-----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, HJDTdTiw6TJ+mSXbW7Zs6aH4VdHOW+B9vtKvkyLXZQLaKD8C6fakkThRVlbsMlIp KXCzuRObCE6NRCRdnNd9mg== 0000950133-96-001062.txt : 19960702 0000950133-96-001062.hdr.sgml : 19960702 ACCESSION NUMBER: 0000950133-96-001062 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960701 SROS: NONE 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: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01286 FILM NUMBER: 96589717 BUSINESS ADDRESS: STREET 1: 1001 N 19TH ST CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 7035221315 424B2 1 DEFINITIVE PROSPECTUS SUPPLEMENT - AES CORP. 1 Filed pursuant to Rule 424(b)(2) PROSPECTUS SUPPLEMENT Registration No. 333-01286 (TO PROSPECTUS DATED JUNE 27, 1996) (AES LOGO) THE AES CORPORATION $250,000,000 10 1/4% Senior Subordinated Notes due 2006 Interest Payable January 15 and July 15 ISSUE PRICE: 100% The 10 1/4% Senior Subordinated Notes (the "Notes") will bear interest from July 2, 1996, at the rate of 10 1/4% per annum, payable semi-annually on January 15 and July 15, commencing January 15, 1997. The Notes are redeemable for cash at any time on or after July 15, 2001 at the option of The AES Corporation ("AES" or the "Company"), in whole or in part, at the redemption prices set forth herein, plus accrued interest. The Notes are redeemable at the option of the holder upon a Change of Control (as defined herein) at 101% of the principal amount thereof, plus accrued interest. The Notes are unsecured obligations of the Company and subordinated to all existing and future Senior Debt (as defined herein) of the Company. As of March 31, 1996, on a pro forma basis after giving effect to the recent acquisition by the Company of the Light Interest (as defined herein) and to the application of the net proceeds from the offering and sale of the Notes (the "Offering"), the Company had approximately $246 million in aggregate principal amount of Senior Debt (as defined herein) and the subsidiaries of the Company had approximately $1.2 billion in aggregate amount of liabilities to which the Notes are effectively subordinated. SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO THE PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3) - --------------------------------------------------------------------------------------------------------- Per Note 100.0000% 2.5625% 97.4375% - --------------------------------------------------------------------------------------------------------- Total $250,000,000 $6,406,250 $243,593,750 - ---------------------------------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses estimated at $360,000, which will be paid by the Company. The Notes are being offered by the Underwriters subject to prior sale, when, as, and if accepted by the Underwriters, and subject to various prior conditions, including their right to reject orders in whole or in part, and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Notes will be made through the book-entry facilities of the Depositary (as defined herein), against payment therefor in New York funds, on or about July 2, 1996. J.P. MORGAN & CO. GOLDMAN, SACHS & CO. June 27, 1996 2 No dealer, salesperson or other person is authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus Supplement or in the Prospectus in connection with the offer made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any underwriters, dealers or agents. Neither the delivery of this Prospectus Supplement or the accompanying Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained or incorporated by reference herein is correct as of any time subsequent to its date. This Prospectus Supplement and the accompanying Prospectus do not constitute an offer to sell or a solicitation of an offer to buy the securities offered hereby by anyone in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. TABLE OF CONTENTS PROSPECTUS SUPPLEMENT PAGE Prospectus Supplement Summary........ S- 3 The Offering......................... S- 5 Summary Consolidated Financial Data............................... S- 6 Recent Developments.................. S- 7 Use of Proceeds...................... S- 9 Capitalization....................... S-10 Unaudited Pro Forma Consolidated Financial Information.............. S-11 Selected Consolidated Financial Data............................... S-13 Description of Corporate Credit Facility........................... S-14 Description of Notes................. S-17 Underwriting......................... S-40 Calculations of Fixed Charge Ratio... R-1 PROSPECTUS PAGE Available Information................ i Incorporation of Certain Documents by Reference.......................... i The Company.......................... 1 Risk Factors......................... 2 Use of Proceeds...................... 8 Discussion and Analysis of Financial Condition and Results of Operations......................... 9 Ratio of Earnings to Fixed Charges... 16 Description of Debt Securities....... 17 Plan of Distribution................. 22 Legal Matters........................ 23 Experts.............................. 23 Index to Consolidated Financial Statements......................... F-1
SUPPLEMENTAL INFORMATION The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form 10-K") is attached hereto. The delivery of the 1995 Form 10-K shall not be intended to create an implication that there has been no change in the affairs of the Company since the date of filing thereof, nor that the information contained or incorporated by reference therein is correct as of any time subsequent to its date. Without limitation of the foregoing, the Company's financial statements incorporated by reference in the 1995 Form 10-K have been superseded by the Company's financial statements included as part of the accompanying Prospectus. See "Recent Developments." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 3 PROSPECTUS SUPPLEMENT SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements of AES and the notes thereto, appearing elsewhere or incorporated by reference in the Prospectus and this Prospectus Supplement. All pro forma adjustments herein relating to the Offering assume that the net proceeds from the Offering will be used to repay borrowings under the Reimbursement Agreement (as defined herein). See "Use of Proceeds." THE COMPANY The AES Corporation is a global power company which supplies electricity to customers world-wide. The Company markets power principally from electric generating and other related facilities that it owns and operates. AES was one of the original entrants in the independent power market and today is one of the world's largest independent power companies, based on net equity ownership of generating capacity (in megawatts) in operation or under construction. Over the last five years, the Company has experienced significant growth. This growth has resulted primarily from the development and construction of new plants ("greenfield development") and also from the acquisition of existing plants, primarily through competitively bid privatization initiatives outside the United States. Since 1991, the Company's total generating capacity in megawatts has grown by 293%, with the total number of plants in operation increasing from 6 to 20. Additionally, the Company's revenues have increased 106% from $333 million in 1991 to $685 million in 1995, while EBITDA has grown from $5 million to $110 million over the same period. Through its subsidiaries and affiliated companies, AES operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total generating capacity of 4,158 megawatts. Of that total, 1,069 are produced by plants located in the United States, 1,420 in the United Kingdom, 840 in Argentina, 788 in Brazil and 41 in China. Of the total megawatts, 29% are produced by plants fueled by solid fuel, 19% are produced by plants fueled by natural gas, 24% are produced by hydroelectric facilities and the remaining 28% are produced by plants capable of burning multiple fossil fuels. AES is now in the process of adding 1,462 megawatts to its operating portfolio by constructing two oil-fired power plants in Pakistan totaling 674 megawatts, a 180 megawatt coal-fired plant in the United States and four plants totaling 608 megawatts in China that will be coal and oil-fired. In total, AES's net equity ownership in plants in operation and construction is 3,233 megawatts. On May 30, 1996, a subsidiary of AES acquired common shares representing an 11.35% interest (the "Light Interest") in Light Servicos de Eletricidade S.A. ("Light"), a publicly-held corporation that operates as the concessionaire of an approximately 3,800 megawatt electric power generation, transmission and distribution system in Rio de Janeiro, Brazil. In connection with the acquisition of the Light Interest, AES, through a subsidiary, is participating in a consortium with certain other successful bidders, and the ownership interest held by the consortium represents a controlling interest in Light. THE GLOBAL INDEPENDENT POWER MARKET The market for independent power generation has expanded from a U.S. market, consisting of cogeneration and small power production projects, to a global competitive market for power generation. Although many foreign countries initiated restructuring policies after the advent of the independent power market in the United States, many of these countries have put in place market structures that the Company believes are more competitive than most markets existing in the United States today. A part of AES's business strategy is to participate in competitive generation markets both in the United States and world-wide. The Company believes that the growth in the need for new capacity in the United States has and will continue to slow, partly because utilities are making more efficient use of their existing resources by improving plant availability, extending plant lives, repowering and taking advantage of attractive bulk power purchases, and partly because utilities have initiated programs to reduce the demand for electricity. As a result of the reduced need for new capacity in the United States, AES and many of its competitors are seeking new business in markets outside the S-3 4 United States. In addition, a number of foreign countries have privatized (or are in the process of privatizing) their generation capacity, which provides opportunities to purchase existing generation assets. AES, through subsidiaries and affiliates, now operates 14 plants in non-U.S. countries, is constructing six others overseas, and has offices in numerous foreign locations to take advantage of the opportunities in these new markets. BUSINESS STRATEGY The Company's primary objective is to help meet the need for electricity world-wide by participating in competitive electricity markets as a clean, safe and reliable power supplier. The Company's strategy is to participate in competitive power generation markets as they develop either by greenfield development or by acquiring and operating existing facilities in these markets. Other elements of the Company's strategy include: - Supplying energy to customers at the least cost possible, taking into account factors such as reliability and environmental performance. - Constructing or acquiring projects of a relatively large size (generally larger than 100 megawatts). - Entering into power sales contracts with electric utilities or other customers with credit strength. 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. 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 in the future. The Company's strategy also has been to attempt to finance its projects primarily without credit recourse to the Company or to other projects, and to construct new plants under fixed or guaranteed-maximum price contracts with contractor-guaranteed performance standards ("turnkey" contracts). In addition, the Company engages in careful site selection, taking into consideration transportation, water and transmission access and attempting to gauge local government and community receptivity to the environmental permitting process. S-4 5 THE OFFERING NOTES OFFERED....................... $250 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2006. MATURITY DATE....................... July 15, 2006. INTEREST RATE....................... The Notes will bear interest at the rate of 10 1/4% per annum, payable semi-annually. INTEREST PAYMENT DATES.............. January 15 and July 15, commencing January 15, 1997. OPTIONAL REDEMPTION BY THE COMPANY............................. The Notes may not be redeemed prior to July 15, 2001. On and after that date, the Notes may be redeemed at any time, in whole or in part, on not less than 30 nor more than 60 days' notice at the prices set forth herein. RANKING............................. The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all Senior Debt (as defined herein) of the Company. As of March 31, 1996, on a pro forma basis after giving effect to application of the net proceeds from the Offering and the Company's recent acquisition of the Light Interest, the Company had approximately $246 million in aggregate principal amount of Senior Debt. In addition, the Company's subsidiaries had approximately $1.2 billion in aggregate amount of liabilities to which the Notes are effectively subordinated. CHANGE OF CONTROL OFFER............. Upon a Change of Control (as defined), the Company has the obligation, subject to certain conditions, to offer to purchase the Notes at 101% of the principal amount thereof, plus accrued interest to the date of purchase in accordance with the procedures set forth in the Indenture for the Notes. If a Change of Control occurs, the subordination provisions of the Notes require Senior Debt to be repaid prior to the purchase of any tendered Notes. Due to the highly leveraged nature of the Company, there can be no assurance that, upon a Change of Control, the Company will be able to fund the purchase of the Notes. See "Description of Notes -- Repurchase of Notes Upon a Change of Control". PRINCIPAL COVENANTS................. The Indenture for the Notes will restrict, among other things, the ability of the Company and its Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay dividends and make other distributions, (iii) make certain investments, (iv) engage in unrelated businesses, (v) sell or issue preferred stock of a subsidiary, (vi) create encumbrances to secure Debt that is pari passu with or subordinated to the Notes, (vii) engage in certain transactions with affiliates, (viii) dispose of certain assets or (ix) merge or consolidate with or into, or sell or otherwise transfer their properties and assets as an entirety to, another entity. See "Description of Notes". USE OF PROCEEDS OF THE OFFERING..... The repayment of certain indebtedness. See "Use of Proceeds". S-5 6 SUMMARY CONSOLIDATED FINANCIAL DATA (1)
------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 QUARTER ENDED MARCH 31 PRO PRO ACTUAL FORMA(2) ACTUAL FORMA(2) In millions, except ratio and per ---------------------------------------------- ----- ---------------- ------ share data 1991 1992 1993 1994 1995 1995 1995 1996 1996 ------ ------ ------ ------ ------ ----- ------ ------ ------ (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA: Revenues........................... $ 333 $ 401 $ 519 $ 533 $ 685 $685 $ 171 $ 172 $ 172 Operating costs and expenses....... 201 248 326 301 437 437 111 109 109 Operating income................... 132 153 193 232 248 248 60 63 63 Interest expense................... 85 97 125 121 122 157 31 28 38 Income before income taxes and minority interest................ 51 66 89 145 167 143 39 45 41 Net income......................... 43 56 71 100 107 97 25 29 29 Net income per share............... $ 0.66 $ 0.80 $ 0.98 $ 1.32 $ 1.41 $1.27 $ 0.33 $ 0.38 $ 0.38 Weighted average shares outstanding...................... 63 70 73 76 76 76 76 76 76 Ratio of earnings to fixed charges (3).............................. 1.31 1.37 1.63 2.08 2.18 1.79 2.18 2.12 1.76 BALANCE SHEET DATA: Total assets....................... $1,367 $1,552 $1,687 $1,915 $2,320 -- $2,129 $2,353 $2,762 Revolving bank loan (current)...... 10 -- -- -- 50 -- -- 31 65 Project finance debt (current)..... 48 71 79 61 84 -- 98 84 84 Revolving bank loan (long-term).... -- -- -- -- -- -- -- -- 125 Project finance debt (long-term)... 1,093 1,146 1,075 1,019 1,098 -- 1,030 1,108 1,108 Other notes payable (long-term).... -- 50 125 125 125 -- 125 125 375 Stockholders' equity............... 141 177 309 401 549 -- 429 582 582 Debt to total capitalization and short-term debt ratios: -- Project financing debt........ 88.2% 83.2% 72.4% 67.0% 61.6% -- 65.6% 61.8% 51.0% -- Parent debt (4)............... 0.8 3.4 7.9 7.8 9.1 -- 7.7 8.0 24.2 ------ ------ ------ ------ ------ ------ ------ ------ Total........................ 89.0% 86.6% 80.3% 74.8% 70.7% -- 73.3% 69.8% 75.2% ====== ====== ====== ====== ====== ====== ====== ======
------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31 FOUR QUARTERS ENDED MARCH 31 PRO PRO ACTUAL FORMA(2) ACTUAL FORMA(2) ---------------------------------------------- ----- ---------------- ----- 1991 1992 1993 1994 1995 1995 1995 1996 1996 ------ ------ ------ ------ ------ ----- ------ ------ ----- (unaudited) (unaudited) OTHER DATA: Net cash provided by operating activities....................... $ 86 $ 78 $ 123 $ 164 $ 197 $197 $ 168 $ 199 $199 Consolidated EBITDA (5)(6)......... 5 45 30 68 110 132 111 115 137 Consolidated Fixed Charges (5)..... 1 3 7 11 12 42 11 13 42 Fixed Charge Ratio (5)............. 6.88 14.48 4.18 6.15 9.20 3.16 9.74 9.05 3.29
- --------------- (1) The information for the five years ended December 31, 1995 has been derived from AES's audited consolidated financial statements. The information for the three months ended March 31, 1995 and 1996 and pro forma for the year ended December 31, 1995 and for the three months ended March 31, 1996 are derived from AES's unaudited consolidated financial statements. (2) Pro forma as adjusted to give effect to the recent acquisition by the Company of the Light Interest and to the application of the net proceeds from the Offering. For assumptions made in the pro forma calculations, see "Unaudited Pro Forma Consolidated Financial Information". (3) For purposes of this ratio, earnings include income before taxes and fixed charges excluding capitalized interest. Fixed charges include interest, whether capitalized or expensed, and amortization of deferred financing costs, whether capitalized or expensed. The pro forma after giving effect to the Company's recent acquisition of the Light Interest and the application of the net proceeds of the Offering of the Notes. (4) Parent debt represents obligations of the Company, as parent. It does not include non-recourse obligations of the Company's subsidiaries. (5) The other data presented for "Consolidated EBITDA," "Consolidated Fixed Charges" and "Fixed Charge Ratio" is calculated in accordance with the respective definitions of such terms in the Indenture and set forth herein under "Description of Notes -- Certain Definitions." (6) Consolidated EBITDA is a concept defined in the Indenture and is not a substitute for cash flows from operating activity as defined by generally accepted accounting principles. S-6 7 RECENT DEVELOPMENTS On May 30, 1996, AES, through certain subsidiaries, acquired for approximately $393 million, common shares representing an 11.35% interest (the "Light Interest") in Light, a publicly-held Brazilian corporation that operates as the concessionaire of an approximately 3,800 megawatt electric power generation, transmission and distribution system which serves 28 municipalities in the state of Rio de Janeiro, Brazil. AES acquired its interest by bidding in the Brazilian privatization program auction of 60% of Light's outstanding shares held on May 21, 1996. Subsequent to the auction, the winning bidders, including a subsidiary of the Company, formed a consortium (the "Consortium") whose aggregate ownership interest of 50.44% represents a controlling interest in Light. Prior to the privatization auction, Light was owned primarily by the Brazilian government utility holding company, Centrais Eletricas Brasileiras S.A. ("Eletrobras") (81.6%) and public shareholders (17.9%). The Consortium, organized pursuant to a shareholders agreement dated as of May 27, 1996 (the "Shareholder's Agreement"), is comprised of the direct common share ownership interests held in Light by subsidiaries or affiliates of AES (11.35%), Electricite de France ("EDF") (11.35%), Houston Industries Incorporated ("HI") (11.35%), Companhia Siderurgica Nacional ("CSN") (7.25%), and Banco Nacional de Desenvolvimento Economico E Social (BNDES) (9.14%). In addition, pursuant to the terms of an Addendum to Shareholders Agreement dated May 30, 1996, entered into among the members of the Consortium and InvestLight -- Clube de Investimento dos Empregados da Light ("InvestLight"), an investment group owned by Light employees, InvestLight may join the Consortium and become a party to the Shareholder's Agreement if it acquires at least 5% of the total outstanding registered voting common shares of Light on or prior to June 28, 1996. Under the provisions of the Shareholder's Agreement, principal responsibilities for the various aspects of Light's business will be allocated among AES, EDF, HI and CSN. AES will have the principal responsibility for all matters relating to generation and purchasing of electricity by Light. In connection with the privatization process, the Brazilian National Department of Water and Electric Energy ("DNAEE") has requested an opportunity to review and to approve the general terms and conditions of the Shareholder's Agreement. Such review by DNAEE is expected to be completed by the end of June 1996. There can be no assurance that DNAEE will not request modifications to the terms and conditions of the Shareholder's Agreement. Light currently serves approximately 2.8 million customers or approximately 70% of the population of the state of Rio de Janeiro. Light generates about 16% of the total electricity it distributes through four hydroelectric complexes having an aggregate installed generating capacity of approximately 788 megawatts. Of the remaining electricity distributed by Light (approximately 84% of the total), 53% is purchased from Furnas Centrais Eletricas S.A., a power generation and transmission company owned by Eletrobras, and the remaining 31% is purchased from Itaipu Binacional, a power generation company owned by the Republic of Brazil and the Republic of Paraguay. In connection with the purchase of the controlling interest by the Consortium, the Federal Government of Brazil, through the Ministry of Mines and Energy (the "Grantor"), granted a 30-year concession to Light pursuant to the terms of a concession agreement (the "Concession"). The Concession obligates Light to provide electric services to all customers within its concession area and to conduct whatever related projects are necessary to serve such customers. The Concession also grants certain rights and privileges to Light to enable it to fulfill its service obligations. Additionally, Light is obligated to provide open access transmission and distribution services to certain individual customers and to other entities interconnected with the Light system. As a result, new customers with capacity needs greater than three megawatts have the right to purchase electricity from providers other than Light. The Concession authorizes Light to charge its customers a tariff for electric services which consists of two components -- an expense pass-through component and an inflation-adjusted operating cost component. Beginning in 2004, the Grantor has the authority to review Light's costs to determine the adjustment, if any, to the operating cost component for subsequent five-year periods. There can be no assurance that, beginning in 2004, the Grantor will continue to allow adjustments to the operating cost component of the tariff, consistent with adjustments allowed historically or that future adjustments will not be set in a manner that adversely affects Light's revenues. The Company financed its purchase and other related transaction costs of Light through (i) drawings of $179 million under a $425 million credit facility issued pursuant to a credit agreement dated as of May 20, 1996, among AES, S-7 8 certain banks listed therein, and Morgan Guaranty Trust Company of New York, as Agent (the "Bank Credit Agreement"), and (ii) a $225 million reimbursement agreement dated as of May 20, 1996 between AES Light, Inc. ("AES Light"), an indirect subsidiary of AES with an indirect ownership interest in Light, and Morgan Guaranty Trust Company of New York (the "Reimbursement Agreement"). The Credit Agreement has a three-year term, and may be extended for two one-year terms subject to the prior written consent of the parties thereto. The Reimbursement Agreement has an 18-month term, is recourse only to AES Light and is secured by a pledge of approximately 18 million shares of common stock of AES which had been previously contributed to AES Light. For a discussion of certain litigation involving Light, see, in the accompanying Prospectus, "Risk Factors -- Risk of Litigation Involving Light." The following table presents summary financial data for Light: LIGHT SERVICOS DE ELETRICIDADE S.A. (1) SUMMARY FINANCIAL DATA IN BRAZILIAN GAAP
----------------------------------- YEAR ENDED DECEMBER 31 1994 1995 1995(2) ------- ------- ----------- (unaudited) In millions STATEMENT OF OPERATIONS DATA: Revenues.................................................... R$1,575 R$1,465 US$1,592 Operating income............................................ 117 146 159 Net income.................................................. 149 (110) (120) BALANCE SHEET DATA: Total assets................................................ R$8,133 R$7,938 US$8,183 Total debt.................................................. 650 563 580 Stockholders' equity........................................ 6,763 6,746 6,955
- --------------- (1) The information for the two years ended December 31, 1995 has been derived from Light's audited consolidated financial statements which are presented in conformity with Brazilian generally accepted accounting principles and not U.S. GAAP. AES owns indirectly an 11.35% interest in Light. The information does not reflect the spin-off of Electropaulo which was approved by stockholders of Light on January 29, 1996. (2) Statement of Operations data is presented at an average exchange rate of R$0.92 to US$1.00 and Balance Sheet data is presented at the year end exchange rate of R$0.97 to US$1.00. In early June 1996, the Company, through one of its subsidiaries, participated in the bidding for shares of common stock representing an 80% interest in Tiszai Eromu Rt. ("Tiszai"), a 1,281 megawatt electric generating and coal mining company in Hungary, presently owned by the Hungarian government. The sale of the interest in Tiszai is part of the Hungarian government's privatization of its electric and gas industries. The evaluation committee of the Hungarian State Privatization Agency Board (the "APV") is reviewing the bids received in connection with the auction and will recommend a bid for approval. The APV is expected to formally approve the winning bid by late June 1996. The successful bidder has 120 days to agree to the terms of the government's sale of the interest in Tiszai upon notification from the APV. If the Company's bid is successful, the Company expects to pay in excess of $100 million for its interest in Tiszai, and expects to initially finance such acquisition through borrowings under its Bank Credit Agreement, the incurrence of additional indebtedness, internally generated cash flows or a combination thereof. There can be no assurance that (i) the Company's bid will be recommended for approval, (ii) that the Company's bid, if recommended for approval, will be approved by the APV, or (iii) that if the Company's bid is approved by the APV, the Company will be able to successfully conclude the terms of the sale. S-8 9 USE OF PROCEEDS The Company intends to use the net proceeds from the Offering to either repay amounts outstanding under the Bank Credit Agreement, repay amounts outstanding under the Reimbursement Agreement or for general corporate purposes. The Reimbursement Agreement bears interest at the rate of LIBOR plus 2.50% and matures on November 20, 1997. The Company may use $225 million of the net proceeds of the Offering to repay the amount outstanding of $225 million under the Reimbursement Agreement, which was incurred in connection with the Company's acquisition of the Light Interest, and the remainder of such net proceeds to repay a portion of the amount outstanding under the Bank Credit Agreement. The Bank Credit Agreement, the Company's working capital facility which was used in part to finance its acquisition of the Light Interest, bears interest at a rate of LIBOR plus 1.75% and matures on May 19, 1999. As of the date hereof, an amount of $202 million is outstanding under the Bank Credit Agreement. If the Company uses the proceeds of the Offering to repay indebtedness under the Bank Credit Agreement, the Company intends to use the remainder of the net proceeds of the Offering for general corporate purposes. See "Description of Corporate Credit Facility." All pro forma adjustments herein relating to the Offering assume that all of the net proceeds from the Offering will be used to repay the entire amount outstanding under the Reimbursement Agreement and a portion of the amount outstanding under the Bank Credit Agreement, as described above. S-9 10 CAPITALIZATION The following table sets forth the book capitalization (including short-term debt) of AES as of March 31, 1996 and such capitalization as adjusted to give effect on a pro forma basis to the recent acquisition by the Company of the Light Interest, the sale of the Notes offered hereby and the application of the proceeds thereof.
------------------------------------------- PRO FORMA FOR THE PRO FORMA LIGHT INTEREST AS OF FOR THE AND THE In millions MARCH 31 LIGHT INTEREST OFFERING -------- -------------- -------------- SHORT-TERM DEBT: Revolving bank loan -- current portion.............. $ 31 $ 85 $ 65 Project financing debt -- current portion........... 84 84 84 ------ ------ ------ Total short-term debt............................ $ 115 $ 169 $ 149 ====== ====== ====== LONG-TERM DEBT: Revolving bank loan................................. $ -- $ 125 $ 125 Project financing debt.............................. 1,108 1,333 1,108 9 3/4% Senior Subordinated Notes due 2000........... 75 75 75 10 1/4% Senior Subordinated Notes due 2006.......... -- -- 250 6 1/2% Convertible Subordinated Debentures due 2002............................................. 50 50 50 ------ ------ ------ Total long-term debt............................. 1,233 1,583 1,608 ------ ------ ------ STOCKHOLDERS' EQUITY: Common Stock; $.01 par value; 100 million shares authorized; 75 million shares issued and outstanding (1).................................. 1 1 1 Additional paid-in capital.......................... 294 294 294 Retained earnings................................... 300 300 300 Treasury stock...................................... (3) (3) (3) Cumulative translation adjustment................... (10) (10) (10) ------ ------ ------ Total stockholders' equity............................ 582 582 582 ------ ------ ------ Total capitalization.................................. $1,815 $2,165 $2,190 ====== ====== ======
- --------------- (1) As of March 31, 1996 there were outstanding 75 million shares of Common Stock, warrants and options to purchase shares of Common Stock and stock units representing a total of 5 million shares of Common Stock, and $50 million principal amount of the Company's 6 1/2% Convertible Subordinated Debentures due 2002 convertible at a per share price of $26.16 into 2 million shares of Common Stock. S-10 11 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following tables and related notes present financial information at and for the periods presented herein to give effect on a pro forma basis to the recent acquisition by the Company of the Light Interest and the sale of the Notes. The acquisition of the Light Interest will be accounted for using the purchase method. The unaudited pro forma adjustments are based upon available information and certain assumptions and estimates which the Company believes are reasonable under the circumstances. The unaudited pro forma results do not purport to be indicative of the results that would have been obtained had the acquisition of the Light Interest occurred at the beginning of the periods presented, nor are they intended to be a projection of future results. The unaudited pro forma financial information should be read in conjunction with the notes hereto. The following unaudited pro forma consolidated statements of operations information combine the results of AES's investment in Light for the year ended December 31, 1995 and the quarter ended March 31, 1996 on the equity method as if the acquisition by the Company of the Light Interest and the Offering had occurred at the beginning of the periods.
----------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 (1)(2)(3) PRO FORMA FOR THE ADJUSTMENTS PRO FORMA ADJUSTMENTS LIGHT INTEREST FOR THE FOR THE FOR THE AND THE In millions except per share data ACTUAL LIGHT INTEREST (4) LIGHT INTEREST OFFERING (4) OFFERING ------ -------------- -------------- -------- -------- STATEMENT OF OPERATIONS DATA: Total revenues........................ $ 685 $ -- $ 685 $ -- $ 685 Total operating cost and expenses..... 437 -- 437 -- 437 ---- ----- ---- ----- ---- Operating income...................... 248 -- 248 -- 248 Other income and (expense): Interest expense.................... (122) (27)(d) (149) (8)(h) (157) Interest income..................... 27 -- 27 -- 27 Equity in earnings of affiliates...... 14 11(c) 25 -- 25 ---- ----- ---- ----- ---- Income before income taxes and minority interest................... 167 (16) 151 (8) 143 Income taxes.......................... 57 (11)(e) 46 (3)(e) 43 Minority interest..................... 3 -- 3 -- 3 ---- ----- ---- ----- ---- Net income............................ $ 107 $ (5) $ 102 $ (5) $ 97 ==== ===== ==== ===== ==== Net income per share.................. $1.41 $(0.07) $1.34 $(0.07) $1.27 ==== ===== ==== ===== ====
--------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1996 (1)(2)(3) PRO FORMA FOR THE ADJUSTMENTS PRO FORMA ADJUSTMENTS LIGHT INTEREST FOR THE FOR THE FOR THE AND THE ACTUAL LIGHT INTEREST (4) LIGHT INTEREST OFFERING (4) OFFERING ------ -------------- -------------- -------- -------- STATEMENT OF OPERATIONS DATA: Total revenues........................ $ 172 $ -- $ 172 $ -- $ 172 Total operating cost and expenses..... 109 -- 109 -- 109 ---- ----- ---- ----- ---- Operating income...................... 63 -- 63 -- 63 Other income and (expense): Interest expense.................... (28) (7)(d) (35) (3)(h) (38) Interest income..................... 5 -- 5 -- 5 Equity in earnings of affiliates...... 5 6(c) 11 -- 11 ---- ---- ---- ----- ---- Income before income taxes and minority interest................... 45 (1) 44 (3) 41 Income taxes.......................... 15 (3)(e) 12 (1)(e) 11 Minority interest..................... 1 -- 1 -- 1 ---- ---- ---- ----- ---- Net income............................ $ 29 $ 2 $ 31 $ (2) $ 29 ==== ===== ==== ===== ==== Net income per share.................. $0.38 $0.03 $0.41 $(0.03) $0.38 ==== ===== ==== ===== ====
S-11 12 The following unaudited pro forma consolidated balance sheet information represents AES's financial position at March 31, 1996 as if the acquisition by the Company of the Light Interest and the Offering had occurred on that date.
----------------------------------------------------------------------------------- AS OF MARCH 31, 1996 (1)(2)(3) PRO FORMA FOR THE ADJUSTMENTS PRO FORMA ADJUSTMENTS LIGHT INTEREST FOR THE FOR THE FOR THE AND THE In millions except ratios ACTUAL LIGHT INTEREST (4) LIGHT INTEREST OFFERING (4) OFFERING ------ -------------- -------------- -------- -------- BALANCE SHEET DATA: Total assets......................... $2,353 $404(a) $2,757 $ 5(f) $2,762 Revolving bank loan (current)........ 31 54(b) 85 (20)(g) 65 Project financing debt (current)..... 84 -- 84 -- 84 Revolving bank loan (long-term)...... -- 125(b) 125 -- 125 Project financing debt (long-term)... 1,108 225(b) 1,333 (225)(g) 1,108 Other notes payable (long-term)...... 125 -- 125 250(g) 375 Stockholders' equity................. 582 -- 582 -- 582 Debt to total capitalization plus short-term debt ratio: -- Project financing debt.......... 61.8% 60.7% 51.0% -- Parent debt..................... 8.0% 14.4% 24.2% ----- ----- ----- Total................................ 69.8% 75.1% 75.2% ===== ===== =====
- --------------- (1) Basis of presentation. The AES subsidiary which owns an 11.35% interest in Light is participating in a consortium that owns a 50.44% controlling interest. As a result, the Company has the ability to exert significant influence over the operations of Light, and will record its investment using the equity method. The unaudited pro forma financial information presented is based on Light's financial position and results of operations as of March 31, 1996 and for the periods ended December 31, 1995 and March 31, 1996, during which time it was controlled by Eletrobras, the Brazilian government utility holding company (which owned approximately 81.6%). The unaudited pro forma financial information has been prepared based on the Company's estimate of Light's financial position and results of operation in conformity with U.S. generally accepted accounting principles. Equity in earnings of Light for the year ended December 31, 1995 has been translated into U.S. dollars at the average rate during the year of R$0.92 to U.S.$1.00, and at the average rate for the quarter ended March 31, 1996, of R$0.99 to U.S.$1.00. (2) Goodwill. The estimated excess of the purchase price over the Company's proportionate share of the net assets acquired is being amortized over the 30 year life of the concession. (3) Financing. For purposes of the unaudited pro forma financial information presented herein, the acquisition of the Light Interest was funded through drawings of $179 million under the Company's $425 million Bank Credit Agreement and borrowings of $225 million under the Reimbursement Agreement which is assumed to be repaid by the proposed issuance of the $250 million Notes. (4) Description of unaudited pro forma entries. (a) Represents the investment in Light of $393 million and costs of $11 million financed by borrowings of $225 million under the Reimbursement Agreement and drawings of $179 million under the Bank Credit Agreement. (b) Represents the financing of the transaction described in (a). (c) Represents equity in earnings of Light, net of goodwill amortization. (d) Represents interest expense associated with borrowings under the Reimbursement Agreement and the Bank Credit Agreement, and amortization of deferred financing costs. (e) Represents the income tax benefit related to the interest costs. (f) Represents the deferred financing costs resulting from the issuance of the Notes. (g) Assumes that the net proceeds to the Company from the proposed issuance of the $250 million Notes will be used to repay the $225 million Reimbursement Agreement and $20 million of the amount outstanding under the Bank Credit Agreement. Alternatively, the Company may use the proceeds from the Offering to repay amounts outstanding under the Bank Credit Agreement, currently $202 million, and the balance for general corporate purposes. See "Use of Proceeds." (h) Represents incremental interest costs associated with the assumed refinancing of the Reimbursement Agreement and of a portion of the Bank Credit Agreement through the Offering, and write-off of deferred financing costs associated with the Reimbursement Agreement. S-12 13 SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain selected consolidated financial data, which should be read in conjunction with the Company's consolidated financial statements and related notes and with the "Discussion and Analysis of Financial Condition and Results of Operations" included in the accompanying Prospectus. The selected consolidated financial data as of and for each of the five years in the period ended December 31, 1995 have been derived from the audited consolidated financial statements of the Company. The consolidated financial statements as of December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, and the independent auditors' report thereon, are included in the accompanying Prospectus. The selected financial data presented below as of March 31, 1995 and 1996 and for the three months ended March 31, 1995 and 1996 are derived from the unaudited consolidated financial statements of the Company included in the accompanying Prospectus. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. The Company believes that the unaudited information for the three months ended March 31, 1995 and 1996 contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the operating results for such periods.
---------------------------------------------------------- QUARTER ENDED YEAR ENDED DECEMBER 31 MARCH 31 In millions except ratio and per share data 1991 1992 1993 1994 1995 1995 ----- ----- ----- ----- ----- ----- (unaudited) STATEMENT OF OPERATIONS DATA: Revenues: Sales............................................................. $ 328 $ 394 $ 508 $ 514 $ 672 $ 167 Services.......................................................... 5 7 11 19 13 4 ----- ----- ----- ----- ----- ----- Total revenues.................................................. 333 401 519 533 685 171 ----- ----- ----- ----- ----- ----- Operating cost and expenses: Cost of sales..................................................... 187 224 260 256 393 99 Cost of services.................................................. 4 6 9 13 12 4 Selling, general and administrative expenses...................... 10 18 35 32 32 8 Provision to reduce carrying value of lease hold oil interest..... -- -- 22 -- -- -- ----- ----- ----- ----- ----- ----- Total operating costs and expenses.............................. 201 248 326 301 437 111 ----- ----- ----- ----- ----- ----- Operating income................................................... 132 153 193 232 248 Other income and (expense): Interest expense.................................................. (85) (97) (125) (121) (122) (31) Interest income................................................... 4 8 11 22 27 7 Equity in earnings of affiliates................................... -- 2 10 12 14 3 ----- ----- ----- ----- ----- ----- Income before income taxes, minority interest and extraordinary item.............................................................. 51 66 89 145 167 39 Income taxes....................................................... 7 9 18 44 57 14 Minority interest.................................................. 1 1 -- 3 3 -- ----- ----- ----- ----- ----- ----- Income before extraordinary item................................... 43 56 71 98 107 25 Extraordinary item................................................. -- -- -- 2 -- -- ----- ----- ----- ----- ----- ----- Net income......................................................... $ 43 $ 56 $ 71 $ 100 $ 107 $ 25 ====== ====== ====== ====== ====== ====== Net income per share............................................... $0.66 $0.80 $0.98 $1.32 $1.41 $0.33 Ratio of earnings to fixed charges (1)............................. 1.31 1.37 1.63 2.08 2.18 2.18 QUARTER ENDED MARCH 31 In millions except ratio and per share data 1996 ----- (unaudited) STATEMENT OF OPERATIONS DATA: Revenues: Sales............................................................. $ 170 Services.......................................................... 2 ----- Total revenues.................................................. 172 ----- Operating cost and expenses: Cost of sales..................................................... 99 Cost of services.................................................. 1 Selling, general and administrative expenses...................... 9 Provision to reduce carrying value of lease hold oil interest..... -- ----- Total operating costs and expenses.............................. 109 ----- Operating income................................................... Other income and (expense): Interest expense.................................................. (28) Interest income................................................... 5 Equity in earnings of affiliates................................... 5 ----- Income before income taxes, minority interest and extraordinary item.............................................................. 45 Income taxes....................................................... 15 Minority interest.................................................. 1 ----- Income before extraordinary item................................... 29 Extraordinary item................................................. -- ----- Net income......................................................... $ 29 ====== Net income per share............................................... $0.38 Ratio of earnings to fixed charges (1)............................. 2.12 ------------------------------------------------------------- QUARTER ENDED YEAR ENDED DECEMBER 31 MARCH 31 In millions except ratio and per share data 1991 1992 1993 1994 1995 1995 ----- ----- ----- ----- ----- ----- (unaudited) BALANCE SHEET DATA: Total assets....................................................... $1,367 $1,552 $1,687 $1,915 $2,320 $2,129 Revolving bank loan (current)...................................... 10 -- -- -- 50 -- Project financing debt (current)................................... 48 71 79 61 84 98 Project financing debt (long term)................................. 1,093 1,146 1,075 1,019 1,098 1,030 Other notes payable (long term).................................... -- 50 125 125 125 125 Stockholders' equity............................................... 141 177 309 401 549 429 Debt to total capitalization plus short term debt ratio: -- Project financing debt......................................... 88.2% 83.2% 72.4% 67.0% 61.6% 65.6% -- Parent debt (2)................................................ 0.8 3.4 7.9 7.8 9.1 7.7 ------ ------ ------ ------ ------ ------ Total....................................................... 89.0% 86.6% 80.3% 74.8% 70.7% 73.3% ======= ======= ======= ======= ======= ======= QUARTER ENDED MARCH 31 In millions except ratio and per share data 1996 ----- (unaudited) BALANCE SHEET DATA: Total assets....................................................... $2,353 Revolving bank loan (current)...................................... 31 Project financing debt (current)................................... 84 Project financing debt (long term)................................. 1,108 Other notes payable (long term).................................... 125 Stockholders' equity............................................... 582 Debt to total capitalization plus short term debt ratio: -- Project financing debt......................................... 61.8% -- Parent debt (2)................................................ 8.0 ------ Total....................................................... 69.8% ======= -------------------------------------------------------------- FOUR QUARTERS ENDED YEAR ENDED DECEMBER 31 MARCH 31 In millions except ratio and per share data 1991 1992 1993 1994 1995 1995 ------ ------ ------ ------ ------ ------ (unaudited) OTHER DATA: Net cash provided by operating activities.......................... $86 $78 $123 $164 $197 $168 Consolidated EBITDA (3)(4)......................................... 5 45 30 68 110 111 Consolidated Fixed Charges (3)..................................... 1 3 7 11 12 11 Fixed charge ratio (3)............................................. 6.88 14.48 4.18 6.15 9.20 9.74 FOUR QUARTERS ENDED MARCH 31 In millions except ratio and per share data 1996 ------ (unaudited) OTHER DATA: Net cash provided by operating activities.......................... $199 Consolidated EBITDA (3)(4)......................................... 115 Consolidated Fixed Charges (3)..................................... 13 Fixed charge ratio (3)............................................. 9.05
- --------------- (1) For purposes of this ratio, earnings include income before taxes and fixed charges excluding capitalized interest. Fixed charges include interest, whether capitalized or expensed, and amortization of deferred financing costs, whether capitalized or expensed. On a pro forma basis giving effect to the Company's recent acquisition of the Light Interest and the application of the net proceeds of the Offering of the Notes at the beginning of the relevant periods, the ratio of earnings to fixed charges would have been 1.79x and 1.76x for the year ended December 31, 1995 and the quarter ended March 31, 1996, respectively. (2) Parent debt represents obligations of the Company, as parent. It does not include non-recourse obligations of the Company's subsidiaries. (3) The other data presented for "Consolidated EBITDA," "Consolidated Fixed Charges" and "Fixed Charge Ratio" is calculated in accordance with the respective definitions of such terms in the Indenture and set forth herein under "Description of Notes -- Certain Definitions." On a pro forma basis giving effect to the Company's recent acquisition of the Light Interest and the application of the net proceeds of the Offering of the Notes at the beginning of the relevant periods, the Fixed Charge Ratio would have been 3.16x and 3.29x for the year ended December 31, 1995 and for the four quarters ended March 31, 1996, respectively. (4) Consolidated EBITDA is a concept defined in the Indenture and is not a substitute for cash flows from operating activity as defined by generally accepted accounting principles. S-13 14 DESCRIPTION OF CORPORATE CREDIT FACILITY The Company has a $425 million credit facility pursuant to the Bank Credit Agreement dated May 20, 1996 with Morgan Guaranty Trust Company of New York ("Morgan Guaranty"), as agent. There follows under this caption a brief summary of certain provisions of the Bank Credit Agreement and related subsidiary guaranties. The summary is subject to and qualified in its entirety by reference to the detailed provisions of the Bank Credit Agreement, a copy of which has been filed with the Commission. Unless otherwise indicated, capitalized terms used in this summary description of the Bank Credit Agreement have the same meaning as that given to them in the Bank Credit Agreement. BORROWING AND LETTER OF CREDIT COMMITMENTS The Company can borrow up to $425 million under the Bank Credit Agreement, provided that for a period of 30 consecutive days during each twelve-month period there are no loans under the agreement outstanding in excess of $125 million in the aggregate and, during such period, no letter of credit will be used to fund any debt service reserve. The Company also can utilize the entire facility (less any outstanding borrowings) for letters of credit. The Bank Credit Agreement terminates on May 19, 1999, but may be extended for two one-year periods with the consent of the parties to the agreement. INTEREST AND FEES The "Base Rate" as defined under the Bank Credit Agreement is the rate per annum equal to the higher of (i) the rate as announced from time to time by Morgan Guaranty as its prime rate and (ii) the federal funds rate plus 1/2%. The Company may specify whether its borrowing is either a Base Rate Loan or a Eurodollar Loan. Base Rate Loans bear interest at the Base Rate and mature at the end of 30 days. The percentages of the Eurodollar margin, commitment fee rate and letter of credit commission rate are based on a schedule related to the Company's long-term debt rating. As of the date hereof, Eurodollar Loans bear interest at the rate per annum equal to LIBOR plus 1.75% and mature in one, two, three or six months, as specified by the Company. As of the date hereof, outstanding letters of credit bear a fee of 1.75% per annum. Reimbursement obligations in respect of any letters of credit drawn bear interest at the Base Rate. A penalty interest rate of Base Rate plus 2% applies to any overdue reimbursement obligations. As of the date hereof, the Company pays a commitment fee at the rate of 3/8% per annum on the unused portion of the facility. CERTAIN COVENANTS OF THE COMPANY Definitions. In the Bank Credit Agreement, "subsidiary" means any corporation or other entity of which securities or ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by the Company. "Material AES Entity" means any of AES Connecticut Management Co., Inc.; AES Hawaii Management Co., Inc.; AES Thames; AES Barbers Point; and AES Shady Point and any other person in which AES has a direct or indirect equity investment if such person's contribution to Parent Operating Cash Flow for the four most recently completed fiscal quarters of AES constitutes 15% or more of the total Parent Operating Cash Flow for such period. "Significant AES Entity" means any Material AES Entity and any other person in which AES has a direct or indirect equity investment so long as the Company's direct or indirect interest in the total assets of such person, if such person is a Consolidated Subsidiary (as defined therein), or in the net assets of such person in all other cases is at least equal to 10% of the consolidated assets of the Company and its Consolidated Subsidiaries, taken as a whole, or the Company's direct or indirect interest in the total net income of such person (for the preceding fiscal quarter) is at least equal to 10% of the net income of the Company and its Consolidated Subsidiaries (for such fiscal quarter) taken as a whole, or such person's contribution to Parent Cash Flow for the four most recently completed fiscal quarters of AES constitutes 10% or more of Parent Cash Flow for such period. Affirmative Covenants. Among other affirmative covenants, the Company is required to pay all its material obligations and liabilities at or before maturity and to cause its subsidiaries to maintain appropriate reserves and accruals therefor. The Company is required to continue and to cause its subsidiaries to continue to engage in businesses of the same general type as now conducted. Mergers of subsidiaries into the Company or into another person are permitted if the survivor is a subsidiary and after giving effect thereto, no Default shall have occurred and be continuing and certain other conditions are satisfied. The Company is required to comply and cause each S-14 15 subsidiary to comply in all material respects with applicable laws, except where non-compliance would result in payments of less than $200,000 for each such non-compliance and the necessity of compliance therewith is contested in good faith by appropriate proceedings. Financial Tests. The Company must maintain consolidated tangible net worth at least equal to $300 million plus 75% of the amount of any net proceeds to AES from the issuance of any equity securities issued by the Company after the date of the Bank Credit Agreement and, for each fiscal quarter of AES ended after June 30, 1995 and at or prior to such time for which the consolidated net income of AES is a positive number, 50% of the consolidated net income earned by the Company for such quarter. The Company must also maintain a minimum ratio of Adjusted Parent Operating Cash Flow (defined as parent operating cash flow for such period less the sum of development expenses, income tax payments, and corporate overhead expenses) to Corporate Charges (defined as the sum of interest expense, rental expense and dividends paid on AES's capital stock) of 1.8 to 1. In addition, the Company must maintain a ratio of Cash Flow to total parent debt outstanding of 0.17 to 1. Restrictions on Debt. The Company cannot assume, incur or create any debt (including guaranties of debt of others) except for: (i) certain existing debt; (ii) debt under the Credit Agreement and related subsidiary guaranty thereof; (iii) debt incurred by a subsidiary to finance the development, acquisition, construction, maintenance or working capital requirements of a power project operated or managed (including on a joint basis with others), directly or indirectly, by AES and in which such Subsidiary has an interest and that is not also the debt of, or guaranteed by, any other subsidiary with an interest in any other Power Project; (iv) debt owing to AES or one of its Consolidated Subsidiaries; (v) debt of AES or its subsidiaries representing the refinancing, replacement or refunding of debt permitted by clauses (ii) and (iii) hereof; (vi) guarantees by AES of debt permitted under clause (ii) hereof; (vii) the Notes offered hereby; and (viii) other debt in an aggregate principal amount of no more than $2 million. Limitations on Dividends and Repurchases of Capital Stock. The Company cannot pay any dividend on its capital stock (except dividends payable solely in shares of its capital stock), or pay for the purchase, redemption, retirement or other acquisition of shares of its capital stock or any right to acquire shares of its capital stock, unless the aggregate amount of all such payments made after June 30, 1995 does not exceed the sum of $5 million plus 5% of consolidated net income of AES calculated from June 30, 1995. Limitations on Liens. The Company cannot create, assume or suffer to exist any lien on any asset now owned or hereafter acquired by it except existing liens on the date thereof; liens existing on any asset prior to the acquisition thereof (including an asset of any corporation at the time it becomes a subsidiary or is merged with the Company or a subsidiary) not created in contemplation of such acquisition; liens on assets securing debt incurred or assumed for the purpose of financing the costs of acquiring such asset; liens arising out of the refinancing, extension, renewal or refunding of any debt secured by any lien permitted by the foregoing clauses; liens arising in the ordinary course which do not secure debt, do not secure any obligation exceeding $25 million and do not in the aggregate materially detract from the value of or materially impair the use of the assets encumbered thereby; other liens required in the ordinary course of business and not in connection with the borrowing of money or obtaining advances or credit; liens on cash collateral securing investment and guarantee commitments; and liens securing debt of subsidiaries permitted by clause (iii) of the "Restrictions on Debt" covenant described above or utility obligations, or other customer, supplier or contractor obligations associated with power projects that are limited to the assets and revenues of such power projects and the capital stock or other assets of subsidiaries of AES having a direct or indirect interest in such power projects. Restrictions on Mergers and Sales of Assets. The Company cannot consolidate or merge with or into any other person unless the Company is the survivor and, immediately after giving effect thereto, no Default or Event of Default shall have occurred or be continuing. The Company cannot sell, lease or otherwise transfer all or any substantial part of its or its subsidiaries' assets, taken as a whole, and may not sell or transfer the capital stock of AES Finance or any Material AES Entity unless certain conditions, including meeting a pro forma cash flow coverage ratio of 1.8 to 1, are met. Other Restrictions. The Bank Credit Agreement restricts the Company's ability to make investments and restricts the ability of the Company and its subsidiaries to engage in transactions with affiliates. S-15 16 EVENTS OF DEFAULT An "Event of Default" is defined in the Bank Credit Agreement as the failure by any Obligor to pay when due any principal of any Loan or any Reimbursement Obligation, or failure to pay within three days of the date when due any interest, fees or other amounts payable under any Financing Document; the failure by the Company to observe or perform any covenant imposing limitations on project exposure, debt, subordinated debt, investments, guarantees and commitments to invest and liens on assets; requiring the maintenance of a cash flow to debt ratio; requiring the maintenance of minimum consolidated tangible net worth and cash flow coverage; and restricting certain payments, consolidations, mergers, sales of assets, use of proceeds and transactions with affiliates; the failure by any Obligor to observe or perform any covenant or agreement contained in any Financing Document for 20 days after notice thereof has been given to the Company; the failure in any material respect of any representation or warranty to have been correct when made or deemed made; and the failure by the Company or any Material AES Entity to make any payment in respect of any Material Debt when due or within any applicable grace period. It is also an Event of Default if any event or condition shall occur which results in the acceleration of the maturity of any debt of the Company or any of its subsidiaries (except AES Placerita and San Nicolas) or enables the holder of any Material Debt to accelerate the maturity thereof or enables the holder of any debt outstanding under the Reimbursement Agreement to accelerate the maturity thereof; the Company or any Significant AES Entity commences a voluntary bankruptcy or is the subject of an involuntary bankruptcy; any member of the ERISA Group shall fail to pay when due amounts in excess of $1 million for which it shall have become liable under Title IV of ERISA, any material plan shall be in danger of termination; a judgment in excess of $1 million shall be rendered against the Company or any of its subsidiaries which shall continue unsatisfied and unstayed for 10 days; any person or group (other than a member of the Company's management) shall acquire beneficial ownership of 20% or more of the Company's Common Stock; or there shall be a change in the majority of the Board of Directors during any 12 consecutive months. SUBSIDIARY GUARANTIES AES Oklahoma Management Company, Inc., is a wholly-owned subsidiary of the Company which in turn is the direct parent of AES Shady Point. AES Hawaii Management Co., Inc., is a wholly-owned subsidiary of the Company which in turn is the direct parent of AES Barbers Point. Each of AES Oklahoma Management Company, Inc. and AES Hawaii Management Co., Inc. has agreed, if the Company shall have failed to make full and punctual payment of each reimbursement obligation or any debt owed under the Corporate Credit Facility, to pay the amount not so paid. Each of the two subsidiary guarantors (hereinafter "guarantor") also has agreed to be precluded from declaring or paying any dividends, purchasing any shares of its capital stock or making any investment in the Company, if there shall have been an Event of Default under the Bank Credit Agreement due to a payment default by the Company thereunder, a payment default by the Company or any subsidiary in respect of any Material Debt, any acceleration or ability to accelerate any Material Debt or a voluntary or involuntary bankruptcy of the Company or any Significant AES Entity. Each guarantor and its subsidiaries also is precluded from merging into or consolidating with any person or selling or otherwise disposing of all or substantially all of its assets, except for mergers into or transfers of assets to the guarantor, and provided that, in the case of a merger, the guarantor is the survivor and, in any case, no event constituting a breach of a material provision of the guaranty agreement would exist and Morgan Guaranty shall have consented to any assumption by the guarantor of the debt of any subsidiary so merging or transferring its assets. No guarantor can sell, assign, lease or otherwise dispose of any equity interest in the project subsidiary of which it is the direct parent or cause or permit such project subsidiary to be owned other than as currently owned by the guarantor. S-16 17 DESCRIPTION OF NOTES The Notes will be issued under an Indenture as amended by the First Supplemental Indenture thereto (such Indenture, as so amended, hereinafter referred to as the "Indenture") to be dated as of July 1, 1996 between the Company and The First National Bank of Chicago (hereinafter referred to as the "Trustee"). A copy of the form of the Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part and is also available for inspection at the office of the Trustee. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Wherever particular Sections or defined terms of the Indenture are referred to, such Sections or defined terms shall be incorporated herein by reference. A summary of certain defined terms used in the Indenture and referred to in the following summary description of the Notes is set forth below under "Certain Definitions". GENERAL The Notes will be general unsecured obligations of the Company subordinated in right of payment to all Senior Debt of the Company, will be limited to $250 million aggregate principal amount, and will mature on July 15, 2006. Principal of, and premium, if any, on, the Notes will be payable, and the Notes may be exchanged or transferred, at the office or agency of the Company in Chicago, Illinois (which initially shall be the corporate trust office of the Trustee, at One First National Plaza, Suite 0126, Chicago, Illinois 60670-0126). Interest at the annual rate set forth on the cover page hereof will accrue from July 2, 1996, will be payable semi-annually on January 15 and July 15, commencing January 15, 1997, to the Holders thereof at the close of business on the preceding January 1 and July 1, respectively, and, unless other arrangements are made, will be paid by checks mailed to such Holders. The Notes will be issued only in fully registered form in denominations of $1,000 and any multiple of $1,000. No service charge shall be payable for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. OPTIONAL REDEMPTION The Notes will be redeemable, at the Company's option, in whole or in part, at any time on or after July 15, 2001 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice, at the following redemption prices (expressed in percentages of principal amount) ("Redemption Prices"), plus accrued interest to the date of redemption, if redeemed during the 12-month period commencing on or after July 15 of the years set forth below:
----------- REDEMPTION YEAR PRICE - -------------------------------------------------------------------------------- ----------- 2001............................................................................ 105.1250% 2002............................................................................ 102.5625%
and, after July 15, 2003, at 100% of the principal amount. GLOBAL NOTES The Notes will be issued in the form of one or more fully registered global notes (each a "Global Note") deposited with The Depository Trust Company (the "Depositary") or a nominee thereof. Unless and until it is exchanged in whole or in part for Notes in definitive registered form, a Global Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor of the Depositary or a nominee of such successor. Ownership of beneficial interests in a Global Note will be limited to persons that have accounts with the Depositary ("Participants") or persons that may hold interests through Participants. Upon the issuance of a Global Note, the Depositary for such Global Note will credit, on its book-entry registration and transfer system, the Participants' accounts with the respective principal amounts of the Notes represented by such Global Note beneficially owned by S-17 18 such Participants. The accounts to be credited will be designated by the Underwriters. Ownership of beneficial interests in such Global Note will be shown on, and the transfer of such ownership interests will only be effected through, records maintained by the Depositary (with respect to interests of Participants) and on the records of Participants (with respect to interests of persons holding through Participants). The laws of some states may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to own, transfer, or pledge beneficial interests in Global Notes. So long as the Depositary or its nominee is the owner of record of a Global Note, the Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under the Indenture. Except as set forth below, owners of beneficial interests in a Global Note will not be entitled to have the Notes represented by such Global Note registered in their names, and will not receive or be entitled to receive physical delivery of such Notes in definitive form and will not be considered the owners or holders thereof under the Indenture. Accordingly, each person owning a beneficial interest in a Global Note must rely on the procedures of the Depositary and, if such person is not a Participant, on the procedures of the Participant through which such person owns its interest, to exercise any rights of a holder of record under the Indenture. The Company understands that under existing industry practices, if the Company requests any action of holders or if any owner of a beneficial interest in a Global Note desires to give or take any action which a holder is entitled to give or take under the Indenture, the Depositary would authorize the Participants holding the relevant beneficial interests to give or take such action, and such Participants would authorize beneficial owners owning through such Participants to give or take such action or would otherwise act upon the instruction of beneficial owners holding through them. Payments of principal of, premium, if any, and interest on Notes represented by a Global Note registered in the name of the Depositary or its nominee will be made to such Depositary or such nominee, as the case may be, as the registered owner of such Global Note. None of the Company, the Trustee, or any agent of the Company or agent of the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in such Global Note or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests. The Company expects that the Depositary, upon receipt of any payment of principal, premium, if any, or interest in respect of such Global Note, will immediately credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in such Global Note as shown on the records of the Depositary. The Company also expects that payments by Participants to owners of beneficial interests in such Global Note held through such Participants will be governed by standing customer instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participants. If the Depositary notifies the Company that it is at any time unwilling or unable to continue as Depositary or ceases to be eligible under applicable law, and a successor Depositary eligible under applicable law is not appointed by the Company within 90 days, the Company will issue such Notes in definitive form in exchange for such Global Note. In addition, the Company may at any time and in its sole discretion determine not to have any of the Notes represented by one or more Global Notes and, in such event, will issue Notes in definitive form in exchange for all of the Global Notes representing such Notes. Any Notes issued in definitive form in exchange for a Global Note will be registered in such name or names as the Depositary shall instruct the Trustee. It is expected that such instructions will be based upon directions received by the Depositary from Participants with respect to ownership of beneficial interests in such Global Note. SAME-DAY SETTLEMENT IN RESPECT OF GLOBAL NOTES So long as any Notes are represented by Global Notes registered in the name of the Depositary or its nominee, such Notes will trade in the Depositary's Same-Day Funds Settlement System, and secondary market trading activity in such Notes will therefore be required by the Depositary to settle in immediately available funds. No assurances can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. S-18 19 SUBORDINATION The payment of principal of, Change of Control purchase price, premium, if any, and interest on the Notes will, to the extent and in the manner set forth in the Indenture, be subordinated in right of payment to the prior payment in full, in cash equivalents, of all Senior Debt. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshalling of assets and liabilities or any bankruptcy, insolvency or similar proceedings of the Company, the holders of all Senior Debt will first be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Notes will be entitled to receive any payment in respect of the principal of, Change of Control purchase price, premium, if any, or interest on the Notes. No payments on account of principal, Change of Control purchase price, premium, if any, or interest in respect of the Notes may be made by the Company if there shall have occurred and be continuing a default in any payment with respect to Senior Debt. In addition, during the continuance of any other event of default (other than a payment default) with respect to Designated Senior Debt pursuant to which the maturity thereof may be accelerated, from and after the date of receipt by the Trustee of written notice from the holders of such Designated Senior Debt or from an agent of such holders, no payments on account of principal, Change of Control purchase price, premium, if any, or interest in respect of the Notes may be made by the Company for a period ("Payment Blockage Period") commencing on the date of delivery of such notice and ending 179 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the Trustee from the holders of such Designated Senior Debt or from an agent of such holders, or such event of default has been cured or waived or has ceased to exist). Only one Payment Blockage Period may be commenced with respect to the Notes during any period of 360 consecutive days. No event of default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt initiating such Payment Blockage Period shall be or be made the basis for the commencement of any subsequent Payment Blockage Period by the holders of such Designated Senior Debt, unless such event of default shall have been cured or waived for a period of not less than 90 consecutive days. By reason of such subordination, in the event of insolvency, funds that would otherwise be payable to Holders will be paid to the holders of Senior Debt to the extent necessary to pay the Senior Debt in full, and the Company may be unable to meet fully its obligations with respect to the Notes. As of March 31, 1996, after giving effect to the Company's recent acquisition of the Light Interest and to the application of the net proceeds of the Offering, the Company had approximately $246 million in aggregate principal amount of Debt which would have constituted Senior Debt. The Company expects from time to time to incur additional Debt constituting Senior Debt. Although the Indenture contains limitations on the amount of Debt which the Company may incur, the amount of such Debt could be substantial and, in any case, such Debt may be Senior Debt. See "Covenants -- Limitation on Debt" below. In addition, the Company currently conducts substantially all of its operations through its Subsidiaries. The rights of the Company and its creditors, including the Holders of the Notes, to participate in the distribution of the assets of any Subsidiary upon any liquidation or reorganization of such Subsidiary or otherwise will be effectively subordinated to, and subject to, the prior claims of creditors of such Subsidiary, except to the extent that the Company may itself be a creditor with recognized claims against the Subsidiary. The ability of the Company to pay principal of, Change of Control purchase price, premium, if any, and interest on the Notes will be dependent upon the receipt of funds from its Subsidiaries by way of dividends, fees, interest, loans or otherwise. Most of the Company's Subsidiaries with interests in a Power Generation Facility currently have in place, and the Indenture will permit the Company's Subsidiaries to enter into, arrangements that restrict their ability to make distributions to the Company by way of dividends, fees, interest, loans and otherwise. As of March 31, 1996, the Company's Subsidiaries had approximately $1.2 billion of indebtedness to which the Notes would have been effectively subordinated. The Company expects its Subsidiaries from time to time to incur additional Debt and the amount of such Debt could be substantial. S-19 20 COVENANTS Limitation on Debt The Company shall not Incur any Debt, including Acquisition Debt, unless after giving effect to the Incurrence of such Debt and the receipt and application of the proceeds therefrom, the Fixed Charge Ratio of the Company would be greater than (a) 2 to 1 through June 30, 1999 and (b) 2.625 to 1 thereafter. The Company's obligation to comply with this covenant will terminate if and when the Notes become Investment Grade. On a pro forma basis, after giving effect to the Company's recent acquisition of the Light Interest and the application of the net proceeds from the Offering, as of March 31, 1996, the Company could have Incurred $160 million of additional Debt at an interest rate of 10.25% per annum. Notwithstanding the foregoing, the Company may Incur each and all of the following: (i) Debt under or in respect of the Bank Credit Agreement in an aggregate principal amount at any one time outstanding not to exceed $225 million; provided that in the event the Notes are rated both Ba2 or higher by Moody's Investors Service Inc. and BB or higher by Standard & Poor's Corporation, the $225 million amount in the foregoing clause shall be increased to $425 million; and provided further that such Debt shall be permitted under this clause (i) only to the extent such Debt consists of borrowings for working capital purposes or letters of credit issued for purposes consistent with the practices of the Company in its use of the Bank Credit Agreement on or prior to the date of the Indenture; (ii) Debt issued in exchange for, or the proceeds of which are used to refinance, outstanding Notes or other Debt of the Company in an amount (or, if such new Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so exchanged or refinanced (plus accrued interest and fees and expenses related to such exchange or refinancing); provided that (A) the date of any payment of principal by way of sinking fund, mandatory redemption or otherwise (including defeasance) on any Debt so refinanced or exchanged otherwise due after the final scheduled maturity date of the Notes shall not occur prior to such maturity date as a result of such exchange or refinancing and (B) new Debt the proceeds of which are used to exchange or refinance the Notes or other Debt of the Company that is subordinated in right of payment to the Notes shall only be permitted under this clause (ii) if (x) in case the Notes are exchanged or refinanced in part, such new Debt, by its terms or by the terms of any agreement or instrument pursuant to which such Debt is issued, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes, (y) in case the Debt to be exchanged or refinanced is subordinated in right of payment to the Notes, such new Debt, by its terms or by the terms of any agreement or instrument pursuant to which such Debt is issued, is expressly made subordinate in right of payment to the Notes, at least to the extent that the Debt to be exchanged or refinanced is subordinated in right of payment to the Notes and (z) in case the Notes are exchanged or refinanced in part or the Debt to be exchanged or refinanced is subordinated in right of payment to the Notes, as of the date the new Debt is Incurred, the Average Life of the new Debt shall be equal or greater than the Average Life of the Notes or Debt to be exchanged or refinanced; (iii) Debt of the Company to any of its Consolidated Subsidiaries, except that any transfer of such Debt by a Consolidated Subsidiary (other than to another Consolidated Subsidiary) will be deemed to be an Incurrence of Debt; provided that such Debt is expressly subordinated in right of payment to the Notes; and (iv) Debt in an aggregate principal amount not to exceed $50 million at any one time outstanding. For purposes of determining any particular amount of Debt under this "Limitation on Debt" covenant, Guarantees of, or obligations with respect to letters of credit supporting, Debt otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with this "Limitation on Debt" covenant, (A) in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company, in its sole discretion, shall classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses and (B) the amount of Debt issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. Limitation on Subsidiary Debt The Company shall not permit any Subsidiary to Incur, directly or indirectly, any Debt, including Acquisition Debt. The Company's obligation to comply with this covenant will terminate if and when the Notes become Investment Grade. S-20 21 Notwithstanding the foregoing, each and all of the following Debt may be Incurred by a Subsidiary; (i) Debt outstanding as of the Closing Date; (ii) Debt Incurred for any purpose (including without limitation the purposes set forth in clause (iii) below) to the extent of the amount thereof that is also Debt of the Company and is permitted under the "Limitation on Debt" covenant described above; (iii) Debt Incurred to finance the development, acquisition, construction, maintenance, working capital requirements in the ordinary course of business consistent with past practice or operation of a Power Generation Facility or Unrelated Business in which such Subsidiary has a direct or indirect interest; provided that (a) such Debt shall be permitted under this clause (iii) only to the extent of the amount thereof which (x) is Non-Recourse to the Company and (y) is Non-Recourse to any other Subsidiary with a direct or indirect interest in any other Power Generation Facility or Unrelated Business; provided that, the foregoing clause (y) shall not apply if (A) each of Moody's Investors Service Inc. and Standard & Poor's Corporation reaffirms the rating of the Notes at a level at least 1 rating category above the respective ratings of the Notes on the date of issuance thereof and (B) such Debt is Non-Recourse to any other Subsidiary of the Company other than Subsidiaries which represented less than 30% of the Consolidated EBITDA of the Company for the Reference Period, and (b) upon the commencement of commercial operations of such Power Generation Facility or, in the case of an acquisition of such Power Generation Facility or Unrelated Business, upon the date of such acquisition, the Company directly or through its Subsidiaries either (x) controls, under an operating and management agreement or otherwise, the day to day management and operation of the Power Generation Facility or Unrelated Business so financed or (y) has significant influence over the management and operation of such Power Generation Facility or Unrelated Business; (iv) Debt issued in exchange for, or the proceeds of which are used to refinance, outstanding Debt of such Subsidiary otherwise permitted under the Indenture in an amount (or, if such new Debt provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so exchanged or refinanced (plus accrued interest and fees and expenses related to such exchange or refinancing plus any principal amounts previously repaid); provided that (a) the new Debt shall be Non-Recourse to the Company to the same extent as the Debt to be exchanged or refinanced, (b) if such Subsidiary has a direct or indirect interest in any Power Generation Facility or Unrelated Business, the new Debt shall be Non-Recourse to any other Subsidiary with a direct or indirect interest in any other Power Generation Facility or Unrelated Business to the same extent as the Debt to be exchanged or refinanced, (c) the date of any payment of principal by way of sinking fund, mandatory redemption or otherwise (including defeasance) on any Debt so refinanced or exchanged otherwise due after the final scheduled maturity date of the Notes shall not occur prior to such maturity date as a result of such exchange or refinancing and (d) if the new Debt refinances principal amounts previously repaid, (x) such new Debt shall be permitted only if on the date such new Debt is Incurred, the Company could incur at least $1 of Debt under the first paragraph of the "Limitation on Debt" covenant described above and (y) the proceeds from such new Debt are not to be used to make any Restricted Payments; (v) Guarantees of Debt of the Company under the Bank Credit Agreement; (vi) Debt Incurred to support the performance obligations of a Subsidiary engaged in providing construction management or operating services to a Power Generation Facility; provided that (a) such Debt shall be permitted under this clause (vi) only to the extent of the amount thereof which is Non-Recourse to the Company and is Non-Recourse to any other Subsidiary with a direct or indirect interest in any other Power Generation Facility or Unrelated Business and (b) upon the commencement of commercial operation of such Power Generation Facility or in the case of an acquisition of such Power Generation Facility, upon the date of such acquisition, the Company directly or through its Subsidiaries either (x) controls, under an operating and management agreement or otherwise, the day to day management and operation of such Power Generation Facility or (y) has significant influence over the management and operation of such Power Generation Facility; (vii) Debt in an aggregate amount for all Subsidiaries at any one time outstanding of not more than $10 million Incurred to finance the on-going operation, but not any expansion or improvement, of a Power Generation Facility or Unrelated Business in which Subsidiary has a direct or indirect interest; provided that such Debt shall be permitted under this clause (vii) only to the extent it is Non-Recourse to the Company and to any other Subsidiary with a direct or indirect interest in any other Power Generation Facility or Unrelated Business; (viii) Debt of any Subsidiary of the Company owed to (A) the Company or (B) an Intermediate Holding Company; (ix) Debt in respect of Currency Agreements or Interest Rate Agreements; (x) Debt that is Non-Recourse to the Company and Non-Recourse to any other Subsidiary of the Company with a direct or indirect interest in any other Power Generation Facility or Unrelated Business only to the extent that the proceeds of such Debt are received by the Company or an Intermediate Holding Company (as defined below) as a result of such proceeds being used to pay dividends or make distributions on the Capital Stock of such Subsidiary and any other Subsidiary in the chain of ownership between the Company or such Intermediate Holding Company and such Subsidiary; and (xi) Debt of the type described in clause (iii) of the definition thereof the Incurrence of which causes S-21 22 a corresponding reduction in any debt service or other similar cash reserve required to be maintained in connection with any Debt of such Subsidiary permitted by clause (iii) above and (to the extent that the same constitutes a refinancing of Debt permitted under such clause (iii)), clause (iv) above, in each case, only to the extent that the proceeds from such reserve reduction are received by the Company or an Intermediate Holding Company as a result of such proceeds being used to pay dividends or make distributions on the Capital Stock of such Subsidiary and any other Subsidiary in the chain of ownership between the Company or such Intermediate Holding Company and such Subsidiary. For purposes of determining compliance with this "Limitation on Subsidiary Debt" covenant, (A) in the event that an item of Debt meets the criteria of more than one of the types of Debt described in the above clauses, the Company, in its sole discretion, shall classify such item of Debt and only be required to include the amount and type of such Debt in one of such clauses and (B) the amount of Debt issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in conformity with GAAP. Limitation on Restricted Payments The Company will not, and will not permit any Subsidiary to, directly or indirectly, make any Restricted Payment if at the time of such Restricted Payment or after giving effect thereto: (a) an Event of Default or event that, after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing, (b) the Company could not Incur at least $1 of Debt under the first paragraph of the "Limitation on Debt" covenant described above or (c) the aggregate amount expended by the Company and its Subsidiaries for all Restricted Payments (the amount of any single or related series of Restricted Payments so expended or distributed, if in excess of $15 million and other than in cash, to be determined in good faith by the Board of Directors, as evidenced by a Board resolution) after July 1, 1996 shall exceed the sum of: (1) 50% of the Net Income of the Company and its Consolidated Subsidiaries for the period (taken as one accounting period) beginning on July 1, 1996 and ending on the last day of the fiscal quarter immediately prior to the date of such calculation; provided that if Net Income for such period is less than zero, then minus 100% of such net loss; plus (2) if the Notes are Investment Grade at the time of the Restricted Payment, an additional 25% of the Net Income of the Company and its Consolidated Subsidiaries for a period, if any, consisting of the one or more consecutive quarters (taken as one accounting period), if any, contained within, and ending on the same day as, the period referred to in clause (1) above in which the Notes were Investment Grade during the entire period; provided that if Net Income for such period is less than zero, then no amount shall be added under this clause (2); plus (3) the aggregate net proceeds (including the fair market value of proceeds other than cash, as determined in good faith by the Board of Directors, as evidenced by a Board resolution if the fair market value of such non-cash proceeds is in excess of $15 million) received by the Company from and after July 1, 1996 from the issuance and sale (other than to a Subsidiary) of its Capital Stock (excluding Redeemable Stock, but including Capital Stock other than Redeemable Stock issued upon conversion of, or in exchange for, Redeemable Stock or securities other than its Capital Stock), and warrants, options and rights to purchase its Capital Stock (other than Redeemable Stock), but excluding the net proceeds from the issuance, sale, exchange, conversion or other disposition of its Capital Stock convertible (whether at the option of the Company or the holder thereof or upon the happening of any event) into (x) any security other than its Capital Stock or (y) its Redeemable Stock; plus (4) the net reduction in Investments of the type specified in clause (iv) of the definition of Restricted Payment resulting from payments of interest on Debt, dividends, repayments of loans or advances, or other transfers of assets to the Company or other Person that made the original Investment from the person in which such Investment was made or resulting from the sale or disposition of the Investment or other return of the amount of the Investment; provided that such payment, for purposes of the calculation to be made pursuant to this clause (4), shall not exceed the amount of the original investment; plus (5) any amount previously included as a Restricted Payment on account of an obligation by the Company or any Subsidiary to make a Restricted Payment which has not actually been made by the Company or any Subsidiary and which is no longer required to be paid by the Company or any Subsidiary; plus (6) $150 million; provided that the foregoing clause (c) shall not prevent the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration without violation of the provisions of this covenant. For purposes of clause (c)(3) above, the aggregate net proceeds received by the Company (x) from the issuance of its Capital Stock upon the conversion of, or exchange for, securities evidencing Debt of the Company, shall be calculated on the assumption that the gross proceeds from such issuance are equal to the aggregate principal amount (or, if discount Debt, the accreted principal amount) of the Debt evidenced by such securities converted or exchanged and (y) upon the conversion or exchange of other securities of the Company shall be equal to the S-22 23 aggregate net proceeds of the original sale of the securities so converted or exchanged if such proceeds of such original sale were not previously included in any calculation for the purposes of clause (c)(3) above plus any additional sums payable upon conversion or exchange. If an Investment which the Company or any Subsidiary is obligated to make either in part from time to time or in whole in the future is fixed in amount by the agreement setting forth such obligation, for purposes of determining whether such Investment is a Restricted Payment permitted under the foregoing covenant or is a Permitted Payment, the Investment shall be deemed to have been made only once, in the amount so fixed, at the time the obligation first arises (and not when payments in respect thereof are later made). If an Investment which the Company or any Subsidiary is obligated to make either in part from time to time or in whole in the future is not fixed in amount by the agreement setting forth such obligation, for purposes of determining whether such Investment is a Restricted Payment permitted under the foregoing covenant or is a Permitted Payment, the Investment shall be deemed to have been made at the time the obligation first arises in an amount to be determined in good faith by the Board of Directors, as evidenced by a Board resolution, and any actual payments in respect of such Investment shall be deemed to be Investments made on the date of payment thereof. Subject to the terms of clause (v) of the definition of Permitted Payments, such later Investments may be Permitted Payments. Restricted Payments are defined in the Indenture to exclude Permitted Payments which include Permitted Investments. See "Certain Definitions" below. Limitation on Subsidiary Investments and Mergers The Company will not permit any Subsidiary with any direct or indirect interest in a Power Generation Facility to make any Investment in, or to consolidate or merge with, any other Person with a direct or indirect interest in any other Power Generation Facility or any Unrelated Business. In addition, the Company will not permit any Subsidiary with any direct or indirect interest in any Unrelated Business to make any Investment in, or to consolidate or merge with, any other Person with a direct or indirect interest in any Power Generation Facility or any other Unrelated Business. The Company's obligation to comply with this covenant shall terminate if and when the Notes become Investment Grade. Notwithstanding the foregoing: (a) subject to any applicable restrictions imposed by the "Limitation on Restricted Payments" covenant described above, the Company may permit one or more of its Subsidiaries (each, an "Intermediate Holding Company") to serve as a holding company for the Company's direct and indirect interests in Power Generation Facilities and Unrelated Businesses; provided that (i) each such Intermediate Holding Company's direct and indirect interest in any Power Generation Facility or Unrelated Business shall be limited to the ownership of Capital Stock or Debt obligations of a Person with a direct or indirect interest in such Power Generation Facility or Unrelated Business; (ii) no consensual encumbrance or restriction of any kind shall exist on the ability of any Intermediate Holding Company to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) of the first paragraph of the description of the "Limitations on Dividend and Other Payment Restrictions Affecting Subsidiaries" covenant set forth below, other than those in existence on the date of the Indenture or those required by the Bank Credit Agreement or any Guarantee thereof; (iii) no Intermediate Holding Company shall incur, assume, create or suffer to exist any Debt (including any Guarantee of Debt) other than Debt to the Company or Debt permitted under clause (iii) of the "Limitation on Subsidiary Debt" covenant described above; and (iv) no Lien shall exist upon any assets of such Intermediate Holding Company whether now or hereafter acquired, except for Liens upon the Capital Stock of a Subsidiary of an Intermediate Holding Company securing Debt of such Subsidiary; and (b) subject to any applicable restrictions imposed by the "Limitation on Restricted Payments" covenant described above, a Subsidiary with an indirect interest in a Power Generation Facility in commercial operations as of the date of the Indenture may acquire the Capital Stock of a Person with a direct or indirect interest in another Power Generation Facility; provided (i) such acquisition is in connection with an Asset Disposition described under clause (B) of the "Limitation on Asset Dispositions" covenant described below; (ii) the Subsidiary's direct and indirect interest in each Power Generation Facility shall be limited to the ownership of Capital Stock of a Person with a direct or indirect interest in such Power Generation Facility; and (iii) no consensual encumbrance or restriction of any kind shall exist on the ability of the Subsidiary to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) of the first paragraph of the description of the "Limitations on Dividend and Other Payment Restrictions Affecting S-23 24 Subsidiaries" covenant set forth below, other than those in effect on the date of the Indenture or those required by the Bank Credit Agreement or any Guarantee thereof. Limitation on Business The Company (a) will continue, and will cause each Material AES Entity to continue, to engage in business of the same general type as now conducted by the Company and its Subsidiaries and (b) will continue, and will cause each Material AES Entity to continue, to operate its and their respective businesses on a basis substantially consistent with the policies and standards of the Company or such Material AES Entity as in effect on the Closing Date. Limitations on Dividend and Other Payment Restrictions Affecting Subsidiaries The Company will not, and will not permit any Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Subsidiary owned by the Company or any other Subsidiary, (ii) make payments in respect of any Debt owed to the Company or any other Subsidiary, (iii) make loans or advances to the Company or any other Subsidiary or (iv) transfer any of its Property to the Company or any other Subsidiary. The Company's obligation to comply with this covenant will terminate if and when the Notes become Investment Grade. This covenant shall not restrict or prohibit any encumbrances or restrictions existing: (i) in connection with the Incurrence of any Debt permitted under clause (iii), (vi), (vii) or (x) of the "Limitation on Subsidiary Debt" covenant described above or with respect to any portion thereof that is also Debt of the Company and permitted under the "Limitation on Debt" covenant described above; provided that such encumbrances or restrictions are required in order to effect such financing and are not materially more restrictive, taken as a whole, on the ability of the applicable Subsidiary to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) of the preceding paragraph than encumbrances and restrictions, taken as a whole, customarily accepted (or, in the absence of any industry custom, reasonably acceptable) in substantially non-recourse project financing, (ii) in connection with the execution and delivery of an electric power or thermal energy purchase contract to which such Subsidiary is the supplying party or other contracts with customers, suppliers and contractors to which such Subsidiary is a party and where such Subsidiary is engaged in the development, construction, acquisition or operation of a Power Generation Facility; provided that such encumbrances or restrictions are required in order to effect such contracts and are not materially more restrictive, taken as a whole, on the ability of the applicable Subsidiary to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) in the preceding paragraph than encumbrances and restrictions, taken as a whole, customarily accepted (or, in the absence of any industry custom, reasonably acceptable) in substantially non-recourse project financing, (iii) in connection with the Incurrence of any Debt permitted under clause (iv) of the "Limitation on Subsidiary Debt" covenant described above, provided that such encumbrances or restrictions taken as a whole are not materially more restrictive on the ability of the applicable Subsidiary to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) in the preceding paragraph than those that are then in effect, taken as a whole, in connection with the Debt so exchanged or refinanced, (iv) in connection with the Bank Credit Agreement and the project financing, electric power and thermal energy purchase arrangements and other contracts with customers, suppliers and contractors in effect on the Closing Date, including extensions, refinancings, renewals or replacements thereof; (v) pursuant to customary non-assignment provisions in leases, (vi) pursuant to restrictions imposed pursuant to any stock purchase or asset purchase agreement pending the consummation of the transactions contemplated thereby, (vii) in connection with any Acquisition Debt, provided that such encumbrance or restriction was not incurred in contemplation of the obligor becoming a Subsidiary of the Company, which encumbrance or restriction is not applicable to any Person, or the Property or assets of any Person, other than the Person, or the Property or assets, acquired, (viii) customary restrictions on transfers of Property subject to a Lien which could not materially adversely affect the Company's ability to satisfy its obligations under the Indenture and the Notes or (ix) provisions contained in agreements or instruments relating to Debt which prohibit the transfer of all or substantially all of the assets of the obligor thereunder unless the transferee shall assume the obligations of the obligor under such agreement or instrument, in each case; provided that, in the case of clause (iv) above, such encumbrances and restrictions, taken as a whole, in any such extensions, refinancings, renewals or replacements are not materially more restrictive on the ability of the applicable Subsidiary to make the payments, distributions, loans, advances or transfers referred to in clauses (i) through (iv) in the preceding paragraph than those S-24 25 encumbrances or restrictions taken as a whole in effect immediately before such extension, refinancing, renewal or replacement. The covenant shall not prevent the Company from granting any Liens not expressly prohibited by this covenant. Limitation on Issuance of Preferred Stock of Subsidiaries The Company will not permit any Subsidiary to create, assume or otherwise cause or suffer to exist any Preferred Stock except: (i) Preferred Stock outstanding on the Closing Date, (ii) Preferred Stock issued to and held by the Company or a Consolidated Subsidiary of the Company (but only so long as held or owned by the Company or a Consolidated Subsidiary of the Company), (iii) Preferred Stock issued by a Person prior to the time (a) such Person became a Subsidiary, (b) such Person merges with or into a Subsidiary or (c) another Subsidiary merges with or into such Person (in a transaction in which such Person becomes a Subsidiary), which Preferred Stock was not issued in anticipation of such transaction, (iv) Preferred Stock issued or agreed to be issued by a Subsidiary in connection with the financing of the construction, equipping, development, operation, acquisition, maintenance or working capital requirements in the ordinary course of business consistent with past practice of a Power Generation Facility or any Unrelated Business; provided that as of the Closing Date either the Company does not have any direct or indirect interest or Investment therein or such Power Generation Facility or Unrelated Business is not in commercial operation, (v) Preferred Stock issued by a Subsidiary in connection with an Asset Disposition described in clause (B) of the first sentence of the description of the "Limitation on Asset Dispositions" covenant described below and (vi) Preferred Stock which is exchanged for, or the proceeds of which are used to refinance, any Preferred Stock permitted to be outstanding pursuant to clauses (i) through (v) hereof (or any extension, renewal or refinancing thereof), having a liquidation preference not to exceed the liquidation preference of the Preferred Stock so exchanged or refinanced. The Company's obligation to comply with this covenant will terminate if and when the Notes become Investment Grade. Limitation on Additional Tiers of Senior Subordinated Debt The Company will not Incur or suffer to exist any Debt, other than Debt evidenced by the Notes, that is subordinate in right of payment to any Senior Debt unless such Debt, by its terms or the terms of the instrument creating or evidencing it, is pari passu with, or subordinate in right of payment to, the Notes; provided that any Debt of the Company or any of its Subsidiaries which is outstanding on the Closing Date shall be excluded from the operation of this covenant. Limitation on Asset Dispositions Subject to the provisions of "Subordination" above and "Restriction on Mergers, Consolidations and Sales of Assets" below, the Company will not make, and will not permit any of its Subsidiaries to make, any Asset Disposition unless the Company (or the Subsidiary, as the case may be) receives consideration at the time of each such Asset Disposition at least equal to the fair market value of the shares or assets sold or otherwise disposed of (such amounts in excess of $15 million determined in good faith by the Board of Directors, as evidenced by a Board resolution) and either (A) (i) not less than 75% of the consideration received by the Company (or such Subsidiary, as the case may be) is in the form of cash, provided that any note or other obligation received by the Company (or such Subsidiary, as the case may be) that is immediately converted into cash shall be deemed to be cash for purposes of this clause (i), and (ii) first, the Net Cash Proceeds of such Asset Disposition are applied within 90 days from the later of the date of such Asset Disposition or the receipt of Net Cash Proceeds related thereto, to the payment of the principal of, premium and interest on any Senior Debt of the Company (including to cash collateralize letters of credit) if required by the lenders, or the terms, of the Senior Debt and, in connection with any such payment, any related loan commitment, standby facility or the like shall be permanently reduced in an amount equal to the principal amount so repaid and second, to the extent such Net Cash Proceeds are not required by the lenders, or the terms, of the Senior Debt to be applied in accordance with the foregoing or, if after being so applied there remain Net Cash Proceeds, then at the Company's election, such Net Cash Proceeds are either (x) invested in the business or businesses of the Company or any of its Subsidiaries consistent with the "Limitation on Business" covenant described above; provided that such investment is made within 365 days from the later of the date of such Asset Disposition or the receipt of the Net Cash Proceeds related thereto or (y) in the case of any Asset Disposition by a Subsidiary, applied to the payment of any Debt of such Subsidiary or any Consolidated Subsidiary (other than Debt owed to the Company or another Subsidiary), and, in connection with any such payment, any related loan commitment, standby facility or the like shall be permanently reduced in an amount equal to the principal amount so repaid; provided that such Net Cash Proceeds are so applied within three months after the expiration of the S-25 26 270 day period referred to in clause (x) above or (z) applied to make a tender offer (the "Offer") to purchase Notes at a purchase price of 100% of their principal amount, plus accrued interest (subject to proration in the event of oversubscription in the manner set forth below); or (B) if the Asset Disposition is with respect to the assets or Capital Stock of a Subsidiary, (i) the Company or a Subsidiary receives as consideration exclusively Capital Stock, cash, or assets of a Person which will be used by the Company and its Subsidiaries consistent with the "Limitation on Business" covenant described above, (ii) the Company could Incur at least $1 of Debt under the first paragraph of the "Limitation on Debt" covenant described above and (iii) if the Asset Disposition is with respect to greater than 25% of the outstanding Capital Stock or assets of a Significant Subsidiary, the Fixed Charge Ratio of the Company after giving effect to the Asset Disposition shall be no less than 3 to 1; provided that to the extent the Company or any Subsidiary receives any cash consideration in connection with any Asset Disposition pursuant to this clause (B), the Net Cash Proceeds from such Asset Disposition shall be applied in accordance with clause (A)(ii) of this covenant. Notwithstanding the foregoing, to the extent that any or all of the Net Cash Proceeds of any Foreign Asset Disposition are prohibited or delayed by applicable local law from being repatriated to the U.S., the Company (or such Subsidiary, as the case may be) shall not be required to apply the portion of such Net Cash Proceeds so affected in accordance with clause (A) (ii) above (other than to repay Debt of the Subsidiary making such Asset Disposition or Debt of a Consolidated Subsidiary of the Company, in each case as contemplated by clause (A)(ii) above and to the extent the prohibition or delay on repatriation is not applicable to such repayment and such repayment is not in violation of the terms of any Senior Debt) (the Company hereby agreeing to cause the applicable Subsidiary to promptly take all actions required by the applicable local law to permit such repatriation); provided that once such repatriation of any such affected Net Cash Proceeds is permitted under the applicable local law, such repatriation will be immediately effected and such repatriated Net Cash Proceeds will be applied in the manner set forth in this covenant. To the extent that dividends or distributions of any or all of the Net Cash Proceeds of any Foreign Asset Disposition would result in a tax liability greater than that which would be incurred if such Net Cash Proceeds were not so dividended or distributed, the Net Cash Proceeds so affected may be retained by the applicable Subsidiary for so long as such adverse tax liability would continue to be incurred. Notwithstanding anything in this covenant to the contrary, the Company and any Subsidiary may make the following Asset Dispositions: (i) a disposition resulting from the bona fide exercise by governmental authority of its claimed or actual power of eminent domain, (ii) a realization upon a security interest, (iii) any Permitted Payment or Restricted Payment that is permitted hereunder, or (iv) any sale, transfer, conveyance, lease or other disposition of the Capital Stock or Property of a Subsidiary pursuant to the terms of any power sales agreement or steam sales agreement or other agreement or contract related to the output or product of, or services rendered by, a Power Generation Facility as to which such Subsidiary is the supplying party; provided that to the extent the Company or any Subsidiary receives any cash consideration in connection with such Asset Disposition, the Net Cash Proceeds from such Asset Disposition shall be applied in accordance with clause (A)(ii) of this covenant. If the aggregate purchase price of Notes tendered pursuant to an Offer made pursuant to clause (A)(ii)(z) in the preceding paragraph is less than the Net Cash Proceeds allotted to the purchase of the Notes, the Company may use the remaining Net Cash Proceeds for general corporate purposes. The Company will not be required to comply with the provisions of clause (A)(ii) in the first paragraph of this covenant if the Net Cash Proceeds from one or more Asset Dispositions occurring on or after the date of the Indenture are less than $25 million in any one fiscal year. Any lesser amounts so carried forward and cumulated need not be segregated or reserved and may be used for general corporate purposes. The Company will make such Offer by mailing to each Holder of the Notes, within 30 days from the receipt of Net Cash Proceeds, a written notice specifying the purchase date, which shall be not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain certain information concerning the business of the Company which the Company believes in good faith will enable the Holders of the Notes to make an informed decision. Holders electing to have their Notes purchased will be required to surrender such Notes at least one Business Day prior to the Purchase Date. If at the expiration of the offer period the aggregate principal amount of Notes surrendered by Holders exceeds the amount available to purchase Notes, the Company will select the Notes to be purchased on a pro rata basis. In the event the Company is unable to purchase Notes from Holders in an Offer because of provisions of applicable law, the Company need not make an Offer. The Company shall then be obligated to use the Net Cash Proceeds in accordance with clauses (A)(ii)(x) or (y) in the first paragraph of this covenant description. S-26 27 The Company will comply with all applicable tender offer rules, including without limitation Rule 14e-1 under the Exchange Act, in connection with an Offer under the provisions of this covenant. Repurchase of Notes Upon a Change of Control Upon a Change of Control, each Holder of the Notes shall have, subject to the provisions of "Subordination" above, the right to require that the Company repurchase such Holder's Notes at a repurchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. Certain of the events constituting a Change of Control under the Notes will also constitute an event of default under the Company's Bank Credit Agreement and, in any event, the right of Holders to receive the Change of Control purchase price is subordinated in right of payment to the payment of all Senior Debt, including Debt outstanding under the Bank Credit Agreement. As of March 31, 1996, on a pro forma basis after giving effect to the Company's recent acquisition of the Light Interest and to the application of the net proceeds of the Offering, the Company had approximately $246 million in aggregate principal amount of Debt which would have constituted Senior Debt. Furthermore, other Senior Debt is permitted to be Incurred, provided certain Fixed Charge Ratios are met. Due to the highly leveraged nature of the Company, there can be no assurance that the Company will have sufficient funds to purchase tendered Notes upon a Change of Control. The Change of Control provisions may not be waived by the Trustee or by the Board of Directors, and any modification thereof must be approved by each Holder. Nevertheless, the Change of Control provisions will not necessarily afford protection to Holders, including protection against an adverse effect on the value of the Notes, in the event that the Company or its Subsidiaries Incur additional Debt, whether through recapitalizations or otherwise. Furthermore, the Change of Control provisions will not be applicable in the event of certain transactions with Affiliates of the Company that are approved by the Board of Directors. The Change of Control provisions will not prevent a change in the Board of Directors which is approved by the then-present members of the Board of Directors. See "Certain Definitions -- Change of Control" below. With respect to a sale of assets, the phrase "all or substantially all", which appears in the definition of Change of Control, has not gained an established meaning. In interpreting this phrase, courts have made subjective determinations, considering such factors as the value of the assets conveyed and the proportion of an entity's income derived from such assets. Accordingly, there may be uncertainty as to whether a Holder can determine whether a Change of Control has occurred and can exercise any remedies such Holder may have upon a Change of Control. Within 30 days following any Change of Control, the Company shall mail a notice to each Holder of the Notes with a copy to the Trustee stating (1) that a Change of Control has occurred and that such Holder has the right to require the Company to repurchase such Holder's Notes at a repurchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase (the "Change of Control Offer"), (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control), (3) the repurchase date (which shall be not earlier than 30 days or later than 60 days from the date such notice is mailed) (the "Repurchase Date"), (4) that any Note not tendered will continue to accrue interest, (5) that any Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Repurchase Date, (6) that Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the paying agent at the address specified in the notice prior to the close of business on the Repurchase Date, (7) that Holders will be entitled to withdraw their election if the paying agent receives, not later than the close of business on the third Business Day (or such shorter periods as may be required by applicable law) preceding the Repurchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes the Holder delivered for purchase, and a statement that such Holder is withdrawing his election to have such Notes purchased, and (8) that Holders which elect to have their Notes purchased only in part will be issued new Notes in a principal amount equal to the unpurchased portion of the Notes surrendered. On the Repurchase Date, the Company shall (i) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Trustee money sufficient to pay the purchase price of all Notes or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee Notes so accepted together with an officers' certificate identifying the Notes or portions thereof tendered to the Company. The Trustee shall promptly mail to the Holders of the Notes so accepted payment in an amount equal to the purchase price, and promptly authenticate and mail to such Holders a new Note in a principal amount equal to any unpurchased portion S-27 28 of the Note surrendered. The Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Repurchase Date. The Company will comply with all applicable tender offer rules, including without limitation Rule 14e-1 under the Exchange Act, in connection with a Change of Control Offer. Limitations on Transactions with Affiliates The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly enter into any transaction (including, without limitation, the sale, purchase or lease of any assets or properties or the rendering of any services) involving aggregate consideration in excess of $5 million with any Affiliate or holder of 5% or more of any class of Capital Stock of the Company except for transactions (including, subject to the "Limitation on Restricted Payments" covenant described above, any loans or advances by or to, or Guarantee on behalf of, any Affiliate or any such holder) made in good faith the terms of which are fair and reasonable to the Company or such Subsidiary, as the case may be, and are at least as favorable as the terms which could be obtained by the Company or such Subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis with Persons who are not such a holder or Affiliate; provided that any such transaction shall be conclusively deemed to be on terms which are fair and reasonable to the Company or any of its Subsidiaries and on terms which are at least as favorable as the terms which could be obtained on an arm's-length basis with Persons who are not such a holder or Affiliate if such transaction is approved by a majority of the Company's directors (including a majority of the Company's independent directors) and; provided further that with respect to the purchase or disposition of assets of the Company or any of its Subsidiaries having a net book value in excess of $15 million, in addition to approval of its Board of Directors, the Company shall obtain a written opinion of an Independent Financial Advisor stating that the terms of such transaction are fair to the Company or its Subsidiary, as the case may be, from a financial point of view; and provided further that the fairness, reasonableness and arm's-length nature of the terms of any transaction which is part of a series of related transactions may be determined on the basis of the terms of the series of related transactions taken as a whole. This covenant shall not apply to (a) transactions between the Company or any of its Subsidiaries and any employee of the Company or any of its Subsidiaries that are approved by the Board of Directors or any committee of the Board of Directors consisting of the Company's independent directors, (b) the payment of reasonable and customary regular fees to directors of the Company or a Subsidiary, (c) any transaction between the Company and any of its Consolidated Subsidiaries or between any of its Consolidated Subsidiaries, (d) any Permitted Payment and any Restricted Payment not otherwise prohibited by the "Limitation on Restricted Payments" covenant described above or (e) the provision of general corporate administrative, operating and management services, including, without limitation, procurement, construction engineering, construction administration, legal, accounting, financial, money management, risk management, personnel, administration and business planning services, in each case, in the ordinary course. EVENTS OF DEFAULT An Event of Default, as defined in the Indenture and applicable to the Notes, will occur with respect to the Notes if: (i) the Company defaults in the payment of all or any part of principal, the Change of Control Purchase price or premium, if any, on any Note when the same becomes due and payable at maturity, upon acceleration, redemption, mandatory repurchase, or otherwise; (ii) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (iii) an event of default, as defined in any indenture or instrument evidencing or under which the Company or any Significant Subsidiary has at the date of this Indenture or shall hereafter have outstanding any Debt, shall happen and be continuing and either (a) such default results from the failure to pay the principal of such Debt in excess of $10 million at final maturity of such Debt or (b) as a result of such default, the maturity of such Debt shall have been accelerated so that the same shall be or become due and payable prior to the date on which the same would otherwise have become due and payable, and such acceleration shall not be rescinded or annulled within 30 days and the principal amount of such Debt, together with the principal amount of any other Debt of the Company or any Significant Subsidiary in default, or the maturity of which has been accelerated, aggregates $10 million or more; provided that such default shall not be an Event of Default if such Debt is Debt of a Significant Subsidiary, is Non-Recourse to the Company in respect of the amounts not paid or due upon acceleration and the Company could, at the time of default, incur at least $1 of Debt under the "Limitation on Debt" covenant described above; and provided further however that, subject to certain provisions, the Trustee shall not be charged with knowledge of any such default unless written notice thereof shall have been given to the Trustee by the Company, by the holder or an agent of the holder of any such Debt, by the S-28 29 trustee then acting under any indenture or other instrument under which such default shall have occurred, or by the holders of not less than 25% in the aggregate principal amount of the Notes at the time outstanding; (iv) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture with respect to the Notes or under the Notes and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or by the Holders of 25% or more in aggregate principal amount of the Notes; (v) one or more judgments or orders shall be entered by a court against the Company or any Significant Subsidiary for the payment of money in an amount which, individually or in the aggregate exceeds $10 million (excluding the amount thereof covered by insurance or by a bond written by third parties but treating any deductibles, self insurance or retentions as not so covered by insurance) and which judgments or orders shall not be discharged or waived, and shall remain outstanding and there shall be any period of 30 consecutive days following entry of such judgment or order in excess of $10 million or the judgment or order which causes the aggregate amount to exceed $10 million during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, that such a judgment or order shall not be an Event of Default if such judgment or order is against a Significant Subsidiary and does not require any payment by the Company and the Company could, at the expiration of the applicable 30 day period, incur at least $1 of Debt under the "Limitation on Debt" covenant described above; (vi) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any of its subsidiaries in an involuntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of the Company or any of its subsidiaries or for all or substantially all of the property and assets of the Company or any of its subsidiaries or (C) the winding up or liquidation of the affairs of the Company or any of its subsidiaries and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (vii) the Company or any of its subsidiaries (A) commences a voluntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of the Company or any of its subsidiaries or for all or substantially all of the property and assets of the Company or any of its subsidiaries or (C) effects any general assignment for the benefit of creditors. If an Event of Default (other than an Event of Default specified in clause (vi) or (vii) above that occurs with respect to the Company) occurs with respect to the Notes and is continuing under the Indenture, then, and in each and every such case either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding by written notice to the Company (and to the Trustee if such notice is given by the holders (the "Acceleration Notice")), may, and the Trustee at the request of such holders shall, declare the principal of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such principal of, Change in Control purchase price or premium, if any, and accrued interest shall be immediately due and payable. If an Event of Default specified in clause (vi) or (vii) above occurs with respect to the Company, the principal of, Change in Control purchase price or premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable, subject to the prior payment in full of all Senior Debt, without any declaration or other act on the part of the Trustee or any holder. The holders of at least a majority in principal amount of the outstanding Notes may, by written notice to the Company and to the Trustee, waive all past defaults with respect to the Notes and rescind and annul a declaration of acceleration with respect to the Notes and its consequences if (i) all existing Events of Default applicable to the Notes, other than the nonpayment of the principal of, Change in Control purchase price or premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. The holders of at least a majority in aggregate principal amount of the outstanding the Notes may direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of holders of the Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from holders of the Notes. A holder may not pursue any remedy with respect to the Indenture or the Notes unless: (i) the holder gives the Trustee written notice of a continuing Event of Default; (ii) the holders of at least 25% in aggregate principal amount of the outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such holder or holders offer the S-29 30 Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the holders of a majority in aggregate principal amount of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any Notes to receive payment of the principal of, premium, if any, or interest on, such Notes or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, which right shall not be impaired or affected without the consent of the Holder. The Indenture will require certain officers of the Company to certify, on or before a date not more than four months after the end of each fiscal year, that to the best of such officers' knowledge, the Company has fulfilled all its obligations under the Indenture. The Company will also be obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. MODIFICATION AND WAIVER The Indenture provides that the Company and the Trustee may amend or supplement the Indenture or the Notes without notice to or the consent of any Holder: (i) to cure any ambiguity, defect, or inconsistency in the Indenture; provided that such amendments or supplements shall not adversely affect the interests of the Holders in any material respect; (ii) to comply with Article 5 of the Indenture; (iii) to comply with any requirements of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act of 1939, as amended; (iv) to evidence and provide for the acceptance of appointment with respect to the Notes by a successor Trustee; (v) to establish the form or forms or terms of Notes or of the coupons pertaining to such Notes as permitted by the Indenture; (vi) to provide for uncertificated Notes and to make all appropriate changes for such purpose; and (vii) to make any change that does not materially and adversely affect the rights of any Holder. The Indenture also provides that modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the outstanding Notes; provided, however, that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the stated maturity of the principal of, or any sinking fund obligation or any installment of interest on, any Note, (ii) reduce the principal amount of, or premium, if any, or interest on, any Note, (iii) reduce the above-stated percentage of outstanding Notes the consent of whose Holders is necessary to modify or amend the Indenture with respect to the Notes, or (iv) reduce the percentage or aggregate principal amount of outstanding Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. It shall not be necessary for the consent of the Holders to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement, or waiver becomes effective, the Company shall give to the Holders affected thereby a notice briefly describing the amendment, supplement, or waiver. The Company will mail supplemental indentures to Holders upon request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. RESTRICTION ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS The Company may not consolidate with, merge with or into, or transfer all or substantially all of its assets (as an entirety or substantially an entirety in one transaction or a series of related transactions), to any Person unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which properties and assets of the Company are transferred shall be a solvent corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume in writing all the obligations of the Company under the Notes; (ii) immediately after giving effect to such transaction no Event of Default or event or condition which through the giving of notice of lapse of time or both would become an Event of Default shall have occurred and be continuing; (iii) the Net Worth of the Company or the surviving entity, as the case may be, on a pro forma basis after giving effect to such transaction is not less than the Net Worth of the Company immediately prior to such transaction; and (iv) immediately after giving effect to such transaction on a pro forma basis, the Company or the surviving entity would be able to incur at least $1 of Debt under the first paragraph of the "Limitation on Debt" covenant described above. Notwithstanding the foregoing, clause (iv) of the preceding sentence shall not prohibit a transaction, the principal purpose of which is (as determined in good faith by the Board of Directors as evidenced by a Board S-30 31 resolution) to change the state of incorporation of the Company, and such transaction does not have as one of its purposes the evasion of the limitations imposed by this covenant. DEFEASANCE Defeasance and Discharge The Indenture provides that the Company shall be deemed to have paid and shall be discharged from any and all obligations in respect of the Notes of any series, on the 123rd day after the deposit referred to below has been made, and the provisions of the Indenture shall no longer be in effect with respect to the Notes (except for, among other matters, certain obligations to register the transfer or exchange of the Notes, to replace stolen, lost, or mutilated Notes, to maintain paying agencies, and to hold monies for payment in trust) if, among other things, (A) the Company has deposited with the Trustee, in trust, money and/or U.S. government obligations that through the payment of interest and principal in respect thereof, in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes on the Stated Maturity thereof or earlier redemption (irrevocably provided for under arrangements satisfactory to the Trustee), as the case may be, in accordance with the terms of the Indenture and the Notes, (B) the company has delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that holders of the Notes will not recognize income, gain, or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance, and discharge had not occurred, which opinion of counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the date of the Indenture such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned opinion of counsel and (ii) an opinion of counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of section 547 of the United States Bankruptcy Code or section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which the Company is bound, (D) the Company is not prohibited from making payments in respect of the Notes by the subordination provisions contained in the Indenture and (E) if at such time the Notes are listed on a national securities exchange, the Company has delivered to the Trustee an opinion of counsel to the effect that the Notes will not be delisted as a result of such deposit, defeasance, and discharge. Defeasance of Certain Covenants and Certain Events of Default The Indenture further provides that the provisions of the Indenture will no longer be in effect with respect to the covenants described in this Prospectus Supplement under "-- Covenants" and clause (iv) under "-- Events of Default" with respect to such covenants and clauses (iii) and (v) under "-- Events of Default" shall be deemed not to be Events of Default with respect to the Notes, upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. government obligations through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Notes, on the Stated Maturity thereof or earlier redemption (irrevocably provided for under agreements satisfactory to the Trustee), as the case may be, in accordance with the terms of the Indenture and the Notes, the satisfaction of the provisions described in clauses (B)(ii), (C), (D), and (E) of the preceding paragraph and the delivery by the Company to the Trustee of an opinion of counsel to the effect that, among other things, the holders of the Notes will not recognize income, gain, or loss for federal income tax purposes as a result of such deposit and defeasance of the covenants and Events of default and will be subject to federal income tax on the same S-31 32 amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. Defeasance and Certain Other Events of Default If the Company exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to the Notes as described in the immediately preceding paragraph and the Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Notes at the time of their Stated Maturity, but may not be sufficient to pay amounts due on the Notes at the time of the acceleration resulting from such Event of Default. However, the Company shall remain liable for such payments. CERTAIN DEFINITIONS "Acquisition Debt" is defined to mean Debt of any Person existing at the time such Person became a Subsidiary of the Company (or such Person is merged into the Company or one of its Subsidiaries) or assumed in connection with the acquisition of assets from any such Person (other than assets acquired in the ordinary course of business), including Debt Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company (but excluding Debt of such Person which is extinguished, retired or repaid in connection with such Person becoming a Subsidiary of the Company). "Adjusted Consolidated Net Income" is defined to mean, for any period, for any Person the aggregate Net Income (or loss) of such Person and its Consolidated Subsidiaries for such period determined in conformity with GAAP plus the Net Income of any Subsidiary of such Person for prior periods to the extent such Net Income is actually paid in cash to such Person during such period plus the Net Income of any Person (other than a Subsidiary) in which such Person has a joint interest with a third party for prior periods to the extent such Net Income is actually paid in cash to such Person during such period; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the Net Income (or loss) of any Person (other than a Subsidiary) in which such Person has a joint interest with a third party, except to the extent such Net Income is actually paid in cash to such Person during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (c)(1) or (c)(2) of the "Limitation on Restricted Payments" covenant described above (and in such case, except to the extent includible pursuant to clause (i) above), the Net Income (if positive) of such Person accrued prior to the date it becomes a Subsidiary of any other Person or is merged into or consolidated with such other Person or any of its Subsidiaries or all or substantially all of the property and assets of such Person are acquired by such other Person or any of its Subsidiaries; (iii) the Net Income (or loss) of any Subsidiary of such Person, except to the extent such Net Income (if positive) is actually paid in cash to such Person during such period; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) the cumulative effect of a change in accounting principle; and (vi) any amounts paid or accrued as dividends on Preferred Stock of such Person or Preferred Stock of any Subsidiary of such Person. "AES Hawaii" is defined to mean AES Hawaii Management Co., Inc., a Delaware corporation and a Subsidiary of the Company, and its successors. "AES Oklahoma" is defined to mean AES Oklahoma Management Co., Inc., a Delaware corporation and a Subsidiary of the Company, and its successors. "Affiliate" is defined to mean, as applied to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with") when used with respect to any Person is defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Acquisition" is defined to mean (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged into or consolidated with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries of the Property of any Person other than the Company or any of its Subsidiaries that constitutes substantially all of an operating unit or business of such Person. "Asset Disposition" is defined to mean, with respect to any Person, any sale, transfer, conveyance, lease or other disposition (including by way of merger, consolidation or sale-leaseback) by such Person or any of its Subsidiaries to S-32 33 any Person (other than to such Person or a Consolidated Subsidiary of such Person and other than in the ordinary course of business) of (i) any assets (excluding cash and cash equivalents) of such Person or any of its Subsidiaries or (ii) any shares of Capital Stock of such Person's Subsidiaries. For purposes of this definition, any disposition in connection with directors' qualifying shares or investments by foreign nationals mandated by applicable law shall not constitute an Asset Disposition. In addition, the term "Asset Disposition" shall not include any sale, transfer, conveyance, lease or other disposition of assets governed by the "Restriction on Mergers, Consolidations and Sales of Assets" covenant described above. The term "Asset Disposition" also shall not include (i) any sale of shares of Capital Stock for the purposes of, and subject to the provisions set forth in, the "Limitation on Issuance of Preferred Stock of Subsidiaries" covenant described above, (ii) the grant of a security interest by any Person in any assets or shares of Capital Stock securing a borrowing by, or contractual performance obligation of, such Person or any Subsidiary of such Person, (iii) a sale-leaseback transaction involving substantially all of the assets of a Power Generation Facility where a Subsidiary of the Company sells the Power Generation Facility to a Person in exchange for the assumption by that Person of the Debt financing the Power Generation Facility and the Subsidiary leases the Power Generation Facility from such Person, (iv) dispositions of contract rights, development rights and resource data made in connection with the initial development of a Power Generation Facility, made prior to the commencement of commercial operation of such Power Facility or (v) transactions made in order to enhance the repatriation of cash proceeds in connection with a Foreign Asset Disposition or in order to increase the after-tax proceeds thereof available for immediate distribution. "Asset Sale" is defined to mean the sale or other disposition by the Company or any of its Subsidiaries (other than to the Company or another Subsidiary of the Company) of (i) all or substantially all of the Capital Stock of any Subsidiary of the Company or (ii) all or substantially all of the Property that constitutes an operating unit or business of the Company or any of its Subsidiaries. "Average Life" is defined to mean, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the product of (A) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security multiplied by (B) the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Agent" is defined to mean Morgan Guaranty Trust Company of New York, as agent for the Banks pursuant to the Bank Credit Agreement, and any successor or successors thereto in such capacity. "Banks" is defined to mean the lenders who are from time to time parties to the Bank Credit Agreement. "Bank Credit Agreement" is defined to mean the Credit Agreement dated as of May 20, 1996 among the Company, the Banks named on the signature pages thereof and the Bank Agent, as such Agreement has been and may be amended, restated, supplemented or otherwise modified from time to time, and includes any agreement extending the maturity of, or restructuring (including, but not limited to, the inclusion of additional borrowers thereunder that are Subsidiaries of the Company and whose obligations are guaranteed by the Company thereunder) all or any portion of, the Debt under such Agreement or any successor agreements and includes any agreement with one or more banks or other lending institutions refinancing all or any portion of the Debt under such Agreement or any successor agreements. "Board of Directors" is defined to mean either the Board of Directors of the Company or (except for the purposes of clause (iii) of the definition of "Change of Control") any committee of such Board duly authorized to act hereunder. "Business Day" is defined to mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law or regulation to close in The City of New York. "Capital Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of, or interests in (however designated), the equity of such Person which is outstanding or issued on or after the Closing Date, including, without limitation, all Common Stock and Preferred Stock and partnership and joint venture interests of such Person. "Capitalized Lease" is defined to mean, as applied to any Person, any lease of any Property of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person; and "Capitalized Lease Obligation" is defined to mean the rental obligations, as aforesaid, under such lease. "Change of Control" is defined to mean the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the S-33 34 assets of the Company to any Person or group (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) of Persons, (ii) a Person or group (as so defined) of Persons (other than management of the Company on the date of this Indenture or their Affiliates) shall have become the beneficial owner of more than 35% of the outstanding Voting Stock of the Company, or (iii) during any one-year period, individuals who at the beginning of such period constitute the Board of Directors (together with any new director whose election or nomination was approved by a majority of the directors then in office who were either directors at the beginning of such period or who were previously so approved) cease to constitute a majority of the Board of Directors. "Closing Date" is defined to mean the date on which the Notes are originally issued under the Indenture. "Common Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of common stock of such Person which is outstanding or issued on or after the date of this Indenture, including, without limitation, all series and classes of such common stock. "Consolidated EBITDA" of any Person for any period is defined to mean the Adjusted Consolidated Net Income of such Person, plus (without duplication) (i) income taxes (other than income taxes (x) (either positive or negative) attributable to extraordinary and non-recurring gains or losses or Asset Sales and (y) actually payable with respect to such period) determined on a consolidated basis for such Person and its Consolidated Subsidiaries in accordance with GAAP to the extent payable by such Person, (ii) Consolidated Fixed Charges, (iii) depreciation and amortization expense for such period and prior periods, all determined on a consolidated basis for such Person and its Consolidated Subsidiaries in accordance with GAAP, but only to the extent that the positive cash flow associated with such depreciation and amortization expense is actually received in cash by such Person during such period and (iv) all other non-cash items reducing Net Income for such period and prior periods, all determined on a consolidated basis for such Person and its Consolidated Subsidiaries in accordance with GAAP, but only to the extent that the positive cash flow associated with such non-cash items is actually received in cash by such Person during such period, and less (without duplication) (i) all non-cash items increasing Net Income of such Person during such period and prior periods, but only to the extent that positive cash flow associated with such non-cash items in not actually received in cash by such Person during such period, and (ii) the aggregate amount of any capitalized expenses (including capitalized interest) paid by such Person during such period which have the effect of increasing Net Income for such period. "Consolidated Fixed Charges" of any Person is defined to mean, for any period, the aggregate of (i) Consolidated Interest Expense, (ii) the interest component of Capitalized Leases, determined on a consolidated basis for such Person and its Consolidated Subsidiaries in accordance with GAAP, excluding any interest component of Capitalized Leases in respect of that portion of a Capitalized Lease Obligation of a Subsidiary that is Non-Recourse to such Person and (iii) cash and non-cash dividends due (whether or not declared) on the Preferred Stock of any Subsidiary and any Redeemable Stock of such Person. "Consolidated Interest Expense" of any Person is defined to mean, for any period, the aggregate interest expense in respect of Debt (including amortization of original issue discount and non-cash interest payments or accruals) of such Person and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, including all commissions, discounts, other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs associated with Interest Rate Agreements and any amounts paid during such period in respect of such interest expense, commissions, discounts, other fees and charges that have been capitalized; provided that Consolidated Interest Expense of the Company shall not include any interest expense (including all commissions, discounts, other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs associated with Interest Rate Agreements) in respect of that portion of Debt of a Subsidiary of the Company that is Non-Recourse to the Company; and provided further that Consolidated Interest Expense of the Company in respect of a Guarantee by the Company of Debt of a Subsidiary shall be equal to the commissions, discounts, other fees and charges that would be due with respect to a hypothetical letter of credit issued under the Bank Credit Agreement that can be drawn by the beneficiary thereof in the amount of the Debt so guaranteed if (i) the Company is not actually making directly or indirectly interest payments on such Debt and (ii) GAAP does not require the Company on an unconsolidated basis to record such Debt as a liability of the Company. "Consolidated Subsidiary" is defined to mean at any date with respect to any Person, any Subsidiary of such Person or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. S-34 35 "Consolidated Total Assets" is defined to mean, with respect to any Person at any time, the total assets of such Person and its Consolidated Subsidiaries at such time determined in conformity with GAAP. "Currency Agreement" is defined to mean, with respect to any Person, any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in currency values to or under which such Person or any of its Subsidiaries is a party or a beneficiary on the Closing Date or becomes a party or a beneficiary thereafter. "Debt" is defined to mean, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or bankers' acceptance or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred purchase price of property or services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person; provided that, for purposes of determining the amount of any Debt of the type described in this clause, if recourse with respect to such Debt is limited to such asset, the amount of such Debt shall be limited to the lesser of the fair market value of such asset or the amount of such Debt, (vii) all Debt of others Guaranteed by such Person to the extent such Debt is Guaranteed by such Person, (viii) all Redeemable Stock valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends and (ix) to the extent not otherwise included in this definition, all obligations of such Person under Currency Agreements and Interest Rate Agreements. "Designated Senior Debt" is defined to mean (i) Debt under the Bank Credit Agreement and (ii) Debt constituting Senior Debt which, at the time of its determination, (A) has an aggregate principal amount of at least $30 million and (B) is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. "Excess Cash Flow" of any Person for any period is defined to mean Consolidated EBITDA less Consolidated Fixed Charges less any income taxes actually paid by such Person during such period. "Fixed Charge Ratio" is defined to mean the ratio, on a pro forma basis, of (i) the aggregate amount of Consolidated EBITDA of any Person for the Reference Period immediately prior to the date of the transaction giving rise to the need to calculate the Fixed Charge Ratio (the "Transaction Date") to (ii) the aggregate Consolidated Fixed Charges of such Person during such Reference Period; provided that for purposes of such computation, in calculating Consolidated EBITDA and Consolidated Fixed Charges, (1) the Incurrence of the Debt giving rise to the need to calculate the Fixed Charge Ratio and the application of the proceeds therefrom shall be assumed to have occurred on the first day of the Reference Period, (2) Asset Sales and Asset Acquisitions which occur during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date (but including any Asset Acquisition to be made with the Debt Incurred pursuant to clause (1) above) shall be assumed to have occurred on the first day of the Reference Period, (3) the Incurrence of any Debt during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date and the application of the proceeds therefrom shall be assumed to have occurred on the first day of such Reference Period, (4) Consolidated Interest Expense attributable to any Debt (whether existing or being Incurred) computed on a pro forma basis and bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period unless such Person or any of its Subsidiaries is a party to an Interest Rate Agreement (which shall remain in effect for the twelve month period after the Transaction Date) which has the effect of fixing the interest rate on the date of computation, in which case such rate (whether higher or lower) shall be used and (5) there shall be excluded from Consolidated Fixed Charges any Consolidated Fixed Charges related to any amount of Debt which was outstanding during and subsequent to the Reference Period but is not outstanding on the Transaction Date, except for Consolidated Fixed Charges actually incurred with respect to Debt borrowed (as adjusted pursuant to clause (4)) (x) under a revolving credit or similar arrangement to the extent the commitment thereunder remains in effect on the Transaction Date or (y) pursuant to clause (iv) in the "Limitation on Debt" covenant described above. For the purpose of making this computation, Asset Sales and Asset Acquisitions which have been made by any Person which has become a Subsidiary of the Company or been merged with or into the Company or any Subsidiary of the Company during the Reference Period or subsequent to the Reference Period and prior to the Transaction Date shall be calculated on a pro forma basis (including all of the calculations referred to in clauses (1) through (5) above assuming such Asset Sales or Asset Acquisitions occurred on the first day of the Reference Period). S-35 36 "Foreign Asset Disposition" is defined to mean any Asset Disposition in respect of the Capital Stock and/or Property of any Subsidiary of any Person where such Subsidiary is organized under the laws of any jurisdiction other than the U.S. or any state thereof or any Subsidiary of the type described in Section 936 of the Internal Revenue Code of 1986, as amended, to the extent that the proceeds of such Asset Disposition are received by a Person subject in respect of such proceeds to the tax laws of a jurisdiction other than the U.S. or any state thereof. "GAAP" is defined to mean generally accepted accounting principles in the U.S. as in effect as of the date of this Indenture applied on a basis consistent with the principles, methods, procedures and practices employed in the preparation of the Company's audited financial statements, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as is approved by a significant segment of the accounting profession. "Guarantee" is defined to mean any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keepwell, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder", "holder of Securities", "Securityholder" and other similar terms mean the registered holder of any Security. "Incur" is defined to mean, with respect to any Debt, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Debt; provided that neither the accrual of interest (whether such interest is payable in cash or kind) nor the accretion of original issue discount shall be considered an Incurrence of Debt. "Independent Financial Advisor" is defined to mean a nationally recognized investment banking firm (i) which does not (and whose directors, officers, employees and Affiliates do not) have a direct or indirect material financial interest in the Company and (ii) which, in the sole judgment of the Board of Directors, is otherwise independent and qualified to perform the task for which such firm is being engaged. "Interest Rate Agreement" is defined to mean, with respect to any Person, any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in interest rates to or under which such Person or any of its Subsidiaries is a party or a beneficiary on the date of the Indenture or becomes a party or a beneficiary thereafter. "Investment" in a Person is defined to mean any investment in, loan or advance to, Guarantee on behalf of, directly or indirectly, or other transfer of assets to such Person. "Investment Grade" is defined to mean, with respect to any security, a rating of Baa3 or higher of such security by Moody's Investors Service Inc. together with a rating of BBB- or higher of such security by Standard & Poor's Corporation. "Joint Venture" is defined to mean a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that, as to any such arrangement in corporate form, such corporation shall not, as to any Person of which such corporation is a Subsidiary, be considered to be a Joint Venture to which such Person is a party. "Lien" is defined to mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Indenture, the Company shall be deemed to own subject to a Lien any Property which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Property. "Material AES Entity" is defined to mean (i) any Subsidiary Guarantor, (ii) any of AES Connecticut Management Co., Inc., AES Thames, Inc., AES Barbers Point, Inc. and AES Shady Point, Inc. and (iii) any other Person in S-36 37 which the Company has a direct or indirect equity Investment if such Person's contribution to Consolidated EBITDA of the Company for the four most recently completed fiscal quarters of the Company constitutes 15% or more of the Consolidated EBITDA of the Company for such period. "Net Cash Proceeds" from an Asset Disposition is defined to mean cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received (including any cash received upon sale or disposition of such note or receivable), excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property disposed of in such Asset Disposition or received in any other noncash form) therefrom, in each case, net of all legal, title and recording tax expenses, commissions and other fees and expenses incurred (including, without limitation, consent and waiver fees and any applicable premiums, earn-out or working interest payments or payments in lieu or in termination thereof), and all federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP (i) as a consequence of such Asset Disposition, (ii) as a result of the repayment of any Debt in any jurisdiction other than the jurisdiction where the Property disposed of was located or (iii) as a result of any repatriation to the U.S. of any proceeds of such Asset Disposition, and in each case net of a reasonable reserve for the after tax-cost of any indemnification payments (fixed and contingent) attributable to seller's indemnities to the purchaser undertaken by the Company or any of its Subsidiaries in connection with such Asset Disposition (but excluding any payments, which by the terms of the indemnities will not, under any circumstances, be made during the term of the Notes), and net of all payments made on any Debt which is secured by such Property, in accordance with the terms of any Lien upon or with respect to such Property or which must by its terms or by applicable law be repaid out of the proceeds from such Asset Disposition, and net of all distributions and other payments made to minority interest holders in Subsidiaries or Joint Ventures as a result of such Asset Disposition. "Net Income" of any Person for any period is defined to mean the net income (loss) of such Person for such period, determined in accordance with GAAP, except that extraordinary and non-recurring gains and losses as determined in accordance with GAAP shall be excluded. "Net Worth" of any Person is defined to mean, as of any date, the aggregate of capital, surplus and retained earnings (including any cumulative translation adjustment) of such Person and its Consolidated Subsidiaries as would be shown on a consolidated balance sheet of such Person and its Consolidated Subsidiaries prepared as of such date in accordance with GAAP. "Non-Recourse" to a Person as applied to any Debt (or portion thereof) is defined to mean that such Person is not directly or indirectly liable to make any payments with respect to such Debt (or portion thereof), that no Guarantee of such Debt (or portion thereof) has been made by such Person and that such Debt (or portion thereof) is not secured by a Lien on any asset of such Person. "Opinion of Counsel" is defined to mean an opinion in writing signed by legal counsel who may be an employee of or counsel to the Company or who may be other counsel satisfactory to the Trustee. Each such opinion shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in the Indenture, if and to the extent required thereby. "Permitted Investment" is defined to mean any Investment of the type specified in clauses (iv) through (v) of the definition of Restricted Payment which is made directly or indirectly by the Company and its Subsidiaries; provided that (i) at the time such Investment is made, the Company could Incur at least $1 of Debt under the first paragraph of the "Limitation on Debt" covenant described above; (ii) at the time such Investment is made, no Event of Default or event that, after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing; (iii) after giving effect to the Investment, the aggregate Investments made by the Company and its Subsidiaries in the applicable Person and in any other Persons that have a direct or indirect interest in the same Power Generation Facility or Unrelated Business does not exceed 40% of the Net Worth of the Company as of the end of its most recently ended fiscal quarter; (iv) the Person in which the Investment is made is engaged only in the businesses described in the "Limitation on Business" covenant described above; and (v) the Company directly or through its Subsidiaries either (x) controls, under an operating and management agreement or otherwise, the day to day management and operation of any Power Generation Facility or Unrelated Business of the Person in which the Investment is made or (y) has significant influence over the management and operation of any such Power Generation Facility or Unrelated Business in connection with such management or operation. To the extent that an Investment is not a Permitted Investment only because the aggregate investment limitation in clause (iii) above is not satisfied, such Investment shall be treated as a Permitted Investment to the extent of the limitation S-37 38 and any excess Investment shall be subject to the other restrictions of the "Limitation on Restricted Payments" covenant described above. "Permitted Payments" is defined to mean with respect to the Company or any of its Subsidiaries (i) any dividend on shares of Capital Stock payable (or to the extent paid) solely in shares of Capital Stock (other than Redeemable Stock) or in options, warrants or other rights to purchase Capital Stock (other than Redeemable Stock) and any distribution of Capital Stock (other than Redeemable Capital Stock) in respect of the exercise of any right to convert or exchange any instrument (whether Debt or equity and including Redeemable Stock); (ii) any dividend or other distribution payable to the Company by any of its Subsidiaries or by a Subsidiary to another Subsidiary; (iii) the repurchase or other acquisition or retirement for value of any shares of the Company's Capital Stock, or any option, warrant or other right to purchase shares of the Company's Capital Stock with additional shares of, or out of the proceeds of a substantially contemporaneous issuance of, Capital Stock other than Redeemable Stock (unless the redemption provisions of such Redeemable Stock prohibit the redemption thereof prior to the date on which the Capital Stock to be acquired or retired was by its terms required to be redeemed); (iv) any defeasance, redemption, repurchase or other acquisition for value of any Debt which by its terms ranks pari passu with, or subordinate in right of payment to the Notes with the proceeds from the issuance of (x) Debt which is also pari passu with the Notes or subordinate to the Notes at least to the extent and in the manner as the Debt to be defeased, redeemed, repurchased or otherwise acquired is subordinate in right of payment to, the Notes; provided that such new pari passu or subordinated Debt provides for no payments of principal by way of sinking fund, mandatory redemption or otherwise (including defeasance) by the Company (including, without limitation, at the option of the holder thereof other than an option given to a holder pursuant to a "change of control" covenant which is no more favorable to the holders of such Debt than the provisions contained in the Debt being replaced or, if none, the "Repurchase of Notes Upon a Change in Control" covenant described above) prior to the maturity of Debt being replaced and the proceeds of such new pari passu or subordinated Debt are utilized for such purpose within 45 days of issuance or (y) Capital Stock (other than Redeemable Stock); (v) in respect of any actual payment on account of an Investment which is not fixed in amount at the time when made, the amount determined by the Board of Directors to be a Restricted Payment on the date such Investment was originally deemed to have been made (the "Original Restricted Payment Charge") plus an amount equal to the interest on a hypothetical investment in a principal amount equal to the Original Restricted Payment Charge assuming interest at the rate of 7% per annum compounded annually for a period beginning on the date the Investment was originally deemed to have been made and ending with respect to any portion of the Original Restricted Payment Charge actually paid on the date of actual payment, less any actual payments previously made on account of such Investment; provided that the Permitted Payment under this clause (v) shall in no event exceed the payment actually made; or (vi) a Permitted Investment. "Person" is defined to mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Power Generation Facility" is defined to mean an electric power or thermal energy generation or cogeneration facility or related facilities, and its or their related electric power transmission, distribution, fuel supply and fuel transportation facilities, all subject to related security interests under related project financing arrangements, together with its or their related power supply, thermal energy and fuel contracts as well as other contractual arrangements with customers, suppliers and contractors. "Preferred Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of preferred or preference stock of such Person which is outstanding or issued on or after the date of this Indenture. "Principal" wherever used with reference to the Notes or any Note or any portion thereof, shall be deemed to include "and premium, if any". "Property" of any Person is defined to mean all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included in the most recent consolidated balance sheet of such Person under GAAP. "Redeemable Stock" is defined to mean any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Debt having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require the Company to S-38 39 repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or a "change of control" occurring prior to the Stated Maturity of the Securities shall not constitute Redeemable Stock if the "asset sale" or "change of control" provision applicable to such Capital Stock is no more favorable to the holders of such Capital Stock than the provisions contained in the "Limitation on Asset Dispositions" and "Repurchase of Notes upon a Change of Control" covenants described above, and such Capital Stock specifically provides that the Company will not repurchase or redeem any such Capital Stock pursuant to such provisions prior to the Company's repurchase of Notes required to be repurchased by the Company under the "Limitation on Asset Dispositions" and "Repurchase of Notes upon a Change of Control" covenants described above. "Reference Period" is defined to mean the four fiscal quarters for which financial information is available preceding the date of a transaction giving rise to the need to make a financial calculation. "Responsible Officer" when used with respect to the Trustee is defined to mean any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Restricted Payment" is defined to mean, with respect to any Person, (i) any dividend or other distribution on any shares of such Person's Capital Stock; (ii) any payment on account of the purchase, redemption, retirement or acquisition for value of such Person's Capital Stock; (iii) any defeasance, redemption, repurchase or other acquisition or retirement for value prior to scheduled maturity of any Debt ranked pari passu with or subordinated in right of payment to the Notes and having a maturity date after the maturity of the Notes; (iv) any Investment in a Subsidiary after the occurrence of an event of default, as defined in any indenture or instrument evidencing or under which such Subsidiary has at the date of this Indenture or shall thereafter have outstanding any Debt, shall happen and be continuing; and (v) any Investment made in an Affiliate (other than a Person that constitutes an Affiliate solely because of the Company's, or a Subsidiary of the Company's, control of such Person). Notwithstanding the foregoing, "Restricted Payment" shall not include any Permitted Payment. "Security" or "Securities" is defined to mean any Notes or Notes, as the case may be, authenticated and delivered under the Indenture. "Senior Debt" is defined to mean the principal of (and premium, if any) and interest on all Debt of the Company whether created, incurred or assumed before, on or after the date of the issuance of the Securities; provided that Senior Debt shall not include (i) the Company's 9 3/4% Senior Subordinated Notes due 2000 which rank pari passu to the Notes, (ii) the Company's 6 1/2% Convertible Subordinated Debentures due 2002 which rank junior to the Notes, (iii) Debt that, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, was without recourse to the Company, (iv) Debt of the Company to any Affiliate, (v) any other Debt of the Company which by the terms of the instrument creating or evidencing the same are specifically designated as not being senior in right of payment to the Notes and (vi) Redeemable Stock of the Company. "Significant Subsidiary" of a Person is defined to mean, as of any date, any Subsidiary which has two or more of the following attributes: (i) it contributes 20% or more of such Person's Excess Cash Flow for its most recently completed fiscal quarter or (ii) it contributes 15% or more of Net Income before tax of such Person and its Consolidated Subsidiaries for such Person's most recently completed fiscal quarter or (iii) it constitutes 20% or more of Consolidated Total Assets of such Person at the end of such Person's most recently completed fiscal quarter. "Stated Maturity" is defined to mean, with respect to any debt security or any installment of interest thereon, the date specified in such debt security as the fixed date on which any principal of such debt security or any such installment of interest is due and payable. "Subsidiary" is defined to mean, with respect to any Person, any corporation or other entity of which a majority of the Capital Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Subsidiary Guarantors" is defined to mean (i) prior to the first day, if any, on which the Company's long-term debt is rated BBB- or higher by Standard & Poor's Ratings Group and Baa3 or higher by Moody's Investors Service, Inc., AES Oklahoma and AES Hawaii, and (ii) on and after such first day, if any, AES Hawaii. "Trade Payables" is defined to mean, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Unrelated Business" is defined to mean any business not of the same general type now conducted by the Company and its Subsidiaries. S-39 40 "U.S. Government Obligations" is defined to mean securities which are (i) direct obligations of the U.S. for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the U.S. the payment of which is unconditionally guaranteed as a full faith and credit obligation by the U.S., which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligations or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "Voting Stock" is defined to mean, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors of such Person. "Wholly-Owned Subsidiary" is defined to mean, with respect to any Person, any Subsidiary of such Person if all the Capital Stock or other ownership interests in such Subsidiary having ordinary voting power to elect the entire board of directors or entire group of other persons performing similar functions (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by such Person. UNDERWRITING Subject to certain conditions contained in an underwriting agreement (the "Underwriting Agreement"), each of the Underwriters named below has severally agreed to purchase from AES the aggregate principal amount of Notes set forth opposite its name below.
------------ PRINCIPAL UNDERWRITER AMOUNT - ------------------------------------------------------------------------------ ------------ J.P. Morgan Securities Inc. .................................................. $166,667,000 Goldman, Sachs & Co........................................................... 83,333,000 ------------ Total.................................................................... $250,000,000 ===========
Under the terms and conditions of the Underwriting Agreement, the Underwriters are obligated to purchase all the Notes offered hereby if any are purchased. The Underwriters propose to offer the Notes to the public at the initial offering price set forth on the cover page of this Prospectus Supplement, and to certain dealers at such price less a concession not in excess of 0.275% of the principal amount. The Underwriters may allow, and such dealers may reallow, a concession not in excess of 0.100% of the principal amount to certain other dealers. After the initial public offering, the public offering price and such concessions may from time to time be changed. In the Underwriting Agreement, AES has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The rules of the National Association of Securities Dealers, Inc. (the "NASD") provide that no NASD member shall participate in a public offering of an issuer's securities where more than 10% of the net offering proceeds are intended to be paid to members participating in the distribution of the offering or associated or affiliated persons of such members, unless a "qualified independent underwriter", as defined in Section 2(l) of Schedule E of the NASD's By-Laws, shall have been engaged on the terms provided in such rules. In connection with the Offering, greater than 10% of the net proceeds from the sale of the Notes may be used to repay outstanding indebtedness of the Company to Morgan Guaranty, an affiliate of J.P. Morgan Securities Inc., under the Bank Credit Agreement or under the Reimbursement Agreement. In view of such potential use of proceeds, the Offering is being conducted in accordance with the rules of the NASD and Goldman, Sachs & Co. is acting as "qualified independent underwriter" and will recommend the maximum price at which the Notes may be offered hereby in accordance with the requirement of Schedule E. Goldman, Sachs & Co. will receive compensation from the Company in the amount of $10,000 for serving in such role. In connection with the Offering, Goldman, Sachs & Co. in its role as qualified independent underwriter has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus Supplement, the Prospectus and the Registration Statement of which this Prospectus Supplement and the Prospectus form a part. S-40 41 THE AES CORPORATION AND SUBSIDIARIES CALCULATIONS OF FIXED CHARGE RATIO (IN THOUSANDS, UNAUDITED)
------------------------------------------------------------------------- FOUR QUARTERS YEAR ENDED DECEMBER 31 ENDED MARCH 31 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- -------- -------- ACTUAL: Net Income........................ $42,626 $55,809 $71,000 $100,000 $107,000 $100,200 $111,000 Equity in Earnings of Affiliates Less Than (in Excess of) Distributions................... -- (2,509) (10,578) 2,700 3,701 3,000 2,915 Net Income From Wholly-Owned Subsidiaries Less Than (in Excess of) Distributions........ (39,258) (22,965) (38,061) (37,436) 12,301 8,674 6,933 ------- ------- ------- -------- -------- -------- -------- Adjusted Consolidated Net Income.......................... 3,368 30,335 22,361 65,264 123,002 111,874 120,848 Income Taxes...................... 6,822 10,008 2,000 3,000 6,000 2,548 6,793 Consolidated Fixed Charges........ 749 3,111 7,200 11,000 11,969 11,411 12,665 Depreciation and Amortization..... 608 494 789 1,465 1,470 1,737 1,472 Project Development and Other Capitalized Expenses............ (12,981) (7,626) (2,286) (13,026) (32,383) (16,469) (27,167) Other............................. 6,584 8,731 -- -- -- -- -- ------- ------- ------- -------- -------- -------- -------- Consolidated EBITDA............... $ 5,150 $45,053 $30,064 $ 67,703 $110,058 $111,101 $114,611 ======== ======== ======== ========= ========= ========= ========= Consolidated Fixed Charges........ $ 749 $ 3,111 $ 7,200 $ 11,000 $ 11,969 $ 11,411 $ 12,665 ======== ======== ======== ========= ========= ========= ========= Fixed Charge Ratio................ 6.88x 14.48x 4.18x 6.15x 9.20x 9.74x 9.05x PRO FORMA: Net Income........................ $ 97,000 $102,000 Equity in Earnings of Affiliates Less Than (in Excess of) Distributions................... 1,201 415 Net Income From Wholly-Owned Subsidiaries Less Than (in Excess of) Distributions........ 12,301 6,933 -------- -------- Adjusted Consolidated Net Income.......................... 110,502 109,348 Income Taxes...................... 6,000 6,793 Consolidated Fixed Charges........ 41,969 41,665 Depreciation and Amortization..... 6,470 6,472 Project Development and Other Capitalized Expenses............ Changes in working capital components...................... (32,383) (27,167) Other............................. -- -- -------- -------- Consolidated EBITDA............... $132,558 $137,111 ========= ========= Consolidated Fixed Charges........ $ 41,969 $ 41,665 ========= ========= Fixed Charge Ratio................ 3.16x 3.29x
R-1 42 PROSPECTUS (AES LOGO) THE AES CORPORATION $250,000,000 Debt Securities ------------------ The AES Corporation (the "Company" or "AES") intends to offer from time to time up to $250,000,000 aggregate principal amount of its debt securities (the "Debt Securities") in one or more series on terms to be determined at the time or times of sale, and otherwise as more fully described under "Description of Debt Securities". The specific designation, aggregate principal amount, authorized denominations, purchase price, maturity, rate and time of payment of interest, any redemption terms or other specific terms and any listing on a securities exchange of any Debt Securities in respect of which this Prospectus is being delivered ("Offered Debt Securities") will be set forth in a Prospectus Supplement to be delivered at the time of the offering and sale of such Offered Debt Securities. SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ The Company may sell the Debt Securities through underwriters, dealers or agents, directly to one or a limited number of purchasers, or through a combination of the foregoing. See "Plan of Distribution." The Prospectus Supplement will set forth the names of the underwriters, dealers or agents, if any, any applicable commissions or discounts and the net proceeds to the Company from the sale of the Offered Debt Securities. Any such underwriter (or any representative thereof), dealer or agent may include J.P. Morgan Securities Inc. and Goldman, Sachs & Co. No dealer, salesperson or other person is authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained or incorporated by reference herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the securities offered hereby by anyone in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. J.P. MORGAN & CO. GOLDMAN, SACHS & CO. The date of this Prospectus is June 27, 1996 43 AVAILABLE INFORMATION The AES Corporation is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). These reports, proxy and information statements and other information may be inspected without charge and copied at the public reference facilities maintained by the Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials also can be obtained at prescribed rates from the Public Reference Section of the Commission at the principal offices of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Debt Securities offered hereby (including all amendments and supplements thereto, the "Registration Statement"). This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement and the exhibits filed thereto, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. Statements contained herein concerning the provisions of any documents are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Registration Statement and the exhibits thereto can be inspected and copied at the public reference facilities and regional and other offices referred to above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates in this Prospectus by reference thereto and makes a part hereof the following documents, heretofore filed with the Commission pursuant to the Exchange Act: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995; (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and (iii) the Company's Current Reports on Form 8-K filed on June 12, 1996, February 26, 1996 and February 6, 1996. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to termination of the offering being made hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the respective dates of the filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus and the Registration Statement of which it is a part to the extent that a statement contained herein or in any subsequently filed document which also is, or is deemed to be, incorporated by reference herein, modifies or supersedes such earlier statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus or such Registration Statement. Without limitation of the foregoing, the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995 have been superseded by the financial statements of the Company included herein. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, upon written or oral request of any such person, a copy of any and all of the documents referred to above which have been or may be incorporated in this Prospectus by reference, other than exhibits to such documents which are not specifically incorporated by reference into such documents. Requests for such copies should be directed to William R. Luraschi, General Counsel and Secretary, The AES Corporation, 1001 North 19th Street, Arlington, Virginia 22209, telephone (703) 522-1315. i 44 THE COMPANY The AES Corporation is a global power company which supplies electricity to customers world-wide. The Company markets power principally from electric generating and other related facilities that it owns and operates. AES was one of the original entrants in the independent power market and today is one of the world's largest independent power companies, based on net equity ownership of generating capacity (in megawatts) in operation or under construction. Over the last five years, the Company has experienced significant growth. This growth has resulted primarily from the development and construction of new plants ("greenfield development") and also from the acquisition of existing plants, primarily through competitively bid privatization initiatives outside the United States. Since 1991, the Company's total generating capacity in megawatts has grown by 293%, with the total number of plants in operation increasing from 6 to 20. Additionally, the Company's revenues have increased 106% from $333 million in 1991 to $685 million in 1995, while EBITDA has grown from $5 million to $110 million over the same period. Through its subsidiaries and affiliated companies, AES operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total generating capacity of 4,158 megawatts. Of that total, 1,069 are produced by plants located in the United States, 1,420 in the United Kingdom, 840 in Argentina, 788 in Brazil and 41 in China. Of the total megawatts, 29% are produced by plants fueled by solid fuel, 19% are produced by plants fueled by natural gas, 24% are produced by hydroelectric facilities and the remaining 28% are produced by plants capable of burning multiple fossil fuels. AES is now in the process of adding 1,462 megawatts to its operating portfolio by constructing two oil-fired power plants in Pakistan totaling 674 megawatts, a 180 megawatt coal-fired plant in the United States and four plants totaling 608 megawatts in China that will be coal and oil-fired. In total, AES's net equity ownership in plants in operation and construction is 3,233 megawatts. On May 30, 1996, a subsidiary of AES acquired common shares representing an 11.35% interest (the "Light Interest") in Light Servicos de Eletricidade S.A. ("Light"), a publicly-held corporation that operates as the concessionaire of an approximately 3,800 megawatt electric power generation, transmission and distribution system in Rio de Janeiro, Brazil. In connection with the acquisition of the Light Interest, AES, through a subsidiary, is participating in a consortium with certain other successful bidders, and the ownership interest held by the consortium represents a controlling interest in Light. THE GLOBAL INDEPENDENT POWER MARKET The market for independent power generation has expanded from a U.S. market, consisting of cogeneration and small power production projects, to a global competitive market for power generation. Although many foreign countries initiated restructuring policies after the advent of the independent power market in the United States, many of these countries have put in place market structures that the Company believes are more competitive than most markets existing in the United States today. A part of AES's business strategy is to participate in competitive generation markets both in the United States and world-wide. The Company believes that the growth in the need for new capacity in the United States has and will continue to slow, partly because utilities are making more efficient use of their existing resources by improving plant availability, extending plant lives, repowering and taking advantage of attractive bulk power purchases, and partly because utilities have initiated programs to reduce the demand for electricity. As a result of the reduced need for new capacity in the United States, AES and many of its competitors are seeking new business in markets outside the United States. In addition, a number of foreign countries have privatized (or are in the process of privatizing) their generation capacity, which provides opportunities to purchase existing generation assets. AES, through subsidiaries and affiliates, now operates 14 plants in non-U.S. countries, is constructing six others overseas, and has offices in numerous foreign locations to take advantage of the opportunities in these new markets. 1 45 BUSINESS STRATEGY The Company's primary objective is to help meet the need for electricity world-wide by participating in competitive electricity markets as a clean, safe and reliable power supplier. The Company's strategy is to participate in competitive power generation markets as they develop either by greenfield development or by acquiring and operating existing facilities in these markets. Other elements of the Company's strategy include: - Supplying energy to customers at the least cost possible, taking into account factors such as reliability and environmental performance. - Constructing or acquiring projects of a relatively large size (generally larger than 100 megawatts). - Entering into power sales contracts with electric utilities or other customers with credit strength. 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. 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 in the future. The Company's strategy also has been to attempt to finance its projects primarily without credit recourse to the Company or to other projects, and to construct new plants under fixed or guaranteed-maximum price contracts with contractor-guaranteed performance standards ("turnkey" contracts). In addition, the Company engages in careful site selection, taking into consideration transportation, water and transmission access and attempting to gauge local government and community receptivity to the environmental permitting process. The Company is a Delaware corporation that was formed in 1981. The principal office of the Company is located at 1001 North 19th Street, Arlington, Virginia 22209, and its telephone number is (703) 522-1315. RISK FACTORS Purchasers of the Debt Securities should read this entire Prospectus carefully. Ownership of the Debt Securities involves certain risks. The following factors should be considered carefully in evaluating AES and its business before purchasing the Debt Securities offered by this Prospectus. Leverage and Subordination. On a pro forma basis after giving effect to the application of the net proceeds of the offering of $250 million in aggregate principal amount of Debt Securities and the Company's recent acquisition of the Light Interest, the Company and its subsidiaries had approximately $1.8 billion of outstanding indebtedness at March 31, 1996. As a result of the Company's level of debt, the Company might be significantly limited in its ability to meet its debt service obligations, to finance the acquisition and development of additional projects, to compete effectively or to operate successfully under adverse economic conditions. As of March 31, 1996, the Company would have had, on a pro forma basis after giving effect to the application of the net proceeds from the offering of $250 million in aggregate principal amount of Debt Securities and the Company's recent acquisition of the Light Interest, a consolidated ratio of total debt to total book capitalization (including current debt) of approximately 75%. The Debt Securities will be subordinated to all Senior Debt, including, but not limited to, the Company's current $425 million credit facility. As of March 31, 1996, on a pro forma basis after giving effect to the application of the net proceeds of the offering of $250 million in aggregate principal amount of Debt Securities and the Company's recent acquisition of the Light Interest, the Company had approximately $246 million in aggregate principal amount of Senior Debt. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshaling of assets and liabilities or any bankruptcy, insolvency or similar proceedings of the Company, the holders of Senior Debt will first be entitled to receive payment in full of all amounts due or to become due under all Senior Debt before the holders of the Debt Securities will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the 2 46 Debt Securities. No payments on account of principal, premium, if any, or interest in respect of the Debt Securities may be made if there shall have occurred and be continuing a default in any payment under any Senior Debt or, during certain periods, an event of default under certain Senior Debt permitting the lenders thereunder to accelerate the maturity thereof. See "Description of Debt Securities -- Subordination". The Debt Securities will be effectively subordinated to the indebtedness and other obligations (including trade payables) of the Company's subsidiaries. At March 31, 1996, the indebtedness and obligations of the Company's subsidiaries, on a pro forma basis after giving effect to the application of the net proceeds of the offering of $250 million in aggregate principal amount of Debt Securities and the Company's recent acquisition of the Light Interest, aggregated approximately $1.2 billion. The ability of the Company to pay principal of, premium, if any, and interest on the Debt Securities will be dependent upon the receipt of funds from its subsidiaries by way of dividends, fees, interest, loans or otherwise. Most of the Company's subsidiaries with interests in power generation facilities currently have in place, and the Indenture for the Debt Securities will, under certain circumstances, permit the Company's subsidiaries to enter into, arrangements that restrict their ability to make distributions to the Company by way of dividends, fees, interest, loans or otherwise. The Company's subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Debt Securities or to make any funds available therefor, whether by dividends, loans or other payments, and do not guarantee the payment of interest on or principal of the Debt Securities. Any right of the Company to receive any assets of any of its subsidiaries upon any liquidation, dissolution, winding up, receivership, reorganization, assignment for the benefit of creditors, marshaling of assets and liabilities or any bankruptcy, insolvency or similar proceedings of the Company (and the consequent right of the holders of the Debt Securities to participate in the distribution of, or to realize proceeds from, those assets) will be effectively subordinated to the claims of any such subsidiary's creditors (including trade creditors and holders of debt issued by such subsidiary). The Company currently conducts substantially all of its operations through its subsidiaries. See "Description of Debt Securities -- Subordination". Doing Business Outside the United States. The Company's involvement in the development of new projects and the acquisition of existing plants in locations outside the United States is increasing and most of the Company's current development and acquisition activities are in respect of projects and plants outside the United States. The Company, through subsidiaries and joint ventures, has ownership interests in 20 power plants outside the United States in operation or under construction. Five of such power plants are located in Argentina; four in Brazil; one in England; two in Northern Ireland; two in Pakistan; and six in the People's Republic of China. The financing, development and operation of projects outside the United States entail significant political and financial uncertainties (including, without limitation, uncertainties associated with first-time privatization efforts in the countries involved, currency exchange rate fluctuations, currency repatriation restrictions, currency convertibility, political instability, civil unrest, and expropriation) and other structuring issues that have the potential to cause substantial delays in respect of or material impairment of the value of the project being developed or operated, which AES may not be capable of fully insuring or hedging against. The ability to obtain financing on a commercially acceptable non-recourse basis in developing nations may also require higher investments by the Company than historically have been the case. In addition, financing in countries with less than investment grade sovereign credit ratings may also require substantial participation by multilateral financing agencies. There can be no assurance that such financing can be obtained when needed. The uncertainty of the legal environment in certain countries in which the Company, its subsidiaries and its affiliates are or in the future may be developing, constructing or operating could make it more difficult for the Company to enforce its respective rights under agreements relating to such projects. In addition, the laws and regulations of certain countries may limit the Company's ability to hold a majority interest in some of the projects that it may develop or acquire. International projects owned by the Company may, in certain cases, be expropriated by applicable governments. Although AES may have legal recourse in enforcing its rights under agreements and recovering damages for breaches thereof, there can be no assurance that any such legal proceedings will be successful. Competition. The global power production market is characterized by numerous strong and capable competitors, many of whom may have extensive and more diversified developmental or operating experience (including both 3 47 domestic and international experience) and greater financial resources than the Company. Further, in recent years, the power production industry has been characterized by strong and increasing competition with respect to both obtaining power sales agreements and acquiring existing power generation assets. In certain markets, these factors have caused reductions in prices contained in new power sales agreements and, in many cases, have caused higher acquisition prices for existing assets through competitive bidding practices. The evolution of competitive electricity markets and the development of highly efficient gas-fired power plants have also caused, or are anticipated to cause, price pressure in certain power markets where the Company sells or intends to sell power. There can be no assurance that the foregoing competitive factors will not have a material adverse effect on the Company. Development Uncertainties. The majority of the projects that AES develops are large and complex and the completion of any such project is subject to substantial risks. Development can require the Company to expend significant sums for preliminary engineering, permitting, legal and other expenses in preparation for competitive bids which the Company may not win or before it can be determined whether a project is feasible, economically attractive or capable of being financed. Successful development and construction is contingent upon, among other things, negotiation on terms satisfactory to the Company of engineering, construction, fuel supply and power sales contracts with other project participants, receipt of required governmental permits and consents and timely implementation and satisfactory completion of construction. There can be no assurance that AES will be able to obtain new power sales contracts, overcome local opposition, if any, obtain the necessary site agreements, fuel supply and ash disposal agreements, construction contracts, steam sales contracts, licenses and certifications, environmental and other permits and financing commitments necessary for the successful development of its projects. There can be no assurance that development efforts on any particular project, or the Company's efforts generally, will be successful. If these development efforts are not successful, the Company may abandon a project under development. At the time of abandonment, the Company would expense all capitalized development costs incurred in connection therewith and could incur additional losses associated with any related contingent liabilities. The future growth of the Company is dependent, in part, upon the demand for significant amounts of additional electrical generating capacity and its ability to obtain contracts to supply portions of this capacity. Any material unremedied delay in, or unsatisfactory completion of, construction of the Company's projects could, under certain circumstances, have an adverse effect on the Company's ability to meet its obligations, including the payment of principal of, premium, if any and interest on Notes. The Company also is faced with certain development uncertainties arising out of doing business outside of the United States. See "-- Doing Business Outside the United States." Uncertainty of Access to Capital for Future Projects. Each of AES's projects under development and those independent power facilities it may seek to acquire may require substantial capital investment. Continued access to capital with acceptable terms is necessary to assure the success of future projects and acquisitions. 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 4 48 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 issuances of senior subordinated notes, convertible debentures and common stock of the Company. The Company's ability to arrange for financing on either a fully recourse or a substantially non-recourse basis and the costs of such capital are dependent on numerous factors, including general economic and capital market conditions, the availability of bank credit, investor confidence in the Company, the continued success of current projects and provisions of tax and securities laws which are conducive to raising capital in this manner. Should future access to capital not be available, AES may decide not to build new plants or acquire existing facilities. While a decision not to build new plants or acquire existing facilities would not affect the results of operations of AES on its currently operating facilities or facilities under construction, such a decision would affect the future growth of AES. Dependence on Utility Customers and Certain Projects. The nature of most of AES's power projects is such that the facility generally relies on one power sales contract with a single customer for the majority, if not all, of its revenues over the life of the power sales contract. During 1995, four customers accounted for 73% of the Company's revenues. The prolonged failure of any one utility customer to fulfill its contractual obligations could have a substantial negative impact on AES's primary source of revenues. AES has sought to reduce this risk in part by entering into power sales contracts with utilities or other customers of strong credit quality and by locating its plants in different geographic areas in order to mitigate the effects of regional economic downturns. Four of the Company's plants collectively represented approximately 61% of AES's consolidated total assets at December 31, 1995 and generated approximately 80% of AES's consolidated total revenues for the year ended December 31, 1995. Regulatory Uncertainty. AES' cogeneration operations are subject to the provisions of various laws and regulations, including the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") and the Public Utility Holding Company Act, as amended ("PUHCA"). PURPA provides to qualifying facilities ("QFs") certain exemptions from substantial federal and state legislation, including regulation as public utilities. PUHCA regulates public utility holding companies and their subsidiaries. AES is not and will not be subject to regulation as a holding company under PUHCA as long as the domestic power plants it owns are QFs under PURPA. QF status is conditioned on meeting certain criteria, and would be jeopardized, for example, by the loss of a steam customer. The Company believes that, upon the occurrence of an event that would threaten the QF status of one of its domestic plants, it would be able to react in a manner that would avoid the loss of QF status (such as by replacing the steam customer). In the event the Company were unable to avoid the loss of such status for one of its plants, to avoid public utility holding company status, AES could apply to the Federal Energy Regulatory Commission ("FERC") to obtain status as an Exempt Wholesale Generator ("EWG"), or could restructure the ownership of the project subsidiary. EWGs, however, are subject to broad regulation by FERC and may be subject to state public utility commissions regulation regarding non-rate matters. In addition, any restructuring of a project subsidiary would likely result in, among other things, a reduced financial interest in such subsidiary, which could result in a gain or loss on the sale of the interest in such subsidiary, the removal of such subsidiary from the consolidated income tax group or the consolidated financial statements of the Company, or an increase or decrease in the results of operations of the Company. The United States Congress is considering proposed legislation which would repeal PURPA entirely, or at least repeal the obligation of utilities to purchase from QFs. There is strong support for grandfathering existing QF contracts if such legislation is passed, and also support for requiring utilities to conduct competitive bidding for new electric generation if the PURPA purchase obligation is eliminated. Various bills have also proposed repeal of PUHCA. Repeal of PUHCA would allow both independents and vertically integrated utilities to acquire retail utilities in the United States that are geographically widespread, as opposed to the current limitations of PUHCA which require that retail electric systems be capable of physical integration. In addition, registered holding companies would be free to acquire non-utility businesses, which they may not do now, with certain limited exceptions. Competition for independent power generators from vertically integrated utilities would likely increase. Repeal of PURPA and/or PUHCA may or may not be part of comprehensive legislation to restructure the electric 5 49 utility industry, allow retail competition, and deregulate most electric rates. The effect of any such repeal cannot be predicted, although any such repeal could have a material adverse effect on the Company. Electric Utility Industry Restructuring Proposals. The FERC and many state utility commissions are currently studying a number of proposals to restructure the electric utility industry in the United States to permit utility customers to choose their utility supplier in a competitive electric energy market. The FERC issued a final rule in April 1996 which requires utilities to offer wholesale customers and suppliers open access on utility transmission lines, on a comparable basis to the utilities' own use of the lines. The final rule is subject to rehearing and may become the subject of court litigation. Many utilities have already filed "open access" tariffs. The utilities contend that they should recover from departing customers their fixed costs that will be "stranded" by the ability of their wholesale customers (and perhaps eventually, their retail customers) to choose new electric power suppliers. The FERC final rule endorses the recovery of legitimate and verifiable "stranded costs." These may include the costs utilities are required to pay under many QF contracts which the utilities view as excessive when compared with current market prices. Many utilities are therefore seeking ways to lower these contract prices or rescind the contracts altogether, out of concern that their shareholders will be required to bear all or part of such "stranded" costs. Some utilities have engaged in litigation against QFs to achieve these ends. In addition, future United States electric rates may be deregulated in a restructured United States electric utility industry and increased competition may result in lower rates and less profit for United States electricity sellers. Falling electricity prices and uncertainty as to the future structure of the industry is inhibiting United States utilities entering into long-term power purchase contracts. The effect of any such restructuring on the Company cannot be predicted, although any such restructuring could have a material adverse effect on the Company. Risk of Litigation Involving Light. Light is the subject of certain lawsuits by industrial customers who have alleged that increases in electricity tariffs introduced by Light and all other electric utilities in Brazil during a price freeze imposed by the federal government of Brazil from March through November 1986 (the "Cruzado Period") were illegal. The plaintiffs are seeking reimbursement for amounts relating to (i) increases paid during the Cruzado Period, which Light estimates may range up to approximately $75 million, and (ii) increases paid subsequent to the Cruzado Period on the basis that all tariff increases after the Cruzado Period were illegal because they took into account the allegedly illegal increase introduced during the Cruzado Period, which Light estimates may range up to $700 million. The Company has been informed by Light that the Superior Tribunal of Justice in Brazil has affirmed lower court decisions that Light and the other utilities are required to reimburse their industrial customers for the tariff increase during the Cruzado Period and that the Superior Tribunal of Justice has, in an appellate proceeding involving one other utility, ruled that the plaintiffs in that proceeding are not entitled to reimbursement for tariff increases introduced after the Cruzado Period. Although Brazilian counsel has advised the Company that such counsel does not believe that it is likely that the lawsuits involving Light will be decided differently by the Superior Tribunal of Justice, no assurance can be given that amounts in excess of $75 million (attributable to tariff increases after the Cruzado Period) will not be required to be reimbursed by Light. Although Light has informed the Company that it may be able to recover amounts it is required to reimburse to industrial customers through tariff rate increases, the Company believes that, in the event that the government does not allow such recovery, such claims for recovery may not be legally enforceable. There can be no assurance that if Light were required to reimburse amounts for tariff increases after the Cruzado Period, this would not have a material adverse effect on the financial condition of Light. Business Subject to Stringent Environmental Regulations. AES's activities are subject to stringent environmental regulation by federal, state, local and foreign governmental authorities. In addition, the Clean Air Act Amendments of 1990 impose more stringent standards than those previously in effect, and require states to impose permit fees on certain emissions. Congress and other foreign governmental authorities also may consider proposals to restrict or tax certain emissions, which proposals, if adopted, could impose additional costs on the operation of AES's power plants. 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 domestic or foreign environmental laws and regulations. The Company has made and will continue to make capital and other expenditures to comply with environmental laws and regulations. There can be no assurance that such expenditures will not have a material adverse effect on the Company's financial condition or results of operations. 6 50 Control by Existing Stockholders. As of February 1, 1996, AES's two founders, Roger W. Sant and Dennis W. Bakke, and their immediate families together owned beneficially approximately 28% of AES's outstanding Common Stock. As a result of their ownership interests, Messrs. Sant and Bakke may be able to significantly influence or exert control over the affairs of AES, including the election of the Company's directors. As of February 1, 1996, all of AES's officers and directors and their immediate families together owned beneficially approximately 39% of AES's outstanding Common Stock. To the extent that they decide to vote together, these stockholders would be able to significantly influence or control the election of AES's directors, the management and policies of AES and any action requiring stockholder approval, including significant corporate transactions. Adherence to AES's Principles -- Possible Impact on Results of Operations. A core part of AES's corporate culture is a commitment to "shared principles": to act with integrity, to be fair, to have fun and to be socially responsible. 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. However, if the Company perceives a conflict between these principles and profits, the Company will try to adhere to its principles -- even though doing so might result in diminished or foregone opportunities. No Prior Public Market -- Possible Price Volatility of Debt Securities. Prior to the offering, there has been no public market for the Debt Securities. There can be no assurance that an active trading market for the Debt Securities will develop or be sustained. If such a market were to develop, the Debt Securities could trade at prices that may be higher or lower than their initial offering price depending upon many factors, including prevailing interest rates, the Company's operating results and the markets for similar securities. Historically, the market for non-investment grade debt has demonstrated substantial volatility in the prices of securities similar to the Debt Securities. There can be no assurance that the future market for the Debt Securities will not be subject to similar volatility. 7 51 USE OF PROCEEDS The Company intends to use the net proceeds from the offering of the Debt Securities to either repay amounts outstanding under a credit agreement dated as of May 20, 1996, between the Company and Morgan Guaranty Trust Company of New York, as Agent (the "Bank Credit Agreement"), repay amounts outstanding under a reimbursement agreement dated as of May 20, 1996 between AES Light, Inc. and Morgan Guaranty Trust Company of New York (the "Reimbursement Agreement") or for general corporate purposes. The Reimbursement Agreement bears interest at the rate of LIBOR plus 2.50% and matures on November 20, 1997. The Company may use $225 million of the net proceeds of the offering of the Debt Securities to repay the amount outstanding of $225 million under the Reimbursement Agreement, which was incurred in connection with the Company's acquisition of the Light Interest, and the remainder of such net proceeds to repay a portion of the amount outstanding under the Bank Credit Agreement. The Bank Credit Agreement, the Company's working capital facility which was used in part to finance its acquisition of the Light Interest, bears interest at a rate of LIBOR plus 1.75% and matures on May 19, 1999. As of the date hereof, an amount of $202 million is outstanding under the Bank Credit Agreement. If the Company uses the proceeds of the offering of the Debt Securities to repay indebtedness under the Bank Credit Agreement, the Company intends to use the remainder of the net proceeds of the offering of the Debt Securities for general corporate purposes. See "Description of Corporate Credit Facility." All pro forma adjustments herein relating to the offering and sale of the Debt Securities assume that all of the net proceeds from the offering of the Debt Securities will be used to repay the entire amount outstanding under the Reimbursement Agreement and a portion of the amount outstanding under the Bank Credit Agreement, as described above. 8 52 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The AES Corporation and its subsidiaries and affiliates are primarily in the business of selling electricity to customers in the U.S., England, Northern Ireland, Argentina and China. Electricity sales accounted for 97% of total revenues during 1995 and 95% during 1994. 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 now operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total capacity of 4,158 megawatts. Of that total, 1,069 megawatts are produced by plants located in the U.S., 1,420 in the U.K., 840 in Argentina, 788 in Brazil and 41 in China. Of the total megawatts, 29% are produced by plants fueled by solid fuel, 19% are produced by plants fueled by natural gas, 24% are produced by hydroelectric facilities and the remaining 28% are produced by plants capable of burning multiple fossil fuels. AES has grown its portfolio of generating assets by developing and constructing new plants ("greenfield development") and by acquiring existing plants, primarily through competitively bid privatization initiatives outside the U.S. AES is now in the process of adding 1,462 megawatts to its operating portfolio by constructing two oil-fired power plants in Pakistan totalling 674 megawatts, a 180 megawatt coal-fired plant in the U.S. and 4 plants totalling 608 megawatts in China that will be coal and oil-fired. In total, AES's net equity ownership in plants in operation and construction is 3,233 megawatts. 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 certain 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 to 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. 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 December 31, 1995, capitalized costs for projects under development were approximately $41 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 U.K. 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 9 53 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 which is discussed further under "Cash Flows, Financial Resources and Liquidity") for specific potential acquisitions. As a result, during 1996, the Company enhanced its financial capabilities to respond to these more accelerated opportunities by entering into the $425 million Bank Credit Agreement. In addition to using additional indebtedness, AES may consider an exchange of project ownership interests or the issuance of its common stock to fund future acquisition opportunities. RESULTS OF OPERATIONS First Quarter 1996 and 1995 Revenues increased approximately $1 million (1%), to $172 million from the first quarter of 1995 to the first quarter of 1996. Cost of sales and services decreased approximately $3 million (3%), to $100 million from the first quarter of 1995 to the first quarter of 1996. Gross margin, which represents total revenues reduced by cost of sales and services, increased approximately $4 million (6%), to $72 million during the same period. Gross margin as a percentage of total revenues was 42% for the first quarter of 1996 and 40% for the same period of 1995. The increase in gross margin is primarily due to improved results at Deepwater due to higher gas prices during the first quarter of 1996, and better performance at Central Termica San Nicolas S.A. ("San Nicolas") due to cost reduction efforts at the plant. Selling, general and administrative expenses increased approximately $1 million (13%) from the first quarter of 1995 to the first quarter of 1996, and as a percentage of total revenue, remained constant at 5% of revenues. Operating income increased approximately $3 million (5%), to $63 million from the first quarter of 1995 to the first quarter of 1996. This increase is the result of the factors discussed above. Interest expense decreased approximately $3 million (10%), to $28 million from the first quarter of 1995 to the first quarter of 1996. The decrease is primarily due to the declining balances of project financing debt at U.S. plants and at San Nicolas. Interest income decreased approximately $2 million (29%), to $5 million from the first quarter of 1995 to the first quarter of 1996. This decrease is primarily due to investments in new projects at AES Chigen and a decrease in the balance of corporate unrestricted cash and cash equivalents. Equity in net earnings of affiliates increased approximately $5 million (67%) from the first quarter of 1995 to the first quarter of 1996. The increase is primarily due to Medway, which was not in operation in 1995. Income taxes increased approximately $1 million (7%), to $15 million from the first quarter of 1995 to the first quarter of 1996. This increase 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. Fiscal Years 1995, 1994 and 1993 Revenues. Total revenues increased $152 million (29%) to $685 million in 1995 after increasing $14 million (3%) to $533 million in 1994 as compared to each applicable preceding year. The increase in 1995 primarily reflects the additional revenues arising from the acquisitions of a controlling interest in San Nicolas and the outstanding debt of AES Deepwater during the year, improved capacity factors at AES Thames and AES Barbers Point and increases in revenues associated with wholesale power services provided by AES Power, the Company's power marketing subsidiary. These increases were offset, in part, by decreased energy revenues at AES Placerita. The 1994 increase was primarily attributable to a higher capacity factor and contract rate increases at AES Beaver Valley and increased service revenues associated with an affiliated plant under construction, offset, in part, by an earthquake in California which temporarily shut down AES Placerita in early 1994 and lower energy revenues at AES Shady Point. 10 54 The nature of most of the Company's operations is such that each power plant 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 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 customers 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. A portion of the electricity sales at San Nicolas is not subject to a contract and is available for sale, when economically advantageous, in the competitive Argentine spot electricity market. The prices paid for electricity in the Argentine market are significantly dependent on the behavior of the Argentine economy, including the demand for and retail price of electricity and the competitive price and availability of power from other suppliers, including hydroelectric facilities. During 1994 and 1995, prices paid for electricity in the Argentine spot market were often lower than San Nicolas's marginal cost of production and as a result, sales of electricity in excess of its contracts were curtailed. Such economic conditions may continue. Costs of Sales and Services. Total costs of sales and services increased $136 million (51%) to $405 million in 1995 after remaining constant at $269 million in 1994 as compared to each applicable preceding year. The increase in 1995 was caused primarily by the additional operating costs arising from the acquisitions of a controlling interest in San Nicolas and the purchase of the outstanding debt of AES Deepwater during the year, increased fuel costs arising from a higher capacity factor at AES Barbers Point and increased costs associated with AES Power's wholesale power services, offset, in part, by decreased fuel and operating costs at AES Placerita due to operating efficiency and cost reduction efforts. Operating costs at both AES Thames and AES Shady Point were lower in 1994 as compared to 1993 due to operating efficiency and cost reduction efforts. In addition, operating costs at AES Placerita were lower in 1994 due to the temporary shutdown resulting from the earthquake. These reductions in costs were offset by increases in operating costs at AES Beaver Valley due to higher capacity factors in 1994 and increases in costs associated with operating and construction services performed for affiliates. Gross Margin. Gross margin (revenues less costs of sales and services) increased $16 million (6%) to $280 million in 1995 after increasing $14 million (6%) in 1994 as compared to each applicable preceding year. The improvement in 1995 reflects the acquisitions of a controlling interest in San Nicolas and the outstanding debt of AES Deepwater during the year and improved operations at AES Placerita and AES Thames, offset, in part by lower service revenues from affiliates. The increase in 1994 was primarily due to improved operations at AES Beaver Valley and service revenues from affiliates, offset, in part, by lower revenues at AES Shady Point and the effect of the earthquake on AES Placerita. As a percentage of total revenues, gross margin decreased to 41% in 1995, down from 50% in 1994, and 48% in 1993. Because the Company's operations 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 specific needs of each plant to perform routine (including annual or multi-year) outages 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 generally are not reduced. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased less than $1 million (2%) to $32 million in 1995 after decreasing $3 million (9%) to $32 million in 1994 as compared to each applicable preceding year. The 1995 increase is attributable to a slight increase in administrative costs. The decrease in 1994 was due primarily to a higher proportion of capitalized costs associated with certain projects under development in 1994, offset, in part, by increased development and administrative costs of AES Chigen. As a percentage of total revenue, selling, general and administrative expenses decreased to 5% in 1995 down from 6% in 1994 and 7% in 1993. 11 55 Operating Income. Operating income improved $16 million (7%) to $248 million in 1995 after increasing $39 million (20%) to $232 million in 1994 as compared to each applicable preceding year. The increases result from the factors discussed in the preceding paragraphs. Other Income and Expense. Other income and expense decreased $6 million (7%) to $81 million in 1995 after decreasing $17 million (16%) to $87 million in 1994 as compared to each applicable preceding year. Interest expense increased 1% in 1995 and decreased 3% in 1994. The increase in 1995 reflects the additional interest expense associated with the acquisition of a controlling interest in San Nicolas offset almost entirely by declining balances of project financing debt through the year. The decline in 1994 was also primarily due to declining balances of project financing debt offset, in part, by the interest expense associated with the issuance of the Company's 9 3/4% Senior Subordinated Notes due 2000 in June 1993. AES capitalizes interest incurred during the development and construction of its facilities. Capitalized interest totaled approximately $8 million in 1995, $2 million in 1994 and $1 million in 1993. Interest income increased 23% in 1995 and 100% in 1994. The 1995 increase reflects higher cash and debt service reserve account balances at operating plants, higher interest rates and a full year of interest on AES Chigen's invested cash balances offset, in part, by investments in new projects at AES Chigen and a decrease in the balance of corporate unrestricted cash and cash equivalents. The 1994 increase was due to higher cash balances including, most significantly, the funds raised in the initial public offering of AES Chigen of approximately $152 million. Equity in earnings of affiliates (after income taxes) increased 17% in 1995 and 20% in 1994. The increase in 1995 results most significantly from the start of operations at Medway Power Ltd. ("Medway") in late 1995. Medway is a 660 megawatt gas-fired plant located east of London, England. AES operates the plant and holds a 25% ownership interest in the joint venture. The increase in 1994 was attributable to improved results from NIGEN, Ltd. Income Taxes. The Company's effective tax rate increased to 38% in 1995 and to 34% in 1994. The increase in 1995 is due to the elimination of the U.S. federal valuation allowance resulting from the purchase in 1995 of the previously outstanding debt of AES Deepwater. The 1994 increase resulted from the absence of reductions to the valuation allowance that were recorded in 1993 in connection with the Company's adoption of Statement of Financial Accounting Standards No. 109 in that year. Extraordinary Items. During 1994, the Company purchased and retired the subordinated project financing debt and accrued interest at AES Placerita, resulting in an extraordinary gain of $4 million, net of taxes. Also, in 1994, the Company's affiliate, NIGEN, Ltd., refinanced its outstanding project financing loan through a public debenture offering. The extinguishment of such debt resulted in an extraordinary loss of $7 million. The Company's share, $2 million, net of taxes, resulted in an extraordinary loss. OUTLOOK Although recent activity in the U.S. electricity market has provided opportunities for independent and competitive power generators like AES, most of the country's generating capacity along with substantially all of the transmission and distribution services continue to be regulated under a state and federal regulatory framework. As consumers, regulators and suppliers continue the debate about how to further decrease the regulatory aspects of providing electricity services, the Company believes in and is encouraging an orderly transition to a more competitive electricity market. Inherent in any significant transition to competitive markets are risks associated with the competitiveness of existing regulated enterprises, and as a result, their ability to perform under long-term contracts such as the Company's electricity sale contracts. Although AES strongly believes in the integrity of its contracts, there can be no assurance that each of its customers, in a restructured and competitive environment, will fulfill or will be capable in all circumstances of fulfilling their financial and legal obligations. It is also possible that as more of the world's markets for electricity move towards competition (as in Argentina and the U.K.), an increasing proportion of the Company's revenues may be dependent on prices determined in spot markets. In order to capture a portion of the market share in competitive generation markets, AES is considering and may elect to invest in and construct technologically-advanced, low-cost electricity plants. Such an investment, which would not necessarily be supported by a long-term contract for all or any of the plant's expected output, would 12 56 most likely require the Company (as well as its competitors) to make larger equity contributions (as a percentage of the total capital cost) than the more "traditional" contract-based investments. CASH FLOWS, FINANCIAL RESOURCES AND LIQUIDITY Cash from Operations. Cash flows provided by operating activities totaled $197 million during 1995 as compared to $164 million during 1994. The increase in 1995 was primarily due to increased pre-tax income. Operating cash flows in the first quarter of 1996 provided $45 million. Cash from Investing Activities. Net cash used in investing activities totaled $343 million during 1995 as compared to $120 million during 1994. The 1995 amount primarily reflects the Company's investments in the outstanding debt of AES Deepwater, additional ownership in AES San Nicolas, the acquisition of AES Rio Juramento, and construction efforts at AES Lal Pir, AES Pak Gen and AES Warrior Run, and AES Chigen's investments in the Wuxi and Yangchun Fuyang projects. The 1994 amount primarily reflects the investment of cash in short-term investments of $72 million and debt service reserves of $17 million, capital additions of $10 million and investments in projects in development of $17 million. Approximately $45 million of cash for investing activities in the first quarter of 1996 was used to fund construction in progress and to acquire Hidrotermica San Juan, S.A., an Argentine company which operates two power plants in Argentina. Cash from Financing Activities. Net cash provided by financing activities aggregated $130 million during 1995 as compared to $80 million during 1994. During 1995, the Company borrowed $133 million in project financing loans associated with the construction of AES Lal Pir and AES Warrior Run and $50 million under its revolving credit facility. Repayments of project finance borrowings were $63 million during the year. During 1994, AES Chigen, a controlled affiliate, raised $152 million (net of issuance costs) through an initial public offering of 10.2 million shares of Class A common stock. These proceeds are being used to fund the development, acquisition and construction of electric power generation and related facilities in China, including equity investments in, and loans to, joint venture companies, and for general corporate purposes. Also during 1994, the Company made principal payments on project financing debt of $72 million. During the first quarter of 1996, financing activities included $12 million in repayments on project financing, $19 million in repayments on the revolving credit facility and $20 million in project finance borrowings related to projects in construction. 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 of its projects. These investments have generally taken the form of equity investments or loans, which are subordinated to the project 13 57 financing loans. The funds for these investments have been provided by cash flows from operations and by the proceeds from issuances of senior subordinated notes, convertible debentures and common stock of the Company. Interim needs for shorter-term and working capital financing have been met with borrowings under AES's Bank Credit Agreement. Over the past several years, the Company has continued to increase the amount of available financing under the revolver while striving to enhance its flexibility and usefulness. During 1996, AES entered into a new $425 million revolver, the Bank Credit Agreement, which provides full availability as borrowings or letters of credit. Under the terms of the Bank Credit Agreement, AES is required to reduce its direct borrowings to $125 million for 30 consecutive days during each twelve month period. The terms of the Bank 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. See "Description of Corporate Credit Facility". The ability of AES's subsidiaries to declare and to pay dividends to AES is restricted under the terms of existing project financing debt agreements. See Note 5 to the consolidated financial statements. In connection with its project financings, AES has expressly undertaken certain limited obligations and contingent liabilities, most of which will only be effective or will be terminated upon the occurrence of future events. These obligations and contingent liabilities, excluding letter of credit obligations under the revolver, were limited by their terms as of March 31, 1996 to an aggregate of approximately $176 million. Approximately $14 million of these guarantees are supported by cash deposits or cash collateralized letters of credit. The Company is obligated under other contingent liabilities which are limited to amounts, or percentages of amounts received by AES as distributions from its project subsidiaries. These contingent liabilities aggregated $37 million as of March 31, 1996. In addition, AES has expressly undertaken certain other contingent obligations, which the Company does not expect to have a material adverse effect on its results of operations, but which by their terms are not capped at a dollar amount. Because each of the Company's plants and projects is a distinct entity, the plants and projects are geographically diverse and the obligations related to a single plant or project are based on contingencies of varying types, the Company believes it is unlikely that it will be called upon to perform under several of such obligations at any one time. AES's obligations and contingent liabilities described above in certain cases take the form of, or are supported by, letters of credit. INFLATION, INTEREST RATES, EXCHANGE RATES, CHANGING ENERGY PRICES, AND ENVIRONMENTAL PERFORMANCE The Company attempts, whenever possible, to hedge certain aspects of its projects against the effects of fluctuations in inflation, interest 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 plants. In some cases a portion of revenues is associated with operations and maintenance costs, and as such is indexed to adjust with inflation. AES has also used a hedging strategy to insulate each plant's financial performance, where appropriate, against the risk of fluctuations in interest rates. Depending on whether capacity payments are fixed or vary with inflation, the Company generally hedges against interest rate fluctuations by arranging fixed-rate or variable rate financing, respectively. In certain cases, the Company executes interest rate swap agreements to effectively fix the interest rate on the underlying variable rate financing. Such swaps effectively increased the Company's weighted average borrowing rate by 5.0%, 4.1% and 3.5% for the years ended December 31, 1993, 1994 and 1995. Swap payments included in interest expense for those same periods were $53 million, $44 million and $24 million, respectively. In addition, certain subsidiaries of the Company have interest rate cap agreements with terms ranging from one to six years in an aggregate notional amount of $619 million. The hedging mechanisms described above 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 contract. 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 its portfolio, although significantly hedged, will likely be somewhat affected by fluctuations in inflation, 14 58 interest rates and energy prices. For example, AES's current portfolio of operating plants generally performs better with higher oil and natural gas prices and with lower interest rates. Performance is also 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 the applicable tax benefit, in cumulative translation adjustment losses at December 31, 1995. Because of the nature of AES's operations, its activities are subject to stringent environmental laws and regulations by relevant authorities at each plant location. 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 or results of operations would not be materially and adversely affected. The Company has made and will continue to make capital and other expenditures to comply with such environmental laws and regulations. There can be no assurance that such expenditures will not have a material adverse effect on the Company's financial condition or results of operations. 15 59 RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------- QUARTER ENDED YEAR ENDED DECEMBER 31 MARCH 31 1991 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- --------- Ratio of earnings to fixed charges.......................... 1.31 1.37 1.63 2.08 2.18 2.12
For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations before income taxes and minority interest, plus fixed charges, less capitalized interest, less excess of earnings over dividends of less-than-fifty-percent-owned companies. Fixed charges consist of interest (including capitalized interest) on all indebtedness, amortization of debt discount and expense and that portion of rental expense which the Company believes to be representative of an interest factor. A statement setting forth the computation of the above ratios of earnings to fixed charges is on file as an exhibit to the Registration Statement of which this Prospectus is a part. 16 60 DESCRIPTION OF DEBT SECURITIES The Debt Securities are to be issued under an Indenture (the "Indenture") between The First National Bank of Chicago, as Trustee (the "Trustee"), and the Company. A copy of the form of Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part and is also available for inspection at the office of the Trustee. The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture, including the definitions therein of certain terms. Whenever particular provisions of the Indenture or terms defined therein are referred to herein, such provisions or definitions are incorporated by reference as a part of the statements made, and the statements are qualified in their entirety by such reference. GENERAL The Indenture does not limit the amount of Debt Securities which may be issued thereunder and provides that Debt Securities may be issued thereunder up to the aggregate principal amount which may be authorized from time to time by the Company. Reference is made to the Prospectus Supplement for the following terms of the Offered Debt Securities: (i) the designation, aggregate principal amount and authorized denominations of the Offered Debt Securities; (ii) the date or dates on which the Offered Debt Securities will mature; (iii) the rate or rates per annum at which the Offered Debt Securities will bear interest; (iv) the dates on which any such interest will be payable and the record dates for any such interest payments; (v) any mandatory or optional redemption terms; (vi) the place where the principal of and interest on the Offered Debt Securities will be payable; (vii) if other than denominations of $1,000 or multiples thereof, the denominations in which the Offered Debt Securities will be issuable; (viii) whether the Offered Debt Securities shall be issued in the form of Global Securities (as defined below) or certificates; (ix) additional provisions, if any, relating to the defeasance of the Offered Debt Securities; (x) the currency or currencies, if other than the currency of the United States, in which payment of the principal of and interest on the Offered Debt Securities will be payable; (xi) whether the Offered Debt Securities will be issuable in registered form or bearer form ("Bearer Securities") or both and, if Bearer Securities are issuable, any restrictions applicable to the exchange of one form for another and the offer, sale and delivery of Bearer Securities; (xii) any applicable United States federal income tax consequences, including whether and under what circumstances the Company will pay additional amounts on Offered Debt Securities held by a person who is not a U.S. Person (as defined in the Prospectus Supplement) in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Company will have the option to redeem such Offered Debt Securities rather than pay such additional amounts; and (xiii) other specific terms, including any additional events of default or covenants provided for with respect to the Offered Debt Securities. As described in each Prospectus Supplement relating to any particular series of Debt Securities offered thereby, the Indenture may contain covenants limiting: (i) the incurrence of debt by the Company; (ii) the incurrence of debt by subsidiaries of the Company; (iii) the making of certain payments by the Company and its subsidiaries; (iv) subsidiary mergers; (v) business activities of the Company and its subsidiaries; (vi) the issuance of preferred stock of subsidiaries; (vii) asset dispositions; (viii) transactions with affiliates; (ix) liens; and (x) mergers and consolidations involving the Company. The Debt Securities will be unsecured and will rank on a parity with all other unsecured senior subordinated indebtedness of the Company. See "-- Subordination." BOOK-ENTRY SYSTEM If so specified in the accompanying Prospectus Supplement, Debt Securities of any series may be issued under a book-entry system in the form of one or more global securities (each a "Global Security"). Each Global Security will be deposited with, or on behalf of, a depositary, which, unless otherwise specified in the accompanying Prospectus Supplement, will be The Depository Trust Company, New York, New York (the "Depositary"). The Global Securities will be registered in the name of the Depositary or its nominee. The Depositary has advised the Company that the Depositary is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of the New York banking law, a 17 61 member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depositary was created to hold securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depositary's participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations, some of which (and/or their representatives) own the Depositary. Access to the Depositary's book-entry system is also available to others, such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Upon the issuance of a Global Security in registered form, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the Debt Securities represented by such Global Security to the accounts of participants. The accounts to be credited will be designated by the underwriters, dealers, or agents, if any, or by the Company, if such Debt Securities are offered and sold directly by the Company. Ownership of beneficial interests in the Global Security will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests by participants in the Global Security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by such participants. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in a Global Security. So long as the Depositary or its nominee is the owner of record of a Global Security, the Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Global Security for all purposes under the Indenture. Except as set forth below, owners of beneficial interests in a Global Security will not be entitled to have the Debt Security represented by such Global Security registered in their names, and will not receive or be entitled to receive physical delivery of such Debt Securities in definitive form and will not be considered the owners or holders thereof under the Indenture. Accordingly, each person owning a beneficial interest in a Global Security must rely on the procedures of the Depositary and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder of record under the Indenture. The Company understands that under existing industry practices, if the Company requests any action of holders or if any owner of a beneficial interest in a Global Security desires to give or take any action which a holder is entitled to give or take under the Indenture, the Depositary would authorize the participants holding the relevant beneficial interests to give or take such action, and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instruction of beneficial owners holding through them. Payments of principal of, premium, if any, and interest on Debt Securities represented by a Global Security registered in the name of the Depositary or its nominee will be made to such Depositary or such nominee, as the case may be, as the registered owner of such Global Security. None of the Company, the Trustee or any other agent of the Company or agent of the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in such Global Security or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests. The Company has been advised by the Depositary that the Depositary will credit participants accounts with payments of principal, premium, if any, or interest on the payment date thereof in amounts proportionate to their respective beneficial interests in the principal amount of the Global Security as shown on the records of the Depositary. The Company expects that payments by participants to owners of beneficial interests in the Global Security held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in "street name," and will be the responsibility of such participants. A Global Security may not be transferred except as a whole by the Depositary to a nominee or successor of the Depositary or by a nominee of the Depositary to another nominee of the Depositary. A Global Security representing all but not part of the Debt Securities being offered hereby is exchangeable for Debt Securities in definitive form of like tenor and terms if (i) the Depositary notifies the Company that it is unwilling or unable to continue as depositary for such Global Security or if at any time the Depositary is no longer eligible to be or in good standing as 18 62 a clearing agency registered under the Exchange Act, and in either case, a successor depositary is not appointed by the Company within 90 days of receipt by the Company of such notice or of the Company becoming aware of such ineligibility, or (ii) the Company in its sole discretion at any time determines not to have all of the Debt Securities represented by a Global Security and notifies the Trustee thereof. A Global Security exchangeable pursuant to the preceding sentence shall be exchangeable for Debt Securities registered in such names and in such authorized denominations as the Depositary for such Global Security shall direct. The Debt Securities of a series may also be issued in the form of one or more bearer global Debt Securities (a "Bearer Global Security") that will be deposited with a common depositary for Euro-clear and CEDEL, or with a nominee for such depositary identified in the Prospectus Supplement relating to such series. The specific terms and procedures, including the Specific terms of the depositary arrangement, with respect to any portion of a series of Securities to be represented by a Bearer Global Security will be described in the Prospectus Supplement relating to such series. SUBORDINATION The payment of principal of, premium, if any, and interest on the Debt Securities will, to the extent and in the manner set forth in the Indenture, and as more fully described in the Prospectus Supplement, be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all Senior Debt. By reason of such subordination, in the event of insolvency, funds that would otherwise be payable to holders of Debt Securities will be paid to the holders of Senior Debt to the extent necessary to pay the Senior Debt in full, and the Company may be unable to meet fully its obligations with respect to the Debt Securities. "Senior Debt" is defined to mean the principal of (and premium, if any) and interest on all Debt of the Company whether created, incurred or assumed before, on or after the date of the Indenture; provided that Senior Debt shall not include (i) the Company's 9 3/4% Senior Subordinated Notes Due 2000 which rank pari passu to the Debt Securities, (ii) the Company's 6 1/2% Convertible Subordinated Debentures Due 2002 which rank junior to the Debt Securities, (iii) Debt that, when incurred and without respect to any election under Section 1111 (b) of Title 11, U.S. Code, was without recourse to the Company, (iv) Debt of the Company to any affiliate, (v) any other Debt of the Company which by the terms of the instrument creating or evidencing the same are specifically designated as not being senior in right of payment to the Debt Securities and (vi) redeemable stock of the Company. "Debt" is defined to mean, with respect to any person at any date of determination (without duplication), (i) all indebtedness of such person for borrowed money, (ii) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such person in respect of letters of credit or bankers' acceptances or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such person to pay the deferred purchase price of property or services, except trade payables, (v) all obligations of such person as lessee under capitalized leases, (vi) all Debt of others secured by a lien on any asset of such person, whether or not such Debt is assumed by such person; provided that, for purposes of determining the amount of any Debt of the type described in this clause, if recourse with respect to such Debt is limited to such asset, the amount of such Debt shall be limited to the lesser of the fair market value of such asset or the amount of such Debt, (vii) all Debt of others guaranteed by such person to the extent such Debt is Guaranteed by such person, (viii) all redeemable stock valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends and (ix) to the extent not otherwise included in this definition, all obligations of such person under currency agreements and interest rate agreements. EVENTS OF DEFAULT An Event of Default, as defined in the Indenture and applicable to Debt Securities, will occur with respect to the Debt Securities of any series if: (i) the Company defaults in the payment of principal of (or premium if any, on) any Debt Security of such series when the same becomes due and payable at maturity, upon acceleration, redemption, mandatory repurchase, or otherwise; (ii) the Company defaults in the payment of interest on any Debt Security of such series when the same becomes due and payable, and such default continues for a period of 30 days; (iii) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture with respect to the Debt Security of such series or under the Debt Securities of such Series and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or by the holders 19 63 (as defined in the Indenture) of 25% or more in aggregate principal amount of the Debt Securities of all series affected hereby; (iv) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any of its subsidiaries in an involuntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of the Company or any of its subsidiaries or for all or substantially all of the property and assets of the Company or any of its subsidiaries or (C) the winding up or liquidation of the affairs of the Company or any of its subsidiaries and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (v) the Company or any of its subsidiaries (A) commences a voluntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of the Company or any of its subsidiaries or for all or substantially all of the property and assets of the Company or any of its subsidiaries or (C) effects any general assignment for the benefit of creditors; and (vi) any other Events of Default set forth in the applicable Prospectus Supplement occur. If an Event of Default (other than an Event of Default specified in clause (iv) or (v) above that occurs with respect to the Company) occurs with respect to the Debt Securities of any series then outstanding and is continuing under the Indenture, then, and in each and every such case, except for any series of Debt Securities the principal of which shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities of any such series then outstanding under the Indenture (each such series voting as a separate class) by written notice to the Company (and to the Trustee if such notice is given by the holders (the "Acceleration Notice")), may, and the Trustee at the request of such holders shall, declare the principal of, premium, if any, and accrued interest on the Debt Securities of such series to be immediately due and payable. Upon a declaration of acceleration, such principal of, premium, if any, and accrued interest shall be immediately due and payable. If an Event of Default specified in clause (iv) or (v) above occurs with respect to the Company, the principal of, premium, if any, and accrued interest on the Debt Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder. The holders of at least a majority in principal amount of the outstanding Debt Securities of any Series may, by written notice to the Company and to the Trustee, waive all past defaults with respect to Debt Securities of such series and rescind and annul a declaration of acceleration with respect to Debt Securities of such series and its consequences if (i) all existing Events of Default applicable to Debt Securities of such series, other than the nonpayment of the principal of, premium, if any, and interest on the Debt Securities that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. For information as to the waiver of defaults, See "-- Modification and Waiver." The holders of at least a majority in aggregate principal amount of the outstanding Debt Securities of any series may direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of holders of such series of Debt Securities not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from holders of Debt Securities of such series. A holder may not pursue any remedy with respect to the Indenture or the Debt Securities of any Series unless: (i) the holder gives the Trustee written notice of a continuing Event of Default; (ii) the holders of at least 25% in aggregate principal amount of outstanding Debt Securities of such series make a written request to the Trustee to pursue the remedy; (iii) such holder or holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the holders of a majority in aggregate principal amount of the outstanding Debt Securities of such Series do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any holder of a Debt Security to receive payment of the principal of, premium, if any, or interest on, such Debt Security or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Debt Securities, which right shall not be impaired or affected without the consent of the holder. 20 64 The Indenture will require certain officers of the Company to certify, on or before a date not more than four months after the end of each fiscal year, that to the best of such officers knowledge, the Company has fulfilled all its obligations under the Indenture. The Company will also be obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. MODIFICATION AND WAIVER The Indenture provides that the Company and the Trustee may amend or supplement the Indenture or the Debt Securities of any series without notice to or the consent of any holder: (i) to cure any ambiguity, defect, or inconsistency in the Indenture; provided that such amendments or supplements shall not adversely affect the interests of the holders in any material respect; (ii) to comply with Article 5 of the Indenture; (iii) to comply with any requirements of the Commission in connection with the qualification of the Indenture under the Trust Indenter Act of 1939, as amended; (iv) to evidence and provide for the acceptance of appointment with respect to the Debt Securities of any or all series by a successor Trustee; (v) to establish the form or forms or terms of Debt Securities of any series or of the coupons pertaining to such Debt Securities as permitted by the Indenture; (vi) to provide for uncertificated Debt Securities and to make all appropriate changes for such purpose; and (vii) to make any change that does not materially and adversely affect the rights of any holder. The Indenture also provides that modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Debt Securities of each series affected thereby (each series voting as a separate class); provided, however, that no such modification or amendment may, without the consent of each holder affected thereby, (i) change the stated maturity of the principal of, or any sinking fund obligation or any installment of interest on, any Debt Security, (ii) reduce the principal amount of, or premium, if any, or interest on, any Debt Security, (iii) reduce the above-stated percentage of outstanding Debt Securities the consent of whose holders is necessary to modify or amend the Indenture with respect to the Debt Securities of any series, (iv) reduce the percentage or aggregate principal amount of outstanding Debt Security of any series the consent of whose holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. A supplemental indenture which changes or eliminates any covenant or other provision of the Indenture which has expressly been included solely for the benefit of one or more particular series of Debt Securities, or which modifies the rights of holders of Debt Securities of such series with respect to such covenant or provision, shall be deemed not to affect the rights under the Indenture of the holders of Debt Securities of any other series or of the coupons appertaining to such Debt Securities. It shall not be necessary for the consent of the holders under this section of the Indenture to approve the particular form of any proposed amendment, supplement, or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement, or waiver under this section of the Indenture becomes effective, the Company shall give to the holders affected thereby a notice briefly describing the amendment, supplement, or waiver. The Company will mail supplemental indentures to holders upon request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. RESTRICTION ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS The Company may not consolidate with, merge with or into, or transfer all or substantially all off its assets (as an entirety or substantially an entirety in one transaction or a series of related transactions), to any Person unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which properties and assets of the Company are transferred shall be a solvent corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume in writing all the obligations of the Company under the Notes; (ii) immediately after giving effect to such transaction no Event of Default or event or condition which through the giving of notice of lapse of time or both would become an Event of Default shall have occurred and be continuing, and (iii) such other conditions as may be established in connection with the issuance of the Debt Securities of any series then outstanding. 21 65 DEFEASANCE AND DISCHARGE The Indenture provides that the Company shall be deemed to have paid and shall be discharged from any and all obligations in respect of the Debt Securities of any series, on the 123rd day after the deposit referred to below has been made, and the provisions of the Indenture will no longer be in effect with respect to the Debt Securities of such series (except for, among other matters, certain obligations to register the transfer or exchange of the Debt Securities of such series, to replace stolen, lost or mutilated Debt Securities of such series, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Company has deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof, in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Debt Securities, on the due date thereof or earlier redemption (irrevocably provided for under arrangements satisfactory to the Trustee), as the case may be, in accordance with the terms of the Indenture and the Debt Securities, (B) the Company has delivered to the Trustee (i) either (x) an opinion of counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which opinion of counsel must be based upon a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law or related treasury regulations after the date of the Indenture such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned opinion of counsel and (ii) an opinion of counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which the Company is bound, (D) the Company is not prohibited from making payments in respect of the Debt Securities by the subordination provisions contained in the Indenture and (E) if at such time the Debt Securities are listed on a national securities exchange, the Company has delivered to the Trustee an opinion of counsel to the effect that the Debt Securities will not be delisted as a result of such deposit, defeasance and discharge. As more fully described in the Prospectus Supplement, the Indenture also provides for defeasance of certain covenants and certain events of default. PLAN OF DISTRIBUTION The Company may sell the Debt Securities in any of three ways (or in any combination thereof): (i) through underwriters or dealers; (ii) directly to a limited number of purchasers or to a single purchaser; or (iii) through agents. The Prospectus Supplement with respect to any Offered Debt Securities will set forth the terms of the offering of such Offered Debt Securities, including the name or names of any underwriters, dealers or agents and the respective amounts of such Offered Debt Securities underwritten or purchased by each of them, the initial public offering price of such Offered Debt Securities and the proceeds to the Company from such sale, any discounts, commissions or other items constituting compensation from the Company and any discounts, commissions or concessions allowed or reallowed or paid to dealers and any securities exchanges on which such Offered Debt Securities may be listed. Any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. If underwriters are used in the sale of any Offered Debt Securities, such Offered Debt Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Such Offered Debt Securities may be either offered to the public through underwriting syndicates represented by managing underwriters, or directly by underwriters. Such managing underwriters or underwriters may include 22 66 J.P. Morgan Securities Inc. and Goldman, Sachs & Co. Unless otherwise set forth in the Prospectus Supplement, the obligations of the underwriters to purchase such Offered Debt Securities will be subject to certain conditions precedent and the underwriters will be obligated to purchase all of such Offered Debt Securities if any are purchased. Debt Securities may be sold directly by the Company or through agents designated by the Company from time to time. Any agent involved in the offer or sale of Offered Debt Securities in respect of which this Prospectus is delivered will be named, and any commissions payable by the Company to such agent will be set forth, in the Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best efforts basis for the period of its appointment. If so indicated in the Prospectus Supplement, the Company will authorize underwriters, dealers or agents to solicit offers by certain purchasers to purchase Offered Debt Securities from the Company at the public offering price set forth in the Prospectus Supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. Such contracts will be subject only to those conditions set forth in the Prospectus Supplement, and the Prospectus Supplement will set forth the commission payable for solicitation of such contracts. Agents and underwriters may be entitled under agreements entered into with the Company to indemnification by the Company against certain civil liabilities, including liabilities under the Securities Act, or to contribution with respect to payments which the agents or underwriters may be required to make in respect thereof. Agents and underwriters may be customers of, engage in transactions with, or perform services for the Company in the ordinary course of business. LEGAL MATTERS The legality of the Debt Securities offered hereby will be passed upon for the Company by Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York 10112. Unless otherwise indicated in the Prospectus Supplement relating to any Offered Debt Securities, certain legal matters in connection with the offering of the Offered Debt Securities will be passed upon for any underwriters or agents by Davis Polk & Wardwell. EXPERTS The consolidated financial statements in this Prospectus, and the consolidated financial statement schedules incorporated in this Prospectus by reference from the Company's Annual Report on Form 10-K, for the year ended December 31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports, which are included herein and incorporated by reference, herein, respectively, and have been so included and incorporated, in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The financial statements of Light incorporated in this Prospectus by reference for the years ended December 31, 1995 and 1994 and for the years then ended have been audited by Deloitte Touche Tohmatsu, Rio de Janeiro, Brazil, independent auditors, as stated in their reports, which are incorporated herein by reference, and have been so incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. 23 67 THE AES CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants............................................... F-2 Consolidated Balance Sheets at December 31, 1995 and 1994 and March 31, 1996 (unaudited).......................................................................... F-3 Consolidated Statements of Operations -- For the Years Ended December 31, 1995, 1994 and 1993 and For the Three Months Ended March 31, 1996 and 1995 (quarterly unaudited)........................................................................... F-4 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1995, 1994 and 1993 and For the Three Months Ended March 31, 1996 and 1995 (quarterly unaudited)........................................................................... F-5 Notes to Consolidated Financial Statements -- For the Years Ended December 31, 1995, 1994 and 1993........................................................................ F-8
The Financial Statements at December 31, 1995 and 1994, and For the Three Years Ended December 31, 1995 contained herein supersede the Financial Statements incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. F-1 68 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of The AES Corporation: We have audited the accompanying consolidated balance sheets of The AES Corporation and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The AES Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Washington, DC February 20, 1996, except for Note 14, as to which the date is May 30, 1996 F-2 69 CONSOLIDATED BALANCE SHEETS
------------------------------ MARCH 31 DECEMBER 31 1996 In millions, except par values 1995 1994 ----------- ------ ------ (unaudited) ASSETS Current Assets: Cash and cash equivalents............................................. $ 239 $ 255 $ 207 Short-term investments................................................ 58 94 50 Accounts receivable................................................... 54 33 50 Inventory............................................................. 36 23 42 Receivable from affiliates............................................ 11 10 11 Prepaid expenses and other current assets............................. 27 20 34 ------ ------ --------- Total current assets.................................................... 425 435 394 Property, Plant and Equipment: Land.................................................................. 9 2 10 Electric and steam generating facilities.............................. 1,594 1,328 1,619 Furniture and office equipment........................................ 11 7 11 Accumulated depreciation, depletion, and amortization................. (222) (162) (235) Construction in progress.............................................. 158 9 198 ------ ------ --------- Property, plant and equipment, net...................................... 1,550 1,184 1,603 Other Assets: Deferred costs, net................................................... 32 33 31 Project development costs............................................. 41 38 43 Investments in and advances to affiliates............................. 48 93 52 Debt service reserves and other deposits.............................. 168 122 178 Goodwill & other intangible assets, net............................... 37 -- 37 Other assets.......................................................... 19 10 15 ------ ------ --------- Total other assets...................................................... 345 296 356 ------ ------ --------- Total................................................................... $2,320 $1,915 $ 2,353 ====== ====== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable...................................................... $ 33 $ 12 $ 43 Income taxes payable.................................................. -- 2 4 Accrued interest...................................................... 12 9 17 Accrued and other liabilities......................................... 49 23 33 Revolving bank loan................................................... 50 -- 31 Project financing debt -- current portion............................. 84 61 84 ------ ------ --------- Total current liabilities............................................... 228 107 212 Long-Term Liabilities: Project financing debt................................................ 1,098 1,019 1,108 Other notes payable................................................... 125 125 125 Deferred income taxes................................................. 149 73 159 Other long-term liabilities........................................... 13 5 9 ------ ------ --------- Total long-term liabilities............................................. 1,385 1,222 1,401 Minority Interest....................................................... 158 21 158 Redeemable Common Stock of AES Chigen................................... -- 164 -- Commitments and Contingencies........................................... -- -- -- Stockholders' Equity: Preferred stock (no par value; 1 million shares authorized; none issued)............................................................. -- -- -- Common stock ($.01 par value; 100 million shares authorized; shares issued and outstanding: 1995 -- 74.8 million; 1994 -- 74.7 million)............................................................ 1 1 1 Additional paid-in capital............................................ 293 240 294 Retained earnings..................................................... 271 164 300 Unrealized loss on investment securities available-for-sale........... -- (1) -- Cumulative foreign currency translation adjustment.................... (10) (3) (10) ------ ------ --------- Less treasury stock at cost (.3 million shares)......................... (6) -- (3) ------ ------ --------- Total stockholders' equity.............................................. 549 401 582 ------ ------ --------- Total................................................................... $2,320 $1,915 $ 2,353 ====== ====== =========
See notes to consolidated financial statements. F-3 70 CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------- YEAR ENDED THREE MONTHS DECEMBER 31 ENDED MARCH 31 In millions, except per share amounts 1995 1994 1993 1996 1995 ----- ----- ----- ----- ----- (unaudited) REVENUES: Sales.................................................. $ 672 $ 514 $ 508 $ 170 $ 167 Services............................................... 13 19 11 2 4 ----- ----- ----- ----- ----- Total revenues........................................... 685 533 519 172 171 OPERATING COSTS AND EXPENSES: Costs of sales......................................... 393 256 260 99 99 Costs of services...................................... 12 13 9 1 4 Selling, general and administrative expenses........... 32 32 35 9 8 Provision to reduce carrying value of leasehold oil interests....................................... -- -- 22 -- -- ----- ----- ----- ----- ----- Total operating costs and expenses....................... 437 301 326 109 111 ----- ----- ----- ----- ----- Operating Income......................................... 248 232 193 63 60 OTHER INCOME AND (EXPENSE): Interest expense....................................... (122) (121) (125) (28) (31) Interest income........................................ 27 22 11 5 7 Equity in earnings of affiliates (net of income tax)... 14 12 10 5 3 ----- ----- ----- ----- ----- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM..................................... 167 145 89 45 39 INCOME TAXES............................................. 57 44 18 15 14 MINORITY INTEREST........................................ 3 3 -- 1 -- ----- ----- ----- ----- ----- INCOME BEFORE EXTRAORDINARY ITEM......................... 107 98 71 29 25 Extraordinary item-net gain on extinguishment of debt (less applicable income taxes of $1)................... -- 2 -- -- -- ----- ----- ----- ----- ----- NET INCOME............................................... $ 107 $ 100 $ 71 $ 29 $ 25 ===== ===== ===== ===== ===== NET INCOME PER SHARE: Before extraordinary gain.............................. $1.41 $1.30 $0.98 $0.38 $0.33 Extraordinary gain..................................... -- 0.02 -- -- -- ----- ----- ----- ----- ----- NET INCOME PER SHARE..................................... $1.41 $1.32 $0.98 $0.38 $0.33 ===== ===== ===== ===== =====
See notes to consolidated financial statements. F-4 71 CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------- YEAR ENDED THREE MONTHS DECEMBER 31 ENDED MARCH 31 In millions 1995 1994 1993 1996 1995 ----- ----- ----- ----- ----- (unaudited) OPERATING ACTIVITIES: Net income............................................... $ 107 $ 100 $ 71 $ 29 $ 25 Adjustments to net income: Depreciation, depletion and amortization............... 55 43 42 14 12 Provision for deferred taxes........................... 48 39 15 14 14 Undistributed earnings of affiliates................... 3 (3) (11) (4) (2) Provision to reduce carrying value of leasehold oil interests........................................... -- -- 22 -- -- Payments for deferred financing costs.................. (3) (6) (4) -- -- Other.................................................. 4 -- 4 1 1 Changes in working capital............................. (17) (9) (16) (9) (7) ----- ----- ----- ----- ----- Net cash provided by operating activities................ 197 164 123 45 43 INVESTING ACTIVITIES: Property additions....................................... (158) (10) (14) (45) (11) Acquisitions, net of cash acquired....................... (121) -- -- (20) (65) Sale (purchase) of short-term investments................ 36 (72) (22) 8 23 Affiliate advances and investments....................... (10) -- (46) (1) -- Project development costs................................ (35) (17) (2) (2) (2) Debt service reserves and other assets................... (55) (21) (46) (6) -- ----- ----- ----- ----- ----- Net cash used in investing activities.................... (343) (120) (130) (66) (55) FINANCING ACTIVITIES: Net borrowings (repayments) under the revolver........... 50 -- -- (19) -- Issuance of project financing debt and other notes payable................................................ 133 -- 75 20 -- Repayments of project financing debt..................... (63) (72) (65) (12) (15) Other liabilities........................................ 8 -- (1) -- -- Payments (to)/from minority partners..................... 7 152 -- (1) 3 Sale (repurchase) of common stock........................ (5) -- 69 1 1 Dividends paid........................................... -- -- (13) -- -- ----- ----- ----- ----- ----- Net cash provided by financing activities................ 130 80 65 (11) (11) INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS......... (16) 124 58 (32) (23) CASH AND CASH EQUIVALENTS, BEGINNING..................... 255 131 73 239 255 ===== ===== ===== ===== ===== CASH AND CASH EQUIVALENTS, ENDING........................ $ 239 $ 255 $ 131 $ 207 $ 232 ===== ===== ===== ===== ===== SUPPLEMENTAL DISCLOSURES: Cash payments for interest............................... $ 120 $ 127 $ 124 $ 25 $ 28 Cash payments for income taxes........................... 6 3 2 1 --
See notes to consolidated financial statements. F-5 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The AES Corporation and its subsidiaries and affiliates, (collectively "AES" or the "Company") is a global power company primarily engaged in developing, owning and operating electric power generating facilities. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of the Company include the accounts of AES, its subsidiaries and controlled affiliates. 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. The accounts of AES China Generating Co. Ltd. ("AES Chigen"), a controlled affiliate, are included on the basis of a fiscal year ended November 30. Intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS -- The Company considers cash on hand, deposits in banks, certificates of deposit and short-term marketable securities with an original maturity of three months or less as cash and cash equivalents. INVESTMENTS -- During 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities that the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at historical cost. Other investments that the Company does not intend to hold to maturity are classified as available-for-sale, and any unrealized gains or losses are recorded as a separate component of stockholders' equity. Interest and dividends on investments are reported in interest income. Short-term investments consist of investments with original maturities in excess of three months but less than one year. Debt service reserves and other deposits, which might otherwise be considered cash and cash equivalents are treated as noncurrent assets (see Note 3). INVENTORY -- Inventory, valued at the lower of cost or market (first in, first out method), consists of coal, raw materials, spare parts, and supplies. Inventory consists of the following (in millions):
------------ DECEMBER 31 1995 1994 ---- ---- Coal and other raw materials................................... $24 $14 Spare parts, materials and supplies............................ 12 9 ---- ---- Total.......................................................... $36 $23 ==== ====
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at cost including the cost of improvements. Depreciation, after consideration of salvage value, is computed using the straight-line method over the estimated composite lives of the assets, which range from 3 to 40 years. Maintenance and repairs are charged to expense as incurred. Emergency and rotable spare parts inventories are included in electric and steam generating facilities and are depreciated over the useful life of the related components. In 1993, the Company recorded a total after tax charge of $17 million ($.23 per share) related to the write-down of leasehold oil interests in connection with enhanced oil recovery operations at the AES Placerita facility due to economic impairment. INTANGIBLE ASSETS -- Goodwill and other intangible assets are amortized on a straight-line basis over their estimated periods of benefit or their estimated lives. No amortization period exceeds 30 years. Intangible assets at December 31, 1995 are shown net of accumulated amortization of $1 million. The Company will review its goodwill and intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. CONSTRUCTION IN PROGRESS -- Construction progress payments, engineering costs, insurance costs, wages, interest and other costs relating to construction in progress are capitalized. Construction in progress balances are transferred to electric and steam generating facilities when the assets are ready for their intended use. Capitalized interest during development and construction totaled $8 million, $2 million and $1 million in 1995, 1994 and 1993, respectively. F-6 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED COSTS -- Financing costs are deferred and amortized using the straight-line method over the related financing period. Deferred costs are shown net of accumulated amortization of $31 million and $26 million for 1995 and 1994, respectively. PROJECT DEVELOPMENT COSTS -- The Company capitalizes the costs of developing new projects. These costs represent amounts incurred for professional services, salaries, permits, options, capitalized interest and other related costs. These costs are included in investment in affiliates, or property when financing is obtained, or expensed at the time the Company determines that a particular project will no longer be developed. The continued capitalization is subject to on-going risks related to successful completion, including those related to political, siting, financing, construction, permitting and contract compliance. FOREIGN CURRENCY TRANSLATION -- Foreign subsidiaries and affiliates translate their assets and liabilities into U.S. dollars at the current exchange rates in effect at the end of the fiscal period. The gains or losses that result from this process which the Company does not intend to repatriate, and gains and losses on intercompany transactions which are long-term in nature, are shown in the cumulative translation adjustments balance in the stockholders' equity section of the balance sheet, net of applicable taxes. The revenue and expense accounts of foreign subsidiaries and affiliates are translated into U.S. dollars at the average exchange rates that prevailed during the period. REVENUE RECOGNITION AND CONCENTRATION -- Revenues from the sale of electricity and steam are recorded based upon output delivered and capacity provided at rates as specified under contract terms. Most of the Company's power plants rely primarily on one power sales contract with a single customer for the majority of its revenues. Four customers accounted for 24%, 18%, 18% and 13% of revenues in 1995; four customers accounted for 31%, 23%, 22% and 11% of revenues in 1994, and three customers accounted for 33%, 23% and 23% of revenues in 1993. The prolonged failure of any customer to fulfill its contractual obligations could have a substantial negative impact on AES's revenues. However, the Company does not anticipate non-performance by the customers under these contracts. INTEREST RATE SWAP AND CAP AGREEMENTS -- The Company enters into interest rate swap and cap agreements as a hedge against interest rate exposure on floating rate project financing debt. The transactions are accounted for as a hedge and interest is expensed or capitalized, as appropriate, using the effective interest rates. Any fees or payments are amortized as yield adjustments. These derivative financial instruments are classified as other than trading. INCOME TAXES -- The Company uses an asset and liability approach in reporting income taxes. 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 and stock dividends. 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, 75.8 million, and 73.0 million for 1995, 1994 and 1993, respectively. Primary and fully diluted earnings per share are approximately the same. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates. Actual results could differ from those estimates. RECLASSIFICATIONS -- Certain reclassifications have been made to prior period amounts to conform with the 1995 presentation. UNAUDITED QUARTERLY DATA -- Such data includes all such adjustments considered necessary for a fair presentation. Such information is not indicative of the results for a full year. F-7 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS On January 20, 1995, a subsidiary of the Company acquired the remaining outstanding debt of AES Deepwater, a 140 megawatt cogeneration plant in Pasadena, Texas, for $65 million from a syndicate of lenders. Prior to that date, the Company did not maintain or exercise control over the utilization of the AES Deepwater facility, and accordingly, recorded its investment using the cost method. The acquisition resulted in the creation of goodwill of approximately $24 million which is being amortized over the remaining estimated life of the plant. In June and July 1995, a subsidiary of the Company increased its ownership interest in Central Termica San Nicolas, S. A. ("San Nicolas"), a 650 megawatt power plant located in San Nicolas, Argentina from approximately 34% to approximately 69% by purchasing the interests of two former minority shareholders. The 1995 purchase price was $24 million. The net results attributable to the Company's non-owned portion of earnings from San Nicolas in 1995 is reflected as minority interest. In addition, in December 1995, another subsidiary of the Company purchased Hidroelectrica Rio Juramento S.A. ("AES Rio Juramento") a 112 megawatt hydroelectric system in the province of Salta, Argentina for $43 million. As a result of this acquisition, the Company acquired intangible assets of $14 million which are being amortized over the life of the hydroelectric concession of 30 years. These acquisitions were accounted for as purchases. The accompanying financial statements include the operating results of AES Deepwater from January 20, 1995, the operating results of San Nicolas as of January 1, 1995 and the operating results of AES Rio Juramento from December 1, 1995. The following table presents supplemental unaudited proforma operating results as if the acquisitions of AES Deepwater, San Nicolas, and AES Rio Juramento had occurred at the beginning of 1994 (in millions, except per share amounts):
----------------- YEAR ENDED DECEMBER 31 1995 1994 ----- ----- Revenues................................................... $ 690 $ 694 Income before extraordinary item........................... 108 96 Net income................................................. 108 97 Earnings per share before extraordinary item............... 1.42 1.28 Earnings per share......................................... 1.42 1.29
The pro forma results are based upon assumptions and estimates which the Company believes are reasonable. The proforma results do not purport to be indicative of the results that actually would have been obtained had the acquisitions occurred on January 1, 1994, nor are they intended to be a projection of future results. 3. INVESTMENTS At December 31, 1995 and 1994, the Company's investments were classified as either held-to-maturity or available-for-sale. The amortized cost and estimated fair value of the investments at December 31, 1995 classified as held-to- maturity and available-for-sale were approximately the same. A $1 million unrealized loss, net of tax, was recorded by the Company as a separate component of stockholders' equity on December 31, 1994 relating to $26 million of U.S. Federal Agency securities classified as available-for-sale. F-8 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The short-term investments and debt service reserves and other deposits were invested as follows (in millions):
---------------------------- DECEMBER 31 1995 1994 ------------ ------------ Restricted cash................................................... $144 $ 81 Held-to-maturity US treasury and government agency securities...................... 33 29 Securities issued by foreign central governments.................. -- 5 Foreign certificates of deposit................................... 3 23 Commercial paper.................................................. 3 -- Corporate bonds................................................... -- 20 Floating rate notes............................................... 6 31 Asset-backed securities........................................... -- 2 ------ ------ Subtotal.......................................................... 45 110 Available-for-sale US treasury and government agency securities...................... 30 25 Certificates of deposit........................................... 4 -- Foreign certificates of deposit................................... 3 -- ------ ------ Subtotal.......................................................... 37 25 ------ ------ Total............................................................. $226 $216 =========== ===========
Short-term investments classified as held-to-maturity and available-for-sale were $44 and $14 million, respectively, at December 31, 1995. The short-term investments of $94 million at December 31, 1994 were classified as held-to- maturity. 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES The following table presents summarized financial information (in millions) for equity method affiliates on a combined 100% basis. Amounts presented include the accounts of NIGEN, Ltd. (47% owned UK affiliate) and Medway Power Ltd. (25% owned UK affiliate) at 1995 and 1994, and for the years then ended, and the accounts of San Nicolas (34% owned Argentine affiliate) at December 31, 1994 and for the year then ended.
------------- 1995 1994 ---- ----- Sales......................................................................... $276 $ 335 Operating income.............................................................. 86 75 Net income.................................................................... 49 33 Current assets................................................................ 171 156 Noncurrent assets............................................................. 949 1,030 Current liabilities........................................................... 70 133 Noncurrent liabilities........................................................ 973 945 Stockholders' equity.......................................................... 77 108
In 1994, NIGEN, Ltd. refinanced its outstanding project financing loan through a public debenture offering. The extinguishment of such debt resulted in an extraordinary loss of $7 million. The Company's share, $2 million, net of taxes, is included in the accompanying financial statements as an extraordinary loss. The Company's share of undistributed earnings of affiliates included in consolidated retained earnings was $13 million and $19 million at December 31, 1995 and 1994, respectively. The Company charged and recognized F-9 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED) management fees and interest on advances to its affiliates which aggregated $8 million, $18 million and $10 million for each of the years ended December 31, 1995, 1994 and 1993, respectively. 5. DEBT PROJECT FINANCING DEBT -- Project financing debt at December 31, 1995 and 1994 consisted of the following (in millions):
----------------------------------------- INTEREST RATE 12/31/95 MATURITY 1995 1994 ------------- -------- ------ ------ Senior Debt -- floating AES Beaver Valley............... 7.8% 1998 $ 33 $ 43 AES Thames.............................................. 7.0% 2004 181 199 AES Shady Point......................................... 8.3% 2004 320 336 AES Barbers Point....................................... 7.1% 2007 340 354 AES Lal Pir............................................. 5.3% 2007 28 -- AES Warrior Run......................................... 7.0% 2014 22 -- Senior Debt -- fixed AES Placerita -- capital lease.......................... 8.2% 2009 111 115 AES Warrior Run-tax exempt bonds........................ 7.4% 2019 74 -- Subordinated Debt....................................... 11.3% 2010 73 33 ------ ------ Subtotal................................................ 1,182 1,080 Less current maturities................................. (84) (61) ------ ------ Total................................................... $1,098 $1,019 ====== ======
Project financing debt borrowings are primarily collateralized by the capital stock of the project subsidiary, the physical assets of such facility and all project agreements associated with such facility. In 1994, the Company purchased and retired subordinated project financing debt and accrued interest at AES Placerita, resulting in an extraordinary gain of $4 million, net of taxes. The Company has interest rate swap agreements in an aggregate notional principal amount of $613 million at December 31, 1995. The swap agreements effectively change the interest rate on the portion of the debt covered by the notional amounts, to a weighted average fixed rate ranging from approximately 9.5% to 10.5%. The agreements expire at various dates from 1997 through 2007. In the event of nonperformance by the counterparties, the subsidiaries may be exposed to increased interest rates, however, the Company does not anticipate nonperformance by the counterparties, which are multinational financial institutions. At December 31, 1995, subsidiaries of the Company have interest rate cap agreements with terms ranging from one to six years in an aggregate notional amount of $619 million. AES Shady Point and AES Barbers Point have issued commercial paper supported by irrevocable letters of credit issued by multinational financial institutions. In the event of nonperformance or credit deterioration of these institutions, the Company may be exposed to the risk of higher effective interest rates. The Company does not believe that such nonperformance or credit deterioration is likely. F-10 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT (CONTINUED) OTHER NOTES PAYABLE -- Other notes payable at December 31, 1995 and 1994 consisted of the following (in millions):
-------------------------------------- INTEREST RATE 12/31/95 MATURITY 1995 1994 ------------- -------- ---- ---- Corporate revolving bank loan*............................. 7.70% 1998 $ 50 -- Senior subordinated notes.................................. 9.75% 2000 75 $ 75 Convertible subordinated debentures........................ 6.50% 2002 50 50 ---- ---- Subtotal................................................... 175 125 Less current maturities.................................... (50) -- ---- ---- Total...................................................... $125 $125 ==== ====
- --------------- * floating rate loan Under the terms of the $225 million corporate revolving bank loan and letter of credit facility ("Revolver"), the Company must reduce its direct borrowings to zero for 30 consecutive days annually to obtain additional loans. Commitment fees on the unused portion at December 31, 1995 are .375% per annum, and as of that date $120 million was available. The Company's senior subordinated notes ("Notes") and convertible subordinated debentures ("Debentures") are general unsecured obligations of the Company. The Notes are redeemable at the Company's option, in whole or in part, beginning June 1997 at redemption prices in excess of par and are redeemable at par beginning June 1999. The Debentures are convertible into common stock of the Company at the rate of $26.16 per common share, and redeemable at the Company's option at redemption prices in excess of par, and at par beginning March 1999. FUTURE MATURITIES OF DEBT -- Scheduled maturities of long-term debt at December 31, 1995 are (in millions): 1996................................................ $ 134 1997................................................ 76 1998................................................ 90 1999................................................ 95 2000................................................ 176 Thereafter.......................................... 786 ------ Total $1,357 ======
COVENANTS -- The terms of the Company's Revolver, Notes, Debentures and project financing debt agreements contain certain covenants and provisions. The covenants provide for, among other items, maintenance of certain reserves, and require that minimum levels of working capital, net worth and certain financial ratio tests are met. The most restrictive of these covenants include limitations on incurring additional debt and on the payment of dividends to shareholders. The project financing debt limitations of AES's subsidiaries permit the payment of dividends to the parent company out of current cash flow for quarterly, semi-annual 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. As of December 31, 1995, approximately $59 million was available under project loan documents for distribution by subsidiaries. 6. COMMITMENTS AND CONTINGENCIES As of December 31, 1995, the Company and its consolidated subsidiaries are obligated under long-term non-cancelable operating leases, primarily for office rental and site leases. Rental expense for operating leases was $3 million, $2 million and $2 million in the years ended 1995, 1994 and 1993, respectively. The future minimum F-11 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) lease commitments under these leases are $3 million for 1996, $2 million each year for 1997 through 1999, $1 million for 2000, and $52 million for the years thereafter. Operating subsidiaries of the Company enter into various long-term contracts for the purchase of fuel subject to termination only in certain limited circumstances. These contracts have remaining terms of 4 to 12 years. GUARANTEES -- In connection with certain of its project financing, acquisition, disposition, and power purchase agreements, AES has expressly undertaken limited obligations and commitments most of which will only be effective or will be terminated upon the occurrence of future events. These obligations and commitments, excluding letter of credit obligations discussed below, were limited as of December 31, 1995, by the terms of the agreements, to an aggregate of approximately $138 million. Approximately $15 million of these guarantees are supported by cash deposits or cash collateralized letters of credit. The Company is also obligated under other commitments which are limited to amounts, or percentages of amounts, received by AES as distributions from its project subsidiaries. These amounts aggregated $37 million as of December 31, 1995. LETTERS OF CREDIT -- At December 31, 1995 and 1994, the Company had $56 million and $11 million, respectively, of letters of credit outstanding under its credit facility which operate to guarantee performance relating to certain project development activities and subsidiary operations. The Company pays a letter of credit fee of 1.75% on the outstanding amounts. LITIGATION -- In 1992, a shareholder class action suit was filed against the Company, its directors, certain of its officers and the underwriters of the Company's 1991 initial public offering of common stock and its 1992 offering of Debentures. In February 1995, the Company entered into a settlement agreement with plaintiffs' counsel on behalf of the class. The settlement is on a claims made basis and consists of up to $4.5 million of cash plus warrants to purchase up to .7 million shares of AES common stock at $29.43 per share through July 2000. Insurance proceeds are 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. Plaintiffs' counsel are currently processing claims and, once concluded, the settlement proceeds will be distributed. 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 fraud, 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. F-12 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY
-------------------- In millions 1995 1994 1993 ---- ---- ---- Common stock Balance at January 1 and December 31................................. $ 1 $ 1 $ 1 ===== ===== ===== Additional paid-in capital Balance at January 1................................................. $240 $203 $103 Issuance of common stock............................................. -- -- 68 Issuance of common stock under benefit plans and exercise of stock options and warrants.............................................. 2 2 5 Common stock dividends (1993 -- $0.58 per share, 1994 -- 3% per share)............................................................ -- 47 27 AES Chigen Class A redeemable common stock........................... 51 (12) -- ---- ---- ---- Balance at December 31................................................. $293 $240 $203 ===== ===== ===== Retained earnings Balance at January 1................................................. $164 $111 $ 82 Net income for the year.............................................. 107 100 71 Common stock dividends (1993 -- $0.58 per share, 1994 -- 3% per share)............................................................ -- (47) (42) ---- ---- ---- Balance at December 31................................................. $271 $164 $111 ===== ===== ===== Unrealized gain/(loss) on investments Balance at December 31............................................... $ -- $ (1) $ -- ===== ===== ===== Cumulative translation adjustment Balance at December 31............................................... $(10) $ (3) $ (6) ===== ===== ===== Treasury stock Balance at December 31............................................... $ (6) $ -- $ -- ===== ===== =====
Common Stock -- During 1993, the Company declared three alternative cash or stock dividends aggregating to $.58 per share. In connection with the 1993 alternative cash or stock dividends, the Company issued 1.5 million shares of common stock. Stock Split and Stock Dividend -- On December 7, 1993, the Board of Directors authorized a three-for-two split, effected in the form of a stock dividend, payable to stockholders of record on January 15, 1994. Additionally, on February 17, 1994, the Company declared a 3% stock dividend, payable to stockholders of record on March 10, 1994. Accordingly, all outstanding share, per share and stock option data in all periods presented have been restated to reflect the split and the 3% stock dividend. Stock Options and Warrants -- The Company has granted options or warrants for shares of common stock under its stock option plans. One of the plans provides for the grant of options to directors who are not employed by the Company. Under the terms of the plans, the Company may issue options to purchase shares of the Company's common stock at a price equal to 100% of the market price at the date the option is granted. The options become eligible for exercise under various schedules. At December 31, 1995, there were .7 million shares reserved for F-13 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY (CONTINUED) future grants under the plans. A summary of the warrant and option activity (with parenthetical prices per share) follows (in thousands of shares):
-------------------------- DECEMBER 31 1995 1994 1993 ------ ------ ------ Warrants and options outstanding -- beginning of year............. 3,540 2,999 2,995 Exercised during the year (from $1.04 to $22.75).................. (355) (187) (422) Forfeitures during the year (from $1.55 to $21.36)................ (57) (12) (2) Granted during the year (from $16.38 to $23.14 ).................. 935 740 428 ------ ------ ------ Outstanding -- end of year (from $1.04 to $23.14)................. 4,063 3,540 2,999 ====== ====== ====== Eligible for exercise -- end of year.............................. 1,209 990 1,102 ====== ====== ====== Percentage of options outstanding to total common stock outstanding..................................................... 5% 5% 4% ====== ====== ======
At December 31, 1995, the weighted average exercise price for all options outstanding was $14.56 per share. Of the total options outstanding, approximately 1 million are eligible for exercise below the market price of the common stock at December 31, 1995 and such options, if all were exercised, would generate proceeds to the Company of approximately $11 million. AES China Generating Co. Ltd. -- During 1994, AES Chigen completed an initial public offering for the sale of 10.2 million shares of Class A redeemable common stock. Prior to the offering, AES contributed $50 million to AES Chigen for 7.5 million shares of Class B common stock. AES, as the sole Class B holder, is entitled to elect one-half of the board of directors of AES Chigen. As of December 22, 1995, AES Chigen had entered into binding commitments to invest in excess of $50 million in power projects in the People's Republic of China and the previously held right of Class A Shareholders to require AES Chigen to repurchase their shares has expired. As a result, the Company has allocated the net proceeds from the issuance of the Class A shares to additional paid-in capital and minority interest during 1995. 8. INCOME TAXES Income Tax Provision -- The provision for income taxes attributable to continuing operations consists of the following (in millions):
-------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 ---- ---- ---- Federal Current........................................ $ 4 $ 2 $ 1 Deferred....................................... 47 35 11 State Current........................................ 5 4 1 Deferred....................................... 1 3 5 ---- ---- ---- Total............................................ $57 $44 $18 ==== ==== ====
F-14 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) Effective and Statutory Rate Reconciliation -- A reconciliation of the U.S. statutory federal income tax rate to the Company's effective tax rate as a percentage of income before taxes is as follows:
-------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 ---- ---- ---- Statutory federal tax rate............................................. 35% 35% 35% Change in valuation allowance.......................................... (6) (2) (18 ) State taxes, net of federal tax benefit................................ 6 5 6 Other -- net........................................................... 3 (4) -- ---- ---- ---- Effective tax rate..................................................... 38% 34% 23% ==== ==== ====
Deferred Income Taxes -- Deferred income taxes relate principally to accelerated depreciation methods used for tax purposes and certain other expenses which are deducted for income tax purposes, but not for financial reporting purposes. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Deferred tax assets and deferred tax liabilities are as follows (in millions):
----------------------- YEAR ENDED DECEMBER 31 1995 1994 1993 ----- ----- ----- Differences between book and tax basis of property and total deferred tax liability........................................................ $ 379 $ 219 $ 182 ----- ----- ----- Operating loss carryforwards........................................... (167) (231) (224) Tax credit carryforwards............................................... (71) (68) (67) Other deductible temporary differences................................. (1) (15) (31) ----- ----- ----- Total gross deferred tax asset......................................... (239) (314) (322) Less: valuation allowance.............................................. 9 168 171 ----- ----- ----- Total net deferred tax asset........................................... (230) (146) (151) ----- ----- ----- Net deferred tax liability............................................. $ 149 $ 73 $ 31 ===== ===== =====
As of December 31, 1995, the Company had federal net operating loss carryforwards for tax purposes of approximately $434 million expiring from 2001 through 2009, federal investment tax credit carryforwards for tax purposes of approximately $61 million expiring in years 2001 through 2006, and federal alternative minimum tax credits of approximately $5 million which carryforward without expiration. The valuation allowance decreased during the year by approximately $159 million to $9 million at December 31, 1995. The primary reason for this decrease was the Company's purchase of the outstanding debt of AES Deepwater on January 20, 1995, which had the effect of reducing certain of the Company's deferred tax assets. The $9 million valuation allowance at December 31, 1995 relates primarily to state tax credits and foreign operating losses, the ultimate realization of which is uncertain. The Company believes that it is more likely than not that the remaining deferred tax assets will be realized. Undistributed earnings of certain foreign affiliates aggregated $33 million on December 31, 1995. The Company considers these earnings to be indefinitely reinvested outside of the U.S. and, accordingly, no U.S. deferred taxes have been recorded with respect to the earnings. Should the earnings be remitted as dividends, the Company may be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount F-15 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) of any additional taxes which may be payable on the undistributed earnings. A deferred tax asset of $2 million has been recorded as of December 31, 1995 for the cumulative effects of certain foreign currency translations. 9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS Profit Sharing and Stock Ownership Plan -- The Company has a profit sharing and stock ownership plan, qualified under section 401 of the Internal Revenue Code, which is available to all AES people. The profit sharing plan provides for Company matching contributions, other Company contributions at the discretion of the Compensation Committee of the Board of Directors, and discretionary tax deferred contributions from the participants. Participants are fully vested in their own contributions and the Company's matching contributions. Participants vest in other Company contributions over a five-year period. Company contributions to the plan were $4 million for each of the years ended 1995, 1994 and 1993. Deferred Compensation Plans -- The Company has a deferred compensation plan under which directors of the Company may elect to have a portion or all of their compensation deferred. The amounts allocated to each participant's deferred compensation account may be converted into common stock units. Upon termination or death of a participant, the Company is required to distribute, under various methods, cash or the number of shares of common stock accumulated within the participant's deferred compensation account. Distribution of stock is to be made from common stock held in treasury or from authorized but previously unissued shares. The plan terminates and full distribution is required to be made to all participants upon any changes of control of the Company (as defined). In addition, the Company has an executive officers' deferred compensation plan. At the election of an executive officer, the Company will establish an unfunded, non-qualified compensation arrangement for each officer who chooses to terminate participation in the Company's profit sharing and employee stock ownership plan. The participant may elect to forego payment of any portion of his or her compensation and have an equal amount allocated to a contribution account. In addition, the Company will credit the participant's account with an amount equal to the Company's contributions (both matching and profit sharing) that would have been made on such officer's behalf if he or she had been a participant in the profit sharing plan. The participant may elect to have all or a portion of the Company's contribution converted into stock units. Dividends paid on common stock are allocated to the participant's account in the form of stock units. The participant's account balances are distributable upon termination of employment or death. During 1995, the Company adopted a supplemental retirement plan covering certain AES people. The plan provides incremental profit sharing and matching contributions to participants that would have been paid to their accounts in the Company's profit sharing plan if it were not for limitations imposed by income tax regulations. All contributions to the plan are vested in the manner provided in the Company's profit sharing plan, and once vested are nonforfeitable. The participant's account balances are distributable upon termination of employment or death. The Company is not obligated under any post-retirement benefit plans other than the profit sharing and deferred compensation plans described in this Note. F-16 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. QUARTERLY DATA (UNAUDITED) The following table summarizes the unaudited quarterly statements of operations (in millions, except per share amounts):
----------------------------------- QUARTER ENDED 1995 MAR 31 JUN 30 SEP 30 DEC 31 ------ ------ ------ ------ Sales and services........................................... $ 171 $ 167 $ 174 $ 173 Gross margin................................................. 67 67 73 73 Net income................................................... 25 27 27 28 Net income per share......................................... 0.33 0.35 0.36 0.37
----------------------------------- QUARTER ENDED 1994 MAR 31 JUN 30 SEP 30 DEC 31 ------ ------ ------ ------ Sales and services........................................... $ 125 $ 136 $ 137 $ 135 Gross margin................................................. 60 69 67 68 Extraordinary item........................................... 4 -- -- (2) Net income................................................... 25 25 26 24 Net income per share: Before extraordinary item.................................... 0.28 0.34 0.34 0.35 Extraordinary item........................................... 0.05 -- -- (0.03) ------ ------ ------ ----- Net income per share......................................... 0.33 0.34 0.34 0.32 ====== ===== ===== =====
F-17 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. GEOGRAPHIC SEGMENTS Information about the Company's operations in different geographic areas is as follows (in millions):
------------------ YEAR ENDED DECEMBER 31 1995 1994 ------ ------ REVENUES North America............................................................ $ 548 $ 523 Latin America............................................................ 131 2 Asia..................................................................... 1 -- Other.................................................................... 5 8 ------ ------ Total.................................................................... $ 685 $ 533 ====== ======
------------------ YEAR ENDED DECEMBER 31 1995 1994 ------ ------ OPERATING INCOME North America............................................................ $ 246 $ 241 Latin America............................................................ 14 -- Asia..................................................................... (8) (11) Other.................................................................... (4) 2 ------ ------ Total.................................................................... $ 248 $ 232 ====== ======
------------------ DECEMBER 31 1995 1994 ------ ------ IDENTIFIABLE ASSETS North America............................................................ $1,672 $1,569 Latin America............................................................ 230 46 Asia..................................................................... 328 221 Other.................................................................... 90 79 ------ ------ Total.................................................................... $2,320 $1,915 ====== ======
- --------------- In 1993, foreign operations and investments were insignificant. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's assets and liabilities have been determined using available market information. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value of current financial assets, current liabilities, debt service reserves and other deposits, and other assets are assumed to be equal to their reported carrying amounts. The fair value of project financing debt is estimated differently based upon the type of loan. For variable rate loans, the carrying value approximates fair value. For fixed rate loans, the fair value is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying value and fair value of the AES Placerita capital lease have been excluded from this disclosure. The carrying amount of commitments represents the Company's aggregate maximum exposure. The fair value of other commitments are estimated based on the amount of exposure and the Company's estimate of the likelihood of performance being required. The fair value of swap agreements is the estimated net amount that the Company would pay to terminate the agreements at F-18 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) the balance sheet date. The estimated fair values of the Debentures and Notes are based on the quoted market price at December 31, 1995. The estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows (in millions):
------------------------------------ 1995 1994 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ----- Project financing debt...................................... $1,071 $1,078 $965 $ 966 Other notes payable......................................... 175 180 125 119 Interest rate swaps......................................... -- 137 -- 52 Other commitments........................................... 231 19 72 6
The fair value estimates presented herein are based on pertinent information available as of December 31, 1995. The Company is not aware of any factors that would significantly affect the estimated fair value amounts since that date. 13. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 123, "Accounting for Stock Based Compensation" becomes effective and will be adopted by the Company in 1996. The Company does not plan to adopt the recognition and measurement provisions of SFAS No. 123. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of " was adopted by the Company in 1995. Such adoption had no effect on the Company's financial position. 14. SUBSEQUENT EVENT On May 30, 1996, AES, through its subsidiaries, acquired for $393 million the common shares representing an 11.35% interest in Light Servicos de Eletricidade S.A. ("Light"), a publicly-held corporation that operates as the concessionaire of electric power generation, transmission and distribution public services in 28 municipalities of the state of Rio de Janeiro, Brazil. AES acquired its interest through participation in a consortium (the "Consortium") that concurrently won the bid for a controlling interest in Light under the Brazilian privatization program auction of 60% of Light's outstanding shares held on May 21, 1996. The consortium's aggregate ownership interest of 50.44% represents a controlling interest in Light. The Consortium, organized pursuant to a shareholders agreement dated as of May 27, 1996, is comprised of the direct common share ownership interests held in Light by affiliates of AES (11.35%), Electricite de France ("EDF") (11.35%), Houston Industries Incorporated ("HI") (11.35%), Companhia Siderurgica Nacional ("CSN") (7.25%), and Banco Nacional de Desenvolvimento Economico e Social ("BNDES") (9.14%). The aggregate ownership interest of 50.44% held by the members of the Consortium under the Shareholders Agreement represents the controlling ownership of Light. Under the provisions of the Shareholders Agreement, principal responsibilities for the various aspects of Light's business will be allocated among AES, EDF, HI and CSN. AES will have principal responsibility for the electric generation and bulk power supply operations of Light. F-19 86 SUPPLEMENTAL INFORMATION The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form 10-K") is attached hereto. The delivery of the 1995 Form 10-K shall not be intended to create an implication that there has been no change in the affairs of the Company since the date of filing thereof, nor that the information contained or incorporated by reference therein is correct as of any time subsequent to its date. Reference is made to the Company's Consolidated Financial Statements beginning on page F-1 hereof which may include more recent information. See "Recent Developments." 87 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER [0-19281] THE AES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 54-1163725 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1001 N. 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: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------------------------------------------------------------- COMMON STOCK, PAR VALUE $0.01 PER SHARE NASDAQ NATIONAL MARKET SYSTEM 6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002 NONE 9 3/4% SENIOR SUBORDINATED NOTES DUE 2000 NONE
------------- 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. / X / ------------- THE AGGREGATE MARKET VALUE OF REGISTRANT'S VOTING STOCK HELD BY NON-AFFILIATES OF REGISTRANT, AT FEBRUARY 26, 1996, WAS $1,084,594,950. THE NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK, PAR VALUE $0.01 PER SHARE, AT MARCH 25, 1996, WAS 74,868,326. DOCUMENTS INCORPORATED BY REFERENCE (1) PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT TO BE HELD ON APRIL 16, 1996. CERTAIN INFORMATION THEREIN IS INCORPORATED BY REFERENCE INTO PART III HEREOF. (2) THE REGISTRANT'S 1995 ANNUAL REPORT TO STOCKHOLDERS. CERTAIN INFORMATION THEREIN IS INCORPORATED BY REFERENCE INTO PART I, PART II AND PART IV HEREOF. 88 PART I ITEM 1. BUSINESS (a) General Development of Business The Registrant (also hereinafter referred to as the "Company" or "AES"), together with its subsidiaries and affiliates, is engaged in the business of developing, acquiring, owning and operating electric power generation facilities throughout the world. AES is one of the original entrants in the market for electric power generated by independent power producers which developed in the United States as a result of the enactment of the Public Utility Regulatory Policies Act of 1978 ("PURPA"), as amended. Today AES is one of the largest independent power producers in the world, based on net equity ownership of generating capacity (in megawatts) in operation or under construction, and the Company's objective is to become the world's leading global power company. The Company is a Delaware corporation and was incorporated in 1981. Through subsidiaries and affiliates, AES operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total capacity of 3,370 megawatts. Of that total, 35 percent are fueled by solid fuel, 24 percent are fueled by natural gas, 6 percent are hydroelectric facilities and the remaining 35 percent are capable of burning multiple fossil fuels. Of the total megawatts, 1,069 are located in the United States, 1,420 are in the United Kingdom, 840 are in Argentina and 41 are in China. AES has grown its portfolio of generating assets by developing and constructing new plants ("greenfield development") and by acquiring existing plants, primarily through competitively bid privatization initiatives outside the United States. AES is now in the process of adding 962 megawatts to its operating portfolio by constructing two oil-fired power plants in Pakistan totaling 674 megawatts, a 180 megawatt coal-fired plant in the United States and two plants totaling 108 megawatts in China that will be coal and oil-fired. In total AES's net equity ownership in plants in operation and construction is 3,027 megawatts. All of its existing operating U.S. power plants are cogeneration facilities -- a power generation technology that provides for the sequential generation of two or more useful forms of energy (e.g., electricity and steam) from a single primary fuel source. The Company's foreign plants are not cogeneration facilities. Other than the plants in Argentina and China, which were financed solely by contributions from the Company, each of the Company's domestic and foreign plants has been financed primarily through project financing which is substantially non-recourse to AES and the other projects. For a discussion of the terms "project financing" and "substantially non-recourse," see "Description of Projects." (b) Financial Information About Industry Segments The Registrant operates in only one industry segment: electric power generation. (c) Narrative Description of Business OVERALL STRATEGY AES's primary objective is to help meet the need for electricity in the United States and other countries by participating in competitive electricity markets as a safe, clean and reliable power supplier. AES's strategy is to participate in competitive power generation markets as they develop, both in the United States and in other countries, either by constructing and operating new generation facilities or by acquiring and operating existing facilities in these markets. 1 89 Other elements of the Company's strategy include: - Supplying energy to customers at the least cost possible, taking into account factors such as reliability and environmental performance. - Constructing or acquiring projects of a relatively large size (generally larger than 100 megawatts). - Entering into power sales contracts with electric utilities or other customers with credit strength. The Company's strategy also has been to finance each project, to the maximum extent possible, without credit recourse to the Company or to other projects, and to construct new plants under fixed or guaranteed-maximum price contracts with contractor-guaranteed performance standards ("turnkey" contracts). In addition, the Company engages in careful site selection, taking into consideration transportation, water and transmission access and attempting to gauge local government and community receptivity to the environmental permitting process. AES also strives for operating excellence as a key element of its strategy. 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. Because of this emphasis, the Company prefers to operate all projects which it develops or acquires. THE GLOBAL INDEPENDENT POWER MARKET The market for independent power generation has expanded from a U.S. market, consisting of cogeneration and small power production projects, to a global competitive market for power generation. Although many foreign countries initiated restructuring policies after the advent of the independent power market in the United States, many of these countries have put in place market structures that the Company believes are more competitive than most markets existing in the United States today. A part of AES's business strategy is to participate in competitive generation markets both in the United States and worldwide. The Company believes that the growth in the need for new capacity in the United States has and will continue to slow, partly because utilities are making more efficient use of their existing resources by improving plant availability, extending plant lives, repowering and taking advantage of attractive bulk power purchases, and partly because utilities have initiated programs to reduce the demand for electricity. In addition, over the past decade, obtaining a power sales contract with a U.S. utility has become a progressively more difficult, expensive and competitive process. Many states now require power sales contracts to be awarded by competitive bidding, which both increases the costs and decreases the chances of obtaining such contracts. Bids significantly outnumber awards in most competitive solicitations. As a result of the reduced need for new capacity in the United States, AES and many of its competitors are seeking new business in markets outside the United States. In addition, a number of foreign countries have privatized (or are in the process of privatizing) their generation capacity, which provides opportunities to purchase existing generation assets. AES, through subsidiaries and affiliates, now operates eight plants in non-U.S. countries, is constructing four others , and has offices in numerous foreign locations to take advantage of the opportunities in these new markets. Development of new power generation projects in foreign markets is, however, difficult and expensive, and many of AES's competitors in these foreign markets have significantly larger capital resources and greater local market knowledge than AES. 2 90 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. Every AES person has been encouraged to participate in strategic planning and new plant design for the Company. 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. 3 91 DESCRIPTION OF PROJECTS The table below sets forth information on the Company's plants and projects currently in operation or under construction.
Year of Acquisition or AES Electricity Commercial Ownership Plants and Projects Location (megawatts) Operations Fuel Interest - ----------------------------------------------------------------------------------------------------------------- In operation (through subsidiaries and affiliates): ----------------------- AES Deepwater U.S. 143 1986* Petroleum Coke 100% AES Beaver Valley U.S. 125 1987 Coal 80% AES Placerita U.S. 120 1989 Natural Gas 100% AES Thames U.S. 181 1990 Coal 100% AES Shady Point U.S. 320 1991 Coal 100% AES Barbers Point U.S. 180 1992 Coal 100% Kilroot U.K. 520 1992 Coal and Oil 47% Belfast West U.K. 240 1992 Coal 47% San Nicolas Argentina 650 1993 Multiple 69% Xiangci China 26 1994 Hydro 24.5% Yangchun-Fuyang China 15 1995 Oil 12% Rio Juramento Argentina 112 1995 Hydro 98% Medway Power U.K. 660 1995 Natural Gas 25% San Juan Argentina 78 1996 Hydro 98% Under construction: --------------------- Fuling Aixi China 45 1996** Coal 33.6% Wuxi China 63 1996** Oil 26.4% AES Lal Pir Pakistan 337 1997** Oil 90% AES Pak Gen Pakistan 337 1997** Oil 90% AES Warrior Run U.S. 180 1999** Coal 100% ---- Total 4332 ====
* Plant operations commenced in 1986, but control was acquired in 1995. ** Estimated. Except as noted below, AES's domestic and foreign plants sell electricity under long-term power sales contracts. The Company attempts, whenever possible, to structure the revenue provisions of its power sales contracts such that changes in the cost components of a facility (primarily fuel costs) correspond, as effectively as possible, to changes in the revenue components of the contract. A plant's revenue 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 or its available capacity. Capacity payment rates vary over the term of a power sales contract according to various schedules. Some power sales contracts permit the utility customer to dispatch the plant (i.e., direct the plant to deliver a reduced amount of electric output) within certain specified parameters. The power sales contract payments are structured so that, even when dispatching occurs, the plant continues to receive capacity payments (which provide substantially all of the plant's profits, if any), while it receives reduced energy payments (which primarily cover the variable operating, maintenance and fuel costs associated 4 92 with operating at higher or lower levels). The hydroelectric plants in Argentina sell electricity in the Argentine spot market. Electricity prices in the Argentine spot market are based on the supply of and demand for electricity. The San Nicolas plant sells electricity under two power sales contracts and in the Argentine spot market. Revenues under the contracts consist of an energy component (with prices indexed predominantly to natural gas prices) and a notional capacity element (based on the number of units of electricity delivered), with prices indexed to U.S. wholesale prices. The Company's plants under construction in Pakistan and Maryland will, when constructed and in commercial operation, sell electricity under long-term contracts similar to those described above. A portion of the steam produced by AES's domestic plants is utilized for industrial and other purposes ("process steam"). One of such plants produces steam for use by an AES subsidiary. The remaining domestic plants sell process steam to unaffiliated industrial users, including oil refiners, chemical producers and paper recyclers. AES's steam sales contracts generally are long-term contracts which require a purchaser to take at least the minimum process steam necessary for the project to retain its Qualifying Facility ("QF") status. Under some contracts, a steam purchaser can terminate the contract if it no longer requires any steam, while under other contracts there is no right to terminate. Fuel for the Company's operating plants in the United States, the United Kingdom and a portion of the San Nicolas plant is purchased under long-term supply agreements. Four of the Company's domestic plants are fueled with coal, one plant uses natural gas and one uses petroleum coke. Three of the four domestic coal plants utilize circulating fluidized-bed ("CFB") boiler technology. The two plants in Northern Ireland primarily utilize coal (with oil as an alternative fuel) and the plant in England uses natural gas. The San Nicolas plant utilizes coal as a primary source of fuel but also utilizes oil, petroleum coke and/or natural gas. A portion of the plant's fuel requirements is purchased under a long-term coal contract and the remainder is purchased under short-term arrangements. Since the San Nicolas power sales contracts have energy payments indexed predominantly to natural gas prices, and the plant burns coal as a primary fuel source, the energy payments received by the San Nicolas plant are not indexed to its fuel payments. Contracts with outside parties, often the project's fuel supplier, provide for the removal and disposal of waste ash. Because of the nature of the plant's power sales contracts, the Company believes that short-term fuel purchases should hedge against fluctuations in revenues. In addition, the flexibility of the plant to utilize a variety of fuels allows for an adjustment of fuels to take advantage of the least cost alternative. There can be no assurance, however, that the Company will be successful in hedging its revenues with the fuel costs for the San Nicolas plant, or that the Company's attempts to hedge through fuel supply contracts at other plants will be successful. Except for the plants in Argentina and China, the Company has financed each domestic and foreign plant 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 plant subsidiary or affiliate. This type of financing is generally referred to as "project financing." The lenders under these project financing structures cannot look to AES or its other projects for repayment (that is, they are "non-recourse" to AES and the other plants), 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 guaranties, 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 guaranties 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, a small portion of the aggregate project debt, and thus the project financing structures are generally described throughout this Report as being "substantially non-recourse" to AES and its other projects. See "1995 Financial Review - Cash Flows, 5 93 Financing Resources and Liquidity" on pages 29 through 31 of the Company's 1995 Annual Report to Stockholders, which is incorporated herein by reference. AES's plants averaged 94 percent availability in 1995, 90 percent availability in 1994, and 92 percent availability in 1993. In calculating plant availability, the Company has adapted the utility industry's definition of "equivalent availability factor" to the independent power industry. The "equivalent availability factor" is defined as the percentage of time that a plant is available for operation at full capacity in a given period (usually a year), where each hour of availability is prorated if the plant is only partially available. For an independent power producer like AES, full capacity is generally defined as contracted-for electric generating capacity (in megawatts). For plants that sell steam (except AES Deepwater and AES Beaver Valley), full capacity includes contracted-for steam capacity, in megawatt-equivalents. In calculating availability with respect to AES Deepwater and AES Beaver Valley, the Company has used rated electric generation capacity rather than contracted-for capacity due to the particular characteristics of such projects. AES SHADY POINT AES Shady Point, Inc. ("AES Shady Point"), an indirectly owned subsidiary of AES, owns and operates a 320 megawatt coal-fired CFB cogeneration plant in LeFlore County, Oklahoma. The AES Shady Point facility includes a 240-ton per day food grade, liquid CO plant, which utilizes in its 2 CO production processes approximately 65,000 pounds per hour of process steam 2 produced by the plant. AES Shady Point sells electricity to Oklahoma Gas and Electric Company ("OG&E") under a contract with a remaining term of approximately 12 years with three automatic five-year renewal terms unless the contract is terminated by OG&E prior to the start of each renewal term. The AES Shady Point plant uses coal supplied under contracts with remaining terms of approximately 12 years from 4 Oklahoma coal companies. Each contract can be terminated by the coal supplier if its costs of supplying coal exceed the contract price for specified time periods. In addition, AES Shady Point has negotiated a back-up coal supply contract to provide AES Shady Point with coal from an out-of-state source in the event the Oklahoma coal suppliers could not fulfill their contractual obligations. AES has guaranteed the obligation of AES Shady Point under the back-up coal supply agreement to pay price differentials between the monthly price of coal under the agreement and the average price the coal supplier receives for coal sales to other parties during the same period. The plant generated revenues of $173 million in 1993, $168 million in 1994, and $169 million in 1995. AES THAMES AES Thames, Inc. ("AES Thames"), an indirectly owned subsidiary of AES, owns and operates a 181 megawatt coal-fired CFB cogeneration plant located in Montville, Connecticut. Power generated by AES Thames is sold to Connecticut Light and Power Company ("CL&P") under a contract with a remaining term of approximately 19 years. AES has guaranteed to CL&P certain of AES Thames's obligations under the power sales contract and has provided a limited tax indemnity. The guaranteed amounts with respect to the power sales contract vary over the term of the contract. The current maximum guaranteed amount is $8 million through 2005, and falls to $5 million in 2006, where it remains at that level through the remaining term of the contract. A tax indemnity guaranty is limited to $1 million. AES Thames, under a contract with a remaining initial term of approximately nine years, sells steam to Stone Connecticut Paperboard Corporation ("Stone Connecticut"), for use in its recycled paperboard plant located adjacent to the plant. Stone Connecticut is obligated to take the minimum amount of steam per year necessary for the AES Thames plant to maintain QF status under PURPA, subject to a maximum annual amount. 6 94 The plant's coal requirements are supplied under a contract with a remaining term of approximately nine years. Under the terms of AES Thames' project financing arrangements, AES is obligated to return to a debt reserve account of AES Thames all or a portion of a current year's distributions received if AES Thames does not meet certain debt reserve levels in that year. In addition, AES has guaranteed the provision of up to $1 million to fund the capital costs associated with certain ash handling equipment modifications, if necessary. The plant generated revenues of $121 million in 1993, $121 million in 1994 and $126 million in 1995. AES BARBERS POINT AES Barbers Point, Inc. ("AES Barbers Point"), an indirectly owned subsidiary of AES, owns and operates a 180 megawatt coal-fired CFB cogeneration plant located in Kapolei, Oahu, Hawaii. AES Barbers Point sells electricity to Hawaiian Electric Company, Inc. ("HECO") under a contract with a remaining term of 27 years. AES Barbers Point has entered into a letter agreement with HECO to provide up to nine additional megawatts of capacity on a preferred basis and expects to do so at such time as HECO requires such added capacity. AES Barbers Point is required to pay specified liquidated damages to HECO if the plant fails (unless due to force majeure) to meet certain performance standards relating to, among other things, availability levels. AES also has guaranteed to HECO the payment of any liquidated damages resulting from these performance shortfalls, not to exceed $25 million per occurrence. Steam generated by the plant is sold to Chevron USA Inc. ("Chevron") for use in its oil refining operations under a steam sales agreement with a remaining term of 17 years. The plant's requirements for coal are supplied under an agreement with a remaining term of 17 years, subject to termination in 12 years in the event the parties are unable to renegotiate the price of coal for the last five years of the contract term. The AES Barbers Point plant generated revenues of $119 million in 1993, $120 million in 1994 and $126 million in 1995. AES BEAVER VALLEY The AES Beaver Valley plant, located in Monaca, Pennsylvania, is a 125 megawatt pulverized coal-fired cogeneration facility owned by BV Partners, a Pennsylvania partnership ("BV Partners"). AES Beaver Valley, Inc. ("AES Beaver Valley"), a subsidiary of AES, and Shepperton Leasing Company ("SLC") are the sole partners in BV Partners. AES Beaver Valley, as an 80% owner and managing partner, operates the plant for the partnership. AES has guaranteed payment and performance obligations of AES Beaver Valley to SLC under the BV Partners partnership agreement. The material payment obligations of AES Beaver Valley include obligations to fund operation and maintenance expenses incurred in excess of certain inflation adjusted annual amounts, limited obligations to reduce any existing deficit in its capital account prior to dissolution of the partnership, and limited indemnity obligations to SLC for breaches of the partnership agreement. West Penn Power Company ("West Penn") purchases electricity produced by the plant under a power sales contract with a remaining term of approximately 21 years. The West Penn contract is subject to termination if the AES Beaver Valley facility fails to deliver to West Penn 80 percent of 7 95 contracted capacity (125 megawatts), excluding outages due to force majeure or dispatching, over a five-year rolling period. BV Partners has granted to West Penn a mortgage and security interest (subordinated to the project lenders' liens) in BV Partners' project assets to secure the partnership's obligations to deliver electricity. BV Partners sells steam to ARCO Chemical Company ("ARCO Chemical") for use in its chemical processing activities under a requirements contract with a remaining term of approximately seven years. If ARCO Chemical ceases operations, it may terminate the contract upon 90 days' notice to BV Partners. AES has provided a guarantee to ARCO Chemical, as a subordinated lender to BV Partners, which provides for payment of certain amounts of unpaid interest or principal to ARCO Chemical under limited circumstances. Coal for the facility is supplied pursuant to a requirements contract with a remaining term of three years with United Pittsburgh Coal Sales, Inc. Electricity from the AES Beaver Valley facility is transmitted ("wheeled") to the Duquesne-West Penn interconnection pursuant to a transmission agreement with Duquesne Light Company ("Duquesne"). Duquesne's obligations to wheel are subject to certain limitations and, as a result, transmission interruptions adversely affecting BV Partners' revenues could occur. No such interruptions have occurred to date. The plant generated revenues of $48 million in 1993, $63 million in 1994 and $63 million in 1995. AES DEEPWATER AES Deepwater, Inc. ("AES Deepwater"), a subsidiary of AES, owns a 143 megawatt petroleum coke-fired cogeneration facility located in Houston, Texas. The facility sells electricity to Houston Lighting and Power Company ("HL&P") under a power sales contract which expires in 1998. The power sales contract with HL&P was originally entered into by AES and then assigned by AES to AES Deepwater, but HL&P, although consenting to the assignment, did not agree to release AES from the contract. If there were a failure to deliver power from the AES Deepwater facility to the utility, HL&P might seek to hold AES liable under the contract. While AES is unable to predict with certainty the amount of damages, if any, HL&P might incur in such event, AES believes that the amount of any such damages is unlikely to be material. AES Deepwater, under a contract which expires in 1998, also produces and delivers process steam to an ARCO Petroleum Products Company ("ARCO Petroleum") refinery adjacent to the cogeneration facility. Under another agreement which also expires in 1998, ARCO Petroleum supplies petroleum coke fuel for the plant. ARCO Petroleum is entitled to receive a majority allocation of the plant's cash flow available after operating expenses, debt service and a project fee available to AES Deepwater of up to $3 million each year. AES Deepwater is entitled to a minority allocation constituting the balance of the remaining cash flow. To date, there has not been, and there is not expected to be in the future, sufficient cash flow to make distributions to either ARCO Petroleum or AES Deepwater because of significant deficiencies in cash flows required to service the project debt. Because the price received for electricity under the HL&P power sales contract is linked to the price of natural gas, AES Deepwater has been unable to convert its construction loans to term loans and its cash flows from operations have been insufficient to cover interest or to repay the principal due at the maturity of the construction loans. In January 1995, a subsidiary of the Company acquired the remaining 90 percent of the outstanding debt of AES Deepwater not already owned by such subsidiary. 8 96 The Company intends to actively pursue new fuel supply and power sales contracts to take effect after the expiration of the existing contracts in 1998. The fuel supply contract is renewable by the fuel supplier annually. There can be no assurance that such new arrangements can be made. AES PLACERITA AES Placerita, Inc. ("AES Placerita"), an indirectly owned subsidiary of AES, leases and operates a combined-cycle gas turbine cogeneration facility near Los Angeles, California. The plant currently has the ability to generate up to 120 megawatts of electricity while also producing approximately 80,000 pounds per hour of steam for "enhanced oil recovery" operations (injecting steam into existing oil wells in order to reduce the viscosity of heavy crude and thereby facilitate its recovery). The plant generates electricity for sale to Southern California Edison Company ("SCE") under a Standard Offer No. 4 contract with a remaining term of approximately 18 years. AES Placerita sells steam to Hillside Oil Partners, which is engaged in oil recovery operations, and ARCO Oil and Gas Company ("ARCO OGC"). Steam sales to ARCO OGC commenced in the third quarter of 1993. AES Placerita purchases natural gas under an agreement with a remaining term of approximately eight years. The agreement requires AES Placerita to nominate, take and pay for a minimum quantity of gas each year. In order to support its working capital needs, AES Placerita has secured from its financing parties a line of credit, currently in an amount of $6 million. AES has committed to provide $3 million of this facility. AES has also agreed to purchase up to an additional $3 million of AES Placerita's obligations outstanding under this line of credit in the event the indenture trustee under the project financing facility forecloses against the project or AES Placerita initiates or becomes subject to bankruptcy or other debt relief action. Depending on AES Placerita's liquidity, AES may be requested to provide additional working capital support in the future. As a result of several factors, including lower than anticipated oil production, mechanical failures of the plant's steam turbine in 1991 and excessive maintenance requirements related to the plant's gas turbines, AES Placerita's cash flow has not been sufficient to pay any dividends to AES and AES does not anticipate receiving dividends for the next several years. In the fourth quarter of 1993, the Company recorded a total after tax charge of $17 million related to the write-down of its leasehold oil interests in connection with its original investment in enhanced oil recovery operations at the AES Placerita facility. The plant generated revenues of $47 million in 1993, $41 million in 1994 and $37 million in 1995. NIGEN NIGEN Limited ("NIGEN"), a joint venture company owned by a U.K. subsidiary of the Company and a subsidiary of Tractebel, S.A. ("Tractebel"), a Belgian utility, owns and operates two power plants: Kilroot, an 12-year old 520 megawatt dual-fired (coal and oil) power plant, and Belfast West, a 36-year old 240 megawatt coal-fired power plant. NIGEN has established an employee share ownership plan under which people at both plants will be able to own up to a maximum of 15 percent of the stock in NIGEN. As of December 31, 1995, NIGEN has made grants under the plan equal to 5 percent of its outstanding stock. The Kilroot and Belfast West plants have entered into power sales contracts, subject to cancellation in 14 years and 2 years, respectively, with Northern Ireland Electricity, plc, a 9 97 transmission and distribution company, and long-term coal supply contracts, with remaining initial terms of 11 years and 1 year, respectively, with an affiliate of Tractebel. NIGEN obtained original project financing from a consortium of commercial banks. This facility was refinanced in July 1994 through the issuance of 199 million pound sterling ($308 million) 9.5 percent secured debentures due 2006-2010. The issuer was Kilroot Electric Limited, a special purpose subsidiary of Kilroot Power Limited, which has guaranteed the issue. The Kilroot and Belfast West plants have obtained working capital lines of credit in an amount of 10 million pound sterling ($16 million) and 4 million pound sterling ($6 million) respectively. AES British pound sterling (pound sterling) amounts set forth in this Report have been translated into U.S. dollar ($) amounts at an exchange rate of $1.55/pound sterling. SAN NICOLAS PLANT Central Termica San Nicolas S.A. ("San Nicolas"), an Argentine corporation which is an indirectly owned subsidiary of AES, owns and operates a 650 megawatt power plant in San Nicolas, Argentina. AES owns approximately 69 percent of San Nicolas, a subsidiary of a U.S. utility owns approximately 19 percent, and the remaining 12 percent is owned by an employee stock ownership plan. San Nicolas sells a total of 345 megawatts of electricity (approximately 55 percent of the plant's output capability) under two power sales contracts, each with a remaining term of five years. San Nicolas's obligations under these contracts can be fulfilled either through electricity generated by the plant or through purchases of electricity in the Argentine spot market. In the event neither is possible, San Nicolas will be liable for certain penalty payments. Under one of the contracts, Empresa Social de Energia de Buenos Aires S.A. ("ESEBA"), a distribution company controlled by the Argentine government, purchases 285 megawatts, except during the month of April of each year, when the amount purchased is 57 megawatts. Under the other contract, EDELAP, S.A. ("EDELAP"), a recently privatized Argentine distribution company, purchases 60 megawatts of electricity. The plant sells additional electricity, when profitable, into the Argentine spot market. The San Nicolas power plant consists of five operational generating units, two of which are fueled with oil and coal, two of which can be fueled with oil or natural gas and the fifth and largest (350 megawatts) of which can be fueled by oil, natural gas, coal and/or a blend of coal and petroleum coke. In 1995, in response to a sustained decline in the price of electricity sold on the Argentine spot market, San Nicolas decided to remove the four older units from base load operation and began operating such units in the market as reserve capacity. This change included a major reduction in fixed costs, including people. San Nicolas continues to evaluate the economic and technical feasibility of various plant operating strategies, particularly regarding various fuel sources and expected prices in the Argentine spot market costs. Up to approximately 16 percent of the power plant's fuel requirements is supplied under a coal contract with a privatized Argentine coal company with a remaining term of seven years. San Nicolas is required to purchase a maximum of 370,000 metric tons of coal per year from such supplier even if the plant is unable to use coal as a fuel source. San Nicolas's payment obligations under the contract are supported by a bank guaranty in an amount up to $10 million. The current amount of the bank guaranty is approximately $7 million, and AES has guaranteed its proportionate share ($5 million) of such guaranty to the bank. The plant's remaining fuel needs are purchased from international sources at prices which currently are substantially lower than the contract price. AES may seek the return of a portion of its investments, and as a result, San Nicolas may consider project financings, where possible. There can be no assurance that attempts to consummate such financing, if made, will be successful. 10 98 The plant generated revenues of $130 million in 1995. RIO JURAMENTO In November 1995, the Company acquired a 98 percent interest in Hidroelectrica Rio Juramento S.A. ("Rio Juramento"), which leases and operates a 112 megawatt hydroelectric station in the province of Salta, Argentina. The station consists of a 101 megawatt facility with a large storage reservoir capable of inter-year storage, and an 11 megawatt facility capable of inter-seasonal storage. The Company paid $41 million for its interest. Two percent of the facility is owned by a participation plan for the benefit of the employees of Rio Juramento. Rio Juramento has exclusive rights to operate the facility under a 30-year concession agreement, and sells electricity in the Argentine spot market. MEDWAY POWER 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 megawatt combined cycle gas-fired power plant in southeast England on the Isle of Grain. The plant began operations in November 1995. AES Medway owns 25 percent of Medway Power and the subsidiaries of Southern and SEEBOARD each own 37.5 percent. AES Medway Operations Limited ("AESMO"), an indirectly owned U.K. subsidiary of AES, managed the construction of and operates and maintains the plant. Medway Power sells its entire electrical 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, in exchange for a transfer of payments received by Medway Power from sales of electricity to the Pool, 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"). Fuel for the facility will be provided by British Gas plc ("British Gas") on an interruptible basis under a gas supply agreement with a term of 15 years. The ability of British Gas to interrupt supply, other than due to force majeure, is limited to a specified number of days in each year and in the aggregate over the term of the agreement. Medway Power, however, has the benefit of a long-term fuel oil supply agreement with BP Oil UK Limited to enable the facility to run on fuel oil during periods of natural gas supply interruption. Medway Power contracted with TBV Power Limited and Europower Development Limited for the engineering, procurement and construction of the plant under a turnkey contract. During pre-commercial start-up operations in the second quarter of 1995, the plant began experiencing equipment difficulties, most notably with its turbine rotors. The difficulties have prevented Medway Power from reaching commercial operations, as such term is defined under the Contracts for Differences. As a result, Medway Power has not accepted the facility and released the contractor from contractual liability. In addition, the contract for the supply of natural gas for the facility also has not yet become effective, and Medway Power has been purchasing natural gas for the plant in the spot market. Medway Power has amended its engineering, procurement and construction contract, whereby the contractor has supplied an interim solution which has allowed the facility to engage in limited operations, and is working to provide a permanent solution to the rotor problems at its cost. In addition, the contractor is responsible to the joint venture for any cumulative net losses arising through July 31, 1996. 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. 11 99 Under the terms of Medway Power's loan agreements, AES Medway and its affiliates are responsible for remaining equity contributions to Medway Power of approximately 1 million pound sterling ($2 million). In addition, AES Medway may be required to contribute up to approximately pound sterling 5 million ($8 million) in the event of project cost overruns. Both the expected and contingent obligations are supported by a cash-collateralized letter of credit. An additional contingent equity contribution obligation of AES Medway in the amount of approximately 0.4 million pound sterling ($0.6 million) is supported by a guaranty of AES. Under its agreements to manage the construction of and to operate and maintain the plant, AESMO has provided a letter of credit, which may escalate up to 2 million pound sterling ($3 million), to support its performance. AES has also provided a guaranty of up to 3 million pound sterling ($5 million). While siting, initial permitting and financing risks have been largely overcome for the Medway Power project, there exist significant risks to successful completion, including risks of completion of construction, additional permitting and conversion from construction financing to permanent financing. SAN JUAN In March 1996, AES acquired a 98 percent interest in Hidrotermica San Juan, S.A., ("San Juan"), an Argentine corporation, which is the owner and operator of a 78 megawatt power generating facility in the province of San Juan, Argentina. The facility includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas combustion power plant. The remaining 2 percent is owned by a participation plan for the employees of San Juan. San Juan will sell electricity into the Argentine spot market. PROJECTS UNDER CONSTRUCTION LAL PIR AND PAK GEN Two project subsidiaries of the Company, AES Lal Pir Limited ("AES Lal Pir") and AES Pak Gen (Private) Company ("AES Pak Gen"), are constructing two substantially identical, adjacent 337 megawatt oil-fired facilities in Punjab Province, Pakistan. The Water and Power Development Authority ("WAPDA") has agreed to purchase the electrical capacity and electrical output of the facilities through two separate 30-year power sales agreements. Fuel for the facilities will be provided by the Pakistan State Oil Company ("PSO") pursuant to the terms of fuel supply agreements for each plant. Certain of the obligations of WAPDA under the power sales agreements and PSO under the fuel supply agreements are guaranteed by the Government of Pakistan. Financing for the AES Lal Pir project was completed in May 1995 and is comprised of (i) a 20.25 billion Yen ($197 million) commercial loan provided by a syndicate of lenders, (ii) an International Finance Corporation ("IFC") loan of $40 million, and (iii) equity of $95 million. The Export-Import Bank of Japan is providing a political risk guarantee for 95 percent of the yen-denominated loans and Nichimen Corporation is providing a similar guarantee for the remaining 5 percent. AES will fund 90 percent of the equity, or approximately $85 million, and 10 percent of the equity will be provided by IFC. AES has supported certain of AES Lal Pir's pre-completion obligations in an aggregate amount of up to $42 million, and certain post-completion obligations in an aggregate amount of up to $59 million. Each of these obligations will only be effective or will be terminated upon the occurrence of future events. The financing for the AES Pak Gen project was completed in January 1996, and consists of (i) a buyer's credit facility established by The Export Import Bank of Japan of US$40 million and 14.203 billion Yen (US$138 million), (ii) an IFC direct loan of US$20 million, (iii) an IFC syndicated loan of US$50 million, and (iv) equity of $95 million. IFC will make an equity investment in AES Pak Gen of US$9.5 million. AES has committed to fund the remaining equity of US$85.5 million. AES has supported certain of AES Pak Gen's pre-completion obligations in an aggregate amount of up to $42 million, and certain post-completion obligations in an aggregate amount of up to $65 million. Each of 12 100 these obligations will only be effective or will be terminated upon the occurrence of future events. The facilities are being built by Nichimen Corporation under two "turn-key", lump sum price contracts, with key equipment in each case being supplied by Mitsubishi Heavy Industries. The projects are scheduled to commence commercial operations by the end of 1997. All yen amounts set forth in this Report have been translated into U.S. dollar ($) amounts at an exchange rate of 103Yen/$. Substantial risks to the successful completion of these projects exist, including those relating to political risk, exchange rate risk, currency inconvertibility, governmental approvals, siting, construction and permitting, and the possible termination of the power sales contract as a result of the failure to meet certain construction milestones. No assurance can be given that these projects will be completed. AES WARRIOR RUN AES WR Limited Partnership ("AES Warrior Run"), an indirectly owned subsidiary of AES, is currently constructing a 180 megawatt coal-fired cogeneration facility in Allegany County, Maryland. The Potomac Edison Company ("Potomac Edison") will purchase all of the electrical capacity of the facility pursuant to a 30-year dispatchable power sales contract. The earliest estimated commercial operation date for the plant is October 1, 1999. In the event AES Warrior Run does not commence commercial operations by October 1, 1999, AES will be liable to Potomac Edison for up to $1.4 million of termination payments unless AES elects to pay $45,000 per month to extend the contract for one year. AES Warrior Run supports this potential obligation to Potomac Edison with a letter of credit and cash deposits. The project obtained its financing in September 1995 consisting of (i) commercial bank loan commitments of $331 million, (ii) approximately $74 million of tax-exempt bonds issued by the Maryland Energy Financing Administration and (iii) equity of approximately $46 million. Construction services are being performed under a lump sum, turn-key contract by a consortium consisting of Raytheon Engineers & Constructors, Inc. and Combustion Engineering, Inc. with key equipment supplied by ABB, Inc. Coal will be supplied to the project under a 20-year contract. Substantial risks to the successful completion of this project exist, including those relating to construction and permitting, and the possible termination of the power sales contract as a result of a failure to meet certain construction milestones and, as a result, no assurance can be given that this project will be completed. OTHER PROJECTS An affiliate of the Company, San Francisco Energy Company, LP ("SFEC"), which is a joint venture between AES and Sonat Inc., is developing a 240 megawatt gas fired facility in San Francisco, California. The electrical capacity of the facility is to be purchased by Pacific Gas & Electric ("PG&E") under a 30-year power sales agreement, which SFEC executed in April 1994. 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, and that the ultimate resolution of this matter will not have a material adverse effect on the Company. However, substantial risks to the successful completion of this project exist, including those relating to the FERC decision, siting, financing, construction and permitting. No assurance can be given that this project will be completed. Another subsidiary of the Company, AES Puerto Rico, L.P. ("AES Puerto Rico"), is developing a 454 megawatt 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. However, substantial risks to the successful completion of this project exist, including those relating to governmental approvals, financing, construction and permitting, and possible termination of the power sales contract as a result of a failure to meet certain development or construction milestones. There can be no assurance that this project will be completed. 13 101 A project subsidiary of the Company, AES Ib Valley Corporation ("AES Ib Valley") has been developing a 420 megawatt coal-fired facility in the State of Orissa, India. 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 the 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. In October 1993, AES established a subsidiary, AES Power, Inc., for the purpose of participating in the developing market for wholesale bulk power in the U.S. In March 1994, AES China Generating Co. Ltd. ("AES Chigen") completed an initial public offering for the sale of 10,216,000 shares of Class A Common stock. AES owns 7,500,000 shares of AES Chigen's Class B Common Stock, and is entitled to elect one-half of the board of directors of AES Chigen. Certain officers of AES also serve as officers and directors of AES Chigen. AES provides development, construction management and operations services to AES Chigen through a project service agreement. AES Chigen will be the Company's exclusive investment for independent power project development and acquisition opportunities in China. AES Chigen is currently operating 41 megawatts of oil and hydroelectric facilities, and is constructing 108 megawatts of new generating facilities in China. AES has dedicated significant resources to pursue the development and acquisition of additional projects located in the United States, Europe, Pakistan, India, Southeast Asia, South America and Africa. Most the Company's current development and acquisition activities are in respect of projects and plants outside the United States. Acquisitions of existing power facilities or companies could be accomplished by the payment of cash, by an exchange of project ownership interests or by the issuance of the Company's securities. The Company expects that its involvement in connection with any such acquisitions will be consistent with its overall strategy. See "Overall Strategy" above. In particular, the Company would generally seek projects of a relatively large size that would likely be operated by the Company, have long-term power sales contracts, and be financed, to the maximum extent possible, with debt on a basis that is substantially non-recourse to AES and its other projects. Based on the Company's experience, it is likely that no more than a few of these projects or existing plants will be developed or acquired. As of December 31, 1995, capitalized costs for projects under development were approximately $41 million. REGULATORY MATTERS AES is subject to federal, state and local energy and environmental laws and regulations applicable to the development, ownership and operation of its U.S. plants. Federal laws and regulations govern transactions with utilities, the types of fuel utilized, the type of energy produced and power plant ownership. State regulatory commissions must approve the rates and, in some instances, other terms under which utilities purchase electricity from qualifying independent producers. Under certain circumstances, such state commissions may have broad jurisdiction over non-utility power plants. Power projects also are subject to laws and regulations governing emissions and 14 102 other substances produced by a plant and the geographical location, zoning, land use and operation of a plant. Applicable federal environmental laws typically have state and local enforcement and implementation provisions. These environmental laws and regulations generally require that a wide variety of permits and other approvals be obtained before construction or operation of a power plant commences and that the facility operate in compliance therewith. The FERC must also approve rates charged by certain activities of power marketers such as the Company's subsidiary, AES Power. AES also has ownership interests in operating power plants in the United Kingdom, Argentina and, through AES Chigen, China, is constructing two plants in Pakistan and is developing projects in numerous other countries. U.K. projects are subject to laws and regulations similar to many of those encountered in the United States. The generation of electricity is subject to licensing and the supply of natural gas (the fuel for the Medway Power project) is regulated. Governmental approvals must be obtained in order to burn natural gas for power generation, and pollutant emissions are regulated. In Argentina, the production, distribution and use of electricity, and term and spot markets for electricity, are regulated by the federal, state and local governments, and environmental emissions also are regulated at the federal and provincial levels. Foreign power projects owned by U.S. companies must obtain exemptions to the Public Utility Holding Company Act, as amended ("PUHCA"), several of which are available to the Company. Qualifying Facilities ("QF") are relieved of compliance with extensive federal, state and local regulations that control the development, financial structure and operation of power plants and the prices at and terms on which power plants sell energy 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, and also permit the utility customer to terminate the power sales contract for the AES Deepwater plant and, in the case of the AES Beaver Valley, AES Thames and AES Shady Point plants, would permit the utility customer to pay the lesser of the price under the respective power sales contract or the rates then in effect under Federal Energy Regulatory Commission ("FERC") rules. The Company believes, however, that it will usually be able to react in a manner that would avoid the loss of QF status. State Regulation. 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 IPPs are indirectly under the regulatory purview of PUCs. PUCs often will pre-approve contracts with prices that do not exceed avoided costs because such contracts often have been acquired through a competitive or market-based process. Recognizing the competitive nature of the acquisition process, 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 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. ENVIRONMENTAL REGULATIONS The construction and operation of power projects are subject to extensive environmental and land use regulation. Those applicable to AES primarily involve the discharge of emissions into the water and 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, extensive modifications to project technologies and facilities could be required. Based on current trends, AES expects that environmental and land use regulation in the U.S. will become more stringent. Accordingly, AES plans to continue to place a strong emphasis on the development and use of "best-available" technology, as required under the Clean Air Act, to minimize the environmental impact of its energy generation. 15 103 Clean Air Act. In late 1990, Congress passed the Clean Air Act Amendments of 1990 (the "1990 Amendments"). The original Clean Air Act of 1970 set guidelines for emissions standards for major pollutants (e.g., SO2 and NOx) from newly-built sources. All of AES's domestic operating plants perform at levels better than federal performance standards mandated for such plants under the Clean Air Act. The 1990 Amendments attempt to reduce emissions from existing sources -- particularly large, older power plants that were exempted from certain regulations under the original Clean Air Act. The hazardous air pollutant provisions of the 1990 Amendments presently exclude electric steam generating facilities such as AES' domestic plants. However, two studies addressing mercury and hazardous air pollutant emissions from such facilities are in progress. The Environmental Protection Agency's ("EPA") final study reports are scheduled to be released in 1996, and depending on the results, could prompt EPA to promulgate regulations to address their findings. If this occurs, AES may be required to meet additional pollution control requirements. Further, the Ozone Transport Assessment Group ("OTAG"), composed of state and local air regulatory officials from the 37 eastern-most states, is considering additional NOx emission reduction requirements that would go beyond current federal standards. If more stringent NOx standards are adopted by EPA and/or certain states, AES could be required to install additional NOx emission control technology at some of its plants. In addition, the National Ambient Air Quality Standards for ozone and particulates are also currently undergoing review by EPA. If EPA decides to make these standards more stringent, additional control technology requirements may be imposed on existing AES plants. The Company does not believe that the effect of any such additional requirements, if implemented, will have a material adverse effect on its 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. 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. PROPOSED LEGISLATION There is consideration in the U.S. Congress of legislation to repeal PURPA entirely, or at least to repeal the obligation of utilities to purchase from QFs. There is strong support for grandfathering existing QF contracts if such legislation is passed, and also support for requiring utilities to conduct competitive bidding for new electric generation if the PURPA purchase obligation is eliminated. Various bills have also proposed repeal of PUHCA. Repeal of PUHCA would allow both independents and vertically integrated utilities to acquire retail utilities in the United States that are geographically widespread, as opposed to the current limitations of PUHCA which require that retail electric systems be capable of physical integration. Also, registered holding companies would be free to acquire non-utility businesses, which they may not do now, with certain limited exceptions. With the repeal of PURPA or PUHCA, competition for independent power generators from vertically integrated utilities would likely increase. The Company does not believe that the effect of any such repeal will have a material adverse effect on its consolidated financial position. In addition, the FERC, many state PUCs and Congress are currently studying a number of proposals to restructure the electric utility industry in the United States to permit utility customers to choose their utility supplier in a competitive electric energy market. The FERC has issued a proposed rulemaking to require utilities to offer wholesale customers and suppliers open access on their transmission lines on a comparable basis to the utilities' own use of the lines. The FERC plans to issue a final rule in 1996, but many utilities have already filed "open access" tariffs. The utilities contend that they should recover from departing customers their fixed costs that will be "stranded" by the ability of their wholesale customers (and perhaps eventually, their retail customers) to choose new electric power suppliers. These include the costs utilities are required to pay under many QF contracts 16 104 which the utilities view as excessive when compared with current market prices. Many utilities are therefore seeking ways to lower these contract prices or rescind the contracts altogether, out of concern that their shareholders will be required to bear all or part of such "stranded" costs. Some utilities have engaged in litigation against QFs to achieve these ends. In addition, future U.S. electric rates may be deregulated in a restructured U.S. electric utility industry and increased competition may result in lower rates and less profit for U.S. electricity sellers. Falling electricity prices and uncertainty as to the future structure of the industry is inhibiting United States utilities entering into long-term power purchase contracts. The effect of any such restructuring on the Company cannot be predicted, although the Company does not believe that any such restructuring will have a material adverse effect on its consolidated financial position. EMPLOYEES At December 31, 1995, AES and its subsidiaries employed approximately 800 people, approximately 685 of whom are involved in operations or construction. Approximately 51 people are covered by a collective bargaining agreement at the AES Beaver Valley plant. The total number of people employed in facilities which AES operates or has an equity interest is approximately 1250. (d) Financial Information About Foreign and Domestic Operations and Export Sales See the information contained under the caption "Geographic Segments" on page 46 of the Registrant's 1995 Annual Report to stockholders, which information is incorporated herein by reference. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following is certain information concerning the executive officers of the Company. Roger W. Sant, 64 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 Board of Directors of AES Chigen, an affiliate of the Registrant and The World Wildlife Fund U.S., and serves on the Board of Directors of The World Resources Institute, World Wide Fund for Nature, and Marriott International, Inc., and serves on the National Council for The Environmental Defense Fund. He was Assistant Administrator for Energy Conservation and the Environment of the Federal Energy 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. Dennis W. Bakke, 50 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 1, 1994. He currently is a director of AES Chigen. 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 FEA from 1974 to 1976 and as Deputy Director of the Energy Productivity Center from 1978 to 1981. He is a trustee of Geneva College. Robert F. Hemphill, Jr., 52 years old, has been Executive Vice President of the Registrant since 1987. From 1984 to 1987, he was Senior Vice President and from 1982 to 1984 he served as a Vice President for project development. He currently is Vice Chairman of AES Chigen, and served as President and Chief Executive Officer of AES Chigen from December 1993 until February 1995. Kenneth R. Woodcock, 52 years old, has been Senior Vice President for business development of the Registrant since 1987. From 1984 to 1987, he served as a Vice President for business development. 17 105 Thomas A. Tribone, 43 years old, has been Senior Vice President of the Registrant since 1990, and now heads an AES division responsible for power marketing, project development, construction and plant operations in South and Central 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. He currently is as a director of AES Chigen. Mark S. Fitzpatrick, 45 years old, has served as a Vice President of the Registrant since 1987, and 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. David G. McMillen, 57 years old, was named Vice President of the Company in December 1991. He was named President of AES Shady Point in 1995 and is currently plant manager of the AES Shady Point Plant. 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, 48 years old, has been Vice President for planning since 1981. Prior to joining the Registrant, Dr. Naill was Director of the Office of Analytical Services at the U.S. Department of Energy. Barry J. Sharp, 36 years old, has 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 Director of Finance and Administration. Mr. Sharp is a CPA. J. Stuart Ryan, 37 years old, was appointed Vice President of the Registrant effective January 1, 1994, and heads an AES division responsible for project development, construction and plant operations in Asia (excluding China), California and Hawaii. He served as general manager of a group within AES from 1988 to 1993. Paul T. Hanrahan, 38 years old, was appointed Vice President of the Registrant effective January 1, 1994. He currently is President and Chief Executive Officer of AES Chigen, where he served as Executive Vice President, Chief Operating Officer and Secretary from December 1993 until February 1995. He was General Manager of AES Transpower, Inc., a subsidiary of the Registrant, from 1990 to 1993. ITEM 2. PROPERTIES The Registrant leases its principal office in Arlington, Virginia. The Arlington lease expires in April 1999, and the Registrant has two renewal options thereafter for five years each. Subsidiaries of the Registrant also lease office space in Richmond, England; San Francisco, California; San Juan, Puerto Rico; Hong Kong; Beijing, China; Singapore; Buenos Aires, Argentina; New Delhi, India; Lahore, Pakistan; and Sao Paolo, Brazil, none of which leases or leased premises is material. The following table shows the material properties owned or leased by the Registrant, its subsidiaries, partnerships or affiliated plants. All of these properties are subject to mortgages or other liens or encumbrances granted to the lenders providing financing for the plant or project. 18 106
Ownership Interest to Plant or Project Location Land Plant Description - ----------------------------------------------------------------------------------------------------------- AES Beaver Valley Monaca, Pennsylvania Leased Coal-fired cogeneration power plant AES Placerita Newhall, California Leased Natural gas-turbine power plant AES Thames Montville, Connecticut Leased Coal-fired cogeneration power plant AES Shady Point LeFlore County, Owned Coal-fired cogeneration Oklahoma facility and liquid carbon dioxide power plant AES Barbers Point Oahu, Hawaii Leased Coal-fired power plant Kilroot Belfast Lough, Leased Coal and oil-fired power plant Northern Ireland Belfast West Belfast Port, Northern Leased Coal-fired power plant Ireland San Nicolas San Nicolas, Argentina Owned Power plant fueled by coal, oil, gas or petroleum coke Medway Isle of Grain, England Leased Gas-fired power plant AES Warrior Run Cumberland, Maryland Owned Coal-fired power plant under construction AES Lal Pir and Pak Gen Punjab, Pakistan Owned Oil-fired power plants under construction Rio Juramento Salta, Argentina Leased Hydroelectric power plant San Juan San Juan, Argentina Leased Hydroelectric power plant Hunan Xiangci-AES Hydro Hunan Province, Land Use Hydroelectric power plant Power Company Ltd. People's Republic of Right China Wuxi-AES-CARE Gas Turbine Jiangsu Province, Land Use Oil-fired Gas Turbine power Power Company Ltd. People's Republic of Right plant currently under China construction Wuxi-AES-Zhonghang Power Jiangsu Province, Land Use Heat Recovery Steam Turbine Company Ltd. People's Republic of Right power plant currently under China construction
19 107 Yangchun Fuyang Diesel Guangdong Province, Land Use Diesel power plant Engine Power Co. Ltd. People's Republic of Right China Sichuan Fuling Aixi Power Sichuan Province, Land Use Coal-fired Circulating Company Ltd. People's Republic of Right Fluidized Bed Boiler power China plant currently under construction - -----------------------------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS In re The AES Corporation Securities Litigation is a purported class action suit brought in the U.S. District Court for the Southern District of New York by certain persons who claim to have purchased shares of common stock and debentures issued by AES between June 25, 1991 and June 23, 1992 and who purport to sue on behalf of others similarly situated. The litigation consolidates four purported class actions previously filed against AES in June and July 1992. Also named as defendants are AES's directors, certain of its officers and the underwriters of its 1991 initial public offering of common stock and its 1992 offer of its 6 1/2 percent convertible subordinated debentures due 2002. In February 1995, the Company entered into a settlement agreement with plaintiffs' counsel on behalf of the class. The settlement is on a claims-made basis, and consists of $4.5 million, as well as warrants to purchase approximately 716,800 shares of AES Common Stock. Insurance proceeds are 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 is currently being finalized and, once concluded and approved by the court, the settlement proceeds will be distributed. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information 20 108 See the information contained under the caption "Price Range of Common Stock" on page 48 of the Registrant's 1995 Annual Report to Stockholders, which information is incorporated herein by reference. (b) Holders On March 27, 1996, there were 791 record holders of Registrant's Common Stock, par value $0.01 per share. (c) Dividends On December 7, 1993, the Board of Directors authorized a three-for-two stock split, effected in the form of a stock dividend, payable to stockholders of record on January 15, 1994. In addition, on February 17, 1994 the Board of Directors authorized a 3 percent stock dividend payable to stockholders of record on March 10, 1994. Accordingly, all outstanding share and per share data in all periods presented in Exhibit 11.1 and Item 6 of this Report have been restated to reflect the split and the stock dividend. On February 14, 1995, the Board of Directors decided to not issue either a cash or stock dividend. Under the terms of a corporate revolving loan and letters of credit facility of $225 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 loan and other documents 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. As of December 31, 1995, approximately $59 million was available under project loan documents for distribution by subsidiaries to the Registrant. ITEM 6. SELECTED FINANCIAL DATA See "Summary Financial Data" on page 48 of the Registrant's 1995 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See those portions of "1995 Financial Review" contained on pages 19 through 20, 22 through 25 inclusive, and 29 through 31 inclusive of the Registrant's 1995 Annual Report to Stockholders, which discussion and analysis are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the information contained in the consolidated financial statements on pages 20, 21, 26 through 28 inclusive, and 32 through 47 inclusive of the Registrant's 1995 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 21 109 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the information with respect to the ages of the Registrant's directors in the table on page 4 and the information contained under the caption "Election of Directors" on pages 1 through 3 inclusive, of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 16, 1996, which information is incorporated herein by reference. See also the information with respect to executive officers of the Registrant under Item 1A of Part I hereof, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See the information contained under the captions "Compensation of Executive Officers" on pages 9 through 11 inclusive and "Compensation of Directors" on page 5, of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 16, 1996, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners See the information contained under the caption "Security Ownership of Certain Beneficial Owners, Directors, and Executive Officers" on page 4 of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 16, 1996, which information is incorporated herein by reference. (b) Security Ownership of Management See the information contained under the caption "Security Ownership of Certain Beneficial Owners, Directors, and Executive Officers" on page 4 of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 16, 1996, which information is incorporated herein by reference. (c) Changes in Control Not applicable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the information contained under the caption "Certain Relationships and Related Transactions" on page 3 of the Proxy Statement, which information as incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) Financial Statements (all financial statements listed below are of the Company and its consolidated subsidiaries) -- Report of Independent Public Accountants is incorporated herein by reference to page 20 of the Registrant's 1995 Annual Report to Stockholders. 22 110 -- Consolidated Balance Sheets at December 31, 1994 and 1995 are incorporated herein by reference to pages 26 and 27 of the Registrant's 1995 Annual Report to Stockholders. -- Consolidated Statements of Operations -- For the Years Ended December 31, 1993, 1994 and 1995 are incorporated herein by reference to page 28 of the Registrant's 1995 Annual Report to Stockholders. -- Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 are incorporated herein by reference to pages 41 and 42 of the Registrant's 1995 Annual Report to Stockholders. -- Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1993, 1994 and 1995 are incorporated herein by reference to page 21 of the Registrant's 1995 Annual Report to Stockholders. -- Notes to Consolidated Financial Statements -- For the Years Ended December 31, 1993, 1994 and 1995 are incorporated herein by reference to pages 32 through 47 inclusive of the Registrant's 1995 Annual Report to Stockholders. (2) Financial Statement Schedules -- See Index to Financial Statement Schedules of the Registrant and subsidiaries at page S-1 hereof, which Index is incorporated herein by reference. (3) Exhibits 3.1 Amended and Restated Certificate of Incorporation of The AES Corporation is incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 3.2 By-Laws of The AES Corporation, as amended, are incorporated herein by reference to Exhibit 3.2 to Amendment No. 2 to the Registration Statement on Form S-1 (Registration No.E33-40483). 4.1(a) Indenture dated as of March 1, 1992 between The AES Corporation and Morgan Guaranty Trust Company of New York, including the form of 6 1/2 percent Convertible Subordinated Debenture Due 2002, is incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 4.1(b) Indenture dated as of June 15, 1993 between The AES Corporation and The Bank of New York, including the form of 9 3/4 percent Senior Subordinated Note Due 2000, is incorporated herein by reference to Amendment No. 1 to the Registration Statement on Form S-3 (Registration No. 33-62910). 10.1 Agreement for Purchased Power, dated January 10, 1983, between AES and Houston Lighting & Power Company, as amended, is incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 23 111 10.2 Electric Energy Purchase Agreement, dated August 15, 1985, between BV Partners and West Penn Power Company is incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.3 Power Purchase Contract, dated November 14, 1984, between Southern California Edison Company and AES Placerita, Inc. is incorporated herein by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.4 Amendment No. 1 effective February 5, 1988 to the Power Purchase Agreement between AES Placerita, Inc. and Southern California Edison Company, is incorporated herein by reference to Exhibit 10.3(a) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.5 Amendment No. 2 executed as of March 20, 1992 to the Power Purchase Contract between AES Placerita, Inc. and Southern California Edison Company, is incorporated herein by reference to Exhibit 10.3(b) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.6 Amendment No. 3 executed as of March 20, 1992 to the Power Purchase Contract between AES Placerita, Inc. and Southern California Edison Company, is incorporated herein by reference to Exhibit 10.3(c) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.7 Electricity Purchase Agreement, dated as of December 6, 1985, between The Connecticut Light and Power Company and AES Thames, Inc. is incorporated herein by reference to Exhibit 10.4 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.8 Amended Power Sales Agreement, dated as of December 10, 1985, between Oklahoma Gas and Electric Company and AES Shady Point, Inc. is incorporated herein by reference to Exhibit 10.5 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.9 Power Purchase Agreement, dated March 25, 1988, between AES Barbers Point, Inc. and Hawaiian Electric Company, Inc., as amended, is incorporated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.10 Amended and Restated Agreement for the Purchase of Firm Capacity and Energy, dated as of July 2, 1990, between AES Cedar Bay, Inc. and Florida Power & Light Company is incorporated herein by reference to Exhibit 10.7 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.11 Indemnity and Assumption Agreement, dated as of March 31, 1993, between Cedar Bay Generating Company, Limited Partnership and The AES Corporation is incorporated by reference to Exhibit 10.7(b) to the Company's Registration Statement on Form S-3 (Registration No. 33-62858). 24 112 10.12 Amended and Restated Coal Supply Agreement, dated April 13, 1988, between BV Partners and United Pittsburgh Coal Sales, Inc. is incorporated herein by reference to Exhibit 10.8 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.13 Coal and Limestone Supply and Ash Disposal Agreement, dated as of September 15, 1988, between LeFlore County Coal Company and AES Shady Point, Inc., as amended, is incorporated herein by reference to Exhibit 10.9 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.14 Coal and Limestone Supply and Ash Disposal Agreement, dated August 15, 1988, between P&K Co., Ltd. and AES Shady Point, Inc. is incorporated herein by reference to Exhibit 10.10 to Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.15 Coal, Limestone, Waste Disposal and Railroad Transportation Agreement, dated as of September 18, 1986, between CSX Transportation, Inc. and AES Thames, Inc., as amended, is incorporated herein by reference to Exhibit 10.11 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.16 Amended and Restated Fuel Supply Agreement, dated as of January 12, 1990, among AES Barbers Point, Inc., PT Kaltim Prima Coal and Sprague Energy Corp., as amended, is incorporated herein by reference to Exhibit 10.12 to Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.17 Gas Purchase Agreement, entered into in 1988, between Union Pacific Resources Company and AES Placerita, Inc. is incorporated herein by reference to Exhibit 10.13 to Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.18 Inducement, Assignment and Stock Pledge Agreement, dated as of December 27, 1983, between Applied Energy Services, Inc. and The Connecticut Bank and Trust Company, National Association is Inc. herein by reference to Exhibit 10.16 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.19 Amended and Restated Guarantee, dated as of November 30, 1990, by Applied Energy Services, Inc. and AES Connecticut Management, Inc. to The Connecticut Light and Power Company is incorporated herein by reference to Exhibit 10.17 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.20 Guarantee Agreement, dated March 25, 1988, between Applied Energy Services Inc. and Hawaiian Electric Company, Inc., as amended, is incorporated herein by reference to Exhibit 10.18 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.21 Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is incorporated herein by reference 25 113 to Exhibit 10.20 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.22 Amended and Restated Credit Agreement, dated as of November 30, 1990, among AES Montville, Inc., certain banks named therein and Citibank, N.A., as agent, is incorporated herein by reference to Exhibit 10.21 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.23 Ground Lease, dated as of August 15, 1985, between Atlantic Richfield Company and BV Partners is incorporated herein by reference to Exhibit 10.22 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.24 Facility Lease and Loan Agreement, dated as of August 15, 1988, between Manufacturers Hanover Trust Company of California and AES Placerita, Inc. is incorporated herein by reference to Exhibit 10.23 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.25 Surface Lease, dated December 9, 1985, among Mobil Oil Corporation, Tosco Enhanced Oil Recovery Corporation and AES Placerita, Inc. is incorporated herein by reference to Exhibit 10.24 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.26 Surface Sublease, dated as of August 15, 1988, between AES Placerita, Inc. and Manufacturers Hanover Trust Company of California, as Trustee, is incorporated herein by reference to Exhibit 10.25 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.27 Ground Lease, dated as of November 25, 1986, between Stone Connecticut Paperboard Corporation and AES Thames, Inc., as amended, is incorporated herein by reference to Exhibit 10.26 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.28 Sublease, dated as of August 20, 1990, between Hawaii Pacific Industries, Inc. and AES Barbers Point, Inc., as amended, is incorporated herein by reference to Exhibit 10.27 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.29 The AES Corporation Profit Sharing and Stock Ownership Plan is incorporated herein by reference to Exhibit 4c1 to the Registration Statement on Form S-8 (Registration No. 33-49262).* 10.30 The AES Corporation Incentive Stock Option Plan of 1991, as amended. 10.31 Applied Energy Services, Inc. Incentive Stock Option Plan of 1982 is incorporated herein by reference to Exhibit 10.31 to the Registration Statement on Form S-1 (Registration No. 33-40483).* 10.32 Deferred Compensation Plan for Executive Officers, as amended, is incorporated herein by reference to Exhibit 10.32 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.33 Deferred Compensation Plan for Directors, as amended, is incorporated herein by reference to Exhibit 10.33 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483).* 26 114 10.34 Assumption Agreement, dated as of November 30, 1990 among AES Montville, Inc., AES Thames, Inc. and Citibank, N.A., as agent, is incorporated herein by reference to Exhibit 10.35 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.35 Credit and Reimbursement Agreement, dated as of March 20, 1990, among AES Barbers Point, Inc., certain banks named therein and Security Pacific National Bank, as agent, is incorporated herein by reference to Exhibit 10.36 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.36 Agreement for Engineering, Procurement and Construction Services, dated as of August 24, 1989, between AES Barbers Point, Inc. and Multipower Associates is incorporated herein by reference to Exhibit 10.40 to Amendment No. 3 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.37 Transmission Agreement, dated as of August 28, 1985, between Duquesne Light Company and AES Beaver Valley, Inc. is incorporated herein by reference to Exhibit 10.42 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.38 The AES Corporation Stock Option Plan for Outside Directors is incorporated herein by reference to Exhibit 10.43 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.* 10.39 Subordinated Debt Agreement between AES Shady Point, Inc. and The AES Corporation dated as of December 6, 1991 is incorporated herein by reference to Exhibit 10.44 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.40 First Amendment to the Amended Power Sales Agreement, dated as of December 19, 1985, between Oklahoma Gas and Electric Company and AES Shady Point, Inc. is incorporated herein by reference to Exhibit 10.45 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.41 Revolving Loan Agreement dated as of July 1, 1991 between Manufacturers Hanover Trust Company of California, The AES Corporation, Ford Motor Credit Company, Prudential Interfunding Corporation, AES Placerita, Inc., ABB Energy Services Inc. and ABB Energy Ventures Inc. is incorporated herein by reference to Exhibit 10.46 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.42 Amendment No. 1 dated as of July 16, 1987 to Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is incorporated herein by reference to Exhibit 10.47 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.43 Amendment No. 2 dated as of December 18, 1987 to Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard 27 115 Chartered Bank is incorporated herein by reference to Exhibit 10.48 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.44 Amendment No. 3 dated as of June 3, 1988 to Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is incorporated herein by reference to Exhibit 10.49 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.45 Amendment No. 4 dated as of July 1, 1991 to Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is incorporated herein by reference to Exhibit 10.50 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.46 Amendment No. 5 dated as of December 6, 1991 to Application for Letter of Credit and Reimbursement Agreement, dated as of June 23, 1987, among AES Shady Point, Inc., Security Pacific National Bank, Union Bank, Credit Suisse, New York Branch, The Bank of Nova Scotia and Standard Chartered Bank is incorporated herein by reference to Exhibit 10.51 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.47 Guarantee letter agreement dated July 17, 1990 executed by Applied Energy Services, Inc. in favor of Florida Power & Light Company, is incorporated herein by reference to Exhibit 10.53 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.48 Agreement for the sale and purchase of the whole of the issued share capital of Kilroot Power Limited, Belfast West Power Limited and Cloghan Point (Holdings) Limited dated March 6, 1992 between The Department of Economic Development, Nigen Limited, The AES Corporation and Powerfin S.A., is incorporated herein by reference to Exhibit 10.54 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.49 Variation Agreement dated May 31, 1992 between Cloghan Limited, The Department of Economic Development, Nigen Limited, The AES Corporation and Powerfin S.A., is incorporated herein by reference to Exhibit 10.55 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.50 Lease of Belfast West Power Station dated April 1, 1992 between Northern Ireland Electricity plc and Belfast West Power Limited, is incorporated herein by reference to Exhibit 10.56 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.51 Lease of Kilroot Power Station dated April 1, 1992 between Northern Ireland Electricity plc and Kilroot Power Limited, is incorporated herein by reference to Exhibit 10.57 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.52 Facility Agreement dated May 31, 1992 between Nigen Limited, Barclays Bank PLC and National Westminster Bank Plc as Lead Arrangers, ABN 28 116 AMRO Bank N.V., Banque Indosuez, Barclays Bank PLC, The Industrial Bank of Japan, Limited and National Westminster Bank Plc as arrangers, Generale Bank S.A./NV as sponsor relationship bank, Barclays Bank PLC as agent, Ulster Bank Limited and the financial institutions named in the first schedule thereto, is incorporated herein by reference to Exhibit 10.58 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.53 Coal and Oil Supply Contract for Kilroot Power Station dated May 31, 1992 between Powerfin S.A., Tractebel S.A. and Kilroot Power Limited, is incorporated herein by reference to Exhibit 10.59 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.54 Coal Supply Contract for Belfast West Power Station dated May 31, 1992 between Powerfin S.A., Tractebel S.A. and Belfast West Power Limited, is incorporated herein by reference to Exhibit 10.60 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.55 Agreement in Respect of Kilroot Power Station Generating Unit GT1 dated April 1, 1992 between Kilroot Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.61 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.56 Schedule identifying a substantially identical agreement to the Agreement constituting Exhibit 10.61 hereto entered into between Kilroot Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.61(a) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.57 Agreement in Respect of Kilroot Power Station Generating Unit No. 1 dated April 1, 1992 between Kilroot Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.62 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.58 Schedule identifying a substantially identical agreement to the Agreement constituting Exhibit 10.62 hereto entered into between Kilroot Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.62(a) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.59 Agreement in Respect of Belfast West Power Station Generating Unit No. 1 dated April 1, 1992 between Belfast West Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.63 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 10.60 Schedule identifying substantially identical agreements to the Agreement constituting Exhibit 10.63 hereto entered into between Belfast West Power Limited and Northern Ireland Electricity plc., is incorporated herein by reference to Exhibit 10.63(a) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1992. 29 117 10.61 $225,000,000 Credit Agreement dated as of September 8, 1995 among The AES Corporation, the Banks listed therein, Barclays Bank PLC and Union Bank, as Fronting Banks, Barclays Banks PLC, as Managing Agents, and Morgan Guaranty Trust Company of New York, as Agent is incorporated herein by reference to Exhibit 10.64 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1995. 10.62 The AES Corporation Supplemental Retirement Plan is incorporated herein by reference to Exhibit 10.64 to the Annual Report on Form 10-K of the Registrant for the year ended December 31, 1994. 10.63 Sponsors' Support Agreement dated as of May 16, 1995 among AES Transpower, Inc. and The AES Corporation as Sponsors; AES Lal Pir Limited as the Borrower; the International Finance Corporation and The Bank of Tokyo, Ltd. as Facility Agents. 10.64 Sponsors' Support Agreement dated as of January 5, 1996 among The AES Corporation as Sponsor; AES Pakistan Holdings and AES Pak Gen Holdings, Inc. as Sponsors and Shareholders; AES Pak Gen (Private) Company as Borrower; the International Finance Corporation and The Bank of Tokyo, Ltd. as Facility Agents. 11 Statement of computation of earnings per share. 12 Statement of computation of ratio of earnings to fixed charges. 13 1995 Annual Report to Stockholders of the Registrant. 21 Significant subsidiaries of The AES Corporation. 23 Consent of Independent Public Accountants, Deloitte & Touche LLP. 24 Power of Attorney. (b) Reports on Form 8-K Not applicable. 30 118 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 1, 1996 THE AES CORPORATION (COMPANY) By:/s/Dennis W. Bakke ------------------ Dennis W. Bakke President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/Roger W. Sant* Chairman of the Board April 1, 1996 - ------------------------------- Roger W. Sant /s/Dennis W. Bakke President, Chief Executive Officer and April 1, 1996 - ------------------------------- Director (Principal Executive Officer) Dennis W. Bakke /s/Vicki-Ann Assevero* Director April 1, 1996 - ------------------------------- Vicki-Ann Assevero /s/Dr. Alice F. Emerson* Director April 1, 1996 - ------------------------------- Dr. Alice F. Emerson /s/Frank Jungers* Director April 1, 1996 - ------------------------------- Frank Jungers /s/Dr. Henry R. Linden* Director April 1, 1996 - ------------------------------- Dr. Henry R. Linden /s/Russell E. Train* Director April 1, 1996 - ------------------------------- Russell E. Train
119 /s/Thomas I. Unterberg* Director April 1, 1996 - ------------------------------- Thomas I. Unterberg /s/Robert H. Waterman, Jr.* Director April 1, 1996 - ------------------------------- Robert H. Waterman, Jr. /s/Barry J. Sharp Vice President and Chief Financial April 1, 1996 - ------------------------------- Officer (Principal Financial and Accounting Barry J. Sharp Officer) *By: Barry J. Sharp - ------------------------------- Barry J. Sharp Attorney-in-Fact*
120 THE AES CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES S-2 Independent Auditors' Report S-3 Schedule I - Condensed Financial Information of Registrant S-8 Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above are omitted as the information is either not applicable, not required, or has been furnished in the financial statements or notes thereto incorporated by reference in Item 8 hereof. S-1 121 INDEPENDENT AUDITORS' REPORT The AES Corporation: We have audited the consolidated financial statements of The AES Corporation as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated February 20, 1996; such consolidated financial statements and report are included in your 1995 Annual Report and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of The AES Corporation, listed in the index to the consolidated financial statement schedules on page S-1. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE, LLP Washington, D.C. February 20, 1996 S-2 122 THE AES CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT UNCONSOLIDATED BALANCE SHEETS (in millions)
ASSETS December 31 - ------------------------------------------------------------------------------------- 1994 1995 Current Assets: Cash and cash equivalents $ 66 $ 2 Accounts receivable -- 2 Accounts and notes receivable from subsidiaries 129 64 Prepaid expenses and other 12 11 - ------------------------------------------------------------------------------------- Total current assets 207 79 Investment in subsidiaries (on the equity method) 306 556 Office Equipment: Cost 5 4 Accumulated depreciation (2) (3) - ------------------------------------------------------------------------------------- Office equipment, net 3 1 Other Assets: Deferred costs (Less accumulated amortization: 1994, $2, 1995, $3) 5 6 Project Development costs 38 40 Investment in affiliate 6 -- Deferred income taxes -- 8 Notes receivable from subsidiaries 43 40 Escrow deposits and other assets 5 9 - ------------------------------------------------------------------------------------- Total other assets 97 103 - ------------------------------------------------------------------------------------- TOTAL $613 $739 =====================================================================================
See notes to Schedule I S-3 123 THE AES CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT UNCONSOLIDATED BALANCE SHEETS (in millions)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31 - ------------------------------------------------------------------------------------- 1994 1995 Current Liabilities: Accounts payable $ 1 $ 3 Income taxes payable 2 9 Accrued liabilities 7 50 - ------------------------------------------------------------------------------------- Total current liabilities 10 62 Long-term Liabilities: Other notes payable 125 125 Deferred income taxes 73 -- Other long-term liabilities 3 3 - ------------------------------------------------------------------------------------- Total long-term liabilities 201 128 Stockholders' Equity: Preferred stock -- -- Common stock 1 1 Additional paid-in capital 240 293 Retained earnings 164 271 Treasury Stock -- (6) Cumulative translation adjustment (3) (10) - ------------------------------------------------------------------------------------- Total stockholders' equity 402 549 - ------------------------------------------------------------------------------------- TOTAL $613 $739 =====================================================================================
See notes to Schedule I S-4 124 THE AES CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF UNCONSOLIDATED OPERATIONS (in millions)
For the Years Ended December 31 - --------------------------------------------------------------------------------------------------------------- 1993 1994 1995 Revenues $ 46 $ 47 $ 64 Equity in earnings of subsidiaries 73 106 108 - --------------------------------------------------------------------------------------------------------------- Total revenues 119 153 172 Operating Costs and Expenses: Cost of sales and services 28 30 53 Selling, general and administrative expenses 35 25 20 - --------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 63 55 73 - --------------------------------------------------------------------------------------------------------------- Operating Income 56 98 99 Interest Income, net 9 8 8 - --------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 65 106 107 Income Tax Expense (Benefit) (5) 4 -- - --------------------------------------------------------------------------------------------------------------- Net income before extraordinary item and cumulative effect of change in accounting principle 70 102 107 Extraordinary item - loss on extinguishment of debt (less applicable income taxes of $1) -- 2 -- - --------------------------------------------------------------------------------------------------------------- Net income before cumulative effect of change in 70 100 107 accounting principle Cumulative effect (benefit) on prior years of change to a (1) -- -- different method of accounting for income tax - --------------------------------------------------------------------------------------------------------------- Net Income $71 $100 $107 ===============================================================================================================
See notes to Schedule I S-5 125 THE AES CORPORATION SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF UNCONSOLIDATED CASH FLOWS (in millions)
For the Years Ended December 31, - --------------------------------------------------------------------------------------------------------------- 1993 1994 1995 Net cash provided by (used in) operating activities $ (21) $ 1 $ 1 Investing Activities Issuance of notes receivable -- (1) 2 Acquisitions -- -- (130) Distributions from subsidiaries 32 62 88 Additions to office equipment -- (1) -- Project development costs, net (9) (17) (34) Investment in subsidiaries (114) (6) (32) Escrow deposits and other (4) 3 (4) - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (95) 40 (110) Financing ActivitiesNet borrowings under the revolver -- -- 50 Proceeds from other notes payable 80 -- -- Principal payments on other notes payable (5) -- -- Proceeds from issuance of common stock 69 1 1 Purchased treasury stock -- -- (6) Dividends paid (14) -- -- Other -- -- -- - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 130 1 45 Increase/(decrease) in cash and cash equivalents 14 42 (64) Cash and cash equivalents, beginning 10 24 66 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, ending $ 24 $ 66 $ 2 ===============================================================================================================
See notes to Schedule I S-6 126 THE AES CORPORATION SCHEDULE I NOTES TO SCHEDULE I 1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting for Subsidiaries -- The AES Corporation has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information. Revenues -- Construction management fees earned by the parent from its consolidated subsidiaries are eliminated. Income Taxes -- Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect on prior years of changing to a different method of accounting for income taxes relates to the accumulated net tax benefits of subsidiaries which will not be reimbursed by the Company. The provision for income taxes reflects the difference between the effective consolidated tax rate and the tax as allocated to each of the subsidiaries computed as if each subsidiary were a separate taxpayer. All tax benefits generated by subsidiaries which will not be reimbursed by the Company. The Company's income or loss for income tax purposes is included in a consolidated and other affiliated companies (the "group"). Prior to 1995, the consolidated amount of current and deferred tax expense for the group was allocated to each number as if it were a separate taxpayer and by allocating certain tax benefits available to the group based on their respective net incomes before taxation. Effective January 1, 1995, the group changed its method of allocating income taxes and no longer allocates tax benefits available from other members of the group when calculating its tax balances. This more accurately depicts the tax assets and liabilities of The AES Corporation and its subsidiaries on a "stand alone" basis. The effect of this change on the unconsolidated balance sheet was to decrease the deferred tax liability at the parent company level by approximately $81 million and decrease the accounts and rates receivable from subsidiaries by the same amount at January 1, 1995. Accounts and Notes Receivable from Subsidiaries -- Such amounts have been shown in current or long-term assets based on terms in agreements with subsidiaries, but payment is dependent upon meeting conditions precedent in the subsidiary loan agreements. 2. SCHEDULE OF MATURITIES Long-term debt of $125.0 million at December 31, 1994 and 1995 is to be repaid $75.0 in 2000 and $50.0 million 2002. S-7 127 THE AES CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in millions)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND CONSTRUCTION END OF DESCRIPTION PERIOD EXPENSES IN PROGRESS RETIREMENTS PERIOD =================================================================================================================== Amortization of deferred costs Year ended December 31, 1993 20 3 --- --- 23 Year ended December 31, 1994 23 3 --- --- 26 Year ended December 31, 1995 26 5 --- --- 31
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