UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
October 2, 1996 (October 2, 1996)
---------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
AES CHINA GENERATING CO. LTD.
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 0-23148 98-0152612
-----------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
3/F., Jinquiao Building
#1 Jianguomenwai Avenue
Beijing 100020, People's Republic of China
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (8610) 65089619
Page 1 of 16
Exhibit Index on page 4
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
- ------ ------------
In connection with the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995 (the "Act"), the Registrant intends,
from time to time, to issue statements that are intended to be forward looking
statements entitled to the "Safe Harbor" protection of the Act. Certain
cautionary statements identifying important factors that could cause the
Registrant's actual results to differ materially from those projected in any
forward looking statements made by or on behalf of the Registrant are filed
herewith as Exhibit 20.1 and are incorporated herein by reference.
Item 7. Financial Statements and Exhibits.
- ------ ---------------------------------
(c) Exhibits.
--------
20.1 Certain Cautionary Statements for Purposes of the "Safe Harbor"
for Forward Looking Statements Under the Private Securities Litigation Reform
Act of 1995.
2
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Current Report to be signed on
its behalf by the undersigned thereunto duly authorized.
AES CHINA GENERATING CO LTD.
---------------------------
(Registrant)
By
------------------------------
Jeffery A. Safford
Vice President, Chief
Financial Officer and
Secretary
Date: October 2, 1996
3
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- -------------
20.1 Certain Cautionary Statements for
Purposes of the "Safe Harbor" for
Forward Looking Statements Under
the Private Securities Litigation
Reform Act of 1995. 5
4
<PAGE>
Exhibit 20.1
Certain Cautionary Statements for Purposes of the "Safe
Harbor" for Forward Looking Statements Under the Private
Securities Litigation Reform Act of 1995
AES China Generating Co. Ltd. (the "Company" or "AES Chigen") or its
representatives from time to time may make or may have made certain forward
looking statements, whether orally or in writing, including without limitation
any such statements made or to be made in the Management's Discussion and
Analysis contained in its various filings with the Securities and Exchange
Commission ("SEC"). The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements, so as to ensure to the fullest
extent possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from those projected in such forward looking statements.
The Company cautions the reader that this list of factors may not be
exhaustive. The Company operates in a rapidly changing business, and new risk
factors emerge from time to time. Management cannot predict such risk factors,
nor can it assess the impact, if any, of such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those projected in any forward looking
statements. Accordingly, forward looking statements, which speak only as of the
date made, should not be relied upon as a prediction of actual results. The
Company does not undertake any obligation to release publicly any revisions to
forward looking statements to relect events or circumstances after the date
forward looking statements are made or to reflect the occurrence of
unanticipated events.
Many of the important factors discussed below have been discussed
previously in the Company's filings with the SEC, including without limitation
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1995. Reference is made to those filings for a more detailed discussion of the
business of the Company and the factors described herein.
5
<PAGE>
Considerations Relating to China
Domestic Political, Economic and Social Conditions
The People's Republic of China ("PRC" or "China") is a socialist state
which since 1949 has been, and is expected to continue to be, controlled by the
Communist Party of China. The Company's investments may be adversely affected by
the political, economic and social environment in China, diplomatic developments
or changes in laws or regulations (or interpretations thereof), tax or economic
policies or policies relating to the allocation of foreign currency, materials,
supplies or services (at the central, provincial or local levels). Changes in
the top political leadership of the PRC or the departure of a single political
leader may have a significant adverse impact on policy, the political
environment and economic development in the PRC. Moreover, economic reforms and
growth in the PRC have been more successful in certain provinces than in others,
and the continuation or increase of such disparities could affect the political
or social stability of the PRC.
International Political Conditions
A significant and growing portion of economic activity in the PRC is
export-driven and, therefore, is affected by developments in the economies of
the PRC's principal trading partners. The U.S. Congress considers annually the
renewal of "Most Favored Nation" trading status for the PRC and may attach
conditions to the renewal of such status (such as human rights, arms sales
policies, regional stability or other conditions) which the PRC may decline, or
be unable, to meet. The possibility cannot be completely discounted that the
United States will revoke or conditionally extend the PRC's Most Favored Nation
status because of the PRC's record with respect to these conditions. Moreover,
current or future disputes over specific trade issues, such as intellectual
property or the balance of trade, or arms sales policies could lead to the
imposition of trade or other sanctions by either party or both parties which
could affect the PRC's overall and bilateral foreign trade, whether or not the
sanctions directly impinge upon any specific commodity or service.
6
<PAGE>
GOVERNMENT CONTROL OVER ECONOMY
The PRC only recently has permitted greater provincial and local
economic autonomy and private economic activities, and the government of the PRC
has exercised and continues to exercise substantial control over every sector of
the Chinese economy through regulation and state ownership. Accordingly,
government actions in the future, including any decision not to support the
economic reform program begun in 1978 and possibly to return to the more
centrally-planned economy that existed prior to the time the reform program was
started, could have a significant effect on economic conditions in the PRC. Any
such development could affect opportunities for foreign investment, the
prospects of private sector enterprises and the value of the Company's
investments in power projects.
RESTRICTIONS ON ECONOMIC GROWTH AND INFLATION
The PRC's economy has been expanding at a very rapid pace. Economic
growth has decelerated somewhat under government policy raising the priority of
inflation control in macroeconomic management. This and other policy directives
intended to slow economic growth and limit the PRC's foreign indebtedness may
affect the prospects for third-party financing of some of the Company's
projects. There can be no assurance that these austerity measures alone will
succeed in slowing the economy's expansion or in controlling inflation, or that
they will not reduce liquidity or result in severe dislocations in the PRC
economy in general.
EXCHANGE RATE FLUCTUATIONS
The Company anticipates that a portion of its costs and expenses will
be incurred and that a portion of its potential equity contributions and/or loan
advances may be made in Renminbi, the official currency of the PRC. The Company
also anticipates that until project investments are made and such projects reach
commercial operations, the majority of its revenues will be generated through
interest in earnings on U.S. dollar denominated investments. Although the
Renminbi has appreciated somewhat in recent months, over the past ten years the
Renminbi has experienced a net devaluation against the U.S. dollar. As a result,
the
7
<PAGE>
Company does not currently anticipate the need to hedge its projected Renminbi
expenditures. Additionally, the Company believes that there is a lack of
economically efficient foreign currency hedging strategies based on
Renminbi-U.S. dollar futures, swaps and/or options. As a result, if the
long-term Renminbi devaluation trend were to reverse, the Company may not be
able to mitigate its exposure to potentially fluctuating exchange rates.
However, the Company will monitor the availability of financial instruments that
may develop and that would permit, in the Company's opinion, economically
attractive hedging strategies. In addition, the Company will attempt, whenever
possible, to hedge against exchange rate fluctuations by structuring its joint
venture and power purchase contracts to provide for adjustments in profit
distributions and in electricity payments for changes in the Renminbi and the
U.S. dollar exchange rate.
LIMITED CONVERSION AND REPATRIATION OF CURRENCY
After project investments are made, the Company anticipates that its
project subsidiaries will receive a substantial portion of their revenues in
Renminbi. A portion of such revenues will need to be converted to other
currencies to meet foreign currency obligations (such as payment obligations to
non-Chinese lenders and suppliers of plant and equipment) or to be remitted to
the Company as a return of capital or dividends. Because of the PRC government's
policy to control its foreign currency reserves, Renminbi earnings within the
PRC can be freely converted into foreign currencies only with the permission of
the PRC's State Administration for Exchange Control ("SAEC")and only on the
basis of rates prevailing in the China Foreign Exchange Trading Center
("CFETC"). The CFETC is an interbank foreign exchange trading market. In
accordance with new regulations effective July 1, 1996, foreign investment
enterprises, such as sino-foreign joint ventures, in selected locations are now
permitted to exchange Renminbi into foreign currencies (up to specified U.S.
dollar limits) for current account transactions, including remittance of profits
and payments of foreign debts, at designated financial institutions without the
need for prior government approval. It remains unclear what impact these
regulations will have on the ability of foreign investment enterprises to
convert Renminbi into foreign currency in order to make distributions to
investors. While in the last two years foreign currency has been readily
8
<PAGE>
available, no assurance can be given that the Company's joint ventures will
freely be able to remit foreign currency abroad.
RESTRICTIONS ON FOREIGN OWNERSHIP
Presently, any project in China must fit within the National Economic
and Social Development Plan and all related sub-plans, such as the State Energy
Plan, the State Credit Plan and the State Transportation Plan. Accordingly, the
negotiation of joint venture power projects involving foreign equity
participation, such as those contemplated by the Company, is subject to numerous
government approvals and regulatory consents. Because China has allowed private
foreign investment in the energy sector only recently, a formal, uniform set of
procedures for the approval of the construction and operation of power plants
involving foreign investment does not exist.
Additional restrictions have been imposed by the PRC on ownership and
financing by foreign direct investors in large and medium-sized electric power
plants. At present, foreign investors are prohibited from acquiring a majority
interest in any such plant.
EVOLVING REGULATIONS AND POLICIES
Factors such as broad administrative discretion, administrative
interpretation, inadequacy of comprehensive laws and regulations, bureaucratic
procedures guided by directives of the Communist Party of China and regional
variances may add uncertainty to the process of obtaining approvals for any
power project with foreign investment.
In a number of instances, the Company has entered into a series of
separate joint venture contracts establishing joint ventures that intend to
construct, own or operate different elements or phases of an electric power
generation facility and which joint ventures have proceeded or will proceed on
the basis of provincial and local government approvals. There is a risk that
joint ventures structured in this fashion could be viewed as a single project
and that central government entities would seek to challenge the validity of the
approvals granted by the provincial and local government entities, or that the
projects would be unable to obtain the support of central
9
<PAGE>
government authorities in resolving issues if such support were subsequently
required in the course of development, construction or operation of a project.
DEVELOPING INFRASTRUCTURE
Transportation, electricity transmission and other major
infrastructure systems in China are not highly developed. In addition, these
logistical hardships are exacerbated by the fact that approximately two-thirds
of China's coal resources are concentrated in northern and northwestern China,
while a significant portion of its industrial and population centers, and thus
the demand for electricity, are in the eastern and southern coastal provinces.
As a result, delays in the provision of materials and equipment for the
construction of electric power generation facilities, and in the supply of spare
parts and fuel once operations commence, are expected to be more common than in
more developed countries. Such delays in turn could lead to increased
construction-period costs and penalties, shortages of equipment, spare parts or
fuel and an inability to operate at or above expected operating levels.
PRC LAWS
The PRC's legal system is a civil law system which is based on written
statutes and in which decided legal cases have little precedential value. The
PRC does not have a well-developed, consolidated body of laws governing foreign
investment enterprises. As a result, the administration of laws and regulations
by government agencies may be subject to considerable discretion, particularly
in the event of political change. As the legal system in the PRC develops,
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. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement
thereof.
10
<PAGE>
FINANCING CONSIDERATIONS
NEED FOR AND UNCERTAINTY OF OBTAINING ADDITIONAL FINANCING
The Company has committed approximately $224 million and invested
approximately $91 million in seven projects. The Company has also, over the past
two years, repurchased approximately $18 million worth of its Class A Common
Stock. In addition, the Company is considering investment opportunities in
projects which are in advanced stages of development or under construction and
which need additional equity in order to be completed. The Company would invest
in these projects on an all equity basis or by providing shareholder loans. If
any of these projects are successfully developed, it is likely that the Company
will seek to raise debt or additional equity in the near future.
In addition, the Company and its joint venture partners will need to
raise limited-recourse or non-recourse debt for certain projects. The Company
believes such projects will be successfully developed only if such debt is
obtained. To date, the debt component of electric power projects involving
foreign private ownership in China has been provided by a limited number of
multilateral and government financing institutions, such as The World Bank and
the Asian Development Bank and various export credit agencies, and, to a more
limited extent, commercial lenders. However, these institutions and lenders have
often required government guarantees and commercial assurances with respect to
certain matters such as: the availability, transferability and convertibility of
foreign currency; long-term electric power purchase contracts with clear pricing
mechanisms; long-term fuel supply contracts; construction completion guarantees;
and mitigation of the risks associated with the underdeveloped nature of China's
regulatory and legal framework. The Company believes that these guarantees and
commercial assurances may generally, as a matter of Chinese government policy,
not currently be available in the PRC in form satisfactory to lenders.
There is a risk that the Company may not be able to access the debt
markets to raise the amount of debt required when it is needed, or may not be
able to obtain reasonable rates and other terms if debt is available. Factors
which could affect the Company's ability to raise such debt include general
economic conditions, political
11
<PAGE>
conditions in China, capital market conditions, the success of any completed
projects and the progress of projects still under development. If debt financing
is not available for a project, further development of such project may have to
be suspended or terminated and the Company might lose its investment in the
project. Such suspension or termination may have possible adverse effects on the
Company's credibility in the China power market.
PROJECT SPECIFIC CONSIDERATIONS
TRADITIONAL PROJECT FINANCE STRUCTURES MAY BE UNAVAILABLE
It is the Company's intention, when evaluating or developing project
opportunities in the PRC to seek to utilize project structures and contractual
terms which generally have been proven to be important in international
independent power projects for reducing risks, obtaining financing and achieving
commercially sound projects. The Company anticipates, however, that projects in
China will 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 may be required or elect
to assume certain risks not typically assumed by project sponsors in an
international independent power project, including risks associated with
construction (such as completion risks), 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.
Limited Contractual Protections for Certain Potential Projects
A number of the potential projects being pursued by the Company are
currently memorialized in initialed or signed joint venture contracts. The joint
venture contracts become effective under Chinese law following receipt of
certain required government approvals and, in the case of joint venture
contracts that have been initialed, following
12
<PAGE>
reexecution by the parties. Some of the Company's joint venture contracts are
also subject to the satisfaction or waiver of certain significant conditions
precedent. There can be no assurance that such projects will receive all the
necessary governmental approvals or that all conditions precedent to the
relevant joint venture contracts will be satisfied.
The Company also has preliminary agreements related to the development
of a number of potential power projects in the PRC. Such preliminary agreements
are not binding under Chinese law, but do set forth a framework upon which
further discussions and negotiations may build and serve as a basis for seeking
preliminary government approvals. However, there are substantial uncertainties
as to which, if any, of these projects will be completed with the participation
of the Company. The Company is pursuing other projects as well.
CONSTRUCTION RISKS
The construction of an electric power generation plant may be
adversely affected by many factors commonly associated with large infrastructure
projects, including shortages of equipment, materials and labor, labor disputes,
adverse weather conditions, natural disasters, accidents and unforeseen
circumstances and problems. Any of these could give rise to delays in the
completion of a project and to 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 loss of revenues and, if completion
is delayed beyond the contractual completion date, in the payment of penalties.
The failure to complete construction according to specifications can result in
liabilities, reduced plant efficiency, higher operating costs and reduced
earnings. In some cases, the Company's potential projects require the
construction of a high voltage transmission line between the plant and the
customer. Delays in completion of such a transmission line could also delay the
commencement of commercial operation of such a plant.
13
<PAGE>
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, natural disasters, and the need to comply with the directions of the
relevant government authorities or industrial customer. In addition, such
operation may be adversely affected by insufficient or poor quality fuel
resulting either from inadequate sources of supply or inadequate transportation.
Although it is expected that power purchase contracts with Chinese entities
will, in certain cases, provide for certain minimum levels of revenue which are
calculated to be sufficient under expected circumstances to cover the fixed
operating expenses, tax liabilities and financing costs of the particular
project and to provide a reasonable return on investment, such payments
generally will be dependent on the plant producing electricity at some specific
level. Moreover, the Company's ability to generate income in excess of the
contractual minimum will often depend upon the plant operating at a level above
the specified minimum, which in turn will be subject to load demand for such
electricity by the power purchaser, the power purchaser's willingness and
ability to dispatch the plant and future government policies permitting such
operation.
DEPENDENCE ON CUSTOMERS
It is intended that each project company in which the Company invests
will sell electricity under one or more long-term power purchase contracts to
central, provincial, municipal or county electric power organizations or
industrial customers which the Company believes will be able to perform their
obligations under the power purchase contracts. The creditworthiness of PRC
entities may be difficult to ascertain. It is contemplated that the power
purchaser would, where possible, purchase at an agreed price a specified minimum
amount of electricity generated by the plant during the term of the power
purchase contract. The minimum revenue projected to be received by the project
company from the power purchaser during the term of the power purchase contract
is intended under normal circumstances to be sufficient to pay the projected
operating expenses of the plant and the projected financing
14
<PAGE>
costs of the project and also to enable the Company to realize a reasonable
return on its investment. The ability to attain such levels of revenue will be
dependent upon the operating reliability of the plant.
ENVIRONMENTAL MATTERS
Approval by the relevant environmental protection bureaus is required
at each of the design, construction and start-up stages of the project before
the planning commission for the same level of government can issue its approval
of the project feasibility study report. Filing of an environmental impact
statement or, in some cases, an environmental impact assessment, is required
prior to the issuance of such approval. The filing must demonstrate that the
project conforms to applicable environmental standards. Discharge permits are
likely to be required for water and airborne emissions. Approvals and permits
generally have been issued for projects utilizing modern pollution control
technology, but there can be no assurance that the legislative basis or the
conditions under which such approvals or permits are granted may not be made
more stringent in the future. 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. China'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.
The PRC is a party to the Framework Convention on Climate Change (the
"Climate Change Convention"), which is intended to limit or capture
anthropogenic 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. Although ceilings
on the emissions of greenhouse gases have not been assigned to developing
countries such as the PRC under the Climate Change Convention, the PRC has
objected to the possibility of the imposition of such ceilings. The Company's
business strategy could be affected if such ceilings were imposed, or
15
<PAGE>
if the PRC otherwise decided to limit the increase in its production of
electricity or to reduce its reliance on coal-fired power plants. 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 coals, and to
plants in urban areas that generate steam as well as electricity. The PRC State
Planning Commission also has stated that it favors the construction of more
plants relying on clean fuels.
CONTROL BY AND RELIANCE ON AES
The AES Corporation ("AES") 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 people who are also senior executives, officers and
project personnel employed by AES. In addition, AES Chigen has entered into a
Project Services Agreement, dated as of December 29, 1993, with AES (the
"Services Agreement"). Under the Services Agreement, AES provides 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, acquisition, financing, construction,
ownership, maintenance and operation of electric power generation projects in
the PRC.
ADHERENCE TO COMPANY VALUES - POSSIBLE IMPACT ON RESULTS OF OPERATIONS
A core part of the AES Chigen culture is a commitment to "shared
principles" of integrity, fairness, fun and social responsibility. The Company
tries to adhere to these principles even though doing so might result in
diminished or foregone opportunities. The Company's principles are relevant
because they help explain how it will approach its business. Additionally, the
Company believes that earning a fair profit is an important result of providing
a quality product to its customers. Some argue there is no inherent conflict
between principles and profits and the Company agrees with this belief. However,
if a perceived conflict arises between these principles and profits, the Company
intends to try to adhere to its principles. The Company seeks to adhere to these
16
<PAGE>
principles, not as a means to achieve economic success, but because adherence is
a worthwhile goal in and of itself.
17
