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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-19281
THE AES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 54-1163725
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1001 NORTH 19TH STREET, ARLINGTON, VIRGINIA 22209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 522-1315
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.01 per share New York Stock Exchange
$2.6875 Term Convertible Securities, Series A New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Warrants to Purchase Common Stock,
par value $.01 per share NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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.
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The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at March 2, 2000, was $13,584,103,262. The
number of shares outstanding of Registrant's Common Stock, par value $0.01
per share, at March 2, 2000, was 207,234,949.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 18, 2000 is hereby incorporated by reference.
Certain information therein is incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS.
OVERVIEW
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are a global power company committed to serving the
world's needs for electricity in a socially responsible way. AES's electricity
"generation" business consists of sales to wholesale customers (generally
electric utilities, regional electric companies or wholesale commodity markets
known as "power pools") for further resale to end users. AES also sells
electricity directly to end users such as commercial, industrial, governmental
and residential customers through its "distribution" business.
In its generation business, AES now operates and owns (entirely or in
part) a diverse portfolio of electric power plants (including those within the
integrated distribution companies discussed below) with a total capacity of
36,675 megawatts (MW). Of that total, 33% are fueled by coal or petroleum coke,
18% are fueled by natural gas, 15% are hydroelectric facilities, 4% are fueled
by oil, and the remaining 30% are capable of using multiple fossil fuels. Of the
total MW, 7,606 (eighteen plants) are located in the United States, 754 (seven
plants) are in China, 1,281 (three plants) are in Hungary, 9,106 (fifty-one
plants) are in Brazil, 5,763 (six plants) are in the UK, 885 (six plants) are in
Argentina, 7,909 (seven plants) are in Kazakhstan (including 4,000 MW
attributable to Ekibastuz which currently has a reliable capacity of
approximately 22%), 210 (one plant) are in the Dominican Republic, 110 (one
plant) are in Canada, 695 (two plants) are in Pakistan, 405 (one plant) are in
the Netherlands, 1,254 (three plants) are in Australia, 420 (one plant) are in
India, 277 (four plants) are in Panama.
AES has majority ownership in three distribution companies in Argentina
and individual distribution companies in the United States, Brazil, El Salvador,
Dominican Republic, and The Republic of Georgia. The Company also has assumed
management control of a heat and electricity distribution business in
Kazakhstan. In addition the Company has less than majority ownership in three
additional distribution companies in Brazil and one in India. These distribution
companies serve a total of over 15 million customers with annual sales exceeding
109,000 gigawatt hours. On a net equity basis, AES's ownership represents
approximately 5.4 million customers and annual sales exceeding over 24,000
gigawatt hours. The Company also has three subsidiaries in the United States
that serve retail customers in those states that have introduced a competitive
market for the sale of electricity to end users.
AES is also currently in the process of adding approximately 6,646 MW
to its operating portfolio through its construction of new plants (known as
"greenfield" development). These include a 454 MW natural gas-fired plant, a 705
MW natural gas-fired plant, and a 180 MW coal-fired plant in the United States,
a 600 MW natural gas-
fired plant in Brazil, a 2,100 MW coal-fired plant in China, an 830 MW
natural gas-fired plant and a 123 MW hydroelectric facility in Argentina, a
refurbished 360 MW coal-fired plant in England, two natural gas fired plants
totaling 810 MW in Bangladesh and a 484 MW natural gas-fired plant in Mexico.
In addition, a Brazilian subsidiary, Eletronet, is in the process of
constructing a national broadband telecommunications network attached to the
existing national transmission grid in Brazil.
As a result, AES's total MW of the 122 power plants in operation or
under construction is approximately 43,321 MW and net equity ownership (total
MW adjusted for the Company's ownership percentage) represents approximately
31,751 MW.
AES considers continually acquisition opportunities, including
significant acquisition opportunities throughout the world. The Company has
been actively involved in the acquisition and operation of electricity assets
in countries that are restructuring and deregulating the electricity
industry. Some of these acquisitions have been made from other electricity
companies that are exiting the electricity generation business. In these
situations, sellers generally seek to complete competitive solicitations in
less than one year, which is much faster than the time incurred to complete
greenfield developments, and require payment in full on transfer. The Company
also actively considers acquisition opportunities in non-competitive bidding
situations, including unsolicited acquisition proposals. AES believes that
its experience in competitive markets and its worldwide integrated group
structure (with its significant geographic coverage and presence) enable it
to react quickly and creatively in such situations.
The Company, a corporation organized under the laws of Delaware, was
formed in 1981. AES has its principal offices located at 1001 North 19th
Street, Suite 2000, Arlington, Virginia 22209. Its telephone number is (703)
522-1315, and its web address is http://www.aesc.com.
CAUTIONARY STATEMENTS AND RISK FACTORS
The Company wishes to caution readers that the following important
factors, among others, indicate areas affecting the Company which involve
risk and uncertainty. These factors should be considered when reviewing the
Company's business, and are relied upon by AES in issuing any forward-looking
statements. Such factors could affect AES's actual results and cause such
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, AES. Some or all of these factors may
apply to the Company's businesses as currently maintained or to be maintained.
- Changes in company-wide operation and availability of the plants
(including wholly and partially owned facilities) compared to the
Company's historical performance; changes in the Company's
historical operating cost structure, including but not
limited to those costs associated with fuel, operations, supplies,
raw materials, maintenance and repair, people, purchase and
transmission of electricity and insurance.
- In certain non-U.S. countries where the Company is or is seeking to
conduct business: unexpected changes (or lack thereof) in
electricity tariff rates or tariff adjustments for increased
expenses; the ability or inability of AES to obtain, or hedge
against, foreign currency; foreign exchange rates and fluctuations
in those rates; the economic, political and military conditions
affecting property damage, interruption of business and
expropriation risks; changes in trade, monetary and fiscal
policies, laws and regulations; other activities of governments,
agencies and similar organizations; social and economic conditions;
local inflation and monetary fluctuations; import and other charges
or taxes; conditions or restrictions impairing repatriation of
earnings or other cash flow; nationalizations and unstable
governments and legal systems, and intergovernmental disputes.
- In certain jurisdictions where the Company's electricity tariffs
are subject to regulatory review or approval, changes in the
application or interpretation of regulatory provisions including,
but not limited to, changes in the determination, definition or
classification of costs to be included as reimbursable or pass
through costs, changes in the definition or determination of
controllable or non-controllable costs, changes in the definition
of events which may or may not qualify as changes in economic
equilibrium, changes in the timing of tariff increases or other
changes in the regulatory determinations under the relevant
concessions, state or federal regulatory provisions.
- Changes in the amount of, and rate of growth in, AES's selling,
general and administrative expenses; the impact of AES's ongoing
evaluation of its development costs, business strategies and asset
valuations, including, but not limited to, the effect of a failure to
successfully complete certain development projects.
- The inability to raise capital on favorable terms to refinance
existing short-term project indebtedness or to fund future
acquisitions and other capital commitments.
- Legislation intended to promote competition in U.S. and non-U.S.
electricity markets, such as: (i) The New Energy Trading
Arrangements (NETA) currently proposed in the United Kingdom to
replace the current electricity pool structure; (ii) legislation
currently receiving serious consideration in the United States
Congress to repeal (a) the Public Utility Regulatory Policies Act
of 1978, as amended, or at least to repeal the obligation of
utilities to purchase electricity from qualifying facilities, and
(b) the Public Utility Holding Company Act of 1935, as amended;
(iii) changes in regulatory rule-making by the Federal Energy
Regulatory Commission or other regulatory bodies; (iv) changes in
energy taxes; (v) new legislative or regulatory initiatives in
non-U.S. countries; (vi) changes in national, state or local
energy, environmental, safety, tax and other laws and regulations
applicable to the Company or its operations.
- The prolonged failure by any customer of the Company or any of its
subsidiaries to fulfill its contractual payment obligations presently
or in the future, either because such customer is financially unable
to fulfill such contractual obligation or otherwise refuses to do so.
- Successful and timely completion of (i) the respective construction
for each of the Company's electric generating projects now under
construction and those projects yet-to-begin construction or (ii)
capital improvements to its existing facilities.
- Changes in inflation, fuel, electricity and other commodity prices in
U.S. and non-U.S. markets; conditions in financial markets, including
fluctuations in interest rates and the availability of capital; and
changes in the economic and electricity consumption growth rates in
U.S. and non-U.S. countries.
- Adverse weather conditions and the specific needs of each plant to
perform unanticipated facility maintenance or repairs or outages
(including annual or multi-year).
- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims (including
insurance claims for losses suffered), and changes in those items,
developments or assertions by or against AES; the effect of new, or
changes in, accounting policies and practices and the application
of such policies and practices.
- Changes or increases in taxes on property, plant, equipment,
emissions, gross receipts, income or other aspects of the Company's
business or operations.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company operates in two business segments: generation and
distribution. See Note 15 to the Consolidated Financial Statements included
in Item 8 herein for financial information about those segments.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company attempts to participate in competitive power markets
through either greenfield development or by acquiring and operating existing
facilities. The Company operates electric generating facilities that utilize
natural gas, coal, oil, hydropower, or combinations thereof. In addition, the
Company participates in the electricity distribution business and will
continue to review opportunities in such markets in the future. Other
elements of the Company's strategy include:
- Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
- Constructing or acquiring projects of a relatively large size;
- When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
- Where possible, participating in distribution and supply markets that
grant concessions with long-term pricing arrangements.
The Company also strives for operating excellence as a key element of
its strategy, which it believes it accomplishes by minimizing organizational
layers and maximizing company-wide participation in decision-making. AES has
attempted to create an operating environment that results in safe, clean and
reliable electricity generation and distribution. Because of this emphasis, the
Company prefers to operate all facilities which it develops or acquires;
however, there can be no assurance that the Company will have operating control
of all of its facilities.
The Company's focus is the wholesale generation and retail distribution
of electricity. References to power sales agreements, fuel supply agreements and
plants generally mean those related to the generation business. Concession (or
service) contracts, supply contracts and networks are generally associated with
the distribution businesses.
Traditionally, most of AES's generation plants have sold electricity
under long-
term power sales agreements to electric utilities or state-owned power
companies. Generated electricity is sold under a two part pricing method,
representing the two main products, capacity and energy, produced by electric
generating facilities. Energy refers to the sale of the actual electricity
produced by the plant and capacity refers to the amount of generation
reserved for a particular customer, irrespective of the amount of energy
actually purchased. Most of the Company's generating businesses (based upon
revenues) are structured so that each power plant generally relies on one
power sales contract with a single electric customer for the majority, if not
all, of its revenues. At some generation plants, all or a portion of the
electricity sales are not sold pursuant to a long-term contract and are sold
into the short-term contract or spot electricity markets. The prices paid for
electricity in the spot markets can be, and from time to time, have been
unpredictable and volatile.
To the extent possible, the Company attempts to structure a
generation plant's fuel supply contract so that fuel costs are indexed in a
manner similar to the energy payments a project receives under the power sales
contract. In this way, project revenues are partially hedged against
fluctuations in fuel costs.
As with fuel prices, AES has hedged a substantial portion of its
projects against the risk of fluctuations in interest rates. In each project
with fixed capacity payments, AES has attempted to hedge all or a significant
portion of its risk of interest rate fluctuations by arranging for fixed-rate
financing or variable-rate financing with interest rate swaps or other hedging
mechanisms. Those projects with fluctuating capacity payments are hedged by
arranging for floating rate financing.
The Company attempts to finance each domestic and foreign project
primarily under loan agreements and related documents which, except as noted
below, require the loans to be repaid solely from the project's revenues and
provide that the repayment of the loans (and interest thereon) is secured
solely by the capital stock, physical assets, contracts and cash flow of that
project subsidiary or affiliate. This type of financing is usually referred
to as "project financing." The lenders under these project financing
structures generally cannot look to AES or its other projects for repayment,
unless such entity explicitly agrees to undertake liability. AES has
explicitly agreed to undertake certain limited obligations and contingent
liabilities, most of which by their terms will only be effective or will be
terminated upon the occurrence of future events. These obligations and
liabilities take the form of guarantees, indemnities, letter of credit
reimbursement agreements, and agreements to pay, in certain circumstances, to
project lenders or other parties. To the extent AES becomes liable under
guarantees and letter of credit reimbursement agreements, distributions
received by AES from other projects are subject to the possibility of being
utilized by AES to satisfy these obligations. To the extent of these
obligations, the lenders to a project effectively have recourse to AES and to
the distributions to AES from other projects. The aggregate contractual
liability of AES is, in each case, usually a small portion of the aggregate
project debt, and thus the project financing structures are generally
described herein as being "substantially non-recourse" to AES and its other
projects.
PRINCIPLES AND PRACTICES
A core part of AES's corporate culture is a commitment to "shared
principles." These principles describe how AES people endeavor to behave,
recognizing that they don't always live up to these standards. The principles
are:
INTEGRITY - AES strives to act with integrity, or "wholeness." The
Company seeks to honor its commitments. The goal is that the things AES
people say and do in all parts of the Company should fit together with
truth and consistency.
FAIRNESS - AES wants to treat fairly its people, its customers, its
suppliers, its stockholders, 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 - AES desires that people employed by the Company and those people
with whom the Company interacts have fun in their work. AES's goal has
been to create and maintain an environment in which each person can
flourish in the use of her or his gifts and skills and thereby enjoy
the time spent at AES.
SOCIAL RESPONSIBILITY - The Company believes that it has a
responsibility to be involved in projects that provide social benefits,
such as lower costs to customers, a high degree of safety and
reliability, increased employment and a cleaner environment.
AES recognizes that most companies have standards and ethics by which
they operate and that business decisions are based, at least in part, on such
principles. The Company believes that an explicit commitment to a particular set
of standards is a useful way to encourage ownership of those values among its
people. While the people at AES acknowledge that they won't always live up to
these standards, they believe that being held accountable to these shared values
will help them behave more consistently with such principles.
AES makes an effort to support these principles in ways that
acknowledge a strong corporate commitment and encourage people to act
accordingly. For example, AES conducts annual surveys, both company-wide and at
each location, designed to measure how well its people are doing in supporting
these principles -- through interactions within the Company and with people
outside the Company. These surveys are perhaps most useful in revealing
failures, and helping to deal with those failures. AES's principles are relevant
because they help explain how AES people approach the Company's business. The
Company seeks to adhere to these principles, not as a means to achieve economic
success but because adherence is a worthwhile goal in and of itself.
In order to create a fun working environment for its people and
implement its strategy of operational excellence, AES has adopted
decentralized organizational principles and practices. For example, AES works
to minimize the number of supervisory layers in its organization. Most of the
Company's plants operate without shift supervisors. The project subsidiaries
are responsible for all major facility-specific business functions, including
financing and capital expenditures. Criteria for hiring new AES people
include a person's willingness to accept responsibility and AES's principles
as well as a person's experience and expertise. The Company has generally
organized itself into multi-skilled teams to develop projects, rather than
forming "staff" groups (such as a human resources department or an
engineering staff) to carry out specialized functions.
AES BUSINESSES
The following tables set forth information regarding the Company's
businesses that are in operation or under construction. For a description of
risk factors and additional factors that may apply to the Company's
businesses, see also the information contained under the caption "Cautionary
Statements and Risk Factors" in Item 1 above, and Item 7, "Discussion and
Analysis of Financial Condition and Results of Operations" herein.
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YEAR OF
ACQUISITION OR APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
FACILITIES IN OPERATION FUEL OPERATIONS (MWS) LOCATION (PERCENT)
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NORTH AMERICA
Deepwater Pet coke 1986 143 Texas, U.S. 100
Beaver Valley Coal 1987 125 Pennsylvania, U.S. 100
Placerita Gas 1989 120 California, U.S. 100
Thames Coal 1990 181 Connecticut, U.S. 100
Shady Point Coal 1991 320 Oklahoma, U.S. 100
Hawaii Coal 1992 180 Hawaii, U.S. 100
Kingston Gas 1997 110 Canada 50
Alamitos Gas 1998 2,083 California, U.S. 100
Redondo Beach Gas 1998 1,310 California, U.S. 100
Huntington Beach Gas 1998 563 California, U.S. 100
Cayuga Coal 1999 306 New York, U.S. 100
Greenidge Coal 1999 161 New York, U.S. 100
Hickling Multiple 1999 85 New York, U.S. 100
Jennison Coal 1999 71 New York, U.S. 100
Somerset Coal 1999 675 New York, U.S. 100
Westover Coal 1999 126 New York, U.S. 100
Warrior Run Coal 1999 180 Maryland, U.S. 100
Duck Creek Coal 1999 366 Illinois, U.S. 100
Edwards Coal 1999 772 Illinois, U.S. 100
Indian Trails Co-Gen Gas 1999 19 Illinois, U.S. 100
LATIN AMERICA
San Nicolas Multiple 1993 650 Argentina 69
Rio Juramento (2 plants) Hydro 1995 112 Argentina 98
San Juan (2 plants) Hydro/Gas 1996 78 Argentina 98
Light (4 plants) Hydro 1996 788 Brazil 18
CEMIG (37 plants) Hydro 1997 5,668 Brazil 9
Los Mina Oil 1997 210 Dominican Republic 100
Quebrada de Ullum Hydro 1998 45 Argentina 100
EGE Bayano (2 plants) Hydro 1999 192 Panama 49
EGE Chiriqui Hydro 1999 90 Panama 49
Tiete (10 plants) Hydro 1999 2650 Brazil 62
ASIA AND THE PACIFIC
Cili Misty Mountain Hydro 1994 26 China 51
Yangchun Sun Spring Oil 1995 15 China 25
Wuhu Grassy Lake Coal 1996 250 China 25
Ekibastuz Coal 1996 4,000 Kazakhstan 100
Chengdu Lotus City Gas 1997 48 China 35
Altai Power (6 plants) Coal/Hydro 1997 3,909 Kazakhstan 100
Hefei Prosperity Lake Oil 1997 115 China 70
Jiaozuo Aluminum Power Coal 1997 250 China 70
Lal Pir Oil 1997 351 Pakistan 90
Pak Gen Oil 1998 344 Pakistan 90
Aixi Heart River Coal 1998 50 China 70
OPGC Thermal 1998 420 India 49
Mt. Stuart Kerosene 1999 288 Australia 100
Yarra Gas 1999 500 Victoria 100
Jeeralong Gas 1999 466 Australia 100
EUROPE
Kilroot (NIGEN) Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN) Coal 1992 120 United Kingdom 47
Medway Gas 1995 688 United Kingdom 25
Borsod Coal 1996 171 Hungary 100
Tisza II Oil/Gas 1996 860 Hungary 100
Tiszapalkonya Coal 1996 250 Hungary 100
Indian Queens Oil 1997 140 United Kingdom 100
Elsta Gas 1998 405 Netherlands 50
Barry Gas 1998 230 United Kingdom 100
Drax Coal 1999 4,065 United Kingdom 100
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TOTALS 36,675
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PROJECTED YEAR OF APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION FACILITIES OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
UNDER CONSTRUCTION FUEL OPERATIONS* (MWS) LOCATION (PERCENT)
- -----------------------------------------------------------------------------------------------------------------
l
Yangcheng Sun City Coal 2000 2,200 China 25
Uruguaiana Gas 2000 600 Brazil 100
Merida III Gas 2000 484 Mexico 55
Fifoots Point Coal 2000 360 U.K. 100
Parana Gas 2001 830 Argentina 67
Haripur Gas 2001 360 Bangladesh 100
Maghnaghat Gas 2001 450 Bangladesh 100
Ironwood Gas 2002 705 Pennsylvania, U.S. 100
Caracoles Hydro 2002 123 Argentina 100
Puerto Rico Coal 2002 454 Puerto Rico, U.S. 100
Warrior Run Coal 2000 180 Maryland, U.S. 100
- ------- --- ---- ----- ---------- ---
TOTALS 6,646
* Dates for commencement of commercial operation are projections only and
may be subject to change.
- --------------------------------------------------------------------------------------------------------------------------
APPROXIMATE NUMBER AES EQUITY
YEAR OF OF APPROXIMATE GEOGRAPHIC INTEREST
DISTRIBUTION FACILITIES ACQUISITION CUSTOMERS SERVED GIGAWATT HOURS LOCATION (PERCENT)
- --------------------------------------------------------------------------------------------------------------------------
Light 1996 2,800,000 19,981 Rio de Janeiro, Brazil 18
EDEN 1997 270,000 3,572 Buenos Aires, Argentina 60
EDES 1997 129,000 1,182 Buenos Aires, Argentina 60
CEMIG 1997 4,680,000 32,179 Minas Gerais, Brazil 9
Tau Power/Altai 1997 150,000 2,000 Kazakhstan 70
Sul 1997 900,000 6,500 Rio Grande do Sul, Brazil 96
CLESA 1998 206,000 530 Santa Ana, El Salvador 64
Eletropaulo 1998 4,319,000 34,789 Sao Paulo, Brazil 10
EDELAP 1998 506,000 2,000 Buenos Aires, Argentina 60
Telasi 1998 370,000 2,200 Tbilisi, Georgia 75
CILCO 1999 193,000 6,000 Illinois, U.S. 100
EDE ESTE 1999 400,000 2,990 Dom. Republic 50
East Kazakhstan and Semipalatinsk 1999 470,000 2,572 Kazakstan NA
CESCO 1999 600,000 2,102 India 48
- ----- ---- ------- -------------- ---
TOTALS 15,993,000 118,597
REGULATORY OUTLOOK
In the year 2000, regulation affecting AES's electricity generation
and distribution businesses worldwide remains in transition: generally the
trend is towards more competition and less regulation, but both the timing of
the transition and the regulatory rules vary greatly amount countries and
regimes.
The United States is a good example of this regulatory "patchwork
quilt." In the last 5 years, several states have passed legislation that
allows electricity customers to choose their electricity supplier in a
competitive electricity market (so-called "retail access" or "customer
choice" laws), and all but two of the remaining states are considering such
legislation. While such "customer choice" plans differ in detail, they
usually share important elements: (1) they allow customers to choose their
electricity suppliers by a certain date (the dates in the existing or
proposed legislation vary between 1998 and 2003); (2) they allow utilities to
recover so-called "stranded costs"--the remaining costs of uneconomic
generating or regulatory assets; and (3) they reaffirm the validity of
existing Qualifying Facility ("QF") contracts, and make provisions to assure
payment over the contract life.
In addition to state restructuring legislation, some members of
Congress have proposed new Federal legislation to encourage customer choice
and recovery of stranded assets. Some argue that Federal legislation is
needed to avoid the "patchwork" effect of each state acting separately to
pass restructuring legislation; others argue that each state should decide
whether to allow retail choice. Several bills have been (and others are
expected to be) submitted to Congress on electricity restructuring. Currently
most of these bills focus on competitive wholesale markets; retail
legislation is currently being left to the states to decide. While it is
uncertain whether or when any Federal legislation dealing with electricity
restructuring might be passed, it is the opinion of the Company that such
legislation would not have a materially adverse effect on the Company's U.S.
business.
In anticipation of restructuring legislation, many U.S. utilities
are seeking ways to lower their costs in order to become more competitive.
These include the costs that utilities are required to pay under QF
contracts, which the utilities may view as excessive when compared to current
market prices. Many utilities are therefore seeking ways to lower these
contract prices by renegotiating the contracts, or in some cases by
litigation. In 1999 AES renegotiated contracts for two of its "QFs"--Thames
(a partial prepayment) and Placerita (a complete buyout). Completion of the
Thames transaction is currently subject to approval by the Connecticut
Department of Public Utilities Commission, among other things.
Despite the recent movement toward electricity restructuring,
electricity markets in the United States are still heavily regulated. United
States laws and regulations still govern to some extent wholesale electricity
transactions, the type of fuel utilized, the
type of energy produced, and power plant ownership. State regulatory
commissions have jurisdiction over retail electricity transactions. United
States power projects also are subject to laws and regulations controlling
emissions and other substances produced by a plant and the siting of plants.
These laws and regulations generally require that a wide variety of permits
and other approvals be obtained before the construction or operation of a
power plant commences, and that the facility operate in compliance with these
permits thereafter
In the United States, so-called Qualifying Facilities ("QFs") are
relieved of compliance with extensive federal, state and local regulations by
the provisions of the Public Utility Regulatory Policies Act, as amended
("PURPA"). Some of AES's current domestic plants is a QF. Loss of QF status
would subject these plants to more extensive regulations. The Company
believes, however, that if needed it will be able to react in a manner that
would avoid the loss of QF status.
AES must obtain exemptions from, or become subject to regulation by,
the Securities and Exchange Commission under the Public Utility Holding
Company Act ("PUHCA") in regard to both its domestic and foreign utility
company holdings. There are a number of exemptions from PUHCA that are
available for both domestic and foreign utility company owners, including
those for QFs, Exempt Wholesale Generators and Foreign Utility Companies. In
August 1999, in connection with its acquisition of CILCORP, AES obtained an
order from the U.S. Securities and Exchange Commission approving the
Company's application to be classified as an exempt holding company under
Section 3(a)(5) of PUHCA. AES believes that it will be able to maintain
appropriate PUHCA exemptions both for CILCORP as well as its foreign utility
acquisitions, although no assurances can be given.
In addition, as one of the Company's major non-U.S. markets,
changes in Brazilian regulatory structures will have an impact on the
Company. The electricity industry in Brazil is regulated by the Brazilian
federal government, acting through the Ministry of Mines and Energy, which
has exclusive authority over the electricity sector through regulatory powers
assigned to it. This sector is currently in a state of rapid change in
Brazil. For example, pursuant to a federal law enacted in 1996, regulatory
policy for the sector, which was implemented by the Departmento Nacional de
Aguas e Energia Eletrica ("DNAEE"), is now implemented by a new autonomous
national electric energy agency (Agencia Nacional de Energia Eletrica or
"ANEEL"). ANEEL is an independent regulatory agency and delegates certain
functions to agencies based in certain states of Brazil. However, ANEEL
cannot delegate any authority regarding tariffs to state agencies.
ANEEL is responsible for (i) granting and supervising concessions
for electricity generation, transmission and distribution, including approval
of applications for the setting of electricity tariffs; (ii) supervising and
performing financial examinations of the concessionary companies; (iii)
issuing regulations for the electricity sector; and (iv) planning,
coordinating and executing water resource studies and granting and
supervising concessions for the use of water resources. Due to electricity
tariffs' significant weight in the measurement of national inflation, tariff
increases have been controlled by the Ministry of Finance, although it is not
its official responsibility.
In addition to the powers currently granted to DNAEE, ANEEL has the
following responsibilities: (i) to implement and regulate the exploitation of
electric energy and the use of hydroelectric power pursuant to the Power
Sector Law; (ii) to promote the bidding process for the granting of new
concessions; (iii) to solve administrative disputes among utilities, IPP
companies, self-producers and customers; and (iv) to determine the criteria
for the establishment of the cost of the transmission of energy pursuant to
the Power Sector Law. Nevertheless, until regulations regarding the
implementation of ANEEL are promulgated, DNAEE will continue to monitor and
regulate the Brazilian electricity sector.
UNITED STATES ENVIRONMENTAL REGULATIONS
The construction and operation of power projects are subject to
extensive environmental and land use laws and regulations. In the United
States those laws and regulations applicable to AES primarily involve the
discharge of effluents into the water, emissions into the air and the use of
water, but can also include wetlands preservation, endangered species, waste
disposal and noise regulation. These laws and regulations often require a
lengthy and complex process of obtaining licenses, permits and approvals from
federal, state and local agencies. If AES violates or fails to comply with
such laws, regulations, licenses, permits or approvals, AES could be fined or
otherwise sanctioned by regulators. In addition, under certain environmental
laws, AES could be responsible for costs relating to contamination at its
facilities or at third party waste disposal sites. AES is committed to
operating its businesses cleanly, safely and reliably and strives to comply
with all environmental laws, regulations, permits and licenses. Despite such
efforts, the Company has at times been in non-compliance with such laws,
regulations, licenses, permits and approvals, although no such instance has
resulted in revocation of any permit or license. AES has incurred and will
continue to incur capital and other expenditures to comply with environmental
laws. Although AES is not aware of any costs of complying with environmental
laws and regulations which would result in a material adverse effect on its
consolidated financial position or results of operations, there can be no
assurance that AES will not be required to incur such costs in the future.
Environmental laws and regulations are complex, change frequently
and have tended to become more stringent over time. If such laws and
regulations are changed and any of AES's facilities are not "grandfathered"
(that is, made exempt by the fact that the facility pre-existed the law) or
are not otherwise excluded, extensive modifications to a facility's
technologies and operations could be
required. Should environmental laws or regulations change in the future,
there can be no assurance that AES would be able to recover all or any
increased costs from its customers or that its consolidated financial
position or results of operations would not be materially and adversely
affected. In addition, the Company may be required to make significant
capital or other expenditures in connection with such changes in
environmental laws or regulations. The Company is not aware of any currently
planned changes in law, however, that would result in a material adverse
effect on its consolidated financial position or results of operations.
Clean Air Act. The Clean Air Act of 1970 (the "Clean Air Act of
1970"), as amended in 1990 (the "1990 Amendments"), sets guidelines for
emissions standards for major pollutants (in particular, SO2 and NOx) from
newly-built sources. Among other things, the 1990 Amendments attempt to
reduce acid rain precursor emissions (SO2 and NOx) from existing sources,
particularly large, older power plants that were exempted from certain
regulations under the Clean Air Act of 1970. Other provisions of the Clean
Air Act relate to the reduction of ozone precursor emissions (VOC and NOx)
and have resulted in the imposition by various states of "reasonably
available control technology" to reduce such emissions.
In 1997, the EPA published new standards that tighten ambient air
quality standards for ozone and fine particulate matter (PM 2.5). In May
1999, the EPA issued its final guidelines for the revised ground-level ozone
and particulate matter, which further delineate the so-called "non attainment
regions" and other non-attainment classifications. In October 1999, a federal
appeals court overturned the new standards. In January 2000, the Department
of Justice filed a petition seeking Supreme Court review of the decision. The
EPA anticipates resolution of this issue could take up to two years. If
additional ozone and particulate matter non-attainment areas are created,
AES's plants may be faced with further emission reduction requirements that
could necessitate both the installation of additional control technology and
a related increase in capital expenditures.
In October 1998, the EPA issued a final rule addressing the regional
transport of ground-level ozone across state boundaries to the eastern United
States through NOx (a precursor to ozone formation) emissions reduction from
various emission sources, including utility sources. The rule focuses on such
reductions in the eastern United States, requiring twenty two states and the
District of Columbia to submit revised "state implementation plans" (SIPs) by
September 1999 and have NOx emission controls in place by May 2003 (the "NOx
SIP call"). In March 2000, a federal appeals court upheld the NOx SIP call
rule. The decision is expected to be appealed. (In a related action, the EPA
in December 1999 granted petitions filed by four northeastern states seeking
to reduce ozone across state boundaries through reductions in NOx emissions
from 30 states and the District of Columbia. In granting the petitions, the
EPA made a finding that certain large electric utilities, including the AES
Beaver Valley plant in Pennsylvania, significantly contribute to air
pollution in other states. A number of electric utilities are expected to
challenge the EPA's action. If further reductions in NOx emissions are
required, AES would be required to make such reductions at some of its
facilities.
The 1990 Amendments also regulate certain hazardous air pollutants.
Although the hazardous air pollutant provisions of the 1990 Amendments
presently exclude electric steam generating facilities such as AES's domestic
plants, the 1990 Amendments direct the Environmental Protection Agency (the
"EPA") to prepare a study on hazardous air pollutant ("HAP") emissions from
power plants. A separate EPA study on mercury emissions from power plants,
the Final Mercury Study Report to Congress, released in December 1997,
describes the need for further research in the area of utility mercury
emission controls, as current control technology is still in an early stage
of development. In February 1998, the EPA released a final report on HAP
emissions from power plants that, among other things, concluded that the risk
of contracting cancer from exposure to HAPs (other than mercury) from most
plants is low (less than one in one million) and that further research on
mercury emissions was necessary. In March 1999, the EPA issued a report which
examined hypothetical pollution control options to reduce mercury emissions
from power plants. The EPA is expected to make a final determination on
whether to regulate mercury emissions from power plants by December 2000. If
it is determined that mercury emissions from power plants should be
regulated, the use of "maximum available control technology" could be
required.
The EPA has commenced an industry-wide investigation of coal-fired
electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to the facilities over the years.
The EPA's focus is on whether the changes were subject to new source review
or new performance standards, and whether best available control technology
was or should have been used. On August 4, 1999, the EPA issued a notice of
violation ("NOV") to the AES Beaver Valley plant, generally alleging that the
facility failed to obtain the necessary permits in connection with certain
changes made to the facility in the mid-to-late 1980s. The Beaver Valley
facility disagrees with the EPA's findings and if a mutually acceptable
resolution is not reached, the EPA may seek to enforce the NOV through a
judicial process and seek monetary penalties and/or injunctive relief under
the Clean Air Act. The Company believes that the Beaver Valley facility has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
In October 1999, a subsidiary of the Company received an information
request letter from the New York Attorney General, which sought detailed
operating and maintenance history for certain plants. On January 13, 2000, a
subsidiary of the Company received a subpoena from the New York State
Department of Environmental Conservation ("DEC") seeking similar operations
and maintenance history for additional plants. The information is being
sought in connection with the Attorney General's and the DEC's investigations
of several electricity generating stations in New York that are suspected of
undertaking medications in the past without undergoing an air permitting
review. If the Attorney General or the DEC does file an enforcement action
against the Company, then penalties might be imposed and further emission
reductions may be necessary at these plants. The Company believes that it has
meritorious defenses to such an action and expects the facility to
vigorously defend itself if any action is brought against it.
13
On November 3, 1999, the Department of Justice filed lawsuits on
behalf of the EPA charging that 32 electric utility plants made illegal
repairs to facilities, causing the release of massive amounts of air
pollutants. Although AES was not named as one of the owners of the affected
utility plants, there can be no assurances that it will not be named in
similar lawsuits in the future.
The Company does not believe that any of the potential issues
discussed above or any additional requirements imposed as a result of such
issues will have a material adverse effect on its consolidated financial
position or results of operations. There can be no assurance, however, that
they will not have such an effect in the future.
Hazardous Waste Regulation. Based on a 1988 study, the EPA does not
regulate most coal combustion ash as a hazardous waste. In a report to
Congress in March 1999, the EPA tentatively concluded that coal combustion
ash should remain exempt from regulation, but the EPA is expected to publish
a regulatory "determination" on this subject by April 10, 2000. The Company
has recently learned that the EPA is considering moving in the direction of
making a major change in the regulation of coal ash, possibly requiring that
some coal combustion ash be regulated as a hazardous waste. The standards and
criteria that would trigger such regulation would have to be developed by the
EPA in future rulemaking proceedings, possibly after additional ash studies.
The Company cannot predict the timing or the outcome of such regulatory
actions at this time. If the EPA decides, and is able, to regulate coal ash
as a hazardous or special waste, AES could incur additional ash management or
disposal costs from its plants.
14
FOREIGN ENVIRONMENTAL REGULATIONS
AES has ownership interests in operating power plants in many
countries outside the United States. Each of these countries (and the
localities therein) have separate laws and regulations governing the siting,
permitting, ownership and power sales from AES's plants that are often
different than those in effect in the United States. In addition to such
foreign laws and regulations, projects funded by the World Bank are subject
to World Bank environmental standards, which may be more stringent than local
country standards but are typically not as strict as corresponding standards
in the United States. Whenever feasible, AES attempts to use advanced
environmental technologies (such as CFB coal technology or advanced gas
turbines) in its non-U.S. businesses in order to minimize environmental
impacts.
15
Based on current trends, AES expects that environmental and land use
regulations affecting its plants located outside the United States will
likely become more stringent over time. This may be due in part to a greater
participation by local citizenry in the monitoring and enforcement of
environmental laws, better enforcement of applicable environmental laws by
the regulatory agencies, and the adoption of more sophisticated environmental
requirements. If foreign environmental and land use regulations were to
change in the future, the Company may be required to make significant capital
or other expenditures. There can be no assurance that AES would be able to
recover all or any increased costs from its customers or that its business,
financial condition or results of operations would not be materially and
adversely affected by future changes in foreign environmental and land use
regulations.
EMPLOYEES
At December 31, 1999, AES and its subsidiaries employed
approximately 14,500 people.
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT
The following is certain information concerning the present
executive officers and significant employees of the Registrant set out in
alphabetical order.
Dennis W. Bakke, 54 years old, co-founded the Registrant with Roger
Sant in 1981 and has been a director of the Registrant since 1986. He has
been President of the Registrant since 1987 and Chief Executive Officer since
January 1994. From 1987 to 1993, he served as Chief Operating Officer of the
Registrant; from 1982 to 1986, he served as Executive Vice President of the
Registrant; and from 1985 to 1986 he also served as Treasurer of the
Registrant. He served with Mr. Sant as Deputy Assistant Administrator of the
Federal Energy Agency ("FEA") from 1974 to 1976 and as Deputy Director of the
Energy Productivity Center, an energy research organization affiliated with
The Mellon Institute at Carnegie-Mellon University, from 1978 to 1981. He is
a trustee of Rivendell School and a member of the Board of Directors of
MacroSonix Corporation in Richmond, Virginia.
Mark S. Fitzpatrick, 49 years old, was appointed Executive Vice
President in February 2000, was Senior Vice President until February 2000, and
was appointed Vice President of the Registrant in 1987. Mr. Fitzpatrick
became Managing Director of Applied Energy Services Electric Limited for the
United Kingdom and Western Europe operations in 1990. From 1984 to 1987, he
served as a project director of the AES Beaver Valley and AES Thames projects.
Paul T. Hanrahan, 42 years old, has been a Senior Vice President
since 1997, and was appointed Vice President of the Registrant effective
January 1994. Since May 1, 1998, Mr. Hanrahan has been Managing Director of
AES Americas South, a business group within AES responsible for all of AES's
activities in Argentina, Paraguay, Southern Brazil, Peru and Chile. From
February 1995 until becoming Managing Director of AES Americas South he was
President and Chief Executive Officer of AES Chigen, where he served as
Executive Vice President, Chief Operating Officer and Secretary from December
1993 until February 1995. He was General Manager of AES Transpower, Inc., a
subsidiary of the Registrant, from 1990 to 1993.
Lenny M. Lee, 41 years old, was appointed Vice President in February
2000 and has served as Managing Director of AES Transpower since June 1998. As
Managing Director of AES Transpower, Mr. Lee
16
leads the AES group responsible for all of AES's business, including project
development and plant operations, in Australia, New Zealand, portions of
Southeast Asia (Thailand, Indonesia, Malaysia and Vietnam) Hawaii and
Southern China. Prior to his appointment, Mr. Lee developed various projects
within the same group. Mr. Lee has been with the Company since August 1987.
William R. Luraschi, 36 years old, has been Vice President of the
Registrant since January 1998, Secretary since February 1996 and General
Counsel of the Registrant since January 1994. Prior to that, Mr. Luraschi was
an attorney with the law firm of Chadbourne & Parke L.L.P.
David G. McMillen, 61 years old, was named Vice President of the
Company in December 1991. He was appointed President of AES Shady Point in
1995 and is currently plant manager of the AES Shady Point facility. He was
President of AES Thames from 1989 to 1995. From 1985 to 1988, he served as
plant manager of the AES Beaver Valley plant and from 1986 to 1988 he served
as President of AES Beaver Valley.
Dr. Roger F. Naill, 52 years old, has been Vice President for
Planning at AES since 1981. Prior to joining the Registrant, Dr. Naill was
Director of the Office of Analytical Services at the U.S. Department of
Energy.
Shahzad S. Qasim, 45 years old, was appointed Vice President of the
Company in February 2000 and has served as Managing Director of AES Oasis
since April 1998. As Managing Director of AES Oasis, Mr. Qasim leads the AES
group responsible for all of AES's business, including project development
and plant operations, in Pakistan, India, portions of South Asia and the
Middle East. Prior to his appointment, Mr. Qasim had been developing various
projects within the same geographical region for the Company. Mr. Qasim has
been with the Company since November 1992; before he joined the Company Mr.
Qasim was with the international management consulting firm of McKinsey &
Company.
William Ruccius, 48 years old, was appointed Vice President of the
Company in February 2000 and has served as Managing Director of AES Orient
since June 1998. As Managing Director of AES Orient, Mr. Ruccius leads the
AES group responsible for all of AES's business, including project
development and plant operations, in Northern China and most of North and
East Asia including the Philippines. From June 1996 until his appointment as
Managing Director, he was President and CEO of AES Lal Pir and AES Pak Gen,
the Company's duel Pakistani generating facilities. Prior to that Mr. Ruccius
was Plant Manager at AES Hawaii from April 1995 to June 1996 and worked at
AES Deepwater from June 1993 to April 1995.
John Ruggirello, 49 years old, was appointed Executive Vice
President of the Registrant in February 2000, was Senior Vice President until
February 2000 and was appointed Vice President in January 1997. Mr.
Ruggirello heads an AES group responsible for project development,
construction and plant operations in much of the United States and Canada. He
served as President of AES Beaver Valley from 1990 to 1996.
J. Stuart Ryan, 41 years old, was appointed Executive Vice President
of the Registrant in February 2000, was Senior Vice President until February
2000 and is Managing Director of the AES Pacific group which is responsible
for the Company's business in the western United States. Between 1994 and
1998, Mr. Ryan lead the AES Transpower group responsible for AES's activities
in Asia (excluding China). From 1994 through 1997, he served as Vice
President of the Registrant. Prior to 1994, Mr. Ryan served as general
manager of a group within AES.
Roger W. Sant, 68 years old, co-founded the Company with Dennis
Bakke in 1981. He has been Chairman of the Board and a director of the
Registrant since its inception, and he held the office of Chief
17
Executive Officer through December 31, 1993. He currently is Chairman of the
Boards of Directors of The Summit Foundation and The World Wildlife Fund
U.S., and serves on the Boards of Directors of The World Resources Institute,
the World Wide Fund for Nature and Marriott International, Inc. He was
Assistant Administrator for Energy Conservation and the Environment of the
Federal Energy Agency ("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.
Barry J. Sharp, 40 years old, was appointed Senior Vice President
and Chief Financial Officer effective January 1998 and had been Vice
President and Chief Financial Officer since 1987. He also served as Secretary
of the Registrant until February 1996. From 1986 to 1987, he served as the
Company's Director of Finance and Administration. Mr. Sharp is a certified
public accountant.
Sarah Slusser, 37 years old, was appointed Vice President of the
Registrant in January 1999, and was appointed President of AES Aurora, Inc.,
effective April 1997. AES Aurora is a wholly owned subsidiary of the Company
and a group of AES which is responsible for business development,
construction and operations of facilities and projects in Mexico, Central
America, the Caribbean and the Gulf States in the United States. Prior to
that, Ms. Slusser served as Project Director for various AES projects in the
same region from 1993 to 1997.
Paul D. Stinson, 43 years old, was appointed Vice President of the
Registrant effective January 1998. Since April 1997 Mr. Stinson has been
Managing Director of AES Silk Road, Ltd., a wholly owned subsidiary of the
Company, which is a group of AES responsible for business development,
construction and operations of facilities and projects in Russia, Kazakhstan,
Pakistan and other parts of Asia. Mr. Stinson served as Managing Director of
Medway Power Ltd. from 1994 until 1997 and was Plant Manager of the Medway
Power Station owned by Medway Power Ltd. from 1992 to 1997.
Thomas A. Tribone, 47 years old, Executive Vice President since
January 1998, and had been Senior Vice President of the Registrant from 1990
to January 1998. Mr. Tribone and leads AES Americas, a group responsible for
power marketing, project development, construction and plant operations in
northern portions of South America including much of Brazil. From 1987 to
1990 he served as Vice President for project development and from 1985 to
1987 he served as project director of the AES Shady Point plant.
Kenneth R. Woodcock, 56 years old, has been Senior Vice President of
the Registrant since 1987. Mr. Woodcock is responsible for coordinating AES's
relationships with the investment community, and he provides support for AES
business development activities worldwide. From 1984 to 1987, he served as a
Vice President for Business Development. Prior to the founding of AES he
served in the United States federal government in energy and environment
departments.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.
See the information contained under the caption "Segments" in Note
15 to the Consolidated Financial Statements included in Item 8 herein.
ITEM 2. PROPERTIES
18
Offices are maintained by the Registrant in many places around the
world which are generally occupied pursuant to the provisions of long and
short-term leases, none of which are material to the Company. With a few
exceptions, the Registrant's facilities which are described in Item 1 hereof
are subject to mortgages or other liens or encumbrances as part of the
project's related finance facility. The land interest held by the majority of
the facilities is that of a lessor or, in the case of the facilities located
in the People's Republic of China, a land use right that is leased or owned
by the related joint venture that owns the project. However, in a few
instances there exists no accompanying project financing for the facility and
in a few of these cases the land interest may not be subject to any
encumbrance and is owned by the subsidiary or affiliate owning the facility
outright.
ITEM 3. LEGAL PROCEEDINGS.
In September 1999, an appellate judge in Minas Gerais state court
system granted a temporary injunction that suspended the effectiveness of the
shareholders' agreement for Companhia Energetica de Minas Gerais ("Cemig").
The appellate ruling suspended the shareholders' agreement while the action
to determinate the validity of the shareholders' agreement is litigated.
In early November 1999, the same appellate court modified in part
this decision and reinstated the effectiveness of the shareholders'
agreement, but not the super majority voting rights afforded to the Company
under the agreement. In February 2000, as a result of a new motion filed by
the State of Minas Gerais, the appellate court reversed such modification and
confirmed the temporary injunction suspending the effectiveness of the
shareholders' agreement.
In March 2000, the Minas Gerais state trial court determined that
the shareholders' agreement is invalid on the grounds that it violated the
State of Minas Gerais constitution because it transferred control without the
approval of the state's legislative assembly. The Company intends to appeal
this decision, and vigorously pursue its legal rights in this matter in order
to restore all of its rights under the shareholders' agreement.
The EPA has commenced an industry-wide investigation of coal-fired
electric power generators to determine compliance with environmental
requirements under the Clean Air Act associated with repairs, maintenance,
modifications and operational changes made to the facilities over the years.
The EPA's focus is on whether the changes were subject to new source review
or new performance standards, and whether best available control technology
was or should have been used. On August 4, 1999, the EPA issued a notice of
violation ("NOV") to the AES Beaver Valley plant, generally alleging that the
facility failed to obtain the necessary permits in connection with certain
changes made to the facility in the mid-to-late 1980s. The Beaver Valley
facility disagrees with the EPA's findings and if a mutually acceptable
resolution is not reached, the EPA may seek to enforce the NOV through a
judicial process and seek monetary penalties and/or injunctive relief under
the Clean Air Act. The Company believes that the Beaver Valley facility has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
In October 1999, a subsidiary of the Company received an information
request letter from the New York Attorney General, which sought detailed
operating and maintenance history for certain plants. On January 13, 2000, a
subsidiary of the Company received a subpoena from the New York State
Department of Environmental Conservation ("DEC") seeking similar operations
and maintenance history for additional plants. The information is being
sought in connection with the Attorney General's and the DEC's investigations
of several electricity generating stations in New York that are suspected of
undertaking medications in the past without undergoing an air permitting
review. If the Attorney General or the DEC does file an enforcement action
against the Company, then penalties might be imposed and further emission
reductions may be necessary at these plants. The Company believes that it has
meritorious defenses to such an action and expects the facility to vigorously
defend itself if any action is brought against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION.
The common stock of the Company is currently traded on the New York
Stock Exchange (NYSE) under the symbol "AES". The following tables set forth
the high and low sale prices for the common stock as reported by the NYSE for
the periods indicated.
19
Price Range of Common Stock 1999 High Low 1998 High Low
- ----------------------------- --------------- -------- -------- ---------------- -------- -------
First Quarter 49 1/4 32 13/16 First Quarter $54 5/16 $39 3/8
--------------- -------- -------- ---------------- -------- -------
Second Quarter 59 3/4 36 3/4 Second Quarter 58 45 1/4
--------------- -------- -------- ---------------- -------- -------
Third Quarter 66 11/16 53 1/16 Third Quarter 55 3/8 23
--------------- -------- -------- ---------------- -------- -------
Fourth Quarter 76 3/8 50 7/16 Fourth Quarter 47 3/8 32
--------------- -------- -------- ---------------- -------- -------
(b) HOLDERS.
As of February 23, 2000, there were 1,092 record holders of the
Registrant's Common Stock, par value $0.01 per share.
(c) DIVIDENDS.
Under the terms of the Company's corporate revolving loan and
letters of credit facility of $600 million entered into with a commercial
bank syndicate and $250 million letter of credit facility, the Company is
currently prohibited from paying cash dividends. In addition, the Registrant
is precluded from paying cash dividends on its Common Stock under the terms
of a guaranty to the utility customer in connection with the AES Thames
project in the event certain net worth and liquidity tests of the Registrant
are not met. The Registrant has met these tests at all times since making the
guaranty.
The ability of the Registrant's project subsidiaries to declare and
pay cash dividends to the Registrant is subject to certain limitations in the
project loans, governmental provisions and other agreements entered into by
such project subsidiaries. Such limitations permit the payment of cash
dividends out of current cash flow for quarterly, semiannual or annual
periods only at the end of such periods and only after payment of principal
and interest on project loans due at the end of such periods, and in certain
cases after providing for debt service reserves.
ITEM 6. SELECTED FINANCIAL DATA.
(in millions, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data
Revenues $ 3,253 $ 2,398 $1,411 $ 835 $ 679
Income before income taxes, minority
interest, and extraordinary items 420 546 284 207 175
Extraordinary items, net of applicable
income tax/(benefit) (17) 4 (3) -- --
Net income 228 311 185 125 107
Basic earnings per share:
Before extraordinary items $ 1.28 $ 1.73 $ 1.13 $ 0.83 $ 0.71
Extraordinary items (0.09) 0.02 (0.02) -- --
Basic earnings per share $ 1.19 $ 1.75 $ 1.11 $ 0.83 $ 0.71
Diluted earnings per share:
Before extraordinary items $ 1.25 $ 1.67 $ 1.11 $ 0.80 $ 0.70
Extraordinary items (0.09) 0.02 (0.02) -- --
Diluted earnings per share $ 1.16 $ 1.69 $ 1.09 $ 0.80 $ 0.70
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Total assets $20,880 $10,781 $8,909 $3,622 $2,341
Project financing debt (long-term) 8,651 3,597 3,489 1,558 1,098
Other notes payable (long-term) 2,167 1,644 1,096 450 125
Mandatorily redeemable preferred 22 -- -- -- --
stock of subsidiary
Company-obligated
convertible mandatorily
redeemable preferred
securities of subsidiary 1,318 550 550 -- --
trust holding solely
junior subordinated
debentures of AES
Stockholders' equity 2,637 1,794 1,481 721 549
- --------------------------------------------------------------------------------------------------------------------
No cash dividends were declared by the Registrant on its common stock during
the five-year period ended December 31, 1999.
The comparability of the information in the table above is materially
affected by various business combinations and asset acquisitions. See Notes 2
and 3 to the Consolidated Financial Statements included in Item 8 herein.
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
EXISTING OPERATIONS. The AES Corporation and its subsidiaries and affiliates
(collectively "AES" or the "Company") are a global power company committed to
serving the world's needs for electricity in a socially responsible way.
AES's electricity "generation" business consists of sales to wholesale
customers (generally electric utilities, regional electric companies or
wholesale commodity markets known as "power pools") for further resale to end
users. AES also sells electricity directly to end users such as commercial,
industrial, governmental and residential customers through its "distribution"
business.
AES's generation business represented 61% of total revenues in 1999 compared
to 59% for 1998. Sales within the generation business are made under
long-term contracts from power plants owned by the
20
Company's subsidiaries and affiliates, as well as directly into power pools.
The Company owns new plants constructed for such purposes ("greenfield"
plants) as well as older power plants acquired through competitively bid
privatization initiatives or negotiated acquisitions.
AES's distribution business represented 39% of total revenues for 1999 compared
to 41% for 1998. Electricity sales by AES's distribution businesses, including
affiliates, are generally made pursuant to the provisions of long-term
electricity sale concessions granted by the appropriate governmental
authorities. In certain cases, these distribution companies are "integrated", in
that they also own electric power plants for the purpose of generating a portion
of the electricity they sell.
In its generation business, AES now operates and owns (entirely or in part) a
diverse portfolio of electric power plants (including those within the
integrated distribution companies discussed below) with a total capacity of
36,675 megawatts (MW). Of that total, 33% are fueled by coal or petroleum coke,
18% are fueled by natural gas, 15% are hydroelectric facilities, 4% are fueled
by oil, and the remaining 30% are capable of using multiple fossil fuels. Of the
total MW, 7,606 (eighteen plants) are located in the United States, 754 (seven
plants) are in China, 1,281 (three plants) are in Hungary, 9,106 (fifty-one
plants) are in Brazil, 5,763 (six plants) are in the UK, 885 (six plants) are in
Argentina, 7,909 (seven plants) are in Kazakhstan (including 4,000 MW
attributable to Ekibastuz which currently has a reliable capacity of
approximately 22%), 210 (one plant) are in the Dominican Republic, 110 (one
plant) are in Canada, 695 (two plants) are in Pakistan, 405 (one plant) are in
the Netherlands, 1,254 (three plants) are in Australia, 420 (one plant) are in
India, 277 (four plants) are in Panama.
AES has majority ownership in three distribution companies in Argentina and
individual distribution companies in the United States, Brazil, El Salvador,
Dominican Republic, and The Republic of Georgia. The Company also has assumed
management control of a heat and electricity distribution business in
Kazakhstan. In addition the Company has less than majority ownership in three
additional distribution companies in Brazil and one in India. These distribution
companies serve a total of over 15 million customers with annual sales exceeding
109,000 gigawatt hours. On a net equity basis, AES's ownership represents
approximately 5.4 million customers and annual sales exceeding over 24,000
gigawatt hours. The Company also has three subsidiaries in the United States
that serve retail customers in those states that have introduced a competitive
market for the sale of electricity to end users.
CONSTRUCTION AND BUSINESS DEVELOPMENT ACTIVITIES. AES is also currently in the
process of adding approximately 6,646 MW to its operating portfolio through its
construction of greenfield plants. These include a 454 MW natural gas-fired
plant, a 705 MW natural gas-fired plant, and a 180 MW coal-fired plant in the
United States, two natural gas-fired plants totaling 600 MW in Brazil, a 2,100
MW coal-fired plant in China, an 830 MW natural gas-fired plant, a 123 MW
hydroelectric facility in Argentina, a refurbished 360 MW coal-fired plant in
England, two natural gas-fired plants totaling 810 MW in Bangladesh and a 484 MW
natural gas-fired plant in Mexico.
As a result, AES's total MW of the 122 power plants in operation or under
construction is approximately 43,321 MW and net equity ownership (total MW
adjusted for the Company's ownership percentage) represents approximately 31,751
MW.
Because of the significant complexities associated with building new electric
generating plants, construction periods often range from two to five years,
depending on the technology and location. AES
21
currently expects that projects now under construction will reach
commercial operation and begin to sell electricity at various dates through
the year 2004. The timely completion of each plant is generally supported by
a guarantee from the plant's construction contractor, although in certain
cases, AES has assumed the risk of successfully completing construction.
Changes in economic, political, technological, regulatory or logistical
circumstances may substantially delay, or in some cases even prevent,
completion and commercial operation.
In addition, a Brazilian subsidiary Eletronet is in the process of constructing
a national broadband telecommunications network attached to the existing
national transmission grid in Brazil.
AES continues to believe that there is significant demand for more
efficiently operated electricity generation and distribution businesses. As a
result AES is pursuing additional greenfield development projects and
acquisitions in many countries. Several of these, if consummated, would
require the Company to obtain substantial additional financing, including
both debt and equity financing.
Certain subsidiaries and affiliates of the Company (domestic and non-U.S.) have
signed long-term contracts or made similar arrangements for the sale of
electricity and are in various stages of developing the related greenfield power
plants. Successful completion depends upon overcoming substantial risks,
including, but not limited to, risks relating to failures of siting, financing,
construction, permitting, governmental approvals or termination of the power
sales contract as a result of a failure to meet certain milestones. As of
December 31, 1999, capitalized costs for projects under development and in early
stage construction were approximately $53 million. The Company believes that
these costs are recoverable; however, no assurance can be given that individual
projects will be completed and reach commercial operation.
The Company has been actively involved in the acquisition and operation of
electricity assets in countries that are restructuring and deregulating the
electricity industry. Some of these acquisitions have been made from other
electricity companies that have chosen to exit the electricity generation
business. In these situations, sellers generally seek to complete competitive
solicitations in less than one year, which is much faster than the time incurred
to complete greenfield developments, and require payment in full on transfer.
AES believes that its experience in competitive markets and its worldwide
integrated group structure (with its significant geographic coverage and
presence) enable it to react quickly and creatively in such situations.
The financing for such acquisitions, in contrast to that for greenfield
development, often must be arranged quickly and therefore may preclude the
Company from arranging non-recourse project financing (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk"). Moreover, acquisitions that are
large, that occur simultaneously with one another or those occurring
simultaneously with commencing construction on several greenfield developments
would potentially require the Company to obtain substantial additional
financing, including both debt and equity. As a result, and in order to enhance
its financial capabilities to respond to these more accelerated opportunities,
the Company maintains a $600 million revolving line and letter of credit
facility (the Revolver) and a $250 million letter of credit facility. AES also
maintains a "universal shelf" registration statement with the SEC which allows
for the public issuance of various additional debt and preferred or common
equity securities, either individually or in combination, and which currently
represents approximately $932 million in unused potential proceeds from the
issuance of public securities.
22
RESULTS OF OPERATIONS
GENERATION. Traditionally, most of AES's generation plants have sold electricity
under long-term power sales agreements to electric utilities or state-owned
power companies. Generated electricity is sold under a two part pricing method,
representing the two main products, capacity and energy, produced by electric
generating facilities. Energy refers to the sale of the actual electricity
produced by the plant and capacity refers to the amount of generation reserved
for a particular customer, irrespective of the amount of energy actually
purchased. Most of the Company's generating businesses (based upon revenues) are
structured so that each power plant generally relies on one power sales contract
with a single electric customer for the majority, if not all, of its revenues.
The prolonged failure of any significant customer to fulfill its contractual
payment obligations in the future could have a substantial negative impact on
AES's results of operations. The Company has sought to reduce this risk, where
possible, by entering into power sales contracts with customers who have their
debt or preferred securities rated "investment grade", or by obtaining sovereign
government guarantees of the purchaser's obligations, as well as by locating its
plants in different geographic areas in order to mitigate the effects of
regional economic downturns.
However, AES does not limit its business solely to the most developed countries
or economies, nor even to those countries with investment grade sovereign credit
ratings. In certain locations, particularly in developing countries or countries
that are in a transition from centrally-planned to market-oriented economies,
the electricity purchasers, both wholesale and retail, may be unable or
unwilling to honor their payment obligations. Moreover collection of receivables
may be hindered in these countries due to ineffective systems for adjudicating
contract disputes.
At some generation plants, all or a portion of the electricity sales are not
sold pursuant to a long-term contract and are sold into the short-term
contract or spot electricity markets. The prices paid for electricity in the
spot markets can be, and from time to time, have been unpredictable and
volatile. Electricity price volatility often exists in those regions in the
United States and other parts of the world that are introducing competitive
energy markets and where periods of temporary shortage of or excess supply of
electricity occur. This volatility is influenced by peak demand requirements,
weather conditions, competition, electricity transmission constraints and
fuel prices, as well as plant availability and other relevant factors. The
majority of the electricity generated at the New York plants and a
significant portion of that generated by the Drax plant and the generation
businesses in Argentina is sold into power pools or under short-term
contracts (or in case of the Drax plant subject to the provisions of
contractual instruments that have the effect of hedging a portion of the
plant's output from price volatility). As a result, the sales revenues
(consisting of both volume and price considerations) from these businesses
are less predictable and subject to potentially greater variability from
period to period than those businesses selling under long-term sales
contracts.
DISTRIBUTION. In the United States, the Company participates in certain
competitive retail electricity supply markets, where state laws permit, by
selling electricity to end users. In these markets, the Company typically enters
into one to three year electricity supply contracts with its customers. These
contracts may be structured as shared savings arrangements, fixed savings
arrangements or fixed price supply contracts. In certain of its fixed savings
arrangements and fixed price supply contracts, the cost
23
to supply electricity to the customer may be greater than the price the
customer is required to pay the Company. The Company also engages in
wholesale purchases and sales of electricity to support its electricity sales
to end users. AES also owns and operates an integrated distribution company,
CILCORP, that serves approximately 193,000 electric and 202,000 gas customers
in Central Illinois under existing state regulatory provisions that provide
for the transition to a competitive market. Under these provisions, CILCORP's
return on equity is subject to regulation by the Illinois state regulatory
authorities.
Outside of the United States, retail electricity sales by AES's distribution
businesses are made pursuant to provisions of long-term electricity sales
concession agreements ranging in remaining length from 17 to 92 years. Each
business is generally authorized to charge its customers a tariff for electric
services that consists of two components: an energy expense pass-through
component and an operating cost component. Both components are established as
part of the original grant of the concession for certain initial periods
(ranging from four to eight years remaining). Beginning subsequent to the
initial periods, and at regular intervals thereafter, the concession grantor has
the authority to review the costs of the relevant business to determine the
inflation adjustment (or other similar adjustment factor), if any, to the
operating cost component (the "Adjustment Escalator") for the subsequent regular
interval. This review can result in an Adjustment Escalator that has a positive,
zero or negative value. This electricity market structure is often referred to
as "price-cap" regulation, because the investors rate of return on its equity is
not directly subject to regulation. To date, the Company has not reached the end
of the initial tariff periods in any of its distribution businesses. As a
result, there can be no assurance as to the effects, if any, on its future
results of operations of potential changes to the Adjustment Escalator.
As stated above, the electricity sales concessions provide for an annual
adjustment to the tariff, resulting in adjustments based on several factors
including inflation increases as measured by different agreed upon indices.
In certain situations, although not including Brazil, there is also an
explicit linkage through the pricing provisions of the contract to a portion
of the tariff that reflects changes, either entirely or in part, in exchange
rates between the local currency and the U.S. Dollar. Such adjustments are
made in arrears at various regular intervals, and in certain cases, requests
for interim adjustments are permitted.
If a foreign currency experiences a sudden or severe devaluation relative to the
U.S. Dollar (the Company's reporting currency), such as occurred to the
Brazilian Real in January 1999, because of the lack of direct adjustment to the
then current exchange rate, the in arrears nature of the respective adjustment
in the tariff or the potential delays or magnitude of the resulting local
currency inflation of the tariff, the future results of operations of AES's
distribution companies in that country could be adversely affected. Depending on
the duration or severity of such devaluation, the future results of operations
of AES may also be adversely affected. During 1999, the Brazilian Real
experienced a significant devaluation relative to the U.S. Dollar, declining
from 1.21 Brazilian Reais to the Dollar at December 31, 1998 to an average of
1.81 Reais to the Dollar for the year ended December 31, 1999.
In Brazil, AES has interests in four distribution companies or integrated
utilities (the Brazilian Businesses). These companies have long-term
concession agreements which, although varying in term, have similar clauses
providing for tariff adjustments based on certain specific events or
circumstances. These adjustments occur annually (at different times) for each
Brazilian Business and, in certain instances, in response to specific
requests for adjustment. Adjustments to the tariff rates during the annual
proceedings are designed to reflect, among others, (i) increases in the
inflation rate as represented by a Brazilian inflation index (IGPM), and (ii)
increases in specified operating costs (including
24
purchased power costs), in each case as measured over the preceding
twelve months. The specific tariff adjustment mechanism provides each Brazilian
Business the option to request additional rate adjustments arising from
significant events, such as the increase in cost of purchased power due to
exchange rate variations, which disrupt the economic and financial equilibrium
of such business. Other normal, or recurring, events are also included as a
specific tariff increase and may include normal increases in purchased power
costs, taxes on revenue generated or local inflation. The Brazilian Business
requesting relief has the burden to prove the impact on its financial or
economic equilibrium, however, there can be no assurance that such adjustments
will be granted. Each Brazilian Business intends to recover the specific rate
adjustments provided for in the concession agreements, and approximately $30
million of these costs (representing the Company's portion of such costs) that
are expected to be recovered through future tariff increases were deferred in
1999.
1999 COMPARED TO 1998
REVENUES. Revenues increased $855 million, or 36%, to $3.25 billion in 1999 from
$2.40 billion in 1998. The increase in revenues is due primarily to the
acquisition of both new generation and distribution businesses, as well as from
the commercial operation of greenfield generation projects.
Generation revenues increased $557 million, or 39%, to $1.97 billion in 1999
and accounted for 65% of the Company's total increase in revenues in 1999.
New businesses acquired during 1999 that contributed significantly to the
overall increase in generation revenues include certain of the New York
plants, Drax and Panama. A full year of operations at Southland and Barry, as
well as the acquisitions of Tiete and CILCORP in the fourth quarter of 1999
also contributed to the increase in generation revenues.
Distribution revenues increased $298 million, or 30%, to $1.28 billion in 1999
and accounted for 35% of the Company's total increase in revenues in 1999. New
businesses acquired during 1999 that contributed significantly to the overall
increase in distribution revenues include NewEnergy, CILCORP and EDE Este. A
full year of operations at Edelap also contributed to the increase in revenues.
Distribution revenues were negatively impacted at Sul due to the effects of the
devaluation of the Brazilian Real in early 1999.
GROSS MARGIN. Gross margin, which represents total revenues reduced by cost of
sales, increased $193 million, or 24%, to $1.00 billion in 1999 from $811
million in 1998. Gross margin as a percentage of revenues decreased to 31% in
1999 from 34% in 1998. The decrease in gross margin as a percentage of revenues
is due to the decrease in the distribution gross margin.
The generation gross margin increased $203 million, or 35%, to $779 million in
1999 from $576 million in 1998. The generation gross margin as a percentage of
revenues remained fairly constant at 40% in 1999 and 41% in 1998.
The distribution gross margin decreased $10 million, or 4%, to $225 million in
1999 from $235 million in 1998. The distribution gross margin as a percentage of
revenues decreased to 18% in 1999 from 24% in 1998. The decrease in gross margin
is due primarily to a decline in gross margin at Sul which was negatively
impacted by the devaluation of the Brazilian Real. The overall decrease in gross
margin as a percentage of revenues is due primarily to losses at NewEnergy and
CESCO, both of which were acquired in 1999.
25
PROVISION TO REDUCE CONTRACT RECEIVABLES. The provision to reduce contract
receivables decreased $14 million, or 64%, to $8 million in 1999 from $22
million in 1998. The overall decrease in the provision resulted from a decrease
in the generation provision to reduce contract receivables offset by an increase
in the distribution provision. The generation provision was reduced due to a
favorable settlement with the government of Kazakhstan as well as improved
collections at Los Mina in the Dominican Republic. The distribution provision
increased due mainly to the provision recorded at Telasi, a distribution company
in Tbilisi, Georgia, that was acquired during 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $15 million, or 27%, to $71 million in 1999
from $56 million in 1998. Selling, general and administrative expenses as a
percentage of revenues remained constant at 2% in both 1999 and 1998. The
increase is due in equal part to an increase in corporate overhead and an
increase in business development activities.
INTEREST EXPENSE. Interest expense increased $156 million, or 32%, to $641
million in 1999 from $485 million in 1998. Interest expense as a percentage of
revenues remained constant at 20% in both 1999 and 1998. Interest expense
increased primarily due to the interest at new businesses, as well as additional
corporate interest costs arising from the senior debt and convertible securities
issued within the past two years.
INTEREST INCOME. Interest income increased $10 million, or 15%, to $77 million
in 1999 from $67 million in 1998. Interest income as a percentage of revenues
decreased to 2% in 1999 from 3% in 1998. Interest income increased primarily due
to an increase in funds available for investment.
NET GAIN ON CONTRACT BUYOUT. The Company recorded a $29 million gain (before
extraordinary loss) in 1999 from the buyout of its long-term power sales
agreement at Placerita. The Company received gross proceeds of $110 million
which were offset by transaction related costs of $19 million and an impairment
loss of $62 million to reduce the carrying value of the electric generation
assets to their estimated fair value after termination of the contract. The
estimated fair value was determined by an independent appraisal. Concurrent with
the buyout of the power sales agreement, the Company repaid the related project
financing debt prior to its scheduled maturity and recorded an extraordinary
loss of $11 million, net of income taxes.
FOREIGN CURRENCY TRANSACTION GAIN (LOSS). In businesses which are controlled and
consolidated by the Company, the Company recorded $9 million of foreign currency
transaction gains during 1999 and $1 million of foreign currency transaction
losses in 1998. The foreign currency transaction gain in 1999 resulted from the
increase in the Brazilian Real sub-sequent to the Company's acquisition of Tiete
in the fourth quarter of 1999 offset by a decline in the value of the Pakistani
Rupee. The Company was also negatively impacted by the devaluation of the
Brazilian Real during the first nine months of 1999. The Brazilian Real
experienced a significant devaluation relative to the U.S. Dollar, declining
from 1.21 Reais to the Dollar at December 31, 1998 to an average of 1.81 Reais
for the year ended December 31, 1999. The Company recorded $203 million of
foreign currency transaction losses on its investments in Brazilian affiliates
during 1999. Equity in earnings of affiliates (before income tax) is presented
net of the foreign currency transaction losses in the statements of operations.
26
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates (before
income taxes) decreased $211 million, or 91%, to $21 million in 1999 from $232
million in 1998. Equity in earnings of affiliates includes foreign currency
transaction losses of $203 million and $59 million in 1999 and 1998,
respectively. Excluding foreign currency transaction losses, equity in earnings
of affiliates decreased 23%. The overall decline in equity in earnings of
affiliates resulted from the decrease in equity in earnings of distribution
investments offset by an increase in equity in earnings of generation
investments.
Equity in earnings of generation affiliates increased $19 million, or 58%, to
$52 million in 1999 from $33 million in 1998. The increase is due primarily to
the Company's 1999 investment in OPGC.
Equity in earnings of distribution affiliates decreased $230 million to a
loss of $31 million in 1999 from earnings of $199 million in 1998. All of the
Company's equity investments in distribution businesses are in Brazil, and
they were negatively impacted by the devaluation of the Brazilian Real during
1999.
INCOME TAXES. Income taxes (including income taxes on equity in earnings)
decreased $34 million, or 23%, to $111 million in 1999 from $145 million in
1998. The Company's effective tax rate was 31% in 1999 and 32% in 1998.
MINORITY INTEREST. Minority interest decreased $30 million, or 32%, to $64
million in 1999 from $94 million in 1998. The increase in generation minority
interest was offset by a larger decrease in distribution minority interest,
resulting in the overall decrease.
Generation minority interest increased $14 million, or 50%, to $42 million in
1999 from $28 million in 1998. The increase in minority interest is due
primarily to the acquisition of control of two hydroelectric companies in
Panama in January 1999.
Distribution minority interest decreased $44 million, or 67%, to $22 million
in 1999 from $66 million in 1998. The decrease in minority interest is due
primarily to lower contributions from Cemig and Sul in 1999, both of which
were negatively impacted by the devaluation of the Brazilian Real during 1999.
EXTRAORDINARY ITEM. In 1999, the Company recorded a $17 million loss, net of
income taxes from the early extinguishment of corporate debt and project
financing debt at Placerita. In 1998, the Company recorded a $4 million gain,
net of income taxes from the early redemption of $18 million of 10.125% notes at
Chigen.
NET INCOME. Net income decreased $83 million, or 27%, to $228 million in 1999
from $311 million in 1998. The decrease in net income is due primarily to the
devaluation of the Brazilian Real and the resulting decline in equity in
earnings of affiliates in distribution businesses in Brazil. Excluding the $132
million of foreign currency transaction losses, net of income taxes, net income
increased $49 million in 1999.
1998 COMPARED TO 1997
REVENUES. Revenues increased $987 million, or 70%, to $2.40 billion in 1998 from
$1.41 billion in 1997. The increase in revenues is due primarily to the
acquisition of both new generation and distribution businesses, as well as from
the commercial operation of greenfield generation projects.
Generation revenues increased $303 million, or 27%, to $1.41 billion in 1998
and accounted for 31% of the Company's total increase in revenues in 1998.
Generation revenues increased due to the acquisition of Southland, as well as
the start of commercial operations at Barry and Pak Gen.
27
Distribution revenues increased $684 million, or 227%, to $985 million in 1998
and accounted for 69% of the Company's total increase in revenues in 1998. A
full year of operations at Eden, Edes and Sul combined with the acquisitions of
Edelap and Clesa resulted in the significant increase in distribution revenues.
GROSS MARGIN. Gross margin, which represents total revenues reduced by cost of
sales, increased $381 million, or 89%, to $811 million in 1998 from $430 million
in 1997. Gross margin as a percentage of revenues increased to 34% in 1998 from
30% in 1997. Both generation and distribution gross margin increased as a
percentage of revenues.
Generation gross margin increased $186 million, or 48%, to $576 million in 1998
from $390 million in 1997. Generation gross margin as a percentage of revenues
increased to 41% in 1998 from 35% in 1997. The increase in gross margin as a
percentage of revenues is due primarily to higher relative gross margins at
certain of the businesses acquired in 1998.
Distribution gross margin increased $195 million, or 488%, to $235 million in
1998 from $40 million in 1997. Distribution gross margin as a percentage of
revenues increased to 24% in 1998 from 13% in 1997. The increase in gross margin
is due primarily to improved margins at Eden, Edes and Sul, all of which were
acquired in 1997 and had their first full year of operations by the Company in
1998.
PROVISION TO REDUCE CONTRACT RECEIVABLES. The provision to reduce contract
receivables increased $5 million, or 29%, to $22 million in 1998 from $17
million in 1997. Additional provisions were recorded in the Dominican Republic
and in Kazakhstan.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11 million, or 24%, to $56 million in 1998
from $45 million in 1997. Selling, general and administrative expenses as a
percentage of revenues remained fairly constant at 2% in 1998 and 3% in 1997.
The increase is consistent with the Company's increased business development
activities.
INTEREST EXPENSE. Interest expense increased $241 million, or 99%, to $485
million in 1998 from $244 million in 1997. Interest expense as a percentage of
revenues increased to 20% in 1998 from 17% in 1997. Interest expense increased
primarily due to the interest at new businesses, as well as a full year of
interest on the senior debt and convertible subordinated debentures issued
during 1997.
INTEREST INCOME. Interest income increased $26 million, or 63%, to $67 million
in 1998 from $41 million in 1997. Interest income as a percentage of revenues
remained constant at 3% in both 1998 and 1997. Interest income increased
primarily due to interest income associated with late payments on customer
accounts at certain distribution businesses.
EQUITY IN EARNINGS OF AFFILIATES. Equity in earnings of affiliates (before
income taxes) increased $106 million, or 84%, to $232 million in 1998 from $126
million in 1997. The increase is due primarily to a full year of earnings in
equity investments made during 1997.
28
Equity in earnings of generation affiliates increased $12 million, or 57%, to
$33 million in 1998 from $21 million in 1997. The increase is due primarily to
additional earnings from the Company's investments in Medway and Elsta.
Equity in earnings of distribution affiliates increased $94 million, or 90%, to
$199 million in 1998 from $105 million in 1997. The increase is due primarily to
a full year of earnings from Cemig.
INCOME TAXES. Income taxes (including income taxes on equity in earnings)
increased $68 million, or 88%, to $145 million in 1998 from $77 million in 1997.
The Company's effective tax rate was 32% in 1998 and 29% in 1997. The lower rate
in 1997 was due primarily to a one-time tax benefit realized from the reduction
of statutory tax rates of certain foreign countries.
MINORITY INTEREST. Minority interest increased $75 million, or 395%, to $94
million in 1998 from $19 million in 1997. Both generation and distribution
minority interest increased during 1998.
Generation minority interest increased $18 million, or 180%, to $28 million in
1998 from $10 million in 1997. The increase in minority interest is due
primarily to the start of commercial operations at Pak Gen and Hefei, as well as
a full year of operations at Lal Pir.
Distribution minority interest increased $57 million, or 633%, to $66 million in
1998 from $9 million in 1997. The increase in minority interest is due primarily
to a full year of operations at Eden, Edes and Cemig.
EXTRAORDINARY ITEMS. The Company recorded extraordinary items in both 1998 and
1997 from the early extinguishment of debt. In 1998, the Company recorded a $4
million gain on the early redemption of $18 million of 10.125% notes at Chigen.
In 1997, the Company recorded a $3 million loss on the early redemption of its
$75 million 9.75% Senior Subordinated Notes due 2000.
NET INCOME. Net income increased $126 million, or 68%, to $311 million in 1998
from $185 million in 1997. The increase in net income is consistent with the
Company's increased activity in 1998. Net income as a percentage of revenues was
13% in both 1998 and 1997.
OUTLOOK
Global electricity markets continue to restructure and shift away from
government-owned and government-regulated electricity systems toward
deregulated, competitive market structures. Many countries have rewritten their
laws and regulations to allow foreign investment and private ownership of
electricity generation, transmission or distribution companies. Some countries
(for example Hungary, Brazil and some of the newly independent countries of the
former Soviet Union, among others) have or are in the process of "privatizing"
their electricity systems by selling all or part of such to private investors.
In addition, some companies are choosing to divest some or all of their
electricity generating assets. This global trend of electricity market
restructuring provides significant new business opportunities for companies like
AES.
In the United States, the federal government and some of the state government
regulatory agencies have also embraced the global trend encouraging liberalized
electricity markets. In particular, the federal
29
government has adopted regulations encouraging the establishment of wholesale
electricity markets by permitting generating facilities that sell their
electricity solely to wholesale customers to avoid regulation by state
utility commissions and sell their output at market based rates. The federal
government has also adopted regulations requiring utilities to transport
electricity generated by competitors on the same terms and conditions that
they apply to their own generation.
As a result, many regulated U.S. public utilities have begun to sell or auction
their generation capacity. Substantially all of the transmission and
distribution services in the U.S. continue to be regulated under a combined
state and Federal framework. As a result, the Company is subject in the United
States to a complex set of federal and state regulation, both directly through
regulations affecting the electricity business and indirectly through
environmental and other regulations that have an indirect effect upon the
business of generating and distributing electricity.
In addition, in those states and regions in which the Company owns generating
assets that sell electricity directly into power pools, the Company is subject
to a changing regulatory environment which may affect or influence the orderly
development of the applicable power pool. In some of these power pools the
oversight bodies have not adopted and/or finalized regulations governing the
operation of these markets and thus new laws and regulations may become
applicable to AES that may have an effect on our business or results of
operations.
In addition, many states have passed or are considering new legislation that
would permit utility customers to choose their electricity supplier in a
competitive electricity market (so-called "retail access" or "customer choice"
laws). While each state's plan differs in details, there are certain consistent
elements, including allowing customers to choose their electricity suppliers by
a certain date (the dates in the existing or proposed legislation vary between
1999 and 2003), allowing utilities to recover "stranded assets" (the remaining
costs of uneconomic generating or regulatory assets) and a reaffirmation of the
validity of contracts like the Company's U.S. contracts.
In addition to the potential for state restructuring legislation, several
competing bills have been proposed in the Congress to encourage customer choice
and recovery of stranded assets. Federal legislation might be needed to avoid
the conflicting effect of each state acting separately to pass restructuring
legislation (with the likely result of uneven market structures in neighboring
states). While it is uncertain whether or when Federal legislation dealing with
electricity restructuring might be passed, the Company believes that such
legislation would not likely have a negative effect on the Company's U.S.
business, and may create opportunities.
The Company's generation activities in the United States are subject to the
provisions of various laws and regulations, including, the Federal Power Act,
the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") and the
Public Utility Holding Company Act of 1935, as amended ("PUHCA"). There is
legislation currently before the U.S. Congress to repeal part or all of the
current provisions of PURPA and PUHCA. The Company believes that if such
legislation is adopted, competition in the U.S. for new generation capacity from
vertically integrated utilities would increase. However, independents like AES
would also be free to acquire such utilities.
As consumers, regulators and suppliers continue the debate about how to further
decrease the regulatory aspects of providing electricity services, the Company
believes in and is encouraging the continued
30
orderly transition to a more competitive electricity market. Inherent in any
significant transition to competitive markets are risks associated with the
competitiveness of existing regulated enterprises, and as a result, their
ability to perform under long-term contracts such as the Company's
electricity sale contracts. Although AES strongly believes that its contracts
will be honored, there can be no assurance that each of its customers, in a
restructured and competitive environment, will be capable in all
circumstances of fulfilling their financial and legal obligations.
AES's investments and involvement in the development of new projects and the
acquisition of existing power plants and distribution companies in locations
outside the U.S. are increasing. The financing, development and operation of
such businesses may entail significant political and financial uncertainties and
other structuring issues (including uncertainties associated with the legal
environments including tax regulations, with first-time privatization efforts in
the countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, currency inconvertibility, political instability,
civil unrest and, in severe cases, possible expropriation). Although AES
attempts to minimize these risks, these issues have the potential to cause
substantial delays or material impairment to the value of the project being
developed or business being operated.
It is also possible that as more of the world's markets move toward
competition, an increasing proportion of the Company's revenues may be
dependent on prices determined in electricity spot markets. In order to
capture a portion of the market share in competitive generation markets, AES
has in certain instances acquired or invested in low-cost "merchant" plants
(plants without long-term electricity sale contracts) in those markets. Such
an investment may require the Company (as well as its competitors) to make
larger equity contributions (as a percentage of the total capital or
acquisition cost) than the more traditional long-term contract-based
investments. Moreover, in some of these electricity markets, such as in the
United Kingdom, the regulatory authorities have proposed changes, that if
enacted, could restructure the way electricity is bought and sold and, as a
result, could adversely effect the Company's results of operations.
In addition, the Company has entered the new retail supply market, in some cases
as extensions of its generation or distribution businesses, and in other cases
as a separate business enterprise. The Company's retail businesses operate in a
new and developing market environment and hence there is considerable
uncertainty as to how quickly and significantly these markets will develop.
AES's business activities are subject to stringent environmental regulation by
relevant authorities at each location. Particularly in the United States, owners
and operators of coal fired generating facilities are under increasing scrutiny
from state and federal environmental authorities. If environmental laws or
regulations were to change in the future, or if the regulatory agencies with
oversight authority were to adopt new enforcement priorities under existing
laws, there can be no assurance that AES would be able to recover all or any
increased costs from its customers or that its business and financial condition
would not be materially and adversely affected. In addition, the Company or its
subsidiaries and affiliates may be required to make significant capital
expenditures in connection with environmental matters. AES is committed to
operating its businesses cleanly, safely and reliably and strives to comply with
all environmental laws, regulations, permits and licenses but, despite such
efforts, at times has been in non-compliance, although no such instance has
resulted in revocation of any permit or license.
31
FINANCIAL POSITION AND CASH FLOWS
At December 31, 1999, AES had consolidated working capital of $17 million as
compared to negative $722 million at the end of