AES CORPORATION - 10-K Annual Report

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

Delaware (State or other jurisdiction of incorporation or organization)		54-1163725 (I.R.S. Employer Identification No.)
1001 North 19^th Street, Arlington, Virginia (Address of principal executive offices)		22209 (Zip Code)

Title of Each Class
Common Stock, par value $0.01 per share

Name of Each Exchange on Which Registered
New York Stock Exchange

Title of Each Class

Name of Each Exchange on Which Registered

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 / /

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. / /

The aggregate market value of Registrant's voting stock held by non-affiliates of Registrant, at March 2, 2001, was $21,998,399,015. The number of shares outstanding of Registrant's Common Stock, par value $0.01 per share, at March 2, 2001, was 490,226,393.

The Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 19, 2001 is hereby incorporated by reference. Certain information therein is incorporated by reference into Part III hereof.

The AES Corporation (including its subsidiaries and affiliates, and collectively referred to herein as "AES" or the "Company" or "we") is a global power company committed to serving the world's needs for electricity and other services in a socially responsible way. AES participates primarily in two related lines of business: electricity generation and distribution. The Company's electricity generation business is characterized by sales from its power plants to nonaffiliated wholesale customers (generally electric utilities, regional electric companies, electricity marketers and traders or wholesale commodity markets known as "power pools") for further resale to end users. AES's distribution business is characterized by sales of electricity directly to end users such as commercial, industrial, governmental and residential customers.

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 (as of December 31, 2000) of 42,133 megawatts (MW) (the Company's Ekibastuz plant currently operates at approximately 35% of its 4,000 MW nameplate capacity). Of that total, 38% are fueled by coal or petroleum coke, 18% are fueled by natural gas, 33% are hydroelectric facilities, 4% are fueled by oil, and the remaining 7% are capable of using multiple fossil fuels. These MWs are distributed 7,740 in North America, 15,231 in South America, 7,449 in Europe and 11,713 in Asia.

AES has majority ownership in three distribution companies in Argentina and individual distribution companies in the United States, Brazil, El Salvador, Venezuela, 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 18 million customers with annual sales exceeding 126,000 gigawatt hours. On a net equity basis, AES's ownership in distribution businesses represents approximately 6.2 million customers and annual sales exceeding over 48,000 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. The Company is using its distribution infrastructure and knowledge of certain markets to develop the ability to provide wholesale and/or retail telecommunications services. For instance, a subsidiary is currently constructing a national broadband telecommunications network attached to the existing national transmission grid in Brazil.

AES is also currently in the process of adding approximately 7,591 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, a 720 MW natural-gas-fired plant, an 832 MW natural gas-fired plant and a 47 MW coal-fired plant in the United States, a 2,100 MW coal-fired plant in China, an 845 MW natural gas-fired plant and a 123 MW hydroelectric facility in Argentina, a 360 MW coal-fired plant in England, two natural gas-fired plants totaling 810 MW in Bangladesh, a 310 MW natural gas-fired plant and liquefied natural gas plant in the Dominican Republic, a 165 MW natural gas-fired plant in Sri Lanka and a 120 MW hydroelectric facility in Panama.

AES's total MW of the 141 power plants in operation or under construction is approximately 49,724 MW and net equity ownership (total MW adjusted for the Company's ownership percentage) represents approximately 31,751 MW.

AES continually considers business development 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. In the event that the Company makes an unsolicited offer to acquire another company, management of the target company may oppose the offer and not provide the Company with access to financial and operational information that could be obtained if management supported the offer. 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.

In May 2000, a subsidiary of the Company won a bid to purchase a controlling interest in the 1,580 MW Mohave Generating Station ("Mohave") in Laughlin, Nevada from Southern California Edison Company ("Edison"), Los Angeles Department of Water and Power ("LADWP") and Nevada Power Company for $667 million. Mohave provides power to markets in Phoenix, Arizona, Las Vegas, Nevada and Southern California. The approval to permit AES to purchase the 56% interest currently held by Edison was denied by the California Public Utility Commission. In addition, another party has exercised its right of first refusal to acquire the 20% interest held by LADWP. AES continues to pursue the purchase but there can be no assurance that the Company will be successful in acquiring the ownership interest on the terms determined in the original competitive bid.

In February 2001, a subsidiary of the Company entered into an agreement to acquire Thermo Ecotek Corporation ("Thermo Ecotek"), a wholly owned subsidiary of Thermo Electron Corporation. The purchase price for the transaction is approximately $195 million in cash, plus additional closing adjustments to reimburse the seller for project development expenses incurred between September 30, 2000, and the closing date of the transaction. Thermo Ecotek is a developer and operator of gas-fired, biomass-fired (agricultural and wood waste) and coal-fired power plants. The portfolio of assets to be acquired by AES includes 516 gross MW of operating power assets in the United States, the Czech Republic, and Germany, a natural gas storage project in the United States, and over 1,250 MW of advanced development power projects in the United States. The transaction is subject to a number of closing conditions, including anti-trust and other state and federal regulatory approvals, as well as customary conditions. The closings will be structured in two phases, both of which are expected to close by the end of 2001.

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.

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.

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.

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 distribution business, which includes retail energy supply and the development of the ability to provide wholesale and retail telecommunication services in certain markets. Elements of the Company's strategy include:

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 primary 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. A significant portion of the Company's generating businesses are structured so that each power plant generally relies on one power sales contract or hedging arrangement with a single electric customer for the majority, if not all, of its revenues. Several of AES's generation plants do not make all or a significant portion of their electricity sales pursuant to long-term contracts but rather pursuant to short-term contracts or into 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.

AES has also 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.

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 non-recourse debt or "project financing." The lenders under these project financing structures generally do not have recourse 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.

A core part of AES's corporate culture is a commitment to "shared principles." These principles describe how AES people endeavor to commit themselves to the Company's mission of serving the world by providing safe, clean, reliable and low-cost electricity while adhering to AES's principles. The principles are:

Integrity—AES strives to act with integrity, or "wholeness." AES people seek to keep the same moral code at work as at home.

Fairness—AES wants to treat fairly its people, its customers, its suppliers, its stockholders, governments and the communities in which it operates.

Fun—AES desires that people employed by the Company and those people with whom the Company interacts have fun in their work. The Company believes that making decisions and being

accountable is fun, and has structured its organization to maximize the opportunity for fun for as many people as possible.

Social Responsibility—Primarily, the Company believes that doing a good job at fulfilling its mission is socially responsible. But the Company also believes that it has a responsibility to be involved in projects that provide other social benefits, and consequently has instituted programs such as corporate matching of individual charitable gifts.

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 business 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.

The following tables set forth information regarding the Company's businesses that are in operation or under construction at December 31, 2000. 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

Generation Facilities in Operation	Fuel	Year of Acquisition or Commencement of Commercial Operations*	Approximate Capacity in Megawatts (MWS)	Geographic Location	AES Equity Interest (Percent)
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
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
Central and South 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	22
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	85	Panama	49
AES Tiete (10 plants)	Hydro	1999	2,650	Brazil	44
AES Ururguaina	Gas	2000	600	Brazil	100
EDC	Thermal/Hydro	2000	2,265	Venezuela	87
Alicura	Hydro	2000	1,000	Argentina	98
Mamonal	Gas	2000	90	Columbia	62
TermoCandelaria	Gas	2000	314	Columbia	100
Merida III	Gas/Oil	2000	484	Mexico	55

Distribution Facilities	Year of Acquisition	Approximate Number of Customers Served	Approximate Gigawatt Hours	Geographic Location	AES Equity Interest (Percent)
Light	1996	2,800,000	19,981	Rio de Janeiro, Brazil	21
EDEN	1997	277,533	2,570	Buenos Aires, Argentina	60
EDES	1997	138,528	898	Buenos Aires, Argentina	60
CEMIG	1997	4,680,000	32,179	Minas Gerais, Brazil	22
Tau Power/Altai	1997	150,000	2,000	Kazakhstan	70
Sul	1997	900,160	5,772	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	50
EDELAP	1998	286,768	1,939	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	469,513	2,572	Kazakstan	NA
CESCO	1999	600,000	2,102	India	48
EDC	2000	1,159,261	9,799	Caracas, Venezuela	87
CAESS, EEO & DEUSEM	2000	604,978	2,055	San Salvador, El Salvador	33

Totals		17,554,741	128,376

Over the past decade, regulations and laws affecting U.S. and world electricity generation and distribution businesses have moved toward more competition and less government control. The timing of this transition and the nature of the new regulatory rules varies greatly among states and countries.

In the U.S., the movement toward competitive markets has been slowed by the recent events in California. In the last 5 years, several states (including California) passed legislation that allows electricity customers to choose their electricity supplier in a restructured electricity market (so-called "retail access" or "customer choice" laws). While these "customer choice" plans differ in detail, they share some important elements: (1) they allow certain customers to choose their electricity supplies by a certain date (the dates in existing or proposed legislation vary between 1998 and 2007); and (2) they allow utilities to recover so-called "stranded costs"—the remaining costs of uneconomic generating or regulatory assets (including Qualifying Facility ("QF") contracts). However, in some markets—particularly California's —"deregulation" has resulted in only partial deregulation. Retail prices in California (and some other states) were required to be capped at a level designed to be higher than wholesale price levels. But because of a supply shortage, wholesale prices in California have substantially exceeded the capped retail prices—causing a structural imbalance between the wholesale and retail markets. While it is uncertain whether this imbalance will be repeated in other states, this structural flaw (partial deregulation) is capable of creating supply shortages and high power prices in other States. To the extent that other jurisdictions adopt similar partial deregulation, the problems currently experienced in California may be repeated elsewhere.

The events in California have generally caused lawmakers and politicians to slow the transition to deregulation —or even in some cases to propose a return to a regulated electric market. For example, New Mexico recently postponed the date for "customer choice" in that state from 2003 to 2007 (while encouraging the development of new supply in the interim). Nevada has also announced that it will indefinitely postpone its plans for deregulation.

AES owns approximately 4,000 MW of gas-fired generation in the Los Angeles area (AES Southland), but has sold the electricity output of those plants to a third party in exchange for substantially fixed long-term payments under a tolling agreement. Most AES generation businesses—AES Hawaii, Shady Point, Thames, Warrior Run, and Beaver Valley, for example—have long term

revenue contracts that substantially reduce their exposure to wholesale price fluctuations. Some U.S. plants—specifically Placerita, the New York plants (Westover, Greenidge, Somerset and Cayuga) and Deepwater—do not have long-term revenue contracts and therefore are more exposed to volatility in wholesale electric prices.

In addition to State restructuring legislation, there continues to be a number of Federal bills under consideration. 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 governing 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.

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 (the "SEC") approving the Company's application to be classified as an exempt holding company under Section 3(a)(5) of PUHCA.

In August 2000, AES announced it had reached a definitive merger agreement with IPALCO Enterprises, Inc. ("IPALCO") for approximately $2.15 billion, plus the assumption of $890 million of debt and preferred stock. IPALCO is a utility holding company whose primary subsidiary, Indianapolis Power & Light, is an integrated utility. Under current SEC guidelines and interpretations of PUHCA, AES is not permitted to control both the transmission and distribution assets of both CILCORP and IPALCO, even with the current exemption under Section 3(a)(5) of PUHCA. The business combination has now been completed, and as a condition of the SEC Order granting the PUHCA exemption, the Company is required to divest the utility assets of CILCORP within two years.

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.

ANEEL also 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.

The electricity industry in the UK is subject to regulation under, among other things, the Electricity Act of 1989 (as amended principally by the Competition and Service (Utilities) Act 1992 and the Utilities Act 2000). Under the Electricity Act, a license is generally required to generate, transmit or supply electricity. Under the present electricity regime, electricity is traded between generators and suppliers through a day-ahead market in England and Wales (the "Pool"), which is administered by The National Grid Company plc. The Pool is used to determine which generating assets are called to satisfy demand at any particular time and what price is received by them. The price is set by the marginal price for sales of electricity. The electricity generated at the power stations is delivered through the high voltage transmission system owned and operated by The National Grid. It is then transformed for delivery on to the local distribution networks owned and operated by holders of public electricity supply licenses.

The current pool system is scheduled to be replaced on March 27, 2001 by the New Energy Trading Arrangements ("NETA"). NETA will establish bilateral trading between generators, suppliers and other traders. Under NETA, the present pooling and settlement agreement governing the operation of the electricity pool will be replaced. The new arrangements provide mechanisms for near real-time clearing and settlement of differences between contractual and physical positions of those buying, selling, producing and consuming electricity. A balancing mechanism will enable the system operator, National Grid, to change levels of generation and demand to near real-time; and a mechanism for imbalance settlement will provide for the settling of the differences between net physical and net contractual positions of parties. Since NETA has not been implemented, there can be no assurance either that the new arrangements will achieve their objectives or that there will not be material disruptions in the electricity trading system as a result of the implementation of the new arrangements.

AES Drax entered into a 15 year hedging agreement with a subsidiary of Texas Utilities, Inc. ("TXU") at the closing of the acquisition of the Drax power station to protect a significant portion of AES Drax's revenues from price fluctuations in the electricity market. The hedging contract originally was a financial instrument settled against the pool purchase price ("PPP"). As discussed above, NETA is scheduled to replace the pool system on March 27, 2001 with a physically settled market based on bilateral contracts. Consequently, a single clearing price such as the PPP may no longer exist. In February 2000, AES Drax and TXU agreed to changes to the hedging contract, effective upon the implementation of NETA, which are intended to preserve the original commercial intent of the parties. The principal change to the hedging contract was to convert it from a financially settled instrument to physical settlement.

Under the terms of AES Drax's 1.3 billion sterling bank facility, the amendment to the hedging agreement required the prior consent of a majority of the lenders thereunder. In addition, under the terms of the bank facility AES Drax had undertaken to have a trading strategy to be implemented under NETA approved by the majority senior lenders at least five weeks prior to implementation of NETA. AES Drax has obtained a temporary waiver of these requirements through April 6, 2001. AES Drax is currently seeking permanent approval from the senior lenders of the revised terms of the hedging agreement, a proposed trading strategy for the Drax power station under NETA and certain other related matters. There can be no assurance that such approvals will be obtained. In addition, under the terms of AES Drax's outstanding senior secured bonds (200 million pound sterling 9.07%

Senior Secured Bonds due 2025 and $302.4 million 10.41% Senior Secured Bonds due 2020) the amendment to the hedging agreement constitutes an event of default thereunder unless each of ratings agencies reaffirms their ratings of such bonds within 30 days of the effective date of the hedging amendment. AES Drax is currently seeking such rating affirmations. There can be no assurance that such rating affirmations will be obtained.

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 significant 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 additional material compliance 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, although AES's businesses generally take into account capital expenditures for future environmental compliance. The Company is not aware of any currently planned changes in law, however, that would have 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, sulfur dioxides ("SO₂") and nitrogen oxides ("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 (volatile organic compounds ("VOC") and NOx) and have resulted in the imposition by various states of "reasonably available control technology" to reduce such emissions.

As a result of the shortage of electricity in California this year, the generating facilities of one of the Company's subsidiaries (AES Southland), which has approximately 4,000 megawatts of electric generation capacity, operated at substantially higher than expected capacity factors for most of 2000. These higher than expected capacity factors resulted in AES Southland's generating facility at Alamitos

exceeding its annual inventory of NOx air emission allocations. See Item 3—Litigation for a description of certain litigation.

Global warming continues to be a concern. While it now seems unlikely that the Kyoto Protocol to the United Nations Framework Convention on climate change (which would force U.S. and other signatory countries to make substantial reductions in "greenhouse gas" emissions) will be ratified by each signatory country any time soon, global warming remains a policy issue that is regularly considered for possible government regulation. Although AES believes that any government legislation affecting greenhouse gases (other than voluntary reductions) is unlikely, such legislation could substantially affect both the costs and the operating characteristics of AES's fossil-fuel (coal, oil, gas) businesses.

In 1997, the U.S. Environmental Protection Agency ("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 February 2001, the U.S. Supreme Court upheld the new standards, but held that the EPA's policy of implementing these standards in non-attainment regions was unlawful. If the EPA develops a reasonable interpretation of these standards as they may be applied in non-attainment regions, consistent with the Supreme Court's decision, 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, and as amended on August 2000 by a federal appeals court decision, requires twenty-two states and the District of Columbia to submit revised "state implementation plans" "SIPs" by October 2000 and have NOx emission controls in place by May 2004 (the "NOx SIP call"). In March 2000, a federal appeals court upheld the NOx SIP call rule. In a related action, the EPA in December 1999 granted petitions filed by four northeastern states seeking to reduce ozone damage 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 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. In December 2000, the EPA decided that mercury emissions from coal- and oil fired power plants should be regulated. The EPA expects to propose these regulations by December 2003 and issue final regulations by December 2004. Once these final regulations have been issued, the use of "maximum available control technology" may 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. See Item 3—Litigation for a description of certain litigation.

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. In May 2000, the EPA issued a final regulatory determination which concluded that coal ash is exempt from hazardous waste regulation. It was determined, however, that national non-hazardous waste regulations are needed for coal combustion wastes disposed in surface impoundments and landfills. The Company does not expect costs to comply with these regulations, if and when passed, will have a material adverse effect on its consolidated financial position or results of operations. 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.

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 from 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.

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 an

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	3,774	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	510	Victoria	100
Jeeralong	Gas	1999	449	Australia	100
Gardabani	Gas/Oil	2000	600	Georgia	100
Kharmi I & II	Hydro	2000	223	Georgia	100
Europe
Kilroot	Coal/Oil	1992	520	United Kingdom	98
Belfast West	Coal	1992	120	United Kingdom	98
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

Totals			42,133
Under Construction
Yangcheng Sun City	Coal	2001	2,100	China	25
Parana	Gas	2001	845	Argentina	67
Fifoots Point	Coal	2001	360	United Kingdom	100
Haripur	Gas	2001	360	Bangladesh	100
Meghnaghat	Gas	2001	450	Bangladesh	100
Medina Valley	Gas	2001	47	Illinois, U.S.	100
Andres	Gas	2002	310	Dominican Republic	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
Kelanitissa	Diesel	2002	165	Sri Lanka	100
Red Oak	Gas	2002	832	New Jersey, U.S.	100
Granite Ridge	Gas	2002	720	New Hampshire, U.S.	100
Esti	Hydro	2003	120	Panama	49

Totals			7,591