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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 of incorporation or organization) (I.R.S. Employer 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 REGISTER
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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
Warrants to Purchase Common Stock,
par value $.01 per share NASDAQ
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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. [ ]
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The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at February 1, 1998, was $5,415,482,847. The
number of shares outstanding of Registrant's Common Stock, par value $0.01 per
share, at February 1, 1998, was 175,065,659.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Stockholders of the
Registrant to be held on April 21, 1998. Certain information therein is
incorporated by reference into Part III hereof.
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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 helping to meet the world's needs by providing
electricity to customers in many countries in a socially responsible way.
Until recently, the Company's sales of electricity were almost
exclusively made to customers (generally electric utilities or regional electric
companies) on a wholesale basis for further resale to end users. This is often
referred to as the electricity "generating" business. Sales by these generating
companies are usually made under long-term contracts from power plants owned by
the Company's subsidiaries and affiliates. The Company's ownership portfolio of
power facilities includes new plants constructed for such purposes ("greenfield"
plants) as well as existing power plants acquired through competitively bid
privatization initiatives and negotiated acquisitions.
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 17,636 megawatts (MW). Of
that total, 43% are fueled by coal or petroleum coke, 6% are fueled by natural
gas, 34% are hydroelectric facilities, 6 % are fueled by oil, and the remaining
11% are capable of using multiple fossil fuels. Of the total MW, 1,069 (six
plants) are located in the United States, 1,588 (four plants) are in China,
1,281 (three pants) are in Hungary, 5,856 (thirty-nine plants) are in Brazil,
5,384 (seven plants) are in Kazakhstan (including 4,000 MW attributable to
Ekibastuz which currently has a capacity factor of approximately 20%), 210 (one
plant) is in the Dominican Republic, 110 (one plant) is in Canada, and 695 (two
plants) are in Pakistan.
AES is also currently in the process of adding approximately 5,331 MW
to its operating portfolio by constructing several new plants. These include a
180 MW coal-fired plant in the United States, four coal-fired plants in China
totaling 2,314 MW, a 230 MW natural gas-fired plant in the UK, a 405 MW natural
gas-fired plant in the Netherlands, a 288 MW kerosene-fired plant in Australia,
an 830 MW natural gas-fired plant in Argentina, a 484 MW natural gas-fired plant
in Mexico and a 600 MW natural gas-fired plant in Brazil.
As a result, AES's total MW of 84 power plants in operation and under
construction is approximately 22,967 and net equity ownership (total MW adjusted
for the Company's ownership percentage) represents approximately 12,247 MW.
Beginning in 1996 and continuing through 1997, AES has also acquired
interests (both majority and minority) in companies that sell electricity
directly to commercial, industrial, governmental and residential customers. This
is often referred to as the electricity "distribution" business. Electricity
sales by AES's distribution businesses are generally made pursuant to the
provisions of long-term electricity sale concessions granted by the appropriate
governmental authority as part of the original privatization of each
distribution company. 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. Each distribution company
also purchases, in varying proportions, electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.
AES has majority ownership in two distribution companies in Argentina,
one in Brazil and one in El Salvador (purchased in 1998), and less than majority
ownership in two additional distribution companies in Brazil. These six
companies serve a total of approximately 8 million customers with gigawatt hour
sales exceeding 63,000. On a net equity basis, AES's ownership represents
approximately 2 million customers and gigawatt hour sales exceeding 15,000.
AES has been successful in growing its business and serving additional
customers by participating in competitive bidding under privatization
initiatives and has been particularly interested in acquiring existing
businesses or assets in electricity markets that are promoting competition and
eliminating rate of return regulation. In such privatizations, sellers generally
seek to complete competitive solicitations in less than one year, much quicker
than the time periods associated with greenfield development, and usually
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.
Because of this relatively quick process or other considerations, it
may not always be possible to arrange "project financing" (the Company's
historically preferred financing method, which is discussed further under Item
7, "Discussion and Analysis of Financial Condition and Results of Operations"
herein) for specific potential acquisitions. Additionally, as in the past,
certain acquisitions or the commencement of construction in several greenfield
developments would potentially require the Company to obtain substantial
additional financing including both debt and equity.
OUTLOOK
All over the world, electricity markets continue to be restructured and
there is a trend 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 the UK, Brazil and some of those 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 systems to private investors.
This global trend of electricity market restructuring provides significant new
business opportunities for companies like AES.
Several states in the United States are also beginning to follow this
trend. In particular, some regulated public utilities have begun to sell or
auction their generation capacity. Substantially all of the transmission and
distribution services in the United States continue, however, to be regulated
under a state and Federal regulatory framework. 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 1998 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.
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 United States is 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, 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.
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, and its telephone number is (703)
522-1315.
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.
o Changes in company-wide operation and availability (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, transmission of electricity and insurance.
o In certain non-U.S. countries where the Company is or is seeking to
conduct business: unexpected changes 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.
o 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.
o Legislation intended to promote competition in U.S. and non-U.S.
electricity markets, such as those currently receiving serious
consideration in the United States Congress to repeal (i) 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 (ii) the Public Utility Holding Company Act
of 1935, as amended; changes in regulatory rule-making by the Federal
Energy Regulatory Commission or other regulatory bodies; changes in
energy taxes; or new legislative or regulatory initiatives in non-U.S.
countries; changes in national, state or local environmental, safety,
tax and other laws and regulations applicable to the Company or its
operations.
o 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.
o 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.
o 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.
o Unusual weather conditions and the specific needs of each plant to
perform unanticipated facility maintenance or outages (including annual
or multi-year).
o The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims, 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.
o 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 only one industry segment: electric power
supply.
(c) Narrative description of business.
The Company attempts to participate in competitive power markets as
they develop either by greenfield development or by acquiring and operating
existing facilities or systems in these markets. The Company generally operates
electric generating facilities that utilize natural gas, coal, oil, hydro power,
or combinations thereof. In addition, the Company participates in electricity
distribution and retail supply businesses in certain limited instances, and will
continue to review opportunities in such markets in the future. Other elements
of the Company's strategy include:
o Supplying energy to customers at the lowest cost possible, taking into
account factors such as reliability and environmental performance;
o Constructing or acquiring projects of a relatively large size
(generally larger than 100 megawatts);
o When available, entering into power sales contracts with electric
utilities or other customers with significant credit strength; and
o Where possible, participating in distribution and retail 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 historical and significant focus has been and continues
to be the wholesale generation and supply of electricity. More recently AES has
acquired four electricity distribution businesses and has invested in two
integrated utilities in Central and South America. Asset composition, operating
margins and a variety of other business characteristics differ significantly
from one type of business to another. 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. Integrated utilities have
characteristics of both businesses. In addition, integrated utilities may
generate more or less of their own electricity. For example, Light generates a
comparatively low percentage of its own electricity (approximately 16 percent)
while CEMIG generates almost all of its own electricity needs.
Most of AES's electric generation plants sell electricity under
long-term power sales contracts. The Company attempts, whenever possible, to
structure the revenue provisions of its plants' power sales contracts such that
changes in the revenue components of these contracts correspond, as closely as
possible, to fluctuations in the cost components of the plant (primarily fuel
costs). A plant's revenues from a power sales contract usually consists of two
components, energy payments and capacity payments. Energy payments are based on
a plant's net electrical output, with payment rates usually indexed to the fuel
costs of the contracting utility or to general inflation indices. Capacity
payments are based on either a plant's net electrical output (the amount of
electricity delivered on a kilowatt-hour basis) or its available capacity (the
ratio of kilowatt hours the plant delivers to the total kilowatt hours requested
by the customer). Capacity payment rates vary over the term of a power sales
contract according to various schedules.
To the extent possible, the Company attempts to structure an electric
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,
letter of credit reimbursement agreements, and agreements to pay, in certain
circumstances, to project lenders or other parties amounts up to the amounts of
distributions previously made by the applicable subsidiary or affiliate to AES.
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.
Year 2000. The Company is reviewing and assessing the anticipated
costs, problems and uncertainties associated with the so-called Year 2000 issues
in accordance with Securities and Exchange Commission Staff Legal Bulletin No.
5, dated October 8, 1997. In connection therewith, and with its ongoing
evaluation of technological developments and information systems' needs, the
Company's facilities have begun implementation of a Year 2000 review whereby
each facility is in the process of identifying systems requiring modification or
conversion. Within the context of risks identified in the SEC Bulletin noted
above and the ongoing review the Company is conducting, the Registrant believes
that Year 2000 issues will not materially affect its facilities, services, or
competitive conditions, and that the costs of addressing the Year 2000 issues
will not materially impact future consolidated operating results, financial
condition or cash flows.
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 his or her 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.
FACILITIES
The following tables set forth relevant information regarding the
Company's generation facilities that are currently in operation by geographic
region or currently under construction and the distribution companies in which
AES has an ownership interest. 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)
- --------------------------------------------------------------------------------------------------------------------
North America
- -------------
Deepwater Pet coke 1986(1) 143 Texas 100
Beaver Valley Coal 1987 125 Pennsylvania 80
Placerita Gas 1989 120 California 100
Thames Coal 1990 181 Connecticut 100
Shady Point Coal 1991 320 Oklahoma 100
Hawaii (Barbers Point) Coal 1992 180 Hawaii 100
Kingston Gas 1997 110 Canada 50
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 14
CEMIG (35 plants) Hydro(3) 1997 5,068 Brazil 9
Los Mina Oil 1997 210 Dominican Republic 100
Asia and the Pacific
- --------------------
Cili Misty Mountain Hydro 1994 26 China 51
Yangchun Sun Spring Oil 1995 15 China 25
Wuxi Tin Hill Oil 1996 63 China 55
Wuhu Grassy Lake Coal 1996 250 China 25
Ekibastuz Coal 1996 4,000(2) Kazakhstan 70
Chengdu Lotus City Gas 1997 48 China 35
Tau Power (6 plants) Coal/Hydro 1997 1,384 Kazakhstan 85
Hefei Prosperity Lake Oil 1997 76(4) China 70
Jiaozuo Aluminum Power Coal 1997 125(4) China 70
Lal Pir Oil 1997 344 Pakistan 90
Pak Gen Oil 1998 351 Pakistan 90
Europe
- ------
Kilroot (NIGEN) Coal/Oil 1992 520 United Kingdom 47
Belfast West (NIGEN) Coal 1992 240 United Kingdom 47
Medway Gas 1995 688 United Kingdom 25
Borsod (Tiszai) Coal 1996 171 Hungary 63
Tisza II (Tiszai) Oil/Gas 1996 860 Hungary 96
Tiszapalkonya (Tiszai) Coal 1996 250 Hungary 96
Indian Queens Gas 1997 140 United Kingdom 100
- ------------- ---
TOTAL IN OPERATION 17,636
(1) Plant operations commenced in 1986, but control was acquired in 1995.
(2) Due to poor historical maintenance over the ten years prior to the Company's
purchase, the facility's capacity factor is approximately 20%.
(3) Total capacity of CEMIG includes 125 MW of thermal generation. Six hydro
plants represent approximately 90% of CEMIG's total generation capacity.
(4) Seventy-six and 125 MW of Hefei Prosperity Lake and Jiaozuo Aluminum Power,
respectively, are currently in operation. The remaining portions are under
construction.
- --------------------------------------------------------------------------------------------------------------------
YEAR OF
ACQUISITION OR APPROXIMATE
COMMENCEMENT CAPACITY IN AES EQUITY
GENERATION OF COMMERCIAL MEGAWATTS GEOGRAPHIC INTEREST
FACILITIES UNDER CONSTRUCTION FUEL OPERATIONS(1) (MWS) LOCATION (PERCENT)
- --------------------------------------------------------------------------------------------------------------------
Elsta Gas 1998 405 Netherlands 50
Jiaozuo Aluminum Power Coal 1998 125(3) China 70
Aixi Heart River Coal 1998 50 China 70
Hefei Prosperity Lake Oil 1998 39(3) China 70
Barry Gas 1998 230 United Kingdom 100
Warrior Run Coal 1999 180 Maryland 100
Mt. Stuart Oil 1999 288 Australia 100
Parana Gas 2000 830 Argentina 67
Yangcheng Sun City Coal 2000(2) 2,100 China 25
Uruguaiana Gas 2000 600 Brazil 100
Merida III Gas 2000 484 Mexico 55
- ---------- ---
TOTAL UNDER CONSTRUCTION 5,331
TOTAL IN OPERATION AND UNDER CONSTRUCTION 22,967
(1) Dates for commencement of commercial operation of facilities under
construction are projections only and may be subject to change.
(2) Yangcheng Sun City is being constructed over a sixty-month period that began
in 1997. The first of the six 350 MW units is estimated to be completed in
2000.
(3) Seventy-six and 125 MW of Hefei Prosperity Lake and Jiaozuo Aluminum Power,
respectively, are currently in operation. The remaining portions are under
construction.
The table below sets forth information regarding the Company's
distribution facilities.
- -----------------------------------------------------------------------------------------------------
APPROXIMATE NUMBER AES EQUITY
DISTRIBUTION OF CUSTOMERS APPROXIMATE GEOGRAPHIC INTEREST
FACILITIES SERVED GIGAWATT HOURS LOCATION (PERCENT)
- -----------------------------------------------------------------------------------------------------
Light 2,700,000 19,981 Rio de Janeiro, Brazil 14
EDEN 270,000 3,572 Buenos Aires, Argentina 60
EDES 129,000 1,182 Buenos Aires, Argentina 60
CEMIG 4,143,000 32,179 Minas Gerais, Brazil 9
Sul 804,000 5,772 Rio Grande do Sul, Brazil 91
CLESA 188,000 561 Santa Ana, El Salvador 64
- ----- ------- ---
TOTALS FOR DISTRIBUTION FACILITIES 8,234,000 63,247
- ---------------------------------- --------- ------
NORTH AMERICA
AES currently owns and operates, through subsidiaries and affiliates,
seven generation facilities in the United States and Canada representing
approximately 1,179 MW.
Deepwater is a 143 MW petroleum coke-fired cogeneration facility
located near Houston, Texas. The facility sells electricity to Houston Lighting
and Power Company under a power sales contract which expires in 1998. Deepwater,
under a contract which also expires in 1998, produces and delivers process steam
to an ARCO Petroleum Products Company refinery adjacent to the cogeneration
facility. Deepwater currently is in negotiations with various parties to provide
for the continued sale of its electricity and steam generation upon the
expiration of the two mentioned contracts.
Beaver Valley is a 125 MW pulverized coal-fired cogeneration facility
located in Monaca, Pennsylvania. AES is the managing partner and operator of
Beaver Valley. West Penn Power Company purchases electricity produced by the
plant under a power sales contract with a remaining term of approximately 19
years. The facility sells steam to NOVA Chemicals Inc. for use in its chemical
processing activities under a requirements contract with a remaining term of
approximately four years.
Placerita is a 120 MW natural gas-fired, combined-cycle cogeneration
facility near Los Angeles, California. The plant sells electricity to Southern
California Edison Company under a contract with a remaining term of
approximately 16 years. Placerita sells steam to Hillside Oil Partners, which is
engaged in oil recovery operations, and ARCO Oil and Gas Company.
Thames is a 181 MW coal-fired, circulating fluidized bed ("CFB")
cogeneration plant located in Montville, Connecticut. Power generated by Thames
is sold to Connecticut Light and Power Company ("CL&P") under a contract with a
remaining term of approximately 17 years. Thames also sells steam to Stone
Container Paperboard Corporation for use in its recycled paperboard plant
located adjacent to the plant. Moody's Investor Service Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") have recently downgraded CL&P's senior
secured long-term debt from Baa3/BBB- to Ba2/BB, and S&P has placed CL&P on
watch for possible downgrade. As a result of regulatory action by the Public
Service Commission of New Hampshire, Moody's and S&P recently downgraded the
senior unsecured debt of Northeast Utilities, the parent of CL&P, from Ba2/BB to
B1/B+ and S&P has placed Northeast Utilities on watch for possible downgrade.
Shady Point is a 320 MW coal-fired, CFB cogeneration plant in LeFlore
County, Oklahoma. The Shady Point facility includes a 240-ton per day food
grade, liquid CO2 plant, which utilizes in its CO2 production processes
approximately 65,000 pounds per hour of process steam produced by the plant.
Shady Point sells electricity to Oklahoma Gas and Electric Company under a
contract with a remaining term of approximately 10 years.
Hawaii is a 180 MW coal-fired, CFB cogeneration plant located in
Kapolei, Oahu, Hawaii. Hawaii sells electricity to Hawaiian Electric Company,
Inc. under a contract with a remaining term of 25 years. Steam generated by the
plant is sold to Chevron USA Inc. for use in its oil refining operations under a
steam sales agreement with a remaining term of 15 years.
Kingston is a 110 MW gas-fired, combined-cycle cogeneration facility
located in Ernestown Township, Ontario. Kingston is owned by a partnership
comprised of AES and two partners, each owning 25 percent. AES acquired its
interest in Kingston in June 1997 upon completion of its acquisition of the
international assets of Destec Energy, Inc. The plant began commercial
operations in February 1997 and is expected to operate as a baseload facility.
The Company operates the business through an operation and maintenance agreement
entered at the time of its acquisition of its interest in the facility.
LATIN AMERICA
AES currently owns and operates, through subsidiaries and affiliates,
forty-five operating plants in Latin America representing approximately 6,906
MW. In addition, AES has majority ownership in two distribution companies in
Argentina, one in Brazil and one in El Salvador (purchased in 1998), and less
than majority ownership in two additional integrated distribution companies in
Brazil. These six facilities serve a total of approximately 8 million customers
with gigawatt hour sales exceeding 63,000.
San Nicolas is a 650 MW power plant in San Nicolas, Argentina. San
Nicolas sells a total of 345 MW of electricity (approximately 53 percent of the
plant's output capability) under two power sales contracts, each with a
remaining term of three years. Under one of the contracts that runs through
2001, the three recently privatized distribution companies of Empresa Social de
Energia de Buenos Aires S.A. ("ESEBA"), two of which are controlled by AES
through its ownership interest in Empresa Distribuidora de Energia Norte S.A.
("EDEN") and Empresa Distribuidora de Energia Sur S.A. ("EDES") (described
below), purchase 285 MW (except during the month of April of each year, when the
amount purchased is 57 MW). Under the other contract, EDELAP, S.A., a privatized
Argentine distribution company, purchases 60 MW of electricity. The plant sells
additional electricity, when it is profitable to do so, into the Argentine spot
market.
Rio Juramento is a 112 MW hydroelectric station in the province of
Salta, Argentina. The station consists of a 102 MW facility with a large storage
reservoir capable of inter-year storage, and a 10 MW facility capable of
inter-seasonal storage. Rio Juramento has exclusive rights to operate the
facility under a 30-year concession agreement, and sells electricity in the
Argentine spot market.
Hidrotermica San Juan, S.A. ("San Juan") is the owner and operator of
two power generating facilities totaling 78 MW in the province of San Juan,
Argentina. The facility includes a 45 MW hydroelectric power plant and a 33 MW
gas combustion power plant.
Los Mina is an oil-fired, simple-cycle power plant located in Santo
Domingo, Dominican Republic that AES acquired through its purchase of the
international assets of Destec in June 1997. The 210 MW plant operates two
simple-cycle combustion turbine generators on land adjacent to a government
owned electricity substation. Los Mina is the second largest generator on the
island and supplies power to the capital city of Santo Domingo. The facility
burns fuel oil that is piped to the plant from a nearby barge dock. The facility
began operations in May 1996. Due to recurring turbine blade failure, Los Mina
has been out of service and unable to provide electricity in several instances
during the period prior to and after the date of AES's acquisition of the
facility. Los Mina is reviewing steps with the facility's equipment supplier to
increase the reliability of the plant's output and has begun processing claims
to recover costs of the repairs and outages against the contractor and with its
insurer. Although no assurance can be given that Los Mina will be able to
collect on any of these claims, the Company believes that the outcome of this
matter will not have a material adverse effect on its consolidated financial
position, results of operation or cash flows.
DISTRIBUTION FACILITIES IN LATIN AMERICA
Light Servicos de Electricidade, S.A. ("Light") is a Brazilian electric
power generation, transmission and distribution system serving 28 municipalities
in the state of Rio de Janeiro, Brazil that is controlled by a consortium
comprised of AES, Electricite de France, Houston Industries, Companhia
Siderurgica Nacional and Banco Nacional de Desenvolvimento Economico E Social
(the
"Light Consortium"). In connection with the purchase of the controlling interest
by the Light Consortium in 1996, the Ministry of Mines and Energy of Brazil
granted a 30-year concession to Light pursuant to the terms of a concession
agreement which obligates Light to provide electric services to all customers
within its concession. Light generates about 16 percent of the total electricity
it distributes through four hydroelectric complexes having an aggregate
installed generating capacity of approximately 788 MW. Of the remaining
electricity distributed by Light (approximately 84 percent of the total), 53
percent is purchased from Furnas Centrais Electricas S.A., a power generation
and transmission company owned by Eletrobras, and the remaining 31 percent is
purchased from Itaipu Binacional, a power generation company owned by the
Republic of Brazil and the Republic of Paraguay ("Itaipu"). AES has principal
responsibility for all matters relating to generation and purchasing of
electricity by Light through its participation in the Light Consortium.
Companhia Energetica de Minas Gerais ("CEMIG") is an integrated
electric utility serving the State of Minas Gerais in Brazil. Through a
consortium consisting of AES and two partners (the "CEMIG Consortium"), AES has
significant operating influence over CEMIG, including the right to appoint its
chief operating officer, and otherwise shares control of CEMIG with the State of
Minas Gerais. As it did with Light, the Ministry of Mines and Energy of Brazil
granted concessions to CEMIG pursuant to the terms of six concession agreements
which obligate CEMIG to provide electric services to all customers within its
concession, and authorizes CEMIG to charge its customers a tariff for electric
services. CEMIG transmits and distributes electricity, generated or purchased by
it, to substantially all areas in Minas Gerais. In addition to the approximately
5,068 MW of electricity it generates, CEMIG purchases approximately 33 percent
of its electricity sales from Itaipu.
EDEN and EDES are two of the three privatized former distribution
companies of ESEBA and are controlled by AES through the purchase of its
ownership interest in 1997. EDEN and EDES have 95-year territorial exclusive
franchise concessions and serve approximately 400,000 customers in the northern
and southern portions of the Argentine Province of Buenos Aires. EDEN and EDES
source their electric power requirements using both spot market purchases in the
wholesale electricity market and contract purchases from San Nicolas, which is
also controlled by AES. The contract, which was signed in May 1993 for a term of
8 years, provides for purchases of approximately 2,332 gigawatt hours of
electricity per year.
Companhia Centro-Oeste de Distibuicao de Energia Eletrica ("Sul") is a
distribution company recently privatized by Companhia Estadual de Energia
Eletrica ("CEEE"). AES purchased Sul in October 1997. Prior to privatization
CEEE was a vertically-integrated electric utility that provided approximately 98
percent of the electricity in the Brazilian State of Rio Grande do Sul. Sul
serves the central and western portion of the state. Sul has a 30 year exclusive
concession to distribute electricity in the territory it currently serves. Sul's
location in the State of Rio Grande do Sul borders Argentina which may allow AES
to integrate its Brazilian and Argentine operations. Sul, along with the other
two distribution companies formerly part of CEEE, will be AES Uruguaiana's
customers (described below in "Projects under Construction").
Compania de Luz Electrica de Santa Ana ("CLESA") is an electricity
distribution company serving the city and surrounding areas of Santa Ana, El
Salvador. AES acquired control of CLESA in February 1998, through its payment of
$109 million for 79.78% of the outstanding shares of CLESA. Comision Ejecutiva
Hidroelectrica del Rio Lempa ("CEL"), the El Salvador government-owned utility,
sold CLESA, along with three other Salvadoran distribution companies, in an
auction held in January 1998. Energia Global International, Ltd., a Bermuda
company with activities in Central America, has the right to purchase up to 20%
of AES's interest in CLESA. CLESA's service area borders Guatemala and Honduras
to the north, with access to the Pacific Ocean. CLESA purchases its electricity
in the local spot market and from CEL under an annual contract.
For a further description of the tariff rate structures, the tariff
rate adjustment escalators and the currency exchange rate adjustments that may
affect the tariff structures in future years for AES's distribution facilities,
please see the information contained in Item 7, "Discussion and Analysis of
Financial Condition and Results of Operations" herein.
ASIA AND THE PACIFIC
In Asia and the Pacific, AES currently operates and owns (entirely or
in part), through subsidiaries and affiliates, interests in nineteen generation
facilities representing approximately 6,682 MW of generating capacity.
The Company founded AES China Generating Co. Ltd. ("AES Chigen") in
December 1993 to develop, acquire, finance, construct, own and operate electric
power generation facilities in the People's Republic of China (the "PRC").
Initially a public company in its own right, AES now owns all of the outstanding
shares of AES Chigen through the completion of its amalgamation with AES Chigen
in May 1997 wherein AES issued approximately 2.4 million shares of AES Common
Stock, par value $.01 per share, in exchange for all of the issued and
outstanding shares of the publicly held, Class A Common Stock of AES Chigen. The
total purchase price was valued at approximately $157 million. AES Chigen has
developed nine power projects which are currently in operation or under
construction in the PRC.
Cili Misty Mountain, located in Cili County, Hunan Province, PRC,
consists of three hydroelectric generating units amounting to 26 MW, the third
unit of which commenced commercial operation in 1997. Cili Misty Mountain is
owned by Xiangci-AES, a 25-year joint venture formed by Hunan Cili Electric
Power Company and AES Chigen. Power is purchased by Hunan Cili Electric Power
Company.
Yangchun Sun Spring, located in Yangchun, Guangdong Province, consists
of one existing 8.6 MW diesel engine generating facility which was constructed
prior to the Company's involvement, and another 6.5 MW diesel engine generating
facility which commenced commercial operation in April 1996. The facility is
owned by Yangchun Fuyang, a 12.5-year cooperative joint venture formed by
Yangchun Municipal Power Supply, Shenzhen Futian Gas Turbine Power Co., Ltd. and
a wholly-owned subsidiary of AES Chigen. Yangchun Municipal Power Supply Bureau
purchases the plant's electricity and Yangchun Municipal Power Supply provides
fuel, both in accordance with 12.5-year agreements.
Wuxi Tin Hill is an oil-fired, combined cycle power plant which
consists of a 48 MW gas turbine generating facility and a 15 MW heat recovery
steam turbine generating facility located in Xishan (previously known as Wuxi
County), Jiangsu Province, PRC. The gas turbine generating plant commenced
commercial operation in March 1996. The heat recovery steam turbine generating
plant commenced commercial operation in the first quarter of 1997. Wuxi Tin Hill
is owned by Wuxi-AES-CAREC and Wuxi-AES-Zhonghang, two 16-year cooperative joint
ventures formed among AES Chigen and China National Aero-Engine Corporation
("CAREC") and Wuxi Power Industry Company ("Wuxi Power"). Xishan Electricity
Management Office purchases the power and steam generated by the plant in
accordance with a 16-year purchase contract. Fuel to the plant is supplied via
two local State-owned oil companies under 16-year contracts.
Wuhu Grassy Lake is a 250 MW coal-fired power plant located near Wuhu,
Anhui Province, PRC. It is the phase IV expansion of an existing 325 MW
coal-fired power station. Both units of the power plant have now commenced
commercial operations. Wuhu Grassy Lake is owned by Wuhu Shaoda, a 20-year
equity joint venture owned by an AES Chigen subsidiary, China Power
International Holdings Limited, Anhui Liyuan Electric Power Development Company
Limited, and Wuhu Energy Development Company Limited. Power is purchased
pursuant to a 20-year operation and off-take contract with Anhui Provincial
Electric Power Corporation.
Chengdu Lotus City is a 48 MW natural gas-fired power plant located in
Chengdu, Sichuan Province, PRC. Construction of the power plant commenced in
September 1996 and commenced commercial operation during 1997. Chengdu Lotus
City is owned by Chengdu AES-Kaihua, a 16-year cooperative joint venture formed
by AES Chigen, Huaxi Electric Power Shareholding Company Ltd. ("Huaxi"),
Huachuan Petroleum & Natural Gas Exploration ("Huachuan") and Development
Company and CAREC. Huaxi purchases the facility's generated power and Huachuan
provides fuel, both pursuant to separate 15-year agreements.
Hefei Prosperity Lake is an oil-fired combined cycle power plant
consisting of two 38 MW gas turbines generating units ("gas turbine unit") and
one 39 MW heat recovery steam turbine generating unit ("steam turbine unit"). It
is located within the boundaries of an existing 325 MW coal fired power plant in
Hefei, Anhui Province, PRC. Construction of the power plant commenced in
November 1996. The gas turbine unit commenced commercial operation in the third
quarter of 1997 and the steam turbine unit is scheduled to commence commercial
operation in the third quarter of 1998. Hefei Prosperity Lake is owned by
Liyuan-AES and Zhongli Energy, two 16-year cooperative joint ventures formed
among a subsidiary of AES Chigen, Hefei Municipal Construction and Investment
Company and by Anhui Liyuan Electric Power Development Company Limited. Anhui
Provincial Electric Power Corporation purchases power from the plant pursuant to
a 16-year operation and off-take contract.
Jiaozuo Aluminum Power is a 250 MW coal-fired power plant located
adjacent to the Jiaozuo Aluminum Mill ("Jiaozuo Mill") in Jiaozuo, Henan
Province, PRC. Construction of the power plant commenced in the first quarter of
1995. The first unit of the power plant commenced commercial operation in the
third quarter of 1997. The second unit is expected to commence commercial
operation in the second quarter of 1998. Jiaozuo Aluminum Power is owned by
Jiaozuo Wan Fang, a 23-year cooperative joint venture owned 70 percent by an AES
Chigen wholly-owned subsidiary and 30 percent by Jiaozuo Mill. Power is
purchased under 23-year contracts by Jiaozuo Mill and by the Henan Electric
Power Corporation. Jiaozuo Aluminum Power purchases fuel under one-year
negotiated contracts from the local area.
Ekibastuz is a 4,000 MW (design capacity) mine-mouth, coal-fired power
facility in eastern Kazakhstan. Due to economic difficulties over the ten years
prior to the Company's purchase, the facility has experienced a reduction in
performance and has operated at a capacity factor of up to approximately 20
percent. In its 1996 acquisition of the facility, AES agreed to increase the
capacity to 63 percent over a five-year period (contingent on the purchaser's
performance of its obligations under the power sales contract). For a further
description of Ekibastuz, see the information contained in the section entitled
"Results of Operations" contained in Item 7, "Discussion and Analysis of
Financial Condition and Results of Operations" hereof.
Lal Pir and Pak Gen are adjacent 344 and 351 MW, respectively,
oil-fired facilities in Punjab Province, Pakistan. Lal Pir commenced commercial
operation during the fourth quarter of 1997 and Pak Gen commenced commercial
operation in the first quarter of 1998. The Pakistan Water and Power Development
Authority ("WAPDA") purchases the electrical capacity and electrical output of
the facilities through two separate 30-year power sales agreements. The Pakistan
State Oil Company Limited ("PSO"), the state-owned petroleum company, supplies
fuel under 30-year agreements. Certain of the obligations of WAPDA under the
power sales agreements and of PSO under the fuel supply agreements are
guaranteed by the Government of Pakistan.
Tau Power, also known as Altai, is a joint venture that is owned by AES
and Israel-based Suntree Power. In October 1997, Tau Power completed its
acquisition and takeover of two hydro-electric stations and four combined heat
and power stations in the province of East Kazakhstan. The total electric
capacity of the stations included in the agreement is 1,384 MW, with additional
thermal capacity of over 1,000 MW electric equivalent. The power stations
included in the agreement signed are: the 332 MW Ust-Kamenogorsk GES, the 702 MW
Shulbinsk GES, the 240 MW Ust-Kamenogorsk TETS, the 50 MW Leninogorsk TETS, the
50 MW Sogrinsk TETS and the 10 MW Semipalatinsk TETS. Included in the
transaction, AES obtained ownership and control of the retail sales department
of the former utility and will assume the existing power supply contracts with
the 50 largest customers in East Kazakhstan, including the distribution
companies.
EUROPE
AES currently owns and operates, through subsidiaries and affiliates,
seven plants in Europe representing approximately 2,869 MW.
NIGEN is a joint venture between AES and a Belgian utility that
consists of two power plants in Northern Ireland: Kilroot, a 520 MW dual-fired
(coal and oil) power plant, and Belfast West, a 240
MW coal-fired power plant. The Kilroot and Belfast West plants have entered into
power sales contracts, subject to cancellation in 13 years and three years,
respectively, with Northern Ireland Electricity, plc, a transmission and
distribution company.
Medway Power Limited is a 688 MW combined cycle gas-fired power plant
in Southeast England on the Isle of Grain. Medway is owned by a joint venture
among an AES subsidiary and subsidiaries of Southern Electric plc ("Southern")
and SEEBOARD plc ("SEEBOARD"). The plant began operations in November 1995. AES,
through a subsidiary, operates and maintains the plant. Medway Power sells its
entire output through national electricity pool trading arrangements (the
"Pool") at prices based on the supply of, and demand for, electricity available
in the Pool. In addition, Medway Power has entered into a contract with each of
Southern and SEEBOARD, under which Southern and SEEBOARD will pay Medway Power
capacity payments based on the plant's available capacity, and energy cost
payments, based on the plant's actual sales of electricity to the Pool, that
reflect fuel costs and variable transmission charges incurred (each a "Contract
for Differences"). The basis of the contracts is 660 MW. Sales of electrical
output in excess of 660 MW are sold into the Pool, and are not subject to the
Contract for Differences.
Tiszai Eromu Rt. owns and operates three power plants totaling 1,281 MW
of gross capacity and a coal mine in Hungary. The plants consist of (i) the
Tisza II facility, an 860 MW oil and natural gas-fired facility that sells
electricity under a contract ending in 2010, (ii) the Tiszapalkonya facility, a
250 MW coal-fired facility that sells electricity under a contract ending in
2001, and (iii) the Borsod facility, a 171 MW coal-fired facility that sells
electricity under a contract ending in 2001. Each plant sells electricity to
Magyar Villamos Muvek Rt., a Hungarian, state-owned integrated utility.
Indian Queens is a 140 MW oil-fired, simple cycle plant located in
Cornwall County, England. AES acquired Indian Queens through its purchase of the
international assets of Destec Energy, Inc. in June, 1997. The plant began
commercial operation in October, 1996. Power generated by Indian Queens is sold
into the national electricity pool in the UK. Indian Queens, because of its
design, also sells ancillary services to the National Grid Company, the operator
of the UK's high voltage transmission system.
PROJECTS UNDER CONSTRUCTION
Aixi Heart River is a 50 MW coal-fired CFB power plant located in
Nanchuan, Sichuan Province, PRC. Construction of the power plant commenced in
February 1996, and is expected to be completed in 1998. Aixi Heart River is
owned by Fuling Aixi, a 25-year cooperative joint venture formed by Sichuan
Fuling Banxi Colliery and a wholly owned subsidiary of AES Chigen. The minority
partner will provide fuel to the plant and Sichuan Fuling Power Company will
purchase the power generated by the facility, both pursuant to separate 25-year
agreements.
The steam turbine unit of Hefei Prosperity Lake is currently under
construction and scheduled to commence commercial operation in the third quarter
of 1998. Likewise, the second unit of the 250 MW coal-fired Jiaozou Aluminum
Power facility remains under construction and is expected to commence commercial
operation in the second quarter of 1998. For a further description of these
facilities see the caption entitled "Asia and the Pacific" above.
Elsta is a 405 MW gas-fired, combined-cycle cogeneration plant
currently under construction at the chemical manufacturing facilities of Dow
Benelux N.V. in the Zeeland Province of the Netherlands. AES acquired its
interest in Elsta through the Company's acquisition of the international assets
of Destec Energy, Inc. in June, 1997. The remaining interest in Elsta is held
equally by two Dutch utilities: N.V. Delta Nutsbedrijven ("Deltan") and N.V.
Provinciale Noordbrabantse Energie-Maatschappij ("PNEM"). Elsta is the first
major private power project in the Netherlands. Pursuant to a 20-year power
sales agreement, Dow Benelux will purchase between 85 and 125 MW of electrical
capacity. Dow Benelux also expects to purchase an average of 500 MT/hr of
multi-pressure process steam energy and will have dispatch rights on steam
energy subject to minimum and maximum purchase obligations. The project's
minority partners, Deltan and
PNEM, have agreed to purchase electrical capacity from the plant not purchased
by Dow (280-320 MW) for an initial contract period of 20 years following the
commercial operation date.
As part of the Company's acquisition of its interest in Elsta, AES
assumed responsibility under a guaranteed lump-sum turn-key contract for the
engineering, procurement and construction of the plant. Due to deficient
engineering and construction performance prior to AES's acquisition, the plant
was unable to meet its originally scheduled commercial operation date of
September 30, 1997. AES now expects that Elsta will achieve commercial operation
in June 1998. No assurance can be given, however, that Elsta will attain
commercial operation by that date. Substantial risks to the successful
completion of the plant continue to exist, including those relating to
undetected design flaws, government permitting difficulties and unknown
construction defects.
In September 1995, AES successfully completed the financing and began
construction of Warrior Run, a 180 MW coal-fired thermal cogeneration facility
near the city of Cumberland in Allegheny County, Maryland. Engineering,
procurement and construction of the project under a turn-key contract with
Raytheon Engineers & Contractors, Inc. and ABB/Combustion Engineering is
expected to be completed in 1999. Potomac Edison, a subsidiary of Allegheny
Power System, Inc. will purchase electricity under a 30 year agreement, which
has been approved by the Maryland Public Service Commission.
Barry is a 230 MW gas-fired combined cycle facility currently under
construction in Barry, South Wales, United Kingdom. Construction began in
October, 1996 and the facility is expected to commence operations by the second
quarter of 1998. Construction services are being supplied by TBV Power Limited
under a lump sum, turnkey construction contract. The Barry facility will sell
electricity into the national electricity spot market in the United Kingdom. In
February 1997, Barry raised (pound)112 million of non-recourse project
financing, underwritten solely by The Industrial Bank of Japan, Limited.
Mt. Stuart is a 288 MW power station located at Townsville, North
Queensland, Australia that is currently under construction. The facility will
consist of two 144 MW open-cycle gas turbines. AES has entered into various
agreements to develop, own, and operate the facility. The plant will burn
liquefied petroleum gas and will sell electricity to the Queensland Transmission
and Supply Corporation under a 10-year power purchase agreement. The facility
will operate as a peaking station and, therefore, it is estimated that the
facility will operate for only 3 percent to 5 percent of the year. In September
1997, AES raised A$103.5 million to finance the plant's construction.
The Company began construction on its Parana project in September 1997.
Parana is an 830 MW gas-fired, combined cycle power plant. Parana will be
located in San Nicolas, Argentina, adjacent to San Nicolas, in which AES owns a
controlling interest. Parana is in the process of arranging for project
financing for the facility. Parana has entered into a lump sum, turnkey
construction contract with Nichimen Corporation and Mitsubishi Heavy Industries
for the plant. Project output will be sold into the Argentine electric market.
Total capital cost is estimated at $440 million, and the project is expected to
commence commercial operation in 2000.
Yangcheng Sun City, currently under construction, is a 2,100 MW
coal-fired mine-mouth power plant located in Yangcheng, Shanxi Province, PRC.
Construction of the power plant commenced in the second quarter of 1997 and AES
made its initial equity investment in the third quarter of 1997. AES Chigen,
through a wholly-owned subsidiary, will be responsible for overseeing the
management of construction and operations of the plant. AES Chigen is committed
to invest $98 million of equity in the project and will own twenty-five percent
of the 20-year joint venture with five other partners owning the remaining 75
percent. The project will be funded with $1.21 billion of debt provided by the
China Construction Bank, China State Development Bank, U.S. Export-Import Bank,
and Kreditanstalt fur Wiederaufbau (KfW) and $393 million of equity.
Yangcheng Sun City is one of the first "coal-by-wire" power projects in
China. The power will be produced in Shanxi Province and shipped via a 755
kilometer transmission line to Jiangsu Province, a coastal province. The project
is being constructed over a 60-month period by the Shanxi
Provincial Power Company under a fixed-price, fixed-schedule turnkey contract.
The first unit is scheduled to come on line within 35 months. Low sulfur coal
will be supplied by the Shanxi Provincial Coal Transportation and Sales Company.
In January 1997, the Comision de Electricidad, a decentralized public
agency of the Federal Government of the United Mexican States selected a
consortium led by AES to develop, design, engineer, construct, equip,
commission, start-up, operate and maintain a 484 MW combined-cycle, gas fired
power generation facility ("Merida III"). The Project will be located in the
city of Merida, Yucatan, Mexico. The Project will consist of two gas-fired
turbines, two heat recovery steam generators, a single steam turbine, and
certain other common facilities. Engineering, procurement and construction of
the project is under a turn-key contract with Westinghouse and construction is
expected to be completed in 2000.
In April 1997, CEEE, the electric distribution company for the state of
Rio Grande do Sul, Brazil, selected AES to build, own, and operate a 600 MW
gas-fired combined cycle power plant to be built at the border city of
Uruguaiana, in the State of Rio Grande do Sul, Brazil ("AES Uruguaiana"). CEEE
will purchase the electricity of AES Uruguaiana under a 20 year power purchase
agreement. The Project will consist of two gas-fired turbines, two heat recovery
steam generators and a single steam turbine, and certain other common
facilities. Engineering, procurement and construction of the project is under a
turn-key contract with Westinghouse and construction is expected to be completed
in 2000.
PROJECTS IN ADVANCED STAGES OF DEVELOPMENT
The Company currently is pursuing over 100 new business opportunities
in various stages of development. Each of these projects are subject to numerous
risks as discussed elsewhere in this Annual Report on Form 10-K, and no
assurance can be given that any of the projects or businesses will be completed
or acquired. Listed below are development projects that have achieved certain
milestone objectives the Company deems significant.
In January 1998, the Company was selected by the Government of
Bangladesh Ministry of Energy and Mineral Resources as the winning bidder to
build, own and operate a 360 MW (net) gas-fired, combined cycle power plant at a
site near Dhaka, Bangladesh ("Haripur"). Haripur is expected to commence
commercial operations in 2000, and electricity will be sold to the Bangladesh
Power Development Board.
In November 1997, AES won a bid to acquire three natural gas-fired,
electric generating stations from Southern California Edison ("Edison") for
approximately $781 million. The three plants, all located on the southern
California coast, are Alamitos (2083 MW), Redondo Beach (1310 MW) and Huntington
Beach (563 MW). Each of the plants has been designated a "must-run facility" and
initially will operate in part under agreements with California's Independent
System Operator being established through electricity restructuring. Pursuant to
California's electricity restructuring law, Edison will remain under contract to
operate and maintain the facilities for two years. Completion of the acquisition
is subject to a number of conditions, including the receipt of California Public
Utilities Commission approval, federal regulatory and anti-trust approvals and
successful implementation of the new California electric spot market, called the
Power Exchange.
The AES Ironwood project is in the advanced stages of development and
will be a natural gas-fired combined cycle facility currently in southeastern
Pennsylvania. Total plant capacity is anticipated to be approximately 720 MW.
The plant is anticipated to achieve commercial operation by the end of 2000.
Power generated by Ironwood will be purchased by General Public Utility under
the terms of a power purchase agreement finalized in February 1997.
An affiliate of the Company, San Francisco Energy Company, LP ("SFEC"),
which is a joint venture between AES Pacific, an indirectly wholly owned
subsidiary of AES and a general partner in SFEC, and Sonat Inc., is developing a
240 MW natural gas-fired facility in San Francisco, California. SFEC signed a
Standard Offer contract in 1994 with Pacific Gas & Electric ("PG&E") as the
winner of the San Francisco portion of the California Public Utilities
Commission's Biennial Resource Plan Update. The contract calls for the full
capacity of the plant to be purchased by Pacific Gas & Electric for 30 years,
with an option to terminate after 17 years. However, a ruling by the Federal
Energy Regulatory Commission ("FERC") has questioned the validity of the
California Biennial Resource Plan update ("BRPU"), pursuant to which SFEC was
awarded its contract. The Company believes that its contract with PG&E is valid,
but the Company is currently involved in litigation with PG&E over the validity
of the contract. The Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the Company. Substantial
risks to the successful completion of this project exist, including those
relating to the contract litigation, FERC decision, siting, financing,
construction and permitting.
AES has been developing AES Puerto Rico which is to be a 454 MW
coal-fired cogeneration facility in Guayama, Puerto Rico. The Puerto Rico
Electricity Power Authority has agreed to purchase the electrical output of the
facility pursuant to a 25-year power sales agreement. The project received
approval of its environmental impact statement from the Puerto Rico
Environmental Quality Board, but such approval has been challenged. This issue
is currently on appeal to the Supreme Court of Puerto Rico, which has not yet
rendered a decision. Development of the project is stayed during determination
of the appeal.
AES has also been developing a 420 MW coal-fired facility in the State
of Orissa, India ("AES Ib Valley"). Under the terms of an executed power sales
agreement, the Orissa State Electricity Board ("OSEB") agreed to purchase at
least 85 percent of the electrical capacity of the facility pursuant to a
30-year contract. Certain of OSEB's obligations are guaranteed by the Government
of Orissa ("GOO"). In addition, the Government of India ("GOI") agreed to
guarantee a portion of GOO's obligations. In July 1995, a newly elected state
government initiated a review of the terms and conditions of AES Ib Valley's
agreements with OSEB and GOO. This review has led OSEB and GOO to seek
significant modifications to the terms of the power sales agreement. In light of
this review AES has been unable to reach financial closing on this project and
has been forced to terminate certain financing and contractual commitments
relating to the project. AES Ib Valley is currently in negotiation with GOO and
OSEB and may agree to changes, including those relating to the plant's technical
configuration, capital cost, size and the price paid for electricity.
Notwithstanding the Company's willingness to discuss modifications to the
project, the Company believes that its current agreements with GOO, OSEB and GOI
are valid, and if agreements cannot be restructured on terms acceptable to AES,
the Company intends to pursue its rights with respect to enforcement of the
existing contracts. No assurance can be given that either (i) the terms of a new
contract will be agreed to or (ii) if AES pursues its legal claims, that it will
be able to compel specific performance or recover significant damages.
REGULATORY MATTERS
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. FERC must also approve rates charged
by certain power marketers such as those of the Company's subsidiary, AES Power.
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"). Each of AES's current domestic plants is a QF. Loss of QF
status, if not prevented, would subject these plants to more extensive
regulations. The Company believes, however, that it will usually be able to
react in a manner that would avoid the loss of QF status.
State public utility commissions ("PUCs") regulate both the retail
rates and financial performance of electric utilities. Since a wholesale power
sales contract is generally reflected in a utility's retail rates, power sales
contracts from QFs are indirectly under the regulatory purview of PUCs. PUCs
often will pre-approve contracts with prices that do not exceed so-called
"avoided costs" because such contracts often have been acquired through a
competitive or market-based process. Recognizing the competitive nature of most
acquisition processes, most PUCs will permit utilities to "pass through"
expenses associated with an independent power contract to the utility's retail
customers, although no assurance can be given that a PUC will not attempt to
deny the "pass through" of these expenses in the future. The Company believes
that any such attempt by a PUC would, among other things, be pre-empted by
federal law.
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. AES has obtained, and
believes that it will be able to obtain and maintain in the future, appropriate
PUHCA exemptions for its utility acquisitions.
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 expected to be an independent
regulatory agency and to delegate certain functions to agencies based in certain
states of Brazil. However, ANEEL cannot delegate any authority regarding tariffs
to state agencies. There is uncertainty regarding the status of current
regulations and the possibility of new regulations which may apply to the
electricity sector in Brazil.
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 regulation. In the United States those
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 such laws and regulations are changed and AES's facilities are not
"grandfathered" (that is, made exempt by the fact that the facility pre-existed
the law) or otherwise are not excluded, extensive modifications to a project's
technologies and facilities could be required. If environmental laws or
regulations were to 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 business and financial condition 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. While AES expects that environmental and land use regulations in
the United States will continue to become more stringent over time, the Company
is not aware of any currently planned changes in law that would result in a
material adverse effect on its consolidated financial position.
Clean Air Act. The original Clean Air Act of 1970 set guidelines for
emissions standards for major pollutants (e.g., SO2 and NOx) from newly-built
sources. In late 1990, Congress passed a set of amendments to the Clean Air Act
(the "1990 Amendments"). All of AES's domestic operating plants perform at
levels better than federal emission standards mandated for such plants under the
Clean Air Act (as amended). 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
original Clean Air Act. Because AES's facilities are relatively new cogeneration
units with low air emissions that qualify as "existing sources" under the 1990
Amendments, they have been "grandfathered" from certain acid rain compliance
provisions of the 1990 Amendments. Other provisions of the Clean Air Act related
to the reduction of ozone precursor emissions (VOC and NOx) have triggered
"reasonably available control technology" ("RACT") requirements by various
states to reduce such emissions.
The hazardous air pollutant provisions of the 1990 Amendments presently
exclude electric steam generating facilities such as AES's domestic plants;
however, the 1990 Amendments directed that the Environmental Protection Agency
("EPA" or the "Agency") prepare a study on hazardous air pollutant ("HAP")
emissions from power plants. In the fall of 1996, EPA released an interim report
on HAP emissions from power plants that tentatively concluded that the risk of
contracting cancer from exposure to HAPs (except mercury) from most plants was
very low (less than one in 1 million). EPA is developing a separate study on
mercury emissions from power plants. The draft mercury study report is currently
being reviewed by the federal Scientific Advisory Board and it is not certain
when a final report will be released. A final comprehensive HAP report with
recommendations is expected to be issued after EPA's review of mercury emissions
from power plants is complete. If it is determined that mercury from power
plants should be regulated, the use of "maximum available control technology"
("MACT") for mercury (which is now not subject to regulation) could be required.
In 1997, EPA published new rules that tighten ambient air quality
standards for ozone and small particulate matter (so-called PM 2.5). These new
standards increase the number of so-called "nonattainment regions" for ozone and
particulates. If new ozone and particulate matter nonattainment areas are
created, AES's plants may be faced with further emission reduction requirements
that could necessitate the installation of additional control technology.
In order to make further improvements in air quality in the eastern
United States, EPA in 1997 issued a call for states to revise their "state
implementation plans" (SIPs) for ozone precursors--primarily NOX. EPA
recommended further reductions of up to 65% for some states, depending on local
conditions. As a result, AES will be required to make further reductions in NOX
emissions at its Beaver Valley plant in Pennsylvania (AES's other plants have
emission levels well below baseline levels).
The Company does not believe that any of the potential additional
requirements discussed above will have a material adverse effect on its results
of operations and consolidated financial position.
Hazardous Waste Regulation. Based on a 1988 study, EPA has decided not
to regulate most coal combustion ash as a hazardous waste; however, EPA reserved
making a decision with respect to coal ash from fluidized bed combustion (the
burning of coal in the presence of limestone), which is still being evaluated by
the Agency. AES, along with other CFB owners and manufacturers, is currently
participating in a study to evaluate whether or not CFB ash should be classified
as hazardous. EPA is required to make a determination on whether to regulate CFB
ash in 1998. If EPA decides to regulate fluidized bed coal ash as a hazardous or
special waste, AES could incur additional ash disposal costs to dispose of ash
from its plants that utilize fluidized bed boilers.
FOREIGN ENVIRONMENTAL REGULATIONS
AES now 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. These laws and regulations are
often quite different than those in effect in the United States--and AES's
non-U.S. businesses have been in substantial compliance with these different
laws and regulations. In addition, 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 U.S. standards. Whenever
feasible, AES attempts to use advanced environmental technologies (such as CFB
coal technology or advanced gas turbines) 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 appears to 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 in order to comply. 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.
NEW UNITED STATES LEGISLATION
In the United States, some states (for example, California, Illinois,
Michigan, Massachusetts and Pennsylvania) have passed or are considering new
legislation that permits utility customers to choose their electricity supplier
in a competitive electricity market (so-called "retail access" or "customer
choice" laws). While such "customer choice" plans differ in details, they
usually share some 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 assets"--the remaining costs of uneconomic generating or
regulatory assets; and (3) they reaffirm the validity of existing QF contracts,
and make provisions to assure payment over the contract life.
In order to guarantee payment of utilities' costs and the costs of QF
contracts, some states have used or are proposing to use financial methods to
"securitize" these payments. The "securitization" process might involve the
following steps: first, the financial obligations to be "securitized" would be
legally affirmed through legislation. This legal obligation then is used to
borrow money in public debt markets to pay off the obligation. The legal
obligation allows the borrower to obtain a good credit rating and therefore a
lower interest rate. In some cases, the benefits of the lower interest rate are
passed on to retail electric customers (perhaps in the form of a rate decrease).
"Securitization" of QF contract obligations, if applied to AES contracts in the
future,
would significantly reduce the risk to AES that its power sales contracts would
not be honored due to potential financial difficulties of the utility purchaser.
In addition to state restructuring legislation, 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. In 1997 several bills were (and others are expected to be) submitted to
Congress on electricity restructuring. While it is uncertain whether or when
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 addition to the federal restructuring legislation proposals, a
number of bills have been proposed by members of Congress to repeal all or
portions of PURPA and/or PUHCA--as separate legislation if a comprehensive
restructuring bill fails to pass. The Company believes that the repeal of PURPA
and/or PUHCA is unlikely (and inappropriate) unless it is a part of a
comprehensive restructuring bill.
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. While the Company
is generally open to renegotiation of existing contracts, it believes that the
aforementioned electricity market restructuring legislation will likely reduce
both the pressure to renegotiate and the need for such contract renegotiations.
EMPLOYEES
At December 31, 1997, AES and its subsidiaries employed approximately
10,000 people. The total number of people employed in facilities which AES
operates or has an equity interest in is approximately 30,000.
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, 52 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, 47 years old, has served as a Senior Vice
President of the Registrant since January 1998, 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, 40 years old, was appointed Vice President of the
Registrant effective January 1994. He currently is President 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.
William R. Luraschi, 34 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, 59 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, 50 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.
Oscar Prieto, 45 years old, was appointed Vice President of the
Registrant effective January 1998 and has been General Executive Director of
Light Servicos de Electricidade, S.A. since June 1996. Mr. Prieto served as
General Manager of San Nicolas from 1994, when he joined AES, until he was
appointed to the position at Light in 1996. Before coming to AES, Mr. Prieto
worked in various positions with the Dow Chemical Company from 1980 to 1994.
John Ruggirello, 47 years old, was appointed Vice President of the
Registrant effective January 1997, and 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, 39 years old, was appointed Senior Vice President of
the Registrant effective January 1998, and heads the AES Transpower group which
is responsible for the Company's business 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, 66 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 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, 38 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, 35 years old, was appointed President of AES Aurora,
Inc., effective April 1997. AES Aurora is a wholly owned subsidiary of the
Company responsible for business development, construction and operations of
facilities and projects in Mexico, Central America, the Caribbean and Texas.
Prior to that, Ms. Slusser served as Project Director for various AES projects
in the same region from 1993 to 1997.
Paul D. Stinson, 41 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 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, 45 years old, has been Senior Vice President of the
Registrant since 1990, and leads an AES group responsible for power marketing,
project development, construction and plant operations in South America. 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, 54 years old, has been Senior Vice President of
the Registrant since 1987 and now handles AES relationships with the investment
community as well as 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 "Geographic Segments"
in Note 13 to the Consolidated Financial Statements contained in Item 8 hereof.
ITEM 2. PROPERTIES
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 is 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. LITIGATION.
The Company is involved in certain legal proceedings in the normal
course of business. It is the opinion of the Company that none of the pending
litigation is expected to have a material adverse effect on its results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
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 NYSE stock
market under the symbol "AES." All stock prices from January 1, 1996 to and
including October 15, 1996 were quoted on the NASDAQ stock market under the
symbol "AESC." The following table sets forth the high and low sale prices for
the common stock as reported by NASDAQ or the NYSE for the periods indicated.
-------------------------------- -------------------- -----------
1996 HIGH LOW
-------------------------------- -------------------- -----------
First Quarter $ 12-5/8 $ 10-1/2
Second Quarter 14-13/16 11-1/8
Third Quarter 20-1/4 13-5/16
Fourth Quarter 25-1/16 19-5/8
-------------------------------- -------------------- -----------
1997 HIGH LOW
-------------------------------- -------------------- -----------
First Quarter $ 34-1/8 $ 22-3/8
Second Quarter 37-3/4 27-1/2
Third Quarter 45-1/4 34-5/8
Fourth Quarter 49-5/8 35
(b) Holders.
As of February 2, 1998, there were 955 record holders of the
Registrant's Common Stock, par value $0.01 per share.
(c) Dividends.
Under the terms of a corporate revolving loan and letters of credit
facility of $600 million entered into with a commercial bank syndicate, 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 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)
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
Statement of Operations Data
Revenues $1,411 $ 835 $ 679 $ 533 $ 519
Operating costs and expenses 1,043 557 426 297 323
Operating income 368 278 253 236 196
Income before income taxes, minority
interest and extraordinary item 263 193 167 145 89
Extraordinary item (3) -- -- 2 --
Net income 185 125 107 100 71
Basic earnings per share:
Before extraordinary item $ 1.13 $ 0.83 $ 0.71 $ 0.67 $ 0.50
Extraordinary item (0.02) -- -- 0.01 --
Basic earnings per share $ 1.11 $ 0.83 $ 0.71 $ 0.68 $ 0.50
Diluted earnings per share:
Before extraordinary item $ 1.11 $ 0.80 $ 0.70 $ 0.66 $ 0.49
Extraordinary item (0.02) -- -- 0.01 --
Diluted earnings per share $ 1.09 $ 0.80 $ 0.70 $ 0.67 $ 0.49
Dividends per share - common stock -- -- -- -- $ 0.29
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
AS OF DECEMBER 31 1997 1996 1995 1994 1993
- ---------------------------------------------- ----------- ------------ ----------- ----------- -----------
Total assets $8,909 $3,622 $2,341 $1,915 $1,687
Revolving bank loan (current) -- 88 50 -- --
Project financing debt (long-term) 3,489 1,558 1,098 1,019 1,075
Other notes payable (long-term) 1,096 450 125 125 125
Stockholders' equity 1,481 721 549 401 309
ITEM 7. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
The AES Corporation and its subsidiaries and affiliates (collectively
"AES" or the "Company") are helping to meet the world's needs by providing
electricity to customers in many countries. Electricity sales accounted for 95%
of total revenues during 1997 and 97% during 1996. Other sales arise from the
sale of steam and other commodities related to the Company's cogeneration
operations. Service revenues represent fees earned in connection with wholesale
power services, and operating and construction services provided by AES to its
affiliates.
Until recently, the Company's sales of electricity were almost
exclusively made to customers (generally electric utilities or regional electric
companies) on a wholesale basis for further resale to end users. This is often
referred to as the electricity "generating" business. Sales by these generating
companies are usually made under long-term contracts from power plants owned by
the Company's subsidiaries and affiliates. The Company's ownership portfolio of
power facilities includes new plants constructed for such purposes ("greenfield"
plants) as well as existing power plants acquired through competitively bid
privatization initiatives and negotiated acquisitions.
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 17,636 megawatts (MW). Of
that total, 43% are fueled by coal or petroleum coke, 6% are fueled by natural
gas, 34% are hydroelectric facilities, 6% are fueled by oil, and the remaining
11% are capable of using multiple fossil fuels. Of the total MW, 1,069 (six
plants) are located in the U.S., 1,588 (four plants) are in the UK, 840 (five
plants) are in Argentina, 603 (seven plants) are in China, 1,281 (three plants)
are in Hungary, 5,856 (thirty nine) are in Brazil, 5,384 (seven plants) are in
Kazakhstan, 210 (one plant) is in the Dominican Republic, 110 (one plant) is in
Canada, and 695 (two plants) are in Pakistan.
AES is also currently in the process of adding approximately 5,331 MW
to its operating portfolio by constructing several new plants. These include a
180 MW coal-fired plant in the U.S., four coal-fired plants in China totaling
2,314 MW, a 230 MW natural gas-fired plant in the UK, a 405 MW natural gas-fired
plant in the Netherlands, a 288 MW kerosene-fired plant in Australia, an 830 MW
natural gas-fired plant in Argentina, a 484 MW natural gas-fired plant in Mexico
and a 600 MW natural gas-fired plant in Brazil.
As a result, AES's total MW of 84 power plants in operation and under
construction is approximately 22,967 and net equity ownership (total MW adjusted
for the Company's ownership percentage) represents approximately 12,247 MW.
Because of the significant magnitude and complexity of building new
electric generating plants, construction periods often range from two to five
years, depending on the technology and location. AES currently expects that
projects now under construction will reach commercial operation and begin to
sell electricity at various dates through the year 2002. The completion of each
plant in a timely manner is generally supported by a guarantee from the plant's
construction contractor, although in certain cases, AES has assumed the risk of
satisfactory construction completion. However, it remains possible, due to
changes in the economic, political, technological, regulatory or logistical
circumstances involving each individual plant, that commercial operations may be
delayed in certain cases.
Beginning in 1996 and continuing through 1997, AES has also purchased
interests (both majority and minority) in companies that sell electricity
directly to commercial, industrial, governmental and residential customers. This
is often referred to as the electricity "distribution" business. Electricity
sales by AES's distribution businesses are generally made pursuant to the
provisions of long-term electricity sale concessions granted by the appropriate
governmental authority as part of the original privatization of each
distribution company. 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. Each distribution company
also purchases, in varying proportions, electricity from third party wholesale
suppliers, including in certain cases, other subsidiaries of the Company.
AES has majority ownership in two distribution companies in Argentina,
one in Brazil and one in El Salvador (purchased in 1998), and less than majority
ownership in two additional distribution companies in Brazil. These six
companies serve a total of approximately 8 million customers with gigawatt hour
sales exceeding 63,000. On a net equity basis, AES's ownership represents
approximately 2 million customers and gigawatt hour sales exceeding 15,000.
AES continues to believe that there is significant demand for more
efficiently operated electricity generation and distribution businesses. Guided
by its commitment to serve the world's needs for electricity, AES is pursuing
additional greenfield developments 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 similar arrangements for the sale
of electricity and are in various stages of developing the related greenfield
power plants. There exist sub-
stantial risks to their successful completion, including, but not limited to,
those 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 milestones. As of December 31, 1997, capitalized costs for
projects under development were approximately $87 million. The Company believes
that these costs are recoverable; however, no assurance can be given that
changes in circumstances related to individual development projects will not
occur or that any of these projects will be completed and reach commercial
operation.
AES has been successful in growing its business and serving additional
customers by participating in competitive bidding under privatization
initiatives and has been particularly interested in acquiring existing
businesses or assets in electricity markets that are promoting competition and
eliminating rate of return regulation. In such privatizations, sellers generally
seek to complete competitive solicitations in less than one year, much quicker
than the time periods associated with greenfield development, 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.
Because of this relatively quick process or other considerations, it may
not always be possible to arrange "project financing" (the Company's
historically preferred financing method, which is discussed further under
"Capital Resources, Liquidity and Market Risk") for specific potential
acquisitions. Additionally, as in the past, certain acquisitions or the
commencement of construction on several greenfield developments would
potentially require the Company to obtain substantial additional financing
including both debt and equity. As a result, during 1997, the Company enhanced
its financial capabilities to respond to these more accelerated opportunities by
expanding its revolving line and letter of credit facility (the "Revolver") to
$600 million from $425 million. AES also currently maintains a $1.5 billion
"universal shelf" registration statement that allows for the issuance of various
additional debt and preferred or common equity securities either individually or
in combination.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased $576 million (69%) to $1,411 million from
1996 to 1997 after increasing $156 million (23%) to $835 million from 1995 to
1996. The increase in 1997 primarily reflects the acquisitions of controlling
interests in the distribution companies Eden, Edes and Sul and electricity
generating plants at Los Mina and Altai, a ful