-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H+hs8N3yxnoAwVPigpaj6hupseMqd+jGBtMJkwbQ03dcaGZ98wEERoNEVpPzwfv8 3gLO0vZW65zf7QXm7z7HMw== 0000874761-96-000004.txt : 19960816 0000874761-96-000004.hdr.sgml : 19960816 ACCESSION NUMBER: 0000874761-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AES CORPORATION CENTRAL INDEX KEY: 0000874761 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 541163725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19281 FILM NUMBER: 96612127 BUSINESS ADDRESS: STREET 1: 1001 N 19TH ST CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 7035221315 10-Q 1 QUARTERLY REPORT FOR THE AES CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-19281 THE AES CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 54-1163725 (IRS Employer Identification No.) 1001 North 19th Street Arlington, Virginia 22209 (Address of principal executive office) Telephone Number (703) 522-1315 (Registrant's telephone number, including area code) 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/ / The total number of shares of the registrant's Common Stock, $.01 par value, outstanding on July 31, 1996, was 75,117,079. THE AES CORPORATION INDEX Page PART 1. FINANCIAL INFORMATION Item 1. Interim Financial Statements: Consolidated Statements of Operations 2 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flow 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements. THE AES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 1995 AND 1996 (Unaudited) Three Three Six Six Months Months Months Months Ended Ended Ended Ended 06/30/95 06/30/96 06/30/95 06/30/96 ($ in millions, except per share amounts) REVENUES: Sales and services $ 167 $ 174 $ 338 $ 346 OPERATING COSTS AND EXPENSES: Cost of sales and services 100 99 203 199 Selling, general and administrative expenses 6 6 14 15 ---- ---- ---- ---- Total operating costs and expenses 106 105 217 214 ---- ---- ---- ---- OPERATING INCOME 61 69 121 132 OTHER INCOME AND (EXPENSE): Interest expense (31) (31) (62) (59) Interest income 7 5 13 10 Equity in net earnings of affiliates 4 2 6 7 ---- ---- ---- ---- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 41 45 78 90 Income taxes 15 16 28 31 Minority interest (1) 1 (1) 2 ---- ---- ---- ---- NET INCOME $ 27 $ 28 $ 51 $ 57 ==== ==== ==== ==== NET INCOME PER SHARE: $0.35 $0.37 $0.68 $0.75 ---- ---- ---- ---- See Notes to Consolidated Financial Statements THE AES CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND JUNE 30, 1996 (Unaudited) 12/31/95 06/30/96 ($ in millions) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 239 $ 220 Short-term investments 58 36 Accounts receivable 54 65 Inventory 36 40 Receivable from affiliates 11 9 Prepaid expenses and other current assets 27 41 ---- ---- Total current assets 425 411 PROPERTY, PLANT AND EQUIPMENT: Land 9 20 Electric and steam generating facilities 1,594 1,657 Furniture and office equipment 11 12 Accumulated depreciation, depletion, and amortization (222) (249) Construction in progress 158 322 ---- ---- Property, plant and equipment, net 1,550 1,762 OTHER ASSETS: Deferred costs, net 32 40 Project development costs 41 46 Investments in and advances to affiliates 48 446 Debt service reserves and other deposits 168 178 Goodwill and other intangible assets, net 37 41 Other assets 19 17 ---- ---- Total other assets 345 768 ---- ---- TOTAL $ 2,320 $ 2,941 ===== ===== See Notes to Consolidated Financial Statements THE AES CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND JUNE 30, 1996 (Unaudited) 12/31/95 06/30/96 ($ in millions) LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 33 $ 35 Income taxes payable -- 4 Accrued interest 12 14 Accrued and other liabilities 49 39 Revolving bank loan - current portion 50 80 Project financing debt - current portion 84 93 ---- ---- Total current liabilities 228 265 LONG-TERM LIABILITIES: Project financing debt 1,098 1,460 Revolving bank loan -- 125 Other notes payable 125 125 Deferred income taxes 149 167 Other long-term liabilities 13 9 ---- ---- Total long-term liabilities 1,385 1,886 MINORITY INTEREST 158 180 STOCKHOLDERS' EQUITY: Common stock 1 1 Additional paid-in capital 293 294 Retained earnings 271 328 Cumulative foreign currency translation adjustment (10) (10) Less treasury stock at cost (6) (3) ---- ---- Total stockholders' equity 549 610 ---- ---- TOTAL $ 2,320 $ 2,941 ===== ===== See Notes to Consolidated Financial Statements THE AES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Unaudited) Six Six Months Months Ended Ended 6/30/95 6/30/96 ($ in millions) OPERATING ACTIVITIES: Net Income $ 51 $ 57 Adjustments to net income: Depreciation, depletion and amortization 24 29 Provision for deferred taxes 27 22 Undistributed earnings of affiliates 7 -- Change in working capital (12) (32) Other 8 (8) ---- ---- Net cash provided by operating activities 105 68 INVESTING ACTIVITIES: Property additions (41) (205) Acquisitions, net of cash acquired (79) (20) Sale of short-term investments 52 22 Affiliate advances and investments (3) (393) Project development costs (16) (8) Debt service reserves and other assets (11) (12) ---- ---- Net cash used in investing activities (98) (616) FINANCING ACTIVITIES: Net borrowings under the revolver 10 155 Issuance of project financing debt -- 390 Repayments of project financing debt (31) (21) Payments to/from minority partners 4 4 Sale/ (repurchase) of common stock (2) 1 ---- ---- Net cash used in financing activities (19) 529 Decrease in cash and cash equivalents (12) (19) Cash and cash equivalents, beginning 255 239 ---- ---- Cash and cash equivalents, ending $ 243 $ 220 ==== ==== See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The consolidated financial statements include the accounts of AES, its subsidiaries, and controlled affiliates. Intercompany transactions and balances have been eliminated. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method. Under the equity method, the Company's investment is recorded at cost and is adjusted to recognize its proportional share of all earnings or losses of the entity. Distributions received reduce the carrying amount of the Company's investment. In the Company's opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the six months ended June 30, 1995 and 1996, respectively, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results of operations to be expected for the full year. The financial statements are unaudited. 2. Net Income Per Share Net income per share is based on the weighted average number of common stock and common stock equivalents outstanding, after giving effect to stock splits. Common stock equivalents result from dilutive stock options, warrants and deferred compensation arrangements. The effect of such common stock equivalents on net income per share is computed using the treasury stock method. The shares used in computing net income per share were 75.9 million and 76.2 million for the quarters ended June 30, 1995 and 1996 respectively, and 75.8 million and 76.1 million for the six months ended June 30, 1995 and 1996, respectively. 3. Inventory Inventory, valued at the lower of cost (principally first in, first out method) or market, consists of coal and other raw materials used in generating electricity and steam, and spare parts, materials and supplies. Inventory at December 31, 1995 and June 30, 1996 consisted of the following (in millions): 1995 1996 Coal and other raw materials 24 26 Spare parts, materials and supplies 12 14 ---- ---- Total $36 $40 ==== ==== 4. Acquisition In May, 1996, AES, through certain subsidiaries, acquired for approximately $393 million, common shares representing an 11.35% interest in Light Servi(os de Electricidade S.A. (OLightO), a publicly-held Brazilian corporation that operates as the concessionaire of an approximately 3,800 MW integrated electric power generation, transmission and distribution system which serves Rio de Janeiro, Brazil. The AES subsidiary which owns an interest in Light is participating in a consortium established through a shareholdersO agreement that owns a 50.44% controlling interest. As a result, the Company has the ability to exert significant influence over the operation of Light, and is recording its investment using the equity method. The acquisition was accounted for as a purchase. The accompanying financial statements include equity earnings of Light, net of tax as of June 1, 1996. The goodwill created as a result of the acquisition is being amortized using the straight line method over the 30 year length of the concession. The following table presents supplemental unaudited proforma financial information as if the acquisition of Light had occurred at the beginning of the periods presented (in million, except per share amounts): Six Months Six Months Year Ended 6/30/95 6/30/96 12/31/95 ---------- ---------- ---------- Revenues $338 $346 $685 Net Income 50 59 102 Net Income Per Share 0.66 0.77 1.34 5. Litigation In re The AES Corporation Securities Litigation was a purported class action suit brought in the U.S. District Court for the Southern District of New York by certain persons who claimed to have purchased shares of common stock and debentures issued by AES between June 25, 1991 and June 23, 1992 and who purported to sue on behalf of others similarly situated. The litigation consolidated four purported class actions previously filed against AES in June and July 1992. In February 1995, the Company entered into a settlement agreement with plaintiffs' counsel on behalf of the class. The settlement was on a claims-made basis, and consisted of $4.5 million, as well as warrants to purchase approximately 716,800 shares of AES Common Stock. Insurance proceeds were available to cover a portion of the settlement. The settlement was approved by the federal court in May 1995, and became effective in July 1995. The review of the claims submitted in the settlement was approved by the court and the settlement proceeds have been distributed. This matter is now concluded. On February 25, 1993, an action was filed in the 10th Judicial District Court, Galveston County, Texas against the Company, over 25 other corporations (including major oil refineries and chemical companies) and utilities, a utility district, 4 Texas cities, McGinnes Industrial Maintenance Corporation, Roland McGinnes and Lawrence McGinnes, claiming personal injuries, property, and punitive damages of $20 billion, arising from alleged releases of hazardous and toxic substances to air, soil and water at the McGinnes waste disposal site located in Galveston County. This matter was consolidated with two other related cases in December 1993. The complaint sets forth numerous causes of action, including fraudulent concealment, negligence and strict liability, including, among other things, allegations that the defendants sent hazardous, toxic and noxious chemicals and other waste products to the McGinnes site for disposal. In March 1995, the Company entered into a settlement agreement with certain plaintiffs, pursuant to which the Company paid seven thousand dollars in return for withdrawal of their claims against the Company. Based on the Company's investigation of the case to date, the Company believes it has meritorious defenses to each and every cause of action stated in the complaint and this action is being vigorously defended. The Company believes that the outcome of this matter will not have a material adverse effect on its consolidated financial statements. The Company is involved in certain other 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 consolidated financial position. Item 2. Discussion and Analysis of Financial Condition and Results of Operations. General The AES Corporation and its subsidiaries and affiliates (collectively "AES" or the "Company") are primarily engaged in the business of developing, acquiring, owning and operating electric power generation and related facilities throughout the world. Electricity sales accounted for 97% of total revenues during 1995. 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 energy consulting, wholesale power services and services provided by AES to its affiliates. Electricity is generated (or manufactured) by power plants owned or leased by the Company's subsidiaries and affiliates. AES operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total capacity of approximately 10,900 MW, of which 9,400 are in operation and approximately 1,500 are in construction. Because of the significant magnitude and complexity of building electric generating plants, construction periods often range from two to four 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 1999. The commercial operation date is generally supported by a guarantee from each plant's construction contractor; however, it remains possible, due changes in the economic, political, technological, regulatory or logistical circumstances surrounding individual plants and their locations, that commercial operations may be delayed or, in extreme circumstances, prohibited. AES believes that there is significant demand for both new and more efficiently operated electric generating capacity in many regions around the world. In an effort to further grow and diversify the Company's portfolio of electric generating plants, AES is pursuing, through its integrated divisions, additional greenfield developments and acquisitions in North America, India, Pakistan, China, other areas in Southeast Asia, South America, Europe, the Middle East and Africa. From time to time, AES also investigates possible acquisitions of existing power plant facilities or energy companies that would be consistent with its objectives and strategy. Such acquisitions may be accomplished by a cash purchase, by an exchange of project ownership interests or by the issuance of the Company's capital stock. Certain subsidiaries of the Company (domestic and non-U.S.) have signed long-term contracts for the sale of electricity and are in various stages of developing the related greenfield projects. Because these potential projects have yet to begin construction or procure committed long-term financing ("financial closing"), there exist substantial 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 June 30 1996, capitalized costs for projects under development were approximately $46 million. The Company believes that the costs are recoverable; however, no assurance can be given that changes in circumstances related to individual projects will not occur or that any of these projects will be completed. As discussed above, AES has been successful in acquiring a portion of its portfolio of generating capacity by participating in competitive bidding under government sponsored privatization initiatives and has been particularly interested in acquiring existing assets in electricity markets that are promoting competition, such as the United Kingdom and Argentina. Sellers generally seek to complete competitive solicitations in less than one year, much quicker than greenfield development, and require payment in full on transfer. AES believes that its experience in competitive markets and its divisional structure, with geographically dispersed locations, enable it to react quickly and creatively in such situations. Because of this relatively quick process, it may not be possible to arrange "project financing" (the Company's historically preferred financing method) for specific potential acquisitions. As a result, the Company enhanced its financial capabilities to respond to these more accelerated opportunities by executing a $425 million revolving credit facility in the second quarter of 1996. During the second quarter of 1996, a subsidiary the Company also entered into a Reimbursement Agreement (Othe LoanO) in the amount of $225 million in connection with the acquisition of its interest in Light. In addition, on July 2, 1996, the Company completed the issuance and sale of its 10(%, $250 million principal amount of Senior Subordinated Notes due 2006. (See Cash Flow, Financial Resources, and Liquidity). In the future, AES may also consider an exchange of project ownership interests or the issuance of its common stock to fund future acquisition opportunities. The nature of most of the Company's domestic independent power operations is such that each facility generally relies on one power sales contract with a single electric utility customer or a regional or national transmission and distribution customer for the majority, if not all, of its revenues. During 1995, four customers accounted for 73% of the Company's revenues. The prolonged failure of any one utility customer to fulfill its contractual payment obligations in the future could have a substantial negative impact on AES's primary source of revenues. Where possible, the Company has sought to reduce this risk, in part, by entering into power sales contracts with utilities that have their debt or preferred stock rated "investment grade" by nationally recognized rating agencies and by locating its plants in different geographic areas in order to mitigate the effects of regional economic downturns. Because the Company's plants are located in different geographical areas, seasonal variations are not generally expected to have a significant effect on quarterly financial results. However, unusual weather conditions and the needs of each plant to perform routine (including annual or multi-year) or unanticipated facility maintenance may have an effect on quarterly financial results. In addition, some power sales contracts permit the utility customer to significantly dispatch the related plant (i.e., direct the plant to deliver a reduced amount of electrical output) within certain specified parameters. Such dispatching, however, does not have a material impact on the results of operations of the related subsidiary because, even when dispatched, the plant's capacity payments are not reduced. The Company's activities are subject to stringent environmental regulation by federal, state, local and foreign governmental authorities. There can be no assurance that AES would be able to recover all or any part of increased costs from its customers or that its business and financial condition would not be materially and adversely affected by future changes in environmental laws or regulations. The Company strives to comply with all environmental laws, regulations, permits and licenses but, despite such efforts, at times has been in non-compliance. No such instance of non-compliance has resulted in revocation of any permit or license. Medway Power Limited ("Medway Power"), a joint venture among AES Medway Electric Limited, an indirectly owned U.K. subsidiary of AES ("AES Medway"), and subsidiaries of Southern Electric plc ("Southern") and SEEBOARD plc ("SEEBOARD"), owns a 660 MW combined cycle gas-fired power plant in southeast England on the Isle of Grain. The plant began operations in November 1995. During pre-commercial start-up operations in the second quarter of 1995, the plant began experiencing equipment difficulties, most notably with its turbine rotors. Medway Power and the plant's construction contractor are working to provide a permanent solution to the rotor problems. For a more complete description of this matter, please see the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Although no assurance can be given that the contractor, and as a result, Medway Power, will be able to adequately correct the equipment difficulties, the Company believes that the outcome of this matter will not have a material adverse effect on its consolidated financial position. In May 1996, a subsidiary of AES, along with its partners, acquired a 50.44% controlling interest in Light, a 3,800 MW integrated electric power generation, transmission and distribution system which serves Rio de Janeiro, Brazil. AESOs interest in Light is 11.35%. Light currently serves approximately 2.8 million customers, or approximately 70% of the population of the state of Rio de Janeiro. Light generates about 17% of the total electricity it distributes through four hydroelectric complexes having an installed generating capacity of approximately 788 MW. Light purchases the remaining 83% of the electricity it distributes. Under a shareholdersO agreement AES co-manages the business with the other members of the consortium, and is responsible for the electric generation and bulk power supply aspects of Light. In August 1996, the Company, through a subsidiary, acquired three power plants totaling 1,281 MW and a coal mine through the purchase of an 81% share of Tiszai Eromu Rt., an electricity generation company in Hungary for up to $143 million. The facility includes an oil and natural gas fired plant supported by a 15 year contract and two coal-fired plants with two and five year contracts, respectively. The transaction also includes the right for AES to develop and operate a 150-300 MW coal-fired power plant that uses circulating fluidized bed boilers. AES expects to sell electricity generated by the new facility to the Hungarian transmission company under a long term power purchase agreement. In August 1996, a subsidiary of the Company won a bid to develop, own and operate a 288 MW simple-cycle gas turbine power station in Townsville, Queensland, Australia. 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 which is expected to be executed shortly. Numerous steps remain to be completed prior to plant operations, including execution of the power purchase agreement, permitting, and construction of the facility. Commencement of commercial operations is scheduled for January 1999, but no assurance can be given that this project will be completed. Also in August 1996, the Company acquired a 70% interest in a 4,000 MW coal-fired facility in Kazakhstan. The facility will sell power to a government owned utility under a 35 year power purchase agreement. Second Quarter 1996 and 1995 Results of Operations Revenues increased 4% or approximately $7 million, to $174 million from the second quarter of 1995 to the second quarter of 1996. Cost of sales and services decreased 1% or approximately $1 million, to $99 million from the second quarter of 1995 to the second quarter of 1996. Gross margin, which represents total revenues reduced by cost of sales and services, increased 12%, or approximately $8 million, to $75 million during the same period. Gross margin as a percentage of total revenues was 43% for the second quarter of 1996 and 40% for the same period of 1995. The increase in gross margin was primarily due to better performance at San Nicol++s due to cost reduction efforts at the plant and higher prices in the Argentine electricity market, improved results at Deepwater due to higher natural gas prices during the quarter, higher production at Thames, better performance at Placerita resulting from a planned outage in the second quarter of 1995, the acquisition of Rio Juramento in late 1995 and San Juan in early 1996, and the start of commercial operations of an AES Chigen subsidiary which was previously under construction. Revenues increased 2% or approximately $8 million to $346 million from the first half of 1995 to the first half of 1996. Cost of sales and services decreased 2% or approximately $4 million to $199 million from the first six months of 1995 to the same period of 1996. Gross margin increased 9% or approximately $12 million, to $147 million during the same period. Gross margin as a percentage of total revenues was 42% for the first six months of 1996 and 40% for the same period of 1996. The increase in gross margin was primarily due to better performance at San Nicolas due to cost reduction efforts at the plant and higher prices in the Argentine electricity market, improved results at Deepwater due to higher natural gas prices, better performance at Placerita due to cost reduction efforts and a planned outage in 1995, offset in part by construction fees for Medway which were recognized in 1995. Selling, general and administrative expenses were approximately $6 million for the second quarter of 1995 and 1996, and as a percentage of total revenue, were 4% of revenues. Selling, general and administrative expenses increased 7% or approximately $1 million from the first six months of 1995 to the first six months of 1996, but as a percentage of total revenue, remained constant at 4% of revenues. Operating income increased 13%, or approximately $8 million, to $69 million from the second quarter of 1995 to the second quarter of 1996, and increased 9% or approximately $11 million to $132 million from the first six months of 1995 to the same period of 1996. These increases were the result of the factors discussed above. Interest expense remained constant at $31 million from the second quarter of 1995 to the second quarter of 1996. Interest expense decreased 5%, or approximately $3 million, to $59 million from the first six months of 1995 to the first six months of 1996. During the quarter, decreases in interest expense due to declining balances of project financing debt at US plants and lower interest expense at San Nicolas were offset by the interest expenses associated with borrowings under the credit facility and the Loan for the Light acquisition. The decrease for the first six months is primarily due to the declining balances of project financing debt at U.S. plants and lower interest expense at San Nicolas. Interest income decreased 29%, or approximately $2 million, to $5 million from the second quarter of 1995 to the second quarter of 1996, and decreased 23% or approximately $3 million, to $10 million from the first six months of 1995 to the same period of 1996. These decreases were primarily due to investments in new projects at AES Chigen and a decrease in the balance of unrestricted cash and cash equivalents. Equity in earnings of affiliates (net of income taxes) decreased 50% to approximately $2 million from the second quarter of 1995 to the same period of 1996. The decrease was primarily due to a planned outage at NIGEN during 1996. From the first six months of 1995 to the first six months of 1996, equity earnings increased 17% or approximately $1 million to $7 million. This increase was primarily due to limited operations at Medway, which was not in operation in 1995, offset in part by a planned outage at NIGEN. Income taxes increased 7% or approximately $1 million, to $16 million from the second quarter of 1995 to the second quarter of 1996, and increased 11% or approximately $3 million, to $31 million from the first six months of 1995 to the same period of 1996. These increases resulted primarily from an increase in the Company's estimated effective income tax rate from approximately 38% in 1995 to 39% in 1996 and higher income before taxes. Cash Flows, Financial Resources and Liquidity At June 30, 1996 cash and cash equivalents totaled approximately $220 million, as compared to $239 million at the beginning of the year. The $19 million decrease in cash resulted from a use of $616 million for investing activities which were funded by $529 million from financing activities and $68 million provided by operating activities. Significant investing activities were the acquisition of Light for $393 million, property and construction in progress additions of $205 million and the acquisition of Hidrotermica San Juan, S.A. for approximately $20 million. Furthermore, the net source of cash from financing activities was primarily the result of borrowing $155 million under the revolving credit facility, borrowing $390 million in project financing debt offset by repayments of $21 million of other project financing debt. Unrestricted net cash flow of the parent company amounted to approximately $108 million for the four quarters ended June 30, 1996. AES has primarily utilized project financing loans to fund the capital expenditures associated with constructing and acquiring its electric power plants and related assets. Project financing borrowings have been substantially non-recourse to other subsidiaries and affiliates and to AES as the parent company and are generally secured by the capital stock, physical assets, contracts and cash flow of the related project subsidiary or affiliate. The Company intends to continue to seek, where possible, such non-recourse project financing in connection with the assets which the Company or its affiliates may develop, construct or acquire. However, depending on market conditions and the unique characteristics of individual projects, the Company's traditional providers of project financing, particularly multinational commercial banks, may seek higher borrowing spreads and increased equity contributions. Furthermore, because of the reluctance of commercial lending institutions to provide non-recourse project financing (including financial guarantees) in certain less developed economies, the Company, in such locations, has and will continue to seek direct or indirect (through credit support or guarantees) project financing from a limited number of multilateral or bilateral international financial institutions or agencies. As a precondition to making such project financing available, these institutions may also require governmental guarantees of certain project and sovereign related risks. Depending on the policies of specific governments, such guarantees may not be offered and as a result, AES may determine that sufficient financing will ultimately not be available to fund the related project. In addition to the project financing loans, if available, AES provides a portion, or in certain instances all, of the remaining long-term financing required to fund development, construction, or acquisition. These investments have generally taken the form of equity investments or loans, which are subordinated to the project financing loans. The funds for these investments have been provided by cash flows from operations and by the proceeds from the credit facility, the Loan, issuances of senior subordinated notes, convertible debentures and common stock of the Company. In the second quarter of 1996, the Company entered into the Loan which was used to fund a portion of the CompanyOs investment in Light. In July 1996, the Company completed the issuance of $250 million of Notes. A portion of the proceeds from the Notes were used to reduce the borrowing under the Loan, the remaining amount was used to fund the CompanyOs investment in Tisza, and for general corporate purpose. The Loan has a current balance of $150 million. The net proceeds to the Company after deducting expenses of the offering were approximately $244 million. Interim needs for shorter-term and working capital financing have been met with borrowings under AES's revolving line of credit and letter of credit facility ("credit facility"). Over the past several years, the Company has increased the amount of available financing under the credit facility while striving to enhance its flexibility and usefulness. In the second quarter of 1996, AES increased the size of its credit facility to $425 million. The credit facility provides full availability as borrowings or letters of credit. Under the terms of the credit facility, AES is required to reduce its direct borrowings to $125 million for 30 consecutive days during each twelve month period. The terms of the credit agreement also include financial covenants related to net worth, cash flow and investments and restrictions related to the incurrence of additional debt and certain other obligations and limitations on cash dividends. Inflation, Interest Rates, Exchange Rates and Changing Energy Prices The Company attempts, whenever possible, to hedge certain aspects of its projects against the effects of fluctuations in inflation, interest and currency exchange rates and energy prices. AES has generally structured the energy payments in its power sales contracts to adjust with similar price indices as do its contracts with the fuel suppliers for the corresponding projects. In some cases a portion of revenues is associated with operations and maintenance, and as such is indexed to adjust with inflation. AES has also used a hedging strategy to insulate each project's financial performance, where appropriate, against the risk of fluctuations in interest rates. Depending on whether a project's capacity payments are either fixed or vary with inflation, the Company attempts to hedge against interest rate fluctuations by arranging fixed-rate or variable-rate financing. In certain cases, the Company executes interest rate swap agreements, or interest rate caps, to effectively fix, or in the case of interest rate caps, limit, the interest rate on the underlying variable rate financing. Such hedging techniques are implemented through contractual provisions with fuel suppliers and international financial institutions. As a result, their effectiveness is dependent, in part, on each counterparty's ability to perform in accordance with the provisions of the relevant contracts. The Company has sought to reduce this risk by entering into contracts with creditworthy organizations, where possible, and where not possible, as in the case of certain local fuel suppliers, to execute standby or option agreements with a creditworthy organization. Because of the complexity of hedging strategies and the diverse nature of AES's operations, the financial performance of AES's portfolio, although significantly hedged, will likely be somewhat affected by fluctuations in inflation, interest rates and energy prices. For example, AES's current portfolio of projects generally performs better with high oil and natural gas prices and with lower interest rates. The Company's performance also is sensitive to the difference between inflation and interest rates, and generally performs better when increases in inflation are higher than increases in interest rates. Through its equity investments in foreign affiliates, AES operates in jurisdictions dealing in currencies other than the Company's functional currency, the U.S. dollar. Such investments were made to fund equity requirements and to provide collateral for contingent obligations. Due primarily to the long-term nature of the investments, the Company accounts for any adjustments resulting from translation as a charge or credit directly to a separate component of stockholders' equity. The Company had approximately $10 million, net of tax, in cumulative translation adjustment losses at June 30, 1996. PART II. OTHER INFORMATION Item 1. Legal Proceedings In re The AES Corporation Securities Litigation was a purported class action suit brought in the U.S. District Court for the Southern District of New York by certain persons who claimed to have purchased shares of common stock and debentures issued by AES between June 25, 1991 and June 23, 1992 and who purported to sue on behalf of others similarly situated. The litigation consolidated four purported class actions previously filed against AES in June and July 1992. In February 1995, the Company entered into a settlement agreement with plaintiffs' counsel on behalf of the class. The settlement was on a claims-made basis, and consisted of $4.5 million, as well as warrants to purchase approximately 716,800 shares of AES Common Stock. Insurance proceeds were available to cover a portion of the settlement. The settlement was approved by the federal court in May 1995, and became effective in July 1995. The review of the claims submitted in the settlement was approved by the court and the settlement proceeds have been distributed. This matter is now concluded. On February 25, 1993, an action was filed in the 10th Judicial District Court, Galveston County, Texas against the Company, over 25 other corporations (including major oil refineries and chemical companies) and utilities, a utility district, 4 Texas cities, McGinnes Industrial Maintenance Corporation, Roland McGinnes and Lawrence McGinnes, claiming personal injuries, property, and punitive damages of $20 billion, arising from alleged releases of hazardous and toxic substances to air, soil and water at the McGinnes waste disposal site located in Galveston County. This matter was consolidated with two other related cases in December 1993. The complaint sets forth numerous causes of action, including fraudulent concealment, negligence and strict liability, including, among other things, allegations that the defendants sent hazardous, toxic and noxious chemicals and other waste products to the McGinnes site for disposal. In March 1995, the Company entered into a settlement agreement with certain plaintiffs, pursuant to which the Company paid seven thousand dollars in return for withdrawal of their claims against the Company. Based on the Company's investigation of the case to date, the Company believes it has meritorious defenses to each and every cause of action stated in the complaint and this action is being vigorously defended. The Company believes that the outcome of this matter will not have a material adverse effect on its consolidated financial position. Item 2. Changes in Securities In May 1996 the Company issued stock warrants to purchase approximately 716,800 shares of Common Stock at $29.43 per share pursuant to a settlement agreement associated with the 1992 shareholder class action suit. On July 2, 1996, the Company completed the issuance and sale of $250 million of Senior Subordinated Notes. The Company originally filed a OshelfO registration statement in February 1996 for the issuance of the notes. The notes bear interest at a rate of 10(%, are due in 2006 and are callable at the CompanyOs option beginning in July 2001. On July 29, 1996, the Company issued a notice of redemption to holders of its $50 million principal amount of 6(% Convertible Subordinated Debentures due 2002 at a redemption price of 103.727% of the principal amount of the debenture, with accrued interest through August 30, 1996. Holders have the right to convert the debentures into shares of AES Common Stock at a conversion price of $26.16 no later than August 30, 1996. If the entire $50 million principal amount of convertible subordinated debenture holders exercise their right to conversion, the Company will issue 1,911,315 shares of Common Stock. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a)The Annual Meeting of Stockholders of the Company was held on April 16, 1996. (b)Proposition 1: Election of Directors Nine unopposed nominees for directors were elected by the stockholders. There were no fewer than 61,365,907 affirmative votes (98%) and no more than 1,547,863 votes withheld for any nominee. There were no abstentions. Proposition 2: Election of Auditors The accounting firm of Deloitte & Touche, LLP was elected as auditors of the Company by a vote of 62,889,633 affirmative votes (99.9%) to 9,892 negative votes with 14,245 abstentions. Proposition 3: Adoption of Incentive Stock Plan Certain amendments relating to the number of authorized shares and employees eligible under the Incentive Stock Plan (OPlanO) were approved by the stockholders by a vote of 60,819,318 votes cast for (96.7%), to 1,999,432 votes cast against and 95,020 abstentions. Item 5. Other Information The Company's By-Laws were amended on May 28, 1996, to increase the number of directors from nine to ten, and Robert F. Hemphill, Jr., formerly the Executive Vice President of the Company, was appointed to fill the vacancy, effective July 1, 1996. Mr. Hemphill resigned as Executive Vice President, effective June 30, 1996. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Document 11 Consolidated Statements Regarding Computation of Earnings Per Share 20 Press Release dated August 12, 1996 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. (b) Reports on Form 8-K The Registrant filed a current report on Form 8-K, dated June 12, 1996 with respect to its acquisition of an ownership interest in an electric power generation, transmission and distribution system which serves Rio de Janeiro, Brazil. The Registrant filed a current report on Form 8-K, dated July 1, 1996 in connection with the registration by the Company of up to $250,000,000 of Debt Securities (Registration Statement No. 333-01286 and Registration Statement No. 333-07041), the First Supplemental Indenture dated as of July 1, 1996, relating to the Company's 10-1/4% Senior Subordinated Notes due 2006, entered into with The First National Bank of Chicago. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The AES Corporation (Registrant) By/s/ BARRY J. SHARP - -------------------- BARRY J. SHARP Vice President and Chief Financial Officer Dated: August 14, 1996 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 11 Consolidated Statements Regarding Computation of Earnings Per Share 20 Press Release dated August 12, 1996 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. EX-11 2 AES STATEMENT RE:COMPUTATION OF EARNINGS PER SHARE STATEMENTS REGARDING COMPUTATION OF EARNINGS PER SHARE FOR THE PERIODS ENDED JUNE 30, 1995 AND 1996 Three Three Six Six Months Months Months Months Ended Ended Ended Ended 6/30/95 6/30/96 6/30/95 6/30/96 ($ in millions, except per share amounts) PRIMARY Weighted Average Number of Shares of Common Stock Outstanding 75.1 75.0 74.9 74.9 Net effect of Dilutive Stock Options and Warrants Based on the Treasury Stock Method Using Average Market Price 0.6 0.9 0.7 0.9 Stock Units Allocated to the Deferred Compensation Plans for Executives and Directors 0.2 0.3 0.2 0.3 ---- ---- ---- ---- Weighted average shares outstanding 75.9 76.2 75.8 76.1 ==== ==== ==== ==== Net Income $ 27.0 $ 28.0 $ 51.0 $ 57.0 ==== ==== ==== ==== Per Share Amount $0.35 $0.37 $0.68 $0.75 ==== ==== ==== ==== FULLY DILUTED Weighted Average Number of Shares of Common Stock Outstanding 75.1 75.0 74.9 74.9 Net effect of Dilutive Stock Options and Warrants Based on the Treasury Stock Method Using Ending Market Price 0.7 1.2 0.7 1.2 Stock Units Allocated to the Deferred Compensation Plans for Executives and Directors 0.2 0.3 0.2 0.3 Effect of Convertible Debt - Based on the If-Converted Method 1.9 1.9 1.9 1.9 ---- ---- ---- ---- Weighted average shares outstanding 77.9 78.4 77.7 78.3 ==== ==== ==== ==== Net Income $ 27.0 $ 28.0 $ 51.0 $ 57.0 Additional Contribution to Net Income if Convertible Debt is fully converted 1.0 1.0 1.0 1.0 ---- ---- ---- ---- Adjusted Net Income $ 28.0 $ 29.0 $ 52.0 $ 58.0 ==== ==== ==== ==== Per Share Amount $0.35 $0.36 $0.67 $0.74 ==== ==== ==== ==== EX-20 3 AES NEWS RELEASE The AES Corporation The Global Power Company News Release FOR IMMEDIATE RELEASE AES AND PARTNER ACQUIRE 4000MW POWER STATION IN KAZAKSTAN ARLINGTON, VA, August 12, 1996-- The AES Corporation (NASDAQ: AESC) announced today that, together with its partner, Suntree Ltd., it acquired the largest power station in Kazakstan, the 4000 MW Ekibastuz GRES-1 facility and signed a 35 year agreement to sell power from the facility to the government owned utility. The joint venture company, called AES Suntree Power Ltd., won the rights to the station in a recently organized tender process conducted by the government of Kazakstan. AES will begin operating and refurbishing the plant immediately. AES has a minimum 70% stake in the joint venture and controls all aspects of the business. Suntree (a privately held organisation operating mainly in the CIS and Israel) owns approximately 30% of the joint venture and with its strong, multifaceted presence in Kazakstan, has led the governmental relations side of the development effort to date and will continue to operate in a similar role going forward. Ekibastuz is a mine-mouth, low-grade coal-fired facility located in Northeastern Kazakstan. It purchases coal from the largest open cast mine in the world. The economies of scale of the mining operation combined with the efficient design of the station, result in the station being one of the lowest cost electricity producers in the world. AES Suntree Power Ltd. has agreed to invest amounts necessary to upgrade all aspects of the power station with specific attention to the correction of safety and environmental problems. This may require an investment in the facility of $500 million or more over the next 5 or 6 years. Due to economic difficulties over the last 10 years, the station has been deprived of necessary maintenance funds, has experienced a reduction in performance and run at approximately 20% capacity factor. AESOs goal within the 5 year period is to enhance plant performance levels to be commensurate with other facilities with similar technology. Mr. Mark Fitzpatrick, Managing Director of AES Electric Ltd., commented, "We are grateful to Mr. Barry Swersky and his team at Suntree for introducing AES to Kazakstan and for being the driving force. Further, we would like to acknowledge the professionalism and commitment of the Kazakstan government, particularly Mr. Viktor Khrapunov, Minister of Energy and Coal Industry, Mr. Akezhan Kazhegeldin and Mr. Garry Shtoik, the Prime Minister and Deputy Prime Minister, respectively, and Mr. Nursultan Nazarbaev, the President. We are also grateful to US Ambassador to Kazakstan, Elizabeth Jones, and her staff for their ongoing support and encouragement." Mr. Dennis Bakke, President & CEO of AES, stated, "This is one of the biggest challenges and opportunities in the history of AES as we try to make a positive contribution in the world. Building a business through refurbishing and operating an established power plant is an AES strength. We are very excited to take this giant step in what we are hopeful will become one of the strongest economies of all nations transitioning from the former Soviet Union." The transaction will increase to nearly 11,000 MWs the generating capacity of plants in which AES has an ownership interest, which includes plants in operation and under construction. AES owns all or part of 31 generating stations. These facilities have assets totaling more than $5 billion and, combined with the Rio de Janeiro utility in which it has a major interest, employs over 20,000 people worldwide. 1996 has become a banner year for AES. Development milestones include the following: In July, AES won a bid to supply electricity from a new, greenfield 288 MW simple cycle, gas turbine power station in Townville, Queensland, Australia. In July, AES acquired three power plants totaling 1,281 MW and a coal mine through the purchase of an 81% share of Tiszai Eromu Rt., an electricity generation company in Hungary. In May, AES, along with Electricite de France, Houston Industries Energy, CSN and NDES (BrazilOs National Development Bank) completed the purchase of a controlling interest in Light, the 3,800 MW integrated electric utility that serves Rio de Janeiro, Brazil. In April, AES Chigen funded Jiazuo Wan Fang, a 250 MW coal-fired facility which is under construction and located in Henan Province, China. In August, AES Chigen funded Wuhu Zhaoda, a 250 MW coal-fired facility under construction in Anhui Province, China. These projects bring the total number of megawatts in construction or operation for AES Chigen to 649 MW. AES Chigen is 48% owned by AES. In April, AES reached agreement to acquire a site in northern Poland, which included the exclusive right to negotiate a power sales agreement for a natural-gas-fired project. This step was the result of a competitive solicitation in 1995. In March, AES purchased AES San Juan, a hydro-thermal company in Argentina that consists of the 45 MW Ullum hydro facility and the 33 MW Sarmiento thermal plant. In January, AES closed the financing of the 337 MW PakGen oil-fired plant in Pakistan. AES is a leading global power company that generates, sells or markets electricity in over 35 countries. The Company currently has over $2.8 billion in assets and, for the year ending December 31, 1995, earned net income of $107 million on revenues of $685 million. * * * * * For more general information visit our web site at www.aesc.com or contact investor relations at investing@aesc.com EX-27 4 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000,000 U.S. Dollars 6-MOS Dec-31-1996 Jan-01-1996 Jun-30-1996 1 220 36 65 0 40 411 2011 (249) 2941 265 1710 0 0 1 609 2941 343 346 199 214 0 0 59 90 31 57 0 0 0 57 0.75 0.74
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