UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1997
Commission file number 0-23148
AES CHINA GENERATING CO. LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 98-0152612
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26/F, Entertainment Building
30 Queen's Road, Central
Hong Kong
Not Applicable
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 852-2842-5111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Title of each class)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
---------------
Registrant is a wholly owned subsidiary of The AES Corporation.
Registrant meets the conditions set forth in General Instruction I(1)(a) and (b)
of Form 10-K and is filing this Annual Report on Form 10-K with the reduced
disclosure format authorized by General Instruction I.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
Item 1. Business
(a) General Development of Business
The Registrant (hereinafter referred to as the "Company" or "AES
Chigen"), a Bermuda Company, is a leading independent power generation company
in the People's Republic of China (the "PRC" or "China") and one of the few
international developers that has successfully completed the development of
electric power projects in the country. AES Chigen was founded in December 1993
by The AES Corporation ("AES") to serve as the exclusive vehicle for AES to
develop, acquire, finance, construct, own and operate electric power generation
facilities in the PRC. The Company is currently a wholly owned subsidiary of
AES.
To respond to significant opportunities in China, AES, through a wholly
owned subsidiary, opened an office in Hong Kong in early 1993. Following the
incorporation of AES Chigen, AES purchased shares of AES Chigen Class B Common
Stock for $50.0 million and, in early 1994, AES Chigen completed an initial
public offering of shares of its Class A Common Stock, which provided AES Chigen
with net proceeds, after underwriting commissions and discounts, of $151.9
million. The Company became a wholly owned subsidiary of AES on May 8, 1997 as a
result of its amalgamation (the "Amalgamation") with a wholly owned subsidiary
of AES pursuant to an Amended and Restated Agreement and Plan of Amalgamation,
dated as of November 12, 1996 (the "Amalgamation Agreement"), between the
Company and AES. Prior to the Amalgamation, the Company was a controlled
affiliate of AES, which owned approximately 48% of the outstanding common stock
of the Company.
Since commencing business, AES Chigen has committed $357.8 million and
as of January 31, 1998 has invested $234.2 million in nine power projects in
operation or under construction in the PRC, having an aggregate nameplate
capacity (the full load continuous rating of a generator, prime mover or other
electrical equipment under specified conditions as designated by its
manufacturer) of approximately 2,918 megawatts ("MW") (approximately 947 MW of
which is attributable to AES Chigen's interests in certain sino-foreign joint
venture enterprises (the "Joint Ventures")). These Joint Ventures' projects
include coal, oil and natural gas-fired and hydropower plants located in seven
different provinces in China. These projects are referred to as the "Current
Projects."
With a presence in over 35 countries, AES is a global power company
committed to supplying electricity to customers world-wide in a socially
responsible way. AES, based in Arlington, Virginia, markets power principally
from electric generating facilities that it develops, owns and operates. AES was
one of the original entrants in the independent power market and today is one of
the world's largest global power companies, based on net equity ownership of
generating capacity (in megawatts) in operation or under construction.
On December 19, 1996, AES Chigen completed a $180 million public
offering of its 10-1/8% Notes due December 2006 (the "2006 Notes") and received
net proceeds of approximately $173.9 million. Pursuant to the terms of the
indenture under which the 2006 Notes were issued (the "Indenture"), AES Chigen
was required to deposit approximately $27.1 million in an interim reserve
account to make interest payments on the 2006 Notes through June 15, 1998, and
approximately $9.1 million in a debt payment reserve. As of February 28, 1998,
the balance in the interim reserve account was $9.1 million. The 2006 Notes are
redeemable at the option of AES Chigen on or after December 15, 2001. Net
proceeds from the offering of the 2006 Notes will be used to fund investments in
AES Chigen's Current Projects and for general corporate purposes. The Company is
permitted, pursuant to the terms of the Indenture, to pay dividends to AES,
provided that the Company satisfies certain conditions.
The 2006 Notes have been rated BB- by Standard & Poor's Rating Group
and Ba3 by Moody's Investors Service. On January 26, 1998, Standard & Poor's
announced that it had placed its BB- rating of the 2006 Notes on CreditWatch
with negative implications. Standard & Poor's noted a number of factors
contributing to this action, including decline in growth rates in demand for
power and construction of new capacity resulting in oversupply in some areas,
failure of purchasers of power from the Company's Joint Ventures to purchase the
minimum offtake of electricity they were contractually required to purchase,
uncertainty concerning the performance by the power purchasers of their
obligations to compensate the Company's Joint Ventures for their failure to
purchase such minimum offtakes, receipt of dividends from the Company's joint
ventures in 1997 that were less than the amounts expected, erosion of
distributable profits of the Company's Joint Ventures due to higher than
expected generating costs incurred by third party operators, higher than
expected corporate overhead expenses in 1997 resulting from non-recurring
charges and higher than expected expenditures on technical staffing at
construction sites and development costs.
In the event of a shortfall between the amount of the Company's
commitments and the cash available, the shortfall may be made up by loans or
equity contributions from AES, but AES is not obligated to provide any such loan
or equity contribution for such purpose and there is no assurance that AES would
decide to provide any such loans or equity contribution.
As a result of the Amalgamation, the Company is subject to covenants
(the "AES Debt Covenants") contained in the documents governing AES's 10-1/4%
subordinated Notes due 2006, 8-3/8% Senior Subordinated Notes due 2007 and $425
million credit facility due 1999. Due to recent amendments to the terms of the
AES Debt Covenants, certain material restrictions previously applicable to AES
Chigen, including a prohibition on direct investments in future projects, are no
longer applicable. However, no assurance can be given that AES Chigen will
invest in any additional future projects.
Both the AES Debt Covenants and the covenants contained in the
Indenture for AES Chigen's 2006 Notes require the repayment or purchase of
indebtedness under specified circumstances involving asset dispositions. Insofar
as separate repayments are required at the AES and the 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.
One of the results of the Amalgamation has been the termination of the
Non-Competition and Non-Disclosure Agreement, dated as of December 29, 1993 and
amended and restated as of February 1, 1994, between the Company and AES, which,
among other things, prohibited the Company from developing, constructing,
owning, managing and operating electric power generation projects in any part of
Asia other than China. The Company may consider investing through its
subsidiaries in power projects outside of China.
The Company's operations, prospects, results of operations and
financial condition are subject to significant risks and uncertainties,
including those set forth in "Business-Narrative Description of Business" on
pages 2 through 19 of the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996, which is incorporated herein by reference.
Several countries in Southeast Asia, including Korea, Thailand and
Indonesia, have experienced a significant devaluation of their currencies and a
decline in the value of their capital markets. In addition, these countries have
experienced a number of bank failures and consolidations. The Company cannot
predict the effect that these conditions will ultimately have on its activities.
Description of the Current Projects
The following table presents certain summary information on the
Company's Current Projects.
<TABLE>
<CAPTION>
The Current Projects
Company
Company Investment
Location Capacity Interest Commitment
Project (Province) (MW) (MW) (%) Fuel Status
- ------------------ ---------- -------- -------- ---------- ---- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Yangcheng Sun City Shanxi 2,100 525 25 Coal Under construction (first
unit scheduled to be in
operation by second quarter
of 2000; last unit scheduled
to be in operation by the
second quarter of 2002)
Jiaozuo Aluminum Henan 250 175 70 Coal First unit commenced
Power commercial operation on
August 17, 1997; second unit
was synchronized with the
power grid on February 22,
1998 and is scheduled to be
in operation by the second
quarter of 1998
Wuhu Grassy Lake Anhui 250 62.5 25 Coal In operation
Hefei Prosperity Anhui 115.2 80.6 70 Oil Simple cycle unit commenced
Lake commercial operation on
August 1, 1997; combined
cycle unit scheduled to be in
operation in the third
quarter of 1998
Wuxi Tin Hill Jiangsu 63 34.7 55 Oil In operation
Aixi Heart River Sichuan 50 35 70 Coal Under construction (scheduled
to be in operation in the
second quarter of 1998)
Chengdu Lotus City Sichuan 48 16.8 35 Natural Commenced commercial
Gas operation on July 5, 1997
Cili Misty Mountain Hunan 26.2 13.4 51 Hydro In operation
Yangchun Sun Spring Guangdong 15.1 3.8 25 Oil In operation
------- ------
TOTAL 2,917.5 946.8
======= ======
</TABLE>
Overview
The Company, directly or through one of its wholly owned offshore
subsidiaries, has formed 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).
Three of the power plants -- Aixi Heart River, Jiaozuo Aluminum Power and
Chengdu Lotus City -- are financed with a combination of registered capital and
shareholder loans. Four of the power plants -- Wuhu Grassy Lake, Hefei
Prosperity Lake, Yangcheng Sun City and Wuxi Tin Hill -- are financed by
registered capital, shareholder loans and 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 five 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 five 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 State Administration of Foreign Exchange of the
Central Government ("State Administration of Foreign Exchange" or "SAFE") if the
loan has been drawn, or the Joint Venture will register the shareholder loan
with the relevant branch of the SAFE 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 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 tariff formulas and other
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 the risk of
fluctuations in the exchange rate between the US dollar and the Renminbi Yuan,
the official currency of the PRC ("RMB(Y)"), 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 formulas
in order to pass through such increased costs.
For 1997, the approved tariff for Wuhu Grassy Lake was less than the
tariff requested by the Joint Venture, which was based on a formula set forth in
the Power Purchase Contract. As a result, Wuhu Grassy Lake's revenue for 1997
was insufficient for the Joint Venture to pay the projected return to its
shareholders. The joint venture plans to make up such shortfall by means of a
tariff adjustment in 1998. However, there is no assurance that the relevant
pricing bureau will approve it.
In 1997, the approved tariff for Chengdu Lotus City was less than the
tariff requested by the Joint Venture, which was based on a formula set forth in
the Power Purchase Contract. Due to the priority return structure in the Joint
Venture Agreement for Chengdu Lotus City, the Company's dividends from Chengdu
Lotus City related to its 1997 operations will be as expected.
The Joint Ventures in all cases except one -- Cili Misty Mountain --
have entered 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 two -- Jiaozuo Aluminum
Power and Yangcheng Sun City -- in the event of an early termination of a power
purchase contract which results from a default of a power purchaser, the Joint
Venture 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 one of the Company's projects currently under construction -- Jiaozuo
Aluminum Power -- the 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, two of which are turnkey arrangements. In all of
the projects described in this section except Yangcheng Sun City, 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 Yangcheng Sun 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.
Six of the nine power plants are or will be operated directly by the
Joint Ventures -- Cili Misty Mountain, Wuxi Tin Hill, Aixi Heart River, Jiaozuo
Aluminum Power, Chengdu Lotus City and Yangcheng Sun 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 in operation or under
construction have obtained insurance coverage for property loss and damage
(including damage arising from natural calamities) and third party liability,
except for Yangcheng Sun City, which is in the process of obtaining insurance
coverage for property loss and damage 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, Hefei Prosperity Lake and Yangcheng Sun City,
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 three projects, the power purchaser is
relieved of its obligation to purchase the minimum amount of electric power
under its respective power purchase 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.
The State Council of the PRC, the highest administrative organ of the
PRC's Central Government, 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 State Planning
Commission of the Central Government ("State Planning Commission" or "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. Separate from project approval, foreign investment must
be approved by The Ministry of Foreign Trade and Economic Cooperation of the
Central Government ("Ministry of Foreign Trade and Economic Cooperation or
"MOFTEC"), or one of its departments at the provincial or local government
level, should the total investment amount be below $30 million.
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 three power plants -- Yangcheng Sun City,
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.
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. However, there can be no assurance that the relevant
pricing bureaus will calculate and adjust tariffs in accordance with these
tariff formulas.
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.
Yangcheng Sun City
The Power Plant. The Yangcheng Sun City power plant is a 6 x 350 MW
coal-fired power plant located near Yangcheng, Shanxi Province. Construction of
the power plant commenced in August 1997. The first unit of the power plant is
scheduled to commence commercial operation by the second quarter of 2000. The
last unit is scheduled to commence commercial operation by the second quarter of
2002.
Joint Venture. The Yangcheng Sun City power plant is owned by Yangcheng
International Power Generating Company Ltd. ("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 a wholly owned subsidiary of the Company.
Pursuant to the joint venture contract, the Company is entitled to a
fixed priority return commencing in the year 2002.
The board of directors of Yangcheng International Power consists of
nine directors, of which two are appointed by the Company. The Company also
appoints one of the three vice chairmen and a deputy general manager of the
power plant.
Financing. 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 being financed through export
credit agency loans, debt arranged or guaranteed by the Chinese parties and
shareholder loans from the Chinese parties. Export credit agency loan guarantees
from the Export-Import Bank of the United States and Hermes
Kreditversicherungs-Aktiengesellschaft of approximately $800 million have been
provided to Yangcheng International Power. The export credit agency loan
guarantees are supported by guarantees from the Construction Bank of China.
Power Purchase. The electric power from the power plant will be
purchased by Jiangsu Provincial Power Company ("Jiangsu Power") pursuant to a
20-year power purchase contract dated as July 1997 between Yangcheng
International and Jiangsu Power. Under the power purchase contract, Jiangsu
Power has agreed to purchase from Yangcheng International at least 5,500
kilowatt hours of electricity for each calendar year prior to the year 2011, at
least 5,386 hours for the calendar year 2011 and at least 5,000 hours for each
year thereafter. In the event that Jiangsu Power fails in any calendar year to
purchase such minimum amount, Jiangsu 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 Yangcheng International
fails to deliver electricity to Jiangsu Power by the construction completion
date specified in the power purchase contract, it is obligated to pay a penalty
to Jiangsu Power for each day of delay.
Construction. Yangcheng International has entered into a lump sum,
fixed price, fixed schedule, turnkey contract with Shanxi Provincial Power
Company ("Shanxi Power") to design, engineer, procure and construct the power
plant. Pursuant to the Engineering, Procurement and Construction Contract
("EPC"), Shanxi Power is the principal contractor and has subcontracted the
design, construction, installation and commissioning work to subcontractors. The
turbines and generators of the power plant will be provided by Siemens and
boilers will be provided by Foster Wheeler Energy Corporation.
Shanxi Power will provide a one-year warranty after the commencement of
operation of a unit. If Shanxi Power fails to complete construction of the each
unit of the power plant by the applicable guaranteed completion date, the
contractor will be required to pay liquidated damages to Yangcheng
International.
Under the EPC, Shanxi Power has guaranteed all the performance
specifications of the power plant, including output, heat rate, and emissions.
If Shanxi Power fails to achieve the performance specifications, Shanxi Power
will be obligated to pay liquidated performance damages to Yangcheng
International.
Interconnection and Dispatch. Jiangsu Power is responsible for the
construction and has guaranteed the completion of the interconnection facility
three months before the first unit of the power plant goes into commercial
operation. If a delay in the completion of the interconnection facility results
in delays in commencement of the commercial operation of the power plant,
Jiangsu Power is obligated to pay Yangcheng International a penalty for each day
of delay.
Electric power for the plant will be transmitted over a 755 kilometer
transmission line to Jiangsu Power in Jiangsu Province, on the eastern coast of
China. When in commercial operation, the power plant will be dispatched by State
Power Dispatch and Communication Centre ("State Power Dispatch"). State Power
Dispatch will ensure that Yangcheng International's on-grid electricity is not
less than the minimum take quantity.
Fuel. Yangcheng International has entered into a 20-year coal supply
contract with Shanxi Coal Sales and Transportation Corporation. The coal
supplier will supply low-cost anthracite coal which is available from several
coal mines located within 30 kilometers of the power plant site. The coal
supplier will be obligated, under the contract, to pay damages for any failure
to supply the power plant with adequate quantities of coal or coal not meeting
certain specifications. The coal supplier is obligated to arrange for the
transportation of the coal by truck or by train to the power plant.
Operator. Yangcheng International will operate the power plant.
Jiaozuo Aluminum Power
The Power Plant. The Jiaozuo Aluminum 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 was completed and commenced commercial operation on August 17, 1997. The
second unit is scheduled to commence commercial operation in the second quarter
of 1998.
Joint Venture. The Jiaozuo Aluminum Power plant is owned by Jiaozuo Wan
Fang Power Company Ltd. ("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
November 30, 1997, 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 contributed $37.6 million to the registered capital of the Joint
Venture. Jiaozuo Mill has contributed $16.1 million in land use rights and
certain fixed assets to the registered capital of the Joint Venture.
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. Both power purchase contracts allow the Joint Venture to
adjust the minimum amount of electricity required to be purchased by the power
purchasers and Jiaozuo Mill may request the Joint Venture to adjust the minimum
amount of electricity required to be purchased by Jiaozuo Mill, in all cases,
upon prior notice.
During 1997, Jiaozuo Mill and Henan Power failed to purchase the
required minimum amounts of electricity under the power purchase contract, and
accordingly, are required to compensate the Joint Venture for the shortfall.
Jiaozuo Mill and Henan Power are negotiating with the Joint Venture about
providing the compensation to the Joint Venture for the shortfall by purchasing
excess on-grid electricity from the Joint Venture during the first half of 1998.
There are no specific provisions regarding liquidated damages 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.
Construction. Jiaozuo Wan Fang has directly managed the construction of
Unit 1 of the power plant and is directly managing the construction of Unit 2 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 (the term "heat rate" refers to a power
plant's thermal efficiency), 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. 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. Unit 2 of the power plant was synchronized with the power grid on
February 22, 1998 and is expected to commence commercial operation in the second
quarter of 1998.
Interconnection and Dispatch. The interconnection facilities were
completed by Henan Power in February 1998. Jiaozuo Wan Fang has provided a loan
in the amount of approximately $9.9 million to Henan Power for the design and
construction of the interconnection facilities. The power plant is currently
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 obtains fuel pursuant to short-term 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
negotiated periodically with the mine owners. The coal supplier arranges for the
transportation of the coal by truck to the power plant.
Operation. Jiaozuo Wan Fang operates 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
went into commercial operation in March 1997.
Joint Venture. The Wuhu Grassy Lake power plant is owned by Wuhu Shaoda
Electric Power Development Company Ltd. ("Wuhu Shaoda"), a 20-year equity joint
venture formed by CPI, Anhui Liyuan Electric Power 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 contributed 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 November 30, 1997,
the estimated total cost of this project was in the range of $118.2 million to
$121.4 million. The difference between the total investment and the registered
capital of Wuhu Shaoda is being financed through a bank facility and shareholder
loans arranged by the Joint Venture partners. Wuhu Shaoda 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 provided a $17.5 million subordinated
loan (the "AES Loan") and Anhui Liyuan has provided $4.6 million and Wuhu Energy
has provided $2.3 million in subordinated shareholders' loans to the Joint
Venture. The $6.9 million total amount of shareholder loans from Anhui Liyuan
and Wuhu Energy were composed of cash in the amount of $4.6 million and accrued
interest to the two partners on their early capital injections in the amount of
$2.3 million. The recognition of this $2.3 million of accrued interest as part
of the two partners' shareholder loans is still subject to the unanimous
agreement by all the partners. The Company has guaranteed to the lenders of the
Term Loan certain obligations of its wholly owned subsidiary under the joint
venture contract, including the obligation to fund 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 is 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 operation and offtake contract, Anhui Power
has agreed to purchase a minimum amount of electricity at a price 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.
During 1997, Anhui Power failed to purchase the required minimum amount
of electricity under the operation and offtake contract. Accordingly, Anhui
Power is required pursuant to the operation and offtake contract to compensate
the Joint Venture for the shortfall based on the 1997 approved tariff less
approved generation cost. The relevant pricing bureau approved only the tariff
and not the generation cost assumed for purposes of setting the tariff. The
Joint Venture and Anhui Power, the operator of the plant, have disagreed over
determination of the generation cost to be used for the calculation of the
minimum take compensation. The minimum take compensation will be subject to
finalization of the generation cost issue, which is currently under negotiation
between Anhui Power and Wuhu Shaoda.
Construction. The power plant was 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 sub-contracted the design, construction, installation
and commissioning work to several of its subsidiaries. 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,
was retained by the lenders of the Term Loan to monitor construction. As of
November 30, 1997, the work remaining was completion of construction of an ash
pond and living quarters. This work is scheduled to be completed by the end of
1998.
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.
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
and is responsible for satisfying all operating costs of the power plant. In
return, Anhui Power is entitled to deduct the approved generation cost from the
electricity fee to the Joint Venture. Due to disagreement between Anhui Power
and the Joint Venture over the determination of generation cost as indicated
above, the total electricity fee for 1997 has not yet been finalized. 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 turbine 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 commenced in November 1996. The gas turbine unit commenced
commercial operation on August 1, 1997 as scheduled, 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 Anhui
Liyuan AES Power Company Ltd. ("Liyuan-AES") and Hefei Zhongli Energy Company
Ltd. ("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 contributed 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 November 30, 1997, it is estimated
that the total cost of Hefei Prosperity Lake will be approximately $65.7
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, of which $14.7 million has been
provided as of November 30, 1997. A PRC bank has entered into long-term loan
contracts with Liyuan-AES and Zhongli Energy for the provision of loans totaling
$14 million of which $7 million has been provided as of November 30, 1997. The
loans were arranged and guaranteed by one of the PRC partners.
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.
Since the commencement of commercial operation of the simple cycle
unit, Anhui Power has failed to purchase the required minimum amount of
electricity under the operation and offtake contract. Accordingly, Anhui Power
is required pursuant to the operation and offtake contract to compensate the
Joint Ventures for the shortfall based on the 1997 approved tariff less approved
generation cost. The relevant pricing bureau approved only the tariff and not
the generation cost assumed for purposes of setting the tariff. The Joint
Ventures and Anhui Power, the operator of the plant, have disagreed over
determination of the generation cost to be used for the calculation of the
minimum take compensation. The minimum take compensation will be subject to
finalization of the generation cost issue, which is currently under negotiation
between Anhui Power and the Joint Ventures.
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 for on-time
completion of the gas turbine unit and early or on-time completion of 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 from GEC Alsthom
Centrales Energetiques S.A. ("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
and is responsible for satisfying all operating costs of the power plant. In
return, Anhui Power is entitled to deduct the approved generation cost from the
electricity fee to the Joint Ventures. Due to disagreement between Anhui Power
and the Joint Ventures over the determination of generation cost as indicated
above, the total electricity fee for 1997 has not yet been finalized. 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 City
(previously known as Wuxi County), Jiangsu Province. The gas turbine generating
plant was completed and commenced commercial operation in March 1996 and the
heat recovery steam turbine generating plant commenced commercial operation in
the first quarter of 1997.
Joint Ventures. The Wuxi Tin Hill power plant is owned by
Wuxi-AES-CAREC Gas Turbine Power Company Ltd. ("Wuxi-AES-CAREC") and
Wuxi-AES-Zhonghang Power Co. Ltd. ("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
November 30, 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 entered into shareholder loan agreements with the Joint Ventures pursuant
to which they provided loans to the two Joint Ventures pro rata in accordance
with their ownership interests.
In January 1998, the Wuxi Tin Hill replaced the shareholder loans
provided by the Company and CAREC with a $12.5 million loan from ING Bank,
Shanghai Branch and RMB(Y)26 million (about $3.1 million) in loans from two
local Chinese banks in Wuxi. The shareholder loans from the Company and CAREC
were fully paid off, leaving a $4.4 million shareholder loan from Wuxi Power.
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 gigawatt hours ("GWh") of electricity per calendar year
from the power plant and to compensate the Joint Ventures for any shortfalls in
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.
During 1996, Xishan Office failed to purchase the required minimum
amount of electricity under the power purchase contract and, accordingly, is
required to compensate the Joint Venture for the shortfall. The parties had a
disagreement over the amount of the required minimum take for 1996. Xishan
Office paid 88% of the amount the Joint Venture believed was due but disputed
the balance. In March 1997, the Joint Venture reached agreement with the power
purchaser on the amount of payment for required minimum offtake of electricity
for 1996. The agreement included the deferral of certain amounts scheduled to be
paid in 1996 and a corresponding adjustment upward of future scheduled payments
of capital return.
During 1997, Xishan office also failed to purchase the required minimum
amount of electricity and has paid 89% of the shortfall to the Joint Venture.
The company expects settlement of the outstanding balance in the near future.
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 Jiangsu Provincial Power Bureau Dispatch Center signed in August
1997.
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 the second quarter 1998.
Joint Venture. The Aixi Heart River power plant is owned by Sichuan
Fuling Aixi Power Company Ltd. ("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 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 November 30, 1997, it is estimated that the total cost
of Aixi Heart River will be approximately $39.1 million. The Company has
contributed $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. As of January 30, 1998, Banxi Colliery has contributed $3.4
million to the registered capital of the Joint Venture. 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 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 February 1998, 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 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 October 1996 and commercial operation commenced
on July 5, 1997.
Joint Venture. The Chengdu Lotus City power plant is owned by
Chengdu-AES-Kaihua Gas Turbine Power Co. Ltd. ("Chengdu AES-Kaihua"), a 16-year
cooperative joint venture formed by the Company, Chengdu Huaxi Electric Power
(Group) Shareholding Company Ltd. ("Huaxi"), Huachuan Petroleum & Natural Gas
Exploration 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
November 30, 1997, the estimated total cost of Chengdu Lotus City was
approximately $34.2 million, $3.2 million less than the original budget. The
Company has contributed $4.2 million to the registered capital of Chengdu
AES-Kaihua. The Company's joint venture partners have contributed the following
amounts to the registered capital of the Joint Venture: Huaxi has contributed
$3.0 million; Huachuan has contributed $1.2 million; and CAREC has contributed
$3.5 million. The Company, Huaxi and CAREC have entered into support contracts
with Chengdu AES-Kaihua pursuant to which they have provided loans to Chengdu
AES-Kaihua in the principal amount of $22.3 million in addition to their
registered capital contributions.
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-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 and the tariff adjustment method as specified in
the power purchase contract. In 1997, the approved tariff for Chengdu Lotus City
was less than the tariff requested by the Joint Venture, which was based on a
formula set forth in the Power Purchase Contract. Due to the priority return
structure in the Joint Venture Agreement for Chengdu Lotus City, the Company's
dividends from Chengdu Lotus City related to its 1997 operations will be as
expected.
Construction. Chengdu AES-Kaihua entered into a construction contract
with CAREC to construct the power plant. The principal equipment for the power
plant, the gas turbine generator sets, was 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 was provided by Chinese manufacturers. An independent engineering company,
Duke/Fluor Daniel International, was retained by the Joint Venture to manage
scheduling and to ensure equipment performance compliance.
Interconnection and Dispatch. The interconnection facility was
constructed by Huaxi. Chengdu AES-Kaihua has provided Huaxi with a loan of
RMB(Y)14.0 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's
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 operates 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"), and two 10.5 MW hydroelectric generating units ("unit 2" and "unit
3"). Unit 1, the original power plant, has been in commercial operation since
1979. Unit 2 went into commercial operation in May 1996 and unit 3 went into
commercial operation in February 1997.
Joint Venture. The Cili Misty Mountain power plant is owned by Hunan
Xiangci-AES Hydro Power Company Ltd. ("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 and the chief accountant.
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. The estimated total cost of this project is
in line with the approved total investment.
Power Purchase. In 1994, Xiangci-AES and Cili Electric Power entered
into a 25-year power purchase contract for the sale of electricity generated by
the power plant. Cili Electric Power was 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. 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 has connected a 36 kilometer low voltage transmission line to the
Hunan provincial grid and the larger market it serves. Since January 1998,
Xiangci-AES has been selling electricity to Zhangjiajie Electricity Power Bureau
("Zhangjiajie Power"). Xiangci-AES and Zhangjiajie Power are negotiating a new
power purchase contract. Zhangjiajie Power has been making payments at a tariff
rate set in the power purchase contract with Cili Electric Power and the
Company's expects the tariff set forth in the new power purchase contract to be
the same as the one with Cili Electric Power, which is the higher of a minimum
rate and a market rate. However, there can be no assurance that Xiangci-AES will
successfully negotiate a new power purchase contract.
As of January 31, 1998, the amount due from Cili Electric Power was
$0.8 million for the electricity sold during 1997. The payment of the
outstanding balance is in negotiation between the Joint Venture and Cili
Electric Power.
Construction. Pursuant to the terms of the joint venture contract, all
of the capital contributed by the Company to Xiangci-AES was 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. Xiangci-AES subsequently entered into an agreement with Cili
Electric Power pursuant to which the Joint Venture directly assumed the work of
completing the construction of unit 3 and Cili Electric Power was discharged
from any further obligation to complete the power plant.
Interconnection and Dispatch. The power plant was originally
interconnected to the Cili County power grid and was dispatched by Cili Electric
Power. Following the completion of the transmission line to connect the power
plant with the Hunan provincial grid, the power plant is being dispatched by the
Zhangjiajie 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 Diesel
Engine Power Co. Ltd. ("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.
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.
Employees
At January 31, 1998, the Company employed 33 people, who are involved
in operations or construction.
Item 2. Properties
The Company leases its principal office in Hong Kong and its
representative office in Beijing, People's Republic of China. The lease for the
Company's office in Hong Kong expires in March 2000. The Beijing lease expires
in July 1998.
The following table shows the material properties which the Company's
subsidiaries and other joint ventures in which the Company invests lease or for
which they have land use rights.
<TABLE>
<CAPTION>
Expiration or Approximate Plant
Plant or Project Location Land Use Rights Term of Land Use Area Description
Rights
- --------------------- --------------------- ---------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Anhui Liyuan-AES 7 Dang Shan Road, Lease of Land March 28, 2012 13,850 m2* Oil-fired
Power Company Ltd. Hefei City, Anhui Use Right Combined
Province, People's Cycle
Republic of China Gas-steam
Turbine
Facility
Chengdu AES-Kaihua Sichuan Sino-US Acquisition of March 2045 21,722 m2 Natural
Gas Turbine Power (Foreign) Medium & Land Use Right Gas-fired
Co. Ltd. Small-sized Simple Cycle
Enterprises Gas Turbine
Development Zone, Facility
Jin Tang County,
Sichuan Province,
People's Republic
of China
Hefei Zhongli 7 Dang Shan Road, Lease of Land March 17, 2012 13,850 m2* Oil-fired
Energy Company Ltd. Hefei City, Anhui Use Right Combined
Province, People's Cycle
Republic of China Gas-steam
Turbine
Facility
Hunan Xiangci-AES Chao Wang Ta Yi Transfer / October 7, 2019 48,110 m2 Hydroelectric
Hydro Power Company Zu and Pi Pa Zhou Assignment of Facility
Ltd. Tou, Chengguan, Land Use Right
Cili County,
Hunan Province,
People's Republic
of China
Jiaozuo Wan Fang Zhao Zhang Gong Transfer / April 25, 2019 481,490 m2 Pulverized
Power Company Ltd. Village, Dong Kong Assignment of Coal-fired
Zhuang Village, Land Use Right Facility
Daiwang Town,
Machun District,
Jiaozuo City, Henan
Province, People's
Republic of China
Sichuan Fuling Aixi Qiaobang Village, Acquisition of March 24, 2026 140,977 m2 Coal-fired
Power Company Ltd. Longhua Town, Land Use Right Circulating
Nanchuan City, Fluidized Bed
Sichuan Province, Boiler
People's Republic Facility
of China
Wuhu Shaoda Xi He Shan, Wuhu Lease of Land July 10, 2008 + 41,658 m2 Coal-fired
Electric Power City, Anhui Use Right Facility
Development Company Province, People's
Ltd. Republic of China
Wuxi-AES-CAREC Gas Xi Zhang Village Acquisition of November 22, 2012 73,103 m2* Oil-fired Gas
Turbine Power and Sheng Feng Land Use Right Turbine
Company Ltd. Village, Qianqiao Facility
Town, Xishan City,
Jiangsu Province,
People's Republic
of China
Wuxi-AES-Zhonghang Xi Zhang Village Acquisition of November 22, 2012 73,103 m2* Heat Recovery
Power Company Ltd. and Sheng Feng Land Use Right Steam Turbine
Village, Qianqiao Facility
Town, Xishan City,
Jiangsu Province,
People's Republic
of China
Yangchun Fuyang Side of Kongdong Transfer / March 26, 2045 624 m2 Diesel Engine
Diesel Engine Power 110kV Substation, Assignment of Facility
Co. Ltd. Chuncheng Town, Land Use Right
Yangchun City,
Guangdong Province,
People's Republic
of China
Yangcheng Jincheng City, Shanxi Acquisition of Application pending 870,000 m2 Coal-fired
International Power Province, People's Land Use Rights for land use rights Facility
Generating Co. Ltd. Republic of China
</TABLE>
- ---------------------------
* Land use rights shared by two plants or projects at the same location.
+ The lessor is Wuhu Energy Development Company ("WED") which is granted the
land use rights of the site by the State for a term of 40 years up to April
16, 2036. WED guaranteed to extend the lease term with the joint venture
prior to its expiration, and obtain the required registration with the Land
Bureau to ensure that the joint venture has the land use right of the site
for its entire term of operations.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
All outstanding equity securities of the Company are owned by The AES
Corporation.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
(in thousands, except per share data)
- --------------------------------------------------- ------------------ ----------------- ------------------ ----------------
For the Years Ended November 30, 1997, 1996 and
1995 and For the Period from December 7, 1993
(inception) to November 30, 1994 1997 1996 1995 1994
- --------------------------------------------------- ------------------ ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $ 18,703 $ 9,212 $ 1,382 $ 38
Operating costs and expenses 16,500 8,867 9,894 6,995
Operating income/(loss) 2,203 345 (8,512) (6,957)
Income/(loss) before taxes and minority interest 9,276 4,804 2,223 (368)
Net income/(loss) 9,470 4,140 2,138 (371)
Net income/(loss) per share 789.17 345.00 178.17 (30.92)
Cash dividend per share 181.42 - - -
- --------------------------------------------------- ------------------ ----------------- ------------------ ----------------
As of November 30 1997 1996 1995 1994
- --------------------------------------------------- ------------------ ----------------- ------------------ ----------------
BALANCE SHEET DATA
Total assets $ 512,798 $ 280,698 $ 229,871 $ 210,870
Long-Term Obligations 217,806 34,933 6,666 -
Shareholders' equity 198,305 190,355 187,585 201,584
</TABLE>
Item 7. Discussion and Analysis of Financial Condition and Results of
Operations.
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 joint ventures. The Company currently owns interests in nine power plants
with an aggregate nameplate capacity of approximately 2,918 MW. See "Description
of the Current Projects."
Because of the significant magnitude and complexity of constructing
electric power plants in the PRC, 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 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 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.
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. 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.
The approved tariff for Wuhu Grassy Lake for 1997 was less than the
tariff requested by the Joint Venture, which was based on a formula set forth in
the Power Purchase Contract. As a result, Wuhu Grassy Lake's revenue for 1997
was insufficient for the Joint Venture to pay the projected return to its
shareholders. The Joint Venture plans to make up such shortfall by means of a
tariff adjustment in 1998. However, there is no assurance that the relevant
pricing bureau will approve it.
In 1997, the approved tariff for Chengdu Lotus City was less than the
tariff requested by the Joint Venture, which was based on a formula set forth in
the Power Purchase Contract. Due to the priority return structure in the Joint
Venture Agreement for Chengdu Lotus City, the Company's dividends from Chengdu
Lotus City related to its 1997 operations will be as expected.
Demand for power produced by a power plant is determined by the demand
for electric power in the area served by the power plant and the degree to which
the power 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.
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.
In 1997, the growth rate in demand for power fell and the construction
of additional electrical generation capacity resulted in over supply in certain
areas. The electric power demand in Henan Province, Anhui Province and Xishan
City has been less than expected and the power purchasers for Jiaozuo Aluminum
Power, Wuhu Grassy Lake, Hefei Prosperity Lake and Wuxi Tin Hill have failed to
purchase the minimum amount of electricity under their respective power purchase
contracts. Accordingly, those power purchasers are required to compensate the
Joint Ventures for any shortfall. The power purchasers have attempted to
negotiate the payment of the shortfall or have disagreed over the generation
cost to be used for the calculation of the minimum take compensation. The Joint
Ventures are in negotiation with the power purchasers. The total minimum take
compensation for 1997 for the four power plants, after adjustment for the
Chinese partners' interests in the Joint Ventures, was approximately $4.5
million of which $2.8 million was outstanding as of January 31, 1998. The
Company has recorded a provision of $0.7 million (net of the Chinese partners'
interests) to reduce the receivables accrued for the balance of the minimum take
compensation as of November 30, 1997. The Company is vigorously pursuing its
rights under the contracts and believes the final resolution of these issues
will not materially affect the Company's financial position or results of
operations.
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.
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 fulfill its obligations to a Joint Venture could have
a substantial negative impact on such Joint Venture's operations.
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.
Pursuant to the Operation and Offtake Contracts between Wuhu Grassy
Lake and Anhui Power and between Hefei Prosperity Lake and Anhui Power, Anhui
Power is the power purchaser as well as the operator of the power plants. Anhui
Power is responsible for satisfying all operating costs and is entitled to
deduct the approved generation costs from the electricity fees to the joint
ventures. In 1997, the relevant pricing bureau approved only the tariffs but not
the generation costs assumed for purposes of setting the tariffs. The Joint
Ventures and Anhui Power have disagreed over the determinations of the
generation costs. As of November 30, 1997, the aggregate amount of the
generation costs in dispute after adjustment for the Chinese partners' interests
in the Joint Ventures was approximately $0.5 million. The Company is vigorously
pursuing its rights under the contracts and believes the final resolution of
these issues will not materially affect the Company's financial position or
results of operations.
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 by 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. Under these circumstances the shareholder loans
generally are, or will be, subordinated to such third party debt.
As of January 30, 1998, the amount of approximately $0.1 million
representing the recoupment of the Company's investment in Yangchun Sun Spring
was outstanding.
The Company's revenue growth will depend in large part on the Company's
ability to bring the Joint Ventures' power plants currently under construction
into commercial operation.
On January 26, 1998, Standard & Poor's announced that it had placed its
BB- rating of the 2006 Notes on CreditWatch with negative implications. Standard
& Poor's noted a number of factors contributing to this action, including
decline in growth rates in demand for power and construction of new capacity
resulting in oversupply in some areas, failure of purchasers of power from the
Company's Joint Ventures to purchase the minimum offtake of electricity they
were contractually required to purchase, uncertainty concerning the performance
by the power purchasers of their obligations to compensate the Company's Joint
Ventures for their failure to purchase such minimum offtakes, receipt of
dividends from the Company's joint ventures in 1997 that were less than the
amounts expected, erosion of distributable profits of the Company's joint
ventures due to higher than expected generating costs incurred by third party
operators, higher than expected corporate overhead expenses in 1997 resulting
from non-recurring charges and higher than expected expenditures on technical
staffing at construction sites and development costs.
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 years ended
November 30, 1997, 1996 and 1995 and the following should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere in
this Annual Report on Form 10-K.
Years ended November 30, 1997 and 1996
Revenues and Costs of Sales. Total revenues increased from $9.2 million
to $18.7 million from 1996 to 1997. Costs of sales, which include fuel,
operations and maintenance expenses, depreciation and amortization, increased
from $5.4 million to $13.5 million from 1996 to 1997. The increases in revenues
and costs of sales were due primarily to the Wuxi Tin Hill facility and Unit 2
of the Cili Misty Mountain facility having been in operation for all of 1997,
Unit 3 of the Cili Misty Mountain facility having been in operation for almost
all of 1997 and the commencement of operation in 1997 of Unit 1 of the Jiaozuo
Aluminum Power facility and the simple cycle unit of the Hefei Prosperity Lake
facility.
Development, Selling, General and Administrative Expenses. Development,
selling, general and administrative expenses decreased from $3.5 million in 1996
to $3.0 million in 1997. The decrease was primarily due to a reduction in the
costs associated with development activities as a result of AES funding the
development costs following the financial closing of Yangcheng Sun City, and a
corresponding increase in costs associated with the operational management of
the Company's existing projects in China.
Interest Income. Interest income increased from $6.4 million to $13.1
million from 1996 to 1997. The increase was primarily due to the proceeds
received from the public offering of the Company's 2006 Notes in December 1996
being available for investment in marketable securities in 1997, interest income
earned on a note receivable with respect to Jiaozuo Aluminum Power and interest
income earned on shareholder loans provided to Wuhu Grassy Lake and Chengdu
Lotus City.
Interest Expense. Interest expense increased from $1.1 million to $7.4
million from 1996 to 1997. The increase was primarily due to (i) the interest
expense and amortization of costs associated with the issuance of the 2006 Notes
in December of 1996, offset in part by capitalization of interest incurred
during the development and construction of the Company's projects, and (ii) an
increase in interest on two minority shareholder loans to Wuxi Tin Hill,
interest on a minority shareholder loan to Jiaozuo Aluminum Power and interest
on a bank loan to Hefei Prosperity Lake. The Company capitalizes interest
accrued during the development and construction of the facilities of its Joint
Ventures. Capitalized interest was approximately $17.9 million for 1997 and $3.2
million for 1996.
Amalgamation Cost. The Company incurred amalgamation costs of $0.4
million and $1.4 million for 1997 and 1996, respectively, related to expenses
incurred in connection with the Amalgamation.
Years ended November 30, 1996 and 1995
Revenues and Costs of Sales. Total revenues increased from $1.4 million
to $9.2 million from 1995 to 1996. Costs of sales, which include fuel,
operations and maintenance expenses, depreciation and amortization, increased
from $0.6 million to $5.4 million from 1995 to 1996. The increases in revenues
and costs of sales were due primarily to the commencement of operations of the
Wuxi Tin Hill project. The increase in revenues generated in 1996 from the
operations of the Wuxi Tin Hill project was offset, in part, by a decrease in
revenues generated pursuant to the payment of construction delay fees paid by
the contractor of the Cili Misty Mountain project. The Company was entitled to
construction delay payments from the contractor through March 11, 1996 to
compensate for the lost generation.
Development, Selling, General and Administrative Expenses. Development,
selling, general and administrative expenses decreased from $9.3 million in 1995
to $3.5 million in 1996. The decrease was primarily due to the capitalization of
a higher proportion of development costs associated with projects which have
achieved financial closing or which have achieved certain project-related
milestones.
Interest Income. Interest income in 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 in
1996 decreased $4.1 million from $10.5 million to $6.4 million compared with
1995. The decrease in interest income for 1996 was primarily due to a lower
average amount of funds available for marketable securities investment due to
capital 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. In 1996, interest expense of $1.1 million related
primarily to the interest on two minority shareholder loans to Wuxi-AES-CAREC.
Amalgamation Cost. In 1996, amalgamation cost of $1.4 million related
to expenses incurred in pursuing the proposed Amalgamation with AES announced in
November 1996.
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. Since commencing business, the
Company has entered into commitments to invest a total of approximately $357.8
million in the form of equity contributions and loans to its joint ventures
including approximately $17.7 million of interest during construction and
provision for potential cost overruns, of which $234.2 million has been invested
as of January 31, 1998. As of January 31, 1998, the Company had approximately
$96.9 million available in cash and cash equivalents and marketable securities
and expects to generate cash flow from operations over the course of the
anticipated investment period to fund any such commitments. In the event of a
shortfall between the amount of the Company's commitments and the foregoing
sources of funds, the shortfall may be made up by loans or equity contributions
from AES, but AES is not obligated to provide any such loan or equity
contribution for such purpose and there are no assurances that AES would decide
to provide any such loan or equity contribution.
As a result of the Amalgamation, the Company is subject to the AES Debt
Covenants, including those contained in the documents governing AES's 10-1/4%
Subordinated Notes due 2006, 8-3/8% Senior Subordinated Notes due 2007 and $425
million credit facility due 1999. Due to recent amendments to the terms of the
AES Debt Covenants, certain material restrictions previously applicable to AES
Chigen, including a prohibition on direct investments in future projects, are no
longer applicable. However, no assurance can be given that AES Chigen will
invest in any additional future projects.
Both the AES Debt Covenants and the covenants contained in the
Indenture for AES Chigen's 2006 Notes require the repayment or purchase of
indebtedness under specified circumstances involving asset dispositions. Insofar
as separate repayments are required at the AES and the 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.
The Company is permitted, pursuant to the terms of the Indenture under
which its 2006 Notes were issued, to pay dividends to AES, provided that the
Company satisfies certain conditions.
One of the results of the Amalgamation has been the termination of the
Non-Competition and Non-Disclosure Agreement, dated as of December 29, 1993 and
amended and restated as of February 1, 1994, between the Company and AES, which,
among other things, prohibited the Company from developing, constructing,
owning, managing and operating electric power generation projects in any part of
Asia other than China. The Company may consider investing through its
subsidiaries in power projects outside of China.
Years ended November 30, 1997 and 1996
Cash from Operations. Net cash used in operating activities totaled
$8.1 million for 1997 as compared to $1.5 million for 1996. The increase in 1997
was primarily due to a higher proportion of net income being derived from
undistributed earnings from affiliates, cash payments for interest on the 2006
Notes and an increase in the components of working capital. These factors offset
an increase in net income before depreciation due to the commencement of
operation of Jiaozuo Aluminum Power and Hefei Prosperity Lake in 1997.
Cash from Investing Activities. Net cash used in investing activities
totaled $173.0 million during 1997 as compared to $66.6 million during 1996. The
1997 amount primarily reflected the purchase of property, plant and equipment
and other project related investments of $118.5 million, the purchase of
short-term investments (net of any proceeds from the maturity or sale of
short-term investments) of $27.2 million and the deposit (net of withdrawal) of
$27.3 million in debt service reserves.
Cash from Financing Activities. Net cash provided by financing
activities aggregated $183.5 million during 1997 as compared to $1.4 million
used in financing activities during 1996. During 1997, the Company received
proceeds, net of underwriting discounts and commissions and offering costs, of
$174.1 million from the issuance of the 2006 Notes, proceeds of $8.8 million
from bank loans available to subsidiaries and $3.4 million of loans and
contributions made to subsidiaries by minority shareholders, which were
partially offset by repayment of bank loans of $1.7 million and repayment of
$1.4 million of loans from minority shareholders.
Years ended November 30, 1996 and 1995
Cash from Operations. Net cash used in operating activities totaled
$1.5 million for 1996 as compared to $0.8 million used in operating activities
for 1995. The increase in 1996 resulted primarily from an increase in net income
due to the commencement of operations of Wuxi Tin Hill offset by an adjustment
of the provision for project development costs and a net reduction in the
components of working capital.
Cash from Investing Activities. Net cash used in investing activities
totaled $66.6 million during 1996 as compared to $22.8 million provided by
investing activities during 1995. The 1996 amount primarily reflected the
purchase of property, plant and equipment and other project related investments
of $101.3 million which was partially offset by cash of $34.7 million provided
by the maturity of short-term investments (net of purchases). The 1995 amount
primarily reflected cash provided by the maturity of short-term investments (net
of purchases) of $64.5 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.
Cash from Financing Activities. Net cash used in financing activities
aggregated $1.4 million during 1996 as compared to $8.2 million provided by
financing activities during 1995. During 1996, the Company repurchased shares of
its Class A Common Stock for $11.4 million which was partially offset by $8.5
million of loans and contributions made to subsidiaries by minority shareholders
and net proceeds from notes payable of $1.9 million. The 1995 amount reflected
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.
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 and 1997. 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.
Foreign Currency Exchange
The Company anticipates that its 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. However, 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 three 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.
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.
Year 2000
The Company has developed plans to address issues related to the impact
on its computer systems of the year 2000. Financial and operational systems have
been assessed and plans have been developed to address systems modification
requirements. The financial impact of making the required systems changes is not
expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
Special Note Regarding Forward-Looking Statements
Certain statements in this Discussion and Analysis of Financial
Condition and Results of Operations and under the caption "Business" and
elsewhere in this Annual Report on Form 10-K 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; holding company structure of the Company; 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 and reliance on AES; limitations resulting from
the Amalgamation and adherence to the AES principles; and other factors
referenced in this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The following financial statements of the Company and its consolidated
subsidiaries are attached to this Annual Report on Form 10-K following the
signature page:
- Report of Independent Auditors.
- Consolidated Statements of Operations for the fiscal years
ended November 30, 1997, 1996 and 1995.
- Consolidated Balance Sheets as of November 30, 1997 and 1996.
- Consolidated Statements of Shareholders' Equity for the
fiscal years ended November 30, 1997, 1996 and 1995.
- Consolidated Statements of Cash Flows for the fiscal years
ended November 30, 1997, 1996 and 1995.
- Notes to Consolidated Financial Statements for the
fiscal years ended November 30, 1997, 1996 and 1995.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
(a) Directors of the Company
The current directors of the Company are listed below:
Name Age Position
Roger W. Sant*................... 66 Chairman of the Board and Director
Dennis W. Bakke*................. 52 Vice Chairman and Director
Robert F. Hemphill, Jr*.......... 54 Vice Chairman and Director
Roger W. Sant has been the Chairman of the Board and a Director of the
Company since December 1993. In 1981, Mr. Sant and Dennis Bakke co-founded AES.
Mr. Sant has been Chairman of the Board and a Director of AES since its
inception, and he 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 and serves 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 Vice Chairman and a Director of the Company
since December 1993. Mr. Bakke co-founded AES with Mr. 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, Mr. Bakke 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. Mr. Bakke 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 has been Vice Chairman of the Company since February
1995 and has been a Director of the Company since December 1993. From December
1993 to February 1, 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 of AES and from 1982 to 1984 he
served as Vice President for project development of AES. 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 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.
(b) Chief Executive Officer of the Company
Paul T. Hanrahan, 40 years old, has been President and Chief Executive
Officer of the Company since February 1995. From December 1993 until such
appointment, Mr. Hanrahan 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 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. Mr. Hanrahan graduated with a
mechanical engineering degree from the U.S. Naval Academy and with a Master of
Business Administration from the Harvard Business School.
Item 11. Executive Compensation.
Not Applicable.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not Applicable.
Item 13. Certain Relationships and Related Transactions.
Not Applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) The following financial statements of the Company
and its consolidated subsidiaries are attached to
this Annual Report on Form 10-K following the
signature page:
- Report of Independent Auditors.
- Consolidated Statements of Operations
for the fiscal years ended November 30,
1997, 1996 and 1995.
- Consolidated Balance Sheets as of Novembe
30, 1997 and 1996.
- Consolidated Statements of Shareholders'
Equity for the fiscal years ended November
30, 1997, 1996 and 1995.
- Consolidated Statements of Cash Flows for
the fiscal years ended November 30, 1997,
1996 and 1995.
- Notes to Consolidated Financial Statements
for the fiscal years ended November 30,
1997, 1996 and 1995.
(2) Financial Statement Schedules
- Schedule I - Condensed Financial Information.
Schedules other than that listed above are
omitted as the information is either not
applicable, not required or has been
furnished in the financial statements or
notes thereto included in this Annual Report
on Form 10-K.
(3) Exhibits
3.1 Memorandum of Association of the Company is incorporated
herein by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Registration No. 33-73668).
3.2 Bye-laws of the Company, as revised effective May 8, 1997.
4.1 Indenture dated as of December 19, 1996 between the Company
and Bankers Trust Company, as Trustee is incorporated
herein by reference to Exhibit 4.1 to the Annual Report on
Form 10-K of the Company for the fiscal year ended November
30, 1996.
4.2 Form of 2006 Note is incorporated herein by reference to
Exhibit 4.2 to the Annual Report on Form 10-K of the
Company for the fiscal year ended November 30, 1996.
4.3 Security Agreement, dated as of December 19, 1996, among
the Company, Bankers Trust Company, as Trustee, and Bankers
Trust Company, as Collateral Agent is incorporated herein
by reference to Exhibit 4.3 to the Annual Report on Form
10-K of the Company for the fiscal year ended November 30,
1996.
10.1 Project Services Agreement, dated as of December 29, 1993,
between the Company and AES is incorporated herein by
reference to Exhibit 10.2 to the Registration Statement on
Form S-1 (Registration No. 33-73668).
10.2* Joint Venture Contract, dated August 1996, by and among
North China Electric Power Group Corporation, Jiangsu
Province Investment Corporation, Shanxi Energy Enterprise
(Group) Company, Jiangsu Provincial Power Company ("Jiangsu
Power") and the Company to establish Yangcheng
International Power Generating Company Limited ("Yangcheng
Power") is incorporated herein by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1997.
10.3 Assignment and Assumption dated as of December 29, 1993
between AES and certain subsidiaries of AES and the Company
is incorporated herein by reference to Exhibit 10.11 to the
Registration Statement on Form S-1 (Registration No.
33-73668).
10.4 AES China Generating Co. Ltd. Incentive Stock Option Plan,
as amended March 27, 1995, is incorporated herein by
reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28,
1995.
10.5 Cooperative Joint Venture Contract for the Establishment of
Sichuan Fuling Aixi Power Company Limited dated February 9,
1995 between Sichuan Fuling Banxi Colliery and AES Tian Fu
Power Company Limited is incorporated herein by reference
to Exhibit 10.17 to the Annual Report on Form 10-K of the
Company for the fiscal year ended November 30, 1994.
10.6 Joint Venture Contract to Establish Xiangci-AES Hydro Power
Company Ltd. dated July 21, 1994 between China Hunan Cili
Power Company and the Company is incorporated herein by
reference to Exhibit 10.19 to the Annual Report on Form
10-K of the Company for the fiscal year ended November 30,
1994.
10.7 Power Purchase Contract dated as of July 21, 1994 between
China Hunan Cili Electric Power Company and Xiangci-AES
Hydro Power Company Ltd. (effectiveness certified on
September 9, 1994) is incorporated herein by reference to
Exhibit 10.20 to the Annual Report on Form 10-K of the
Company for the fiscal year ended November 30, 1994.
10.8 Cooperative Joint Venture Contract for the establishment of
Yangchun Fuyang Diesel Engine Power Company Ltd. dated
December 4, 1994 among Yangchun Municipal Power Supply
Company, Shenzhen Futian Gas Turbine Power Company Ltd. and
ABC Yangchun Company Limited is incorporated herein by
reference to Exhibit 10.22 to the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28,
1995.
10.9 Chengbao (Responsibility) Management Contract for Yangchun
Fuyang Diesel Engine Power Company Ltd. dated December 31,
1994 between Yangchun Fuyang Diesel Engine Power Company
Ltd. and Yangchun Municipal Power Supply Company and
Supplemental Contract dated March 6, 1995 are incorporated
herein by reference to Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
February 28, 1995.
10.10 Power Purchase Contract dated May 24, 1995 between Wuxi
County Sandianban and Wuxi-AES-CAREC Gas Turbine Power
Company Limited is incorporated herein by reference to
Exhibit 10.24 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1995.
10.11 Cooperative Joint Venture Contract for the establishment of
Wuxi-AES-Zhonghang Power Company Ltd. dated May 4, 1995
among Wuxi Power Industry Company, China National
Aero-engine Corporation and the Company is incorporated
herein by reference to Exhibit 10.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31,
1995.
10.12 Cooperative Joint Venture Contract for the establishment of
Wuxi-AES-CAREC Gas Turbine Power Company Ltd. dated May 4,
1995 among Wuxi Power Industry Company, China National
Aero-engine Corporation and the Company is incorporated
herein by reference to Exhibit 10.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31,
1995.
10.13* Power Purchase Contract dated December 11, 1995 among Power
Supply Company of the Fuling Prefecture of Sichuan
Province, Sichuan Fuling Grid Management Department and
Sichuan Fuling Aixi Power Company Limited is incorporated
herein by reference to Exhibit 10.21 to the Annual Report
on Form 10-K of the Company for the fiscal year ended
November 30, 1995.
10.14 Addendum Number One of Cooperative Joint Venture Contract
to Establish Sichuan Fuling Aixi Power Company Limited
dated July 11, 1995 between Sichuan Fuling Banxi Colliery
and AES Tian Fu Power Company Limited is incorporated
herein by reference to Exhibit 10.22 to the Annual Report
on Form 10-K of the Company for the fiscal year ended
November 30, 1995.
10.15 Addendum Number Two of Cooperative Joint Venture Contract
to Establish Sichuan Fuling Aixi Power Company Limited
dated August 29, 1995 between Sichuan Fuling Banxi Colliery
and AES Tian Fu Power Company Limited is incorporated
herein by reference to Exhibit 10.23 to the Annual Report
on Form 10-K of the Company for the fiscal year ended
November 30, 1995.
10.16* Construction and Term Loan Agreement dated December 21,
1995 between AES Tian Fu Power Company (L) Ltd. and Sichuan
Fuling Aixi Power Generating Company Limited is
incorporated herein by reference to Exhibit 10.24 to the
Annual Report on Form 10-K of the Company for the fiscal
year ended November 30, 1995.
10.17* Cooperative Joint Venture Contract to Establish Jiaozuo Wan
Fang Power Company Limited dated March 27, 1996 between
Jiaozuo Power Partners, L.P. and Jiaozuo Aluminum Mill is
incorporated herein by reference to Exhibit 10.26 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1996.
10.18* Shareholder Loan Contract dated April 26, 1996 between
Jiaozuo Wan Fang Power Company Limited and Jiaozuo Aluminum
Mill is incorporated herein by reference to Exhibit 10.27
to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1996.
10.19* Shareholder Loan Contract dated April 26, 1996 between
Jiaozuo Wan Fang Power Company Limited and AES China Power
Holding Co. (L), Ltd. is incorporated herein by reference
to Exhibit 10.28 to Amendment No. 1 on Form 10-Q/A to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1996.
10.20* Power Purchase and Sale Contract dated April 26, 1996
between Jiaozuo Wan Fang Power Company Limited and Jiaozuo
Aluminum Mill is incorporated herein by reference to
Exhibit 10.29 to Amendment No. 1 on Form 10-Q/A to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1996.
10.21* Power Purchase and Sale Contract dated April 25, 1996
between Jiaozuo Wan Fang Power Company Limited and Henan
Electric Power Corporation is incorporated herein by
reference to Exhibit 10.30 to Amendment No. 1 on Form
10-Q/A to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1996.
10.22 Assignment and Assumption Contract dated April 26, 1996
between Jiaozuo Wan Fang Power Company Limited and Jiaozuo
Aluminum Mill is incorporated herein by reference to
Exhibit 10.31 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1996.
10.23 Equity Joint Venture Contract dated February 12, 1996 among
China Power International Holdings Limited, AES China
Holding Company (L) Ltd., Anhui Liyuan Electric Power
Development Company and Wuhu Energy Development Company is
incorporated herein by reference to Exhibit 10.32 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1996.
10.24* Operation & Offtake Contract dated July 5, 1996 between
Wuhu Shaoda Electric Power Development Company Limited and
Anhui Provincial Electric Power Corporation is incorporated
herein by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August
31, 1996.
10.25 Undertaking and Subordination Deed dated June 26, 1996
among AES China Holding Company (L) Limited, Anhui Liyuan
Electric Power Development Company Limited, China Power
International Holding Limited, Wuhu Energy Development
Company, Wuhu Shaoda Electric Power Development Company
Limited and CCIC Finance Limited is incorporated herein by
reference to Exhibit 10.34 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996.
10.26 Junior Subordination Agreement among China Power
International Holding Limited, AES China Holding Company
(L) Limited, Anhui Liyuan Electric Power Development
Company Limited, Wuhu Energy Development Company and Wuhu
Shaoda Electric Power Development Company Limited is
incorporated herein by reference to Exhibit 10.35 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1996.
10.27 Subordinated Insurance Assignment between Wuhu Shaoda
Electric Power Development Company Limited and AES China
Holdings Company (L) Limited is incorporated herein by
reference to Exhibit 10.36 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996.
10.28 Subordinated Borrower Charge Over Accounts between Wuhu
Shaoda Electric Power Development Company Limited and AES
China Holdings Company (L) Limited is incorporated herein
by reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996.
10.29 Subordinated Project Contracts Assignment between Wuhu
Shaoda Electric Power Development Company Limited and AES
China Holdings Company (L) Limited is incorporated herein
by reference to Exhibit 10.38 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996.
10.30 Subordinated Mortgage Contract between Wuhu Shaoda Electric
Power Development Company Limited and AES China Holdings
Company (L) Limited is incorporated herein by reference to
Exhibit 10.39 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1996.
10.31* Cooperative Joint Venture Contract dated March 18, 1996 by
and among Anhui Liyuan Electric Power Development Company
Ltd., Hefei Municipal Construction and Investment Company
and AES Anhui Power Company Ltd. establishing Anhui
Liyuan-AES Power Company Ltd. is incorporated herein by
reference to Exhibit 10.40 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
10.32* AES Loan Contract by and between Anhui Liyuan-AES Power
Company Limited and AES Chigen Company (L), Ltd. is
incorporated herein by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.33* Cooperative Joint Venture Contract dated March 18, 1996 by
and among Anhui Liyuan Electric Power Development Company
Ltd., Hefei Municipal Construction and Investment Company
and AES Anhui Power Company Ltd. establishing Hefei Zhongli
Energy Company Ltd. is incorporated herein by reference to
Exhibit 10.42 to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996.
10.34 AES Loan Contract by and between Hefei Zhongli Energy
Company Limited and AES Chigen Company (L), Ltd. is
incorporated herein by reference to Exhibit 10.43 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.35 Operation and Offtake Contract between Anhui Provincial
Electric Power Corporation, Anhui Liyuan-AES Power Company
Ltd. and Hefei Zhongli Energy Company Ltd. is incorporated
herein by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1996.
10.36* Cooperative Joint Venture Contract by and among Chengdu
Huaxi Electric Power (Group) Shareholding Company Ltd.,
China National Aero-engine Corporation and the Company is
incorporated herein by reference to Exhibit 10.45 to the
Company's Annual Report on Form 10-K for the fiscal year
ended November 30, 1996.
10.37* Support Contract dated as of August 12, 1996 between AES
Tian Fu Power Company (L) Ltd. and Chengdu AES KAIHUA Gas
Turbine Power Co., Ltd. is incorporated herein by reference
to Exhibit 10.46 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1996.
10.38 Power Purchase Contract between Chengdu Huaxi Electric
Power (Group) Shareholding Company Ltd. and Chengdu AES
KAIHUA Gas Turbine Power Co., Ltd. is incorporated herein
by reference to Exhibit 10.47 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30,
1996.
10.39* Agreement of Amendment to the Cooperative Joint Venture
Contract and Articles of Association of Chengdu AES KAIHUA
Gas Turbine Power Co., Ltd. is incorporated herein by
reference to Exhibit 10.48 to the Company's Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
10.40* On-lending Agreement on Using US Export Credit by Yangcheng
International Power Company Ltd. by and between Yangcheng
Power, as the borrower, and Shanxi Branch of China
Construction Bank, as the lender is incorporated herein by
reference to Exhibit 10.49 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997.
10.41* On-lending Agreement on Using German Export Credit by
Yangcheng International Power Company Ltd. (the "German
Export Loan Contract") by and between Yangcheng Power, as
the borrower, and Shanxi Branch of China Construction Bank,
as the lender is incorporated herein by reference to
Exhibit 10.50 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997.
10.42* On-Lending Agreement by and between Shanxi Branch of the
China Construction Bank, as the lender, and Yangcheng
Power, as the borrower is incorporated herein by reference
to Exhibit 10.51 to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1997.
10.43* RMB Fund Loan Contract of State Development Bank by and
between the State Development Bank, as the lender, and
Yangcheng Power, as the borrower is incorporated herein by
reference to Exhibit 10.52 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997.
10.44* Power Purchase Contract between Yangcheng Power and Jiangsu
Power is incorporated herein by reference to Exhibit 10.53
to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1997.
25.1 Power of Attorney.
27.1 Financial Data Schedule.
99.1 Statement Re: Computation of Fixed Charge Coverage Ratio
99.2 "Business-Narrative Description of Business" on pages 2-19
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1996, which is incorporated
by reference in Item 1 hereof.
- --------
* The Company has requested confidential treatment for certain identified
information in this exhibit.
In lieu of filing certain instruments with respect to long-term debt of
the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to
furnish a copy of such instruments to the Securities and Exchange Commission
upon request.
(b) Reports on Form 8-K.
No reports on Forms 8-K have been filed during the last quarter of the
Company's fiscal year ended November 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 1998
AES CHINA GENERATING CO. LTD.
(Company)
By: /s/ Paul T. Hanrahan
--------------------------
Paul T. Hanrahan
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- -------------------------- -------------------
/s/ Roger W. Sant*
- ---------------------------- Chairman of the Board and February 27, 1998
Roger W. Sant Director
/s/ Dennis W. Bakke*
- ---------------------------- Vice Chairman and February 27, 1998
Dennis W. Bakke Director
- ---------------------------- Vice Chairman and
Robert F. Hemphill, Jr. Director
/s/ Paul T. Hanrahan.*
- ---------------------------- President and February 27, 1998
Paul T. Hanrahan Chief Executive Officer
/s/ Kitty, Fung Kin Yee
- ---------------------------- Group Finance Director February 27, 1998
Kitty, Fung Kin Yee (Principal Financial and
Accounting Officer)
*/s/ Jeffery A. Safford
- ----------------------------
Jeffery A. Safford
Attorney-in-Fact
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDER OF
AES CHINA GENERATING CO. LTD.
We have audited the accompanying consolidated balance sheets of AES China
Generating Co. Ltd. and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended November 30, 1997. Our
audits also included the financial statement schedule listed at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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
subsidiaries as of November 30, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
November 30, 1997 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE TOUCHE TOHMATSU
Hong Kong
February 27, 1998
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended November 30,
-------------------------------
1997 1996 1995
---- ---- ----
(in thousands, except per share amounts)
Revenues:
Electricity sales............... $18,703 $8,812 $702
Construction delay fee.......... - 400 680
------- ------- -------
Total revenues.............. 18,703 9,212 1,382
Operating costs and expenses:
Costs of sales.................. 13,480 5,360 635
Development, selling, general
and administrative expenses... 3,020 3,507 9,259
------- ------- -------
Total operating costs and
expenses.................. 16,500 8,867 9,894
------- ------- -------
Operating income / (loss)......... 2,203 345 (8,512)
Other income / (expense):
Interest income................. 13,050 6,360 10,529
Interest expense................ (7,397) (1,120) -
Equity in earnings of affiliates 1,838 663 206
Amalgamation cost .............. (418) (1,444) -
------- ------- -------
Income before income taxes and
minority interest................ 9,276 4,804 2,223
Income taxes.................... (398) (387) -
Minority interest............... 592 (277) (85)
------- ------- -------
Net income........................ $9,470 $4,140 $2,138
------- ------- -------
Net income per share.............. $789.17 $345.00 $178.17
------- ------- -------
Weighted average number of shares. 12 12 12
------- ------- -------
See notes to consolidated financial statements.
F-2
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED BALANCE SHEETS
As of November 30,
1997 1996
---- ----
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents........................ $58,576 $56,200
Debt service reserves - held-to-maturity......... 18,225 -
Investments - held-to-maturity................... 35,324 8,995
Accounts receivable - The AES Corporation........ 363 -
Accounts receivable from related parties......... 10,271 6,809
Accounts receivable - trade...................... 2,498 -
Note receivable - current portion................ 1,427 -
Interest receivable.............................. 1,962 286
Inventory........................................ 2,496 765
Prepaid expenses and other current assets........ 2,145 874
------- -------
Total current assets......................... 133,287 73,929
Property, Plant and Equipment:
Electric and steam generating facilities......... 194,159 64,185
Equipment, furniture and leasehold improvements.. 3,446 2,646
Accumulated depreciation and amortization........ (8,514) (3,143)
Construction in progress......................... 82,778 98,912
------- -------
Total property, plant and equipment, net..... 271,869 162,600
Other Assets:
Deferred finance costs, net...................... 5,526 407
Project development costs........................ - 3,352
Investments in and advances to affiliates........ 79,887 33,202
Note receivable.................................. 8,476 6,626
Investment - available-for-sale.................. 3,002 -
Debt service reserves - held-to-maturity......... 9,113 -
Deposits and other assets........................ 1,638 582
------- -------
Total other assets........................... 107,642 44,169
------- -------
TOTAL........................................ $512,798 $280,698
------- -------
See notes to consolidated financial statements.
F-3
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED BALANCE SHEETS (Continued)
As of November 30,
1997 1996
---- ----
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - The AES Corporation............ $ - $1,185
Accounts payable.................................. 4,500 2,199
Accounts payable for construction................. 16,437 -
Accrued liabilities............................... 2,892 2,618
Accrued interest for notes payable................ 8,264 -
Accrued liabilities for construction.............. 8,804 4,259
Loans from minority shareholders - current portion 8,519 1,365
Bank loans........................................ 2,993 2,861
------- -------
Total current liabilities..................... 52,409 14,487
Long-Term Liabilities:
Notes payable, net................................ 179,844 -
Loans from minority shareholders.................. 30,962 34,933
Bank loan......................................... 7,000 -
Deferred income taxes............................. 785 387
------- -------
Total long-term liabilities................... 218,591 35,320
Minority Interest................................... 43,493 40,536
Commitments and contingencies
Shareholders' Equity:
Common stock - par value $1 per share
(authorized and issued shares:
1997 - 12,000; 1996 - Nil)...................... 12 -
Class A common stock - par value $0.01 per share,
(50,000,000 shares authorized; issued and
outstanding: 1997 - Nil; 1996 - 8,134,100)...... - 81
Class B common stock - par value $0.01 per share,
(50,000,000 shares authorized; issued and
outstanding: 1997 - Nil; 1996 - 7,500,000)...... - 75
Additional paid-in capital........................ 184,566 183,980
Retained earnings................................. 13,200 5,907
Cumulative translation adjustment................. 527 312
------- -------
Total shareholders' equity.................... 198,305 190,355
------- -------
TOTAL......................................... $512,798 $280,698
------- -------
See notes to consolidated financial statements.
F-4
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995................ - $ - 10,216,000 $ 102 7,500,000 $ 75
Purchase of treasury stock................ - - - - - -
Foreign currency translation.............. - - - - - -
Net income for the year................... - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 1995.............. - - 10,216,000 102 7,500,000 75
Purchase of treasury stock................ - - - - - -
Retirement of treasury stock ............. - - (2,081,900) (21) - -
Foreign currency translation ............. - - - - - -
Net income for the year .................. - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 1996 ............. - - 8,134,100 81 7,500,000 75
Issuance of Class A common stock under benefit
plans and exercise of stock options..... - - 37,168 1 - -
Cancellation of Class A and B common stock
upon effectiveness of the amalgamation.. - - (8,171,268) (82) (7,500,000) (75)
Issuance of Common stock upon effectiveness
of the amalgamation..................... 12,000 12 - - - -
Foreign currency translation.............. - - - - - -
Net income for the year .................. - - - - - -
Dividends................................. - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 1997.............. 12,000 $ 12 - $ - - $ -
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - continued
<TABLE>
<CAPTION>
Retained
Additional Earnings Cumulative
Paid-In (Accumulated Translation Treasury Stock Shareholders'
Capital Deficit) Adjustment Shares Amount Equity
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
$ 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 -
- - 62 - - 62
- 4,140 - - - 4,140
--------- --------- --------- --------- --------- ---------
183,980 5,907 312 - - 190,355
441 - - - - 442
157 - - - - -
(12) - - - - -
- - 215 - - 215
- 9,470 - - - 9,470
- (2,177) - - - (2,177)
--------- --------- --------- --------- --------- ---------
$ 184,566 $ 13,200 $ 527 - $ - $ 198,305
--------- --------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended November 30,
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities (note 13)............... (8,133) (1,507) (812)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of notes........................... 174,100 - -
Contributions and loans from minority shareholders............ 3,435 8,497 13,535
Repayment of loans from minority shareholders................. (1,354) (270) -
Proceeds from bank loans...................................... 8,812 2,861 1,000
Repayment of bank loans....................................... (1,680) (1,000) -
Proceeds from issuance of Class A common stock
upon exercise of stock options.............................. 224 - -
Repurchase of Class A common stock............................ - (11,443) (6,360)
------- ------- -------
Net cash provided by / (used in) financing
activities.............................................. 183,537 (1,355) 8,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and construction in progress............ (77,978) (69,205) (29,544)
Purchase of investments - held-to-maturity.................... (48,945) (29,176) (154,630)
Purchase of investments - available-for-sale.................. (14,361) (16,797) (14,557)
Proceeds from the maturity of investments - held-
to-maturity................................................. 24,569 63,656 219,086
Proceeds from the sales of investments - available-
for-sale.................................................... 11,541 16,969 14,609
Investments in and advances to affiliates..................... (36,230) (22,990) (2,360)
Recoupment of investment in affiliate......................... 253 216 -
Project development costs and other assets.................... (1,313) (2,669) (2,269)
Deposit to debt service reserves.............................. (36,248) - -
Withdrawal from debt service reserves......................... 8,961 - -
Investment in note receivable................................. (3,277) (6,626) (7,500)
------- ------- -------
Net cash (used in) / provided by investing
activities.............................................. (173,028) (66,622) 22,835
------- ------- -------
Increase / (decrease) in cash and cash
equivalents............................................. 2,376 (69,484) 30,198
CASH AND CASH EQUIVALENTS,......................................
Beginning of year............................................. 56,200 125,684 95,486
------- ------- -------
End of year................................................... $ 58,576 $ 56,200 $125,684
------- ------- -------
</TABLE>
F-7
<PAGE>
AES CHINA GENERATING CO. LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
Supplemental disclosure of non cash investing and financing activities:
In 1997, the Company's joint venture partner in Jiaozuo Wan Fang contributed
shareholder loans of $0.6 million in the form of construction in progress.
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.
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.
See notes to consolidated financial statements.
F-8
<PAGE>
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"). On May 8,
1997, the amalgamation of a wholly-owned subsidiary of The AES
Corporation ("AES") with AES Chigen (the "Amalgamation") was completed
and the Company became a wholly-owned subsidiary of AES. Prior to the
Amalgamation, the Company was a controlled affiliate of AES, which
owned approximately 48% of the outstanding common stock of the Company.
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 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. The acquisition was accounted for as a
purchase.
The Company's joint venture partners in certain 50% or less owned
affiliates have guaranteed a minimum return on the Company's
investment. The Company recognizes such guaranteed return in excess of
its equity in the earnings of the affiliates to the extent it believes
it is probable that the guaranteed return will be realized.
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 equivalents exclude amounts held as debt
service reserves. 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, if any, 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.
Transactions in investment securities are accounted for on the trade
date.
F-9
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Inventory - Inventory, valued at lower of cost (principally weighted
average method) or market value, consists of coal, oil, raw materials,
spare parts and supplies.
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 3 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 and steam generating facilities
when the related assets or group of assets are ready for their intended
use. Capitalized interest during construction was $20.4 million in
1997, $3.2 million in 1996 and $0.3 million in 1995.
Deferred finance costs - Financing costs are deferred and amortized
using the straight-line method over the related financing period, which
does not differ materially from the effective interest method of
amortization. Deferred costs are shown net of accumulated amortization
of $0.6 million in 1997.
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 and steam generating facilities
after commencement of operations.
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. Five customers accounted for 48%, 23%, 13%,
10% and 6% of electricity sales revenues in 1997. Two customers
accounted for 87% and 13% of electricity sales revenues in 1996 and one
customer accounted for 100% of electricity sales revenues in 1995. The
failure of any customer to fulfill its contractual obligations could
have a substantial negative impact on AES Chigen's revenues. Fees for
construction delay paid by Cili Power Company, the contractor of
Xiangci-AES Hydro Power Company Ltd. ("Xiangci-AES"), to compensate the
Company for lost generation in respect of an expansion facility, are
recognized as revenue when earned.
F-10
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 Per Share - Net income per share for each of the three years
ended November 30, 1997 was computed based on the 12,000 shares
outstanding after the Amalgamation.
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. The functional currency of all the Company's current
subsidiaries and affiliates is the Renminbi Yuan, the lawful currency
of the PRC ("Renminbi").
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 1997 presentation.
2. INVESTMENTS AND DEBT SERVICE RESERVES
At November 30, 1997 and 1996, the Company's investments and debt
service reserves were classified as either held-to-maturity or
available-for-sale. The amortized cost and estimated fair value of the
investments and debt service reserves at November 30, 1997 and 1996
classified as held-to-maturity and available-for-sale were
approximately the same. All investments in debt securities had maturity
dates within one year from the balance sheet date except for $3 million
of available-for-sale investments which mature within three years. The
investments were invested as follows:
As of
November 30,
1997 1996
---- ----
(in thousands)
Held-to-maturity
US Treasury and government agency securities.. $ 37,449 $ 1,000
Foreign certificates of deposit............... 8,000 -
Commercial paper - discounted................. 13,313 7,995
Corporate bonds............................... 3,900 -
------- -------
$ 62,662 $ 8,995
------- -------
Available-for-sale
US Treasury and government agency securities.. $ 3,002 $ -
------- -------
F-11
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
3. ACCOUNTS RECEIVABLE - TRADE AND FROM RELATED PARTIES
During 1997, some of the power purchasers failed to purchase the
required minimum amount of electricity under the respective power
purchase contracts and, accordingly, are required to compensate the
Company's joint ventures for the shortfall. The power purchasers have
attempted to negotiate the payment of the shortfall or have disagreed
over the generation cost to be used for the calculation of the minimum
take compensation. The joint ventures are in negotiation with the power
purchasers. The total minimum take compensation for 1997 for the
projects after adjustment for the Chinese partners' interests in the
joint ventures was approximately $4.5 million of which $2.8 million was
outstanding as of January 31, 1998. The Company has recorded a
provision of $0.7 million (net of the Chinese partners' interests) to
reduce the receivables accrued for the balance of the minimum take
compensation as of November 30, 1997.
For two of the joint ventures the power purchaser is also the operator
of the project and is entitled to deduct the approved generation cost
from the electricity fee to the joint venture. In 1997, the relevant
pricing bureau approved only the tariff but not the generation cost
assumed for purposes of setting the tariff. The joint ventures and the
power purchaser have disagreed over the determination of the generation
cost. As of November 30, 1997, the aggregate amount of the generation
cost in dispute, after adjustment for the Chinese partners' interests
in the joint ventures, was approximately $0.5 million.
The Company is vigorously pursuing its rights under the contracts and
believes the final resolution of these issues will not materially
affect the Company's financial position or results of operations.
F-12
<PAGE>
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of November 30, 1997 and 1996, the Company's investments in and
advances to affiliates included a 25% ownership interest in Yangchun
Fuyang Diesel Power Co. Ltd. ("Yangchun Fuyang") as well as a 25% and
35% ownership interest in, and loans to, Wuhu Shaoda Electric Power
Development Company Ltd. ("Wuhu Shaoda") and Chengdu AES-Kaihua Gas
Turbine Power Co. Ltd. ("Chengdu AES-Kaihua"), respectively.
As of November 30, 1997, the Company's investments in and advances to
affiliates also included a 25% ownership interest in Yangcheng
International Power Generating Company Limited ("Yangcheng
International Power").
Summarized financial information for equity method affiliates on a
combined 100% basis is as follows (in thousands):
1997 1996
---- ----
Sales........................... $ 37,434 $ 4,820
Operating income................ 12,354 1,672
Net income...................... 5,350 324
Current assets.................. 74,341 19,775
Non-current assets.............. 302,754 111,092
Current liabilities............. 8,264 13,291
Non-current liabilities......... 230,934 75,329
Stockholders' equity............ 137,897 42,247
The amount of consolidated retained earnings that represent
undistributed earnings of affiliates was $1.6 million and $0.2 million
for the years ended November 30, 1997 and 1996, respectively.
F-13
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
5. NOTE RECEIVABLE
As of November 30, 1997 and 1996, Jiaozuo Wan Fang had provided loans
in the aggregate amount of $9.9 million and $6.6 million through
Zhongyuan Trust and Investment Company to Henan Electric Power
Corporation for the construction of interconnection and transmission
facilities. The loans are unsecured and bear interest at 15.3% per
annum. The interest is payable in arrears and the principal and
interest are payable in 15 semi-annual installments, beginning in
December 1997.
6. NOTES PAYABLE
As of November 30, 1997, notes payable consisted of $180 million
principal amount Notes due on December 15, 2006 (the "2006 Notes"), net
of unamortized discount on issuance of the notes. The 2006 Notes bear
interest at the rate of 10-1/8% per annum. Interest is payable on June
15 and December 15 of each year, commencing on June 15, 1997. The 2006
Notes rank at least pari passu in right of payment with all existing
and future senior unsecured indebtedness of the Company. The holders of
the 2006 Notes have a claim to amounts on deposit in debt service and
interim reserve accounts that is prior to the claims of other creditors
of the Company. The 2006 Notes are redeemable at the Company's option,
in whole or in part, beginning December 15, 2001 at redemption prices
in excess of par and are redeemable at par beginning December 15, 2003.
The terms of the 2006 Notes contain certain covenants and restrictions.
The most restrictive of these covenants include a requirement to
maintain certain reserves and limitations on the payment of dividends,
redemption of equity interests, redemption of subordinated
indebtedness, making of certain investments, incurrence of certain
indebtedness, certain assets sales and the incurrence of indebtedness
to refinance existing indebtedness, among other things.
F-14
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
7. LOANS FROM MINORITY SHAREHOLDERS
As of November 30, 1997 and 1996, loans from minority shareholders
included debt of $9.3 million and $10.6 million, respectively, provided
by the Company's joint venture partners, Xishan City Power Industry
Company 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. The balance of the
loans consisted of a loan from Jiaozuo Aluminum Mill to Jiaozuo Wan
Fang. This loan is unsecured and bears interest at 15.3% per annum plus
a service fee to the lender of 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 from January 1997. 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.
Scheduled maturities of loans from minority shareholders as of November
30, 1997 are as follows (in thousands):
1998.......................................... $ 8,519
1999.......................................... 5,188
2000.......................................... 5,188
2001.......................................... 5,188
2002.......................................... 5,188
Thereafter.................................... 10,210
-------
$ 39,481
-------
F-15
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
8. SHORT-TERM BANK LOANS
At November 30, 1996, short-term bank loans totaling $0.4 million to
Xiangci-AES were outstanding. The loans are secured by the buildings of
the joint venture and bear interest from 10.7% to 14.5% per annum. In
1997, $0.2 million of the bank loans were renewed for another year with
interest at 10.593% per annum. In addition, at November 30, 1996, a
short-term bank loan of $1.5 million to Anhui Liyuan-AES Power Company
Ltd. ("Anhui Liyuan-AES") was outstanding. The loan was unsecured, bore
interest at the prevailing lending rates in the PRC which ranged at
November 30, 1996 from 6.8125% to 7.49% per annum and was repaid in
1997. Short-term bank loans at November 30, 1996 also included a $1
million bank loan to Wuxi-AES-CAREC. The loan is guaranteed by Xishan
City Power Fuel Company. In 1997, this short-term bank loan was renewed
for another year with average interest at 7.7% per annum.
At November 30, 1997, there were other short-term bank loans totalling
$1.8 million to Wuxi-AES-CAREC outstanding. The loans are unsecured,
bear interest at 11.088% per annum, are repayable within one year and
are guaranteed by Xishan City Power Fuel Company and Xishan City
Electricity Management Office.
The accounts payable for construction are interest bearing. The
interest rate at November 30, 1997 was 7.25% per annum.
9. LONG-TERM BANK LOAN
As of November 30, 1997, a long-term bank loan of $7.0 million to Anhui
Liyuan-AES Power Company Ltd., a joint venture of the Company, was
outstanding. The loan is unsecured, bears interest at the prevailing
lending rates in the PRC and is guaranteed by Anhui Liyuan Power
Development Company. The interest rate for year ended November 30, 1997
was approximately 8.25% per annum. Scheduled maturities of the bank
loan as November 30, 1997 are as follows (in thousands):
1999.......................................... $ 2,000
2000.......................................... 2,000
2001.......................................... 3,000
-------
$ 7,000
-------
F-16
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
10. INCOME TAXES
The Company's PRC joint ventures are entitled to a two-year tax
exemption from state 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 1997, 1996 and 1995 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, 1997 and 1996, a deferred tax liability amounting to
approximately $0.8 million and $0.4 million, respectively, was provided
for, mainly for timing differences arising from deferred expenses and
accelerated depreciation of property, plant and equipment under the PRC
tax rules.
11. COMMITMENTS AND CONTINGENCIES
The Company leases premises under various operating leases which
contain renewal options and escalation clauses. Rental expense under
operating leases was $0.7 million, $0.6 million and $0.6 million for
the years ended November 30, 1997, 1996 and 1995, respectively.
Subsidiaries of the Company entered into various long-term contracts
for the purchase of fuel subject to termination only in certain limited
circumstances. These contracts have remaining terms of 13 years to 26
years.
In April 1996, Wuhu Shaoda entered into a $65.0 million term loan
facility (the "Term Loan") with a syndicate of lenders to finance the
construction of the power plant. The Company has guaranteed to the
lenders of the Term Loan certain obligations of its wholly owned
subsidiary under the joint venture contract, including an obligation to
fund an $18.0 million subordinated loan and certain other liabilities
which, in the aggregate, do not exceed $6.0 million.
Wuhu Shaoda had entered into a lease contract with Wuhu Energy
Development Company, one of the PRC partners in the joint venture, for
land use rights of the site over its entire term of operations at an
annual lease fee of $0.2 million. As of November 30, 1997, total
commitment under the land use rights lease contract amounted to $5.1
million.
As at November 30, 1997, the Company was obligated under operating
leases requiring minimum rentals as follows (in thousands):
Year ending November 30,
1998...................................... $ 777
1999...................................... 603
2000...................................... 126
-------
Total $ 1,506
-------
F-17
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
11. COMMITMENTS AND CONTINGENCIES - continued
Since the commencement of operations, the Company has entered into
commitments to invest a total of approximately $357.8 million in the
form of equity contributions and loans to its joint ventures. As of
November 30, 1997, the total outstanding commitment to its joint
ventures was $129.5 million.
Pursuant to the Payment and Milestone Schedule agreed between Sichuan
Fuling Aixi Power Company Ltd. ("Sichuan Fuling") and Shanghai Electric
Corporation ("Shanghai Electric"), a portion of the price of the
Engineering, Procurement and Construction Services Contract (the "EPC
Contract") for Sichuan Fuling can be deferred. Interest shall accrue on
the amount of the deferred payments as set forth in the Payment and
Milestone Schedule. AES Chigen guaranteed to pay Shanghai Electric up
to $19.2 million, representing 60% of the price of the EPC Contract,
plus the interest accrued thereon. As of November 30, 1997, the amount
of the deferred payment with interest accrued thereon was $16.4
million.
12. SHAREHOLDERS' EQUITY
Common Stock
Since May 8, 1997, the effective date of the Amalgamation, the capital
of the Company has consisted of 12,000 authorized, issued and
outstanding shares of Common Stock, par value $1.00 per share.
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.
Upon the effectiveness of the Amalgamation on May 8, 1997, each issued
and outstanding share of Class A common stock of the Company was
canceled in consideration of the right to receive 0.29 of a share of
common stock of AES and cash in lieu of any fractional shares (the
"Consideration"). All such shares of Class A common stock are no longer
outstanding and were automatically canceled and retired and ceased to
exist and each holder of a certificate representing any such shares of
Class A common stock ceased to have any rights with respect thereto,
except the right to receive the Consideration, without interest.
F-18
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
12. SHAREHOLDERS' EQUITY - 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.
Upon the effectiveness of the Amalgamation on May 8, 1997, each share
of the Class B common stock was automatically canceled and ceased to
exist and no consideration was delivered in exchange therefor.
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 year ended November 30,
1996, the Company repurchased a further 169,300 shares of Class A
common stock. 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 November 30, 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 November 30, 1997, the Company's
share of the net assets of its subsidiaries in the PRC amounted to
$86.7 million. In addition, the ability of Wuhu Shaoda to pay dividends
to the Company is subject to certain restrictions under the terms of a
bank loan facility which has been entered into by the joint venture. No
dividend distributions by the joint venture are permitted if certain
debt service coverage ratios are not met.
F-19
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
12. SHAREHOLDERS' EQUITY - continued
Stock Options
In 1994, the Company adopted the AES China Generating Co. Ltd.
Incentive Stock Option Plan (the "Option 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. Upon the effectiveness of the
Amalgamation on May 8, 1997, all outstanding options issued under the
Option Plan automatically and without any action on the part of the
holders thereof became options for shares of AES common stock. The
Option Plan remains in full force and effect. A summary of stock option
activity is as follows:
Options on Class B common stock Year Ended November 30,
------------------------------- -----------------------
1997 1996 1995
(in shares)
Outstanding at beginning of year... 1,408,560 1,451,059 752,500
Exercised during the year.......... (23,995) -
Forfeited during the year.......... (401) (290,388) -
Granted during the year
(from $8.50 to $16.00) .......... 161,641 247,889 698,559
Conversion to options on
AES common stock................. (1,545,805) - -
--------- --------- ---------
Outstanding - end of year
(from $8.50 to $16.00)........... - 1,408,560 1,451,059
--------- --------- ---------
Eligible for exercise - end of year. - 379,112 150,500
--------- --------- ---------
F-20
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
13. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended November 30,
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net income............................................. $9,470 $4,140 $2,138
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization........................ 5,161 2,071 476
Provision for deferred taxes......................... 398 387 -
Minority interest.................................... (592) 277 85
Equity in earnings of affiliates..................... (1,838) (663) (206)
Dividend from affiliate.............................. 446 626 -
Decrease in provision for project
development costs.................................. - (2,298) -
Loss on sale of property, plant and
equipment.......................................... 26 - -
Amortization of deferred costs....................... 608 - -
Amortization of discount on issuance of
notes.............................................. 17 - -
Amortization of discount/premium on
investments - net.................................. (2,186) (2,038) (3,543)
Capitalization of interest on notes payable,
net of amortization................................ (13,102) - -
Changes in assets and liabilities:
Accounts receivable from related parties........... (3,462) (6,346) (422)
Interest receivable................................ (1,676) 7 683
Inventory, prepaid expenses and other
current assets................................... (8,040) (1,186) (55)
Accrued interest income from affiliates............ (2,158) (333) -
Deposits........................................... (1,077) 28 (82)
Accounts payable and accrued liabilities........... 9,872 3,821 114
------- ------- -------
Net cash used in operating activities............ (8,133) (1,507) (812)
------- ------- -------
</TABLE>
F-21
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
14. 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 totaled $0.2 million, $0.3 million and $0.1
million for the years ended November 30, 1997, 1996 and 1995,
respectively.
As of November 30, 1997 and 1996, accounts receivable from related
parties consisted primarily of amounts due from Cili Power Company, for
sale of electricity, amounts due from the Xishan City Electricity
Management Office, an associated company of the joint venture partner
in Wuxi-AES-CAREC, for sale of electricity, and a short-term loan to a
Chinese partner in Wuxi-AES-CAREC bearing interest at an average rate
of 7.7% per annum during 1997.
As of November 30, 1996, accounts receivable from related parties also
consisted of amounts due from Cili Power Company for the payment of
construction delay fees.
As of November 30, 1997, accounts receivable from related parties also
included amounts due from Jiaozuo Aluminum Mill for sale of
electricity.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments, including cash and cash
equivalents, debt service reserves, investments, note receivable and
short-term bank loans were equal to their approximate fair values as of
November 30, 1997 and 1996 because of the relatively short maturities
of these investments. As of November 30, 1997 and 1996, the carrying
value of loans from minority shareholders and the long-term bank loans
approximated fair value determined by the estimated discount rate a
prospective seller would pay to a credit-worthy third party to assume
the obligation. At November 30, 1997 the fair value of notes payable
was $177 million based on quoted market prices.
F-22
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
16. SUBSEQUENT EVENTS
The Company changed its accounting year end date to December 31,
effective for the period ending December 31, 1998.
In November 1997, the board of directors of Wuxi-AES-Zhonghang and
Wuxi-AES-CAREC passed a resolution that would allow the replacement of
the shareholder loans provided by the Company and CAREC with bank
loans. The transaction was completed in early January 1998 with three
bank loans of $5.6 million, $6.9 million and $3.1 million,
respectively. The $5.6 million and $6.9 million bank loans are secured
by the electric and steam generating facilities of the joint venture
companies and bear interest at LIBOR plus 1.75% per annum. Principal
and interest are repayable in 10 semi-annual installments beginning
June, 1999. The $3.1 million bank loan is unsecured, bears interest at
9.5% per annum and repayable within one year, and is guaranteed by
Xishan City Power Fuel Company. Accordingly, the shareholder loans from
the Company and CAREC were fully paid off, leaving a $4.4 million
shareholder loan from Xishan City Power Industry Company.
In December 1997, Hefei Zhongli Energy Company Limited, a joint venture
of the Company, raised a long term bank loan of $7 million. The loan is
unsecured, bears interest at the prevailing lending rates in the PRC
and is guaranteed by Anhui Liyuan Power Development Company.
F-23
<PAGE>
SCHEDULE 1
AES CHINA GENERATING CO. LTD.
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF UNCONSOLIDATED OPERATIONS
For the year ended November 30,
1997 1996 1995
---- ---- ----
(in thousands)
Revenues.............................. $ - $ 400 $ 680
Equity in earnings of subsidiaries.... 16,616 3,724 465
------- ------- -------
Total revenues.................. 16,616 4,124 1,145
------- ------- -------
Operating costs and expenses:
Costs of sales and services......... 2,502 557 524
Development, selling, general and
administrative expenses........... 3,077 3,463 8,616
------- ------- -------
Total operating costs and
expenses....................... 5,579 4,020 9,140
------- ------- -------
Operating income (loss)............... 11,037 104 (7,995)
Interest income....................... 3,515 5,480 10,133
Interest expense...................... (4,664) - -
Amalgamation cost..................... (418) (1,444) -
------- ------- -------
Income before taxes................... 9,470 4,140 2,138
Income taxes.......................... - - -
------- ------- -------
Net income............................ $ 9,470 $ 4,140 $ 2,138
------- ------- -------
See notes to Schedule 1
S-1
<PAGE>
SCHEDULE 1
AES CHINA GENERATING CO. LTD.
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
As of November 30,
1997 1996
---- ----
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 1,241 $26,190
Debt service reserves - held-to-maturity.......... 18,225 -
Investments - held-to-maturity.................... 1,529 8,995
Accounts receivable - The AES Corporation......... 363 -
Accounts receivable from related parties.......... - 1,231
Prepaid expenses and other current assets......... 933 630
------- -------
Total current assets.......................... 22,291 37,046
Investment in subsidiaries (on the equity method)... 350,534 153,024
Office Equipment:
Cost.............................................. 1,429 1,220
Accumulated depreciation.......................... (604) (653)
------- -------
Total property, plant and equipment, net...... 825 567
Other Assets:
Deferred finance costs, net....................... 5,526 407
Project development costs......................... - 3,352
Debt service reserves - held-to-maturity.......... 9,113 -
Deposits and other assets......................... 636 565
------- -------
Total other assets............................ 15,275 4,324
------- -------
TOTAL............................................... $388,925 $194,961
------- -------
See notes to Schedule 1
S-2
<PAGE>
SCHEDULE 1
AES CHINA GENERATING CO. LTD.
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
As of November 30,
1997 1996
---- ----
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - The AES Corporation.... $ - $ 1,185
Accounts payable.......................... 1,407 1,114
Accrued interest for notes payable........ 8,264 -
Accrued liabilities....................... 1,105 2,307
------- -------
Total current liabilities............. 10,776 4,606
Long-term Liability:
Notes payable, net........................ 179,844 -
Shareholders' Equity:
Common stock.............................. 12 -
Class A common stock...................... - 81
Class B common stock...................... - 75
Additional paid-in capital................ 184,566 183,980
Retained earnings......................... 13,200 5,907
Cumulative translation adjustment......... 527 312
------- -------
Total shareholders' equity............ 198,305 190,355
------- -------
TOTAL....................................... $388,925 $194,961
------- -------
See notes to Schedule 1
S-3
<PAGE>
SCHEDULE 1
AES CHINA GENERATING CO. LTD.
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (12,583) $ (40) $ (1,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of notes 174,100 -- --
Proceeds from issuance of Class A common stock
upon exercise of share options 224 -- --
Repurchase of Class A common stock -- (11,443) (6,360)
--------------- ---------------- ---------------
Net cash provided by / (used in) financing activities 174,324 (11,443) (6,360)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (510) (224) (445)
Purchase of investments - held-to-maturity -- (29,176) (154,630)
Purchase of investments - available-for-sale -- (16,797) (14,557)
Proceeds from the maturity of investments - held-to-maturity 9,000 63,656 219,086
Proceeds from sales of investments - available-for-sale -- 16,969 14,609
Investments in and advances to subsidiaries (168,393) (104,714) (28,453)
Recoupment of investment in subsidiaries 1,813 871 --
Project development costs and other assets (1,313) (2,625) (1,327)
Deposit to debt service reserves (36,248) -- --
Withdrawal from debt service reserves 8,961 -- --
Investment in note receivable -- -- (7,500)
--------------- ---------------- ---------------
Net cash (used in) / provided by investing activities (186,690) (72,040) 26,783
--------------- ---------------- ---------------
(Decrease ) / increase in cash and cash equivalents (24,949) (83,523) 19,053
CASH AND CASH EQUIVALENTS,
Beginning of year 26,190 109,713 90,660
=============== ================ ===============
End of year $ 1,241 $ 26,190 $ 109,713
=============== ================ ===============
Supplemental disclosures:
Cash dividends from:
Consolidated subsidiaries $ -- $ -- $ --
Affiliates 446 626 --
</TABLE>
See notes to Schedule 1
S-4
<PAGE>
AES CHINA GENERATING CO. LTD.
NOTES TO SCHEDULE 1
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for Subsidiaries - AES China Generating Co. Ltd. (the
Company) has accounted for the earnings of its subsidiaries on the
equity method in the unconsolidated condensed financial information.
Revenues - Construction and operation management fees earned by the
parent from its consolidated subsidiaries are eliminated.
2. GUARANTEES
The Company has guaranteed to the lenders of a $65.0 million term loan
facility at Wuhu Shaoda certain obligations of its wholly owned
subsidiary under the joint venture contract, including an obligation to
fund an $18.0 million subordinated loan and certain other liabilities
which, in the aggregate, do not exceed $6.0 million.
The Company has guaranteed the payment of accrued interest on the
construction payable at Aixi Heart River which amounted to $0.7 million
at November 30, 1997.
S-5
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Document Numbered Page
- ------ -------- -------------
3.2 Bye-laws of the Company, as revised
effective May 8, 1997.
25.1 Power of Attorney.
27.1 Financial Data Schedule.
99.1 Statement Re: Computation of Fixed
Charge Coverage Ratio
99.2 "Business-Narrative Description of
Business" on pages 2-19 of the
Registrant's Annual Report on Form 10-K
for the fiscal year ended November 30,
1996, which is incorporated by reference
in Item 1 hereof.
Exhibit 3.2
BYE-LAWS
of
AES CHINA GENERATING CO. LTD.
(Revised Effective as of the Amalgamation)
<PAGE>
TABLE OF CONTENTS
Bye-Law Page
INTERPRETATION
1 Interpretation 1
BOARD OF DIRECTORS
2 Board of Directors 4
3 Management of the Company 4
4 Power to appoint managing director or
chief executive officer 5
5 Power to appoint manager 5
6 Power to authorise specific actions 5
7 Power to appoint attorney 5
8 Power to delegate to a committee 5
9 Power to appoint and dismiss employees
and provide benefits 6
10 Power to borrow and charge property 6
11 Power to purchase shares of or
discontinue the Company 6
12 Number and election of Directors 7
13 Defects in appointment of Directors 7
14 Alternate Directors 7
15 Removal of Directors 8
16 Vacancies on the Board 8
17 Notice of meetings of the Board 9
18 Quorum at meetings of the Board 9
19 Meetings of the Board 10
20 Unanimous written resolutions 10
21 Contracts and disclosure of Directors' interests 10
22 Remuneration of Directors 12
OFFICERS
23 Officers of the Company 12
24 Appointment of Officers 12
25 Remuneration of Officers 13
26 Duties of Officers 13
27 Chairman of meetings 13
28 Register of Directors and Officers 13
MINUTES
29 Obligations of Board to keep minutes 14
INDEMNITY
30 Indemnification of Directors and Officers
of the Company 14
31 Waiver of claim by Member 16
MEETINGS
32 Notice of annual general meeting 17
33 Notice of special general meeting 17
34 Accidental omission of notice of general meeting 17
35 Meeting called on requisition of Members 18
36 Short notice 18
37 Postponement of meetings 18
38 Quorum for general meeting 18
39 Adjournment of meetings 19
40 Attendance at meetings 19
41 Written resolutions 19
42 Attendance of Directors 20
43 Voting at meetings 20
44 Voting on show of hands 21
45 Decision of chairman 21
46 Demand for a poll 21
47 Joint holders voting 23
48 Proxies 23
49 Representation of Members which are not
natural persons 24
SHARE CAPITAL AND SHARES
50 Rights of shares 24
51 Power to issue shares 25
52 Variation of rights and alteration of
share capital 26
53 Registered holder of shares 27
54 Death of a joint holder 28
55 Share certificates 28
56 Calls on shares 28
57 Forfeiture of shares 29
REGISTER OF MEMBERS
58 Register of Members 29
59 Inspection of Register of Members 30
60 Determination of record dates 31
TRANSFER OF SHARES
61 Instrument of transfer 31
62 Transfer of Shares 32
63 Transfers by joint holders 32
TRANSMISSION OF SHARES
64 Representative of deceased Member 32
65 Registration on death or bankruptcy 33
DIVIDENDS AND OTHER DISTRIBUTIONS
66 Declaration of dividends by the Board 33
67 Other distributions 33
68 Reserve fund 34
69 Deduction of amounts due to the Company 34
CAPITALIZATION
70 Issue of bonus shares 34
ACCOUNTS AND FINANCIAL STATEMENTS
71 Records of account 34
72 Financial year end 35
73 Financial statements 35
AUDIT
74 Appointment of Auditor 36
75 Remuneration of Auditor 36
76 Vacation of office of Auditor 36
77 Access to books of the Company 36
78 Report of the Auditor 36
NOTICES
79 Notices to Members of the Company 37
80 Notices to joint holders 37
81 Service and delivery of notice 37
SEAL OF THE COMPANY
82 The seal 38
83 Manner in which seal is to be affixed 38
WINDING-UP
84 Winding-up/distribution by liquidator 38
ALTERATION OF BYE-LAWS
85 Alteration of Bye-laws 39
<PAGE>
INTERPRETATION
1. Interpretation
(1) In these Bye-laws the following words and expressions shall,
where not inconsistent with the context, have the following meanings
respectively:-
(a) "Act" means the Companies Act 1981 as amended from
time to time;
(b) "Affiliate" of the Company means a Person which
directly or indirectly through one or more
intermediaries controls, or is controlled by, or is
under common control with the Company, except that the
Company shall not be deemed to control any Person
other than a Subsidiary;
(c) "Alternate Director" means an alternate Director
appointed in accordance with these Bye-laws;
(d) "Assistant Secretary" means the person appointed to
perform any or all of the duties of assistant
secretary of the Company and, in the Secretary's
absence, any or all of the duties of the Secretary;
(e) "Auditor" includes any individual or partnership;
(f) "Board" means the Board of Directors appointed or
elected pursuant to these Bye-laws and acting by
resolution in accordance with the Act and these
Bye-laws or the Directors present at a meeting of
Directors at which there is a quorum;
(g) "Capital Stock" has the meaning defined in Bye-law
50(1);
(h) "Company" means AES China Generating Co. Ltd., an
exempted company formed under the Act;
(i) "control" with respect to any Person means the
possession, directly or indirectly, of the power to
direct or cause the direction of the management and
policies of such Person, whether through the ownership
of voting securities, by contract or otherwise;
(j) "Director" means a director of the Company and shall
include an Alternate Director;
(k) "Member" means any Person registered in the Register
of Members as the holder of shares in the Company and,
in the case of shares registered jointly in the names
of two or more Persons, means such Persons jointly and
not severally;
(l) "notice" means written notice as further defined in
these Bye-laws unless otherwise specifically stated;
(m) "Officer" means any individual appointed by the Board
to hold an office in the Company;
(n) "Person" means any unincorporated organization,
association, company, corporation, individual, sole
proprietorship, partnership, joint venture, trust,
institution, entity, party or government (including
any instrumentality, division, agency, body or
department thereof);
(o) "Register of Directors and Officers" means the
Register of Directors and Officers referred to in
these Bye-laws;
(p) "Register of Members" means the Register of Members
referred to in these Bye-laws;
(q) "Secretary" means the person appointed to perform any
or all the duties of secretary of the Company;
(r) "Subsidiary" of any Person means any corporation or
other entity of which such Person, or such Person and
one or more Subsidiaries, or any one or more
Subsidiaries, directly or indirectly own outstanding
shares of capital stock or other ownership interests
having voting power sufficient to elect, under
ordinary circumstances (not dependent upon the
happening of a contingency), a majority of the
directors or other persons performing similar
functions;
(2) In these Bye-laws, where not inconsistent with the context:-
(a) words denoting the plural number include the singular
number and vice versa;
(b) words denoting the masculine gender include the
feminine gender;
(c) the word:-
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative;
(d) unless otherwise provided herein words or expressions
defined in the Act shall have the same meaning in
these Bye-laws; and
(e) references to "$" shall be to United States dollars.
(3) Expressions referring to writing or written shall, unless the
contrary intention appears, include facsimile, printing, lithography,
photography and other modes of representing words in a visible form.
(4) Headings used in these Bye-laws and the Table of Contents are
for convenience only and are not to be used or relied upon in the construction
hereof.
BOARD OF DIRECTORS
2. Board of Directors
The business of the Company shall be managed and conducted by the
Board.
3. Management of the Company
(1) In managing the business of the Company, the Board may
exercise all such powers of the Company as are not, by statute or by these
Bye-laws, required to be exercised by the Company in general meeting subject,
nevertheless, to these Bye-laws, the provisions of any statute and to such
regulations as may be prescribed by the Company in general meeting.
(2) No regulation or alteration to these Bye-laws made by the
Company in general meeting shall invalidate any prior act of the Board which
would have been valid if that regulation or alteration had not been made.
(3) The Board may procure that the Company pays all expenses
incurred in promoting and incorporating the Company.
(4) Pursuant to the provisions of the Act, the Board shall
appoint a Secretary who is ordinarily resident in Bermuda and a Resident
Representative who is ordinarily resident in Bermuda, each to maintain all such
records as may be required by law to be maintained in Bermuda, to make all
necessary filings with the Ministry of Finance and Registrar of Companies in
Bermuda as may be required by law and to take any other action as may be
required by law. The Board shall not appoint the Secretary of the Company as a
Director or the Resident Representative.
4. Power to appoint managing director or
chief executive officer
The Board may from time to time appoint one or more Directors to the
office of managing director or chief executive officer of the Company who
shall, subject to the control of the Board, supervise and administer all of the
general business and affairs of the Company.
5. Power to appoint manager
The Board may appoint a person to act as manager of the Company's day
to day business and may entrust to and confer upon such manager such powers and
duties as it deems appropriate for the transaction or conduct of such business.
6. Power to authorise specific actions
The Board may from time to time and at any time authorise any Person
to act on behalf of the Company for any specific purpose and in connection
therewith to execute any agreement, document or instrument on behalf of the
Company.
7. Power to appoint attorney
The Board may from time to time and at any time by power of attorney
appoint any Person, whether nominated directly or indirectly by the Board, to be
an attorney of the Company for such purposes and with such powers, authorities
and discretions (not exceeding those vested in or exercisable by the Board) and
for such period and subject to such conditions as it may think fit. Any such
power of attorney may contain such provisions for the protection and convenience
of Persons dealing with any such attorney as the Board may think fit and may
also authorise any such attorney to sub-delegate all or any of the powers,
authorities and discretions so vested in the attorney. Such attorney may, if so
authorised under the seal of the Company, execute any deed or instrument under
such attorney's personal seal with the same effect as the affixation of the seal
of the Company.
8. Power to delegate to a committee
The Board may delegate any of its powers to a committee appointed by
the Board and every such committee shall conform to such directions as the Board
shall impose on them.
9. Power to appoint and dismiss employees
and provide benefits
(1) The Board may appoint, suspend or remove any manager,
secretary, clerk, agent or employee of the Company and may fix their
remuneration and determine their duties.
(2) The Board on behalf of the Company may provide benefits,
whether by the payment of gratuities or pensions or otherwise, for any person
including any Director or former Director who holds or has held any executive
office or employment with the Company or with any Person which is or has been a
Subsidiary or Affiliate of the Company or a predecessor in the business of the
Company or of any such Subsidiary or Affiliate, and to any member of his family
or any person who is or was dependent on him, and may contribute to any fund
and pay premiums for the purchase or provision of any such gratuity, pension or
other benefit, or for the insurance of any such person.
(3) Without prejudice to the general powers conferred by these
Bye-laws, the Board is hereby authorised to give to any Directors, officers or
employees of the Company an interest in any particular business or transaction
or participation in the profits thereof or in the general profits of the Company
either in addition to or in substitution for a salary or other remuneration.
10. Power to borrow and charge property
The Board may exercise all the powers of the Company to borrow money
and to mortgage or charge its undertaking, property and uncalled capital, or
any part thereof, and may issue debentures, debenture stock and other
securities whether outright or as security for any debt, liability or
obligation of the Company or any third party.
11. Power to purchase shares of or
discontinue the Company
(1) Subject to the provisions of Section 42A of the Act, the
Board may exercise all the powers of the Company to purchase all or any part of
its own shares.
(2) The Board may exercise all the powers of the Company to
discontinue the Company to a named country or jurisdiction outside Bermuda
pursuant to Section 132G of the Act.
12. Number and election of Directors
(1) The Board shall consist of not less than two Directors or
such number in excess thereof as the Members may from time to time determine,
PROVIDED THAT the number of Directors shall not be reduced so as to shorten the
term of any Director at the time in office.
(2) The Board of Directors shall consist of a single class and
shall be elected thereafter, except in the case of casual vacancy, at the
annual general meeting or at any special general meeting called for the
purpose. Directors shall hold office for such term as the Members may determine
or, in the absence of such determination, until the next annual general meeting
or until their successors are elected or appointed or their office is otherwise
vacated, and any general meeting may authorise the Board to fill any vacancy in
their number left unfilled at a general meeting.
(3) Any Member may nominate one or more persons for election as
Director at a general meeting.
13. Defects in appointment of Directors
All acts done bona fide by any meeting of the Board or by a committee
of the Board or by any person acting as a Director shall, notwithstanding that
it be afterwards discovered that there was some defect in the appointment of any
Director or person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a Director.
14. Alternate Directors
(1) Any general meeting of the Company may elect a person or
persons to act as a Director in the alternative to any one or more of the
Directors of the Company or may authorise the Board to appoint such Alternate
Directors. Absent specific authorisation of the Members, no Director may
appoint a person or persons to act as a Director in the alternative to himself
or herself. Any person so appointed shall have all the rights and powers of the
Director or Directors for whom such person is appointed in the alternative
provided that such person shall not be counted more than once in determining
whether or not a quorum is present.
(2) An Alternate Director shall be entitled to receive notice of
all meetings of the Board and to attend and vote at any such meeting at which a
Director for whom such Alternate Director was appointed in the alternative is
not personally present and generally to perform at such meeting all the
functions of such Director for whom such Alternate Director was appointed.
(3) An Alternate Director shall cease to be such if the Director
for whom such Alternate Director was appointed ceases for any reason to be a
Director but may be re-appointed by the Board as alternate to the person
appointed to fill the vacancy in accordance with these Bye-laws.
15. Removal of Directors
(1) Subject to any provision to the contrary in these Bye-laws,
the Members may, at any special general meeting convened and held in accordance
with these Bye-laws, remove a Director provided that the notice of any such
meeting convened for the purpose of removing a Director shall contain a
statement of the intention so to do and be served on such Director not less
than five days before the meeting and at such meeting such Director shall be
entitled to be heard on the motion for such Director's removal.
(2) A vacancy on the Board created by the removal of a Director
under the provisions of subparagraph (1) of this Bye-law may be filled by the
Members at the meeting at which such Director is removed and, in the absence of
such election or appointment, the Board may fill the vacancy.
16. Vacancies on the Board
(1) The Board shall have the power from time to time and at any
time to appoint any person as a Director to fill a vacancy on the Board
occurring as the result of the death, disability, disqualification or
resignation of any Director or the failure of the Members to fill any vacancy
and to appoint an Alternate Director to any Director so appointed.
(2) The Board may act notwithstanding any vacancy in its number
but, if and so long as its number is reduced below the number fixed by these
Bye-laws as the quorum necessary for the transaction of business at meetings of
the Board, the continuing Directors or Director may act for the purpose of (i)
summoning a general meeting of the Company or (ii) preserving the assets of the
Company.
(3) The office of Director shall be vacated if the Director:-
(a) is removed from office pursuant to these Bye-laws or
is prohibited from being a Director by law;
(b) is or becomes bankrupt or makes any arrangement or
composition with his creditors generally;
(c) is or becomes of unsound mind or dies; or
(d) resigns his or her office by notice in writing to the
Company.
17. Notice of meetings of the Board
(1) The Chairman, Deputy Chairman, or President may, and the
Secretary or the Assistant Secretary on the requisition of any two Directors
shall, at any time summon a meeting of the Board upon not less than three days'
prior notice.
(2) Notice of a meeting of the Board shall be deemed to be duly
given to a Director if it is given to such Director verbally in person or by
telephone or otherwise communicated or sent to such Director by post, cable,
telex, telecopier, facsimile or other mode of representing words in a legible
and non-transitory form at such Director's last known address or any other
address given by such Director to the Company for this purpose.
18. Quorum at meetings of the Board
The quorum necessary for the transaction of business at a meeting of
the Board shall be two Directors.
19. Meetings of the Board
(1) The Board may meet for the transaction of business, adjourn
and otherwise regulate its meetings as it sees fit.
(2) Directors may participate in any meeting of the Board by means
of such telephone, electronic or other communication facilities as permit all
persons participating in the meeting to communicate with each other
simultaneously and instantaneously, and participation in such a meeting shall
constitute presence in person at such meeting.
(3) A resolution put to the vote at a meeting of the Board shall
be carried by the affirmative votes of a majority of the votes cast and in the
case of an equality of votes the resolution shall fail.
20. Unanimous written resolutions
A resolution in writing signed by all the Directors which may be in
counterparts, shall be as valid as if it had been passed at a meeting of the
Board duly called and constituted, such resolution to be effective on the date
on which the last Director signs the resolution. For the purposes of this
Bye-law only, "Director" shall not include an Alternate Director.
21. Contracts and disclosure of Directors' interests
(1) Subject to the Act, a Director may hold any other office or
place of profit with the Company (except that of Auditor) in addition to serving
as a Director for such period and upon such terms as the Board may determine,
and may be paid such extra remuneration therefor (whether by way of salary,
commission, participation in profits or otherwise) as the Board may determine,
and such extra remuneration shall be in addition to any remuneration provided
for, by or pursuant to any other Bye-law.
(2) Any Director, or any Director's firm, partner or any company
with whom any Director is associated, may act in a professional capacity for the
Company and such Director or such Director's firm, partner or such company shall
be entitled to remuneration for professional services as if such Director were
not a Director, provided that nothing herein contained shall authorise a
Director or Director's firm, partner or such company to act as Auditor of the
Company.
(3) A Director may be or become a director or other officer of, or
otherwise interested in, any Person promoted by the Company or any other Person
in which the Company may be interested. Any Director may be or become directly
or indirectly interested in a contract or proposed contract or arrangement with
the Company, and shall not be liable to account to the Company or the Members
for any remuneration, profit or other benefits received by him as a director or
officer of or from his interest in such other Person, contract, proposed
contract or arrangement. The Board may also cause the voting power conferred by
the shares in any other Person held or owned by the Company to be exercised in
such manner in all respects as it thinks fit, including the exercise thereof in
favour of any resolution appointing the Directors or any of them to be directors
or officers of such other Person, or voting or providing for the payment of
remuneration to the directors or officers of such other Person.
(4) A Director who is a director or other officer of, or otherwise
interested in, any Person promoted by the Company or any other Person in which
the Company is interested or who is directly or indirectly interested in a
contract or proposed contract or arrangement with the Company shall declare the
nature of such interest as required by the Act.
(5) Following a declaration being made pursuant to this Bye-law,
and unless disqualified by the chairman of the relevant Board meeting, a
Director may vote in respect of any matter involving a Person of which such
Director is a director or other officer or otherwise interested or any contract
or proposed contract or arrangement in which such Director is interested and may
be counted in the quorum at such meeting.
22. Remuneration of Directors
The remuneration (if any) of the Directors shall be determined from
time to time by the Board and shall be deemed to accrue from day to day. The
Directors may also be paid all travel, hotel and other expenses properly
incurred by them in attending and returning from meetings of the Board, any
committee appointed by the Board, general meetings of the Company, or in
connection with the business of the Company or their duties as Directors
generally.
OFFICERS
23. Officers of the Company
The Officers of the Company shall consist of a President and a Vice
President or a Chairman and a Deputy Chairman (who may also use the title of
Vice Chairman), a Secretary, an Assistant Secretary and such additional Officers
as the Board may from time to time determine (including one or more additional
Vice Presidents) all of whom shall be deemed to be Officers for the purposes of
these Bye-laws.
24. Appointment of Officers
(1) The Board shall, after each annual general meeting, appoint a
President and Vice President or a Chairman and Deputy Chairman who shall be
Directors.
(2) The Secretary, the Assistant Secretary and additional
Officers, if any, shall be appointed by the Board from time to time.
(3) Any person elected or appointed pursuant to this Bye-law shall
hold office for such period and upon such terms as the Board may determine and
the Board may revoke or terminate any such election or appointment. Any such
revocation or termination shall be without prejudice to any claim for damages
that such officer may have against the Company or the Company may have against
such officer for any breach of any contract of service between him and the
Company which may be involved in such revocation or termination.
25. Remuneration of Officers
The Officers shall receive such remuneration as the Board may from
time to time determine.
26. Duties of Officers
The Officers shall have such powers and perform such duties in the
management, business and affairs of the Company as may be delegated to them by
the Board from time to time.
27. Chairman of meetings
Unless otherwise agreed by a majority of those attending and entitled
to attend and vote thereat, the Chairman, if there be one, and if not the
President, shall act as chairman at all meetings of the Members and of the Board
at which such person is present. In their absence the Deputy Chairman or Vice
President, if present, shall act as chairman and in the absence of all of them a
chairman shall be appointed or elected by those present at the meeting and
entitled to vote.
28. Register of Directors and Officers
(1) The Board shall cause to be kept in one or more books at its
registered office a Register of Directors and Officers and shall enter therein
the following particulars with respect to each Director and the President, each
Vice-President, the Chairman, and each Deputy Chairman, provided that each such
person is a Director, and the Secretary and the Assistant Secretary, that is to
say:
(a) first name and surname; and
(b) address.
(2) The Board shall, within the period of fourteen days from the
occurrence of -
(a) any change among its Directors, the President, any
Vice-President, the Chairman, and any Deputy Chairman,
provided that each such person is a Director, and in
the Secretary and the Assistant Secretary; or
(b) any change in the particulars contained in the
Register of Directors and Officers,
cause to be entered on the Register of Directors and Officers the particulars of
such change and the date on which such change occurred.
(3) The Register of Directors and Officers shall be open to
inspection at the registered office of the Company on every business day,
subject to such reasonable restrictions as the Board may impose, so that not
less than two hours in each business day be allowed for inspection.
MINUTES
29. Obligations of Board to keep minutes
The Board shall cause minutes to be duly entered in books provided for
the purpose:-
(a) of all elections and appointments of Officers;
(b) of the names of the Directors present at each meeting of the
Board and of any committee appointed by the Board; and
(c) of all resolutions and proceedings of general meetings of the
Members, meetings of the Board, meetings of managers and
meetings of committees appointed by the Board.
INDEMNITY
30. Indemnification of Directors and
Officers of the Company
(1) The Directors, the Secretary, the Assistant Secretary and
other Officers for the time being of the Company and the liquidator or trustees
(if any) for the time being acting in relation to any of the affairs of the
Company and every one of them (individually, an "Indemnified Party," and
collectively, the "Indemnified Parties"), and their heirs, executors and
administrators, shall be indemnified and secured harmless out of the assets of
the Company to the fullest extent authorised by the laws of Bermuda as the same
exist or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Company to provide broader
indemnification rights than such laws permitted prior to such amendment) from
and against all actions, costs, charges, losses, damages and expenses ("Losses")
which the Indemnified Parties or any of them, or their heirs, executors or
administrators, shall or may incur or sustain by or by reason of any act done,
concurred in or omitted in or about the execution of their duty, or supposed
duty, or in their respective offices or trusts with respect to the Company or in
or about the execution of their duty, or supposed duty, or in their respective
offices or trusts with respect to any other Person for whom any of them acted as
director, secretary or other officer, liquidator, trustee, employee or agent at
the request of the Company, and none of them shall be answerable for the acts,
receipts, neglects or defaults of the others of them or for joining in any
receipts for the sake of conformity, or for any bankers or other Persons with
whom any moneys or effects belonging to the Company or any other such Person
shall or may be lodged or deposited for safe custody, or for insufficiency or
deficiency of any security upon which any moneys of or belonging to the Company
or any other such Person shall be placed out on or invested, or for any other
loss, misfortune or damage which may happen in the execution of their respective
offices or trusts, or in relation thereto, PROVIDED THAT, with respect to an
Indemnified Party, this indemnity shall not extend to any Losses to the extent
they arise from or in respect of any fraud or dishonesty of which the
Indemnified Party may be guilty with respect to the Company.
(2) The right to indemnification conferred in this Bye-law 30 is
and shall be a contract right. The right to indemnification conferred in this
Bye-law 30 shall include the right to be paid by the Company the expenses
(including attorneys' fees and retainers therefor) reasonably incurred in
connection with any proceeding for which indemnity is asserted in advance of its
final disposition, such advances to be paid by the Company within 20 days after
the receipt by the Company of a statement or statements from an Indemnified
Party or his or her heirs, executors or administrators requesting such advance
or advances from time to time; provided, however, the payment of such expenses
incurred by an Indemnified Party or his or her heirs, executors or
administrators in advance of the final disposition of a proceeding shall be made
only upon delivery to the Company of an undertaking by or on behalf of such
Indemnified Party or his heirs, executors or administrators to repay all amounts
so advanced if it shall ultimately be determined that such Person is not
entitled to be indemnified under this Bye-law 30 or otherwise.
(3) To obtain indemnification under this Bye-law 30, an
Indemnified Party or his heirs, executors or administrators shall submit to the
Company a written request, including therein or therewith such documentation and
information as is reasonably available to such Person and is reasonably
necessary to determine whether and to what extent such Person is entitled to
indemnification.
(4) The Company may maintain insurance, at its expense, to protect
itself and any Indemnified Party and his or her heirs, executors and
administrators from and against any and all Losses, whether or not the Company
would have the power to indemnify such person against any such Loss under the
Act. To the extent that the Company maintains any policy or policies providing
such insurance, each such Indemnified Party and his or her heirs, executors and
administrators, and each such employee or agent to which rights to
indemnification have been granted as provided in paragraph (5) of this Bye-law
30, shall be covered by such policy or policies in accordance with its or their
terms to the maximum extent of the coverage thereunder for any such Person.
(5) The Company may, to the extent authorized from time to time by
the Board, grant rights to indemnification, and rights to be paid by the Company
the expenses incurred in connection with any proceeding in advance of its final
disposition, to any employee or agent of the Company to the fullest extent of
the provisions of this Bye-law 30 with respect to the indemnification and
advancement of expenses of the Indemnified Parties.
31. Waiver of claim by Member
Each Member agrees to waive any claim or right of action such Member
might have, whether individually or by or in the right of the Company, against
any Director, the Secretary, the Assistant Secretary or other Officer for the
time being of the Company or the liquidator or trustees (if any) for the time
being acting in relation to any of the affairs of the Company, and their heirs,
executors and administrators, on account of any act done, concurred in or
omitted in or about the execution of their duty, or supposed duty or in their
respective offices or trusts PROVIDED THAT, with respect to any such person such
waiver shall not extend to any matter in respect of any fraud or dishonesty
which may attach to such person.
MEETINGS
32. Notice of annual general meeting
The annual general meeting of the Company shall be held in each year
other than the year of incorporation at such time and place as the President or
the Chairman or, the Deputy Chairman or the Board shall appoint. At least five
days' notice of such meeting shall be given to each Member stating the date,
time and place at which the meeting is to be held, that the election of
Directors will take place thereat, and as far as practicable, the general nature
of the other business to be conducted at the meeting.
33. Notice of special general meeting
The President or the Chairman or the Deputy Chairman or the Board may
convene a special general meeting of the Company whenever in their judgment such
a meeting is necessary, upon not less than five days' notice which shall state
the date, time and place at which the meeting is to be held and the general
nature of the business to be considered at the meeting.
34. Accidental omission of notice of general meeting
(1) The accidental omission to give notice of a general meeting
to, or the non-receipt of notice of a general meeting by, any Person entitled to
receive notice shall not invalidate the proceedings, at that meeting.
(2) In the case where instruments of proxy are sent out with
notice of any general meeting, the accidental omission to send such instrument
of proxy to, or the non-receipt of such instrument of proxy by, any Person
entitled to receive notice shall not invalidate the proceedings at that meeting.
35. Meeting called on requisition of Members
Notwithstanding anything herein, the Board shall, on the requisition
of Members holding at the date of the deposit of the requisition not less than
one-tenth of such of the paid-up share capital of the Company as at the date of
the deposit that carries the right to vote at general meetings of the Company,
forthwith proceed to convene a special general meeting of the Company and the
provisions of Section 74 of the Act shall apply.
36. Short notice
A general meeting of the Company shall, notwithstanding that it is
called by shorter notice than that specified in these Bye-laws, be deemed to
have been properly called if it is so agreed by (i) all the Members entitled to
attend and vote thereat in the case of an annual general meeting; and (ii) by a
majority in number of the Members having the right to attend and vote at the
meeting, being a majority together holding not less than 95% in nominal value of
the shares giving a right to attend and vote thereat in the case of a special
general meeting.
37. Postponement of meetings
The Board may postpone any general meeting called in accordance with
the provisions of these Bye-laws (other than a meeting requisitioned under these
Bye-laws) provided that notice of postponement is given to each Member before
the time for such meeting. Fresh notice of the date, time and place for the
postponed meeting shall be given to each Member in accordance with the
provisions of these Bye-laws.
38. Quorum for general meeting
(1) At any general meeting of the Company two Persons present in
person and representing in person or by proxy in excess of 50% of the total
issued voting shares in the Company throughout the meeting shall form a quorum
for the transaction of business, PROVIDED THAT if the Company shall at any time
have only one Member, one Member present in person or by proxy shall form a
quorum for the transaction of business at any general meeting of the Company
held during such time.
(2) If within half an hour from the time appointed for the meeting
any required quorum is not present (or such longer time as the chairman of the
meeting may determine to wait) the meeting, if convened on the requisition of a
Member or Members, shall be dissolved. In any other case, the meeting shall
stand adjourned to the same day one week later, at the same time and place or to
such other day, time or place as the Board may determine. Notwithstanding the
foregoing, prior to dissolution or adjournment of any such meeting, the chairman
of the meeting may permit the transaction of any business by the Company or by
any class of the Company's shares if the required quorum for the transaction of
such business is present and acting throughout.
39. Adjournment of meetings
The chairman of a general meeting may, with the consent of the
Members at any general meeting at which a quorum is present (and shall if so
directed), adjourn the meeting. Unless the meeting is adjourned to a specific
date, time and place, fresh notice of the date, time and place for the
resumption of the adjourned meeting shall be given to each Member in accordance
with the provisions of these Bye-laws.
40. Attendance at meetings
If specifically authorised by the Board at any particular meeting,
Members may participate in any general meeting by means of such telephone,
electronic or other communication facilities as permit all persons participating
in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting.
41. Written resolutions
(1) Subject to subparagraph (6), anything which may be done by
resolution of the Company in general meeting or by resolution of a meeting of
the holders of any class of the shares of the Company, may, without a meeting
and without any previous notice being required, be done by resolution in writing
signed by, or, in the case of a Member that is not a natural person whether or
not a company within the meaning of the Act, on behalf of, all the Members who
at the date of the resolution would be entitled to attend the meeting and vote
on the resolution.
(2) A resolution in writing may be signed by, or, in the case of a
Member that is not a natural person whether or not a company within the meaning
of the Act, on behalf of, all the Members, or any class thereof, in as many
counterparts as may be necessary.
(3) For the purposes of this Bye-law, the date of the resolution
is the date when the resolution is signed by, or, in the case of a Member that
is not a natural person whether or not a company within the meaning of the Act,
on behalf of, the last Member to sign and any reference in any Bye-law to the
date of passing of a resolution is, in relation to a resolution made in
accordance with this Bye-law, a reference to such date.
(4) A resolution in writing made in accordance with this Bye-law
is as valid as if it had been passed by the Company in general meeting or by a
meeting of the holders of the relevant class of shares of the Company, as the
case may be, and any reference in any Bye-law to a meeting at which a resolution
is passed or to Members voting in favour of a resolution shall be construed
accordingly.
(5) A resolution in writing made in accordance with this Bye-law
shall constitute minutes for the purposes of Sections 81 and 82 of the Act.
(6) This Bye-law shall not apply to:-
(a) a resolution passed pursuant to Section 89(5) of the
Act; or
(b) a resolution passed for the purpose of removing a
Director before the expiration of his term of office
under these Bye-laws.
42. Attendance of Directors
The Directors of the Company shall be entitled to receive notice of
and to attend and be heard at any general meeting.
43. Voting at meetings
(1) Notwithstanding any provision of the Act to the contrary and
subject to the provisions of these Bye-laws, any question proposed for the
consideration of the Members at any general meeting shall be decided by the
affirmative votes of a majority of the votes cast in accordance with the
provisions of these Bye-laws and in the case of an equality of votes the
question shall fail.
(2) No Member shall be entitled to vote at any general meeting
unless such Member has paid all the calls on all shares held by such Member.
(3) A Member who is a patient for any purpose of any statute or
applicable law relating to mental health or in respect of whom an order has been
made by any court having jurisdiction for the protection or management of the
affairs of persons incapable of managing their own affairs may vote, whether on
a show of hands or on a poll, by his receiver, committee, curator bonis or other
Person in the nature of a receiver, committee or curator bonis appointed by such
court and such receiver, committee, curator bonis or other Person may vote on a
poll by proxy, and may otherwise act and be treated as such Member for the
purpose of general meetings.
44. Voting on show of hands
At any general meeting a resolution put to the vote of the meeting
shall, in the first instance, be voted upon by a show of hands and, subject to
any rights or restrictions for the time being lawfully attached to any class of
shares and subject to the provisions of these Bye-laws, every Member present in
person and every Person holding a valid proxy at such meeting shall be entitled
to one vote and shall cast such vote by raising his or her hand.
45. Decision of chairman
At any general meeting a declaration by the chairman of the meeting
that a question proposed for consideration has, on a show of hands, been
carried, or carried unanimously, or by a particular majority, or lost, and an
entry to that effect in a book containing the minutes of the proceedings of the
Company shall, subject to the provisions of these Bye-laws, be conclusive
evidence of that fact.
46. Demand for a poll
(1) Notwithstanding the provisions of the immediately preceding
two Bye-laws, at any general meeting of the Company, in respect of any question
proposed for the consideration of the Members (whether before or on the
declaration of the result of a show of hands as provided for in these Bye-laws),
a poll may be demanded by any of the following Persons:-
(a) the chairman of such meeting; or
(b) at least three Members present in person or
represented by proxy; or
(c) any Member or Members present in person or represented
by proxy and holding between them not less than
one-tenth of the total voting rights of all the
Members having the right to vote at such meeting; or
(d) any Member or Members present in person or represented
by proxy holding shares in the Company conferring the
right to vote at such meeting, being shares on which
an aggregate sum has been paid up equal to not less
than one-tenth of the total sum paid up on all such
shares conferring such right.
(2) Where, in accordance with the provisions of subparagraph (1)
of this Bye-law, a poll is demanded, subject to any rights or restrictions for
the time being lawfully attached to any class of shares, every Person present at
such meeting shall have one vote for each share of which such Person is the
holder or for which such Person holds a proxy and such vote shall be counted in
the manner set out in subparagraph (4) of this Bye-Law or in the case of a
general meeting at which one or more Members are present by telephone in such
manner as the chairman of the meeting may direct and the result of such poll
shall be deemed to be the resolution of the meeting at which the poll was
demanded and shall replace any previous resolution upon the same matter which
has been the subject of a show of hands.
(3) A poll demanded in accordance with the provisions of
subparagraph (1) of this Bye-law, for the purpose of electing a chairman or on a
question of adjournment, shall be taken forthwith and a poll demanded on any
other question shall be taken in such manner and at such point in the meeting as
the chairman may direct and any business other than that upon which a poll has
been demanded may be proceeded with pending the taking of the poll.
(4) Where a vote is taken by poll, each Person present and
entitled to vote shall be furnished with a ballot paper on which such Person
shall record his or her vote in such manner as shall be determined at the
meeting having regard to the nature of the question on which the vote is taken,
and each ballot paper shall be signed or initialized or otherwise marked so as
to identify the voter and the registered holder in the case of a proxy. At the
conclusion of the poll, the ballot papers shall be examined and counted by a
committee of not less than two Members or proxy holders appointed by the
chairman for the purpose and the result of the poll shall be declared by the
chairman.
47. Joint holders voting
If two or more Persons are registered as joint holders of any shares,
the Company shall be entitled to require that all of such persons tender their
vote jointly if they are voting in person or that all of such Persons execute a
proxy if they are submitting a proxy.
48. Proxies
Any Member of the Company entitled to attend and vote at a meeting of
the Company or a meeting of the holders of any class of shares in the Company
shall be entitled to appoint another Person as his proxy to attend and vote
instead of him. A Member may appoint more than one proxy to attend on the same
occasion. The instrument appointing a proxy shall be in writing in a form
approved by the Board and under the hand of the appointor or of the appointor's
attorney duly authorised in writing, or if the appointor is not a natural
person, either under its seal, or under the hand of a duly authorised officer or
attorney. A Member may revoke his proxy prior to its exercise by delivering
written notice of revocation to the Secretary or the Assistant Secretary, by
executing a later dated proxy or by attending the meeting to which the proxy
relates and voting in person. The decision of the chairman of any general
meeting as to the validity of any instrument of proxy shall be final.
49. Representation of Members which are
not natural persons
A Member which is not a natural person may, by written instrument,
authorise such person as it thinks fit to act as its representative at any
meeting of the Members and the person so authorised shall be entitled to
exercise the same powers on behalf of the Member which such person represents as
that Member could exercise if it were a natural person. Notwithstanding the
foregoing, the chairman of the meeting may accept such assurances as he or she
thinks fit as to the right of any person to attend and vote at general meetings
on behalf of a Member which is not a natural person.
SHARE CAPITAL AND SHARES
50. Rights of shares
(1) The authorised share capital of the Company at the date of the
adoption of these Bye-laws is $1,000,000 comprised of 100,000,000 shares, par
value $.01 per share (the "Capital Stock").
(2) The voting powers, preferences and relative, participating,
optional and other special rights, and qualifications, limitations and
restrictions of the Capital Stock are as follows:
(a) Voting Rights.
Except as otherwise provided by law or by these
Bye-laws , the holders of shares of the Capital Stock
shall be entitled to one vote per share.
(b) Dividends.
The holders of shares of Capital Stock shall be
entitled to receive, out of assets or funds legally
available therefor, such dividends and distributions,
payable in cash or otherwise, as may be declared
thereon by the Board from time to time.
(c) Winding Up.
In the event of the winding up or dissolution of the
Company, whether voluntary or involuntary or for the
purpose of reorganisation or otherwise, or upon any
distribution of capital, all of the surplus assets of
or capital distributed by the Company shall belong to
and be distributable in equal amounts per share to the
holders of shares of Capital Stock.
51. Power to issue shares
(1) Subject to these Bye-laws and to any resolution of the Members
to the contrary and without prejudice to any special rights previously conferred
on the holders of any existing shares or class of shares, the Board shall have
power to issue and to grant options over any authorised but unissued shares of
the Company and to issue securities convertible into or exchangeable or
exercisable for authorised but unissued shares of the Company on such terms and
conditions as it may determine and any shares or class of shares may be issued
with such preferred, deferred or other special rights or such restrictions,
whether in regard to dividend, voting, return of capital or otherwise as the
Company may from time to time by resolution of the Members prescribe.
(2) The Board shall, in connection with the issue of any share,
have the power to pay such commissions and brokerage fees as may be permitted by
law.
(3) Subject to the Act:
(a) the Company may in accordance with any scheme
for the time being in force and approved by the
Members in general meeting provide directly or
indirectly money or other financial assistance for the
purpose of or in connection with the purchase of, or
subscription for, fully or partly paid shares in the
Company or any holding company of the Company by a
trustee of or to be held by or for the benefit of
employees of the Company, any of its Subsidiaries, any
holding company of the Company or any Subsidiary of
any such holding company including any Director
holding a salaried employment or office with or in any
such company and so that the residual beneficiary of
any such trust may be or include a charitable object;
and
(b) the Company may give financial assistance on
such terms as the Board may approve to bona fide
employees of the Company (including Directors who are
also bona fide employees), any of its Subsidiaries,
any holding company of the Company and/or any
Subsidiary of any such holding company in order that
they may buy shares (fully or partly paid) of the
Company or any holding company of the Company and such
terms may include a reference that, when an employee
ceases to be employed by the Company or such other
company, shares bought with such financial assistance
shall or may be sold to the Company or such other
company on such terms as the Board may approve.
(4) Without prejudice to the general powers conferred by these
Bye-laws, the Board is authorised to give to any Person the right or option of
requiring at a future date that an allotment shall be made to such Person of any
shares at par or at such premium as may be agreed.
(5) Neither the Company nor the Board shall be obliged, when
making or granting any allotment of, offer of, option over or disposal of
shares, to make, or make available, any such allotment, offer, option or
disposal to Members or others with registered addresses in any particular
territory or territories where, in the absence of a registration statement or
other special formalities, this would or might, in the opinion of the Board, be
unlawful or impracticable. Members affected as a result of the foregoing
sentence shall not be, or be deemed to be, holders of a separate class of shares
for any purpose whatsoever.
52. Variation of rights and alteration of share capital
(1) Subject to the provisions of Sections 42 and 43 of the Act any
preference shares may be issued or converted into shares that, at a determinable
date or at the option of the Company, are liable to be redeemed on such terms
and in such manner as the Company before the issue or conversion may by
resolution of the Members determine.
(2) If at any time the share capital is divided into different
classes of shares, the rights attached to any class (unless otherwise provided
by the terms of issue of the shares of that class) may, whether or not the
Company is being wound-up, be varied with the consent in writing of the holders
of three-fourths of the issued shares of that class or with the sanction of a
resolution passed by a majority of the votes cast at a separate general meeting
of the holders of the shares of the class in accordance with Section 47(7) of
the Act.
(3) The Company may from time to time by resolution of the Members
change the currency denomination of, increase, alter or reduce its share capital
in accordance with the provisions of Sections 45 and 46 of the Act. Where, on
any alteration of share capital, fractions of shares or some other difficulty
would arise, the Board may deal with or resolve the same in such manner as it
thinks fit including, without limiting the generality of the foregoing, the
issue to Members, as appropriate, of fractions of shares and/or arranging for
the sale or transfer of the fractions of shares of Members.
53. Registered holder of shares
(1) The Company shall be entitled to treat the registered holder
of any share as the absolute owner thereof and accordingly shall not be bound to
recognize any equitable or other claim to, or interest in, such share on the
part of any other Person.
(2) Any dividend, distribution, interest or other moneys payable
in cash in respect of shares may be paid by cheque or draft made payable to such
Member as such Member's name appears in the Register of Members (in the case of
joint holders, made payable jointly to such joint holders as their names appear
in the Register of Members) sent by first class mail, postage prepaid, directed
to the Member at such Member's address in the Register of Members or to such
Person and to such address as the Member may in writing direct. If two or more
Persons are registered as joint holders of any shares any one can give an
effectual receipt for any dividend paid in respect of such shares.
54. Death of a joint holder
Where two or more Persons are registered as joint holders of a share
or shares under a tenancy in which the estate of a deceased holder does not
retain an interest in the share or shares, then in the event of the death of any
joint holder or holders the remaining joint holder or holders shall be
absolutely entitled to the said share or shares and the Company shall recognize
no claim in respect of the estate of any joint holder except in the case of the
last survivor of such joint holders.
55. Share certificates
(1) Every Member shall be entitled to a certificate under the seal
of the Company (or a facsimile thereof) specifying the number and, where
appropriate, the class of shares held by such Member and whether the same are
fully paid up and, if not, how much has been paid thereon. The Board may by
resolution determine, either generally or in a particular case, that any or all
signatures on certificates may be printed thereon or affixed by mechanical means
and that a facsimile of the seal of the Company be placed thereon.
(2) The Company shall be under no obligation to complete and
deliver a share certificate unless specifically called upon to do so by the
Person to whom such shares have been allotted.
(3) If any such certificate shall be proved to the satisfaction of
the Company to have been worn out, lost, mislaid or destroyed the Company may
cause a new certificate to be issued and request an indemnity for the lost
certificate if it sees fit.
56. Calls on shares
(1) The Board may from time to time make such calls as it thinks
fit upon the Members in respect of any monies unpaid on the shares allotted to
or held by such Members and, if a call is not paid on or before the day
appointed for payment thereof, the Member may at the discretion of the Board be
liable to pay the Company interest on the amount of such call at such rate as
the Board may determine, from the date when such call was payable up to the
actual date of payment. The joint holders of a share shall be jointly and
severally liable to pay all calls in respect thereof.
(2) The Board may, on the issue of shares, differentiate between
the holders as to the amount of calls to be paid and the times of payment of
such calls.
57. Forfeiture of shares
(1) If any Member fails to pay, on the day appointed for payment
thereof, any call in respect of moneys unpaid on any share allotted to or held
by such Member, the Board may, at any time thereafter during such time as the
call remains unpaid, direct the Secretary or the Assistant Secretary to forward
to such Member a notice in the form, or as near thereto as circumstances admit,
of Form "A" in the Schedule hereto.
(2) If the requirements of such notice are not complied with, any
such share may at any time thereafter before the payment of such call and the
interest due in respect thereof be forfeited by a resolution of the Board to
that effect, and such share shall thereupon become the property of the Company
and may be disposed of as the Board shall determine.
(3) A Member whose share or shares have been forfeited as
aforesaid shall, notwithstanding such forfeiture, be liable to pay to the
Company all calls owing on such share or shares at the time of the forfeiture
and all interest due thereon.
REGISTER OF MEMBERS
58. Register of Members
(1) The Board shall cause to be kept in one or more books a
Register of Members andshall enter therein the following particulars:-
(a) the name and address of each Member, the number and, where
appropriate, the class of shares held by such Member and the
amount paid or agreed to be considered as paid on such shares;
(b) the date on which each Person was entered in the Register of
Members; and
(c) the date on which any Person ceased to be a Member for one
year after such Person so ceased.
(2) Subject to the provisions of the Act, if the Board considers
it necessary or appropriate, the Company may establish and maintain a local or
branch register at such location or locations outside Bermuda as the Board
thinks fit and, while the issued share capital of the Company is, with the
consent of the Board, listed on any stock exchange, or quoted on any interdealer
quotation system, the Company shall keep a branch register in any place required
by the rules of such stock exchange or interdealer quotation system.
(3) The Board may, in its absolute discretion, at any time and
from time to time transfer any share upon the principal Register of Members
maintained at the registered office of the Company to any local or branch
register or any share on any local or branch register to the principal Register
of Members or any other local or branch register. Unless the Board otherwise
agrees (which agreement may be on such terms and subject to such conditions as
the Board in its absolute discretion may from time to time stipulate, and which
agreement it shall, without giving any reason therefor, be entitled in its
absolute discretion to give or withhold) no shares on the principal Register of
Members shall be transferred to any local or branch register nor shall shares on
any local or branch register be transferred to the principal Register of Members
or any other local or branch register and all transfers and other documents of
title shall be lodged for registration, and registered, in the case of any
shares on a local or branch register, at such local or branch register, and, in
the case of any shares on the principal Register of Members, at the registered
office of the Company.
59. Inspection of Register of Members
The Register of Members shall be open to inspection at the registered
office of the Company on every business day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
business day be allowed for inspection. The Register of Members may, after
notice has been given by advertisement in an appointed newspaper to that effect,
be closed for any time or times not exceeding in the whole thirty days in each
year.
60. Determination of record dates
Notwithstanding any other provision of these Bye-laws, the Board may
fix any date as the record date for:-
(a) determining the Members entitled to receive any dividend or
other distribution or allotment of any rights or the Members
entitled to exercise any rights in respect of any change,
conversion or exchange of shares, or for any other lawful
action not expressly addressed in this Bye-law 60;
(b) determining the Members entitled to receive notice of and to
vote at any general meeting of the Company; and
(c) determining the Members entitled to receive notice of and to
consent to any action by written resolution without a general
meeting of the Company.
TRANSFER OF SHARES
61. Instrument of transfer
(1) An instrument of transfer shall be in the usual common form or
any other form which the Board may approve. Such instrument of transfer shall be
signed by or on behalf of the transferor and transferee provided that, in the
case of a fully paid share, the Board may accept the instrument signed by or on
behalf of the transferor alone. The transferor shall be deemed to remain the
holder of such share until the same has been transferred to the transferee in
the Register of Members.
(2) The Board may refuse to recognize any instrument of transfer
unless it is accompanied by the certificate in respect of the shares to which it
relates and by such other evidence as the Board may reasonably require to show
the right of the transferor to make the transfer.
62. Transfer of Shares
(1) Subject to the restrictions contained in these Bye-laws as may
be applicable, the Act, such laws or regulations as may govern the transfer of
shares of the Company, including, without limitation, the United States
Securities Act of 1933, as amended, and the United States Securities Exchange
Act of 1934, as amended, or any agreement between any Member and the Company,
any Member may transfer all or any of his shares.
(2) The Board may, in its absolute discretion and without
assigning any reason therefor, decline to register any transfer of any share
which is not a fully-paid share.
(3) The Board may refuse to register any transfer if all
applicable consents, authorisations and permissions of any governmental body or
agency in Bermuda have not been obtained.
(4) If the Board refuses to register a transfer of any share the
Secretary or the Assistant Secretary shall, within three months after the date
on which the transfer was lodged with the Company, send to the transferor and
transferee notice of the refusal.
63. Transfers by joint holders
The joint holders of any share or shares may transfer such share or
shares to one or more of such joint holders, and the surviving holder or holders
of any share or shares previously held by them jointly with a deceased Member
may transfer any such share to the executors or administrators of such deceased
Member.
TRANSMISSION OF SHARES
64. Representative of deceased Member
In the case of the death of a Member, the survivor or survivors where
the deceased Member was a joint holder, and the legal personal representative of
the deceased Member where the deceased Member was a sole holder or a joint
holder under a tenancy in which the estate of the deceased holder retains an
interest in the shares, shall be the only Persons recognized by the Company as
having any title to the deceased Member's interest in the shares. Nothing herein
contained shall release the estate of a deceased joint holder from any liability
in respect of any share which had been jointly held by such deceased Member with
other Persons. Subject to the provisions of Section 52 of the Act, for the
purpose of this Bye-law, legal personal representative means the executor or
administrator of a deceased Member or such other Person as the Board may in its
absolute discretion decide as being properly authorised to deal with the shares
of a deceased Member.
65. Registration on death or bankruptcy
Any Person becoming entitled to a share in consequence of the death
or bankruptcy of any Member may be registered as a Member upon such evidence as
the Board may deem sufficient or may elect to nominate some Person to be
registered as a transferee of such share, and in such case the Person becoming
entitled shall execute in favour of such nominee an instrument of transfer in
the usual common form or any other form which the Board may approve. On the
presentation thereof to the Company, accompanied by such evidence as the Company
may require to prove the title of the transferor, the transferee shall be
registered as a Member but the Company shall, in either case, have the same
right to decline or suspend registration as it would have had in the case of a
transfer of the share by that Member before such Member's death or bankruptcy,
as the case may be.
DIVIDENDS AND OTHER DISTRIBUTIONS
66. Declaration of dividends by the Board
The Board may, subject to these Bye-laws and in accordance with
Section 54 of the Act, declare a dividend to be paid to the Members, in
proportion to the number of shares held by them, and such dividend may be paid
in cash or wholly or partly in other assets in which case the Board may fix the
value for distribution of any assets.
67. Other distributions
The Board may declare and make such other distributions (in cash or
in other assets) to the Members as may be lawfully made out of the assets of the
Company.
68. Reserve fund
The Board may from time to time before declaring a dividend set
aside, out of the surplus or profits of the Company, such sum as it thinks
proper as a reserve fund to be used to meet contingencies or for equalizing
dividends or for any other special purpose.
69. Deduction of amounts due to the Company
The Board may deduct from the dividends or distributions payable to
any Member all monies due from such Member to the Company on account of calls or
otherwise.
CAPITALIZATION
70. Issue of bonus shares
(1) The Board may resolve to capitalise any part of the amount for
the time being standing to the credit of any of the Company's share premium or
other reserve accounts or to the credit of the profit and loss account or
otherwise available for distribution by applying such sum in paying up unissued
shares to be allotted as fully paid bonus shares pro rata to the Members.
(2) The Company may capitalise any sum standing to the credit of a
reserve account or sums otherwise available for dividend or distribution by
applying such amounts in paying up in full partly paid shares of those Members
who would have been entitled to such sums if they were distributed by way of
dividend or distribution.
ACCOUNTS AND FINANCIAL STATEMENTS
71. Records of account
(1) The Board shall cause to be kept proper records of account
with respect to all transactions of the Company and in particular with respect
to:-
(a) all sums of money received and expended by the Company and the
matters in respect of which the receipt and expenditure
relates;
(b) all sales and purchases of goods by the Company; and
(c) the assets and liabilities of the Company.
Such records of account shall be kept at the registered office of the Company
or, subject to Section 83(2) of the Act, at such other place as the Board thinks
fit and shall be available for inspection by the Directors during normal
business hours, PROVIDED THAT if the records of account are kept at some place
outside Bermuda, there shall be kept at an office of the Company in Bermuda such
records as will enable the Directors to ascertain with reasonable accuracy the
financial position of the Company at the end of each three month period. No
Member (other than an Officer or Director of the Company) shall have any right
to inspect any accounting record or book or document of the Company except as
conferred by law or authorised by the Board or the Company in general meeting.
(2) No Member (not being a Director) shall be entitled to require
discovery of or any information respecting any detail of the Company's trading
or any matter which is or may be in the nature of a trade secret, mystery of
trade or secret process which may relate to the conduct of the business of the
Company which in the opinion of the Board it will be inexpedient in the
interests of the Members or the Company to communicate to the public.
72. Financial year end
The financial year end of the Company may be determined by resolution
of the Board and failing such resolution shall be 30th November in each year.
73. Financial statements
Subject to any rights to waive laying of accounts pursuant to Section
88 of the Act, financial statements as required by the Act shall be laid before
the Members in general meeting.
AUDIT
74. Appointment of Auditor
Subject to Section 88 of the Act, at the annual general meeting or at
a subsequent special general meeting in each year, an independent representative
of the Members shall be appointed by them as Auditor of the accounts of the
Company. Such Auditor may be a Member but no Director, Officer or employee of
the Company shall, during his or her continuance in office, be eligible to act
as an Auditor of the Company.
75. Remuneration of Auditor
The remuneration of the Auditor shall be fixed by the Board or in
such other manner as the Members may determine.
76. Vacation of office of Auditor
If the office of Auditor becomes vacant by the resignation or death
of the Auditor, or by the Auditor becoming incapable of acting by reason of
illness or other disability at a time when the Auditor's services are required,
the Board shall, as soon as practicable, convene a special general meeting to
fill the vacancy thereby created.
77. Access to books of the Company
The Auditor shall at all reasonable times have access to all books
kept by the Company and to all accounts and vouchers relating thereto, and the
Auditor may call on the Directors or Officers of the Company for any information
in their possession relating to the books or affairs of the Company.
78. Report of the Auditor
(1) Subject to any rights to waive laying of accounts or
appointment of an Auditor pursuant to Section 88 of the Act, the accounts of the
Company shall be audited at least once in every year.
(2) The financial statements provided for by these Bye-laws shall
be audited by the Auditor in accordance with generally accepted auditing
standards. The Auditor shall make a written report thereon in accordance with
generally accepted auditing standards and the report of the Auditor shall be
submitted to the Members in general meeting.
(3) The generally accepted auditing standards referred to in
subparagraph (2) of this Bye-law shall be those of the United States of America
or of Bermuda or of another country or jurisdiction other than Bermuda. If such
standards are not those of Bermuda, the financial statements and the report of
the Auditor must disclose this fact and name such country or jurisdiction.
NOTICES
79. Notices to Members of the Company
A notice may be given by the Company to any Member either by
delivering it to such Member in person or by sending it to such Member's address
in the Register of Members or to such other address given by such Member for the
purpose. For the purposes of this Bye-law, a notice may be sent by first class
mail, courier service, cable, telex, telecopier, facsimile or other mode of
representing words in a legible and non-transitory form.
80. Notices to joint holders
Any notice required to be given to a Member shall, with respect to
any shares held jointly by two or more Persons, be given to such Persons jointly
in the names and to the address of such Member in the Register of Members.
81. Service and delivery of notice
(1) Any notice shall be deemed to have been served at the time
when the same is mailed, delivered to the courier or to the cable company or
transmitted by telex, facsimile or other method as the case may be, and, in
proving such service, it shall be sufficient to prove that the notice was
properly addressed and prepaid, if mailed, and the time when it was mailed,
delivered to the courier or to the cable company or transmitted by telex,
facsimile or other method as the case may be.
(2) In computing the period of time required in connection with
any notice given hereunder, the day upon which such notice is given shall be the
first day of such period.
SEAL OF THE COMPANY
82. The seal
The seal of the Company shall be in such form as the Board may from
time to time determine. The Board may adopt one or more duplicate seals for use
outside Bermuda and may authorise the use of a facsimile seal on certificates
for the Company's shares or other securities.
83. Manner in which seal is to be affixed
The seal of the Company shall not be affixed to any instrument except
attested by the signature of a Director and either the Secretary or the
Assistant Secretary, or by the signature of any two Directors, or by the
signature of any one or more other Persons authorised by the Board for the
purpose, provided that any Director, or Officer, may affix the seal of the
Company attested by such Director or Officer's signature only to any
authenticated copies of these Bye-laws, the incorporating documents of the
Company, the minutes of any meetings or any other documents required to be
authenticated by such Director or Officer. Signatures attesting the seal on
certificates for the Company's shares or other securities may be printed thereon
or affixed by mechanical means.
WINDING-UP
84. Winding-up/distribution by liquidator
If the Company shall be wound up, the liquidator may, with the
sanction of a resolution of the Members, divide amongst the Members in cash or
in other assets the whole or any part of the assets of the Company (whether they
shall consist of property of the same kind or not) and may, for such purpose,
set such value as he or she deems fair upon any property to be divided as
aforesaid and may determine how such division shall be carried out as between
the Members or different classes of Members. The liquidator may, with the like
sanction, vest the whole or any part of such assets in trustees upon such trusts
for the benefit of the Members as the liquidator shall think fit, but so that no
Member shall be compelled to accept any shares or other securities or assets
whereon there is any liability.
ALTERATION OF BYE-LAWS
85. Alteration of Bye-laws
No Bye-law shall be rescinded, altered or amended and no new Bye-law
shall be made until the same has been approved by a resolution of the Board and
by a resolution of the Members at meetings of the Board and the Members, as the
case may be, for which the notice of meeting contained notice of such proposed
rescission, alteration, amendment or new Bye-law. Any such rescission,
alteration or amendment or making of a new Bye-law shall be approved as provided
in Bye-law 43.
<PAGE>
SCHEDULE - FORM A (Bye-law 57)
- --------------------------------------------------------------------------------
NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL
You have failed to pay the call of [amount of call] made on the .... day of
......, 19.. last, in respect of the [number] share(s) [numbers in figures]
standing in your name in the Register of Members of the Company, on the .... day
of ......., 19.. last, the day appointed for payment of such call. You are
hereby notified that unless you pay such call together with interest thereon at
the rate of ...... per annum computed from the said .... day of ......, 19..
last, on or before the.... day of......, 19.. next at the place of business of
the said Company the share(s) will be liable to be forfeited.
Dated this day of , 19...
[Signature of Secretary or Assistant Secretary]
By order of the Board
Exhibit 25.1
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby severally constitute and appoint Jeffery A.
Safford, William R. Luraschi and Peter K. Ingerman and each of them with full
power to act alone, our true and lawful attorneys and agents to do any and all
acts and things and to execute any and all instruments which they deem necessary
or advisable to enable AES China Generating Co. Ltd., a Bermuda company, to
comply with the Securities Exchange Act of 1934, as amended, in connection with
Section l3 or l5(d) of the Securities Exchange Act of 1934, as amended, the Form
10K Annual Report and any related registration statements, amendments,
post-effective amendments or supplements thereto, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign the name of the Company and the names of the undersigned directors and
officers in the capacities indicated below.
This Power of Attorney may be executed in counterparts, which together
shall constitute one and the same instrument.
Signature Title Date
/s/ Roger W. Sant Chairman of the Board and February 27, 1998
- ---------------------- Director
Roger W. Sant
/s/ Dennis W. Bakke Vice Chairman and February 27, 1998
- ---------------------- Director
Dennis W. Bakke
Vice Chairman and
- ----------------------- Director
Robert F. Hemphill, Jr.
/s/ Paul Hanrahan President and Chief February 27, 1998
- ---------------------- Executive Officer
Paul Hanrahan
/s/ Kitty, Fung Kin Ye Group Finance Director February 27, 1998
- ----------------------
Kitty, Fung Kin Ye
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 58,576
<SECURITIES> 35,324
<RECEIVABLES> 2,498
<ALLOWANCES> 0
<INVENTORY> 2,496
<CURRENT-ASSETS> 133,287
<PP&E> 263,355
<DEPRECIATION> 8,514
<TOTAL-ASSETS> 512,798
<CURRENT-LIABILITIES> 52,409
<BONDS> 217,806
0
0
<COMMON> 12
<OTHER-SE> 198,293
<TOTAL-LIABILITY-AND-EQUITY> 512,798
<SALES> 18,703
<TOTAL-REVENUES> 18,703
<CGS> 13,480
<TOTAL-COSTS> 13,480
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,397
<INCOME-PRETAX> 9,276
<INCOME-TAX> 398
<INCOME-CONTINUING> 9,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,470
<EPS-PRIMARY> 789.17
<EPS-DILUTED> 789.17
</TABLE>
Exhibit 99.1
AES CHINA GENERATING CO. LTD.
STATEMENT RE: COMPUTATION OF FIXED CHARGE COVERAGE RATIO
(in thousands except ratio amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended November 30,
------------------------------------------------
1997 1996 1995
---------- ---------- -------
Adjusted Cash Flow
(A) Cash Inflow:
(i) Dividend, distribution, payment of interest and
scheduled repayment of loan received by the Company
and its Wholly Owned Subsidiaries from the Project
Companies $ 5,168 $ 2,420 $ -
(ii) 50% of the combined interest income of the Company
and its Wholly Owned Subsidiaries from cash, cash
equivalents and investments in marketable securities 3,960 2,751 5,090
-------- -------- -------
9,128 5,171 5,090
-------- -------- -------
(B) Cash Outflow:
(i) Selling, general and administrative expenses of the
Company and its Wholly Owned Subsidiaries 1,352 994 1,779
(ii) Company Designated Costs 6,046 10,312 9,880
-------- -------- -------
7,398 11,306 11,659
-------- -------- -------
$ 1,730 $ (6,135) $ (6,569)
=========== =========== =========
Adjusted Interest Expenses $ 17,849 - -
=========== =========== =========
Fixed Charge Coverage Ratio 0.1:1.0 - -
=========== =========== =========
</TABLE>
Exhibit 99.2
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
47 people in the PRC with 25 people in Beijing and 22 people
in other parts of the country. The Company's principal office
is in Beijing. The Company also maintains an office in Hong
Kong with 22 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 national government of the PRC and its
various ministries, agencies and commissions ("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 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.
In a number of cases, AES Chigen'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.
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.
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. AES
Chigen'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. The
term "dispatch" refers to the schedule of production for all
the generating units on a power system, which generally varies
from moment to moment to match production with demand. As a
verb, "dispatch" means to direct a plant to run.
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
companies that own the power plants. The Company typically
exerts its influence through directors appointed to the board
of directors of the project companies and by appointing either
the general manager of the power plants and/or a deputy
general manager in charge of finance or operations for the
power plants. 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.
Principles and Practices
A core part of the AES Chigen culture is a commitment to
"shared principles." The Company tries to adhere to these principles -- even
though doing so might result in diminished or foregone opportunities.
These principles are:
Integrity - The Company will strive to act with integrity, or
"wholeness." The Company will seek 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
the 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 the Company
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 minimum number of kilowatt
hours ("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.
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.
AES Chigen'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 AES Chigen 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, AES Chigen'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. AES Chigen 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 AES Chigen'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 AES Chigen's Joint
Ventures.
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 of the Central Government ("State Planning
Commission" or "SPC"), which is required for larger projects,
ordinarily includes a provision for the allocation of fuel,
which reduces the fuel supply risk for such projects.
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 AES Chigen's
Joint Ventures may not be able to receive compensation for
increased fuel costs until sometime after the date they are
incurred.
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.
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, AES Chigen'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.
Electricity Transmission. The Chinese electric power
transmission system is not fully interconnected. Some parts of
the transmission system contain isolated grids. Three of AES
Chigen's Joint Ventures are located in areas served by
isolated transmission grids. As a result, if demand in these
areas is less than forecasted, it may be difficult or
impossible for the affected Joint Venture to transmit the
project's available power to a region which has a demand for
it. 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 electric power 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.
In order to take advantage of a broader market and an
additional power purchaser, one of the 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.
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 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 Yuan, the lawful currency of the PRC
("Renminbi," and "RMB(Y)"), 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.
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.
AES Chigen 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, AES Chigen'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, AES Chigen may affect the operation
of a power plant through the appointment of a general manager
and/or deputy general manager of the plant.
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 Guarantee 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.
In all of its projects, AES Chigen 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 AES Chigen or its Joint Ventures.
While AES Chigen 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, AES Chigen, in assessing the
reliability and credit standing of counterparties, is relying on financial or
other information provided to AES Chigen or its Joint Ventures by such parties
or others, or from information and sources publicly available in the PRC. AES
Chigen 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 fulfill its obligations to a Joint Venture could have
a substantial negative impact on such Joint Venture's operations.
The People's Republic of China
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.
General
Since 1978, the Central Government and local governments of
China (together with the Central Government, the "PRC Government") have 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. Enterprises owned or under the administrative control of the
Central Government ("State-owned") 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 was 9.7%.
General economic conditions in the PRC could have a
significant impact on the business prospects of AES Chigen. 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
AES Chigen 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.
AES Chigen 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 6.1% for 1996, there can be no assurance that
such austerity measures will will not be discontinued 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 honor their obligations under their power purchase
contracts, which could adversely affect AES Chigen.
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 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.
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 dispute.
Even where adequate laws exist and contractual terms are clearly stated, there
can be no assurance that AES Chigen or a Joint Venture will obtain swift and
equitable enforcement of its rights.
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 terawatt (one million megawatts) hours ("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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1994 1994
Per Capita Per Capita Per Capita
Installed Electricity GDP --
Capacity(1) Consumption(1) Nominal Real GDP Growth Rate% (3)
--------------------------------------------------------------
(Watts) (kWh) US$(2) 1991 1992 1993 1994 1995 1996
-------------- -------------- ----------- ---- ---- ---- ---- ---- ----
(projected)
- --------------
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 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 Gross Domestic Product ("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>
<S> <C> <C> <C> <C>
Increase in Increase in
Installed Installed Electricity Electricity
Capacity Capacity Generation Generation
Year (MW) (MW) (TWh) (%)
------------------- ---------- ----------- ----------- -------------
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 ("MOEP"
or 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
"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%.
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 ten 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 ten 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 Electric Power.
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.
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 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 of the PRC (the "State Council"), the highest
administrative organ of the Central Government, 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 ("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. 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 "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 plans devised and
implemented by the PRC Government in relation to the economic and social
development of the PRC ("State Plan"). The tariff varies according to the
category and location of the users. 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,
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 tariffs, 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>
<S> <C> <C>
1994 1994
Installed Total Electricity
Capacity Generation
Power Grids (MW) (TWh)
--------------------------- --------- ------------------
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 kilovolts ("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
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.
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.
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.
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 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 local branch of
the State Administration of Foreign Exchange of the Central Government ("State
Administration of Foreign Exchange" or "SAFE") 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 The Ministry of Foreign Trade and Economic Cooperation of the
Central Government ("Ministry of Foreign Trade and Economic Cooperation or
"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 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.
Two of AES Chigen'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, AES Chigen'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 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.
In addition to such project and foreign investment approvals,
the tariffs 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. The tariff
formulas contained in the power purchase contracts entered into by AES Chigen'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 AES Chigen 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. 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 AES Chigen's Joint
Ventures have adopted.
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.
The PRC is a party to the Climate Change Convention ("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. If the PRC were to agree to such ceilings, or otherwise reduce
its reliance on coal-fired power plants, the business prospects of AES Chigen
could be adversely affected. 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.
AES Chigen'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.
Inasmuch as the Joint Ventures' electric power plants currently under
construction are typically among the most modern in the areas in which they are
located, AES Chigen 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.
