has or will become
obligated to pay Additional Amounts as a result of such change, amendment,
application, interpretation or administration.
SELECTION FOR REDEMPTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method that complies with applicable legal and securities exchange
requirements, if any, and that the Trustee in its sole discretion shall deem to
be fair and appropriate, provided, however, that no Note of $1,000 in original
principal amount or less shall be redeemed in part. If any Note is to be
redeemed in part only, the notice of redemption relating to such Note shall
state the portion of the principal amount thereof to be redeemed. A Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
ADDITIONAL AMOUNTS
All payments of principal, premium and interest in respect of each Note
shall be made free and clear of, and without withholding or deduction for, any
taxes, duties, assessments or governmental charges of whatever nature imposed,
levied, collected, withheld or assessed by or within Bermuda or any other
jurisdiction in which the Company is organized or any authority therein or
thereof having power to tax or from which any payment is made with respect to
the Notes, unless such withholding or deduction is required by law or by
regulation or governmental policy having the force of law. In the event that any
such withholding or deduction in respect of principal, premium or interest is so
required, the Company shall pay such additional amounts ("Additional Amounts")
as will result in receipt by each Holder of any Note of such amounts as would
have been received
74
<PAGE> 76
by such Holder or the beneficial owner with respect to such Note, had no such
withholding or deduction been required, except that no Additional Amounts shall
be payable:
(a) for or on account of:
(1) any tax, duty assessment or other governmental charge that
would not have been imposed but for
(A) the existence of any present or former connection between
such Holder or the beneficial owner of such Note and Bermuda or such
other jurisdiction in which the Company is organized, as the case may
be, other than merely holding such Note, including, without
limitation, such Holder or the beneficial owner of such Note being or
having been a national, domiciliary or resident of or treated as a
resident thereof or being or having been present or engaged in a
trade or business therein or having or having had a permanent
establishment therein;
(B) the presentation of such Note (where presentation is
required) more than thirty (30) days after the date on which the
payment in respect of such Note became due and payable or provided
for, whichever is later, except to the extent that such Holder would
have been entitled to such Additional Amounts if it had presented
such Note for payment on any day within such period of thirty (30)
days; or
(C) the presentation of such Note for payment in Bermuda or any
political subdivision thereof or therein, unless such Note could not
have been presented for payment elsewhere;
(2) any estate, inheritance, gift, sale, transfer, personal
property or similar tax, assessment or other governmental charge;
(3) any tax, assessment or other governmental charge that is
imposed or withheld by reason of the failure of such Holder or the
beneficial owner of such Note to comply with a request by the Issuer
addressed to such Holder (A) to provide information concerning the
nationality, residence or identity of such Holder or such beneficial
owner or (B) to make any declaration or other similar claim or satisfy
any information or reporting requirement, which, in the case of (A) or
(B), is required or imposed by a statute, treaty, regulation or
administrative practice of the taxing jurisdiction as a precondition to
exemption from all or part of such tax, assessment or other governmental
charge;
(4) any tax, duty, assessment, or governmental charge which is
payable other than by withholding or deduction from payments with
respect to the Notes; or
(5) any combination of items (1), (2), (3) and (4); or
(b) with respect to any payment of the principal of or any premium or
interest on such Note to such Holder (including a fiduciary or partnership)
to the extent that the beneficial owner of such Note would not have been
entitled to such Additional Amounts had it directly held the Note.
Whenever there is mentioned, in any context, the payment of principal,
premium or interest in respect of any Note or the net proceeds received on the
sale or exchange of any Note, such mention shall be deemed to include the
payment of Additional Amounts provided for in the Indenture to the extent that,
in such context, Additional Amounts are, were or would be payable in respect
thereof pursuant to the Indenture.
SECURITY AGREEMENT
As security for the payment and performance by the Company of its
obligations under the Indenture and the Notes, the Company has agreed to assign
all amounts on deposit in the Collateral Accounts (as defined herein), at any
time, as collateral to Bankers Trust Company, as collateral agent (the
"Collateral Agent"), for the benefit of the Trustee on behalf of the Noteholders
upon the terms and conditions set forth in a Security Agreement to be dated as
of the Issue Date (the "Security Agreement") among the Company, the Trustee
75
<PAGE> 77
and the Collateral Agent. This summary is qualified in its entirety by reference
to the Security Agreement, including the definition therein of certain terms.
Under the terms of the Security Agreement, the Company will assign to the
Collateral Agent for the benefit of the Trustee on behalf of the Noteholders,
and grant a first priority security interest in all of the Company's rights,
title and interest in and to the following assets of the Company (all being
collectively referred to as the "Collateral"): (i) all amounts on deposit in the
Debt Service Reserve Account and the Special Proceeds Account (the "Collateral
Accounts") at any time; (ii) all of the Issuer's right, title and interest in
and to Dollar Permitted Investments, or other investments, made with amounts on
deposit in the Collateral Accounts; and (iii) all distributions, revenues,
products, substitutions, benefits, profits and proceeds, in whatever form, of
any of the foregoing.
So long as no Event of Default shall have occurred and be continuing, all
funds in the Collateral Accounts shall be invested and reinvested by the
Collateral Agent, at the instructions of the Company, in Dollar Permitted
Investments. If any Event of Default shall have occurred and be continuing, the
funds in the Collateral Accounts shall be invested and reinvested in Dollar
Permitted Investments by the Collateral Agent in accordance with the
instructions of the Trustee.
If an Event of Default shall have occurred and be continuing and the
Trustee shall have instructed the Collateral Agent to enforce the Liens of the
Security Agreement, funds in the Collateral Accounts shall be applied in the
following order of priority: First, to the Collateral Agent for amounts due to
the Collateral Agent under the Security Agreement; second, to the Trustee for
amounts due to the Trustee under the Indenture; third, to Noteholders for
amounts due and unpaid on the Notes for principal and interest, ratably, without
preference or priority of any kind, according to the amounts due and payable on
the Notes for principal and interest, respectively; and fourth, to the Company.
DEBT SERVICE RESERVE ACCOUNT
The Trustee will establish a Debt Service Reserve Account on or before the
Issue Date. On the Issue Date, the Company will deposit with the Trustee for
deposit in the Debt Service Reserve Account an amount equal to the sum of (i)
the Interim Reserve and (ii) the Debt Payment Reserve. From the Issue Date until
June 15, 1998, the Company shall maintain on deposit with the Collateral Agent
an amount in the Debt Service Reserve Account in US dollars at least equal to
the sum of (i) the Interim Reserve, less the aggregate amount of interest paid
to Holders on all prior interest payment dates, and (ii) the Debt Payment
Reserve. After June 15, 1998, and on or prior to the Stated Maturity of the
Notes, the Company shall be required to maintain on deposit in the Debt Service
Reserve Account an amount in US dollars at least equal to the Debt Payment
Reserve except that if funds in the Debt Service Reserve Account have been
withdrawn by the Collateral Agent and paid to the Trustee to pay interest due on
any interest payment date. The Company shall have a period of 90 days after any
interest payment date to make additional deposits into the Debt Payment Reserve
Account with the Collateral Agent such that the balance on deposit therein is at
least equal to the Deposit Payment Reserve. Amounts in the Debt Service Reserve
Account may be comprised of cash or Dollar Permitted Investments. If at any time
the amount on deposit in the Debt Service Reserve Account exceeds the amount
required to be held under this paragraph, the Company shall be entitled to
withdraw such excess amount.
"Debt Payment Reserve" means, on any date, an amount equal to the aggregate
amount of interest due and payable on the Notes on the next succeeding interest
payment date.
"Interim Reserve" means, an amount equal to the aggregate amount of
interest payable on the Notes on or prior to June 15, 1998.
On each interest payment date occurring on or prior to June 15, 1998, a
portion of the funds in the Debt Service Reserve Account attributable to the
Interim Reserve shall be withdrawn by the Trustee and applied to the payment of
interest on the Notes. After June 15, 1998, the funds in the Debt Service
Reserve Account will be withdrawn by the Trustee and applied to the payment of
interest due and payable on the Notes on any
76
<PAGE> 78
interest payment date to the extent that the Company has not made available the
full amount of such interest by the close of business on the business day
immediately preceding such interest payment date.
SPECIAL PROCEEDS ACCOUNT
Following the occurrence of any Special Proceeds Event as described under
"-- Covenants -- Limitation on Sales of Assets and Refinancings," the Collateral
Agent will establish a Special Proceeds Account into which the Issuer is
required to deposit all Special Proceeds. Amounts on deposit in the Special
Proceeds Account will be withdrawn by the Collateral Agent and delivered to the
Trustee to pay the aggregate purchase price of Notes properly tendered by
Holders pursuant to a Special Proceeds Offer. Any amounts remaining after a
Special Proceeds Offer shall be retained on deposit in the Special Proceeds
Account. Amounts in the Special Proceeds Account may be comprised of cash or
Dollar Permitted Investments.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for a full definition of all terms
as well as any other capitalized term used herein and not otherwise defined.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
at which such Person became a Subsidiary and not incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary. Acquired Indebtedness
shall be deemed to be Incurred on the date the acquired Person becomes a Project
Company.
"Additional Assets" means (i) any property or assets related to the Line of
Business which will be owned and used by the Company or a Project Company, (ii)
the Capital Stock of a Person that becomes a Project Company as a result of the
acquisition of such Capital Stock by the Company or another Project Company or
(iii) Capital Stock in any Person that at the time of acquisition of such
Capital Stock is a Project Company.
"Adjusted Cash Flow" means, for any period, the excess of (A) the aggregate
amount (without duplication) of (i) dividends, distributions, payments of
interest and scheduled repayments of loans or advances, in each case, that are
received by the Company and its Wholly Owned Subsidiaries from the Project
Companies during such period, (ii) 50% of the dividends, distributions, payments
of interest and scheduled repayments of loans or advances, in each case, that
are received by the Company and its Wholly Owned Subsidiaries from any Person
other than a Project Company during such period, (iii) all payments received by
the Company and its Wholly Owned Subsidiaries during such period from any Person
with respect to agreements to provide development, construction or operations
management, and the provision of consulting or advisory services; (iv) 50% of
the combined interest income of the Company and its Wholly Owned Subsidiaries
for such period from cash, cash equivalents and investments in marketable
securities; (v) the interest income (net of interest expense) of the Company and
its Wholly Owned Subsidiaries from the transactions referred to in clause (viii)
of the definition of Permitted Investments over (B) the aggregate amount
(without duplication) of (i) the combined selling, general and administrative
expenses of the Company and its Wholly Owned Subsidiaries for such period
determined in accordance with GAAP and (ii) the Company Designated Costs for
such period and (iii) the total income taxes paid by the Company and its Wholly
Owned Subsidiaries during such period.
"Adjusted Interest Expense" means, for any period, the sum of (without
duplication) (a) the combined interest expense of the Company and its Wholly
Owned Subsidiaries for such period as determined in accordance with GAAP,
including, without limitation or duplication, (i) amortization of debt issuance
costs or of original issue discount on any Indebtedness and the interest portion
of any deferred payment obligation, calculated in accordance with the effective
interest method of accounting, (ii) accrued interest, (iii) noncash interest
payments, (iv) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (v) interest
actually paid by the Company or any Wholly Owned Subsidiary under any guarantee
of Indebtedness or other obligation of any other Person and (vi) net costs
associated with Interest Rate Agreements (including amortization of discounts)
and Currency Agreements of the Company or any Wholly Owned Subsidiary relating
to Indebtedness, plus (b) all but the principal component of rentals in respect
of Capitalized Lease Obligations paid, accrued, or scheduled to be paid or
77
<PAGE> 79
accrued by the Company or any Wholly Owned Subsidiary, plus (c) capitalized
interest, plus (d) dividends paid in respect of Preferred Stock of the Company
or any Wholly Owned Subsidiary held by Persons other than the Company or any
Wholly Owned Subsidiary, plus (e) cash contributions to any employee stock
ownership plan to the extent such contributions are used by such employee stock
ownership plan to pay interest or fees to any person (other than the Company) in
connection with loans Incurred by such employee stock ownership plan to purchase
Capital Stock of the Company, plus (f) the interest expense of any Project
Company to the extent attributable to any Indebtedness of such Project Company
to the extent guaranteed by the Company or any Wholly Owned Subsidiary, minus
(g) interest expense of the Company or any Wholly Owned Subsidiary attributable
to Indebtedness referred to in clause (viii) of the definition of "Permitted
Investments."
"AES" means The AES Corporation, a Delaware corporation, its successors,
and any subsidiary thereof.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Covenants -- Limitation on
Transactions with Affiliates" only, "Affiliate" shall also mean any beneficial
owner of 5% or more of the total Voting Shares (on a Fully Diluted Basis) of the
Company or of rights or warrants to purchase such stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale leaseback transactions, but excluding those
permitted under "-- Covenants -- Merger and Consolidation" (except as provided
for under "-- Covenants -- Limitation on Sales of Assets and Refinancings") and
any Restricted Payment that is made in conformity with
"-- Covenants -- Limitation on Restricted Payments") in one or a series of
transactions by the Company or any Project Company to any Person other than the
Company or any Wholly Owned Subsidiary, of (i) all or any of the Capital Stock
of any Project Company, (ii) all or substantially all of the assets of any
operating unit, Facility or division of the Company or any Project Company or
(iii) any other property or assets or rights to acquire property or assets of
the Company or any Project Company outside of the ordinary course of business of
the Company or such Project Company.
"Average Life" means, as the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of (A) the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
scheduled redemption or similar payment with respect to such Indebtedness or
Preferred Stock multiplied by (B) the amount of such payment by (ii) the sum of
all such payments.
"Attributable Costs" means, for any period, the Company Designated Costs
for such period to the extent that such amount does not exceed an amount
calculated for such period at a rate equal to $10 million per annum (which shall
increase by 5% for each fiscal year beginning on or after December 1, 1997).
"Authorized Officers" means, with respect to the Company, the President,
the Chief Financial Officer and any vice president.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee thereof.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York City are authorized by law to close or are
otherwise not open for business.
"Capital Stock" means any and all shares, interests (including joint
venture interests), participations or other equivalents (however designated) of
capital stock of a corporation or any and all equivalent ownership interests in
a Person (other than a corporation).
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; the Stated
Maturity thereof
78
<PAGE> 80
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty; and "Capitalized Lease Obligations" means
the rental obligations, as aforesaid, under such lease.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than AES or an underwriter engaged in a firm commitment
underwriting on behalf of the Company, is or becomes the beneficial owner (as
such term is used in Rules 13d-3 and 13d-5 under the Exchange Act, except that
for purposes of this clause (i) a person shall be deemed to have beneficial
ownership of all shares that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total outstanding shares of Class A Common
Stock; (ii) AES is no longer entitled to elect at least one half of the members
of the Board of Directors; (iii) AES ceases to be the beneficial owner (as such
term is used in Rules 13d-3 and 13d-5 under the Exchange Act) of at least the
lesser of (A) 6,000,000 Voting Shares of the Company (as adjusted from time to
time for any stock dividends, splits or recombinations after the Issue Date) and
(B) 48% of the total outstanding shares of Class A Common Stock and Class B
Common Stock, taken together; or (iv) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination for election by the stockholders was approved by a
vote of 66-2/3% of the directors of the Company then in office and entitled to
vote in such election who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office.
"Change of Control Triggering Event" means either (x) the occurrence of
both an event specified in clause (i) or (iv) of the definition of Change of
Control and a Rating Decline or (y) the occurrence of an event specified in
clause (ii) or (iii) of the definition of Change of Control.
"Class A Common Stock" means the Class A Common Stock, par value $0.01 per
share, of the Company.
"Class B Common Stock" means the Class B Common Stock, par value $0.01 per
share, of the Company.
"Company" means AES China Generating Co. Ltd., until a successor replaces
it pursuant to the terms and conditions of the Indenture and thereafter means
the successor.
"Company Designated Costs" means the total costs of development,
construction or operations management and the provision of consulting or
advisory services incurred by the Company and its Wholly Owned Subsidiaries (net
of any amounts received in reimbursement of such costs to the extent not in
excess of such costs).
"Consolidated Current Liabilities," as of the dated of determination, means
the aggregate amount of liabilities of the Company and its Consolidated
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated), after (i) eliminating all inter-company
items between the Company and any Consolidated Subsidiary and (ii) deducting all
current maturities of long-term Indebtedness, all as determined in accordance
with GAAP.
"Consolidated Net Income (Loss)" means for any period, as applied to the
Company, the consolidated net income (loss) of the Company and its Consolidated
Restricted Subsidiaries for such period, determined in accordance with GAAP,
adjusted by excluding (without duplication), to the extent included in such net
income (loss), the following: (i) all extraordinary gains or losses; (ii) any
net income of any Person (other than the Company and its Consolidated Restricted
Subsidiaries), except that (A) the Company's equity in the net income of any
such Person for such period shall be included in Consolidated Net Income (Loss)
up to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or other
distribution and (B) the equity of the Company or a Restricted Subsidiary in a
net loss of any such Person for such period shall be included in determining
Consolidated Net Income (Loss); (iii) the net income of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such income is not at the time
79
<PAGE> 81
thereof permitted, directly or indirectly, by operation of the terms of its
charter or bye-laws or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Restricted
Subsidiary or its stockholders; (iv) any net income (or loss) of any Person
combined with the Company or any of its Restricted Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of such
combination; and (v) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of the Company or its Restricted
Subsidiaries (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition by the Company
or any Restricted Subsidiary of any Capital Stock of any Person, provided that
losses shall be included on an after-tax basis; and further adjusted by
subtracting from such net income the tax liability of any parent of the Company
to the extent of payments made to such parent by the Company pursuant to any tax
sharing agreement or other arrangement for such period.
"Consolidated Net Tangible Assets" means, as of any date of determination,
as applied to the Company, the total amount of assets (less accumulated
depreciation or amortization, allowances for doubtful receivables, other
applicable reserves and other properly deductible items) as set forth on the
most recently available quarterly or annual consolidated balance sheet of the
Company and its Consolidated Restricted Subsidiaries, determined in accordance
with GAAP, and after giving effect to purchase accounting and after deducting
therefrom, to the extent otherwise included, the amounts of: (i) Consolidated
Current Liabilities; (ii) minority interests in Consolidated Subsidiaries held
by Persons other than the Company or a Restricted Subsidiary; (iii) excess of
cost over fair value of assets of businesses acquired, as determined in good
faith by the Board of Directors as evidenced by a Board resolution; (iv) any
revaluation or other write-up in value of assets subsequent to December 31,
1995, as a result of a change in the method of valuation in accordance with
GAAP; (v) unamortized debt discount and expenses and other unamortized deferred
charges, goodwill, patents, trademarks, service marks, trade names, copyrights,
licenses organization or developmental expenses and other intangible items; (vi)
treasury stock; (vii) any cash set apart and held in a sinking or other
analogous fund established for the purpose of redemption or other retirement of
Capital Stock to the extent such obligation is not reflected in Consolidated
Current Liabilities and (viii) any Indebtedness of the Company or a Restricted
Subsidiary referred to in clause (viii) of the definition of "Permitted
Investments."
"Consolidated Net Worth" means, at any date of determination, as applied to
the Company, stockholders' equity as set forth on the most recently available
quarterly or annual consolidated balance sheet of the Company and its
Consolidated Restricted Subsidiaries, less any amounts attributable to
Redeemable Stock or Exchangeable Stock, the cost of treasury stock and the
principal amount of any promissory notes receivable from the sale of Capital
Stock of the Company or any Subsidiary.
"Consolidation" means, with respect to any Person, the consolidation of
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and such subsidiaries are consolidated in accordance
with GAAP. The term "Consolidated" shall have a correlative meaning.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Project Company against fluctuations in currency values to or
under which the Company or any Project Company is a party on the Issue Date or
becomes a party thereafter.
"Default" means any event which is, or, after notice or passage of time or
both, would be, an Event of Default.
"Designated Financing" means any Incurrence of Indebtedness by an Existing
Subsidiary or Existing Joint Venture that refinances Shareholder Loans in whole
or in part.
"Dollar Permitted Investments" means investments which are denominated and
payable in US dollars in any one or more of the following: (i)(a) direct,
interest-bearing obligations of the United States in certificated form; (b)
direct, interest-bearing obligations of and guaranteed as to timely payment of
principal and interest by, the United States, but only if such obligations are
issued in the form of an entry made on the records of the Federal Reserve Bank
of New York; and (c) direct interest bearing obligations of, and interest
bearing obligations guaranteed as to timely payment of principal and interest
by, the Federal National Mortgage Association, the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation
80
<PAGE> 82
or the Student Loan Marketing Association, but only if (A) at the time of
investment, such obligations are assigned the highest credit rating by the
Rating Agency and (B) such obligations have been deposited with The Depository
Trust Company and its successors, or are issued in the form of an entry made on
the records of the Federal Reserve Bank of New York; (ii) certificates of
deposit with an original term to maturity (x) of not more than 180 days or (y)
with respect to the amounts representing the interest payment amounts due on
June 15, 1997 or December 15, 1997, not exceeding the second Business Day prior
to such date, issued by any U.S. depositary institution or trust company whose
principal offices are located in the Borough of Manhattan, City and State of New
York, New York (including the Trustee acting in its individual capacity);
provided that the short-term unsecured debt obligations of such depositary
institution or trust company at the time of such investment are assigned a
rating of "A-1" by S&P and "P1" by Moody's or the long-term unsecured debt
obligations of such depositary institution or trust company at the time of such
investment, are assigned a rating of "A-" or higher by S&P and "A3" or higher by
Moody's; (iii) repurchase obligations pursuant to a written agreement (a) with
respect to any obligation described in clause (i) above, where (in each case)
the Trustee has taken delivery of such obligation and (b) by a U.S. depositary
institution or trust company whose principal offices are located in the Borough
of Manhattan, City and State of New York, New York the short-term unsecured debt
obligations of which are rated "A-1" by S&P and "P-1" by Moody's at the time of
such investment or the long-term unsecured debt obligations of which are rated
"A-" or higher by S&P and "A3" or higher by Moody's (including, if applicable,
the Trustee acting in its individual capacity) at the time of such investment;
or (iv) commercial paper that (a) is assigned a rating of "A-1" by S&P and "P-1"
by Moody's at the time of such investment and (b) had an original term to
maturity of not more than 180 days.
"Eligible Joint Venture" means a Joint Venture (other than a Subsidiary)
(i) that is formed with respect to the construction, development, acquisition,
servicing, ownership, improvement, operation or management of a single Facility;
(ii) in which the Company, directly or indirectly, owns at least 25% of the
Capital Stock therein and (iii) in respect of which the Company, directly or
indirectly, either (a) controls, by voting power, membership on the board of
directors or management committee or other similar governing body, or through
the provisions of any applicable partnership, joint venture, shareholder or
other similar agreement or under an operating, maintenance or management
agreement or otherwise, the management and operation of the Joint Venture and
any Facility of such Joint Venture or (b) otherwise has the right to control or
veto material acts and decisions with respect to the management or operation of
the Joint Venture that, taken as a whole, are substantially similar to the
rights of the Company with respect to the Existing Joint Ventures as of the
Issue Date.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchangeable Stock" means any Capital Stock which by its terms is
exchangeable or convertible at the option of any Person other than the Company
into another security (other than Capital Stock of the Company which is neither
Exchangeable Stock nor Redeemable Stock).
"Existing Joint Venture" means any of Chengdu-AES-Kaihua Gas Turbine Power
Co. Ltd., Wuhu Shaoda Electric Power Company Ltd. and Yangchun Fuyang Diesel
Engine Power Co. Ltd., and their respective successors, in each case, so long as
such Person is a Project Company.
"Existing Project Company Net Cash Flow" means, for any period, (A) the
aggregate amount (without duplication) of dividends, distributions, payments of
interest and scheduled repayments of loans or advances (excluding any of such
amounts that constitute Special Proceeds), in each case, that are received by
the Company and its Wholly Owned Subsidiaries from Existing Joint Ventures and
Existing Subsidiaries during such period less (B) the sum of (i) Attributable
Costs for such period, (ii) the aggregate interest expense accrued with respect
to the Notes after June 15, 1998 and (iii) the aggregate principal amount of
Notes purchased from time to time by the Company (other than pursuant to an
Offer or a Change of Control Offer).
"Existing Subsidiary" means any of Sichuan Fuling Aixi Power Company Ltd.,
Hunan Xiangci-AES Hydro Power Company Ltd., Anhui Liyuan AES Power Company
Limited, the Hefei Zhongli Energy Company Ltd., Jiaozuo Wan Fang Power Company
Ltd., Wuxi-AES-CAREC Gas Turbine Power Company
81
<PAGE> 83
Ltd. and Wuxi-AES-Zhonghang Power Company Ltd., and their respective successors,
in each case, so long as such Person is a Project Company.
"Facility" means a power or steam generation facility or energy producing
facility and related assets (including without limitation electric power
transmission facilities or lines).
"Fixed Charge Coverage Ratio" as of any date of determination means the
ratio of (i) Adjusted Cash Flow for the period of the most recent four
consecutive fiscal quarters for which financial information is available to (ii)
the Adjusted Interest Expense for such period plus the Adjusted Interest Expense
for such period with respect to any Indebtedness proposed to be Incurred by the
Company and its Wholly Owned Subsidiaries; provided, however, that, in making
such computation, the Adjusted Interest Expense attributable to interest on any
Indebtedness bearing a floating interest rate shall be computed on a pro forma
basis as if the rate in effect on the date of computation had been the
applicable rate for the entire period; and provided further, that in the event
(A) of the designation of any Restricted Subsidiary or Restricted Joint Venture
to be an Unrestricted Company during or after such period, or (B) the Company or
any Wholly Owned Subsidiary has made any Asset Sales, Designated Financings or
acquisitions of assets not in the ordinary course of business (including
acquisitions of other Persons by merger, consolidation or purchase of Capital
Stock), or has Incurred or repaid any Indebtedness (or any guarantee thereof has
terminated), during or after such period, or any Project Company has been
designated to be an Unrestricted Company (or redesignated as a Project Company)
during or after such period, such computation shall be made on a pro forma basis
as if such event had taken place on the first day of such period; and provided
further that the Adjusted Cash Flow with respect to any acquisitions shall not
exceed the net income attributable to the acquired assets for such period.
"Fully Diluted Basis" means after giving effect to the exercise of any
outstanding options, warrants or rights to purchase Voting Shares and the
conversion or exchange of any securities convertible into or exchangeable for
Voting Shares.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect and, to the extent optional, adopted by the Company on
the Issue Date, consistently applied, including, without limitation, those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board.
"guarantee" means, as applied to any obligation, contingent or otherwise,
of any Person, (i) a guarantee, direct or indirect, in any manner, of any part
or all of such obligation (other than by endorsement of negotiable instruments
for collection in the ordinary course of business) and (ii) an agreement, direct
or indirect, contingent or otherwise, the practical effect of which is to insure
in any way the payment or performance (or payment of damages in the event of
nonperformance) of any part or all of such obligation, including the payment of
amounts drawn down under letters of credit.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means, as applied to any obligation, to create, incur, issue,
assume, guarantee or in any other manner become liable with respect to,
contingently or otherwise, such obligation, and "Incurred," "Incurrence" and
"Incurring" shall each have a correlative meaning; provided, however, that any
Indebtedness or Capital Stock of a Person existing at the time such Person
becomes (after the Issue Date) a Project Company (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Project Company at the time it becomes a Project Company; and provided, further,
that any amendment, modification or waiver of any provision of any document
pursuant to which Indebtedness was previously Incurred shall not be deemed to be
an Incurrence of Indebtedness as long as (i) such amendment, modification or
waiver does not (A) increase the principal or premium thereof or interest rate
thereon, (B) change to an earlier date the Stated Maturity thereof or the date
of any scheduled or required principal payment thereon or the time or
circumstances under which such Indebtedness may or shall be redeemed, (C) if
such Indebtedness is contractually subordinated in right of payment to the
Notes, modify or affect, in any manner adverse to the Holders, such
subordination, (D) if the Company is the obligor thereon, provide that a Project
Company shall be an obligor, (E) if such Indebtedness is Non-Recourse Debt,
cause such Indebtedness to no longer constitute Non-Recourse Debt or (F)
violate, or cause the Indebtedness to violate, the provisions described under
"-- Covenants -- Limitation on Payment Restrictions Affecting Project Companies"
and "-- Limita-
82
<PAGE> 84
tion on Liens" and (ii) such Indebtedness would, after giving effect to such
amendment, modification or waiver as if it were an Incurrence, comply with
clause (i) of the first proviso to the definition of "Refinancing Indebtedness."
"Indebtedness" of any Person means, without duplication, (i) the principal
of and premium (if any such premium is then due and owing) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, (ii) all Capitalized Lease Obligations of
such Person; (iii) all obligations of such Person Incurred as the deferred
purchase price of property, all conditional sale obligations of such Person and
all obligations of such Person under any title retention agreement; (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit); (v) Redeemable
Stock of such Person and, in the case of any Subsidiary, any other Preferred
Stock not owned by the Company or a Wholly Owned Subsidiary, in either case
valued at, in the case of Redeemable Stock, the greater of its voluntary or
involuntary maximum fixed repurchase price exclusive of accrued and unpaid
dividends, or in the case of Preferred Stock that is not Redeemable Stock, its
liquidation preference exclusive of accrued and unpaid dividends; (vi) all
obligations of such Person in respect of Interest Rate Agreements and Currency
Agreements; (vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee, and (viii) all obligations of the type referred to in clauses (i)
through (vii) of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; provided,
however, that Indebtedness shall not include trade accounts payable arising in
the ordinary course of business. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable Stock
as if such Redeemable Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Redeemable Stock,
such fair market value to be determined in good faith by the Board of Directors
as evidenced by a board resolution. The amount of Indebtedness of any Person at
any date shall be, with respect to unconditional obligations, the outstanding
balance at such date of all such obligations as described above and, with
respect to any contingent obligations at such date, the maximum liability
determined by such Person's board of directors, in good faith, as, in light of
the facts and circumstances existing at the time, reasonably likely to be
Incurred upon the occurrence of the contingency giving rise to such obligation;
provided that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness as determined in accordance with GAAP.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect against fluctuations in interest rates to or under which the Company
or any Project Company is a party on the Issue Date or becomes a party
thereunder.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any other investment in any
other Person, or any purchase or acquisition by such Person of any Capital
Stock, bonds, notes, debentures or other securities or assets issued or owned by
any other Person (whether by merger, consolidation, amalgamation, sale of assets
or otherwise). For purposes of the provisions set forth under
"-- Covenants -- Limitation on Restricted
83
<PAGE> 85
Payments," (i) "Investment" shall include the portion (proportionate to the
Company's Equity Interest in such Project Company) of the fair market value of
the net assets of any Project Company at the time that such Project Company is
designated an Unrestricted Company and shall exclude the fair market value of
the net assets of any Unrestricted Company at the time that such Unrestricted
Company is designated a Project Company, as the case may be, and (ii) any
property transferred to or from an Unrestricted Company shall be valued at its
fair market value at the time of such transfer, in each case as determined by
the Board of Directors in good faith as evidenced by a Board resolution.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether corporation, partnership or other legal form.
"Lien" means any mortgage, lien, pledge, charge, or other security interest
or encumbrance of any kind (including any conditional sale or other title
retention agreement and any lease in the nature thereof).
"Line of Business" means the direct or indirect construction, development,
acquisition, servicing, ownership, improvement, operation and management of
Facilities and consulting or advisory activities related thereto.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" means, (A) with respect to any Designated Financing,
the aggregate amount of cash received by the Company or a Restricted Subsidiary
in repayment of Shareholder Loans in connection therewith; (B) with respect to
any Restricted Designation Event, an amount equal to the fair market value of an
Existing Subsidiary or Existing Joint Venture that is designated an Unrestricted
Company; and (C) with respect to any Asset Sale, the cash or cash equivalent
payments received by the Company or a Project Company in connection with such
Asset Sale (including any cash received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as or when
received and also including the proceeds of other property received when
converted to cash or cash equivalents) net of the sum of, without duplication,
(i) all reasonable legal, title and recording tax expenses, reasonable
commissions, and other reasonable fees and expenses incurred directly relating
to such Asset Sale, (ii) all local, state, federal and foreign taxes required to
be paid or accrued as a liability by the Company or any Project Company as a
consequence of such Asset Sale, (iii) payments made to repay Indebtedness which
is secured by any assets subject to such Asset Sale in accordance with the terms
of any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or by applicable law, be repaid out of the
proceeds from such Asset Sale and (iv) all distributions required by any
contract entered into other than in contemplation of such Asset Sale to be paid
to any holder of an Equity Interest in such Project Company as a result of such
Asset Sale, so long as such distributions do not exceed such holder's pro rata
portion (based on such holder's proportionate Equity Interest) of the cash or
cash equivalent payments described above, net of the amounts set forth in
clauses (i)-(iii) above.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock by any Person, the cash proceeds to such Person of such issuance or sale
net of attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, discounts or commissions and brokerage, consultancy and other fees
actually incurred by such Person in connection with such issuance or sale and
net of taxes paid or payable by such Person as a result thereof.
"Non-Convertible Capital Stock" means, with respect to any Person, any
Capital Stock of such Person which is not convertible into another security
other than non-convertible common stock of such Person, provided, however, that
Non-Convertible Capital Stock shall not include any Redeemable Stock or
Exchangeable Stock.
"Non-Recourse Debt" means Indebtedness of any Project Company (or of any
other Person that directly or indirectly owns the Capital Stock of such Project
Company as its sole assets) that is Incurred to acquire, develop, improve,
construct or to provide working capital for a Facility owned by such Project
Company, provided that such Indebtedness is without recourse to any assets of
the Company or any Project Company
84
<PAGE> 86
other than the assets or Capital Stock of the Project Company Incurring such
Indebtedness (or any other Person that directly or indirectly owns such Capital
Stock as its sole assets) and the income and proceeds therefrom. Indebtedness
that does not comply with the foregoing sentence because of a guarantee provided
by the Company or another Project Company will nevertheless qualify as
Non-Recourse Debt so long as such guarantee complies with the restrictions set
forth under "-- Covenants -- Limitation on Incurrence of Indebtedness."
"Offering" means the public offering and sale of the Notes.
"Officers' Certificate" means a certificate signed by two Authorized
Officers of the Company, one of whom must be the President or Chief Financial
Officer of the Company. Each Officers' Certificate (other than certificates
provided pursuant to TIA Section 314(a)(4)) shall include the statements
provided for in TIA Section 314(e).
"Operating Lease Obligations" means any obligation of the Company and its
Restricted Subsidiaries on a Consolidated basis incurred or assumed under or in
conjunction with any lease of real or personal property which, in accordance
with GAAP, is not required to be classified and accounted for as a capital
lease.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel, if so acceptable and unless otherwise
specified, may be an employee of or counsel to the Company or the Trustee. Each
such Opinion of Counsel shall include the statements provided for in TIA Section
314(e).
"Permitted Investments" means (i) any Investment in any Restricted
Subsidiary (or any Person that would become a Restricted Subsidiary as a result
of such Investment) by the Company or any other Restricted Subsidiary or in the
Company by any Restricted Subsidiary; (ii) any Restricted Joint Venture
Investment; (iii) Investments in existence on the date of the Indenture and
Investments pursuant to letters of intent or legally binding commitments in
existence on the date of the Indenture; (iv) loans and advances made to
employees of the Company in the ordinary course of business consistent with past
practices; (v) loans and advances made by a Project Company to any Person in
connection with the provision of services by such person to such Project
Company, the construction by such Person of fuel transportation facilities for
such Project Company or the construction by such Person of transmission
facilities or lines interconnecting such Project Company's Facility with an
electric power grid; (vi) any Investment in (a) obligations of the U.S.
government and its agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances); (c) floating rate securities and other instruments issued by
governments or international development agencies; (d) commercial paper and
other short-term corporate debt obligations; (e) money market funds; and (f)
repurchase agreements with banks and broker-dealers with respect to securities
described in clauses (a) through (d) above; (vii) Dollar Permitted Investments;
and (viii) any loan made to or deposit made with any commercial banking
institution rated A- or higher by S&P and A3 or higher by Moody's in connection
with a substantially similar loan made by an affiliate of such commercial
banking institution to the Company or a Wholly Owned Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus, if applicable,
the premium on the Note.
"Project Companies" means the Restricted Subsidiaries and Restricted Joint
Ventures and "Project Company" means any of them.
"Rating Agencies" means (i) S&P and Moody's or (ii) if S&P or Moody's or
both shall not make a rating of the Notes publicly available, an internationally
recognized securities rating agency or agencies, as the
85
<PAGE> 87
case may be, selected by the Company which shall be substituted for S&P or
Moody's or both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or equivalent successor
categories): (ii) with respect to Moody's any of the following categories: Aaa,
Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories); and
(iii) the equivalent of any such category used by another Rating Agency. In
determining whether the rating of the Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for S&P, 1, 2 and 3 for
Moody's) shall be taken into account (e.g., with respect to S&P, a decline in
rating from BB+ to BB as well as from BB- to B+, will constitute a decrease of
one gradation).
"Rating Decline" means the occurrence of (i) or (ii) below on, or within 90
days after, the earliest of (A) the Company having become aware that a Change of
Control has occurred, (B) the date of public notice of the occurrence of a
Change of Control or (C) the date of public notice of the intention by AES or
the Company to approve, recommend or enter into, any transaction which, if
consummated, would result in a Change of Control (which period shall be extended
so long as the rating of the Notes is under publicly announced consideration or
possible downgrade by either of the Rating Agencies), (i) a decrease of the
rating of the Notes by either Rating Agency by one or more rating gradations or
(ii) the failure by the Company to advise the Rating Agencies, in writing, of
such occurrence or any subsequent material developments or to use its best
efforts to obtain, from at least one Rating Agency, a written, publicly
announced affirmation of its rating of the Notes, stating that it is not
downgrading and is not considering downgrading the Notes.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that (a) by its terms, by the terms of any security into which it is convertible
or exchangeable or otherwise is, or upon the happening of an event or passage of
time would be, required to be redeemed (in whole or in part) on or prior to the
first anniversary of the Stated Maturity of the Notes, (b) is redeemable at the
option of the holder thereof at any time on or prior to the first anniversary of
the Stated Maturity of the Notes (other than on a Change of Control or Asset
Sale, provided that such Change of Control or Asset Sale shall not yet have
occurred) or (c) is convertible into or exchangeable for Capital Stock referred
to in clause (a) or clause (b) above or debt securities at any time prior to the
first anniversary of the Stated Maturity of the Notes.
"Refinancing Indebtedness" means indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances" and "refinanced" shall have a
correlative meaning) any Indebtedness of the Company or a Project Company
existing on the Issue Date or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Project Company and Indebtedness of any Project Company that refinances
Indebtedness of another Project Company) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) if the Indebtedness being
refinanced is contractually subordinated in right of payment to the Notes, the
Refinancing Indebtedness shall be contractually subordinated in right of payment
to the Notes to at least the same extent as the Indebtedness being refinanced;
(ii) if the Indebtedness being refinanced is Non-Recourse Debt, such Refinancing
Indebtedness shall be Non-Recourse Debt; (iii) the Refinancing Indebtedness is
scheduled to mature either (a) no earlier than the Indebtedness being refinanced
or (b) after the Stated Maturity of the Notes; (iv) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced and (v) such Refinancing Indebtedness is in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if issued with
original issue discount, the aggregate accreted value) then outstanding (plus
fees and expenses, including any premium, swap breakage and defeasance costs)
under the Indebtedness being refinanced; and provided, further, that (x)
Refinancing Indebtedness shall not include Indebtedness of a Project Company
that refinances Indebtedness of the Company; (y) the provisions of clauses (iii)
and (iv) above shall not be applicable with respect to any Refinancing
Indebtedness that refinances Shareholder Loans; and (z) Refinancing Indebtedness
that refinances Shareholder Loans of any Person other than the Company or any of
its Subsidiaries shall be pari passu or subordinated to the Shareholder Loans
being refinanced.
86
<PAGE> 88
"Restricted Designation Event" means the designation by the Board of
Directors of any Existing Subsidiary or Existing Joint Venture to be an
Unrestricted Company.
"Restricted Joint Venture" means any Eligible Joint Venture of the Company
that is not designated an Unrestricted Joint Venture by the Board of Directors.
"Restricted Joint Venture Investment" means any Investment which is made by
the Company or a Restricted Subsidiary in a Restricted Joint Venture; provided
that (i) at the time such Investment is made, no default or Event of Default
shall have occurred and be continuing (or would result therefrom); (ii) the
aggregate Investment in one or more Restricted Joint Ventures operating the same
Facility does not exceed 15% of Consolidated Net Tangible Assets; provided that
such restriction shall not apply to any investment in (A) Yangcheng
International Power Generating Company Ltd. or its successors and (B) Tianjin
TEDA-AES Power Co. Ltd. or its successors, and provided, further, that such
restriction shall not apply to a single additional Investment of up to $100
million in the event that the Company does not make either of the Investments
described in clauses (A) and (B); and (iii) any encumbrance or restriction on
the ability of the Person in which the Investment is made to make the payments,
distributions, loans, advances or transfers referred to in clauses (i) through
(iii) under "-- Covenants -- Limitations on Payment Restrictions Affecting
Project Companies" that would apply immediately following the making of the
Investment could be created or permitted to exist pursuant to clause (d), (g) or
(h) under "-- Covenants -- Limitation on Payment Restrictions Affecting Project
Companies" or in the written opinion of the President or Chief Financial Officer
of the Company (x) are not materially more restrictive, taken as a whole, than
encumbrances and restrictions customarily accepted (or, in the absence of any
industry custom, reasonably acceptable) in substantially non-recourse project
financings and (y) apply only to the assets of the Person in whom the Investment
is made, the Capital Stock of such Person (or any other Person that, directly or
indirectly owns such Capital Stock as its sole assets) and the income and
proceeds therefrom.
"Restricted Subsidiary" means any Subsidiary of the Company that is not
designated an Unrestricted Subsidiary by the Board of Directors.
"S&P" means Standard and Poor's Corporation and its successors.
"Shareholder Loan" means Indebtedness of a Project Company that is payable
to a holder of Equity Interests in such Project Company.
"Special Proceeds Event" means (i) any Asset Sale of the assets, property
or Capital Stock of any Existing Subsidiary or Existing Joint Venture (or any
other person that directly or indirectly owns such Capital Stock as in sole
assets), (ii) any Designated Financing or (iii) any Restricted Designation
Event.
"Special Proceeds" means, with respect to any Special Proceeds Event, the
Net Available Cash from such Special Proceeds Event; provided that the Net
Available Cash from a Special Proceeds Event relating to an Existing Subsidiary
shall not constitute Special Proceeds if and to the extent that (A) the
aggregate amount of Net Available Cash from all Special Proceeds Events excluded
from the definition of Special Proceeds under this proviso after the Issue Date
does not exceed $30 million; (B) at the date of such Special Proceeds Event, the
Fixed Charge Coverage Ratio is greater than 2.25:1.0; and (C) with respect to
any Asset Sale, the Facilities owned by each of the Existing Subsidiaries and
each of the Existing Joint Ventures have commenced commercial operation; and
provided further, that the Net Available Cash from any Special Proceeds Event
relating to an Existing Joint Venture shall not constitute Special Proceeds if
and to the extent that, (A) at the date thereof, the Fixed Charge Coverage Ratio
is greater than 2.25:1.0 and (B) with respect to any Asset Sale, the Facilities
owned by each of the Existing Subsidiaries and each of the Existing Joint
Ventures have commenced commercial operation.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the principal is due and payable,
including pursuant to any mandatory redemption provision (but excluding any
provision providing for the repurchase of such security at the option of the
holder thereof upon the happening of any contingency).
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is contractually
subordinated or junior in right of payment to the Notes or any other
Indebtedness of the Company.
87
<PAGE> 89
"Subsidiary" means, as applied to any Person, any corporation or other
entity of which a majority of the outstanding Voting Shares is, at the time,
directly or indirectly, owned by such Person.
"Taxing Authority" means any government or political subdivision or
territory or possession of any government or any authority or agency therein or
thereof having power to tax.
"Unrelated Business" means any business other than the Line of Business.
"Unrestricted Companies" means the Unrestricted Subsidiaries and
Unrestricted Joint Ventures and "Unrestricted Company" means any of them.
"Unrestricted Joint Venture" means (i) any Eligible Joint Venture that at
the time of determination shall be designated an Unrestricted Joint Venture by
the Board of Directors in the manner provided below; (ii) any Joint Venture of
an Unrestricted Subsidiary or (iii) any Joint Venture of the Company that is not
an Eligible Joint Venture. The Board of Directors may designate any Eligible
Joint Venture (including any newly acquired or newly formed Eligible Joint
Venture) to be an Unrestricted Joint Venture unless such Eligible Joint Venture
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Restricted Joint Venture; provided, that either (A) the
Eligible Joint Venture to be so designated has total assets of $1,000 or less or
(B) if such Eligible Joint Venture has assets greater than $1,000, that such
designation would be an investment permitted pursuant to the provisions under
"-- Covenants -- Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Joint Venture to be a Restricted Joint Venture;
provided, however, that immediately after giving effect to such designation (x)
the Company could incur $1.00 of additional Indebtedness pursuant to the first
paragraph under "-- Covenants -- Limitation on Incurrence of Indebtedness" and
(y) no Default or Event of Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions; provided, however, that the failure to
so file such resolution and/or Officers' Certificate with the Trustee shall not
impair or affect the validity of such designation.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any Project Company that is not a
Subsidiary or Joint Venture of the Subsidiary to be so designated; provided,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, that such
designation would be permitted pursuant to the provisions under
"-- Covenants -- Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the
Company; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness
pursuant to the first paragraph under "-- Covenants -- Limitation on Incurrence
of Indebtedness" and (y) no Default or Event of Default shall have occurred and
be continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions;
provided, however, that the failure to so file such resolution and/or Officers'
Certificate with the Trustee shall not impair or affect the validity of such
designation.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America which, in either case under
clauses (i) or (ii) are not callable or redeemable before the maturity thereof.
"Voting Shares," with respect to any Person, means the Capital Stock having
the general voting power under ordinary circumstances to vote on the election of
the members of the board of directors or other
88
<PAGE> 90
governing body of such Person (irrespective of whether or not at the time stock
of any other class or classes shall have or might have voting power by reason of
the happening of any contingency) and, with respect to the Company, shall
include the Class A Common Stock and the Class B Common Stock and any other
Voting Shares of the Company.
"Wholly Owned Subsidiary" means a Subsidiary (other than an Unrestricted
Subsidiary) all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Subsidiary.
COVENANTS
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of the Indenture, so long as any of the Notes are
outstanding, the Company shall not, and shall not permit any Project Company to,
directly or indirectly, (i) declare or pay (either in cash or property) any
dividend on or make any distribution or similar payment of any sort in respect
of its Equity Interests (including any payment in connection with any merger or
consolidation involving the Company) to the direct or indirect holders of its
Equity Interests (other than dividends or distributions payable solely in its
Non-Convertible Capital Stock or rights to acquire its Non-Convertible Capital
Stock and dividends or distributions by a Project Company that are paid to the
Company or a Wholly Owned Subsidiary and to the other holders of Equity
Interests in such Project Company (A) in accordance with the joint venture
contract, articles of association or other constituent document governing such
Project Company or (B) as permitted by applicable law), (ii) purchase, redeem,
defease or otherwise acquire or retire for value any Equity Interests of the
Company or AES or, with respect to the Company, exercise any option to exchange
any Equity Interests that by their terms are exchangeable solely at the option
of the Company (other than into Capital Stock of the Company which is neither
Exchangeable Stock nor Redeemable Stock), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity or
scheduled repayment thereof or scheduled sinking fund payment thereon, any
Subordinated Indebtedness or (iv) make any Investment, other than a Permitted
Investment (each such payment described in clauses (i)-(iv) of this paragraph, a
"Restricted Payment"), unless at the time of and after giving effect to the
proposed Restricted Payments: (1) no Default or Event of Default shall have
occurred and be continuing (or would result therefrom); (2) the Company would be
permitted to Incur an additional $1.00 of Indebtedness pursuant to the
provisions described in the first paragraph under "-- Limitation on Incurrence
of Indebtedness," and (3) the aggregate amount of all such Restricted Payments
subsequent to the Issue Date shall not exceed the sum of (A) 50% of aggregate
Consolidated Net Income accrued during the period (treated as one accounting
period) from December 1, 1996 to the end of the most recent fiscal quarter for
which financial statements are available (or if such Consolidated Net Income is
a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
received by the Company after the Issue Date from the sale of Equity Interests
(other than Redeemable Stock or Exchangeable Stock) of the Company to any person
other than the Company, any of its Subsidiaries or an employee stock ownership
plan; (C) the amount by which the principal amount of, and any accrued interest
on, Indebtedness of the Company and its Restricted Subsidiaries (other than
Shareholder Loans) is reduced on the Company's Consolidated balance sheet upon
the conversion or exchange (other than by a Subsidiary) subsequent to the issue
date of any Indebtedness of the Company or any Restricted Subsidiary converted
or exchanged for Capital Stock (other than Redeemable Stock or Exchangeable
Stock) of the Company (less the amount of any cash, or the value of any other
property, distributed by the Company or any such Restricted Subsidiary upon such
conversion or exchange) and (D) an amount equal to the net reduction after the
Issue Date in Investments in Unrestricted Companies resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Project Company from
Unrestricted Companies, or from redesignations of Unrestricted Companies as
Project Companies (valued in each case as provided in the definition of
"Investments"), not to exceed in the case of any Unrestricted Company the amount
of Investments previously made by the Company or any Project Company in such
Unrestricted Company.
The failure to satisfy the conditions set forth in clauses (2) and (3) of
the first paragraph under "-- Limitation on Restricted Payments" shall not
prohibit any of the following as long as the condition set
89
<PAGE> 91
forth in clause (1) of such paragraph is satisfied (except as set forth below):
(i) dividends paid within 60 days after the date of declaration thereof if at
such date of declaration such dividend would have complied with the provisions
described in the first paragraph under "-- Limitation on Restricted Payments,"
provided that, solely for purposes of this clause (i), it shall not be necessary
to satisfy the condition set forth in clause (1) of the preceding paragraph at
the date of payment if such clause is satisfied at the date of declaration; (ii)
any purchase, redemption, defeasance, or other acquisition or retirement for
value of Capital Stock of the Company or Subordinated Indebtedness made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Redeemable Stock or Exchangeable Stock
and other than stock issued or sold to a Subsidiary or to an employee stock
ownership plan), provided that such purchase, redemption, defeasance or other
acquisition or retirement shall not be included in the calculation of Restricted
Payments made for purposes of clause (3) of the first paragraph under
"-- Limitation on Restricted Payments," and provided, further, that the Net Cash
Proceeds from such sale shall be excluded from sub-clause (B) of clause (3) of
the first paragraph under "-- Limitation on Restricted Payments;" (iii) any
purchase, redemption, defeasance or other acquisition or retirement for value of
Subordinated Indebtedness made by exchange for, or out of the proceeds of the
substantially concurrent Incurrence of for cash (other than to a Subsidiary),
new Indebtedness of the Company, provided, however, that (A) such new
Indebtedness shall be contractually subordinated in right of payment to the
Notes at least to the same extent as the Indebtedness being so redeemed,
repurchased, defeased, acquired or retired, (B) such new Indebtedness has a
Stated Maturity either (1) no earlier than the Stated Maturity of the
Indebtedness redeemed, repurchased, defeased, acquired or retired or (2) after
the Stated Maturity of the Notes and (C) such Indebtedness has an Average Life
equal to or greater than the Average Life of the Indebtedness redeemed,
repurchased, defeased, acquired or retired, and provided, further, that such
purchase, redemption, defeasance or other acquisition or retirement shall not be
included in the calculation of Restricted Payments made for purposes of clause
(3) of the first paragraph under "-- Limitation on Restricted Payments;" (iv)
any purchase, redemption, defeasance or other acquisition or retirement for
value of Subordinated Indebtedness upon a Change of Control or an Asset Sale to
the extent required by the Indenture or other agreement pursuant to which such
Subordinated Indebtedness was issued, but only if (A) in the case of a Change of
Control, the Company has made an offer to repurchase the Notes as described
under "-- Change of Control" or (B) in the case of an Asset Sale, the Company or
the applicable Project Company, as the case may be, has applied the Net
Available Cash from such Asset Sale in accordance with the provisions described
under "-- Limitation on Sales of Assets or Refinancings;" and (v) Restricted
Payments not otherwise permitted by the foregoing provisions in an aggregate
amount not in excess of $10 million.
LIMITATION ON INCURRENCE OF INDEBTEDNESS
Under the terms of the Indenture, the Company shall not, and shall not
permit any Project Company to, directly or indirectly, Incur any Indebtedness,
except that the Company may Incur Indebtedness if, after giving effect thereto,
the Fixed Charge Coverage Ratio would be greater than (a) 1.75:1.0 through
November 30, 1998, (b) 2.00:1.0 from December 1, 1998 through November 30, 2001,
and (c) 2.25:1.0 thereafter.
The foregoing provision will not limit the ability of the Company or any
Project Company to Incur the following Indebtedness: (i) Indebtedness under the
Notes and the Indenture; (ii) Refinancing Indebtedness; (iii) Indebtedness of
the Company which is owed to and held by a Wholly Owned Subsidiary and
Indebtedness of Project Company which is owed to and held by the Company or a
Wholly Owned Subsidiary, provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any transfer of such Indebtedness
(other than to the Company or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the Company or
by a Project Company, as the case may be; (iv) Acquired Indebtedness that is
Non-Recourse Debt; (v) Indebtedness of the Company or a Project Company
outstanding on the Issue Date; (vi) Indebtedness under any Currency Agreement or
Interest Rate Agreement in each case entered into in the ordinary course of the
financial management of the Company and the Project Companies and not for
speculative purposes; provided that, in the case of any Currency Agreement, such
Currency Agreement does not increase the Indebtedness of the obligor outstanding
at any time other than as a
90
<PAGE> 92
result of fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder; (vii) Indebtedness incurred in
connection with a purchase of the Notes as required in connection with a Change
of Control Triggering Event; provided that the aggregate principal amount of
such indebtedness does not exceed 101% of the aggregate principal amount of the
Notes purchased pursuant to such Change of Control Triggering Event (plus the
amount of reasonable fees and expenses, including underwriting discounts and
commissions, incurred by the Issuer or the Company in connection with obtaining
such Indebtedness) and that such Indebtedness does not mature prior to the
Stated Maturity of the Notes so purchased; (viii) Indebtedness referred to in
clause (viii) of the definition of Permitted Investments; (ix) Non-Recourse Debt
of a Project Company (other than any Existing Subsidiary); (x) Shareholder Loans
to the extent that the aggregate principal amount of Shareholder Loans of a
Project Company is not greater than an amount equal to the principal amount of
Shareholder Loans of such Project Company payable to the Company or a Wholly
Owned Subsidiary divided by the Company's percentage ownership of the Capital
Stock of such Project Company; (xi) Non-Recourse Debt of any Existing Subsidiary
Incurred to pay for construction cost overruns; provided that the aggregate
principal amount of all such Non-Recourse Debt incurred under this clause (xi)
shall not exceed $15 million; (xii) Non-Recourse Debt of any Existing Subsidiary
Incurred to provide for working capital; provided that the aggregate principal
amount outstanding at any time of all such Non-Recourse Debt under this clause
(xii) shall not exceed $10 million and (xiii) other Indebtedness Incurred by the
Company or any Project Company (other than an Existing Subsidiary) in an
aggregate principal amount outstanding at any time of not more than 5% of
Consolidated Net Worth.
Notwithstanding the provisions of this covenant described in the first two
paragraphs above, the Indenture provides that the Company shall not Incur any
Indebtedness if the proceeds thereof are used, directly or indirectly, to repay,
prepay, redeem, defease, retire, refund or refinance any Subordinated
Indebtedness unless such repayment, prepayment, redemption, defeasance,
retirement, refunding or refinancing is not prohibited under "-- Limitation on
Restricted Payments" or unless such Indebtedness shall be contractually
subordinated to the Notes at least to the same extent as such Subordinated
Indebtedness.
LIMITATION ON PAYMENT RESTRICTIONS AFFECTING PROJECT COMPANIES
Under the terms of the Indenture, the Company shall not, and shall not
permit any Project Company to, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or restriction on the ability of any
Project Company to (i) pay dividends to or make any other distributions on its
Capital Stock, or pay any Indebtedness or other obligations owed to the Company
or any other Project Company, (ii) make any loans or advances to the Company or
any Project Company or (iii) transfer any of its property or assets to the
Company or any other Project Company; provided, however, that the foregoing
shall not apply to (a) any encumbrance or restriction existing pursuant to the
Indenture or any other agreement or instrument as in effect or entered into on
the Issue Date; (b) any encumbrance or restriction with respect to any Person or
the assets of such Person acquired by the Company or any Project Company and
existing at the time of such acquisition; provided, however, that such
encumbrance or restriction was not Incurred in connection with or in
contemplation of such Project Company becoming a Project Company; (c) any
encumbrance or restriction pursuant to an agreement effecting a refinancing of
Indebtedness referred to in clause (a) or (b) above or contained in any
amendment or modification with respect to such Indebtedness; provided, however,
that the encumbrances and restrictions contained in any such agreement,
amendment or modification are no less favorable in any material respect with
respect to the matters referred to in clauses (i), (ii) and (iii) above than the
encumbrances and restrictions with respect to the Indebtedness being refinanced,
amended or modified; (d) in the case of clause (iii) above, customary
non-assignment provisions of (A) any leases governing a leasehold interest or
(B) any supply, license or other agreement entered into in the ordinary course
of business of the Company or any Project Company; (e) any restrictions with
respect to a Project Company imposed pursuant to an agreement entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Project Company pending the closing of such sale or dispositions;
(f) any encumbrances or restrictions imposed pursuant to the terms of
Non-Recourse Debt incurred pursuant to clause (ix) of the covenant described
under "-- Limitation on Incurrence of Indebtedness" above, provided that such
encumbrances or restrictions in the written opinion of the President or Chief
Financial Officer of the
91
<PAGE> 93
Company, (x) are required in order to obtain such financing, (y) are not
materially more restrictive, taken as a whole, then encumbrances and
restrictions customarily accepted (or, in the absence of any industry custom,
reasonably acceptable), in substantially non-recourse project financings and (z)
apply only to the assets of the Project Company that has Incurred such
Non-Recourse Debt, the Capital Stock of such Person (or any other Person that,
directly or indirectly owns such Capital Stock as its sole assets) and the
income and proceeds therefrom; (g) any encumbrance or restriction existing by
reason of applicable law; and (h) any restriction under a joint venture,
shareholders' or similar agreement to pay dividends or make other distributions,
so long as there is a contemporaneous agreement providing for the payment of
dividends or the making of distributions according to a schedule or calculation
notwithstanding such restriction. Nothing contained in this "Limitation on
Payment Restrictions Affecting Project Companies" covenant shall prevent the
Company or any Project Company from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any Project Company that secure Indebtedness.
LIMITATION ON LIENS
Under the terms of the Indenture, the Company shall not, and shall not
permit any Project Company to, directly or indirectly, incur or permit to exist
any Lien of any nature whatsoever on any of its properties (including, without
limitation, Capital Stock), whether owned at the date of such Indenture or
thereafter acquired, unless contemporaneously therewith or prior thereto the
Notes are equally and ratably secured other than (a) pledges or deposits made by
such Person under workers' compensation, unemployment insurance laws or similar
legislation, or good faith deposits in connection with bids, tenders, contracts
(other than for payment of Indebtedness) or leases to which such Person is a
party, or deposits to secure statutory or regulatory obligations of such Person
or deposits of cash or United States government bonds to secure surety, appeal
or performance bonds to which such Person is a party, or deposits as security
for contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law such as
carriers', warehousemen's and mechanics' Liens, in each case, arising in the
ordinary course of business and with respect to amounts not yet due or being
contested in good faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made; or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be diligently prosecuting appeal or other
proceedings for review; (c) Liens for property taxes not yet subject to
penalties for non-payment or which are being contested in good faith and for
which appropriate provision, as shall be required in conformity with GAAP, if
any, shall have been made; (d) Liens in favor of issuers or surety bonds or
letters of credit issued pursuant to the request of and for the account of such
Person in the ordinary course of its business; provided, however, that such
letters of credit may not constitute Indebtedness; (e) minor survey exceptions,
minor encumbrances, easements or reservations of, or rights of others for,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not Incurred in connection with
Indebtedness or other extensions of credit and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (f) Liens securing
Indebtedness Incurred to finance the construction or purchase of, or repairs,
improvements or additions to, property; provided, however, that the Lien may not
extend to any other property owned by the Company or a Project Company and the
Indebtedness secured by the Lien may not be issued more than 270 days after the
later of the acquisitions, completion of construction, repair, improvement,
addition or commencement of full operation of the property subject to the Lien;
(g) Liens existing on the Issue Date; (h) Liens on property or shares of stock
of a Person at the time such Person becomes a Project Company; provided,
however, that any such Lien may not extend to any other property owned by the
Company or any Project Company; (i) Liens on property at the time the Company or
a Project Company acquires the property, including any acquisitions by means of
a merger or consolidation with or into the Company or a Project Company;
provided, however, that such Liens are not incurred in connection with, or in
contemplation of, such merger or consolidation; and provided, further, that the
Lien may not extend to any other property owned by the Company or any Project
Company; (j) Liens
92
<PAGE> 94
securing Indebtedness or other obligations of a Project Company owing to the
Company or a Wholly Owned Subsidiary; (k) Liens incurred by a Person other than
the Company or a Project Company on assets that are the subject of a Capitalized
Lease Obligation to which the Company or a Project Company is a party; provided,
however, that any such Lien may not secure Indebtedness of the Company or a
Project Company (except by virtue of clause (viii) of the definition of
"Indebtedness") and may not extend to any other property owned by the Company or
a Project Company; (l) Liens Incurred by a Project Company to secure
Non-Recourse Debt Incurred pursuant to clauses (ix), (xi) or (xii) of the second
paragraph under "-- Limitation on Incurrence of Indebtedness" above, provided
that such Liens (x) are required in order to obtain such financing, (y) are not
materially more restrictive, taken as a whole, than Liens customarily accepted
(or, in the absence of any industry custom, reasonably acceptable), in
substantially non-recourse project financings and (z) apply only to the assets
of the Person that has incurred such Non-Recourse Debt, the Capital Stock of
such Person (or any other Person that, directly or indirectly owns such Capital
Stock as its sole assets) and the income and proceeds therefrom; (m) Liens not
in respect of Indebtedness consisting of the interest of the lessor under any
lease Incurred in the ordinary course of business and not otherwise prohibited
by the Indenture; (n) Liens which constitute banker's liens, rights of set-off
or similar rights and remedies as to deposit accounts or other funds maintained
with any bank or other financial institution, whether arising by operation of
law or pursuant to contract; (o) Liens incurred pursuant to the Security
Agreement and (p) Liens to secure any refinancing, refunding, extension, renewal
or replacement (or successive refinancings, refundings, extensions, renewals or
replacements) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (g), (h) and (i), provided, however,
that (x) such new Lien shall be limited to all or part of the same property that
secured the original Lien (plus improvements on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased (other than by
an amount necessary to pay fees and expenses, including premiums, related to the
refinancing, refunding, extension, renewal or replacement of such Indebtedness).
CHANGE OF CONTROL
Under the terms of the Indenture, in the event of a Change of Control
Triggering Event, the Company shall make an offer to purchase (a "Change of
Control Offer") the Notes then outstanding at a purchase price of not less than
101% of the principal amount (excluding any premium) thereof plus accrued and
unpaid interest to the Change of Control Purchase Date (as defined below) on the
terms set forth in this provision. The date on which the Company shall purchase
the Notes pursuant to this provision (the "Change of Control Purchase Date")
shall be no earlier than 30 days, nor later than 60 days, after the notice
referred to below is mailed, unless a longer period shall be required by law.
The Company shall notify the Trustee in writing promptly after any Change of
Control Triggering Event of the Company's obligation to offer to purchase all of
the Notes.
Notice of a Change of Control Offer shall be mailed by the Company to the
Holders of the Notes at their last registered address (with a copy to the
Trustee and the Paying Agent) within thirty (30) days after a Change in Control
Triggering Event has occurred. The Change of Control Offer shall remain open
from the time of mailing until a date not more than five (5) Business Days
before the Change of Control Purchase Date. The notice shall contain all
instructions and materials necessary to enable such Holders to tender (in whole
or in part) the Notes pursuant to the Change of Control Offer. The notice, which
shall govern the terms of the Change of Control Offer, shall state: (a) that the
Change of Control Offer is being made pursuant to the Indenture; (b) the
purchase price and the Change of Control Purchase Date; (c) that any Note not
surrendered or accepted for payment will continue to accrue interest; (d) that
any Note accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest after the Change of Control Purchase Date; (e) that any
Holder electing to have a Note purchased (in whole or in part) pursuant to a
Change of Control Offer will be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice (or
otherwise make effective delivery of the Note pursuant to book-entry procedures
and the related rules of the applicable depositories) at least five (5) Business
Days before the Change of Control Purchase Date; and (f) that any Holder will be
entitled to withdraw his or her election if the Paying Agent receives, not later
than three (3) Business Days prior to the Change of Control Purchase Date, a
telegram, telex, facsimile
93
<PAGE> 95
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder delivered for purchase and a statement that such
Holder is withdrawing his or her election to have the Note purchased.
On the Change of Control Purchase Date, the Company shall (i) accept for
payment the Notes, or portions thereof, surrendered and properly tendered and
not withdrawn, pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent, no later than 11:00 a.m. eastern standard time, money, in
immediately available funds, sufficient to pay the purchase price of all the
Notes or portions thereof so accepted and (iii) deliver to the Trustee, no later
than 11:00 a.m. eastern standard time, the Notes so accepted together with an
Officers' Certificate stating that such Notes have been accepted for payment by
the Company. The Paying Agent shall promptly mail or deliver to Holders of Notes
so accepted payment in an amount equal to the purchase price. Holders whose
Notes are purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered.
There can be no assurance that the Company will have the financial
resources necessary to repurchase the Notes at the time of any Change of
Control.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with a
Change of Control Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Under the terms of the Indenture, the Company shall not, and shall not
permit any Project Company to, directly or indirectly, enter into, permit to
exist, renew or extend any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of any
assets or property or the rendering of any services) with any Affiliate of the
Company (other than a Project Company) unless (i) the terms of such transaction
or series of related transactions are (A) no less favorable to the Company or
such Project Company as the case may be, than would be obtainable in a
comparable transaction or series of related transactions in arm's-length
dealings with an unrelated third party and (B) set forth in writing, if such
transaction or series of related transactions involve aggregate payments or
consideration in excess of $1,000,000, and (ii) with respect to a transaction or
series of related transactions involving the sale, purchase, lease or exchange
of property or assets having a value in excess of $5,000,000, such transaction
or series of transactions has been approved by a majority of the disinterested
members of the Board of Directors or, if there are no disinterested members of
the Board of Directors, the Board of Directors of the Company shall have
received a written opinion of an internationally recognized investment banking
firm stating that such transaction or series of transactions is fair to the
Company or such Project Company from a financial point of view.
The foregoing provisions do not prohibit (i) the payment of reasonable fees
to directors of the Company and the Project Companies who are not employees of
the Company or a Project Company; (ii) any transaction between the Company and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries not otherwise
prohibited by the terms of the Indenture; (iii) the payment of any Restricted
Payment which is expressly permitted to be paid pursuant to the second paragraph
under "-- Covenants -- Limitation on Restricted Payments;" (iv) any issuance of
securities or other reasonable payments, awards or grants, in cash or otherwise,
pursuant to, or the funding of, employment arrangements approved by the Board of
Directors; (v) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the Board of Directors;
(vi) loans or advances to employees in the ordinary course of business; (vii)
any repurchase, redemption or other retirement of Equity Interests of the
Company held by employees of the Company or any of the Project Companies upon
death, disability or termination of employment at a price not in excess of the
fair market value thereof approved by the Board of Directors or other governing
body of such Project Company; (viii) the extension, renewal, entry into or
payment pursuant to any services agreement with AES that provides for the
payment by the Company to AES of fees on terms that are not more advantageous to
AES than as provided under the Services Agreement as in effect on the Issue
Date; and (ix) any agreement to do any of the foregoing. Any transaction which
has been determined, in the written opinion of an independent internationally
recognized investment banking firm, to be fair, from a financial point
94
<PAGE> 96
of view, to the Company or the applicable Project Company shall be deemed to be
in compliance with this provision.
LIMITATION ON SALES OF ASSETS AND REFINANCINGS
Under the terms of the Indenture, the Company shall not, and shall not
permit any Project Company to, consummate any Asset Sale other than to the
Company or a Wholly Owned Subsidiary unless (i) the Company or such Project
Company, as the case may be, receives consideration at the time of such Asset
Sale at least equal to the fair market value, as determined, in good faith by
the Board of Directors, as evidenced by a Board resolution, of the shares or
assets disposed of pursuant to such Asset Sale, (ii) at least 75% of the
consideration thereof received by the Company or such Project Company is in the
form of cash or cash equivalents which are promptly converted into cash by the
Person receiving such payment and (iii) an amount equal to 100% of the Net
Available Cash is applied by the Company (or such Project Company, as the case
may be) as set forth herein.
Under the terms of the Indenture, to the extent that the fair market value
(as determined in good faith by the Board of Directors, as evidenced by a Board
resolution) of any asset, property or Capital Stock disposed of in any Asset
Sale (other than an Asset Sale of the assets, property or Capital Stock of any
Existing Subsidiary or Existing Joint Venture), together with the fair market
value of all other assets, property, or Capital Stock sold, transferred or
otherwise disposed of in such Asset Sales received during the twelve month
period preceding the date of such Asset Sale, exceeds 5% of Consolidated Net
Tangible Assets, then within 365 days (such period being the "Application
Period") following the consummation of such Asset Sale, the Company or such
Project Company shall apply the Net Available Cash from such Asset Sale as
follows: (i) to the extent the Company or such Project Company elects, to
reinvest in Additional Assets (including by means of an investment in Additional
Assets by a Project Company with Net Available Cash received by the Company or
another Project Company or by means of an exchange of assets that achieves a
similar effect); (ii) to the extent of the balance of such Net Available Cash
after application in accordance with clause (i) and to the extent the Company or
such Project Company elects (or is required by the terms of any Indebtedness or
any Indebtedness of such Project Company), to prepay, repay or purchase
Indebtedness of the Company (other than the Notes or Subordinated Indebtedness)
or Indebtedness of any Project Company (other than Non-Recourse Debt,
Indebtedness owed to the Company or an Affiliate of the Company or Preferred
Stock); provided, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (ii) above, the Company or such Project
Company shall retire such Indebtedness and cause the related loan commitment (if
any) to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased; or (iii) as provided in the following paragraphs
of this covenant.
To the extent of the balance of the Net Available Cash after application in
accordance with clauses (i) and (ii) of the preceding paragraph (the "Excess
Proceeds"), the Company shall, within 30 days after the end of the Application
Period, except as provided below, make an offer to purchase the Notes (an
"Excess Proceeds Offer") at a purchase price of not less than 100% of the
principal amount (excluding any premium) plus accrued and unpaid interest
pursuant to and subject to the conditions set forth in the Indenture. To the
extent that any Net Available Cash from any Asset Sale remains after an Excess
Proceeds Offer, the Company or such Project Company may utilize such remaining
Net Available Cash in any manner not otherwise prohibited by the Indenture.
Under the Indenture, the Company shall not be required to make an Excess
Proceeds Offer if the amount of Excess Proceeds is less than $5,000,000 for any
particular Asset Sale (which lesser amounts shall not be carried forward for
purposes of determining whether an Excess Proceeds Offer is required with
respect to the Net Available Cash from any subsequent Asset Sale).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company as an entirety to a Person in a transaction
permitted under the covenant described under "-- Merger and Consolidation," the
Successor Corporation (as defined below) shall be deemed to have sold the
properties and assets of the Company not so transferred for purposes of this
covenant, and shall comply with the provisions of this covenant with respect to
such deemed sale as if it were an Asset Sale.
95
<PAGE> 97
Under the terms of the Indenture, the Company shall, within 30 days after
the occurrence of any Special Proceeds Event, cause all Special Proceeds with
respect to such Special Proceeds Event to be deposited into the Special Proceeds
Account held by the Collateral Agent and shall, to the extent of the amounts on
deposit in the Special Proceeds Account, except as provided below, make an offer
to purchase the Notes (a "Special Proceeds Offer," and together with an Excess
Proceeds Offer, an "Offer") at a purchase price of not less than 101% of the
principal amount (excluding any premium) plus accrued and unpaid interest
pursuant to and subject to the conditions set forth in the Indenture. To the
extent that any Special Proceeds remain after a Special Proceeds Offer, the
Collateral Agent shall retain such amounts on deposit in the Special Proceeds
Account in the form of cash or Dollar Permitted Investments. Under the
Indenture, the Company shall not be required to make a Special Proceeds Offer
unless the amount held by the Collateral Agent in the Special Proceeds Account
is greater than $5,000,000.
The Company will make an Offer by mailing to each Holder, with a copy to
the Trustee, within 30 days after the end of the relevant Application Period or
Special Proceeds Event, a written notice that will specify the purchase date,
which will not be less than 30 days nor more than 60 days after the date of such
notice (the "Purchase Date"), that will contain certain information concerning
the business of the Company that the Company believes in good faith will enable
the Holders to make an informed decision and that will contain information
concerning the procedures applicable to the Offer (including, without
limitation, the right of withdrawal) and the effect of such Offer on the Notes
tendered. Holders that elect to have their Notes purchased will be required to
surrender such Notes at least one Business Day prior to the Purchase Date. If at
the expiration of the Offer period the aggregate purchase price of the Notes
properly tendered by Holders pursuant to the Offer exceeds the amount of such
Asset Sale Proceeds or Special Proceeds, as the case may be, the Notes or
portions of Notes to be accepted for purchase will be selected by the Trustee in
such manner as the Trustee deems to be fair and appropriate in the
circumstances.
If the Company is prohibited by applicable law from making the Offer or
purchasing Notes thereunder, the Company need not make an Offer pursuant to this
covenant for so long as such prohibition is in effect.
The Company will comply with all applicable tender offer rules, including,
without limitation, Rule 14e-1 under the Exchange Act, in connection with an
Offer.
MAINTENANCE OF CERTAIN CASH AMOUNTS
Pursuant to the terms of the Indenture, at any time (x) prior to the later
to occur of (i) the commencement of commercial operation of each of the Existing
Joint Ventures and Existing Subsidiaries and (ii) January 1, 2000 or (y) at
which the Fixed Charge Coverage Ratio is less than 2.0:1.0, the Company shall
maintain (on an unconsolidated basis) cash and Permitted Investments of the type
referred to in clauses (vi) and (vii) of the definition thereof (exclusive of
any amounts held in the Debt Service Reserve Account or the Special Proceeds
Account) in an amount equal to or greater than the Existing Project Company Net
Cash Flow for the period from the Restricted Date to the date of determination.
For purposes hereof, the "Restricted Date" means December 1, 1996 or, if the
Fixed Charge Coverage Ratio shall at any time have been equal to or greater than
2.0:1.0, then the most recent date on which the Fixed Charge Coverage Ratio
shall have decreased to below 2.0:1.0.
LIMITATION ON THE ISSUANCE OF SUBSIDIARY CAPITAL STOCK
Pursuant to the terms of the Indenture, the Company shall not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell any shares of
such Restricted Subsidiary's Capital Stock (including options, warrants or other
rights to purchase shares of Capital Stock) except, to the extent not otherwise
prohibited by the Indenture, (i) to the Company or another Restricted Subsidiary
that is a Wholly Owned Subsidiary of the Company or (ii) if the Net Cash
Proceeds from such issuance or sale are applied, to the extent required to be
applied, pursuant to the covenant described under "-- Limitation on Sales of
Assets and Refinancings."
96
<PAGE> 98
LIMITATION ON CHANGES IN THE NATURE OF THE BUSINESS
The Indenture provides that the Company and the Project Companies shall
engage only in the Line of Business as well as any other activities reasonably
related to the Line of Business.
LIMITATION ON CERTAIN SUBSIDIARY INVESTMENTS
The Indenture provides that the Company will not permit any Project Company
with an interest in a Facility to make any Investment in or merge with any other
Person with an interest in another Facility or in an Unrelated Business.
Notwithstanding the foregoing, subject to any applicable restrictions
imposed by the "Limitation on Restricted Payments" covenant described above, the
Company may permit one or more of its Subsidiaries (each, an "Intermediate
Holding Company") to serve as a holding company for the Company's direct and
indirect interests in Facilities and Unrelated Businesses; provided that (i)
each such Intermediate Holding Company's direct and indirect interest in any
Facility or Unrelated Business shall be limited to the ownership of Capital
Stock or Indebtedness of a Person with a direct or indirect interest in such
Facility or Unrelated Business; (ii) no consensual encumbrance or restriction of
any kind shall exist on the ability of any Intermediate Holding Company to make
the payments, distributions, loans, advances or transfers referred to in clauses
(i) through (iii) of the first paragraph of the description of the "Limitations
on Payment Restrictions Affecting Project Companies" covenant set forth above;
(iii) no Intermediate Holding Company shall incur, assume, create or suffer to
exist any Indebtedness other than Indebtedness to the Company; and (iv) no Lien
shall exist upon any assets of such Intermediate Holding Company whether now or
hereafter acquired, except for Liens upon the Capital Stock of a Subsidiary of
an Intermediate Holding Company securing Indebtedness of such Subsidiary.
MAINTENANCE OF INSURANCE
The Indenture provides that the Company shall cause each Project Company to
maintain insurance policies covering such risks, in such amounts and with such
terms as are normally carried by similarly situated foreign invested companies
engaged in the Line of Business in the country in which such Project Company is
located.
GOVERNMENT APPROVALS, COMPLIANCE WITH LAWS
The Indenture provides that the Company shall, and shall cause each Project
Company to, at all times (i) obtain and maintain in full force and effect all
government authorizations, approvals and consents relating to any Project
Company or Facility and (ii) preserve and maintain good and valid title to its
properties and assets (subject to the "Limitation on Liens" covenant), except in
any such case where any failure to comply with clause (i) or (ii) would not
reasonably be expected to have a material adverse effect on the business or
results of operations of the Company and its Restricted Subsidiaries, taken as a
whole, or the ability of the Company to perform its obligations under the
Indenture or the Notes.
The Indenture also provides that the Company will, and will cause each
Project Company to, comply with all applicable laws, rules, regulations and
orders of, and all applicable restrictions imposed by, any governmental
authority or regulatory body in respect of the conduct of its business and the
ownership of its properties, except to the extent that any failure to comply
therewith would not reasonably be expected to have a material adverse effect on
the business or results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, or the ability of the Company to perform its
obligations under the Indenture or the Notes.
OPERATION AND MAINTENANCE
The Indenture provides that the Company shall, and shall cause each Project
Company to, in all material respects operate and maintain each Facility in
accordance with prudent industry operating and maintenance practices generally
accepted in the Line of Business.
97
<PAGE> 99
MERGER AND CONSOLIDATION
Under the terms of the Indenture, the Company shall not, in a single
transaction or through a series of related transactions, consolidate, merge or
amalgamate with or into any other corporation or sell, assign, convey, transfer
or lease or otherwise dispose of all or substantially all of its properties and
assets as an entirety to any Person or group of affiliated Persons unless: (i)
either (A) the Company shall be the continuing Person, or (B) the Person (if
other than the Company) formed by such consolidation or into which the Company
is merged or to which the properties and assets of the Company as an entirety
are transferred (the "Successor Corporation") shall be a corporation organized
and existing under the laws of Bermuda, the United States (or any state thereof
or the District of Columbia) or any other member country of the Organization for
Economic Cooperation and Development and shall expressly assume, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee, in form
and substance reasonably satisfactory to the trustee, all the obligations of the
Company under the Indenture and the Notes; (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness which becomes an obligation of the Company (or the
Successor Corporation if the Company is not the continuing obligor under the
Indenture) or any Restricted Subsidiary as a result of such transaction as
having been Incurred by such Person at the time of such transaction), no Default
shall have occurred and be continuing; (iii) the Company shall have delivered,
or caused to be delivered, to the Trustee (A) an Officer's Certificate stating
that such consolidation, merger or amalgamation or such transfer complies with
the "Merger and Consolidation" covenant under the Indenture and that all
conditions precedent under the Indenture provided for or relating to such
transaction have been complied with; (B) an Opinion of Counsel of local counsel
of recognized standing as to the legal issues relating thereto; and (C) an
Opinion of Counsel of United States independent counsel of recognized standing
to the effect that the Holders of the Notes will not recognize income, gain or
loss for United States federal income tax purposes as a result of such
consolidation, merger or amalgamation or such transfer and will be subject to
United States federal income tax (if subject to United States federal income tax
at all either before or after such consolidation, merger or amalgamation or such
transfer) on the same amount and in the same manner and at the same time as
would have been the case if such consolidation, merger or amalgamation or such
transfer had not occurred; (iv) the Successor Corporation shall expressly agree
to indemnify each Holder of a Note against any tax, assessment or governmental
charge payable by withholding or deduction thereafter imposed on such Holder or
with respect to the payment of principal and interest on the Notes solely as a
consequence of such consolidation, merger or amalgamation or such transfer; (v)
immediately after giving effect to such transaction on a pro forma basis (and
treating any Indebtedness which becomes an obligation of the Company (or the
Successor Corporation if the Company is not the continuing obligor under the
Indenture) or a Restricted Subsidiary in connection with or as a result of such
transaction as having been Incurred by such Person at the time of such
transaction), the Company (or the Successor Corporation if the Company is not
the continuing obligor under the Indenture) shall have a Consolidated Net Worth
in an amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (vi) immediately after giving effect
to such transaction, on a pro forma basis, the Company (or the Successor
Corporation if the Company is not the continuing obligor under the Indenture)
would be able to Incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph under "-- Limitation on Indebtedness."
Upon any such assumption by the Successor Corporation, except in the case
of a lease, the Successor Corporation shall succeed to and be substituted for
the Company under the Indenture and the Notes and the Company shall thereupon be
released from all obligations under the Indenture and under the Notes and the
Company as the predecessor corporation may thereupon or at any time thereafter
be dissolved, wound up or liquidated. The Successor Corporation thereupon may
cause to be signed, and may issue either in its own name or in the name of the
Company, all or any of the Notes issuable under the Indenture which theretofore
shall not have been signed by the Company and delivered to the Trustee; and,
upon the order of the Successor Corporation instead of the Company and subject
to all the terms, conditions and limitations prescribed in the Indenture, the
Trustee shall authenticate and shall deliver any Notes which the Successor
Corporation thereafter shall cause to be signed and delivered to the Trustee for
that purpose. All the Notes so issued shall in all respects have the same legal
rank and benefit under the Indenture as the Notes theretofore or thereafter
98
<PAGE> 100
issued in accordance with the terms of the Indenture as though all such Notes
had been issued at the date of the execution of the Indenture.
In the case of any such consolidation, merger, amalgamation or transfer,
such changes in form (but not in substance) may be made in the Notes thereafter
to be issued as may be appropriate.
COMMISSION REPORTS AND REPORTS TO HOLDERS
The Indenture provides that the Company shall deliver to the Trustee and to
the Holders, within 30 days after it files them with the Commission, copies of
its annual and quarterly reports which the Company is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding
that the Company may not be required to remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on
an annual and quarterly basis on forms provided for such annual and quarterly
reporting pursuant to rules and regulations promulgated by the Commission, the
Indenture requires the Company to continue to file with the Commission and
provide to the Trustee and to the Holders annual audited financial statements
and quarterly unaudited financial statements, along in each case with a
discussion and analysis thereof, all in the form the Company would be required
to file were it subject to such reporting requirements. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings. The Company shall also be required to deliver, together
with each annual and quarterly financial statements delivered pursuant to this
paragraph, a calculation of the Fixed Charge Coverage Ratio as of the end of the
period to which such financial statements relate.
EVENTS OF DEFAULT
"Events of Default" are defined in the Indenture as the following events:
(a) default for 30 days in payment of any interest installment due and payable
on the Notes, (b) default in payment of the principal when due on any Note, or
failure to redeem or purchase Notes when required pursuant to the Indenture or
the Notes; (c) default in performance of any other covenants or agreements in
the Indenture, the Notes or the Security Agreement for 30 days after written
notice to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding; (d) there shall have occurred either (i) a default by the Company
or any Project Company under any instrument or instruments under which there is
or may be secured or evidenced any Indebtedness of the Company or any Project
Company (other than the Notes or any Non-Recourse Debt) having an outstanding
principal amount of $5,000,000 (or its foreign currency equivalent) or more
individually or in the aggregate that has caused the holders thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity or (ii) a
default by the Company or any Project Company in the payment when due of any
portion of the principal under any instrument or instruments under which there
is or may be secured or evidenced any Indebtedness of the Company or any Project
Company (other than the Notes or any Non-Recourse Debt), and such unpaid portion
exceeds $5,000,000 (or its foreign currency equivalent) individually or in the
aggregate and is not paid, or such default is not cured or waived, within any
grace period applicable thereto, unless such Indebtedness is discharged within
20 days of the Company or a Project Company becoming aware of such default; (e)
any final judgment or order (not covered by insurance) for the payment of money
shall be rendered against the Company or any Project Company in an amount in
excess of $5,000,000 (or its foreign currency equivalent) individually or in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) and
shall not be discharged, and there shall be any period of 60 consecutive days
following entry of the final judgment or order in excess of $5,000,000 (or its
foreign currency equivalent) individually or in the aggregate during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (f) (A) other than in accordance
with the provisions of the Indenture or the Security Agreement, for any reason,
other than the satisfaction in full and discharge of the obligations secured
thereby, the Collateral Agent shall cease to have a first priority security
interest in the Collateral or (B) other than in accordance with the provisions
of the Indenture, the Company asserts in writing that the Security Agreement has
ceased to be
99
<PAGE> 101
or is not in full force and effect; or (g) certain events of bankruptcy or
insolvency of the Company or any Restricted Subsidiary.
If any Event of Default (other than an Event of Default described in clause
(g) with respect to the Company or any Restricted Subsidiary) occurs and is
continuing, the Indenture provides that the Trustee by notice to the Company, or
the Holders of at least 25% in aggregate principal amount of the Notes by notice
to the Company and the Trustee, may declare the principal amount of the Notes
and any accrued and unpaid interest to be due and payable immediately. If an
Event of Default described in clause (g) with respect to the Company or any
Restricted Subsidiary occurs, the principal of and interest on all the Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holders of Notes. The
Holders of a majority in principal amount of the Notes by notice to the Trustee
may rescind any such declaration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
have been cured or waived other than the non-payment of principal of or interest
on the Notes which shall have become due by such declaration. No such rescission
shall affect any subsequent or other Default or Event of Default or impair any
consequent right.
The Company must file annually with the Trustee a certificate describing
any Default by the Company in the performance of any conditions or covenants
that has occurred under the Indenture and its status. The Company must give the
Trustee written notice within 30 days of any Default under the Indenture that
could mature into an Event of Default.
The Trustee is entitled, subject to the duty of the Trustee during a
Default to act with the required standard of care, to be indemnified before
proceeding to exercise any right or power under the Indenture at the direction
of the Holders of the Notes or which requires the Trustee to expend or risk its
own funds or otherwise incur any financial liability. The Indenture also
provides that the Holders of a majority in principal amount of the Notes issued
under the Indenture may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee; however, the Trustee may refuse to follow any
such direction that conflicts with law or the Indenture, is unduly prejudicial
to the rights of other Holders of the Notes, or would involve the Trustee in
personal liability.
The Indenture provides that while the Trustee generally must mail notice of
a Default or Event of Default to the Holders of the Notes within 90 days of
occurrence, the Trustee may withhold notice to the Holders of the Notes of any
Default or Event of Default (except in payment on the Notes) if the Trustee in
good faith determines that the withholding of such notice is in the interest of
the Holders of the Notes.
MODIFICATION OF THE INDENTURE
Under the terms of the Indenture, the Company and the Trustee may, with the
consent of the Holders of a majority in principal amount of the outstanding
Notes, amend or supplement the Indenture, the Notes or the Security Agreement
except that no amendment or supplement may, without the consent of each affected
Holder, (i) reduce the principal of or change the Stated Maturity of any Note,
(ii) reduce the rate of or change the time of payment of interest on any Note,
(iii) change the currency or consideration of payment of the Notes, (iv) reduce
the premium payable upon the redemption of any Note, or change the time at which
any such Note may or shall be redeemed, (v) amend, change or modify the
obligations of the Company to make or consummate any Change of Control Offer or
Offer or modify any of the provisions or definitions with respect thereto, (vi)
permit the release or termination of all or substantially all of the Liens of
the Collateral Agent on the Collateral or deprive the Holders of all or
substantially all of the security afforded by the Liens of the Security
Agreement, (vii) release the Company from all of its obligations under the
Indenture other than pursuant to the provisions described under "-- Covenants --
Merger and Consolidation," (viii) reduce the amount of Notes, the Holders of
which must consent to an amendment or supplement, (ix) change the obligation of
the Company to pay Additional Amounts or (x) change the provisions of the
Indenture relating to waiver of past defaults, rights of Holders of the Notes to
receive payments or the provisions relating to amendments of the Indenture that
require the consent of Holders of each affected Note.
100
<PAGE> 102
ACTIONS BY HOLDERS
Under the terms of the Indenture, a Holder of Notes may not pursue any
remedy with respect to the Indenture or the Notes (except actions for payment of
overdue principal or interest), unless (i) the Holder has given notice to the
Trustee of a continuing Event of Default, (ii) Holders of at least 25% in
aggregate principal amount of the Notes have made a written request to the
Trustee to pursue such remedy, (iii) such Holder or Holders have offered the
Trustee security or indemnity reasonably satisfactory to it against any loss,
liability or expense, (iv) the Trustee has not complied with such request within
60 days of such request and offer and (v) the Holders of a majority in principal
amount of the Notes have not given the Trustee an inconsistent direction during
such 60-day period.
DEFEASANCE, DISCHARGE AND TERMINATION
Defeasance and Discharge. The Indenture provides that the Company will be
discharged from any and all obligations in respect of the Notes, and the
provisions of the Indenture will no longer be in effect with respect to such
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of such Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust, and the
rights of Holders to receive payments of principal and interest thereon solely
from the trust discussed below), on the 123rd day after the date of the deposit
with the Trustee, in trust, of money, U.S. Government Obligations or a
combination thereof that, through the payment of interest and principal in
respect thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and interest on such Notes when due in
accordance with the terms of the Indenture and such Notes. Such a trust may only
be established if, among other things, (i) the Company has delivered to the
Trustee either (a) an Opinion of Counsel from recognized tax counsel (who may
not be an employee of the Company) to the effect that Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred, which
Opinion of Counsel must refer to and be based upon a ruling of the Internal
Revenue Service or a change in applicable federal income tax law occurring after
the date of the Indenture or (b) a ruling of the Internal Revenue Service to
such effect and (ii) no Default under the Indenture shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after such date of deposit and such deposit shall not result in or
constitute a Default or result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company is a party
or by which the Company is bound.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the obligations of the Company under certain of
the provisions described under "-- Covenants" and the limitations contained in
(v) and (vi) under "-- Covenants -- Merger and Consolidation" shall be
terminated; clauses (d), (e) and (f) under "-- Events of Default" shall be
deemed not to be Events of Default under the Indenture, and the provisions
described herein under "-- Ranking" shall not apply, upon the deposit with the
Trustee or Paying Agent (as defined below) (other than the Company or a
Subsidiary or Affiliate of the Company), in trust, of money, U.S. Government
Obligations or a combination thereof that, through the payment of interest and
principal in respect thereof in accordance with their terms, will provide money
in an amount sufficient to pay the principal of and interest on the Notes issued
thereunder when due in accordance with the terms of the Indenture and such
Notes. Such a trust may only be established if, among other things, the
provisions described in clause (ii) of the immediately preceding paragraph have
been satisfied and the Company has delivered to the Trustee an Opinion of
Counsel from a recognized tax counsel (who may not be an employee of the
Company) to the effect that the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance of
certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
Defeasance and Certain other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes, as described in the immediately
preceding paragraph, and such Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
or U.S. Government Obligations on
101
<PAGE> 103
deposit with the Trustee will be sufficient to pay principal of and interest on
Notes on the respective dates on which such amounts are due but may not be
sufficient to pay amounts due on such Notes at the time of the acceleration
resulting from such Event of Default. However, the Company shall remain liable
for such payments.
UNCLAIMED MONEY
Under the terms of the Indenture, subject to any applicable abandoned
property law, the Trustee will pay to the Company upon request any money held by
it for the payment of principal or interest that remains unclaimed for two
years. After payment to the Company, Holders of Notes entitled to such money
must look to the Company for payment as general creditors.
CONCERNING THE TRUSTEE AND PAYING AGENT
Bankers Trust Company will act as Trustee under the Indenture and will
initially be Paying Agent and Registrar for the Notes. The Company may have in
the future other relationships with such bank.
GOVERNING LAW
The laws of the State of New York will govern the Indenture, the Notes and
the Security Agreement.
CONSENT TO JURISDICTION AND SERVICE OF PROCESS
The Indenture provides that the Company will irrevocably appoint
Prentice-Hall Corporation System, Inc. as its agent for service of process in
any suit, action or proceeding with respect to the Indenture or the Notes
brought in any federal or state court located in New York, New York and will
irrevocably submit to the jurisdiction thereof.
FORM, DENOMINATION AND REGISTRATION
The Notes will be issued in fully registered form, without coupons, in
denominations of US$1,000 and integral multiples thereof. The Notes will be
represented by a single Global Note, and, in certain limited circumstances, may
be represented by Notes in definitive form registered in the name of individual
purchasers or their nominees ("Certificated Notes"). Notes which have become
mutilated, defaced, destroyed, lost or stolen may be replaced upon the terms set
forth in the Indenture.
GLOBAL NOTE
The Global Note will be deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co., as nominee of DTC. Beneficial interests in
the Global Note will be represented by, and transfers thereof will be effected
only through, book-entry accounts of financial institutions acting on behalf of
the actual purchasers of interests in the Global Note, as a direct or indirect
participant in DTC. Investors may elect to hold interests in the Global Note
through any of DTC or Euroclear or Cedel if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
CERTIFICATED NOTES
If (i) DTC is at any time unwilling or unable to continue as depositary for
the Global Note or ceases to be a clearing agency registered under the Exchange
Act at a time when it is required to be and, in either case, a successor
depositary is not appointed by the Company within 90 days after receiving such
notice or becoming aware that DTC is no longer so registered, (ii) the Company
determines that the Global Note shall be exchanged or exchangeable for
Certificated Notes or (iii) an Event of Default has occurred and is continuing,
then, in any such case, the Company will issue or cause to be issued
Certificated Notes upon registration of, transfer of or in exchange for the
Global Note. Certificated Notes will be registered in such names and in such
denominations as DTC shall request. Subject to the terms of the Indenture,
Certificated
102
<PAGE> 104
Notes may be transferred by surrender of such Note at the Corporate Trust Office
of the Trustee, or at the office of the transfer agent.
REGISTRATION AND PAYMENTS
Beneficial interests in the Global Note may only be held in, and
Certificated Notes will only be issued in, denominations of US$1,000 and
integral multiples thereof. The Company will appoint the Trustee as registrar,
principal paying agent and transfer agent of the Notes. In such capacities, the
Trustee will be responsible for, among other things, (i) maintaining a record of
the aggregate holdings of Notes represented by the Global Note and the
Certificated Notes, and accepting Notes for exchange and registration of
transfer, (ii) ensuring that payments of principal and interest in respect of
the Notes received by the Trustee from the Company are duly paid to the
depositaries or their respective nominees and any other Holders of any Notes and
(iii) transmitting to the Company any notices from Holders of any Notes.
Upon the issuance of the Global Note, DTC or its custodian will credit, on
its internal system, the respective principal amounts of the individual
beneficial interests represented by such Global Note to the accounts of Persons
who have accounts with such depositary. Ownership of beneficial interests in the
Global Note will be limited to Persons who have accounts with such depositary or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of Persons other than participants).
So long as DTC, or its nominee, is the registered Holder of the Global
Note, DTC or such nominee, as the case may be, will be considered the sole owner
and Holder of the Notes represented by such Global Note for all purposes under
the Indenture and the Notes. No beneficial owner of an interest in a Global Note
will be able to transfer the interest except in accordance with DTC's applicable
procedures (in addition to those under the Indenture referred to herein and, if
applicable, those of Euroclear and Cedel).
GLOBAL CLEARANCE AND SETTLEMENT
Links have been established among DTC, Cedel and Euroclear to facilitate
the initial issuance of the Notes and cross-market transfers of the Notes
associated with secondary market trading. DTC will be linked to The Chase
Manhattan Bank, a New York banking corporation, as depositary of the Euroclear
System ("Euroclear"), and Citibank, N.A. as depositary for Cedel Bank, S.A.
("Cedel") (the "Depositaries"). The Notes will be tradeable as home market
instruments in both the European and U.S. domestic markets.
Although DTC, Euroclear and Cedel have agreed to the procedures provided
below in order to facilitate transfers of Notes among participants of DTC,
Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures and such procedures may be modified or discontinued at
any time. Neither the Company nor the Trustee will have any responsibility for
the performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of the respective obligations under the rules and
procedures governing their operations.
THE CLEARING SYSTEMS
DTC, Euroclear and Cedel have advised the Company as follows:
DTC. DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations, some of whom own DTC, and may include the Underwriters. Indirect
access to the DTC system is also available to others that clear through or
maintain a custodial
103
<PAGE> 105
relationship with a DTC participant, either directly or indirectly. Transfers of
ownership or other interests in Notes in DTC may be made only through DTC
participants. In addition, beneficial owners of Notes in DTC will receive all
distributions of principal of and interest on the Notes from the Trustee through
such DTC participant.
Cedel. Cedel is incorporated under the laws of Luxembourg as a professional
depositary. Cedel holds securities for its participants and facilities the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Cedel provides to
its participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depositary, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are financial institutions
around the world, including securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may include
the Underwriters. Indirect access to Cedel is also available to others that
clear through or maintain a custodial relationship with a Cedel participant
either directly or indirectly.
Distributions with respect to Notes held beneficially through Cedel will be
credited to cash accounts of Cedel participants in accordance with its rules and
procedures, to the extent received by the Depositary for Cedel.
Euroclear. Euroclear was created in 1968 to hold securities for its
participants and to clear and settle transactions between its participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems, S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear participants. Euroclear participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries and may include the Underwriters. Indirect access to Euroclear is
also available to others that clear through or maintain a custodial relationship
with a Euroclear participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms an Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear participants and has no record of or relationship with Persons holding
through Euroclear participants.
Distributions with respect to Notes held beneficially through Euroclear
will be credited to the cash accounts of Euroclear participants in accordance
with the Terms and Conditions, to the extent received by the Depositary for
Euroclear.
104
<PAGE> 106
INITIAL SETTLEMENT
Initial settlement for the Notes will be made in immediately available
funds. All Notes will be issued in the form of global notes in book-entry form
and will be deposited with the Trustee, as custodian for DTC. Investors'
interests in Notes held in book-entry form by DTC will be represented through
financial institutions acting on their behalf as direct and indirect
participants in DTC. As a result, Euroclear and Cedel will initially hold
positions on behalf of their participants through their respective Depositaries.
Investors electing to hold their Notes through DTC (other than through
accounts at Euroclear or Cedel) must follow the settlement practices applicable
to United States corporate debt obligations. The securities custody accounts of
investors will be credited with their holdings against payment in same-day funds
on the settlement date.
Investors electing to hold their Notes through Euroclear or Cedel accounts
will follow the settlement procedures applicable to conventional Eurobonds in
registered form. Notes will be credited to the securities custody accounts of
Euroclear Holders and of Cedel Holders on the business day following the
settlement date against payment for value on the settlement date.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of trading of any Notes where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC participants. Secondary market trading between DTC
participants (other than Depositaries) will occur in the ordinary way in
accordance with DTC rules and will be settled using the procedures applicable to
United States corporate debt obligations in same-day funds using DTC's Same Day
Funds Settlement System.
Trading between Euroclear and/or Cedel participants. Secondary market
trading between Euroclear participants and/or Cedel participants will occur in
the ordinary way in accordance with the applicable rules and operating
procedures of Cedel and Euroclear and will be settled using the procedures
applicable to conventional Eurobonds in same-day funds.
Trading between DTC seller and Euroclear or Cedel purchaser. When Notes are
to be transferred from the account of a DTC participant (other than the
Depositaries) to the account of a Euroclear participant or a Cedel participant,
the purchaser must send instructions to Euroclear or Cedel through a participant
at least one business day prior to settlement. Euroclear or Cedel, as the case
may be, will instruct the relevant Depositary to receive the Notes against
payment. Payment will then be made by such Depositary to the DTC participant's
account against delivery of the Notes. Payment will include interest accrued on
the Notes from and including the last interest payment date to and excluding the
settlement date, on the basis of a calendar year consisting of twelve 30 day
calendar months. For transactions settling on the 31st day of the month, payment
will include interest accrued to and excluding the first day of the following
month. Payment will then be made by the respective Depositary to the DTC
participant's account against delivery of the Notes. After settlement has been
completed, the Notes will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Euroclear
participant's or Cedel participant's account. Credit for the Notes will appear
on the next day (European time) and cash debit will be back-valued to, and the
interest on the Notes will accrue from, the value date (which would be the
preceding day when settlement occurs in New York). If settlement is not
completed on the intended value date (i.e., the trade date fails), the Euroclear
or Cedel cash debit will be valued instead as of the actual settlement date.
Euroclear participants or Cedel participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Euroclear or Cedel. Under this approach,
they may take on credit exposure to Euroclear or Cedel until the Notes are
credited to their accounts one day later.
105
<PAGE> 107
As an alternative, if Euroclear or Cedel has extended a line of credit to
them, participants can elect not to pre-position funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Euroclear
participants or Cedel participants purchasing Notes would incur overdraft
charges for one day, assuming they cleared the overdraft when the Notes were
credited to their accounts. However, interest on the Notes would accrue from the
value date. Therefore, in many cases, the investment income on Notes earned
during that one-day period may substantially reduce or offset the amount of such
overdraft charges, although this result will depend on each participant's
particular cost of funds.
Because the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Notes to the relevant
Depositary for the benefit of Euroclear participants or Cedel participants. The
sale proceeds will be available to the DTC seller on the settlement date. Thus,
to the DTC participant, a crossmarket transaction will settle no differently
than a trade between two DTC participants.
Finally, day traders that use Euroclear or Cedel and that purchase Notes
from DTC participants for credit to Euroclear participants or Cedel participants
should note that these trades will automatically fail on the sale side unless
affirmative action is taken. At least three techniques should be readily
available to eliminate this potential problem:
(1) borrowing through Euroclear or Cedel for one day (until the
purchase side of the day trade is reflected in their Euroclear account or
Cedel account) in accordance with the clearing system's customary
procedures;
(2) borrowing the Notes in the United States from a DTC participant no
later than one day prior to settlement, which would give the Notes
sufficient time to be reflected in the borrower's Euroclear account or
Cedel account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Euroclear
participant or Cedel participant.
Trading between Euroclear or Cedel seller and DTC purchaser. Due to the
time zone differences in their favor, Euroclear participants or Cedel
participants may employ their customary procedures for transactions in which
Notes are to be transferred by the respective clearing system through the
relevant Depositary to another DTC participant. The seller must send
instructions to Euroclear or Cedel through a participant at least one business
day prior to settlement. In these cases, Euroclear or Cedel will instruct its
Depositary to credit the Notes to the DTC participant's account against payment.
Payment will include interest accrued on the Notes from and including the last
interest payment date to and excluding the settlement date, on the basis of a
calendar year consisting of twelve 30-day calendar months. For transactions
settling on the 31st day of the month, payment will include interest accrued to
the excluding the first day of the following month. Payment will then be made by
the respective Depositary to the DTC participant's account against delivery of
the Notes. The payment will then be reflected in the account of the Euroclear
participant or Cedel participant the following day, and receipt of the cash
proceeds in the Euroclear or Cedel participant's account will be back-valued to
the value date (which would be the preceding day when settlement occurs in New
York). If the Euroclear participant or Cedel participant has a line of credit
with its respective clearing system and elects to draw on such line of credit in
anticipation of receipt of the sale proceeds in its account, the back-valuation
may substantially reduce or offset any overdraft charges incurred over the
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Euroclear or Cedel
participant's account would instead be valued as of the actual settlement date.
As is the case with respect to sales by a DTC participant to a Euroclear or
Cedel participant, participants in Euroclear and Cedel will have their accounts
credited the day after their settlement date. See "-- Trading between DTC Seller
and Euroclear or Cedel Purchaser" above.
106
<PAGE> 108
TAXATION
The following is a summary of certain material Bermuda and United States
federal income tax consequences applicable to an investor in connection with the
purchase, ownership and sale of the Notes.
The discussion below does not purport to address Bermuda or U.S. federal
income tax consequences applicable to specific potential investors, nor does the
discussion address the special tax rules applicable to certain categories of
investors such as banks, dealers in securities, tax-exempt entities and
insurance companies. In addition, it does not address any tax consequences
arising under the tax laws of any state or locality of the United States.
Prospective investors should therefore consult their tax advisors as to the
particular tax consequences to them of any investment in the Notes.
BERMUDA TAXATION
In the opinion of Conyers, Dill and Pearman, Bermuda Counsel to the
Company, the following is a summary of the material Bermuda tax consequences
relevant to the purchase, ownership and disposition of the Notes.
Under current law in Bermuda there is no income, capital gains or
withholding tax, corporation or profits tax, capital transfer tax, estate duty
or inheritance tax payable by the Company or the Holders, other than Holders
ordinarily resident in Bermuda.
No stamp duty will be imposed in Bermuda on the issuance of the Notes. No
stamp duty is payable in Bermuda on any transfer of the Notes or on any
agreement for the transfer of the Notes.
The Company has obtained from the Minister of Finance of Bermuda under the
Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in
the event of there being enacted in Bermuda any legislation imposing withholding
or other tax computed on profits or income, or computed on any capital assets
gain or appreciation or any tax in the nature of an estate duty or inheritance
tax, such tax shall not until March 28, 2016 be applicable to the Company or to
any of its operations or to the Notes except insofar as such tax applies to
persons ordinarily resident in Bermuda.
As an exempted company, the Company is liable to pay in Bermuda a
registration fee upon its authorized share capital and the premium on its issued
shares at a rate not exceeding $25,000 per annum.
UNITED STATES TAXATION
The following is a summary of certain United States Federal income tax
considerations for original purchasers of the Notes. This summary is based upon
existing United States Federal income tax law, which is subject to change,
possibly retroactively. This summary does not discuss all aspects of United
States Federal income taxation which may be important to particular investors in
light of their individual investment circumstances, such as Notes held by
investors subject to special tax rules (e.g., financial institutions, insurance
companies, broker-dealers, and tax-exempt organizations). In addition, this
summary does not discuss any foreign, state, or local tax considerations. This
summary assumes that investors will hold their Notes as "capital assets"
(generally, property held for investment) under the United States Internal
Revenue Code of 1986, as amended. Prospective investors should consult their tax
advisors regarding the United States Federal, state, local, and foreign income
and other tax considerations of owning and disposing of the Notes.
For purposes of this summary, a "U.S. Holder" is an individual who is a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized under the laws of the United States or any state or
political subdivision thereof, an estate that is subject to United States
Federal income taxation without regard to the source of its income, or a trust
whose administration is subject to the primary supervision of a United States
court and which has one or more United States fiduciaries who have the authority
to control all substantial decisions of the trust.
U.S. HOLDERS
Interest. Interest payable on the Notes will be includible in the income
of a U.S. Holder in accordance with such holder's normal method of accounting
and will constitute foreign source income for United States
107
<PAGE> 109
Federal income tax purposes. If any foreign taxes are imposed in respect of
payments on the Notes, a U.S. Holder may be eligible, subject to a number of
complex limitations, for a foreign tax credit.
Sale, Redemption or Other Disposition. A U.S. Holder will recognize
capital gain or loss upon the sale, redemption or other disposition of a Note in
an amount equal to the difference between the amount realized from such
disposition and his tax basis in the Note. Such gain or loss will be long-term
if the Note is held for more than one year. Any such capital gain will generally
be treated as United States source income. Although the matter is subject to
some uncertainty, any such loss may be treated as foreign source loss for United
States Federal income tax purposes.
NON-U.S. HOLDERS
An investment in the Notes by a non-U.S. Holder will not give rise to any
United States Federal income tax consequences, unless the interest received on,
or any gain recognized on the sale or other disposition of, the Notes by such
holder is treated as effectively connected with the conduct by such holder of a
trade or business in the United States or, in the case of gains derived by an
individual, such individual is present in the United States for 183 days or more
and certain other requirements are met.
Payments in respect of the Notes may be subject to information reporting to
the United States Internal Revenue Service and to back-up withholding tax at the
rate of 31%. In order to avoid back-up withholding on payments of interest and
principal made in the United States, a non-U.S. Holder of the Notes must
generally complete, and provide the payor with, a Form W-8 ("Certificate of
Foreign Status"), or other documentary evidence, certifying that such holder is
an exempt foreign person or otherwise establish an exemption from backup
withholding.
108
<PAGE> 110
CERTAIN FOREIGN ISSUER CONSIDERATIONS
The discussion below is based on the advice of Conyers, Dill & Pearman,
Bermuda counsel to the Company.
The Bermuda Monetary Authority has given its permission for the issuance of
the Notes by the Company up to an aggregate amount of $180,000,000. In addition,
a copy of this Registration Statement will be filed with the Registrar of
Companies in Bermuda pursuant to the Companies Act 1981 of Bermuda.
IT MUST BE DISTINCTLY UNDERSTOOD THAT, IN GRANTING SUCH PERMISSION AND UPON
ACCEPTING THIS REGISTRATION STATEMENT FOR FILING, THE BERMUDA MONETARY AUTHORITY
AND THE REGISTRAR OF COMPANIES IN BERMUDA WILL ACCEPT NO RESPONSIBILITY FOR THE
FINANCIAL SOUNDNESS OF ANY SCHEMES OR FOR THE CORRECTNESS OF ANY OF THE
STATEMENTS MADE OR OPINIONS EXPRESSED WITH REGARD TO THEM.
The Company has been classified as a non-resident, for exchange control
purposes, of the Bermuda Exchange Control area by the Bermuda Monetary
Authority. The transfer of Notes between persons regarded as resident outside
Bermuda for exchange control purposes and the issue and redemption of the Notes
to or by such persons may be effected without specific consent under the
Exchange Control Act 1972 of Bermuda and regulations made thereunder. Issues and
transfers of Notes involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under such Act. The
Company, by virtue of being a non-resident of Bermuda for exchange control
purposes, is free to acquire, hold and sell any foreign currency and security
without restriction under the laws of Bermuda.
109
<PAGE> 111
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated December 12, 1996 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters") have severally agreed to purchase,
and the Company has agreed to sell to them, the respective principal amounts of
the Notes set forth opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME NOTES
----------------------------------------------------------------------- ------------
<S> <C>
Morgan Stanley & Co. Incorporated...................................... $149,400,000
Donaldson, Lufkin & Jenrette Securities Corporation.................... 30,600,000
------------
Total........................................................ $180,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to approval of certain
legal matters by their counsel and to certain other conditions. The Underwriters
are obligated to take and pay for all the Notes if any are taken.
The Underwriters initially propose to offer part of the Notes directly to
the public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at prices that represent concessions not
in excess of .250% of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, concessions not in excess of .125% of the
principal amount of the Notes to certain other dealers. After the initial public
offering, the offering price and other selling terms may be varied from time to
time by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
The Notes are a new issue of securities with no established trading market.
The Company does not intend to apply for listing the Notes on any securities
exchange or for quotation through any inter-dealer quotation system. The Company
has been advised by Morgan Stanley & Co. Incorporated that it presently intends
to make a market in the Notes as permitted by applicable laws and regulations.
Morgan Stanley & Co. Incorporated is not obligated, however, to make a market in
any of the Notes and any such market making may be discontinued at any time
without notice at the sole discretion of Morgan Stanley & Co. Incorporated. No
assurances can be given as to the liquidity of, or the trading market for, the
Notes.
Representatives of the Underwriters have informed the Company that they do
not intend to confirm sales to any accounts over which they exercise
discretionary authority.
Each of Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation and certain of their respective affiliates have provided,
and may continue to provide, investment banking services to the Company.
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom (International), and for
the Underwriters by Davis Polk & Wardwell, New York, New York. Certain legal
matters pertaining to the laws of the People's Republic of China will be passed
upon by Commerce & Finance Law Office, Beijing, China. Legal matters pertaining
to Bermuda law will be passed upon by Conyers, Dill & Pearman, Hamilton,
Bermuda.
110
<PAGE> 112
EXPERTS
The Consolidated Financial Statements included in this Prospectus for the
period ended November 30, 1994 and the year ended November 30, 1995 have been
audited by Deloitte Touche Tohmatsu, independent auditors, as stated in their
report, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
111
<PAGE> 113
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...................................................... F-2
Consolidated Statements of Operations for the period ended November 30, 1994, the
fiscal year ended November 30, 1995 and the nine months ended August 31, 1995 and
August 31, 1996 (unaudited)...................................................... F-3
Consolidated Balance Sheets as of November 30, 1994, November 30, 1995 and August
31, 1996 (unaudited)............................................................. F-4
Consolidated Statements of Shareholders' Equity for the period ended November 30,
1994, the fiscal year ended November 30, 1995 and the nine months ended August
31, 1996 (unaudited)............................................................. F-6
Consolidated Statements of Cash Flows for the period ended November 30, 1994, the
fiscal year ended November 30, 1995 and the nine months ended August 31, 1995 and
August 31, 1996 (unaudited)...................................................... F-8
Notes to Consolidated Financial Statements.......................................... F-9
</TABLE>
F-1
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
AES CHINA GENERATING CO. LTD.
We have audited the accompanying consolidated balance sheets of AES China
Generating Co. Ltd. and its subsidiaries as of November 30, 1994 and 1995 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the period from December 7, 1993 (inception) to November 30, 1994
and for the year ended November 30, 1995. 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 auditing standards generally
accepted in the United States of America. 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 AES China Generating Co. Ltd.
and its subsidiaries as of November 30, 1994 and 1995, and the results of their
operations and cash flows for the period from December 7, 1993 (inception) to
November 30, 1994 and for the year ended November 30, 1995 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE TOUCHE TOHMATSU
Hong Kong
January 25, 1996
F-2
<PAGE> 115
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL PERIOD
ENDED NOVEMBER NINE MONTHS ENDED
30, AUGUST 31,
----------------- -----------------------
1994 1995 1995 1996
------- ------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Electricity sales..................................... $ 38 $ 702 $ 916 $ 6,553
Construction delay fee................................ -- 680 -- 400
------- ------- ------- -------
Total revenues................................ 38 1,382 916 6,953
Operating costs and expenses:
Costs of sales........................................ 68 635 496 3,867
Development, selling, general and administrative
expenses........................................... 6,927 9,259 6,920 5,229
------- ------- ------- -------
Total operating costs and expenses............ 6,995 9,894 7,416 9,096
------- ------- ------- -------
Operating loss.......................................... (6,957) (8,512) (6,500) (2,143)
Other income/(expense):
Interest income....................................... 6,589 10,529 8,060 5,001
Interest expense...................................... -- -- -- (679)
Equity in earnings of affiliates...................... -- 206 102 441
------- ------- ------- -------
Income/(loss) before income taxes and minority
interest.............................................. (368) 2,223 1,662 2,620
Income taxes.......................................... -- -- -- 455
Minority interest..................................... 3 85 93 218
------- ------- ------- -------
Net income/(loss)....................................... $ (371) $ 2,138 $ 1,569 $ 1,947
------- ------- ------- -------
Net income/(loss) per share............................. $ (0.03) $ 0.12 $ 0.09 $ 0.12
======= ======= ======= =======
Weighted average number of shares....................... 14,817 17,391 17,487 15,649
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 116
AES CHINA GENERATING CO. LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF
------------------- AUGUST 31,
1994 1995 1996
-------- -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR
VALUES AND SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 95,486 $125,684 $ 92,043
Investments -- held-to-maturity.............................. 91,633 41,609 6,657
Investments -- available-for-sale............................ -- 2,995 5,911
Accounts receivable from related parties..................... 41 463 4,179
Interest receivable.......................................... 976 293 139
Inventory.................................................... 18 31 956
Prepaid expenses and other current assets.................... 380 422 1,530
-------- -------- --------
Total current assets................................. 188,534 171,497 111,415
Property, Plant and Equipment:
Electric generating facilities............................... 3,592 6,468 59,303
Equipment, furniture and leasehold improvements.............. 632 1,233 2,260
Accumulated depreciation and amortization.................... (107) (665) (2,221)
Construction in progress..................................... 6,969 39,555 74,442
-------- -------- --------
Total property, plant and equipment, net............. 11,086 46,591 133,784
Other Assets:
Project development costs.................................... -- 1,083 892
Investments in and advances to affiliates.................... -- 2,566 19,185
Investments -- held-to-maturity.............................. 10,941 -- --
Note receivable.............................................. -- 7,500 4,214
Deposits and other assets.................................... 309 634 812
-------- -------- --------
Total other assets................................... 11,250 11,783 25,103
-------- -------- --------
TOTAL................................................ $210,870 $229,871 $ 270,302
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 117
AES CHINA GENERATING CO. LTD.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF
------------------- AUGUST 31,
1994 1995 1996
-------- -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR
VALUES AND SHARE AMOUNTS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable -- The AES Corporation...................... $ 902 $ 214 $ 1,747
Accounts payable............................................. 85 537 1,817
Payable for repurchase of shares............................. -- 10,011 --
Payable for investment purchase.............................. -- 2,995 --
Accrued liabilities.......................................... 1,080 1,430 1,372
Accrued liabilities for construction......................... -- -- 7,618
Loans from minority shareholders -- current portion.......... -- 351 1,365
Notes payable................................................ -- 1,000 481
-------- -------- --------
Total current liabilities............................ 2,067 16,538 14,400
Long-Term Liabilities:
Deferred income taxes........................................ -- -- 455
Loans from minority shareholders............................. -- 6,666 33,982
-------- -------- --------
Total long-term liabilities.......................... -- 6,666 34,437
Minority Interest.............................................. 7,219 19,082 33,345
Commitments and Contingencies
Shareholders' Equity:
Class A common stock -- par value $0.01 per share,
(50,000,000 shares authorized; 1995 -- 10,216,000 shares
issued; 1996 -- 8,134,100 shares issued and outstanding
after deducting retirement of treasury stock)............. 102 102 81
Class B common stock -- par value $0.01 per share,
(50,000,000 shares authorized; 7,500,000 shares issued and
outstanding).............................................. 75 75 75
Additional paid-in capital................................... 201,762 201,762 183,980
Retained earnings/(accumulated deficit)...................... (371) 1,767 3,714
Cumulative translation adjustment............................ 16 250 270
Treasury stock, at cost, (1,912,600 shares at November 30,
1995)..................................................... -- (16,371) --
-------- -------- --------
Total shareholders' equity........................... 201,584 187,585 188,120
-------- -------- --------
TOTAL................................................ $210,870 $229,871 $ 270,302
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 118
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------ --------- ------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BALANCE DECEMBER 7, 1993................................ -- $ -- -- $ --
Issuance of Class B common stock........................ -- -- 7,500,000 75
Issuance of Class A common stock........................ 10,216,000 102 -- --
Foreign currency translation............................ -- -- -- --
Net loss for the period................................. -- -- -- --
---------- ---- --------- ---
BALANCE NOVEMBER 30, 1994............................... 10,216,000 102 7,500,000 75
Purchase of treasury stock.............................. -- -- -- --
Foreign currency translation............................ -- -- -- --
Net income for the year................................. -- -- -- --
---------- ---- --------- ---
BALANCE NOVEMBER 30, 1995............................... 10,216,000 102 7,500,000 75
Purchase of treasury stock (unaudited).................. -- -- -- --
Retirement of treasury stock (unaudited)................ (2,081,900) (21) -- --
Foreign currency translation (unaudited)................ -- -- -- --
Net income for the period (unaudited)................... -- -- -- --
---------- ---- --------- ---
BALANCE AUGUST 31, 1996 (unaudited)..................... 8,134,100 $ 81 7,500,000 $ 75
========== ==== ========= ===
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 119
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/ CUMULATIVE TREASURY STOCK
PAID-IN (ACCUMULATED TRANSLATION ------------------------- SHAREHOLDERS'
CAPITAL DEFICIT) ADJUSTMENT SHARES AMOUNT EQUITY
---------- ------------ ---------- ---------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S><C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- -- $ -- $ --
49,925 -- -- -- -- 50,000
151,837 -- -- -- -- 151,939
-- -- 16 -- -- 16
-- (371) -- -- -- (371)
---------- ------------ ---------- ---------- ---------- -------------
201,762 (371) 16 -- -- 201,584
-- -- -- (1,912,600) (16,371) (16,371)
-- -- 234 -- -- 234
-- 2,138 -- -- -- 2,138
---------- ------------ ---------- ---------- ---------- -------------
201,762 1,767 250 (1,912,600) (16,371) 187,585
-- -- -- (169,300) (1,432) (1,432)
(17,782) -- -- 2,081,900 17,803 --
-- -- 20 -- -- 20
-- 1,947 -- -- -- 1,947
---------- ------------ ---------- ---------- ---------- -------------
$ 183,980 $3,714 $270 -- $ -- $ 188,120
======== ========== ======== ========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 120
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED NINE MONTHS ENDED
NOVEMBER 30, AUGUST 31,
--------------------- -----------------------
1994 1995 1995 1996
--------- --------- ---------- ----------
(IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)........................................... $ (371) $ 2,138 $ 1,569 $ 1,947
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 107 476 348 1,321
Provision for deferred taxes.............................. -- -- -- 455
Minority interest......................................... 3 85 93 218
Equity in earnings of affiliates.......................... -- (206) (102) (441)
Dividend from affiliates.................................. -- -- -- 447
Change in assets and liabilities:
Accounts receivable from related parties................ (41) (422) (748) (3,373)
Interest receivable..................................... (976) 683 369 246
Inventory, prepaid expenses and other current assets.... (398) (55) 126 (1,851)
Deposits................................................ (309) (82) (98) (90)
Accounts payable and accrued expenses................... 2,067 114 (206) 2,755
--------- --------- -------- ---------
Net cash provided by operating activities.......... 82 2,731 1,351 1,634
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................. 201,939 -- -- --
Contributions and loans from minority shareholders.......... -- 13,535 4,000 1,117
Proceeds from notes payable................................. -- 1,000 -- 481
Repayment of Notes Payable.................................. -- -- -- (1,000)
Repurchase of Class A common stock.......................... -- (6,360) (3,793) (11,443)
--------- --------- -------- ---------
Net cash provided by/(used in) financing
activities....................................... 201,939 8,175 207 (10,845)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and construction in progress.......... (3,274) (29,544) (11,848) (37,552)
Purchase of short-term investments.......................... (195,943) (169,187) (156,719) (38,082)
Proceeds from the sale/maturity of investments.............. 93,369 230,152 191,479 67,123
Investments in and advances to affiliates................... -- (2,360) (1,250) (8,500)
Project development costs and other assets.................. (687) (2,269) (923) (3,205)
Investment in note receivable............................... -- (7,500) -- (4,214)
--------- --------- -------- ---------
Net cash provided by/(used in) investing
activities....................................... (106,535) 19,292 20,739 (24,430)
--------- --------- -------- ---------
Increase/(decrease) in cash and cash equivalents... 95,486 30,198 22,297 (33,641)
CASH AND CASH EQUIVALENTS,
Beginning of year/period.................................. -- 95,486 95,486 125,684
--------- --------- -------- ---------
End of year/period........................................ $ 95,486 $ 125,684 $ 117,783 $ 92,043
========= ========= ======== =========
</TABLE>
SUPPLEMENTAL DISCLOSURE:
In 1994, the Company's joint venture partner in Xiangci-AES contributed
capital in the form of work-in-progress and equipment of $7.2 million.
In 1995, the Company's joint venture partners in Wuxi-AES-CAREC and
Wuxi-AES-Zhonghang contributed capital in the form of work-in-progress and
equipment of $5.3 million. At November 30, 1995, the Company had recorded the
purchase of investments and the purchase of treasury stock for $3.0 million and
$10.0 million, respectively. Payments for such purchases were made subsequent to
year-end.
In April 1996, the Company's joint venture partner in Jiaozuo Wan Fang
contributed capital and shareholder loans of $38.4 million in the form of land
use rights, construction-in-progress, equipment and receivables, net of accounts
payable (unaudited).
See notes to consolidated financial statements.
F-8
<PAGE> 121
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AES China Generating Co. Ltd. ("AES Chigen" or the "Company"), a Bermuda
company, was incorporated on December 7, 1993, to develop, acquire, finance,
construct, own and manage electric power generation facilities in the People's
Republic of China (the "PRC"). The Company is an effectively controlled
affiliate of The AES Corporation ("AES"). As of August 31, 1996, AES owned
approximately 48% of the outstanding common stock of the Company. AES Chigen was
a development stage company in 1994.
As detailed in note 12, an Agreement and Plan of Amalgamation, dated as of
November 12, 1996 has been signed which, if approved by the Class A shareholders
of the Company and subject to the satisfaction of certain conditions, would
result in AES owning the entire outstanding common stock of the Company
(unaudited).
Fiscal Periods -- Statements of operations and cash flows are presented for
the period from December 7, 1993 (inception), to November 30, 1994 and for the
year ended November 30, 1995.
Accounting Principles -- The Company has prepared its financial statements
on the basis of United States generally accepted accounting principles.
Principles of Consolidation -- The consolidated financial statements of the
Company include the accounts of AES Chigen and its subsidiaries. Investments in
50% or less owned affiliates over which the Company exercises significant
influence, but not control, are accounted for by the equity method. Intercompany
transactions and balances have been eliminated. In 1994, the Company acquired an
interest in Hunan Xiangci-AES Hydro Power Company Ltd. ("Xiangci-AES") for cash
which approximated the fair value of net tangible assets acquired. In the second
quarter of 1996, a subsidiary of the Company acquired a controlling interest in
Jiaozuo Wan Fang Power Company Limited ("Jiaozuo Wan Fang") for cash which
approximated the fair value of net tangible assets acquired (unaudited). The
acquisitions were accounted for as purchases.
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. Cash
and cash equivalents consists mainly of short-term commercial paper and US
Treasury bills.
Investments -- Debt and equity securities which the Company has both the
positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Debt and equity securities which
might be sold prior to maturity are classified as available-for-sale and carried
at approximate fair value. Material unrealized gains and losses related to
available-for-sale investments, net of applicable taxes, are reflected in a
separate component of shareholders' equity. The Company determines the
appropriate classification of securities at the time of purchase and evaluates
such classification as of each balance sheet date.
Inventory -- Inventory, valued at lower of cost (principally weighted
average method) or market value, consists of spare parts, materials and fuel
supplies used for the production of electricity.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost including the cost of improvements. Depreciation, after consideration of
salvage value, is computed using the straight-line method over the estimated
composite lives of the assets, which range from three to 25 years. Maintenance
and repairs are charged to expense as incurred.
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 generating facilities when the related assets or group of assets are
ready for their intended use. Capitalized interest during construction was $0.3
million in 1995 and $2.0 million for the nine months ended August 31, 1996
(unaudited).
F-9
<PAGE> 122
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition -- Revenues from the sale of electricity are recorded
based upon output delivered and capacity provided at rates as specified under
contract terms. Most of the Company's power plants rely primarily on one power
sales contract with a single customer for the majority of its revenues. One
customer accounted for 100% of electricity sales revenues in 1994 and 1995, and
for the nine months ended August 31, 1995 (unaudited). Two customers accounted
for 11% and 89%, respectively, of electricity sales revenues for the nine months
ended August 31, 1996 (unaudited). The failure of any customer to fulfill its
contractual obligations could have a substantial negative impact on AES Chigen's
revenues. However, the Company does not anticipate non-performance by the
customers under these contracts. Fees for construction delay paid by Cili Power
Company, the contractor of Xiangci-AES, to compensate the Company for lost
generation in respect of an expansion facility, are recognized as revenue when
earned.
Project Development Costs -- Project development costs generally represent
costs incurred after achieving certain project related milestones prior to the
acquisition of generating assets or the start of physical construction. These
costs represent amounts incurred for professional services, salaries, permits,
options and other related costs. These costs are transferred to construction in
progress during the construction phase and to electric generating facilities
after commencement of operations.
Income Taxes -- Income taxes are provided based on an asset and liability
approach for financial accounting and reporting of income taxes. Deferred income
tax liabilities or benefits are recorded to reflect the tax consequences in
future years of differences between the tax basis of assets and liabilities and
the financial reporting amounts at each year end. A valuation allowance is
recognized if it is more likely than not that some portion of, or all of, a
deferred tax asset will not be realized.
Net Income/(Loss) Per Share -- Net income/(loss) per share is based on the
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents result from dilutive stock options. The
effect of such common stock equivalents on net income/(loss) per share is
computed using the treasury stock method. The weighted average number of shares
used in computing net income/(loss) per share were 14,817,000 and 17,391,000 for
1994 and 1995, respectively, and 17,487,000 and 15,649,000 for the nine months
ended August 31, 1995 and 1996, respectively (unaudited). Primary and fully
diluted earnings per share are the same.
Stock Options -- Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" has been issued and will be
adopted by the Company in the year ended November 30, 1997. The statement
includes an optional new method for recognizing compensation expense for
employee stock options. The Company is continuing to evaluate whether or not it
will change to the new recognition method and, as a result, the Company has not
yet determined the effect of adopting SFAS No. 123.
Foreign Currency Translation -- The Company's financial reports are
prepared using the United States dollar as the reporting currency. For
subsidiaries whose functional currency is deemed to be other than the United
States dollar, asset and liability accounts are translated at period-end rates
of exchange and revenue and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments are included as a separate
component of shareholders' equity.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of estimates.
Actual results could differ from those estimates.
Reclassifications -- Certain reclassifications have been made to prior
period amounts to conform with the 1996 presentation.
F-10
<PAGE> 123
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS
The Company's investments are classified as either held-to-maturity or
available-for-sale. The amortized cost and estimated fair value as of November
30, 1994 and 1995 and as of August 31, 1996 (unaudited), of the investments
classified as held-to-maturity and available-for-sale were approximately the
same. The short-term investments were invested as follows:
<TABLE>
<CAPTION>
AS OF
NOVEMBER 30, AS OF
-------------------- AUGUST 31,
1994 1995 1996
-------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
HELD-TO-MATURITY
US Treasury and government agency securities......... $ 21,747 $32,617 $ 2,657
Securities issued by foreign central governments..... 4,988 -- --
Foreign certificates of deposit...................... 22,977 3,000 4,000
Corporate bonds...................................... 19,942 -- --
Floating rate notes.................................. 30,853 5,992 --
Asset-backed securities.............................. 2,067 -- --
-------- ------- ------
$102,574 $41,609 $ 6,657
======== ======= ======
AVAILABLE-FOR-SALE
US Treasury and government agency securities......... $ -- $ 2,995 $ 5,911
======== ======= ======
</TABLE>
3. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates consists of a 25%
ownership interest in Yangchun Fuyang Diesel Power Co. Ltd. and, from August
1996 (unaudited), a 25% ownership interest in Wuhu Shaoda Electric Power
Development Company Ltd.("Wuhu Shaoda") and a subordinated loan to the project.
4. NOTE RECEIVABLE
In August 1995, the Company provided a non-interest bearing loan in the
amount of $7.5 million to China Power International Holding Limited to develop
and invest in Wuhu Shaoda with a condition that the loan will convert to a
minority equity investment in the project upon obtaining approvals from the PRC
government. In August 1996, the loan successfully converted to a minority equity
investment in the project.
As of August 31, 1996, Jiaozuo Wan Fang had provided an interest bearing
loan in the amount of $4.2 million through Zhongyuan Trust and Investment
Company to Henan Electric Power Corporation for the construction of
interconnection and transmission facilities. (Unaudited).
5. LOANS FROM MINORITY SHAREHOLDERS
As of November 30, 1995, loans from minority shareholders represented debt
provided by the Company's joint venture partners, Wuxi Power Industry Company
("Wuxi Power") and China National Aero-Engine Corporation ("CAREC") to
Wuxi-AES-CAREC Gas Turbine Power Co. Ltd. ("Wuxi-AES-CAREC") and
Wuxi-AES-Zhonghang Power Co. Ltd., ("Wuxi-AES-Zhonghang"). The loans are secured
by the land use rights and all assets of the joint venture companies and bear
interest at 13% per annum through the end of 1995 and 15% per annum thereafter.
Principal and interest are repayable in 20 semi-annual installments beginning
July 1, 1996.
F-11
<PAGE> 124
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 1996 loans from minority shareholders also included a loan
in the amount of $24.7 million from Jiaozuo Aluminum Mill to Jiaozuo Wan Fang.
The total commitment amounts to $29.3 million. The loan is unsecured and bears
interest at 15.3% per annum and a service fee to the lender at 3% per annum. The
loan is divided into two tranches in equal amounts. Interest on the first
tranche of the loan is payable quarterly in arrears following commercial
operation of unit one. Interest on the second tranche of the loan is payable
quarterly in arrears following commercial operation of unit two. Principal of
the first tranche is repayable in 27 quarterly installments beginning January 1,
1998 and the principal of the second tranche is payable in 25 quarterly
installments beginning July 1, 1998. (Unaudited).
Scheduled maturities of loans from minority shareholders as of November 30,
1995 and August 31, 1996 are as follows:
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, AS OF AUGUST 31,
1995 1996
------------------------------------ -------------------------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
1996........................ $ 351 1997........................ $ 1,365
1997........................ 702 1998........................ 3,401
1998........................ 702 1999........................ 4,825
1999........................ 702 2000........................ 4,825
2000........................ 702 2001........................ 4,825
Thereafter.................. 3,858 Thereafter.................. 16,106
------ -------
$7,017 $35,347
====== =======
</TABLE>
6. NOTES PAYABLE
At November 30, 1995 notes payable consisted primarily of a short-term bank
loan to Wuxi-AES-CAREC. The note is guaranteed by Wuxi County Power Fuel
Company, bears interest at 8.4% per annum and is repayable within one year.
At August 31, 1996, short-term bank loans totaling $.4 million to
Xiangci-AES were outstanding. The loans are secured by the buildings of the
joint venture, bear interest from 10.7% to 14.5% per annum and are repayable
within one year. In addition, a short-term bank loan of $.1 million to
Wuxi-AES-CAREC was outstanding. The note is guaranteed by Wuxi County Power Fuel
Company, bears interest at 12.1% per annum and is repayable within one year.
(Unaudited).
7. COMMITMENTS AND CONTINGENCIES
As of November 30, 1995, the Company had an outstanding commitment to
invest an aggregate of $3.6 million (none at August 31, 1996 -- unaudited) in
the form of shareholder loans to Wuxi-AES-CAREC and Wuxi-AES-Zhonghang.
As of November 30, 1995, Xiangci-AES has approximately a $3.1 million ($1.6
million at August 31, 1996 -- unaudited) cash reserve to complete construction
of the expansion facility. Upon completion of the facility, any portion of this
amount not utilized will be paid by Xiangci-AES to Cili Power Company, as
contractor.
On December 22, 1995, the Company, through its wholly-owned subsidiary, AES
Tian Fu Power Co. Ltd., committed to invest in Sichuan Fuling Aixi Power Co.
Ltd. $8.5 million in the form of equity investment and $23.5 million in the form
of shareholder loans. As of August 31, 1996, approximately $5.8 million was
invested in the joint venture as an equity contribution (unaudited).
F-12
<PAGE> 125
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the nine months ended August 31, 1996, the Company through its
wholly-owned subsidiary, AES China Holding Company (L) Limited, committed to
invest an aggregate of $18.0 million in the form of a subordinated term loan to
Wuhu Shaoda. As of August 31, 1996, $9.1 million of the committed term loan was
advanced to the joint venture. (Unaudited).
In April 1996, Wuhu Shaoda entered into a $65.0 million syndicated senior
loan agreement with a group of nine banks ("lenders") to finance the
construction of the power plant. As a condition to the extension of the
facility, AES China Holding Company (L) Limited, and the other joint venture
partners (together referred to as "Partners"), entered into an undertaking and
subordination deed with the lenders and Wuhu Shaoda whereby, the Partners
committed to fund any construction cost overrun and working capital deficit of
the project in proportion to each Partner's respective equity contribution
percentage in the joint venture up to $6.0 million. (Unaudited).
In April 1996, the Company committed to invest an aggregate of
approximately $68.3 million in the form of shareholder loans to Jiaozuo Wan
Fang. In October 1996 the Company funded $20.0 million of its shareholder loan
commitment. As of August 31, 1996, Jiaozuo Wan Fang had an outstanding
commitment to provide a loan of $5.7 million through Zhongyuan Trust and
Investment Company to Henan Electric Power Corporation for the construction of
interconnection and transmission facilities. (Unaudited).
The Company has initialed or signed several joint venture contracts which
become effective under Chinese law following receipt of certain government
approvals. These joint venture contracts are also subject to the satisfaction or
waiver of certain conditions precedent specified in the joint venture contracts.
Until the appropriate governmental approvals have been obtained and all
conditions precedent have been satisfied or waived, the Company regards the
initialing or signing of a joint venture contract as being a preliminary step in
the development of an electric power generation project and therefore does not
recognize amounts under these joint venture contracts as commitments.
8. SHAREHOLDERS' EQUITY
CLASS A COMMON STOCK
On March 2, 1994, the Company issued 10,000,000 shares of Class A common
stock in a public offering. On April 4, 1994, the underwriters for the offering
exercised a portion of the over-allotment option granted to them in connection
with the initial public offering and the Company sold an additional 216,000
shares of Class A common stock. In connection with the offering, the Company
registered its Class A common stock with the United States Securities and
Exchange Commission and its shares were approved for quotation on the National
Association of Securities Dealers Automated Quotation National Market System.
The net proceeds of the offering amounted to $151.9 million.
The holders of AES Chigen's Class A common stock are entitled, voting as a
class, to elect one-half of the Board of Directors of the Company. However, the
voting rights of certain holders, if any, of 20% or more of the Class A shares
will be restricted in accordance with the Company's Bye-laws.
The holders of Class A common stock had a one-time right to require the
Company to repurchase their respective Class A shares if by February 23, 1997
the Company had not invested or entered into binding commitments to invest at
least $50.0 million in one or more electric power generation projects in the PRC
on which construction had commenced. The Company has entered into such
commitments and therefore the Class A shareholders no longer have the right to
require repurchase. As a result, the Class A common stock has been reclassified
into shareholders' equity.
F-13
<PAGE> 126
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASS B COMMON STOCK
On December 29, 1993, AES, pursuant to a Stock Purchase and Shareholder's
Agreement (the "Stock Purchase Agreement") between AES and the Company purchased
7,500,000 shares of Class B common stock. The net proceeds of the sale amounted
to $50.0 million.
The holders of Class B common stock are entitled, voting as a class, to
elect one-half of the Board of Directors of the Company. As of November 30, 1995
and 1994, there were 7,500,000 shares of Class B common stock outstanding, all
of which were owned by AES.
Under the Stock Purchase Agreement, AES agreed that it would not transfer
any Class B shares before February 23, 1996. AES also agreed not to dispose of
more than 3,750,000 Class B shares plus 50% of any Class B shares acquired
subsequent to AES's initial purchase of Class B common stock (excluding certain
shares issued upon reinvestment by AES of performance fees received by it under
the Services Agreement (see Note 9) between the Company and AES) until the
earlier of the tenth anniversary of the effective date of the offering and the
termination of the Services Agreement. Upon the sale or transfer by AES of any
Class B common stock, such shares convert to Class A common stock. Upon the sale
or transfer by AES in one or more transactions of more than approximately 50% of
the Class B common stock acquired by AES, the Class B common stock will convert
into Class A common stock and the right of AES to elect one-half of the Board of
Directors of the Company will terminate.
The Stock Purchase Agreement also provides AES with a preemptive right to
purchase additional Class B common stock in the event the Company issues
additional Class A common stock. AES also has agreed not to acquire any Class A
common stock until such time as all of the shares of Class B common stock have
been converted to shares of Class A common stock.
TREASURY STOCK
On April 4, 1995, the Company announced a plan to repurchase up to an
additional 2,042,000 shares of its Class A common stock. Prior to the
announcement of the plan, the Company had purchased 168,000 shares of Class A
common stock through unsolicited block transactions. As of November 30, 1995,
the Company had repurchased a total of 1,912,600 shares of its Class A common
stock. During the nine months ended August 31, 1996, the Company repurchased a
further 169,300 shares of Class A common stock (unaudited). The aggregate
repurchase of shares approximates 20% of the shares of Class A common stock
issued and were acquired at an average price of $8.55 per share. As of August
31, 1996, the Company had retired all the shares of treasury stock.
TRANSFER OF FUNDS FROM SUBSIDIARIES AND AFFILIATES
Nearly all of the monetary assets of the Company's subsidiaries and 50% or
less owned affiliates are denominated in Renminbi. The conversion of Renminbi
into US dollars and the remittance of US dollars abroad require PRC Government
approvals. At August 31, 1996, the Company's share of the net assets of its
subsidiaries amounted to $67.1 million. (Unaudited).
F-14
<PAGE> 127
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
In 1994, the Company adopted the AES China Generating Co. Ltd. Incentive
Stock Option Plan (the "Plan"). In March 1995, the Company's shareholders
approved an increase in the total number of shares available for issuance upon
exercise of options granted to employees from 875,000 to 2,000,000 shares of
Class B common stock and an increase in the maximum number of shares issuable
upon exercise of options that can be granted to an individual from 250,000 to
500,000 shares of Class B common stock. At November 30, 1995, there were 548,941
shares reserved for future grants under the Plan. A summary of stock option
activity for the period from December 7, 1993 (inception) through November 30,
1994, for the year ended November 30, 1995 and for the nine months ended August
31, 1996 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED
NOVEMBER 30, NOVEMBER 30, AUGUST 31,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
(IN SHARES)
<S> <C> <C> <C>
Outstanding at beginning of period/year........... -- 752,500 1,451,059
Exercised during the period/year.................. -- -- --
Forfeited during the period/year.................. -- (272,821)
Granted during the period/year (from $8.50 to
$16.00)......................................... 752,500 698,559 229,189
------- --------- ---------
Outstanding -- end of period/year (from $8.50 to
$16.00)......................................... 752,500 1,451,059 1,407,427
======= ========= =========
Eligible for exercise -- end of period/year....... -- 150,500 358,112
======= ========= =========
</TABLE>
All options granted under the Plan have an exercise price equal to 100% of
the market price at the date the option was granted. For the options granted in
1994 and 1995, options granted expire in ten years from the date of grant and
generally become eligible for exercise in installments of 20% at the end of each
of the first five years following the grant date. Certain options granted during
1995 become eligible for exercise in installments of 20% at the end of one year
following the date of grant with an additional 20% of the shares vesting on the
later of each of the second, third, fourth and fifth anniversaries of the date
of grant or the date the market price reaches, for a sixty-day consecutive
period, a price per share of $15.00, $20.00, $25.00 and $30.00, respectively.
Options granted in 1996 generally become eligible for exercise over a two year
period (unaudited).
9. RELATED PARTIES
AES Chigen has entered into a Project Services Agreement with AES (the
"Services Agreement") whereby AES will exclusively provide development,
construction management and operations services to the Company. The Services
Agreement has an initial term of five years commencing December 1993 with three
five-year renewal terms. Management fees under the Services Agreement totalled
$.4 million and $.1 million for the period ended November 30, 1994 and for the
year ended November 30, 1995, respectively, and $.3 million for the nine months
ended August 31, 1996 (unaudited). The Services Agreement provides that for the
first five years that the agreement is in effect AES will invest the after-tax
proceeds of certain performance fees in additional shares of Class B common
stock.
The Company has entered into a Non-Competition and Non-Disclosure Agreement
with AES which provides that AES will not compete with the Company in China to
develop, acquire, construct, own, or operate electric power generation
facilities for a period of ten years beginning December 1993, or for the period
ending three years after the Services Agreement is terminated, whichever is
longer. The Company has agreed not to compete with AES in the remaining parts of
Asia with respect to electric power generation activities.
F-15
<PAGE> 128
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the service agreement between Wuxi-AES Zhonghang and
Wuxi-AES-CAREC, and the construction service agreement between Wuxi-AES-CAREC,
CAREC and Wuxi Power Industry Company ("Wuxi Power"), CAREC and Wuxi Power are
responsible for the construction of the combined cycle plant on a cost-plus
basis. The amount paid to CAREC and Wuxi Power for the construction during 1995
and the nine months ended August 31, 1996 was approximately $.2 million and $.9
million (unaudited), respectively.
As of November 30, 1994 and 1995, accounts receivable from related parties
represented the amounts due from Cili Power Company, a joint venture partner in
Xiangci-AES, for sale of electricity.
As of August 31, 1996, accounts receivable from related parties consisted
of amounts due from Cili Power Company and the Xishan City Electricity
Management Office, an associated Company of the joint venture partner in
Wuxi-AES-CAREC, for sale of electricity (unaudited).
10. INCOME TAXES
The Company's PRC joint ventures are entitled to a two-year tax exemption
from national and local income taxes commencing from the first profitable year
of operations, after taking into account any losses brought forward from prior
years, followed by a 50% reduction in tax rates for the next three years ("tax
holidays"). No PRC income tax was incurred during 1994 and 1995 and during the
nine months ended August 31, 1996 (unaudited) as the joint ventures were either
within the exemption period of the tax holidays or had not yet commenced
commercial operations.
As of November 30, 1994 and 1995, there were no material temporary
differences between tax basis and financial reporting, therefore, no provision
for deferred tax was recorded.
As of August 31, 1996, a deferred tax liability amounting to approximately
$.5 million was provided for, mainly for timing differences arising from
deferred expenses and accelerated depreciation of property, plant and equipment
under the PRC tax rules (unaudited).
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments, including cash and cash
equivalents, investments, note receivable and payables for repurchase of shares
and investment purchase, were equal to their approximate fair value as of
November 30, 1994 and 1995 and as of August 31, 1996 (unaudited) because of the
relatively short maturities of these investments. As of November 30, 1995 and as
of August 31, 1996 (unaudited), the carrying value of loans from minority
shareholders and the note payable approximated fair value determined by the
estimated discount rate a prospective seller would pay to a credit-worthy third
party to assume the obligation.
12. SUBSEQUENT EVENTS (UNAUDITED)
In September 1996, Chengdu AES -- Kaihua Gas Turbine Power Company Ltd., a
joint venture, was established to construct, own and operate a 48 MW natural
gas-fired power plant in Chengdu City, Sichuan Province. The Company committed
to invest an aggregate of approximately $18.0 million in the form of equity
contributions and shareholder loans to the joint venture.
In October 1996, Anhui Liyuan-AES Power Company Ltd. and Hefei Zhongli
Energy Company Ltd, two cooperative joint ventures, were established to
construct, own and operate a 115.2 MW combined cycle power plant in Hefei, Anhui
Province. The Company has a 70% ownership interest in the projects and has
committed to invest an aggregate of approximately $37.0 million in the form of
equity contributions and shareholder loans to these two joint ventures.
The Company and AES have entered into an Agreement and Plan of
Amalgamation, dated as of November 12, 1996, pursuant to which a wholly owned
subsidiary of AES would amalgamate (the
F-16
<PAGE> 129
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Amalgamation") with the Company and each share of the Company's Class A common
stock outstanding prior to the Amalgamation will thereafter represent the right
to require shares of AES common stock. The Agreement and Plan of Amalgamation is
subject to various conditions, including the approval of the holders of the
Class A Common Stock of the Company. In the Amalgamation, all outstanding
options to acquire Class B Common Stock in the Company under the Company's
Incentive Stock Option Plan would be converted into options to acquire shares of
AES common stock.
13. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the Company's opinion, all adjustments necessary for a fair presentation
of the unaudited results for the nine months ended August 31, 1995 and 1996,
respectively, are included. All such adjustments are accruals of a normal and
recurring nature. The results of operations for the nine months ended August 31,
1996 are not necessarily indicative of the results of operations for the full
year.
F-17
<PAGE> 130
APPENDIX A -- THE PEOPLE'S REPUBLIC OF CHINA
THE INFORMATION SET FORTH IN THIS APPENDIX HAS BEEN EXTRACTED FROM VARIOUS
INTERNATIONAL ORGANIZATION, GOVERNMENT AND PRIVATE PUBLICATIONS. THE COMPANY
MAKES NO REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION; FURTHERMORE, NO
REPRESENTATION IS MADE THAT ANY CORRELATION EXISTS BETWEEN THE PEOPLE'S REPUBLIC
OF CHINA OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE OF THE COMPANY. ALTHOUGH
STATISTICS WITH RESPECT TO THE ECONOMY OF CHINA GENERALLY ACCORD WITH OBSERVED
ECONOMIC TRENDS, SOME STATISTICS MAY NOT CORRESPOND TO WESTERN MEASURES, OR MAY
BE FLAWED BY INEFFECTIVE COLLECTION METHODS OR OTHER PROBLEMS. DUE TO SUCH
FACTORS, STATISTICAL INFORMATION REGARDING THE ECONOMY OF CHINA MAY BE
INACCURATE OR NOT COMPARABLE TO STATISTICAL INFORMATION WITH RESPECT TO THE U.S.
OR OTHER ECONOMIES.
THE PEOPLE'S REPUBLIC OF CHINA
AREA AND POPULATION
The PRC is the third largest country in the world in terms of land area. It
has a territory of approximately 3.7 million square miles.
The PRC has widely varied topography, with mountain ranges, deserts and
highlands (which account for approximately two-thirds of PRC territory) located
generally in the West, and coastal plains and river basins located generally in
the East. There are three principal river basin systems in Eastern China: the
Yellow River in the North, the Yangtze River in central China and the Pearl
River in the South, each of which supports intensive agricultural, industrial
and transportation activities.
By the end of 1995, the population of the PRC was over 1.2 billion. It is
the world's most populous country, with about one-fifth of the world's
population. Over the last forty years, the PRC has witnessed significant
urbanization; in 1949, urban population accounted for about 11% of the total
population increasing to approximately 29% by the end of 1995.
POLITICAL OVERVIEW
The People's Republic of China was founded in 1949. The PRC Government is
organized pursuant to the Constitution of the PRC (the "Constitution"). The
current Constitution was adopted by the National People's Congress ("NPC") in
1982 and has been amended on a number of occasions since, most recently in 1993.
Administratively, the PRC is divided into 23 provinces, three municipalities
administered directly under the Central Government and five autonomous regions.
The three municipalities which report directly to the Central Government are
Beijing, Shanghai and Tianjin. Chongqing is the fourth such municipality which
was recently approved by the Central Government. The autonomous regions are
Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang. Below the provinces and
autonomous regions are prefectures, municipalities, counties, municipal
districts and townships. Below the municipalities directly under the Central
Government are municipal districts and counties.
Pursuant to the Constitution, the NPC is the highest ranking organ of state
authority. The Constitution provides for the election of members of the NPC by
provinces, autonomous regions, municipalities directly under the control of the
Central Government and by the armed forces. The NPC currently consists of
approximately 2,900 representatives elected to serve five-year terms. The NPC
meets annually and, when not in session, acts through its standing committee.
The NPC is authorized to amend and supervise the implementation of the
Constitution, adopt and amend national laws and regulations and elect and remove
the President, the Premier and Vice President of the PRC, the Chairman of the
Central Military Commission, the Chairman of the Supreme People's Court and
State Councilors and Ministers in charge of ministries. The NPC has final
authority on all major matters of state, including the review and approval of
the PRC's general economic and social program and budgets and the ratification
of treaties and agreements with other states and multilateral organizations.
While the NPC is the highest policy and law-making body, the State Council
is the highest administrative organ of the state. The State Council is composed
of the Premier, Vice Premiers, State Councilors,
A-1
<PAGE> 131
ministers in charge of ministries, directors of commissions, the Auditor-General
and the Secretary-General. The State Council is responsible for the supervision
and coordination of all ministries and commissions at the state level as well as
all administrative agencies at local levels. It prepares and supervises the
implementation of the State Plan and budget. It is authorized to adopt
administrative rules, regulations and orders, and may amend or override
administrative orders, directives and regulations issued by administrative
agencies at both the national and local levels. Forty-one ministries,
commissions and agencies, including the People's Bank of China ("PBOC"), are
currently under the authority of the State Council.
The Communist Party of China ("CPC") was established in 1921 and has been
the governing political party since 1949. The highest body of leadership of the
CPC is the National Party's Congress and the Central Committee elected thereby.
The National Party's Congress is convened by the Central Committee, which
implements resolutions adopted by the Congress and exercises leadership over the
CPC. When the Central Committee of the CPC is not in session, the CPC's
Political Bureau and its Standing Committee exercise the functions and powers of
the Central Committee. The full session of the Central Committee is convened by
the Political Bureau and held at least annually.
ECONOMIC OVERVIEW
THE PRC ECONOMY
In 1978, the PRC began implementing an economic reform program in an effort
to revitalize the PRC's economy and improve its citizens' standard of living.
These policies marked a shift from a more rigid, centrally-planned economy to a
more mixed economy. The doctrine of a "socialist market economy" was endorsed at
the Fourteenth Party Congress of the CPC held in October 1992, the eighth
session of the NPC held in March 1993 and in the Decision of the CPC Central
Committee on Issues Concerning the Establishment of a Socialist Market Economic
Structure. The concept was formally adopted at the Third Plenary Session of the
Fourteenth Central Committee of the CPC convened in November 1993 ("1993
Decision"). As part of the economic reforms, managers of enterprises have been
granted more decision-making powers and responsibilities in relation to matters
such as production, marketing, use of funds and employment of staff. The 1993
Decision stated that additional powers and responsibilities would be granted to
State-owned enterprises in the future. The PRC Government has also implemented
policies designed to attract foreign investment and technology.
The PRC Government is also gradually relaxing many of its controls over
producer prices. Although some products are still controlled and distributed by
the PRC Government at planned prices, the range of products subject to planned
prices has been reduced since 1992. Products which are not subject to the State
Plan are generally sold at prices determined by market conditions. In addition,
a State-owned enterprise which has fulfilled its production obligations under
the State Plan may obtain additional raw materials and sell products in excess
of the State Plan at market prices.
The following table sets out major economic indicators of the PRC from 1991
to 1996:
MAJOR ECONOMIC INDICATORS: PEOPLE'S REPUBLIC OF CHINA
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----------- -----------
(Projected) (Projected)
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Rate of GDP........................... % Change 8.0 13.2 13.4 11.8 9.8 8.9
Agricultural Output.......................... % Change 2.4 4.1 4.0 3.5 4.0 4.5
Industrial Output............................ % Change 13.3 20.8 20.4 16.3 12.0 10.0
Services Output.............................. % Change 5.5 9.3 9.3 10.0 10.0 10.0
Per Capita GDP............................... % Change 6.8 12.1 12.1 10.4 8.5 7.6
Gross Domestic Investment.................... % of GDP 35.3 38.2 42.1 39.5 39.6 39.3
Gross Domestic Savings....................... % of GDP 39.1 40.0 40.0 40.5 40.5 39.5
</TABLE>
A-2
<PAGE> 132
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Projected) (Projected)
Consumer Prices.............................. % Change 3.0 5.3 13.0 21.7 15.0 8.0
Money Supply (M2)............................ % Change 26.5 31.2 24.0 34.4 22.0 22.0
Merchandise Exports f.o.b. (1)............... US$ Billion 58.9 69.6 75.7 98.7 113.5 124.9
% Change 14.4 18.1 8.8 30.5 15.0 10.0
Merchandise Imports f.o.b. (1)............... US$ Billion 50.2 64.4 86.3 95.4 111.6 122.7
% Change 16.8 27.8 33.8 10.5 16.5 10.0
Balance of Trade............................. US$ Billion 8.6 5.1 10.7 3.4 2.0 2.2
Current Account Balance...................... US$ Billion 13.3 6.4 (11.6) 4.4 1.0 1.0
% of GDP 3.5 1.4 (2.1) 0.9 0.2 0.2
External Debt Outstanding.................... US$ Billion 59.6 69.2 83.8 99.9 106.0 114.0
Total Reserves Minus Gold (1)................ US$ Billion 43.7 20.6 22.4 52.9 N/A N/A
Debt Service Ratio........................... % of Exports 11.8 10.2 10.7 11.3 10.2 9.6
Avg. Annual Exchange Rate.................... US$1=RMBY 5.3 5.5 5.8 8.6 N/A N/A
</TABLE>
- ---------------
Source: Asian Development Bank, Asian Development Outlook 1994, 1995 and 1996.
(1) International Monetary Fund, International Financial Statistics Yearbook
(1995).
As indicated in the table above, industrial output in the PRC has grown
rapidly since 1990. The last decade of economic reform has resulted in a change
in the PRC's industrial patterns. In the first three decades after 1949, the PRC
placed greater emphasis on heavy industry than light industry. As a result of
these policies the growth rate of heavy industry consistently outperformed that
of light industry. In recent years, growth in industrial output has become more
balanced between light and heavy industry.
The inflation rate in the PRC has experienced significant fluctuation over
the last few years. Consumer price increases of 20.5% in 1988 brought about the
imposition of severe austerity measures, including the implementation of tight
monetary policies by the PBOC late that year. In 1990, the inflation rate was
reduced substantially to 2.1%, the lowest since 1984, and remained at 2.9% in
1991. The decline in inflation was attributable to suppressed demand and tight
control over prices and credit.
In 1992 the austerity measures were relaxed, and inflation increased to
5.4% in 1992, 13.2% in 1993 and 21.7% in 1994. To combat this rebounding
inflation, the PRC Government has adopted a number of measures to strengthen
"macroeconomic control" of the economy. These measures had the effect of causing
the Renminbi to appreciate against foreign currencies reducing speculative
activities, increasing individual bank deposits, and reducing the prices of
certain commodities. These measures included, among others, increasing interest
rates on bank loans and deposits and postponing certain planned price reforms.
These measures have helped to reverse the rebound in inflation, with the rate of
inflation slowing to 8.6% in the first ten months of 1996.
ECONOMIC STRUCTURE
The PRC's economy is currently comprised of four principal sectors:
enterprises owned by the State, by collectives or by individuals and other
enterprises including enterprises with foreign investment. State-owned
enterprises percentage of total output value has been decreasing. In 1995,
State-owned enterprises accounted for approximately 34.0% of the PRC's gross
value of industrial output while enterprises owned by collectives and
individuals accounted for approximately 36.6% and 12.9%, respectively. The
fastest growing sectors of the economy are other types of enterprises, including
enterprises with foreign investment, which accounted for almost 15% of the PRC's
gross value of industrial output in 1994, representing an increase of
approximately 74.3% over that of 1993.
A-3
<PAGE> 133
The following table sets forth the composition of and growth in gross value
of industrial output by the different sectors of the PRC's economy from 1991 to
1994.
<TABLE>
<CAPTION>
1991 1992 1993 1994
--------------- --------------- --------------- ---------------
OUTPUT OUTPUT OUTPUT OUTPUT
OUTPUT GROWTH OUTPUT GROWTH OUTPUT GROWTH OUTPUT GROWTH
(%)(1) (%)(2) (%)(1) (%)(2) (%)(1) (%)(2) (%)(1) (%)(2)
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State-owned........................ 56.2 8.6 51.5 12.4 47.0 5.7 37.3 6.5
Collective......................... 33.0 18.4 35.1 37.3 34.0 35.0 37.7 24.9
Individual......................... 4.8 25.9 5.8 47.0 8.0 66.2 10.1 56.3
Other ownership.................... 6.0 50.1 7.6 64.8 11.1 92.5 14.8 74.3
</TABLE>
- ---------------
Sources: PRC State Statistical Bureau Statistical Yearbook of China (1996); 1992
Statistical Communique.
(1) Sector output as percentage of gross value of total industrial output.
Columns may not add up to 100% because of rounding.
(2) At comparable year-to-year prices.
While the overall gross value of industrial output grew at around 24.2% for
1994, the output of State-owned enterprises grew at around 6.5% compared to a
growth rate of 24.9% for collectively-owned enterprises and a growth rate of
56.3% and 74.3%, respectively, for individually owned and other enterprises for
1994.
The PRC Government relies predominantly on the income of State-owned
enterprises for its revenues. These enterprises dominate major industrial
sectors such as energy and raw materials, heavy industries, transportation and
communications. Inefficient and loss-making State-owned enterprises have become
a source of public criticism and debate within the PRC, since subsidies to such
enterprises accounted for a significant part of persistent state budget
deficits. There have been demands for State-owned enterprises to be placed under
greater financial discipline.
One goal of recent management and other reforms is to reduce state
subsidies to loss-making State-owned enterprises so these enterprises will
assume sole responsibility for their own profits and losses. Another goal is to
reform the income tax system so that the Central Government will be able to
collect additional revenues on a more equitable basis from more sectors of the
economy, including the coastal provinces and non-State owned enterprises. The
PRC Government has announced reforms to its tax system which include providing
equal tax treatment for domestic and foreign firms. Regulations for domestic
firms became effective on January 1, 1994. In addition, effective April 1, 1996,
the PRC Government cancelled customs duty and import-related tax exemptions for
equipment and raw materials to be imported by foreign-invested enterprises as
part of their capital contribution.
One important aspect of the economic reforms addresses the relationship
between ownership on the one hand and management responsibilities and incentives
on the other hand. The PRC Government has introduced legislation which allows
the development of various forms of enterprise ownership and the relaxation of
State control. These reforms have resulted primarily in the development of
small-scale collectively -- and individually-owned investment enterprises and
enterprises with foreign investment, particularly in southern China and in the
special economic zones.
Recent reforms also have allowed selected State-owned enterprises to be
converted into joint stock limited companies and to issue shares to public and
private investors (including their employees). A significant number of these
State-owned enterprises after being converted into joint stock limited companies
have been granted listings on the Shanghai Securities Exchange or the Shenzhen
Stock Exchange, the two emerging stock markets in the PRC. A number of
State-owned enterprises listed on these domestic stock exchanges have sold "B"
shares to foreign investors, and a smaller number have sold shares in public
offerings in Hong Kong, the United States and other jurisdictions, followed by
listings on the relevant local stock exchanges. These listings provide a new
source of funding for State-owned enterprises in the PRC.
A-4
<PAGE> 134
Collectively-owned enterprises are mostly located in rural areas and
concentrated in industries with lower demands on capital and technology or with
greater consumer orientation. Collectively-owned enterprises are not subject to
mandatory control under the State Plan, but are only under the guidance of the
State Plan. This allows them more operational flexibility than State-owned
enterprises in general, but entitles them to fewer state subsidies.
ECONOMIC PLANS AND DEVELOPMENT
Since 1953, the development of the PRC's economy has been characterized by
the adoption, of Five-Year Plans. The implementation of these plans is carried
out under the supervision of the State Planning Commission, which reports
directly to the State Council. The Ninth Five-Year Plan for National Economic
and Social Development for 1996 to 2000, along with a ten-year program which
extends to 2010, was approved on March 17, 1996 by the NPC ("Plan").
The major target raised in the Plan for the years 2000 to 2010 is to double
GNP. No economic growth rate targets are given. In addition, the Plan emphasizes
the further opening of the PRC to the outside world. The Plan seeks to curb the
pressure of high inflation, the shortage of State financial capacity and weak
macro-control ability.
The Plan also calls for the establishment of an economic structure
consistent with a socialist planned economy based on public ownership and market
regulation. In addition, emphasis is placed on the further opening of the PRC to
the outside world by expanding economic and technological exchanges with other
countries. The Plan also seeks to relieve supply bottle-necks which have arisen
from rapid growth during the 1980's and to allocate resources to the priority
areas of agriculture, energy, transportation, telecommunications and basic
materials industries.
FOREIGN INVESTMENT
In 1979, the PRC promulgated its first joint venture law, and thereafter, a
number of related laws, administrative rules and regulations, which provide a
framework within which foreign investment activities are conducted and
regulated. Foreign investments in the PRC may take a number of forms, including
equity joint ventures, cooperative joint ventures and wholly foreign-owned
enterprises.
An equity joint venture enterprise is a distinct legal entity established
and registered in the PRC as a limited liability company. The parties to an
equity joint venture have rights to share in the profits of the joint venture in
proportion to their respective contributions to the registered capital of the
joint venture. Equity joint ventures are considered as PRC legal persons with
the right to own, use and dispose of property. In contrast with an equity joint
venture, a cooperative joint venture may be structured as an entity similar to a
partnership (in which case it will not be separately qualified as a legal person
under Chinese law) or it may be structured as a limited liability company (in
which case it will be qualified as a legal person under Chinese law). In a
cooperative joint venture structured as a partnership, each PRC and foreign
party is responsible for paying its own taxes on profits derived from the
venture and bears its own liability for risks and losses. A wholly foreign-owned
enterprise is owned completely by one or more foreign investors and does not
involve any PRC joint venture parties. The establishment of wholly foreign-owned
enterprises is restricted or prohibited in certain specified industries, such as
broadcasting, publishing, domestic commerce, foreign trade or
telecommunications.
A-5
<PAGE> 135
Under the Provisional Regulations on Guiding the Direction of Foreign
Investment issued by the PRC Government in 1995, key infrastructure areas, such
as power and transportation, have been targeted as encouraged sectors for
foreign investment in China.
The following table sets forth direct foreign investment in the PRC for
1991 through 1995:
DIRECT FOREIGN INVESTMENT IN THE PRC (DISBURSED AMOUNTS)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
-------- --------- --------- --------- ---------
(IN MILLIONS OF $)
<S> <C> <C> <C> <C> <C>
Equity Joint Ventures (1)............. $2,299.0 $ 6,114.6 $15,347.8 $17,932.5 $19,078.0
Cooperative Joint Ventures (1)........ 763.6 2,122.5 5,237.6 7,120.2 7,536.0
Wholly Foreign-owned enterprises...... 1,134.7 2,520.3 6,505.6 8,035.6 10,317.0
-------- --------- --------- --------- ---------
Total................................. $4,197.3 $10,757.4 $27,091.0 $33,088.3 $36,931.0
</TABLE>
- ---------------
Sources: MOFTEC, Almanacs of China's Foreign Economic Relations and Trade,
(1991-1995); PRC State Statistical Bureau, 1996 Statistical Survey.
(1) Represents amounts actually contributed by non-Chinese investors.
In 1994, approximately 47,547 new investment contracts were approved with
an aggregate value of $82.68 billion. During 1995, approximately 37,011 new
investment contracts were approved with an aggregate value of $91.3 billion. The
number of registered equity joint ventures, cooperative joint ventures and
wholly foreign-owned enterprises increased from 84,000 in 1992 to 206,096 in
1994. The PRC Government began to change its policies regarding the types of
preferred foreign investments in 1994. Pursuant to current government policy
guiding foreign investment, infrastructure, energy and transportation sectors
have become the focus of foreign investment.
ENVIRONMENTAL PROTECTION
In recent years, the PRC has addressed a range of environmental problems
associated with rapid economic development, including industrial air pollution,
and water pollution, waste disposal, high rates of forest resource consumption
and desertification. The PRC has promulgated several national environmental
laws, some 20 national regulations and over 200 national standards for water,
air and ecological protection. The PRC plans to spend over RMBY 200 billion, or
approximately .9% of GNP on a purchasing power parity basis, on environmental
protection projects by the turn of the century. In addition, the PRC
Environmental Protection Agency has publicly identified 3,000 enterprises,
primarily State-owned enterprises, said to account for over 60 percent of
industrial pollution in the country.
The Environmental Protection Law, passed in 1989, requires the filing and
approval of an environmental impact report at the design, construction and
start-up stages of all construction projects. This report must evaluate the
pollution caused by and the ecological impacts of the construction project and
specify its preventative measures. The relevant department in charge of
environmental protection, which may be at the national, provincial and/or local
levels, must confirm that the project conforms to applicable technology-based
and ambient quality standards before issuing its approval. The State Planning
Commission and its local counterparts are prohibited from approving a
construction project until after the environmental protection authority has
issued its own approval. Pollution sources are also required to report their
pollution discharges in terms of types and amounts of pollutants discharged into
the water and air, and to secure discharge permits for their wastewater
discharges and airborne emissions and, from April 1, 1996, solid waste shipments
to ensure compliance with relevant emissions standards. The PRC's environmental
authorities impose a uniform fee on all industrial wastewater discharges and
pollution fees for discharges of waste substances in excess of applicable
standards. Fines and other sanctions may be imposed for violations of laws,
regulations or decrees.
A-6
<PAGE> 136
FOREIGN EXCHANGE CONTROLS AND EXCHANGE RATE INFORMATION
GENERAL
The Renminbi is currently not a freely convertible currency. The PRC
Government imposes control over its foreign currency reserves in part through
control over foreign trade and through foreign exchange regulation. The State
Administration of Exchange Control is responsible for matters relating to
foreign exchange administration, while the PBOC specializes in foreign exchange
operations.
The PRC issued interim regulations on foreign exchange control in December
1980 to provide a basis for the control of foreign exchange transactions. These
interim regulations were followed by a series of implementing rules promulgated
by the SAEC which together established the legal framework for foreign exchange
control in the PRC. Such legislation prohibits the circulation, use or pledging
of foreign currency within the PRC and the sale and purchase of foreign currency
without authorization.
Foreign exchange transactions involving Renminbi must take place either at
official foreign exchange adjustment centers ("swap centers") or through the
China Foreign Exchange Trading Center ("CFETC"), an inter-bank foreign exchange
trading market. Swap centers are institutions administered by the PRC Government
designed to facilitate the trading of Renminbi and foreign currencies. Swap
centers were first established pursuant to the Provisions of the State Council
for the Encouragement of Foreign Investment, promulgated in October 1986, and
were designed to provide a controlled setting under which Renminbi could be
exchanged for foreign currencies at rates approaching market levels. When swap
centers were first introduced, they were affected to a large extent by the
chronic shortages of foreign exchange suffered by the PRC at that time and by
additional measures and rules which were promulgated to implement the operations
of swap centers. With the relative success of the PRC's export drive since 1988,
strict controls over imports and the accumulation of relatively large foreign
surpluses, foreign currency availability (especially in the southern part of the
PRC) has increased and "swapping" of Renminbi for foreign currency at regional
swap centers to satisfy the foreign currency needs of both domestic and foreign
investment enterprises has become more common. SAEC through its local branches
has established swap centers in many cities in the PRC.
In April 1994, the CFETC was created in Shanghai pursuant to new
regulations to coordinate foreign exchange transactions nationwide among
domestic enterprises according to standardized rules and to replace the two-tier
exchange rate system that consisted of the official rate and the swap center
rates. At the end of 1995, the CFETC had linked 373 banks and financial
institutions in 25 cities in the PRC. The CFETC and the swap centers are
regulated by PRC Government policies and administered by the SAEC. The PRC
Government has stated that swap centers will be merged with the CFETC in the
future.
Prior to January 1, 1994, China had a dual-track foreign exchange system.
Under this system the SAEC published an official exchange rate at which foreign
exchange transactions would take place at authorized financial institutions
(which rate reflected over the past ten years a consistent devaluation of the
Renminbi against the U.S. dollar). At the same time, foreign exchange
transactions could be effected with government permission at the swap centers at
prices set in part by supply and demand. Significant variances developed in 1992
and 1993 between the official SAEC exchange rate and the swap center rates.
Effective January 1, 1994, a new unitary, managed floating-rate system was
introduced to replace the dual foreign exchange system. Under the new system,
the PBOC sets and publishes daily a base exchange rate (the "PBOC Rate") with
reference primarily to the supply and demand of Renminbi against the U.S. dollar
in the market during the prior day. The PBOC also takes into account other
factors such as the general conditions in the international foreign exchange
markets. Authorized banks and financial institutions are allowed to quote buy
and sell rates for Renminbi within a specified range around the daily PBOC Rate.
Currently, the PBOC allows Renminbi trading within a range of .25% above and
below the daily PBOC Rate.
Upon adoption of the new managed floating-rate system, the PRC Government
announced that the PBOC would try to balance the demand for and supply of
foreign currencies in China and stabilize the Renminbi exchange rate mainly
through macro-economic measures, including management of monetary policy and
interest rates.
A-7
<PAGE> 137
NEW FOREIGN EXCHANGE LAWS AND REGULATIONS
Several new foreign exchange laws and regulations were promulgated in 1996
by the PRC Central Government.
The PRC Foreign Exchange Control Regulations, which were promulgated by the
State Council and took effect on April 1, 1996, require that domestic
enterprises (including foreign investment enterprises) operating in the PRC must
price and sell their goods and services in the PRC in Renminbi unless such
enterprises have special authority to do otherwise. Foreign investment
enterprises may retain foreign currency received in capital account transactions
and a portion of the foreign currency received from current account
transactions. Any foreign exchange revenues received by domestic enterprises
must be sold to foreign exchange banks in the PRC. In early 1996, the PBOC and
the SAEC first enacted experimental regulations on a trial basis in four Chinese
localities in order to allow foreign investment enterprises to use both swap
centers and designated foreign exchange banks to convert currencies and to open
special purpose foreign currency accounts for currency transactions as well as
capital expenditures. On June 20, 1996, the PBOC issued an announcement and
promulgated the Administrative Regulations on Foreign Exchange Conversions,
Sales and Payment, which took effect on July 1, 1996, effectively allowing
foreign investment enterprises in other parts of the PRC to enjoy the same
treatment as those in the four experimental localities. For current account
transactions, domestic enterprises (including foreign investment enterprises)
and institutions are permitted to buy foreign exchange from State-designated
banks on presentation of appropriate documentation establishing the existence of
import contracts or in exchange for Renminbi on presentation of payment notes
from overseas financial institutions. Such enterprises also are permitted to
purchase foreign exchange for the import of certain products subject to quotas,
import permits and registration controls. Domestic enterprises are permitted to
apply to purchase foreign exchange for the payment of dividends that have been
authorized as payable in foreign currency. However, capital account transactions
in foreign currency are still subject to SAEC approval.
The conversion of Renminbi into foreign currency to be used for payment and
remittance abroad to a foreign party of dividends and other distributions
require, among other things, either the presentation to the designated foreign
exchange bank of properly authorized board resolutions or the presentation to a
swap center of SAEC approvals permitting the conversion and remittance. The
conversion into foreign currency of Renminbi to be used for the payment of
principal or interest with respect to foreign currency loans requires, among
other things, presentation to the designated foreign exchange bank or swap
center of the foreign debt registration certificate issued by the SAEC upon the
registration of the foreign currency loan. The SAEC has authority to establish
ceilings on the total amount of foreign currency income that a foreign
investment enterprise may retain from its current transactions. Such ceilings
are to be set by reference to the level of foreign capital actually invested in
the enterprise and the foreign currency cash flow needs of the enterprise.
The new foreign exchange laws and regulations are intended to be a further
step in the direction of achieving China's goal of full convertibility of the
Renminbi for current account items by the year 2000.
HISTORICAL EXCHANGE RATE
From 1985 to the end of 1993, the official exchange rate, which was set by
the SAEC ("Official Exchange Rate"), experienced a gradual but significant
depreciation against major foreign currencies, falling from an average of RMBY
3.20 to $1.00 in 1985 to RMBY 5.81 to $1.00 at the end of 1993.
As a result of the adoption of the new managed floating-rate system on
January 1, 1994, the official exchange rate for Renminbi was revalued from
approximately RMBY 5.8 to US$1.00, to approximately RMBY 8.7 to US$1.00. The
Renminbi traded in a narrow range during 1995 and in the first quarter of 1996,
ending 1995 at RMBY 8.3374 to $1.00 and the first quarter of 1996 at RMBY 8.3538
to $1.00. On November 26, 1996, the PBOC Rate (as reflected by the Noon Buying
Rate) was RMBY 8.3312 to $1.00.
A-8
<PAGE> 138
The following table sets forth (a) the Official Exchange Rate and the
exchange rate at the Shanghai Swap Center for 1991 through 1994 and (b) the PBOC
Rate (as reflected by the Noon Buying Rate) and the exchange rate at the
Shanghai Swap Center in 1995 and the first quarter of 1996:
EXCHANGE RATES
<TABLE>
<CAPTION>
OFFICIAL EXCHANGE RATE/PBOC RATE(1) SHANGHAI SWAP CENTER RATE
----------------------------------------- -----------------------------------------
PERIOD PERIOD END AVERAGE(2) HIGH LOW PERIOD END AVERAGE(2) HIGH LOW
- ----------------------- ---------- ---------- ------ ------ ---------- ---------- ------ ------
(EXPRESSED IN RMBY PER US$1.00) (EXPRESSED IN RMBY PER US$1.00)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991................... 5.4478 5.3343 5.4478 5.2352 5.8980 5.8534 5.9290 5.7490
1992................... 5.7662 5.5214 5.9007 5.4124 7.7060 6.7497 7.7700 5.8970
1993................... 5.8145 5.7769 5.8245 5.7076 8.7000 8.7207 10.9230 7.7180
1994................... 8.4662 8.6303 8.7409 8.4662 8.4461 8.5790 8.7080 8.4459
1995................... 8.3374 8.3685 8.4584 8.3203 8.3174 8.3494 8.4448 8.2764
1st Quarter, 1996...... 8.3538 8.3429 8.3538 8.3338 8.3339 8.3229 8.3365 8.3079
</TABLE>
- ---------------
Sources: Official Exchange Rates are as reported as the Noon Buying Rates.
Shanghai Swap Center Rates have been obtained from the Shanghai Swap Center.
(1) For periods prior to 1994, the Official Exchange Rate; for subsequent
periods, the PBOC Rate.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
NATURAL RESOURCES AND ENERGY PRODUCTION
Although the PRC is rich in natural resources, its overburdened
transportation network has not been able to provide efficient delivery of these
resources. According to the PRC's current Five-Year Plan, attempts are being
made to overcome this difficulty by improving infrastructure. The main energy
source used by the PRC is coal and the nation is the world's largest coal
producer. In 1995, production of coal reached 1.23 billion tons. The current
Five-Year Plan provides for the PRC's coal output in the year 2000 to reach 1.4
billion tons. Crude oil production in the PRC reached 149 million tons in 1995
and is expected to reach 155 million tons in 2000. In addition, hydroelectric
power is expected to be developed further as an important energy source.
The following table sets forth the PRC's energy production and consumption
for 1988 through 1994:
ENERGY PRODUCTION AND CONSUMPTION
<TABLE>
<CAPTION>
TOTAL PRODUCTION AS% OF TOTAL PRODUCTION TOTAL CONSUMPTION
(IN MILLION -------------------------------------- (IN MILLION
METRIC TONS OF NATURAL HYDRO- METRIC TONS OF
SCE)(1) COAL CRUDE OIL GAS ELECTRIC SCE)(1)
---------------- ---- --------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
1988........................... 958.0 73.1% 20.4% 2.0% 4.5% 930.0
1989........................... 1,016.4 74.1 19.3 2.0 4.6 969.3
1990........................... 1,039.2 74.2 19.0 2.0 4.8 987.0
1991........................... 1,048.4 74.1 19.2 2.0 4.7 1,037.8
1992(2)........................ 1,072.6 74.3 18.9 2.0 4.8 1,091.7
1993........................... 1,110.6 74.0 18.7 2.0 5.3 1,159.9
1994........................... 1,187.3 74.6 17.6 1.9 5.9 1,227.4
1995........................... 1,287.3 75.5 16.7 1.8 6.0 1,290.0(3)
</TABLE>
- ---------------
Source: PRC State Statistical Bureau, China Statistical Yearbook (1996).
(1) Excludes bio-energy, solar, geothermal and nuclear energy. All fuels
converted to Standard Coal Equivalent ("SCE") with thermal equivalent of
7,000 kilocalories per kilogram: 1 kg of coal = 0.714 kg of SCE; 1 kg of
oil = 14.3 kg of SCE; 1 cubic meter of natural gas = 1.33 kg of SCE;
hydroelectric converted to SCE based on coal required to produce equivalent
thermal electric power.
(2) The amount by which 1992 consumption exceeded production was covered by
reserves and imports.
(3) Total energy consumption for 1995 is an estimated figure.
A-9
<PAGE> 139
FOREIGN TRADE
Foreign trade is important to the PRC's economic reform program. Imports
provide access to the advanced technologies and techniques which the PRC needs
to modernize its economy, while exports provide the PRC with the foreign
exchange required to purchase such technologies and techniques. As part of its
economic reform program, the PRC also is modernizing its foreign trade system.
Prior to 1978, foreign trade was highly centralized and all imports and exports
were controlled by the then Ministry of Foreign Trade through a series of
specialized foreign trade corporations. In 1978, the PRC Government began to
decentralize foreign trade. Several Central Government agencies and regional
authorities have since established their own trading corporations. In 1982, the
Ministry of Foreign Economic Relations and Trade was formed following a merger
of the various bodies formerly responsible for monitoring foreign trade and
investment, including the Ministry of Foreign Trade. The name of the Ministry of
Foreign Economic Relations and Trade was changed in 1993 to the Ministry of
Foreign Trade and Economic Cooperation.
The PRC's foreign trade has grown since 1978 in both quantity and range.
Trading partners now include about 200 countries and regions. From 1978 to 1995,
the value of total merchandise trade grew from $6.0 billion to $280.9 billion.
In 1994, the PRC's foreign trade yielded a trade surplus of $5.3 billion,
following 1993's trade deficit of $12.2 billion, which represented the first
trade deficit in four years. Exports in 1995 reach $148.8 billion, which
represented an increase of 23% over that of 1994, and imports reached $132.1
billion, representing an increase of 14.2% over that of 1994.
The PRC currently enjoys MFN trading status with the United States which is
subject to annual renewal. MFN status allows China to maintain those trading
privileges enjoyed by all normal trading partners of the United States. The PRC
has retained MFN privileges since 1980. On March 31, 1996, United States
President Clinton formally informed the US Congress of his intention to seek a
further unconditional one-year renewal of China's MFN status with the United
States. Congress gave final approval to the President's request on June 27,
1996. Rescission of MFN status would subject PRC exports to the United States to
significantly higher tariffs.
LEGAL SYSTEM
The PRC is still in the process of developing a comprehensive system of
laws. A significant number of laws and regulations dealing, in particular, with
economic matters and foreign investment, protection of intellectual property,
taxation, technology transfer and trade have been promulgated since 1978 when
the PRC first embarked on its economic reform policy. The Constitution was
amended in December 1982 to authorize foreign investment and to guarantee the
"lawful rights and interests" of foreign investors in the PRC.
As mentioned above, national laws are promulgated by the NPC. The State
Council, certain of the entities affiliated with the State Council and the
people's congresses at the provincial and municipal levels are also vested with
the power to promulgate administrative measures, rules and regulations having
the force of law.
The legal system in the PRC is a civil system based on written statutes.
Decided cases do not constitute binding precedents, although such cases are
sometimes referred to for guidance. The main legislation governing the judicial
system is The Law of the People's Courts of the People's Republic of China
concerning the Organization of the Judicial System, which came into effect on
January 1, 1980 and was amended September 2, 1983. The main legislation which
sets forth general principles for civil relations, including business
transactions, is The General Principles of Civil Law, enacted by the NPC in
April of 1986. The General Principles of Civil Law is divided into seven broad
categories: general principles, subjects of civil law, contract, property, civil
liability, remedies and special provisions governing foreign economic relations.
The main legislation governing civil procedure is The Law of the People's
Republic of China on Civil Procedure ("Civil Procedure Law") which came into
effect on April 9, 1991.
A-10
<PAGE> 140
All foreign individuals, enterprises and other entities are given the same
rights and obligations as PRC individuals, enterprises and other entities in
instituting or defending proceedings in courts. If, however, the rights and
obligations of PRC individuals, enterprises or other entities to institute or
defend legal proceedings are subject to any restrictions in foreign
jurisdictions, then reciprocal restrictions may be imposed by PRC courts on the
rights and obligations of the individuals, enterprises and other entities of
such jurisdictions to institute or defend legal proceedings in the PRC. All
foreign individuals, enterprises and other entities who wish to retain legal
counsel in instituting or defending any proceedings in a PRC court must retain
lawyers qualified in the PRC.
All civil cases are decided by the court on the basis of a majority vote
and are subject to a two-tier procedure, with cases being heard first by a first
instance court and then subject to appeal to an appellate court. Courts in the
PRC are divided into four levels: the Supreme People's Court at the national
level, the High People's Courts at the provincial level, the Intermediate
People's Courts at the municipal and prefectural levels and the basic-level
People's Courts at the county level. At each level, there is a criminal
division, a civil division, an economic division and an administrative division.
The Supreme People's Court is the highest judicial establishment in the PRC. It
is responsible for supervising all other courts. In case of uncertainty in
relation to the interpretation of any law, rule or regulation, the Supreme
People's Court may be asked to provide an opinion on the interpretation of such
law, rule or regulation in specific cases.
If a legally binding judgment or ruling is given by a PRC court, but the
party against whom such judgment or ruling is to be enforced is not present or
does not have any assets in the PRC, the person seeking enforcement may apply to
the appropriate foreign court for recognition and enforcement of such judgment
or ruling. Alternatively, where there is an applicable international treaty or
other arrangement for reciprocal enforcement of judgments between the PRC and
the country in which the PRC judgment or ruling is sought to be enforced, the
PRC court may be asked to seek the enforcement of such judgment or ruling in
such foreign country. If a PRC court is asked to recognize or enforce a judgment
or ruling given by a foreign court, such judgment or ruling will be recognized
and enforced only where there is an applicable international treaty or other
arrangement for reciprocal enforcement of judgments between the PRC and the
country of the court by which such judgment or ruling is given. The enforcement
of such judgment or ruling, however, must not violate the public security, state
sovereignty or basic principles of the law of the PRC nor contradict the public
interest of the PRC. If it is necessary to enforce such judgment or ruling, the
PRC court will issue an enforcement order and will proceed with enforcement in
accordance with PRC law.
Foreign arbitral awards may be enforced in the PRC in accordance with the
Civil Procedure Law, which provides that an application for enforcement shall be
submitted to the Intermediate People's Court of the place where the party
subject to execution is domiciled or where such party's property is located.
Application for enforcement shall be handled pursuant to international treaties
to which the PRC is a party, most importantly the Convention on the Recognition
and Enforcement of Foreign Arbitral Awards ("New York Convention"), to which the
PRC acceded in 1987. As of January 1, 1993, 89 countries were parties to the New
York Convention, including the United States and the United Kingdom.
There is no express requirement, as in the case of foreign court judgments
and rulings, that foreign arbitral awards which are brought for enforcement in
the PRC must not violate the public security, state sovereignty or basic
principles of the law of the PRC nor contradict the public interest of the PRC.
Thus, the Civil Procedure Law and the New York Convention allow PRC courts
significantly less basis for rejecting an application for enforcement of a
foreign arbitral award than exists in the case of foreign court judgments or
rulings. A consistent record of enforcement of foreign arbitral awards, however,
has yet to develop.
The Arbitration Law of the People's Republic of China ("Arbitration Law"),
which became effective on September 1, 1995, is applicable to disputes involving
foreign parties, and the parties thereto may, pursuant to their arbitration
agreement, submit their dispute to arbitration before a foreign-related
arbitration committee constituted in accordance with the Arbitration Law. The
arbitration rules to be applied by the arbitration committee shall be formulated
in accordance with the Arbitration Law and the Civil Procedure Law. There is no
material difference between the Arbitration Law and previous PRC legal
principles on a foreign-related arbitration and enforcement of foreign-related
arbitration awards.
A-11
<PAGE> 141
The China International Economic and Trade Arbitration Commission
("CIETAC"), established in Beijing under the auspices of the China Council for
the Promotion of International Trade ("CCPIT"), is one of two domestic
arbitration organizations in the PRC charged with arbitrating foreign-related
disputes. CIETAC's arbitration rules, which were formulated pursuant to the
Arbitration Law and became effective on October 1, 1995, provide that CIETAC has
jurisdiction over any dispute arising from "international economic and trade
transactions" with respect to which an arbitration agreement selecting CIETAC
arbitration has been reached. However, according to the practices of the CIETAC,
it will not accept disputes between a foreign-investment enterprise (which is
considered as a Chinese legal person) and a Chinese domestic entity even if both
parties chose CIETAC arbitration in the contract because CIETAC does not view
such dispute between two Chinese legal persons as "foreign-related."
The CIETAC's arbitration rules provide that an award rendered by a CIETAC
tribunal shall be final and binding on the parties. The Civil Procedure Law also
provides that a PRC court may only refuse to enforce a CIETAC final award in the
event of certain procedural errors relating to the jurisdiction of CIETAC over a
given dispute or the failure by an arbitration tribunal to abide by CIETAC
rules, and may also deny execution of the award in the event that it determines
that doing so would be against the "public interest."
A-12
<PAGE> 142
APPENDIX B -- GLOSSARY OF POWER INDUSTRY TERMS
availability............... A percentage of the total amount of hours the
electric generating facility is available to
produce energy during a specified time period.
base load plant............ A plant or a generator which under normal operating
conditions would run continuously to meet the
system's base load or minimum constant level of
electric demand.
capacity................... The load for which a generating unit, generating
station, or other electrical apparatus is rated
either by the user or by the manufacturer.
commercial operation....... The status of an electric generating unit following
the completion of its commissioning when the
electric generating unit is capable of producing
and transmitting electricity to the utility's
system at a given level on a sustained basis.
demand..................... For an integrated electricity system, the amount of
consumer demand for power at any point in time,
including transmission and distribution losses.
design capacity............ Future planned installed capacity, in addition to
currently installed capacity.
dispatch................... The schedule of production for all the generating
units on a power system, generally varying from
moment to moment to match production with demand.
As a verb, to dispatch a plant means to direct the
plant to run.
GW*........................ Gigawatt. One thousand MW.
GWh........................ Gigawatt-hour. One thousand MWh. GWh is typically
used as a measure for the annual energy production
of large power plants.
heat rate.................. A measure of a generating station's thermal
efficiency, generally expressed in Btu (British
thermal unit) per net kWh.
kV......................... Kilovolt -- One thousand volts.
kW*........................ Kilowatt -- One thousand watts.
kWh........................ Kilowatt-hour -- The standard unit of energy used
in the electric utility industry. One kWh is the
amount of energy that would be produced by a
generator producing one thousand watts for one
hour.
load....................... With respect to a power generating plant or a
generator, the extent to which it is being used at
a particular time.
MW*........................ Megawatt. One thousand kW. The installed capacity
of power plants is generally expressed in MW.
MWh........................ Megawatt-hour. One thousand kWh.
nameplate capacity or
installed capacity......... The full-load continuous rating of a generator,
prime mover or other electrical equipment under
specified conditions as designated by its
manufacturers.
outage..................... An interruption that fully or partially curtails
the electric generating facility's output of
electricity.
peaking plant.............. A generating station which is normally operated
only to provide power during maximum load periods.
B-1
<PAGE> 143
transmission line.......... An electrical connection between two points on a
power system for the purpose of transferring high
voltage electrical energy between the points.
Generally, a transmission line consists of large
wires or conductors held aloft by towers.
TW*........................ Terawatt. One thousand GW.
TWh........................ Terawatt-hour. One thousand GWh. TWh is typically
used as a measure of the annual energy output of a
region or country.
- ---------------
* References to MW, GW and TW in the Prospectus are to approximate measures of
capacity. The actual capacity of electric generating power plants varies
depending on temperature, elevation and other factors.
B-2
<PAGE> 144
(LOGO) AES CHINA GENERATING CO. LTD.
