-----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, I4ZI5/Nhhma103Hiu/GRtKMEnCA9GF//YrdnRuMW2FXD19v4GpJKfzXHQWL2YbFl sXYyxPehwmeDRjEHUJdLbw== 0001005150-97-000210.txt : 19970401 0001005150-97-000210.hdr.sgml : 19970401 ACCESSION NUMBER: 0001005150-97-000210 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AES CORPORATION CENTRAL INDEX KEY: 0000874761 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 541163725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12291 FILM NUMBER: 97569367 BUSINESS ADDRESS: STREET 1: 1001 N 19TH ST CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 7035221315 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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 New York Stock Exchange 9-3/4% Senior Subordinated Notes due 2000 None Warrants to Purchase Common Stock, par value $.01 per share NASDAQ 10-1/4% Senior Subordinated Notes due 2006 None $2.6875 Term Convertible Securities, Series A New York Stock Exchange
---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ---------- The aggregate market value of Registrant's voting stock held by non-affiliates of Registrant, at March 3, 1997, was $3,405,813,628. The number of shares outstanding of Registrant's Common Stock, par value $0.01 per share, at March 3, 1997, was 77,492,990. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 15, 1997. Certain information therein is incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS (a) General Development of Business The AES Corporation (the "Company", "AES" and/or the "Registrant"), is a global power company committed to supplying electricity to customers world-wide in a socially responsible way. The Company 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. AES markets power principally from electricity generating facilities that it develops, acquires, owns and operates. 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, through competitively bid privatization initiatives outside of the United States or negotiated acquisitions. Since 1992, the Company's total generating capacity in megawatts has grown by 426 percent, with the total number of plants in operation increasing from eight to 26. AES operates and owns (entirely or in part), through subsidiaries and affiliates, power plants in seven countries with a capacity of approximately 9,600 megawatts (including 4,000 megawatts attributable to the Ekibastuz plant in Kazakstan which at the time of its acquisition in August 1996 was running at approximately 20 percent of its capacity). AES is also constructing eight additional power plants and one expansion in four countries with a design capacity of approximately 1,700 megawatts. The Company's total ownership in plants in operation and under construction aggregates approximately 11,300 megawatts and its net equity ownership in such plants is approximately 7,500 megawatts. In addition, AES has numerous projects in advanced stages of development, including seven projects with an aggregate design capacity of approximately 4,700 megawatts that have executed or been awarded power sales agreements. OUTLOOK The global trend of electricity market restructuring has created significant new business opportunities for companies like AES. There is a trend away from government-owned electricity systems toward deregulated, competitive market structures, in both domestic and international markets. Many countries have rewritten their laws and regulations to allow foreign investment and private ownership of electricity generation, transmission or distribution systems. Some countries have or are in the process of "privatizing" their electricity systems by selling all or part of such systems to private investors. With 18 of its projects having been acquired or having commenced commercial operations since 1992, AES has been an active participant in both the international privatization process and the development process. The Company is currently pursuing over 70 projects through possible acquisitions, the expansion of existing plants and greenfield development. 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 many countries. The Company, a corporation organized under the laws of Delaware, was formed in 1981. The principal office of the Company is located at 1001 North 19th Street, Suite 2000, Arlington, Virginia 22209, and its telephone number is (703) 522-1315. (b) Financial Information About Industry Segments The Company operates in only one industry segment: electric power supply. (c) Narrative Description of Business STRATEGY The Company's strategy in helping meet the world's need for electricity is to participate in competitive power markets as they develop either by greenfield development or by acquiring and operating existing facilities or systems in these markets. The Company generally operates electric generating facilities that utilize natural gas, coal, oil, hydro power, or combinations thereof. In addition, the Company participates in the distribution and retail supply businesses in certain limited instances, and will continue to review opportunities in such markets in the future. Other elements of the Company's strategy include: o Supplying energy to customers at the lowest cost possible, taking into account factors such as reliability and environmental performance; 2 o Constructing or acquiring projects of a relatively large size (generally larger than 100 megawatts); o When available, entering into power sales contracts with electric utilities or other customers with significant credit strength; and o Where possible, participating in distribution and retail supply markets that grant concessions with long-term pricing arrangements. The Company also strives for operating excellence as a key element of its strategy, which it believes it accomplishes by minimizing organizational layers and maximizing company-wide participation in decision-making. AES has attempted to create an operating environment that results in safe, clean and reliable electricity generation. 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. Where possible, AES attempts to sell electricity under long-term power sales contracts. The Company attempts to structure the revenue provisions of such 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 usually based on a plant's net electrical output, with payment rates usually indexed to the fuel costs of the customer 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. AES attempts to structure the power sales contract payments 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 with operating at higher or lower levels). The Company attempts to provide fuel for its operating plants generally under long-term supply agreements, either through contractual arrangements with third parties or, in some instances, through acquisition of a dependable source of fuel. The Company will generally contract with outside 3 parties, often the project's fuel supplier, to provide for the removal and disposal of waste. As electricity markets become more competitive, it may be more difficult for AES (and other power generation companies) to obtain long-term power sales contracts. In markets where long-term contracts are not available, AES will pursue methods to hedge costs and revenues to provide as much assurance as possible of a project's profitability. In markets where long-term power sales contracts are unavailable, AES might choose to develop or acquire a project (i) with a partial contractual hedge, or (ii) with no contractual hedge, or AES may choose not to participate in these markets. To the extent that AES pursues a project with no contractual hedge, AES's diverse portfolio of projects may provide some hedge against the increased volatility of the project's earnings and cash flow. The Company attempts to finance 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, 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, usually a small portion of the aggregate project debt, and thus the project financing structures are generally described herein as being "substantially non-recourse" to AES and its other projects. AES PLANTS IN OPERATION AND UNDER CONSTRUCTION The table below sets forth information on the Company's plants and projects currently in operation or under construction. 4
Year of Acquisition or Commencement of AES Equity Commercial Capacity Interest Plant Fuel Operations (Megawatts) Location (%) - ----- ---- -------------- ----------- -------- ----------- In Operation North America Deepwater.................. Pet Coke 1986(a) 143 Texas 100 Beaver Valley.............. Coal 1987 125 Pennsylvania 80 Placerita.................. Gas 1989 120 California 100 Thames..................... Coal 1990 181 Connecticut 100 Shady Point................ Coal 1991 320 Oklahoma 100 Barbers Point.............. Coal 1992 180 Hawaii 100 Europe Kilroot (NIGEN)............ Coal/Oil 1992 520 United Kingdom 47 Belfast West (NIGEN)....... Coal 1992 240 United Kingdom 47 Medway..................... Gas 1995 660 United Kingdom 25 Borsod (Tiszai)............ Coal 1996 171 Hungary 63 Tisza II (Tiszai).......... Oil/Gas 1996 860 Hungary 93 Tiszapalkonya (Tiszai)..... Coal 1996 250 Hungary 93 Asia Cili Misty Mountain........ Hydro 1994 26 China 24 Yangchun Sun Spring........ Oil 1995 15 China 12 Wuxi Tin Hill.............. Oil 1996 63 China 26 Wuhu Grassy Lake........... Coal 1996 125(b) China 12 Ekibastuz.................. Coal 1996 4,000(c) Kazakstan 70 South America San Nicolas................ Multiple 1993 650 Argentina 69 Cabra Corral (Rio Juramento) Hydro 1995 102 Argentina 98 El Tunal (Rio Juramento)... Hydro 1995 10 Argentina 98 Ullum (San Juan)........... Hydro 1996 45 Argentina 98 Sarmiento (San Juan)....... Gas 1996 33 Argentina 98 Fontes Nova (Light)........ Hydro 1996 144 Brazil 14 Pereira Passos (Light)..... Hydro 1996 100 Brazil 14 Nilo Pecanha (Light)....... Hydro 1996 380 Brazil 14 Ilha dos Pombos (Light).... Hydro 1996 164 Brazil 14 Total in Operation 9,627 Under Construction Lal Pir.................... Oil 1997(d) 337 Pakistan 90 PakGen..................... Oil 1997(d) 337 Pakistan 90 Jiaozuo Aluminium Power.... Coal 1997(d) 250 China 34 Chengdu Lotus City......... Gas 1997(d) 48 China 17 Wuhu Grassy Lake........... Coal 1997(d) 125(b) China 12 Aixi Heart River........... Coal 1998(d) 50 China 34 Hefei Prosperity Lake...... Oil 1998(d) 115 China 34 Barry...................... Gas 1998(d) 230 United Kingdom 100 Warrior Run................ Coal 1999(d) 180 Maryland 100 -------- Total under Construction 1,672
- ---------- (a) Plant operations commenced in 1986, but control was acquired in 1995. (b) 125 megawatts of Wuhu Grassy Lake is currently in operation. The other half is under construction. (c) Due to poor historical maintenance over the ten years prior to the Company's purchase, the facility's capacity factor is approximately 20 percent. (d) Estimated date of commencement of commercial operations. 5 NORTH AMERICA AES currently owns and operates, through subsidiaries and affiliates, six plants in the United States representing approximately 1,069 megawatts. AES Barbers Point, Inc. ("AES Barbers Point") is an indirectly owned subsidiary of AES which owns and operates a 180 megawatt coal-fired circulating fluidized bed ("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 26 years. 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 16 years. HECO's purchases represented approximately 16 percent of AES's 1996 consolidated revenues. AES Beaver Valley is a 125 megawatt pulverized coal-fired cogeneration facility located in Monaca, Pennsylvania which is owned by BV Partners, a Pennsylvania partnership ("BV Partners"). AES Beaver Valley, Inc. ("AES Beaver Valley"), a subsidiary of AES, and Shepperton Leasing Company are the sole partners in BV Partners. AES Beaver Valley, as an 80 percent owner and managing partner, operates the plant for the partnership. West Penn Power Company ("West Penn") purchases electricity produced by the plant under a power sales contract with a remaining term of approximately 20 years. BV Partners sells steam to NOVA Chemicals Inc. for use in its chemical processing activities under a requirements contract with a remaining term of approximately five years. AES Deepwater, Inc. ("AES Deepwater") is a subsidiary of AES which owns a 143 megawatt petroleum coke-fired cogeneration facility located near Houston, Texas. The facility sells electricity to Houston Lighting and Power Company ("HL&P") under a power sales contract which expires in 1998. AES Deepwater, under a contract which also expires in 1998, produces and delivers process steam to an ARCO Petroleum Products Company ("ARCO Petroleum") refinery adjacent to the cogeneration facility. AES Placerita, Inc. ("AES Placerita") is an indirectly owned subsidiary of AES which leases and operates a 120 megawatt combined-cycle gas turbine cogeneration facility near Los Angeles, California. The plant sells electricity to Southern California Edison Company under a contract with a remaining term of approximately 17 years. AES Placerita sells steam to Hillside Oil Partners, which is engaged in oil recovery operations, and ARCO Oil and Gas Company. 6 AES Shady Point, Inc. ("AES Shady Point") is an indirectly owned subsidiary of AES which 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 CO2 plant, which utilizes in its CO2 production processes approximately 65,000 pounds per hour of process steam 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 11 years. OG&E's purchases represented approximately 20 percent of AES's 1996 consolidated revenues. AES Thames, Inc. ("AES Thames") is an indirectly owned subsidiary of AES which 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 18 years. AES Thames also sells steam to Stone Container Paperboard Corporation for use in its recycled paperboard plant located adjacent to the plant. CL&P's purchases represented approximately 16 percent of AES's 1996 consolidated revenues. EUROPE AES currently owns and operates, through subsidiaries and affiliates, seven plants in Europe representing approximately 2,701 megawatts. NIGEN Limited ("NIGEN"), a joint venture company owned by a United Kingdom ("U.K.") subsidiary of the Company and a subsidiary of Tractebel, S.A., a Belgian utility, owns and operates two power plants in Northern Ireland: Kilroot, a 520 megawatt dual-fired (coal and oil) power plant, and Belfast West, a 240 megawatt coal-fired power plant. The Kilroot and Belfast West plants have entered into power sales contracts, subject to cancellation in 14 years and four years, respectively, with Northern Ireland Electricity, plc, a transmission and distribution company. Medway Power Limited ("Medway Power") is 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"), which 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 Operations Limited ("AESMO"), an indirectly owned U.K. subsidiary of AES, operates and maintains the plant. 7 Medway Power sells its entire output through national electricity pool trading arrangements (the "Pool") at prices based on the supply of, and demand for, electricity available in the Pool. In addition, Medway Power has entered into a contract with each of Southern and SEEBOARD, under which Southern and SEEBOARD will pay Medway Power capacity payments based on the plant's available capacity, and energy cost payments, based on the plant's actual sales of electricity to the Pool, that reflect fuel costs and variable transmission charges incurred (each a "Contract for Differences"). The basis of the contracts is 660 megawatts. Sales of electrical output in excess of 660 megawatts are sold into the Pool, and not subject to the Contract for Differences. The plant began commercial operations under the terms of the Contracts for Differences on October 1, 1996. Commercial operations were delayed by one year due to design difficulties with the rotors of the two combustion turbines. These rotors were rebuilt with parts of a new design in the summer of 1996 and there has not been a recurrence of the difficulties since that time. On December 23, 1996, one of the combustion turbines shut down with damage resulting from a problem with its combustion system. The turbine was repaired by Medway Power at its cost and returned to service in January 1997. Medway Power has begun arbitration proceedings against the contractor to recover the costs of the repairs, estimated at approximately $10 million, from the contractor under the terms of the warranty. Although no assurance can be given that Medway Power will prevail in the arbitration, the Company believes that the outcome of this matter will not have a material adverse effect on its consolidated financial position. Tiszai Eromu Rt. is an indirectly owned subsidiary of AES which owns and operates three power plants totaling 1,281 megawatts of gross capacity (1,115 net megawatts) and a coal mine in Hungary. The plants consist of (i) the Tisza II facility, an 860 megawatt oil and natural gas-fired facility that sells electricity under a contract ending in 2010, (ii) the Tiszapalkonya facility, a 250 megawatt coal-fired facility that sells electricity under a contract ending in 2001, and (iii) the Borsod facility, a 171 megawatt coal-fired facility that sells electricity under a contract ending in 2001. Each plant sells electricity to Magyar Villamos Muvek Rt. ("MVM Rt."), a Hungarian, state-owned integrated utility, under long-term power sales contracts. These agreements currently are being renegotiated to conform their pricing methodology with standard international practice. Aggregate purchases by MVM Rt. under the three power sales agreements were approximately 10 percent of the Company's consolidated revenues in 1996. AES also has the right to develop an additional 150 megawatt coal-fired electric generating facility. 8 In August 1996, AES acquired its initial 80.8 percent of Tiszai Eromu Rt. at a cost of $110 million. In December 1996, AES, through a subsidiary, completed the purchase of an additional 12.5 percent of Tiszai Eromu Rt., from employee pension plans at a cost of $17 million, bringing AES's total equity interest in Tiszai Eromu Rt. to 93.3 percent. Substantial risks associated with these plants exist, however, including those relating to the successful renegotiation of power sales arrangements with the Hungarian government, plant operation and maintenance, construction difficulties in respect of the undeveloped facility, plant refurbishment, environmental risk, political risk, repatriation of earnings and currency inconvertibility. ASIA AES currently owns and operates, through subsidiaries and affiliates, five plants in Asia representing approximately 4,229 megawatts of generating capacity. AES China Generating Co. Ltd. ("AES Chigen") was founded in December 1993 by AES to develop, acquire, finance, construct, own and operate electric power generation facilities in the People's Republic of China (the "PRC"). Since commencing business, AES Chigen has developed eight power projects which are currently in operation or under construction in the PRC having an aggregate nameplate capacity of approximately 817 megawatts. AES currently owns all of the issued and outstanding shares of AES Chigen's Class B Common Stock, which represents approximately 48% of the economic value of AES Chigen, and 50% of the voting power, on most matters. The remaining shares, constituting Class A Common Stock, are publicly-held. In November 1996, AES Chigen and AES entered into an Agreement and Plan of Amalgamation, providing among other things for AES Chigen to become a wholly owned subsidiary of AES (the "Amalgamation"). The Amalgamation is subject to various conditions, including the approval of the holders of the Class A Common Stock of AES Chigen, and there can be no assurance that the Amalgamation will be consummated. The special class meeting of the holders of the AES Chigen Class A Common Stock and the special general meeting of the shareholders of AES Chigen to vote on the Amalgamation are scheduled for April 10, 1997. AES Suntree Ltd., is an indirectly owned subsidiary of AES which owns and operates a 4,000 (design capacity) megawatt mine-mouth, coal-fired power facility in Kazakstan. The facility sells electricity to a government-owned distribution company under a 35-year power sales contract. Due to economic difficulties over the ten years prior to the Company's purchase, the facility has experienced a reduction in performance and has operated at a capacity factor of approximately 20 percent. AES has agreed to increase the capacity to 63 percent over a five-year period (contingent on the purchaser's 9 performance of its obligations under the power sales contract). Through December 31, 1996, approximately $35 million (excluding value added taxes) was billed under the power sales contract for electricity, of which the purchaser paid approximately $5 million. The Company has recorded a provision of $20 million to reduce the carrying value of the contract receivable as of December 31, 1996 to $10.0 million. As of December 31, 1996, the net assets of this project were $24 million, a portion of which was represented by the contract receivable referred to above. There can be no assurance as to the ultimate collectibility of amounts owned to AES as of December 31, 1996 or additional amounts related to future deliveries of electricity under the power sales contract or the recoverability of the Company's investment or additional amounts the Company may invest in the project. Other substantial risks associated with this plant exist, including those relating to operations and maintenance, construction, refurbishment, political risk, repatriation of earnings and currency convertibility. SOUTH AMERICA AES currently owns and operates, through subsidiaries and affiliates, and, in certain instances, together with partners, nine plants in South America representing approximately 1,628 megawatts of generating capacity, as well as 3,800 megawatts of transmission and distribution system. Central Termica San Nicolas S.A. ("San Nicolas") is an indirectly owned subsidiary of AES which 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 53 percent of the plant's output capability) under two power sales contracts, each with a remaining term of four years. 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., a privatized Argentine distribution company, purchases 60 megawatts of electricity. The plant sells additional electricity, when profitable, into the Argentine spot market. ESEBA's purchases accounted for approximately 11 percent of AES's 1996 consolidated revenues. Hidroelectrica Rio Juramento S.A. ("Rio Juramento") is an indirectly owned subsidiary of AES which leases and operates a 112 megawatt hydroelectric station in the province of Salta, Argentina. The station consists of 10 a 102 megawatt facility with a large storage reservoir capable of inter-year storage, and a 10 megawatt facility capable of inter-seasonal storage. Rio Juramento has exclusive rights to operate the facility under a 30-year concession agreement, and sells electricity in the Argentine spot market. Hidrotermica San Juan, S.A. ("San Juan"), is an indirectly owned subsidiary of AES and the owner and operator of two power generating facilities totaling 78 megawatts in the province of San Juan, Argentina. The facility includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas combustion power plant. Light Servicos de Electricidade, S.A. ("Light") is a 3,800 megawatt Brazilian electric power generation, transmission and distribution system serving 28 municipalities in the state of Rio de Janeiro, Brazil that is controlled by a consortium (the "Consortium") comprised of the following parties (with each party's respective percentage ownership, as of December 31, 1996, in parentheses): subsidiaries or affiliates of AES (11.35 percent), Electricite de France (11.35 percent); Houston Industries Incorporated (11.35 percent); Companhia Siderurgica Nacional (7.25 percent); and Banco Nacional de Desenvolvimento Economico E Social (9.14 percent). In January 1997, AES acquired an additional 2.4 percent of the voting interest in Light, bringing its total equity interest in Light to 13.75 percent; this acquisition did not alter the respective voting rights, or other rights and obligations, of the parties constituting the Consortium. In connection with the purchase of the controlling interest by the Consortium, the Ministry of Mines and Energy of Brazil granted a 30-year concession to Light pursuant to the terms of a concession agreement which obligates Light to provide electric services to all customers within its concession, and 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 Ministry of Mines and Energy of Brazil has the authority to review Light's costs to determine the adjustment, if any, to the operating cost component for subsequent five-year periods. Light generates about 16 percent 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 percent of the total), 53 percent is purchased from Furnas Centrais Electricas S.A., a power generation and transmission company owned by Eletrobras, and the remaining 31 percent is purchased from Itaipu Binacional, a power generation company owned by the Republic of Brazil and the Republic of Paraguay. 11 In December 1996, a subsidiary of AES completed a $167.5 million syndicated bank financing related to its equity ownership of Light. Under the terms of the financing, a wholly-owned subsidiary of AES pledged the shares of Light owned by it as collateral for the loan. The proceeds of the financing were used to repay a portion of the debt incurred in the acquisition of AES's interest in Light. PROJECTS UNDER CONSTRUCTION AES Lal Pir Limited ("AES Lal Pir") and AES Pak Gen (Private) Company ("AES Pak Gen"), are indirectly owned project subsidiaries of AES which 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. 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 Y20.25 billion ($174 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. IFC will make an equity investment in AES Lal Pir of $9.5 million. 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. 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 Y14.203 billion (US$122 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. The equity commitments in each of AES Lal Pir and AES Pak Gen were partially satisfied as of December 31, 1996. 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 $65 million. The facilities are being built by Nichimen Corporation under two "turn-key", lump sum price contracts, with key equipment in each case being supplied by Mitsubishi Heavy Industries. The projects are scheduled to commence commercial operations by the end of 1997. All yen amounts set forth in this Report have been translated into U.S. dollar ($) 12 amounts at an exchange rate of Y116/US$1.00, the noon buying rate in The City of New York for cable transfers payable in Japanese Yen as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 1996. 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 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 will purchase all of the electrical capacity of the facility pursuant to a 30-year dispatchable power sales contract and that the plant is scheduled to begin commercial operation by October 1, 1999. 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) an equity commitment 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 ABB/Combustion Engineering, Inc. with key equipment supplied by ABB/Combustion Engineering. 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. AES Barry Ltd. ("AES Barry"), an indirectly owned subsidiary of AES, began constructing a 230 megawatt gas-fired combined cycle facility in Barry, South Wales, United Kingdom in October 1996. Construction services are being supplied by TBV Power Limited under a lump sum, turnkey construction contract. The Barry facility will sell electricity into the national electricity "spot" market in the United Kingdom and it is expected to be operational by the second quarter of 1998. In February 1997, AES Barry raised $184 million of non-recourse project financing, underwritten solely by The Industrial Bank of Japan, Limited. Substantial risks to the successful completion of this project exist, including those relating to governmental approvals, the 13 demand for and price of electricity in the United Kingdom national electricity market, financing, construction and permitting. There can be no assurance that this project will be completed. POTENTIAL ACQUISITIONS/PROJECTS IN ADVANCED DEVELOPMENT In February 1997, AES entered into a definitive agreement to acquire the international assets (inclusive of approximately $42 million of net monetized assets) of Destec Energy, Inc. ("Destec"), a large independent energy producer with headquarters in Houston, Texas, for a total price to AES of $407 million, which price is subject to adjustment to reflect net cash flow between the international assets of Destec and the rest of Destec from January 1, 1997 to the closing date. NGC Corporation ("NGC"), working in conjunction with AES, was selected as the winning bidder in an auction for all of Destec at a total acquisition price of $1.27 billion. AES will acquire the international assets of Destec immediately following NGC's acquisition of Destec. Destec's international assets to be acquired by AES include ownership interests in the following five electric generating plants (with ownership percentages in parentheses): (i) a 110 megawatt gas-fired combined cycle plant in Kingston, Canada (50 percent), (ii) a 405 megawatt gas-fired combined cycle plant in Terneuzen, Netherlands (50 percent), (iii) a 140 megawatt gas-fired simple cycle plant in Cornwall, England (100 percent), (iv) a 235 megawatt oil-fired simple cycle plant in Santo Domingo, Dominican Republic (99 percent); and (v) a 1600 megawatt coal-fired plant in Victoria, Australia (20 percent). The acquisition by AES of Destec's international assets also includes all of Destec's non-U.S. developmental stage power projects, including projects in Taiwan, England, Germany, the Philippines, Australia and Colombia. A number of risks are associated with this acquisition, including those relating to the closing of the transaction (which is contingent on the closing of NGC's acquisition of Destec), the receipt of government approvals and other consents, financing, operation and maintenance, construction and environmental risks. In February 1997, subsidiaries of AES executed three power purchase agreements (the "PPAs"), for an aggregate generating capacity of at least 457 megawatts, with GPU Energy, the energy services and delivery business of GPU, Inc., a public utility holding company. AES plans to build a 720 megawatt natural gas-fired, combined cycle facility in Pennsylvania to sell power under the PPAs beginning in 2000 and to sell power to other potential purchasers. Between March and July 1996, subsidiaries of AES acquired the right to negotiate the PPAs from other independent power producers for a net aggregate cost of approximately $28 million. GPU Energy is required to 14 reimburse AES for substantially all its initial net investment if the project does not receive the requisite regulatory approvals and permits. This project is subject to a number of risks, including those related to governmental approvals, siting, permitting, financing, construction and contract compliance, and there can be no assuance that it will be completed successfully. In January 1997, a joint venture company led by a subsidiary of AES was selected as the winning bidder to build, own and operate a 484 megawatt gas-fired combined cycle power plant in the city of Merida, Yucatan, Mexico. This project is subject to a number of risks, including those related to governmental approvals, financing, construction and contract compliance, and there can be no assurance that it will be completed successfully. 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. 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, but the Company is currently involved in litigation with PG&E over the validity of the contract. The Company does not believe that the ultimate resolution of this matter will have a material adverse effect on the Company. Substantial risks to the successful completion of this project exist, including those relating to the contract litigation, FERC decision, siting, financing, construction and permitting. No assurance can be given that this project will be completed. 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 15 portion of GOO's obligations. In July 1995, a newly elected state government initiated a review of the terms and conditions of AES Ib Valley's agreements with OSEB and GOO. This review has led OSEB and GOO to seek significant modifications to the terms of the power sales agreement. In light of this review AES has been unable to reach financial closing on this project and has been forced to terminate certain financing and contractual commitments relating to the project. AES Ib Valley is currently in negotiation with GOO and OSEB and may agree to changes, including those relating to the plant's technical configuration, capital cost, size and the price paid for electricity. Notwithstanding the Company's willingness to discuss modifications to the project, the Company believes that its current agreements with GOO, OSEB and GOI are valid, and if agreements cannot be restructured on terms acceptable to AES, the Company intends to pursue its rights with respect to enforcement of the existing contracts. No assurance can be given that either (i) the terms of a new contract will be agreed to or (ii) if AES pursues its legal claims, that it will be able to compel specific performance or recover significant damages. In August 1996, a subsidiary of the Company won a bid to develop, own and operate a 288 MW simple-cycle gas turbine power station in Townsville, Queensland, Australia. The plant will burn liquefied petroleum gas and will sell electricity to the Queensland Transmission and Supply Corporation under a 10-year power purchase agreement. This project is subject to numerous risks, including those relating to governmental approvals, permitting, financing and construction of the facility. No assurance can be given that this project will be completed successfully. AES has dedicated significant resources to pursue the development and acquisition of additional projects located in the United States, Europe, Pakistan, India, Southeast Asia, Central and South America, Africa, the Middle East and the countries comprising the former Soviet Union. Most of 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. 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 16 existing plants will be developed or acquired. As of December 31, 1996, capitalized costs for projects under development were approximately $53 million. REGULATORY MATTERS Electricity markets in the United States may be considered to be more regulated than those in some other countries in which AES is operating, or is seeking to operate, such as those in Argentina, the United Kingdom and Australia. U.S. laws and regulations still govern to some extent wholesale electricity transactions, the type of fuel utilized, the type of energy produced, and power plant ownership. State regulatory commissions have jurisdiction over retail electricity transactions. U.S. power projects also are subject to laws and regulations controlling emissions and other substances produced by a plant and the siting of plants. These laws and regulations generally require that a wide variety of permits and other approvals be obtained before the construction or operation of a power plant commences, and that the facility operate in compliance with these permits thereafter. FERC must also approve rates charged by certain power marketers such as those of the Company's subsidiary, AES Power. In the United States, so-called Qualifying Facilities ("QFs") are relieved of compliance with extensive federal, state and local regulations by the provisions of the Public Utility Regulatory Policies Act, as amended ("PURPA"). Each of AES's current domestic plants is a QF. Loss of QF status, if not prevented, would subject these plants to more extensive regulations. Furthermore, loss of QF status would permit the utility customer to alter or terminate the power sales contract for the 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 approved by FERC. The Company believes, however, that it will usually be able to react in a manner that would avoid the loss of QF status. State public utility commissions ("PUCs") regulate both the retail rates and financial performance of electric utilities. Since a wholesale power sales contract is generally reflected in a utility's retail rates, power sales contracts from QFs are indirectly under the regulatory purview of PUCs. PUCs often will pre-approve contracts with prices that do not exceed so-called "avoided costs" because such contracts often have been acquired through a competitive or market-based process. Recognizing the competitive nature of most acquisition processes, most PUCs will permit utilities to "pass through" expenses associated with an independent power contract to the utility's retail 17 customers, although no assurance can be given that a PUC will not attempt to deny the "pass through" of these expenses in the future. The Company believes that any such attempt by a PUC would, among other things, be pre-empted by federal law. AES must obtain exemptions from, or become subject to regulation by, the Securities and Exchange Commission under the Public Utility Holding Company Act ("PUHCA") in regard to both its domestic and foreign utility company holdings. There are a number of exemptions from PUHCA that are available for both domestic and foreign utility company owners, including those for QFs, Exempt Wholesale Generators and Foreign Utility Companies. AES has obtained, and believes that it will be able to obtain and maintain in the future, appropriate PUHCA exemptions for its utility acquisitions. U.S. Environmental Regulations The construction and operation of power projects are subject to extensive environmental and land use regulation. In the United States those regulations applicable to AES primarily involve the discharge of effluents into the water and emissions into the air and the use of water, but can also include wetlands preservation, endangered species, waste disposal and noise regulation. These laws and regulations often require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies. If such laws and regulations are changed and AES's facilities are not "grandfathered" (that is, made exempt by the fact that the facility pre-existed the law) or are otherwise not excluded, extensive modifications to a project's technologies and facilities could be required. If environmental laws or regulations were to change in the future, there can be no assurance that AES would be able to recover all or any increased costs from its customers or that its business and financial condition would not be materially and adversely affected. In addition, the Company may be required to make significant capital or other expenditures in connection with such changes in environmental laws or regulations. Although the Company is not aware of non-compliance with environmental laws which would have a material adverse effect on the Company's business or financial condition, at times the Company has been in non-compliance, although no such instance has resulted in revocation of any permit or license. While AES expects that environmental and land use regulations in the United States will continue to become more stringent over time, the Company is not aware of any currently planned changes in law that would result in a material adverse effect on its consolidated financial position. 18 Clean Air Act. The original Clean Air Act of 1970 set guidelines for emissions standards for major pollutants (e.g., SO2 and NOx) from newly-built sources. In late 1990, Congress passed a set of amendments to the Clean Air Act (the "1990 Amendments"). All of AES's domestic operating plants perform at levels better than federal emission standards mandated for such plants under the Clean Air Act (as amended). The 1990 Amendments attempt to reduce acid rain precursor emissions (SO2 and NOX) from existing sources -- particularly large, older power plants that were exempted from certain regulations under the original Clean Air Act. Because AES's facilities are relatively new cogeneration units with low air emissions that qualify as "existing sources" under the 1990 Amendments, they have been "grandfathered" from certain acid rain compliance provisions of the 1990 Amendments. Other provisions of the Clean Air Act related to the reduction of ozone precursor emissions (VOC and NOx) have triggered "reasonably available control technology" ("RACT") requirements by various states to reduce such emissions. The hazardous air pollutant provisions of the 1990 Amendments presently exclude electric steam generating facilities such as AES's domestic plants; however, the 1990 Amendments directed that the Environmental Protection Agency ("EPA" or the "Agency") prepare a study on hazardous air pollutant ("HAP") emissions from power plants. In the fall of 1996, EPA released an interim report on HAP emissions from power plants that tentatively concluded that the risk of contracting cancer from exposure to HAPs (except mercury) from most plants was very low (less than one in 1 million). EPA is developing a separate study on mercury emissions from power plants. The draft mercury study report is currently being reviewed by the federal Scientific Advisory Board and it is not certain when a final report will be released. A final comprehensive HAP report with recommendations is expected to be issued after EPA's review of mercury emissions from power plants is complete. If it is determined that mercury from power plants should be regulated, the use of "maximum available control technology" ("MACT") for mercury (which is now not subject to regulation) could be required. In December 1996, EPA also released proposals to tighten ambient air quality standards for ozone and small particulate matter (so-called PM 2.5). If approved, these new standards will likely increase the number of nonattainment regions for ozone and particulates. These proposals are scheduled to be finalized in the summer of 1997. If new ozone and particulate matter nonattainment areas are created, AES's plants may be faced with further emission reduction requirements that could necessitate the installation of additional control technology. 19 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. In January 1997, EPA issued a notice of intent to require regional reductions in ozone precursors. EPA expects to issue its call for revisions to state implementation plans ("SIPs") in the spring of 1997. EPA's "SIP call" may implement some of the OTAG recommendations calling for reductions in NOx emissions. If more stringent NOx standards are adopted by EPA and/or certain states, AES could be required to install additional NOx emission control technologies at some of its plants, and/or obtain offsets or allocations from other emitters of these substances. The Company does not believe that any of the potential additional requirements discussed above, if implemented, will have a material adverse effect on its results of operations and consolidated financial position. Hazardous Waste Regulation. Based on a 1988 study, EPA has decided not to regulate most coal combustion ash as a hazardous waste; however, EPA reserved making a decision with respect to coal ash from fluidized bed combustion (the burning of coal in the presence of limestone), which is still being evaluated by the Agency. AES, along with other CFB owners and manufacturers, is currently participating in a study to evaluate whether or not CFB ash should be classified as hazardous. EPA is required to make a determination on whether to regulate CFB ash by April 1, 1998. If EPA decides to regulate fluidized bed coal ash as a hazardous or special waste, AES could incur additional ash disposal costs to dispose of ash from its plants that utilize fluidized bed boilers. FOREIGN ENVIRONMENTAL REGULATIONS AES now has ownership interests in operating power plants in a variety of countries outside the United States (China, Argentina, Brazil, United Kingdom, Hungary and Kazakstan). Each of these countries and the localities therein have separate laws and regulations governing the siting, permitting, ownership and power sales from AES's plants. These laws and regulations are often quite different than those in effect in the United States--and AES's non-U.S. businesses have been in substantial compliance with these different laws and regulations. In addition, projects funded by the World Bank are subject to World Bank environmental standards, which may be more stringent than local country standards but are typically not as strict as U.S. standards. Whenever possible, AES attempts to use advanced environmental cleanup technologies 20 (such as CFB coal technology or advanced gas turbines) in its non-U.S. power generation projects, in order to minimize environmental impacts. Based on current trends, AES expects that environmental and land use regulations affecting its plants located outside the U.S. will likely become more stringent over time. This appears to be due in part to a greater participation by local citizenry in the monitoring and enforcement of environmental laws, better enforcement of applicable environmental laws by the regulatory agencies, and the adoption of more sophisticated environmental requirements. If foreign environmental and land use regulations were to change in the future, the Company may be required to make significant capital or other expenditures in order to comply. There can be no assurance that AES would be able to recover all or any increased costs from its customers or that its business, financial condition or results of operations would not be materially and adversely affected by future changes in foreign environmental and land use regulations. PROPOSED LEGISLATION In the United States, some states (for example, California, Illinois, Michigan, Massachusetts and Pennsylvania) have passed or are considering new legislation that permits utility customers to choose their electricity supplier in a competitive electricity market (so-called "retail access" or "customer choice" laws). While such "customer choice" plans differ in details, they usually share some important elements: (1) they allow customers to choose their electricity suppliers by a certain date (the dates in the existing or proposed legislation vary between 1998 and 2003); (2) they allow utilities to recover so-called "stranded assets"--the remaining costs of uneconomic generating or regulatory assets; and (3) they reaffirm the validity of existing QF contracts, and make provisions to assure payment over the contract life. In order to guarantee payment of utilities' costs and the costs of QF contracts, some states have used or are proposing to use financial methods to "securitize" these payments. The "securitization" process might involve the following steps: first, the financial obligations to be "securitized" would be legally affirmed through legislation. This legal obligation then is used to borrow money in public debt markets to pay off the obligation. The legal obligation allows the borrower to obtain a good credit rating and therefore a lower interest rate. In some cases, the benefits of the lower interest rate are passed on to retail electric customers (perhaps in the form of a rate decrease). "Securitization" of QF contract obligations, if applied to AES contracts in the future, would significantly reduce the risk to AES that its power sales contracts would not be honored due to potential financial difficulties of the utility purchaser. 21 In addition to state restructuring legislation, members of Congress have proposed new federal legislation to encourage customer choice and recovery of stranded assets. Some argue that federal legislation is needed to avoid the "patchwork quilt" effect of each state acting separately to pass restructuring legislation; others argue that each state should decide whether to allow retail choice. In early 1997 several bills were (and others are expected to be) submitted to Congress on electricity restructuring. While it is uncertain whether or when federal legislation dealing with electricity restructuring might be passed, it is the opinion of the Company that such legislation would not have a materially adverse effect on the Company's U.S. business. In addition to the federal restructuring legislation proposals, a number of bills have been proposed by members of Congress to repeal all or portions of PURPA and/or PUHCA--as separate legislation if a comprehensive restructuring bill fails to pass. The Company believes that the repeal of PURPA and/or PUHCA is unlikely (and inappropriate) unless it is a part of a comprehensive restructuring bill. In anticipation of restructuring legislation, many U.S. utilities are seeking ways to lower their costs in order to become more competitive. These include the costs that utilities are required to pay under QF contracts, which the utilities may view as excessive when compared to current market prices. Many utilities are therefore seeking ways to lower these contract prices by renegotiating the contracts, or in some cases by litigation. While the Company is generally open to renegotiation of existing contracts, it believes that the aforementioned electricity market restructuring legislation will likely reduce both the pressure to renegotiate and the need for such contract renegotiations. EMPLOYEES At December 31, 1996, AES and its subsidiaries employed approximately 5,700 people, approximately 5,500 of whom are involved in operations or construction. Approximately 50 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 13,000. (d) Financial Information About Foreign and Domestic Operations and Export Sales See the information contained under the caption "Geographic Segments" in Note 11 to the Consolidated Financial Statements contained in the 22 Registrant's Current Report on Form 8-K dated March 12, 1997, which information is incorporated herein by reference. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following is certain information concerning the present executive officers of the Registrant. Roger W. Sant, 65 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, The Summit Foundation 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. 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, 51 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, Rivendell School and a member of the Board of Directors of MacroSonics Corporation. Kenneth R. Woodcock, 53 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. Thomas A. Tribone, 44 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. 23 Mark S. Fitzpatrick, 46 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, 58 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, 49 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, 37 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, 38 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, 39 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. John Ruggirello, 46 years old, was appointed Vice President of the Registrant effective January 1997, and heads an AES division responsible for project development, construction and plant operations in North America (excluding Oklahoma, Hawaii and parts of California). He served as President of AES Beaver Valley from 1990 to 1996. 24 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; Brisbane, Australia; Taipei, Taiwan; Bangkok, Thailand; Rio de Janeiro, Brazil; and Sao Paulo, 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. Except as noted, all of these properties are subject to mortgages or other liens or encumbrances granted to the lenders providing financing for the plant or project.
Land Interest Plant or Project Location Held Plant Description - ------------------------------- ----------------------- ----------------- ------------------------------------ AES Deepwater Houston, Texas Owned1 Coke-fired cogeneration power plant AES Beaver Valley Monaca, Pennsylvania Leased Coal-fired cogeneration power plant AES Placerita Newhall, California Leased Natural gas-fired cogeneration power plant AES Thames Montville, Connecticut Leased Coal-fired cogeneration power plant AES Shady Point LeFlore County, Owned Coal-fired cogeneration facility Oklahoma and liquid carbon dioxide power plant
- ---------- 1 Owmership by an owner trust for the benefit of bondholders; a subsidiary of AES is now the owner of all outstanding bonds. 25
Land Interest Plant or Project Location Held Plant Description - ------------------------------- ----------------------- ----------------- ------------------------------------ AES Barbers Point Oahu, Hawaii Leased Coal-fired cogeneration power plant Kilroot Belfast Lough, Leased Coal and oil-fired power plant Northern Ireland Belfast West Belfast Port, Leased Coal-fired power plant Northern Ireland Medway Isle of Grain, England Leased Gas-fired power plant Borsod (Tiszai) Kazincbarcika, Hungary Owned2 Coal-fired power station and two underground coal mines Tisza II (Tiszai) Tiszaujvaros, Hungary Owned2 Oil and natural gas-fired power plant Tiszapalkonya (Tiszai) Tiszapalkonya, Hungary Owned2 Coal-fired cogeneration power plant Cili Misty Mountain Hunan Province, Land Use Right2 Hydroelectric power plants People's Republic of China Yangchun Sun Spring Guangdong Province, Land Use Right2 Diesel power plant People's Republic of China
- ---------- 2 Not subject to mortgages, liens or encumbrances in favor of any lenders. 26
Land Interest Plant or Project Location Held Plant Description - ------------------------------- ----------------------- ----------------- ------------------------------------ Wuxi Tin Hill Jiangsu Province, Land Use Right2 Oil-fired gas turbine and heat People's Republic of recovery steam turbine power China plants currently under construction Wuhu Grassy Lake Anhui Province, Land Use Right2 Coal-fired power plant People's Republic of China Ekibastuz Pavlodar Region, Land Use Right2 Coal-fired power plant Kazakstan San Nicolas San Nicolas, Argentina Owned Power plant fueled by coal, oil, gas or petroleum coke Rio Juramento Salta, Argentina Leased Hydroelectric power plants San Juan San Juan, Argentina Leased Hydroelectric power plants AES Lal Pir and Pak Gen Punjab, Pakistan Owned Oil-fired power plants under construction Jiaozuo Aluminum Power Henan Province, Land Use Right2 Coal-fired power plant People's Republic of China Chengdu Lotus City Sichuan Province, Land Use Right2 Natural gas-fired power plant People's Republic of China
27
Land Interest Plant or Project Location Held Plant Description - ------------------------------- ----------------------- ----------------- ------------------------------------ Aixi Heart River Sichuan Province, Land Use Right2 Coal-fired power plant currently People's Republic of under construction China - ---------- 2 Not subject to mortgages, liens or encumbrances in favor of any lenders. Hefei Prosperity Lake Anhui Province, Land Use Right2 Oil-fired cogeneration power plant People's Republic of China Barry Barry, United Kingdom Leased Gas-fired power plant AES Warrior Run Cumberland, Maryland Owned Coal-fired power plant under construction
- ---------- 2 Not subject to mortgages, liens or encumbrances in favor of any lenders. ITEM 3. LEGAL PROCEEDINGS In November 1996, an action was filed against AES in the Court of Chancery of the State of Delaware in and for New Castle County, by a holder of 750 shares of AES Chigen Class A Common Stock, individually and on behalf of a purported class of public shareholders of the approximately 8.2 million outstanding shares of AES Chigen Class A Common Stock. AES Chigen is not named in the suit. An amended complaint was filed by the plaintiff on March 7, 1997. The amended complaint seeks preliminarily and permanently to enjoin AES from acquiring the outstanding shares of AES Chigen which it does not already own. In addition, the amended complaint seeks unspecified damages, including attorneys' fees and costs. In the original complaint, plaintiff's allegations state that AES, as the controlling shareholder of AES Chigen, breached its fiduciary duties to treat the plaintiff class with entire fairness in connection with AES's execution of an agreement with AES Chigen to acquire the outstanding AES Chigen Class A Common Stock at an allegedly grossly inadequate price. Plaintiff's amended complaint supplements the prior complaint and asserts claims that, among others things, AES breached its duty 28 of candor to the plaintiff class. On March 13, 1997, counsel for the parties reached an agreement in principle to resolve the lawsuit, subject to court approval and the satisfaction of certain other conditions. In February 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, four 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. In October 1995 an amended complaint was filed in which several of the original causes of action have been dropped. The claims for negligence, strict liability and fraudulent concealment are still included. A number of original defendants have also been dismissed from the case. 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. 29 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information PRICE RANGE OF COMMON STOCK The common stock of the Company is currently traded on the New York Stock Exchange Composite Transaction reporting system (the "NYSE") under the symbol "AES". All stock prices from January 1, 1995 to and including October 15, 1996 were quoted on the Nasdaq National Market System ("Nasdaq") under the symbol "AESC". The following table sets forth the high and low sale prices for the common stock as reported by Nasdaq or the NYSE for the periods indicated.
- ------------------------ ---------------------- ----------------------- 1995 High Low - ------------------------ ---------------------- ----------------------- First Quarter $ 193/4 $ 16 Second Quarter 191/4 16 Third Quarter 215/8 181/2 Fourth Quarter 24 183/4 - ------------------------ ---------------------- ----------------------- 1996 High Low - ------------------------ ---------------------- ----------------------- First Quarter $ 251/4 $ 21 Second Quarter 295/8 221/4 Third Quarter 401/2 277/8 Fourth Quarter 501/8 391/4 - ------------------------ ---------------------- -----------------------
(b) Holders On March 3, 1997, there were 731 record holders of Registrant's Common Stock, par value $0.01 per share. (c) Dividends Under the terms of a corporate revolving loan and letters of credit facility of $425 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. 30 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, 1996, approximately $63 million was available under project loan documents for distribution by subsidiaries to the Registrant. 31 ITEM 6. SELECTED FINANCIAL DATA
(in millions, except per share data) - ------------------------------------------------ ------------- ------------- ------------- ------------- ------------- For the Years Ended December 31 1996 1995 1994 1993 1992 - ------------------------------------------------ ------------- ------------- ------------- ------------- ------------- Statement of Operations Data Revenues $ 835 $ 679 $ 533 $ 519 $ 401 Operating costs and expenses 557 426 297 323 246 Operating income 278 253 236 196 155 Income before income taxes, minority interest, and extraordinary item 193 167 145 89 66 Extraordinary item ---- ---- 2 ---- ---- Net income 125 107 100 71 56 Net income per share: Before extraordinary item 1.62 1.41 1.30 0.98 0.80 Extraordinary item ---- ---- 0.02 ---- ---- Net income per share 1.62 1.41 1.32 0.98 0.80 Dividends per share - common stock ---- ---- ---- 0.58 0.39 - ------------------------------------------------ ------------- ------------- ------------- ------------- ------------- As of December 31 1996 1995 1994 1993 1992 - ------------------------------------------------ ------------- ------------- ------------- ------------- ------------- Balance Sheet Data Total assets $3,622 $2,341 $1,915 $1,687 $1,552 Revolving bank loan (current) 88 50 ---- ---- ---- Project financing debt (long term) 1,558 1,098 1,019 1,075 1,146 Other notes payable (long term) 450 125 125 125 50 Stockholders' equity 721 549 401 309 177
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See the section entitled "Discussion and Analysis of Financial Condition and Results of Operations" contained in the Registrant's Current Report on Form 8-K dated March 12, 1997, 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 contained in the Registrant's Current Report on Form 8-K dated March 12, 1997, which information is incorporated herein by reference. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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 5 and the information contained under the caption "Election of Directors" on pages 2 through 4 inclusive, of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 15, 1997, 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 11 through 13 inclusive and "Compensation of Directors" on page 6, of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 15, 1997, 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 5 of the Proxy Statement for the Annual Meeting of Stockholders of the 33 Registrant to be held on April 15, 1997, 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 5 of the Proxy Statement for the Annual Meeting of Stockholders of the Registrant to be held on April 15, 1997, which information is incorporated herein by reference. (c) Changes in Control Not applicable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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 Auditors is incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 12, 1997. -- Consolidated Balance Sheets at December 31, 1995 and 1996 are incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 12, 1997. -- Consolidated Statements of Operations -- For the Years Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 12, 1997. -- Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 12, 1997. -- Notes to Consolidated Financial Statements -- For the Years Ended December 31, 1994, 1995 and 1996 are incorporated herein by reference to the Registrant's Current Report on Form 8-K dated March 12, 1997. 34 (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 the Registration Statement on Form S-4 (Registration No. 333-22513). 4.1(a) 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). 4.1(b) Form of Indenture dated as of July 1, 1996 between The AES Corporation and The First National Bank of Chicago, as Trustee, for the issuance from time to time of debentures, notes and other evidences of indebtedness is incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-3 (Registration No. 333-01286). 4.1(c) First Supplemental Indenture dated as of July 1, 1996 (Supplemental to Indenture dated as of July 1, 1996) between The AES Corporation and The First National Bank of Chicago, as Trustee, including the form of 10 1/4 percent Senior Subordinated Notes Due 2006, is incorporated herein by reference to Exhibit 4.1(c) to the Current Report on Form 8-K of the Registrant dated July 1, 1996. 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). 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). 35 10.3 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). 10.4 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 36 10.11 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 incorporated herein by reference to Exhibit 10.16 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.12 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). 10.13 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). 10.14 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 10.20 to the Registration Statement on Form S-1 (Registration No. 33-40483). 10.15 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). 10.16 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). 10.17 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). 10.18 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). 37 10.19 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).* 10.20 The AES Corporation Incentive Stock Option Plan of 1991, as amended, is incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1995.* 10.21 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).* 10.22 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).* 10.23 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).* 10.24 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). 10.25 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). 10.26 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). 10.27 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.* 10.28 Subordinated Debt Agreement between AES Shady Point, Inc. and The AES Corporation dated as of December 6, 1991 is incorporated 38 herein by reference to Exhibit 10.44 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.29 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). 10.30 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). 10.31 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 Chartered Bank is incorporated herein by reference to Exhibit 10.48 to the Registration Statement on Form S-1 (Registration No. 33-46011). 10.32 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). 10.33 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). 10.34 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). 39 10.35 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. 10.36 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. 10.37 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. 10.38 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. 10.39 Facility Agreement dated May 31, 1992 between Nigen Limited, Barclays Bank PLC and National Westminster Bank Plc as Lead Arrangers, ABN 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. 10.40 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. 10.41 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. 40 10.42 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. 10.43 Schedule identifying a substantially identical agreement to the Agreement constituting Exhibit 10.42 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. 10.44 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. 10.45 Schedule identifying a substantially identical agreement to the Agreement constituting Exhibit 10.44 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. 10.46 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. 10.47 Schedule identifying substantially identical agreements to the Agreement constituting Exhibit 10.46 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. 10.48 $425,000,000 Credit Agreement dated as of May 20, 1996 among The AES Corporation, the Banks listed therein, Barclays Bank PLC, Morgan Guaranty Trust Company of New York and Union Bank of California, N.A., as Fronting Banks, and Morgan Guaranty Trust Company of New York, as Agent is incorporated herein by reference to Exhibit 10.61 to the Company's Current Report on Form 8-K dated June 10, 1996. 41 10.49 Shareholders' Agreement dated as of May 27, 1996 among AES Coral Reef, Inc., Companhia Siderurgica Nacional, EDF International S.A., Houston Industries Energy - Cayman, Inc. (the "Shareholders") and BNDES Participacoes S.A. is incorporated herein by reference to Exhibit 10.67 to the Company's Current Report on Form 8-K dated June 10, 1996. 10.50 Addendum to Shareholders Agreement dated as of May 30, 1996 among the Shareholders and InvestLight - Clube de Investimento dos Empregados da Light is incorporated herein by reference to Exhibit 10.68 to the Company's Current Report on Form 8-K dated June 10, 1996. 10.51 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.* 10.52 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, is incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1995. 10.53 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, is incorporated herein by reference to Exhibit 10.30 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1995. 10.54 Asset Purchase Agreement dated as of February 17, 1997 by and between NGC Corporation and The AES Corporation. 42 11 Statement of computation of earnings per share is incorporated herein by reference to Exhibit 11 to the Company's Current Report on Form 8-K dated March 12, 1997. 12 Statement of computation of ratio of earnings to fixed charges is incorporated herein by reference to Exhibit 12 to the Company's Current Report on Form 8-K dated March 12, 1997. 21 Significant subsidiaries of The AES Corporation. 23 Consent of Independent Auditors, Deloitte & Touche LLP. 24 Powers of Attorney. 27 Financial Data Schedule (Article 5) is incorporated herein by reference to Exhibit 27 to the Company's Current Report on Form 8-K dated March 12, 1997. 99 Current Report on Form 8-K of the Registrant dated March 12, 1997. * indicates that exhibit is a compensatory plan or arrangement. (b) Reports on Form 8-K Registrant filed a Current Report on Form 8-K dated November 13, 1996 in respect of Registrant's press release dated November 12, 1996 announcing that Registrant had entered into an agreement to acquire all the outstanding shares of the Class A Common Stock of AES Chigen. 43 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: March 28, 1997 THE AES CORPORATION (Company) By: /s/ Dennis W. Bakke ------------------------- Name: Dennis W. Bakke Title: President 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 the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Roger W. Sant * - ---------------------------------------- Chairman of the Board March 28, 1997 (Roger W. Sant) /s/ Dennis W. Bakke - ---------------------------------------- President, Chief Executive March 28, 1997 (Dennis W. Bakke) Officer (principal executive officer) and Director /s/ Vicki-Ann Assevero * - ---------------------------------------- March 28, 1997 (Vicki-Ann Assevero) Director /s/ Alice F. Emerson * - ---------------------------------------- March 28, 1997 (Dr. Alice F. Emerson) Director /s/ Robert F. Hemphill, Jr. * - ---------------------------------------- March 28, 1997 (Robert F. Hemphill, Jr.) Director /s/ Frank Jungers * - ---------------------------------------- March 28, 1997 (Frank Jungers) Director
44
SIGNATURE TITLE DATE /s/ Henry R. Linden * - ---------------------------------------- March 28, 1997 (Dr. Henry R. Linden) Director - ---------------------------------------- March , 1997 (John H. McArthur) Director /s/ Russell E. Train * - ---------------------------------------- March 28, 1997 (Russell E. Train) Director /s/ Thomas I. Unterberg * - ---------------------------------------- March 28, 1997 (Thomas I. Unterberg) Director /s/ Robert H. Waterman, Jr. * - ---------------------------------------- March 28, 1997 (Robert H. Waterman, Jr.) Director /s/ Barry J. Sharp - ---------------------------------------- Vice President and Chief March 28, 1997 (Barry J. Sharp) Financial Officer (principal financial and accounting officer) *By: /s/ William R. Luraschi ------------------------- Attorney-in-fact
45 THE AES CORPORATION AND SUBSIDIARIES - ------------------------------------ INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES INDEPENDENT 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 INDEPENDENT AUDITORS' REPORT To the Stockholders of The AES Corporation: We have audited the consolidated financial statements of The AES Corporation as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated January 30, 1997, except for Note 13, as to which the date is February 18, 1997; such consolidated financial statements and report are included in your Current Report on Form 8-K dated March 12, 1997 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. January 30, 1997 S-2
THE AES CORPORATION SCHEDULE I --------------------------------------------- ------------------------------------------ CONDENSED FINANCIAL INFORMATION OF REGISTRANT UNCONSOLIDATED BALANCE SHEETS (in millions) ASSETS December 31 - ------------------------------------------------------- ------------------------------- 1995 1996 Current Assets: Cash and cash equivalents $ 2 $ 5 Accounts receivable 2 2 Accounts and notes receivable from subsidiaries 64 89 Prepaid expenses and other 11 2 - ------------------------------------------------------- --------------- --------------- Total current assets 79 98 Investment in subsidiaries (on the equity method) 556 893 Office Equipment: Cost 4 5 Accumulated depreciation (3) (4) - ------------------------------------------------------- --------------- --------------- Office equipment, net 1 1 Other Assets: Deferred costs (Less accumulated amortization: 1995, $3, 1996, $9) 6 16 Project Development costs 40 53 Investment in affiliate -- -- Deferred income taxes 8 20 Notes receivable from subsidiaries 40 156 Escrow deposits and other assets 9 56 - ------------------------------------------------------- --------------- --------------- Total other assets 103 301 - ------------------------------------------------------- --------------- --------------- TOTAL $739 $1,293 - ------------------------------------------------------- --------------- ---------------
See notes to Schedule I S-3
THE AES CORPORATION SCHEDULE I - ------------------------------------------------ --------------------------------------- CONDENSED FINANCIAL INFORMATION OF REGISTRANT UNCONSOLIDATED BALANCE SHEETS (in millions) LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ----------------------------------------------------------- -------------------------- 1995 1996 Current Liabilities: Accounts payable $ 3 $ 2 Accrued liabilities 9 29 Other notes payable 50 88 ------------------------------------------------------- -------------- --------------- Total current liabilities 62 119 Long-term Liabilities: Other notes payable 125 450 Other long-term liabilities 3 3 ------------------------------------------------------- -------------- --------------- Total long-term liabilities 128 453 Stockholders' Equity: Preferred stock -- -- Common stock 1 1 Additional paid-in capital 293 360 Retained earnings 271 396 Treasury Stock (6) (3) Cumulative translation adjustment (10) (33) ------------------------------------------------------- -------------- --------------- Total stockholders' equity 549 721 ------------------------------------------------------- -------------- --------------- TOTAL $739 $1,293 ------------------------------------------------------- -------------- ---------------
See notes to Schedule I S-4
THE AES CORPORATION SCHEDULE I - ------------------------------------------------------ ------------------------------------------------------------ CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF UNCONSOLIDATED OPERATIONS (in millions) For the Years Ended December 31 - -------------------------------------------------------------- ---------------------------------------------------- 1994 1995 1996 Revenues $ 47 $ 58 $ 59 Equity in earnings of subsidiaries 106 108 142 - -------------------------------------------------------------- ---------------- ----------------- ----------------- Total revenues 153 166 201 Operating Costs and Expenses: Cost of sales and services 30 47 46 Selling, general and administrative expenses 24 19 30 - -------------------------------------------------------------- ---------------- ----------------- ----------------- Total operating costs and expenses 54 66 76 - -------------------------------------------------------------- ---------------- ----------------- ----------------- Operating Income 99 100 125 Interest Income/(Expense) 7 7 (15) - -------------------------------------------------------------- ---------------- ----------------- ----------------- Income before income taxes and extraordinary item 106 107 110 Income Tax Expense (Benefit) 4 -- (15) - -------------------------------------------------------------- ---------------- ----------------- ----------------- Net income before extraordinary item 102 107 125 Extraordinary item - loss on extinguishment of debt (less applicable income taxes of $1) 2 -- -- - -------------------------------------------------------------- ---------------- ----------------- ----------------- - -------------------------------------------------------------- ---------------- ----------------- ----------------- Net Income $100 $107 $125 - -------------------------------------------------------------- ---------------- ----------------- -----------------
See notes to Schedule I S-5
THE AES CORPORATION SCHEDULE I - ----------------------------------------------------------- --------------------------------------------------------- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF UNCONSOLIDATED CASH FLOWS (in millions) For the Years Ended December 31, - -------------------------------------------------------------------------- ------------------------------------------ 1994 1995 1996 Net cash provided by operating activities $ 1 $ 1 17 Investing Activities Issuance of notes receivable (1) 2 (19) Acquisitions -- (130) (148) Dividends from subsidiaries 62 88 130 Additions to office equipment (1) -- -- Project development costs, net (17) (34) (16) Investment in subsidiaries (6) (32) (322) Escrow deposits and other 3 (4) (47) - -------------------------------------------------------------------------- ------------ ------------ ---------------- Net cash provided by (used in) investing activities 40 (110) (422) Financing Activities Net borrowings under the revolver -- 50 163 Proceeds from other notes payable -- -- 243 Principal payments on other notes payable -- -- -- Proceeds from issuance of common stock 1 1 2 Purchased treasury stock -- (6) -- Dividends paid -- -- -- Other -- -- -- - -------------------------------------------------------------------------- ------------ ------------ ---------------- Net cash provided by financing activities 1 45 408 Increase/(decrease) in cash and cash equivalents 42 (64) 3 Cash and cash equivalents, beginning 24 66 2 - -------------------------------------------------------------------------- ------------ ------------ ---------------- Cash and cash equivalents, ending $ 66 $ 2 $ 5 - -------------------------------------------------------------------------- ------------ ------------ ----------------
See notes to Schedule I S-6 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, 1995, The AES Corporation and other affiliated companies (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 Company joins in filing a consolidated U.S. income tax return with the group. This allows the Company to combine its separate Company income or loss with the income or loss of the group. The unconsolidated income tax expense or benefit computed for the Company in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, reflects the tax assets and liabilities of the Company on a stand alone basis and the effect of filing a consolidated U.S. income tax return with the group. 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 notes receivable from subsidiaries by the same amount at January 1, 1995. The resulting deferred tax asset recorded on the unconsolidated balance sheet represents tax payments due from affiliates under tax sharing agreements. 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. The non-current portion of this balance includes a loan to AES Tiszai of $99 million. 2. SCHEDULE OF MATURITIES Long-term debt of $125.0 million at December 31, 1995 consisted of senior subordinated of $75.0 payable in 2000 and $50.0 million convertible subordinated debentures which were converted into 1.9 million shares of common stock of the Company at a conversion price of $26.16 per share. The long-term debt of $450 million at December 31, 1996 consisted of $75 million of senior subordinated notes due 2000, $250 million of senior subordinated notes due 2006, and the corporate revolving bank loan of $125 million. S-7
THE AES CORPORATION SCHEDULE II - ----------------------------------------------------------- ------------------------------------------------------------ VALUATION AND QUALIFYING ACCOUNTS (in millions) Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Period - ----------------------------------------------------- -------------- ---------------- ------------- Allowance for contract receivables Year ended December 31, 1996 $ -- $ 20 $ 20 Amortization of deferred costs Year ended December 31, 1994 $ 23 $ 3 $ 26 Year ended December 31, 1995 26 5 31 Year ended December 31, 1996 31 5 36
S-8 Exhibit Index
Exhibit Sequentially Number Document Numbered Page - ------ -------- ------------- 10.54 Asset Purchase Agreement dated as of February 17, 1997 by and between NGC Corporation and The AES Corporation. 21 Significant subsidiaries of The AES Corporation. 23 Consent of Independent Auditors, Deloitte & Touche LLP. 24 Power of Attorney. 99 Current Report on Form 8-K of the Registrant dated March 12, 1997.
EX-10.54 2 ASSET PURCHASE AGREEMENT Exhibit 10.54 ================================================================= ASSET PURCHASE AGREEMENT by and between NGC CORPORATION and THE AES CORPORATION dated as of February 17, 1997 ================================================================= ASSET PURCHASE AGREEMENT ------------------------ ASSET PURCHASE AGREEMENT, dated as of February 17, 1997, by and between NGC Corporation, a Delaware corporation ("NGC"), and The AES Corporation, a Delaware corporation ("Parent"). WHEREAS, simultaneously with the execution and delivery hereof, Parent, NGC or its affiliate, Destec Energy, Inc., a Delaware corporation (the "Company"), and The Dow Chemical Company, a Delaware corporation ("Dow"), are entering into an agreement and plan of merger (the "Merger Agreement") pursuant to which the Company has agreed to merge with a subsidiary of NGC (the "Merger"); WHEREAS, the Company owns and operates certain international businesses and assets; WHEREAS, Parent desires to cause a wholly-owned subsidiary, a Delaware corporation ("Purchaser"), to buy and immediately following the Merger, NGC desires to cause the Company to sell the international businesses and assets of the Company and its subsidiaries, and Purchaser is willing to assume certain related liabilities and obligations of the Company and its subsidiaries, all upon the terms and conditions hereinafter set forth; and WHEREAS, in furtherance of such acquisition, the Boards of Directors of Parent and NGC have each approved the transactions contemplated by this Agreement. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.1 Purchase and Sale of the International Assets. Subject --------------------------------------------- to the terms and conditions of this Agreement, on the Closing Date (as hereinafter defined), and immediately following the consummation of the Merger, NGC shall cause the Company to sell, convey, assign, transfer and deliver (or cause to be sold, conveyed, assigned, transferred and delivered) to Purchaser, and the Purchaser shall purchase and acquire the international assets of the Company, including, without limitation, all of the Company's or its Subsidiaries' (as defined in the Merger Agreement) right, title and interest in and to the following: (i) all of the issued and outstanding shares of capital stock (or their equivalent under local law) (the "Purchased Shares") as set forth in Part I of Schedule 1.1 of the disclosure schedule attached hereto (the "Disclosure Schedule"), which when delivered to Purchaser at the Closing (as hereinafter defined) will be free and clear of any liens, claims, security interests, charges, leases, licenses or sublicenses created by, through or under NGC ("Liens"); (ii) all rights, options and other interests in projects or projects in development outside of the United States, including those set forth in Part II of Schedule 1.1 of the Disclosure Schedule; (iii) all contracts and other agreements associated with or relating to the projects known as Elsta, Los Mina, Indian Queens, Hazelwood and Kingston Cogen (collectively, the "Projects"), including those listed on Part III of Schedule 1.1 of the Disclosure Schedule; (iv) all licenses, permits or franchises issued by any Governmental Entity (as hereinafter defined) relating to the Projects; and (v) those other assets and properties set forth in Part IV of Schedule 1.1 of the Disclosure Schedule. The assets being sold, conveyed, assigned, transferred and delivered to Purchaser by the Company hereunder are hereinafter referred to as the "International Assets" or the "International Businesses." Section 1.2 Instruments of Conveyance and Transfer. At the Closing, -------------------------------------- NGC shall cause the Company to (a) deliver or cause to be delivered to Purchaser stock certificates, stock powers, assignments and other good and sufficient instruments of transfer, conveyance and assignment as the Purchaser and its counsel shall deem necessary or appropriate to vest in Purchaser all of the Company's and the Subsidiaries' right, title and interest in and to the International Assets, and (b) transfer to Purchaser all of the Company's and its Subsidiaries' right, title and interest in and to the contracts, agreements, commitments, books, records, files and other data relating to the International Assets. 2 Section 1.3 Assumed Liabilities. At the Closing, Purchaser shall ------------------- deliver to the Company an undertaking (the "Assumption Agreement") in the form to be agreed upon whereby Purchaser, on and as of the Closing Date, assumes and agrees to pay, perform and discharge when due, (i) the liabilities and obligations of the Company and its Subsidiaries primarily attributable to the International Assets including, without limitation, the liabilities and obligations listed on Schedule 1.3 of the Disclosure Schedule, (ii) with respect to any corporate liabilities of the Company unknown to NGC or Parent that are not primarily attributable to the International Assets or to the Company's domestic assets, a pro rata portion of such corporate liabilities calculated based on a fraction the numerator of which is the Purchase Price and the denominator of which is the Merger Consideration (as defined in the Merger Agreement), (iii) all liabilities and obligations with respect to the International Employees described in Section 6.2, including, without limitation, all liabilities and obligations relating to the International Employees under (a) the Destec Energy, Inc. 1996 Variable Pay Plan, (b) the Destec Energy, Inc. 1995 Variable Pay Plan, (c) the Destec Special Recognition Award (SRA) Program, (d) the Destec Energy, Inc. Amended and Restated 1990 Award and Option Plan, (e) the Destec Foreign Service Policy, (iv) all severance costs, obligations under employment agreements and consulting agreements, and employee benefit liabilities arising as a result of (I) the termination of employment of any International Employees from and after the Closing Date or (II) the transactions consummated under this Agreement in respect of the International Employees (the cost, obligations and liabilities under this clause (iv) are collectively the "International Employee Obligations"), and (v) each liability or obligation relating to any International Employee (with respect to employee benefit plans, in excess of any assets owned by the Company or the Subsidiaries and directly related to such plan or held by any trust with respect thereto sponsored or maintained by the Company or the Subsidiaries (other than the International Assets) which are available to satisfy or otherwise offset such liability or obligation), relating to any bonus, deferred compensation, incentive compensation, stock purchase, stock option, restricted stock, deferred stock, stock appreciation right, vacation policy, superannuation, severance or termination pay, hospitalization or other medical, life or other insurance, flexible benefit, cafeteria plan, supplemental unemployment benefits, profit sharing, pension, or retirement plan, program, agreement or arrangement, employment agreements, consulting agreements and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or 3 contributed to by the Company or its Subsidiaries (the "International Employee Plans") and (vi) all obligations and liabilities with respect to transfer stamp taxes or similar taxes arising in connection with the purchase of the International Assets by Purchaser. The liabilities and obligations assumed by Purchaser in accordance with this Section 1.3 are hereinafter referred to as the "Assumed Liabilities." Section 1.4 Excluded Liabilities. Any liability of the Company or -------------------- any affiliate thereof other than the Assumed Liabilities shall not be assumed by Purchaser or its affiliates including, without limitation, all liabilities and obligations relating to the Plans (as defined in the Merger Agreement), except for any of the International Employee Obligations and the International Employee Plans. The liabilities that are not to be assumed by Purchaser or its affiliates in accordance with this Section 1.4 are hereinafter referred to as the "Excluded Liabilities." Section 1.5 Closing. Unless this Agreement shall have been ------- terminated and the transactions contemplated herein shall have been abandoned pursuant to Section 8.1 hereof, the closing of the transactions contemplated by this Agreement (the "Closing") will take place after all of the conditions herein or incorporated herein are satisfied or waived immediately following the Effective Time (as defined in the Merger Agreement), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, unless an earlier date or place is agreed to in writing by the parties hereto. The date on which the Closing occurs is referred to herein as the "Closing Date." Section 1.6 Purchase Price and Payment. (a) In consideration for -------------------------- the International Assets and subject to the terms and conditions of this Agreement, Purchaser shall on the Closing Date assume the Assumed Liabilities as provided in Section 1.3 hereof pursuant to the Assumption Agreement and shall transfer to or to the order of the Company in immediately available funds in New York City an amount equal to U.S. $407,055,000 (the "Base Purchase Price"), as adjusted as set forth in accordance with the provisions of this Section 1.6 (the "Purchase Price"). NGC and Purchaser agree to negotiate in good faith to adjust the Base Purchase Price to be paid at the Closing if allocations of net cash flow to be made pursuant to Section 1.6(c) between the date hereof and the Closing Date are expected to be at least $10,000,000. (b) One business day prior to the proposed Effective Time, Parent or Purchaser shall deposit the Base 4 Purchase Price in trust with the Paying Agent (as defined in the Merger Agreement) in a segregated account (the "AES Fund"). NGC shall instruct the Paying Agent that the AES Fund shall not be released without the written consent of Parent and NGC. Parent shall give its written consent upon satisfaction of the conditions set forth in Article VII of this Agreement. The AES Fund shall be deposited in an interest bearing account. If the conditions set forth in Article VII of this Agreement have not been satisfied by 12:00 noon on the second business day after the AES Fund was initially deposited, or such later date or time as Parent in its sole discretion may agree, NGC shall instruct the Paying Agent to return the AES Fund to Parent or Purchaser, as the case may be, including all interest earned thereon. Upon release of the AES Fund other than to Parent or Purchaser, NGC shall instruct the Paying Agent to promptly pay the interest earned on the AES Fund until the Effective Time of the Merger to Parent or Purchaser, as the case may be. (c) The Base Purchase Price shall be adjusted as set forth in this clause (c) to reflect the following allocation of the net cash flow of the Company and its Subsidiaries for the period from January 1, 1997 to the Closing Date: the net cash flow of the Company and its Subsidiaries for the period from and including January 1, 1997 to and excluding the Closing will be allocated in a fair and reasonable manner between the International Assets, on the one hand, and the Company and its Subsidiaries (other than the International Assets), on the other hand. Within three business days after such allocation becomes final and binding upon Parent and NGC pursuant to clause (d) below, if the net cash flow so allocated to the International Assets is greater than zero, Parent shall cause Purchaser to pay the Company such difference, and if the net cash flow so allocated to the International Assets is less than zero, NGC shall cause the Company to pay Purchaser such difference. Any such adjusting payment shall bear interest at 7.5% per annum for the period from and including the Closing Date through and excluding the date of payment to the party to which it is owed pursuant to this Section 1.6(c). (d) Within 60 days after the Closing Date, NGC shall deliver to Parent a proposed settlement statement (the "Proposed Settlement Statement") prepared in good faith setting forth the allocation of such net cash flows between the International Assets and the Company and its Subsidiaries (other than the International Assets), together with supporting documentation in reasonable detail. NGC shall provide Parent with full access to the same information available to NGC for purposes of determining such allocation of net cash flow. If Parent objects to the 5 Proposed Settlement Statement, it shall so notify NGC in writing within 30 days after receipt of the Proposed Settlement Statement, which notice shall set forth in reasonable detail any such objections. If Parent fails to deliver any such objection within such 30-day period, Parent shall be deemed to have accepted the Proposed Settlement Statement (including the calculation of the Purchase Price therein). NGC and Parent shall promptly meet to attempt to resolve any such objections, and if they fail to resolve such objections within 30 days after receipt by NGC of Parent's objections, such objections shall be resolved by an independent accounting firm (the "Accountants") selected by Deloitte & Touche and Arthur Andersen & Co., with Parent and NGC to bear the fees and expenses of the Accountants pro rata in inverse proportion to the amounts of their --- ---- respective awards with respect to the disputed items. The Purchase Price as determined by agreement by NGC and Parent, by failure of Parent to deliver an objection as described above or by the Accountants pursuant to this Section 1.6(d) shall be final and binding upon the parties. Section 1.7 Allocation of Purchase Price. The Purchase Price shall ---------------------------- be allocated among the International Assets in writing, by the parties hereto prior to the Closing. The parties hereto agree that the net book value of any International Asset may not be indicative of its fair market value. Section 1.8 Transfer of Purchased Assets, Assignment of Contractual ------------------------------------------------------- Rights, Governmental Consents, Etc. (a) Anything contained in this Agreement - ---------------------------------- to the contrary notwithstanding, this Agreement shall not constitute an agreement or an attempted agreement to transfer, sublease or assign any contract, license, lease, commitment, purchase order, sales order or other agreement or any claim, right, benefit, license, permit or authorization arising thereunder or resulting therefrom if a transfer, sublease or assignment or an attempted transfer, sublease or assignment thereof, without the consent of any other party thereto, would be ineffective, would constitute a breach thereof or would in any way affect the rights of the Purchaser thereunder. Additionally, this Agreement shall not constitute an agreement or an attempt to transfer any of the International Assets, the transfer of which may require the prior consent of any United States or foreign governmental authority or agency until such consent is obtained. NGC, Parent and Purchaser shall use their reasonable best efforts to obtain the consent of any such governmental authority and to obtain the consent of the other party to any of the agreements referred to above, to the transfer of the International Assets to the Purchaser in 6 all cases in which such consent is required for such transfer. Except as otherwise agreed between NGC and Parent pursuant to Section 1.8(b) hereof, if, upon the satisfaction of all conditions to the Closing, any such consent (governmental or otherwise) is not obtained or if a transfer, sublease, or assignment or an attempted transfer, sublease or assignment of any of the International Assets would be ineffective, would constitute a breach thereof or would in any way materially affect the rights thereunder such that the Purchaser would not in fact receive all of the rights or ownership to the International Assets as provided in this Agreement (any such International Assets, the "Deferred Assets"), title to the Deferred Assets shall be retained by the Company but there shall be no reduction or reimbursement of the Purchase Price. After the Closing, NGC, the Company, Parent and Purchaser shall continue to use their reasonable best efforts to (i) cooperate to attempt to obtain any such consents and (ii) to transfer to Parent or Purchaser pursuant to reasonable and lawful arrangements the benefits and liabilities with respect to the Deferred Assets effective as of the Closing. After the Closing, such efforts shall include, without limitation, the enforcement for the benefit of the Purchaser (at Purchaser's cost) of any and all rights of NGC, the Company or their subsidiaries against third parties to any contract or agreement and the transfer or sale of such Deferred Asset to any person or entity designated by the Purchaser (and the net proceeds from any such transfer or sale shall be for Purchaser's account). NGC shall cooperate with Parent and the Company in all reasonable requests Parent, Purchaser or the Company shall make in connection with the obtaining of all such consents and approvals. Upon receipt of the required consents or approvals with respect to any Deferred Assets, NGC shall cause the Company to transfer such Deferred Asset (and the liabilities related thereto) to Parent or Purchaser, without recourse except as to encumbrances in each case created by, through or under NGC, the Company or their affiliates from and after the Closing. Any such transfer shall to the extent possible be effective as of the Closing, and arrangements will be made to transfer the net cash flow between the Deferred Assets, on the one hand, and the Company and the Subsidiaries (excluding the International Assets) on the other hand attributable to projects so transferred for the period from the date of the Closing through the date of such transfer, to the extent that they were not theretofore transferred. (b) With respect to the project known as "Hazelwood," NGC and Parent acknowledge that there is a question as to whether consents of the Government of Victoria of Australia that are required pursuant to certain 7 financing, project and other documents relating to the Hazelwood project will be received at or prior to the Closing. Therefore, NGC and Parent agree to fully cooperate to determine whether such consents will be received prior to or at Closing by acting together to seek such consents as expeditiously as possible. If after 15 days from the date of this Agreement it appears to either of the parties that such consents are not reasonably likely to be received prior to or at the Closing, NGC and the Parent agree to negotiate in good faith with respect to (i) whether reasonable and lawful arrangements (which do not violate any law or contractual obligations applicable to the Hazelwood project) can be designed to achieve the transfer described above with respect to the Hazelwood project, including to the extent feasible trust arrangements, put/call arrangements, or obligations on the part of NGC to cause the timely sale of the Hazelwood project (with proceeds thereof to be delivered to Parent or Purchaser with adjustments to be agreed upon to reflect benefits and liabilities of the Hazelwood project from the date of the Closing through the date of the sale of the Hazelwood project), and (ii) whether the structure of the transactions contemplated in this Agreement and the Merger Agreement could be "flipped" so that the Parent or its affiliate merges with the Company and immediately thereafter the Parent causes the Company to sell its assets (other than the International Assets) to NGC. In addition, NGC agrees that, if after such 15 days it appears that the consents will not be received prior to or at the Closing, it shall as expeditiously as possible seek the third party consents necessary to consummate such a flipped transaction. Notwithstanding anything herein to the contrary, NGC shall not be under any obligation to consummate such a flipped transaction if a necessary third party consent is not obtainable after a reasonable good faith effort on NGC's behalf to obtain such a consent or NGC determines in good faith that such a transaction would be significantly adverse to NGC. (c) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE III AND EXCEPT AS OTHERWISE PROVIDED IN SECTION 1.1(i), THE INTERNATIONAL ASSETS ARE BEING SOLD TO PURCHASER AS IS, WHERE IS, WITH ALL FAULTS, DEFECTS, LIENS AND OTHER ENCUMBRANCES; PROVIDED THAT THE FOREGOING SHALL NOT AFFECT PARENT'S RIGHTS UNDER SECTION 7.1. ARTICLE II [Intentionally Omitted] 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF NGC AND THE COMPANY NGC represents and warrants to Parent and Purchaser as follows: Section 3.1 Organization. NGC is a corporation duly organized, ------------ validly existing and in good standing under the laws of the State of Delaware. NGC has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is or will be qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the business or financial condition of NGC and its subsidiaries, taken as a whole, or materially impair or delay the consummation of the transactions contemplated by this Agreement. NGC has previously delivered to the Parent and Purchaser complete and correct copies of its certificate of incorporation and by-laws, as currently in effect, and prior to the Closing NGC will have delivered to Parent complete and correct copies of the certificate of incorporation and by-laws of the Company, as in effect at the time of such delivery. Section 3.2 Authorization; Validity of Agreement. NGC has the ------------------------------------ requisite corporate power and authority to execute and deliver this Agreement. NGC has, and as of the Closing the Company will have, the requisite corporate power and authority to consummate the transactions contemplated hereby. The execution and delivery by NGC of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by NGC's Board of Directors and no other corporate proceedings on the part of NGC are necessary to authorize the execution and delivery of this Agreement by NGC and the consummation of the transactions contemplated hereby. The consummation of the transactions contemplated hereby will be duly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company will be necessary to authorize the transactions contemplated hereby. This Agreement has been duly executed and delivered by NGC and, assuming due authorization, execution and delivery of this Agreement by Parent, is a valid and binding obligation of NGC enforceable against it in accordance with its terms. 9 Section 3.3 No Violations; Consents and Approvals. ------------------------------------- (a) Neither the execution and delivery of this Agreement by NGC nor the consummation by NGC of the transactions contemplated hereby will (i) violate any provision of the respective certificates of incorporation or by-laws of NGC or, as of the Closing, the Company, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, lease, contract, agreement or other instrument or obligation to which NGC or, with respect to agreements entered into by or on behalf of NGC ("New Agreements"), the Company is a party, or by which NGC or, pursuant to New Agreements, the Company or any of their respective assets are bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 3.3(b) or Section 1.8 have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to NGC, any of its subsidiaries (excluding for purposes of this clause (iii) the Company and its subsidiaries) or any of their properties or assets; except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not materially impair or delay the consummation of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by NGC or the consummation by NGC of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws (as hereinafter defined), (ii) applicable requirements under the Securities Exchange Act of 1934, as amended and the regulations thereunder (the "Exchange Act") and (iii) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings the failure of which to be obtained or made would not materially impair or delay the consummation of the transactions contemplated by this Agreement. Section 3.4 No Other Representations or Warranties. Except for the -------------------------------------- representations and warranties contained in this Article III, neither NGC nor any other Person (as defined in the Merger Agreement) makes any other 10 express or implied representation or warranty on behalf of NGC. ARTICLE IV [Intentionally Omitted] ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent represents and warrants and Purchaser as of the Closing will represent and warrant to NGC as follows: Section 5.1 Organization. Parent is a corporation duly organized, ------------ validly existing and in good standing under the laws of the State of Delaware and Purchaser as of the Closing will be a corporation duly organized, validly existing and in good standing under the laws of Delaware. Parent has and as of the Closing Purchaser will have all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being or will be conducted and is or will be qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the business or financial condition of Parent and its Subsidiaries, taken as a whole, or materially impair or delay the consummation of the transactions contemplated by this Agreement. Parent has previously delivered to NGC complete and correct copies of its certificate of incorporation and by-laws, as currently in effect and prior to the Closing Parent will have delivered to NGC complete and correct copies of the certificate of incorporation and by-laws of Purchaser, as in effect at the time of such delivery. Section 5.2 Authorization; Validity of Agreement. Parent has the ------------------------------------ requisite corporate power and authority to execute and deliver this Agreement. Parent has, and as of the Closing Purchaser will have, the requisite corporate power and authority to consummate the transactions contemplated hereby. The execution and delivery by Parent of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of Parent and no other corporate proceedings on the part of Parent are necessary to authorize the execution 11 and delivery of this Agreement by Parent and the consummation of the transactions contemplated hereby. The consummation of the transactions contemplated hereby will be duly authorized by the Board of Directors of Purchaser and no other corporate proceedings on the part of Purchaser will be necessary to authorize the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and, assuming due authorization, execution and delivery of this Agreement by NGC, is a valid and binding obligation of Parent enforceable against Parent in accordance with its terms. Section 5.3 No Violations; Consents and Approvals. ------------------------------------- (a) Neither the execution and delivery of this Agreement by Parent nor the consummation by Parent and Purchaser of the transactions contemplated hereby will (i) violate any provision of the respective certificates of incorporation or by-laws of Parent or Purchaser, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, license, lease, contract, agreement or other instrument or obligation to which Parent or any of its Subsidiaries is a party or by which any of them or any of their assets may be bound or (iii) assuming that all consents, authorizations and approvals contemplated by Section 5.3(b) have been obtained and all filings contemplated thereby have been made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent, any of its Subsidiaries or any of their properties or assets; except for such violations, breaches, defaults, terminations, amendments, cancellations or accelerations which would not materially impair or delay the consummation of the transactions contemplated by this Agreement. (b) No filing or registration with, notification to, or authorization, consent or approval of, any Governmental Entity is required in connection with the execution and delivery of this Agreement by Parent or the consummation by Parent and Purchaser of the transactions contemplated hereby, except (i) applicable requirements under Competition Laws, (ii) applicable requirements under the Exchange Act and (iii) such other consents, approvals, orders, authorizations, notifications, registrations, declarations and filings the failure of which to be obtained or made would not materially impair or delay the 12 consummation of the transactions contemplated by this Agreement. Section 5.4 Financing. One business day prior to the Effective Time, --------- Parent and Purchaser will have sufficient funds available (through existing credit arrangements or otherwise) to pay the Purchase Price and to perform their obligations hereunder. Section 5.5 Brokers. No broker, finder or investment banker is ------- entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent and Purchaser. Section 5.6 Public Utility Company; Public Utility Regulatory ------------------------------------------------- Policies Act. Neither Parent nor its Subsidiaries is subject to regulation as a - ------------ "holding company" or a "subsidiary company" of a holding company or a "public utility company" under Section 2(a) of the Public Utility Holding Company Act of 1935. Section 5.7 Absence of Litigation. As of the date hereof, there is --------------------- no suit, claim, action, proceeding or investigation pending against, or to the actual knowledge of Parent, threatened against, Parent or any of its respective properties before any Governmental Entity or arbitrator which challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement. As of the date hereof, neither Parent nor any of its respective properties is subject to any judgment, decree, order or injunction of any Governmental Entity or arbitrator which would prevent or delay the consummation of the transactions contemplated hereby. Section 5.8 No Other Representations or Warranties. Except for the -------------------------------------- representations and warranties contained in this Article V, neither Parent, Purchaser nor any other Person makes any other express or implied representation or warranty on behalf of Parent or Purchaser. ARTICLE VI COVENANTS Section 6.1 Further Action; Reasonable Best Efforts. --------------------------------------- (a) Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use 13 its reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using reasonable best efforts to effect all necessary registrations and filings. Each of the parties hereto will furnish to the other parties such necessary information and reasonable assistance as such other parties may reasonably request in connection with the foregoing and will provide the other parties with copies of all filings made by such party with any Governmental Entity or any other information supplied by such party to a Governmental Entity in connection with this Agreement, and the transactions contemplated hereby. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and/or directors of the Company, including any successor, shall take or cause to be taken all such necessary action. (b) Parent and NGC shall use their respective reasonable best efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated hereby under the laws, rules, guidelines or regulations of any Governmental Entity. Without limiting the foregoing, Parent and NGC shall, as soon as practicable, file Notification and Report Forms under the HSR Act (as defined below) with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division") and shall use reasonable best efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation; and Parent and NGC shall use their reasonable best efforts to take or cause to be taken all actions necessary, proper or advisable to obtain any consent, waiver, approval or authorization relating to any Competition Law that is required for the consummation of the transactions contemplated by this Agreement; provided, however, that the foregoing shall not -------- ------- obligate Parent or NGC to take any action which would have a material adverse effect on the International Assets. "Competition Laws" means statutes, rules, regulations, orders, decrees, administrative and judicial doctrines, and other laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization, lessening of competition or restraint of trade and includes the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). 14 Section 6.2 Employee Benefits. ----------------- (a) For purposes of this Agreement, the term "International Employees" means those employees of the Company and the Subsidiaries who devote a substantial amount of time to the International Business and those consultants whose services relate primarily to the International Businesses. Parent and Purchaser hereby agree to honor without modification or contest, and to make required payments when due under, all portions of the International Employee Plans in existence on the date hereof (or as modified to the extent permitted by the Merger Agreement); provided, however, that nothing in this Section 6.2 shall -------- ------- be construed to limit the ability of Parent and Purchaser to amend or terminate such Plans after the Closing to the extent permitted under the terms of the International Employee Plans. (b) Parent and Purchaser hereby agree that for a period of one year immediately following the Effective Time, they shall, or shall cause the International Entities (as hereinafter defined) to either (i) continue to maintain the International Employee Plans on terms no less favorable in the aggregate than those provided to the International Employees and former international employees on the date hereof or (ii) provide that International Employees and former international employees may participate in analogous plans of Parent which provide benefits which in the aggregate are substantially similar to those provided to them under the International Employee Plans on the date hereof. Section 6.3 Indemnification. (a) NGC shall, and NGC shall cause the --------------- Company to, jointly and severally indemnify, defend and hold Parent, Purchaser and their affiliates harmless against and in respect of (i) all claims asserted by third parties with respect to Excluded Liabilities and (ii) all costs and expenses (including expenses of investigation, settlement negotiation and attorneys' fees) incurred by Parent or Purchaser in connection with any action, suit, proceeding, demand, claim, investigation, assessment or judgment incident to any of the matters indemnified against in this Section 6.3(a). (b) Parent shall, and Parent shall cause the Purchaser to, jointly and severally indemnify, defend and hold NGC, the Company and their affiliates harmless against and in respect of (i) claims asserted by third parties with respect to the Assumed Liabilities, (ii) all credit support obligations, guarantees and contribution obligations relating to the International Assets, including but not 15 limited to those listed on Schedule 1.3 of the Disclosure Schedule with respect to which the Company and its Subsidiaries have not been fully released by the Closing to the reasonable satisfaction of NGC and (iii) all costs and expenses (including expenses of investigation settlement negotiation and attorneys' fees) incurred by the Company, NGC and their affiliates in connection with any action, suit, proceeding, demand, claim, investigation assessment or judgment incident to any of the matters indemnified against in this Section 6.3(b). (c) Promptly after receipt by an indemnified party under this Section 6.3 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 6.3, notify the indemnifying party in writing of the claim or the commencement of that action, provided that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to the indemnified party except to the extent that the indemnifying party is prejudiced by such failure to notify. If any such claim shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and to assume the defense thereof with counsel reasonably satisfactory to the indemnified party, and to settle and compromise any such claim or action; provided, however, such settlement or compromise shall be effected only with the consent of the indemnified party, which consent shall not be unreasonably withheld. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6.3 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation (including related reasonable attorney's fees and expenses), provided, however, that the indemnified party shall have the right to employ counsel to represent it if, in the indemnified party's reasonable judgment, it is advisable for the indemnified party to be represented by separate counsel), and in that event the fees and expenses of such separate counsel shall be paid by the indemnified party unless the named parties to any such claim or action (including any impleaded parties) include both the indemnifying party and the indemnified party and in the opinion of counsel to the indemnified party (which counsel is reasonably satisfactory to the indemnifying party) representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, in which case 16 the reasonable fees and expenses of separate counsel (which counsel is reasonably satisfactory to the indemnifying party) shall be paid by the indemnifying party. Purchaser and the Company shall each render to each other such assistance (including by asserting reasonable counterclaims and bringing suit against third parties) as may reasonably be requested in order to insure the proper and adequate defense of any such claim or proceeding. (d) The indemnities provided in this Agreement shall survive the Closing. (e) The parties agree that the indemnification payments made pursuant to this Agreement shall be treated for tax purposes as an adjustment to the Purchase Price, unless otherwise required by applicable law. Section 6.4 Publicity. None of NGC, Parent, Purchaser nor any of --------- their respective affiliates shall issue or cause the publication of any press release or other announcement with respect to this Agreement, or the other transactions contemplated hereby without prior consultation with the other parties, except as may be required by law or by any listing agreement with a national securities exchange after prior notice has been given to, and all reasonable efforts have been made to consult with the other parties. Section 6.5 Corporate Names; Termination of Trademark Licensing --------------------------------------------------- Agreements. - ---------- (a) Each of Parent and Purchaser shall change any of the names of the corporations or other Persons included as part of the International Assets which contain "Destec" to corporate names not containing "Destec" within 90 days after the transfer of such Person to Purchaser and shall use their respective reasonable best efforts to remove all corporate names, service marks, trademarks and trade names containing "Destec" (the "Destec Names") from any of the International Assets within one year after the Closing Date. After the Closing Date, neither Parent nor Purchaser shall seek to obtain any rights to or use the Destec Names except as specifically provided in this Section 6.5. (b) All trademark licensing agreements by and between the Company and any of the entities included as part of the International Assets shall be terminated as of the Closing Date subject to the provisions of this Section 6.5. 17 Section 6.6 No Non-Compete Obligation. ------------------------- The parties hereby acknowledge that the consummation of the transactions contemplated hereby will not create an obligation of (i) NGC or its affiliates not to compete in any business with Parent, Purchaser or their respective affiliates; provided that none of NGC, the Company or their affiliates shall use any confidential information obtained from the Company in connection with NGC entering into the Merger Agreement or this Agreement to so compete or (ii) Parent or its affiliates not to compete in any business with NGC, the Company or their respective affiliates; provided that none of Parent, Purchaser or their affiliates shall use any confidential information obtained from the Company in connection with Parent entering into this Agreement. Section 6.7 Obligations under Merger Agreement. If the conditions to ---------------------------------- NGC's obligations under the Merger Agreement have been satisfied, NGC will consummate the Merger; provided, that Parent shall be in compliance with Section 1.6(b) of this Agreement. Section 6.8 Transfer Taxes. Parent shall cause Purchaser to pay all -------------- transfer taxes, stamp taxes or similar taxes arising in connection with the sale and purchase of the International Assets hereunder. Section 6.9 Merger Agreement Break-Up Fee. NGC shall promptly pay to ----------------------------- Parent its pro rata share of any proceeds received by NGC pursuant to Section 8.3 of the Merger Agreement. Section 6.10 Site Development Agreement. If the Company receives -------------------------- notice from The Dow Chemical Company ("Dow") under Section 3.1 of the Site Development Agreement between the Company and Dow dated February 17, 1997 with respect to any project outside the United States of America, NGC shall cause the Company to promptly send to Purchasers a copy of such notice. Section 6.11 Certain Confidentiality Obligations. Parent hereby ----------------------------------- agrees to be bound by the terms and conditions of Section 6.4 of the Merger Agreement. Section 6.12 Tax Matters. ----------- (a) NGC and Parent shall make a joint election for the International Entities (as hereinafter defined) that are U.S. corporations under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code") and 18 under any applicable similar provisions of state or local law (collectively, the "Section 338(h)(10) Elections"). On the Closing Date, NGC and Parent shall exchange completed and executed copies of Internal Revenue Service Form 8023-A and any similar state or local forms (collectively, the "Forms"). If any changes are required in the Forms as a result of information which is first available after such Forms are prepared, the parties will promptly agree on such changes. After all required schedules to support the Forms are completed, NGC and Parent shall file the Forms, which filing shall be made within the time period specified under applicable law. NGC, Parent, the International Entities and the Company shall make all required filings relating to the Section 338(h)(10) Elections in connection with their federal and applicable state and local income tax returns, and shall cooperate fully with each other with respect to such filings. For purposes of this Agreement, "International Entities" means those Persons which own, or have any rights to or interest in (direct or indirect), the International Assets. Within 180 days following the Closing Date, Parent shall (i) draft a schedule (the "Allocation Schedule") allocating the Modified Adjusted Deemed Sales Price (as defined in Section 1.338(h)(10)-1(f) of the Treasury regulations), and the Adjusted Deemed Sales Price (as defined in Section 1.338- 3(d) of the Treasury Regulations for the International Entities for which Section 338(h)(10) Elections or Section 338(g) elections will be among the International Assets and (ii) deliver such Allocation Schedule to NGC. The Allocation Schedule shall be reasonable and shall be prepared in accordance with Section 338 of the Code and the Treasury regulations thereunder. Each of Parent, on the one hand, and NGC (upon its consent to the Allocation Schedule, which consent shall not be unreasonably withheld) on the other hand, shall report the transactions contemplated hereby, and file all Tax Returns (as defined below), in each case, for federal, state, local and foreign Tax purposes in accordance with the Allocation Schedule. NGC represents and warrants that it will make joint Section 338(h)(10) Elections with Dow for the International Entities that are U.S. corporations and will file Section 338(g) elections only for those International Entities designated by Parent. Parent represents and covenants that it will not file, or permit to be filed by any affiliate, Section 338(g) Elections except for those International Entities designated for such Elections pursuant to the preceding sentence. 19 (b) Nothing contained herein shall be construed as altering the rights, obligations and duties of Dow, the Company and any Subsidiaries of the Company to each other pursuant to the Tax Sharing Agreement between Dow, the Company and its Subsidiaries dated May 15, 1996 (the "Tax Sharing Agreement") (attached hereto as Exhibit 6.12). The Tax Sharing Agreement shall continue to govern the rights and obligations of Dow, the Company and any Subsidiaries of the Company with respect to the taxable periods for which it is effective. Parent acknowledges that the Tax Sharing Agreement shall be amended effective as of the Closing Date in the form of the First Amendment to the Tax Sharing Agreement, which has been previously distributed to Parent. Parent shall pay or cause the International Entities to pay to NGC all amount required to be paid by the International Entities to Dow under the Tax Sharing Agreement. NGC shall pay to the International Entities all amounts Dow is required to pay to the International Entities under the Tax Sharing Agreement. (c) (i) NGC shall be liable for, and shall indemnify Parent and Purchaser for and hold Parent and Purchaser harmless against (A) all income Taxes (as defined below) imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group for state, local or foreign tax purposes that include Dow (not including the use of any losses or other Tax attributes) (B) any incremental amount of state and local income Taxes imposed on the International Entities (other than any amount of state or local Taxes imposed on a combined or unitary group that includes Dow) for the taxable year that includes the Closing Date, to the extent that such amount is incurred as a result of the Section 338(h)(10) Elections or any election under Section 338(g) of the Code and (C) all liability for income Taxes imposed on any International Entities pursuant to Section 1.1502-6 of the Treasury Regulations or any comparable provision of state or local law. NGC shall be entitled to any refund of (or credit for) Taxes allocable or attributable to Taxes for which NGC is liable to Parent or Purchaser pursuant to this paragraph (c)(i) of this Section 6.12. (ii) Parent and Purchaser shall be liable for, and shall indemnify NGC for and hold Seller harmless against all Taxes of or imposed on any of the International Entities for any taxable period other than those Taxes referred to in paragraph (c)(i) of this Section 6.12. Parent shall be entitled to any refund of (or credit for) 20 Taxes allocable or attributable to Taxes for which Parent is liable to NGC pursuant to this paragraph (c)(ii) of Section 6.12. (iii) Notwithstanding anything to the contrary contained herein, Parent shall assume and pay all sales, use, privilege, transfer, stock transfer, real property transfer, documentary, gains, stamp, duties, recording and similar Taxes and fees and all foreign Taxes (including any penalties, interest or additions) imposed upon any party incurred in connection with any of the transfers contemplated by this Agreement (collectively, "Transfer Taxes") and Parent shall, at its own expense, accurately file all necessary Tax Returns and other documentation with respect to any Transfer Tax other than Tax Returns which Seller is responsible for filing under applicable law. Parent and Seller agree to timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns with respect to, such Transfer Taxes. (d) (i) Parent acknowledges that Dow shall file or cause to be filed when due all Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement and Dow shall remit or cause to be remitted any Taxes due in respect of such Tax Returns, and Parent shall file or cause to be filed when due all Tax Returns other than those Tax Returns Dow has elected to file pursuant to the Tax Sharing Agreement that are required to be filed by or with respect to the International Entities and Parent shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. (ii) None of Parent or any affiliate of Parent shall (or shall cause or permit the Company or any of its Subsidiaries to) amend, refile or otherwise modify any Tax Return relating in whole or in part to the Company or any of its Subsidiaries with respect to any Company or any of its Subsidiaries with respect to any taxable year or period ending on or before the Closing Date without the prior written consent of NGC. (iii) Parent shall promptly cause the International Entities to prepare and provide to, or at the direction of, NGC, all Tax information materials, including, without limitation, schedules and work papers which the Company is required to provide Dow pursuant to the Tax Sharing Agreement. Each of NGC and Parent shall (and shall cause their respective affiliates to): (A) assist the other party and/or Dow in preparing any Tax Returns which such other party or Dow is responsible for preparing and filing 21 in accordance with clause (i) of this Section 6.12, (B) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company and each Subsidiary of the Company, and (C) make available to the other party and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company and each Subsidiary of the Company, provided, NGC or Parent (or respective -------- affiliates) has access to information, records or personnel concerning such Tax Returns that is not available to the other party. (e) NGC or Parent shall pay the other party for the Taxes for which NGC or Parent, respectively, is liable pursuant to paragraph (c) of Section 6.12 upon the written request of the party entitled to the payment, setting forth in detail the nature and the amount of the Taxes to which the payment relates. (f) Each of NGC and Parent shall (and cause their respective affiliates to): (A) provide timely notice to the other in writing of any notice of deficiency, proposed adjustment, adjustment, assessment, audit, examination, suit, dispute or other claim ("Tax Claim") delivered, sent, commenced or initiated to or against the Company or any Subsidiary of the Company by any Taxing authority with respect to taxable periods for which the other may have a liability under this Section 6.12, and (B) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period. (g) Parent acknowledges that Dow shall have the sole right to represent the Company's and each of its Subsidiaries' interests in any Tax Claim, Tax audit or administrative or court proceeding ("Proceeding") relating to any Taxes (A) imposed for any taxable year on Dow's "affiliated group" (as defined in Section 1504(a) of the Code without regard to the limitations contained in Section 1504(b) of the Code) or any other combined or unitary group of Dow, (B) imposed on the Company or any Subsidiary of the Company as a result of the Section 338(h)(10) Elections (or similar provision under state, local or foreign law) pursuant to paragraph (a) of Section 6.12. None of Parent, any of its affiliates, or any International Entities may settle any Proceeding for any taxable year which may be the subject of indemnification by NGC under paragraph (c) of Section 6.12 without the prior written consent of NGC, which consent may not be unreasonably withheld. Parent shall have the sole right to represent the - --- ------------ International Entities' interests in any Proceeding relating to any Taxes for which 22 Parent could be liable to NGC pursuant to Section 6.12(c) of this Agreement. If the resolution of any Proceeding could adversely affect a party other than the party with the sole right to represent the Company's or any Subsidiary's interest in any Tax Claim then such other party shall have the right to participate in such Proceeding at its own cost and expense. (h) Any payment by Parent, Purchaser or NGC pursuant to this Section 6.12 shall be an adjustment to the Purchase Price. (i) For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, estimated, social security, unemployment, occupation, use, service, service use, license, net worth, payroll, franchise, severance, transfer, recording or other taxes, assessments or charges imposed by any Governmental Entity and any interest, penalties, or additions to tax attributable thereto. For purposes of this Agreement, "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation,, any information return, claim for refund, amended return or declaration of estimated Tax. (j) The obligations set forth in this Section 6.12 shall be unconditional and absolute and shall remain in effect without limitation as to time. Section 6.13 Financing Commitment. -------------------- Parent agrees that: (a) Within 10 days of the signing of this agreement, Parent will provide to NGC a commitment letter substantially in the form of that original letter dated February 17, 1997 from Morgan Guaranty Trust Company of New York and J.P. Morgan Securities, Inc. (Morgan) except that (a) clauses (iii) and (iv) shall be deleted in their entirety and (b) a termsheet evidencing the substantive terms and conditions under which Morgan will finance AES's purchase of the International Assets shall be referenced and attached. 23 (b) No later than three weeks before the special meeting of Destec's stockholders to approve the Agreement and Plan of Merger, Parent will provide to NGC either (a) evidence that Parent has sufficient cash on hand to fund its obligations under this Agreement or (b) a commitment letter substantially in the form described in (a) above except the due diligence condition in clause (i) therein shall be deleted in its entirety, or (c) such other evidence of a firm financing commitment as may be reasonably satisfactory to NGC and Parent. ARTICLE VII CONDITIONS Section 7.1 Conditions to Purchaser's Obligation to Purchase the ---------------------------------------------------- International Assets. The obligation of Purchaser to purchase the International - -------------------- Assets hereunder shall be subject to the satisfaction or waiver by Purchaser at or prior to the Closing of the following: (a) the representations and warranties of NGC and the Company set forth in this Agreement shall be true and correct (except in the case of any representation and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date except for such representations and warranties the failure of which to be true and correct would not have a material adverse effect on the transactions contemplated by this Agreement; (b) no representation, warranty, condition, covenant or other term in the Merger Agreement relating to the International Assets shall be amended, modified or waived, which amendment, modification or waiver could reasonably be expected to have a material adverse effect on the International Assets taken as a whole, without the prior written consent of Parent or Purchaser; (c) the Merger Agreement shall have been consummated, without waiver of any of the conditions contained in the Merger Agreement, which waiver could reasonably be expected to have a material adverse effect on the International Assets taken as a whole, without the written consent of Parent or Purchaser. Section 7.2. Conditions to NGC's Obligation to Sell the International -------------------------------------------------------- Assets. The obligation of NGC to sell the International Assets hereunder shall - ------ be subject to the satisfaction or waiver by NGC at or prior to the Closing of the following: (a) the Merger shall have been consummated, (b) the representations and warranties of the Parent and Purchaser set forth in this Agreement shall be true and correct (except in the case of any representation 24 and warranty made as of a specified date, which need only be true as of such date) as of the date of the Closing as if such representations and warranties were made on such date except for such representations and warranties the failure of which to be true and correct would not have a material adverse effect on the transactions contemplated by this Agreement and (c) Purchaser shall have complied with Section 1.6(b) hereof. ARTICLE VIII TERMINATION Section 8.1 Termination. Notwithstanding anything herein to the ----------- contrary, this Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) By the mutual written consent of Parent and NGC; or (b) By Parent or NGC, if: (i) the Merger Agreement is terminated; (ii) the transactions contemplated by this Agreement have not been consummated on or prior to December 31, 1997, or such other date, if any, as Parent and NGC shall agree upon; provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to a party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date; or (iii) any Governmental Entity shall have issued a statute, order, decree or regulation or taken any other action (which statute, order, decree, regulation or other action the parties hereto shall use their reasonable best efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement or making such transactions illegal and such statute, order, decree, regulation or other action shall have become final and non-appealable. Section 8.2 Effect of Termination. In the event of the termination --------------------- of this Agreement as provided in Section 8.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall terminate, and there shall be no liability on the part of Parent, Purchaser or NGC except as set forth in Section 9.1 hereof; provided that the termination of this 25 Agreement shall not relieve any party from liability for breach of this Agreement. ARTICLE IX MISCELLANEOUS Section 9.1 Fees and Expenses. Except as contemplated by this ----------------- Agreement, all costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. Section 9.2 Specific Performance. The parties hereto agree that -------------------- irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Section 9.3 Amendment; Waiver. ----------------- (a) This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. (b) At any time prior to the Closing, the parties may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (iii) waive compliance with any of the agreements or conditions of the other parties hereto contained herein. Any agreement on the part of any party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 9.4 Survival. The respective representations and warranties -------- of Parent, Purchaser and NGC contained herein or in any certificates or other documents delivered prior to or as of the Closing shall not survive beyond the Closing. The covenants and agreements of the parties hereto shall survive the Closing without limitation (except for those which, by their terms, contemplate a shorter survival period). 26 Section 9.5 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five business days after the day when mailed in the United States by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to NGC, to: NGC Corporation 13430 Northwest Freeway 2500 Citywest Blvd. Suite 1200 Houston, Texas 77040-6095 Telephone: (713) Facsimile: (713) 507-6505 Attention: Hugh Tarpley with a copy to: Vinson & Elkins L.L.P. 2300 First City Tower 1001 Fannin Street Houston, Texas 77002-6760 Telephone: (713) 758-2222 Facsimile: (713) 758-2346 Attention: T. Mark Kelly, Esq. Keith R. Fullenweider, Esq. and (b) if to Parent, to: The AES Corporation 1001 North 19th Street Arlington, Virginia 22209 Telephone: (703) 522-1315 Facsimile: (703) 528-4510 Attention: Katherine Oster 27 with a copy to: Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 Telephone: (212) 408-5100 Facsimile: (212) 541-5369 Attention: John T. Baecher, Esq. Section 9.6 Interpretation. When a reference is made in this -------------- Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation". The phrase "made available" when used in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The words "affiliates" and "associates" when used in this Agreement shall have the respective meanings ascribed to them in Rule 12b-2 under the Exchange Act. The phrase "beneficial ownership" and words of similar import when used in this Agreement shall have the meaning ascribed to it in Rule 13d-3 under the Exchange Act. Section 9.7 Headings; Schedules. The headings contained in this ------------------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any matter disclosed pursuant to any Schedule to the Disclosure Schedule shall be deemed to be disclosed for all purposes under this Agreement but such disclosure shall not be deemed to be an admission or representation as to the materiality of the item so disclosed. Section 9.8 Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. Section 9.9 Entire Agreement. This Agreement constitutes the entire ---------------- agreement, and supersedes all prior agreements and understandings (written and oral) among the parties with respect to the subject matter hereof, including, without limitation, that certain Joint Bidding Agreement, dated February 10, 1997, by and between Parent and NGC. Section 9.10 Severability. If any term, provision, covenant or ------------ restriction of this Agreement is held by a court of competent jurisdiction or other authority to 28 be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 9.11 Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. Section 9.12 Assignment. Neither this Agreement nor any of the ---------- rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. The provisions of this Agreement are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. Section 9.13 Consent to Jurisdiction. Each of the parties hereto ----------------------- hereby irrevocably and unconditionally consents to submit to jurisdiction of the courts of the State of Delaware and of the United States of America located in the State of Delaware (the "Delaware Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such Delaware Courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum. 29 IN WITNESS WHEREOF, Parent and NGC have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. NGC CORPORATION By: /s/ Kenneth E. Randolph -------------------------- Name: Kenneth E. Randolph Title: Senior Vice President and General Manager THE AES CORPORATION By: /s/ Kenneth R. Woodcock -------------------------- Name: Kenneth R. Woodcock Title: Senior Vice President 30 EX-21 3 SIGNIFICANT SUBSIDIARIES EXHIBIT 21 SIGNIFICANT SUBSIDIARIES OR OTHER BUSINESS ORGANIZATIONS OF THE AES CORPORATION
Jurisdiction of Incorporation Company Name or Organization - ----------------------------------------------------------------------- AES Beaver Valley, Inc. Delaware BV Partners Pennsylvania AES Connecticut Management, Inc. Delaware AES Thames, Inc. Delaware AES Hawaii Management, Inc. Delaware AES Barbers Point, Inc. Delaware AES Oklahoma Management, Inc. Delaware AES Shady Point, Inc. Delaware AES Electric, Ltd. United Kingdom NIGEN, Limited United Kingdom AES Brazil Holdings, Inc. Delaware AES Light II, Inc. Delaware AES Cayman I, LLC Cayman Islands AES Coral Reef, LLC Cayman Islands Light Servicos de Electricidade, S.A. Brazil
EX-24 4 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY The undersigned, acting in the capacity or capacities stated opposite their respective names below, hereby constitute and appoint BARRY J. SHARP and WILLIAM R. LURASCHI and each of them severally, the attorneys-in-fact of the undersigned with full power to them and each of them to sign for and in the name of the undersigned in the capacities indicated below the Company's Annual Report on Form 10-K and any and all amendments and supplements thereto.
Signature Title Date --------- ----- ---- /s/ Roger W. Sant Chairman of the Board January 29, 1997 - ------------------------------ and Director Roger W. Sant /s/ Dennis W. Bakke President, January 29, 1997 - ------------------------------ Chief Executive Officer Dennis W. Bakke and Director /s/ Barry J. Sharp Vice President, Chief January 29, 1997 - ------------------------------ Financial Officer and Barry J. Sharp Secretary /s/ Frank Jungers - ------------------------------ Director January 29, 1997 Frank Jungers /s/ Robert F. Hemphill, Jr. - ------------------------------ Director January 29, 1997 Robert F. Hemphill, Jr. /s/ Dr. Henry R. Linden - ------------------------------ Director January 29, 1997 Dr. Henry R. Linden /s/ Dr. Alice Emerson - ------------------------------ Director January 29, 1997 Dr. Alice Emerson
The AES Corporation 1 Power of Attorney /s/ Russell E. Train - ------------------------------ Director January 29, 1997 Russell E. Train /s/ Thomas I. Unterberg - ------------------------------ Director January 29, 1997 Thomas I. Unterberg /s/ Robert H. Waterman, Jr. - ------------------------------ Director January 29, 1997 Robert H. Waterman, Jr. /s/ Vicki Ann Assevero - ------------------------------ Director January 29, 1997 Vicki Ann Assevero
The AES Corporation 2 Power of Attorney EX-23 5 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in The AES Corporation's Registration Statement No. 33-44498 on Form S-8, Registration Statement No. 33-49262 on Form S-8, Registration Statement No. 33-95046 on Form S-3, and Registration Statement No. 333-15487 on Form S-3 of our reports dated January 30, 1997, except for Note 13, as to which the date is February 18, 1997, appearing in and incorporated by reference in this Annual Report on Form 10-K of The AES Corporation for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Washington, D.C. March 28, 1997 EX-99.1 6 EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) N/A ---------------- The AES Corporation -------------------------------------------------- (Exact Name of Registrant as specified in charter) Delaware 0-19281 54-1163725 - ------------------------- ------------ ------------------- (State or other jurisdic- (Commission (IRS Employer tion of incorporation) File Number) Identification No.) 1001 North 19th Street, Arlington, Virginia 22209 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 703-522-1315 ---------------- N/A - -------------------------------------------------------------- (Former name or former address, if changed since last report.) ITEM 5. OTHER EVENTS This Current Report on Form 8-K includes the Discussion and Analysis of Financial Condition and Results of Operations and the 1996 consolidated financial statements filed under Item 7. 2 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, China, Brazil, Hungary and Kazakstan. Electricity sales accounted for 97% of total revenues during 1996 and 1995. Other sales arise from the sale of steam and other commodities related to the Company's cogeneration operations. Service revenues represent fees earned in connection with energy consulting, wholesale power services and services provided to affiliates. The electricity sold is generated (or manufactured) by power plants owned or leased by subsidiaries and affiliates. AES now operates and owns (entirely or in part) a diverse portfolio of electric power plants with a total capacity of 9,627 megawatts. Of that total, 60% are fueled by coal or petroleum coke, 8% are fueled by natural gas, 10% are hydroelectric facilities, 1% are fueled by oil and the remaining 21% are capable of using multiple fossil fuels. Of the total megawatts, 1,069 (six plants) are located in the U.S., 1,420 (three plants) are in the UK, 840 (five plants) are in Argentina, 229 (four plants) are in China, 1,281 (three plants) are in Hungary, 788 (four hydro-electric complexes) are in Brazil and 4,000 (one plant) is in Kazakstan. AES has grown its portfolio of generating assets by greenfield development and by acquisitions of existing plants, primarily through competitively bid privatization initiatives outside the U.S. AES is currently in the process of adding 1,672 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 U.S., one oil-fired, one natural gas-fired and three coal-fired plants in China (one of which is an extension of an existing plant) totaling 588 megawatts and a 230 megawatt natural gas-fired plant in Wales. In total, AES's net equity ownership in plants in operation and under construction is 7,475 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 projects now under construction will reach commercial operation and begin to sell electricity at various dates through 1999. The completion of each plant in a timely manner is generally supported by a guarantee from the 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. 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 many countries. Several of these acquisitions, if consummated, would require the Company to obtain substantial additional financing, in the form of both debt and equity financing, in the short term. Certain subsidiaries and affiliates (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, 1996, capitalized costs for projects under development were approximately $53 million. The Company believes that these costs are recoverable; however, no assurance can be given that changes in circumstances related to individual development projects will not occur or that any of these projects will be completed and reach commercial operation. AES has been successful in acquiring a portion of its portfolio 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. In such privatizations, sellers generally seek to complete competitive solicitations in less than one year, much quicker than greenfield development, and require payment in 3 full on transfer. AES believes that its experience in competitive markets and its integrated divisional structure, with geographically dispersed locations, enable it to react quickly and creatively in such situations. Because of this relatively quick process or other considerations, it may not always be possible to arrange "project financing" (the Company's historically preferred financing method, which is discussed further under "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 expanding the Revolver to $425 million. AES also filed a $750 million "universal shelf" registration statement that provides for the issuance of various additional debt and preferred or common equity securities either individually or in combination. AES also may consider an exchange of project ownership interests to fund future acquisition opportunities. RESULTS OF OPERATIONS Revenues Total revenues increased $156 million (23%) to $835 million from 1995 to 1996 after increasing $146 million (27%) to $679 million from 1994 to 1995. The increase in 1996 primarily reflects the acquisition of controlling interests in AES Tiszai and AES Ekibastuz. The increase from 1994 to 1995 primarily reflects the additional revenues arising from the acquisition of a controlling interest in AES San Nicolas, the consolidation of AES Deepwater (resulting from the acquisition of its outstanding debt), and improved capacity factors at AES Thames and AES Barbers Point. These increases were offset, in part, by decreased energy revenues at AES Placerita. 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 1996, the Company's five largest customers accounted for 73% of total 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 results of operations. 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. However, AES does not limit its business solely to the most developed countries or economies, or only to those countries with investment grade sovereign credit ratings. In certain locations, particularly developing countries or countries that are in a transition from centrally planned to market oriented economies, the electricity purchasers may experience difficulty in meeting contractual payment obligations. In August 1996, AES, together with its partner, acquired a 4,000 megawatt mine-mouth, coal-fired power facility in Kazakstan. The facility sells electricity to the government-owned distribution company under a 35 year power sales contract. Due to economic difficulties over the ten years prior to the Company's purchase, the facility has experienced a reduction in performance and has operated at a capacity factor of approximately 20%. AES has agreed to increase the availability to 63% over a five year period (contingent on the purchaser's performance of its obligations under the power sales contract). Through December 31, 1996, approximately $35 million (excluding VAT) was billed under the power sales contract for electricity, of which the purchaser paid approximately $5 million. The Company has recorded a provision of $20 million to reduce the carrying value of the contract receivable as of December 31, 1996 to $10 million. As of December 31, 1996, the net assets of this project were $24 million, a portion of which was represented by the contract receivable referred to above. There can be no assurance as to the ultimate collectibility of amounts owed to AES as of December 31, 1996 or additional amounts related to future deliveries of electricity under the power sales contract or the recoverability of the Company's investment or additional amounts the Company may invest in the project. Other substantial risks associated with this plant exist, including those relating to operations and maintenance, construction, refurbishment, political risk, repatriation of earnings and currency convertibility. A portion of the electricity sales from certain plants is not subject to a contract and is available for sale, when economically advantageous, in the relevant spot electricity market. The prices paid for electricity in the spot 4 markets may be volatile and are dependent on the behavior of the relevant economies, including the demand for and retail price of electricity and the competitive price and availability of power from other suppliers. Costs of Sales and Services Total costs of sales and services increased $108 million (27%) to $502 million in 1996 after increasing $129 million (49%) to $394 million from 1994 to 1995. The increase in 1996 was caused primarily by the costs of electricity sales associated with the acquisition of controlling interests in AES Tiszai and AES Ekibastuz. The increase from 1994 to 1995 was caused primarily by the additional operating costs arising from the acquisitions of a controlling interest in AES San Nicolas, the consolidation of AES Deepwater and increased fuel costs arising from a higher capacity factor at AES Barbers Point, offset in part by decreased fuel and operating costs at AES Placerita. Gross Margin Gross margin (revenues less costs of sales and services) increased (prior to consideration of the $20 million provision to reduce contract receivable) $48 million (17%) to $333 million from 1995 to 1996 after increasing $17 million (6%) to $285 million from 1994 to 1995. The improvement in 1996 primarily reflects the additional gross margins contributed by the operations of AES Tiszai and AES Ekibastuz, improved operations of AES San Nicolas and AES Thames and higher electricity prices under the AES Deepwater sales contract due to higher natural gas prices. The improvement in 1995 reflects the acquisitions of a controlling interest in AES San Nicolas, the consolidation of AES Deepwater and improved operations at AES Placerita and AES Thames, offset in part by lower service revenues from affiliates. Gross margin as a percentage of total revenues (net of the provision to reduce contract receivable) decreased from 42% in 1995 to 37% in 1996, primarily due to lower gross margin percentages at AES Tiszai and AES Ekibastuz, offset in part by an improved gross margin percentage at AES Deepwater. Gross margin as a percentage of total revenues decreased from 50% in 1994 to 42% in 1995, primarily due to a lower gross margin percentage at AES San Nicolas. Because the Company's operations are located in different geographical areas, seasonal variations have not historically had a significant effect on quarterly financial results. However, unusual weather conditions and the specific needs of each plant to perform routine or unanticipated facility maintenance, which would require an outage, could 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 $3 million (9%) to $35 million from 1995 to 1996 after increasing less than $1 million (3%) to $32 million from 1994 to 1995. The 1996 increase is attributable to increases in administrative costs and expenses associated with the development of new business opportunities. The 1995 increase is attributable to an increase in administrative costs. As a percentage of total revenues, selling, general and administrative expenses decreased to 4% in 1996, down from 5% in 1995 and 6% in 1994. The Company's general and administrative costs do not necessarily vary with changes in revenues. Operating Income Operating income improved $25 million (10%) to $278 million from 1995 to 1996 after increasing $17 million (7%) to $253 million from 1994 to 1995. The increases result from the factors discussed in the preceding paragraphs, offset in part for 1996 by the provision of $20 million to reduce the contract receivable at AES Ekibastuz. Other Income and Expense Other income and expense, on a net basis, decreased $1 million (1%) to $85 million from 1995 to 1996 after decreasing $5 million (5%) to $86 million from 1994 to 1995. Interest expense increased 13% in 1996 and 5 increased 2% in 1995. The increase in 1996 reflects additional interest associated with increased borrowings under the Revolver, the issuance in June 1996 of $250 million of the Company's 10 1/4% senior subordinated notes due 2006 (the "10 1/4 Notes") and project financing debt associated with the acquisition of the Company's equity investment in Light and additional project financing debt associated with the acquisition of AES Tiszai, offset, in part, by declining balances related to other project financing debt. The increase in 1995 reflects the additional interest expense associated with the acquisition of a controlling interest in AES San Nicolas offset almost entirely by declining balances of other project financing debt. AES capitalizes interest incurred during the development and construction of its facilities. Interest capitalized totaled approximately $27 million in 1996, $8 million in 1995 and $2 million in 1994. Interest income decreased 11% in 1996 and increased 23% in 1995. The 1996 decrease results primarily from lower invested funds at AES Chigen, offset in part by interest income earned on notes receivable at AES Tiszai. 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. Equity in earnings of affiliates (after income taxes) increased 150% in 1996 and 17% in 1995. The increase in 1996 results almost entirely from the Company's acquisition of an 11.35% interest in Light in June 1996, offset slightly by a decrease in equity in earnings from NIGEN due to a planned outage. The increase in 1995 results most significantly from the start of operations at Medway in late 1995. Income Taxes The Company's effective tax rate increased to 40% in 1996 and to 38% in 1995 from 34% in 1994. The increase in 1996 is due primarily to foreign withholding and income taxes. 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. 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, refinanced its outstanding project financing loan through a public debenture offering. The extinguishment of such debt resulted in an extraordinary loss of $7 million, of which the Company's share was $2 million, net of taxes. OUTLOOK All over the world, electricity markets are being restructured and there is a trend away from government-owned and government-regulated electricity systems toward deregulated, competitive market structures. Many countries have rewritten their laws and regulations to allow foreign investment and private ownership of electricity generation, transmission or distribution systems. Some countries (for example, the UK, Brazil and some of those of the former Soviet Union, among others) have or are in the process of "privatizing" their electricity systems by selling all or part of such to private investors. This global trend of electricity market restructuring has created significant new business opportunities for companies like AES. Although recent activity in the U.S. electricity market has provided some opportunities for independent and competitive power companies, 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. In the U.S., some states (for example, California, Illinois, Massachusetts, Michigan and Pennsylvania) have passed or are considering new legislation that would permit utility customers to choose their electricity supplier in a competitive electricity market (so-called "retail access" or "customer choice" laws). While each state's plan differs in details, there are certain consistent elements, including allowing customers to choose their electricity suppliers by a certain date (the dates in the existing or proposed legislation vary between 1998 and 2003), allowing utilities to recover "stranded assets" (the remaining costs of uneconomic generating or regulatory assets) and a reaffirmation of the validity of contracts like the Company's U.S. contracts. 6 In addition to the potential for state restructuring legislation, the U.S. Congress has proposed new federal legislation to encourage customer choice and recovery of stranded assets. Federal legislation might be needed to avoid the "patchwork quilt" effect of each state acting separately to pass restructuring legislation. While it is uncertain whether or when federal legislation dealing with electricity restructuring might be passed, it is the opinion of the Company that such legislation would likely have a neutral or positive effect on the Company's U.S. business. There is also legislation currently before the U.S. Congress to repeal part or all of the current provisions of the Public Utility Regulatory Policies Act of 1978 ("PURPA") and of the Public Utility Holding Company Act of 1935 ("PUHCA"). The Company believes that if such legislation is adopted, competition in the U.S. for new capacity from vertically integrated utilities would presumably increase. However, independents like AES would also be free to acquire retail utilities. As consumers, regulators and suppliers continue the debate about how to further decrease the regulatory aspects of providing electricity services, the Company believes in and is encouraging the continued 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 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 toward competition, 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 low-cost plants in those markets. Such an investment, which would not necessarily be supported by a long-term electricity sales contract for all or any of the plant's expected output, may 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. AES's involvement in the development of new projects and the acquisition of existing plants in locations outside the U.S. is increasing and most of AES's current development and acquisition activities are for projects and plants outside the U.S. The financing, development and operation of such projects and plants may entail significant political and financial uncertainties and other structuring issues (including, without limitation, uncertainties associated with the legal environments, with first-time privatization efforts in the countries involved, currency exchange rate fluctuations, currency repatriation restrictions, currency convertibility, political instability, civil unrest and expropriation). These issues have the potential to cause substantial delays in respect of or material impairment of the value of the project being developed or plant being operated, which AES may not be capable of or choose to fully insure or hedge against. FINANCIAL POSITION At December 31, 1996, AES had working capital of $120 million as compared to $218 million at the end of 1995. The decrease is primarily attributable to decreased balances of cash and short-term investments, increases in accounts payable and accrued liabilities and increases in the current portion of borrowings under the Revolver and project financing debt, offset in part by increases in inventory, accounts receivable and deferred income taxes. Property, plant and equipment, net of accumulated depreciation, was $2.22 billion at December 31, 1996, up from $1.55 billion at the end of 1995. The net increase of $670 million (43%) is primarily attributable to the acquisition during 1996 of AES San Juan, AES Tiszai and AES Ekibastuz, the continuation of construction activities at AES Lal Pir, AES Pak Gen and AES Warrior Run and the commencement of construction activities at Jiaozou and AES Barry. Other assets increased $555 million (161%) to $900 million primarily due to the Company's purchase of and undistributed earnings from an 11.35% interest in Light, payments to debt service reserves, payments for deferred financing costs associated with a higher level of debt financing, reimbursable payments for contracts related to a project in development and intangible assets acquired through the purchase of AES San Juan. 7 Project financing debt, net of repayments, increased as a result of additional borrowings associated with the Company's purchase of an 11.35% interest in Light and additional construction borrowings associated with AES Lal Pir, AES Pak Gen and AES Warrior Run. A significant portion of the AES Lal Pir and AES Pak Gen loans, associated with equipment purchases, will be borrowed and repaid (as scheduled in the future) in Japanese yen. The anticipated electricity prices under the related power sales contracts (to be received beginning with commercial operation of those plants) also include a yen component designed to correlate with the yen-based financing. Other notes payable (non-current) increased $325 million (260%) to $450 million as a result of the issuance of the $250 million of the 10 1/4% Notes and increased borrowings under the Revolver of $125 million that are due in excess of one year, offset in part by the conversion of $50 million of the Company's 6 1/2% convertible subordinated debentures. CASH FLOWS, FINANCIAL RESOURCES AND LIQUIDITY Cash from Operations Cash flows provided by operating activities totaled $182 million during 1996 as compared to $197 million during 1995 and $164 million in 1994. The decrease in 1996 was primarily due to a larger proportion of net income being derived from undistributed earnings from affiliates, larger cash payments for income taxes and increased deferred financing costs associated with a higher level of debt financing activity in 1996. These factors offset a significant increase in net income before depreciation as compared with 1995. The increase in 1995 was primarily due to increased pre-tax income. Unrestricted net cash flow (as defined in the Indenture for the 10 1/4% Notes, which is after cash paid for general and administrative costs, taxes and project development expenses but before investments and debt service) amounted to approximately $133 million for the year ended December 31, 1996 as compared to $110 million for the year ended December 31, 1995. Cash from Investing Activities Net cash used in investing activities totaled $1.135 billion during 1996 as compared to $343 million during 1995 and $120 million in 1994. The 1996 amount primarily reflects the acquisitions of AES San Juan, AES Tiszai and AES Ekibastuz; the Light investment; construction progress at AES Lal Pir, AES Pak Gen, AES Warrior Run and AES Barry; AES Chigen's investments in various projects; reimbursable payments for contracts related to a project in development; and the funding of debt service reserves for the project financing of the Light investment. 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; 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, capital additions and investments in projects in development. Cash from Financing Activities Net cash provided by financing activities aggregated $899 million during 1996 as compared to $130 million during 1995 and $80 million in 1994. The significant cash financing inflows in 1996 were caused by construction loan draws for AES Lal Pir, AES Pak Gen and AES Warrior Run; project acquisition financing of the Light investment; issuance of $250 million of the 10 1/4% Notes; initial project financing at AES San Nicolas; and net borrowings under the Company's revolving line of credit. Significant cash financing outflows were due to scheduled debt amortization of the project financings. During 1995 the Company drew on its project financing loan commitments associated with the construction of AES Lal Pir and AES Warrior Run and borrowed under the Revolver. Repayments of project financing loans during the year were made in accordance with contracted debt service requirements. During 1994, AES Chigen completed an initial public offering of 10.2 million shares of Class A common stock. The Company also made scheduled principal payments on project financing debt in 1994. Financial Resources and Liquidity 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- 8 recourse to other subsidiaries and affiliates and to The AES Corporation 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, and may cease development of such project. In addition to the project financing loans, if available, AES provides a portion, or in certain instances all, of the remaining long-term financing required to fund development, construction or acquisition. These investments have generally taken the form of equity investments or loans, which are subordinated to the project financing loans. The funds for these investments have been provided by cash flows from operations and by the proceeds from issuances of senior subordinated notes, convertible debentures and common stock of the Company. In August 1996, substantially all $50 million of the Company's 6 1/2% convertible subordinated debentures due in 2002 were converted into approximately 1.9 million shares of AES Common Stock. The Company also expects to issue approximately 2.5 million shares of AES Common Stock to purchase all of the remaining outstanding Class A shares of AES Chigen at an exchange rate of 0.29 shares of AES Common Stock for each share of AES Chigen Class A common stock in April 1997, subject to approval by the holders of the Class A common stock. Interim needs for shorter-term and working capital financing at the parent company have been met with borrowings under the Revolver. Over the past several years, the Company has continued to increase the amount of available financing under the Revolver. In the second quarter of 1996, AES increased the size of the Revolver to $425 million. Under the terms of the Revolver, AES will be required to reduce its direct borrowings to $125 million for 30 consecutive days during each twelve month period. The terms of the Revolver 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. At December 31, 1996, cash borrowings and letters of credit outstanding under the Revolver amounted to $213 million and $123 million, compared with $50 million and $56 million in 1995. The Company may also attempt to meet its short-term and interim funding needs with commitments from banks and other financial institutions at the parent or subsidiary level on an as needed basis. The ability of AES's subsidiaries and affiliates 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 for additional information. In connection with its project financings and project-related contracts, 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 those collateralized using letter of credit obligations under the Revolver, were limited by their terms as of December 31, 1996 to an aggregate of approximately $176 million. 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 $33 million as of December 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 or financial position, 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 9 obligations and contingent liabilities described above in certain cases take the form of, or are supported by, letters of credit. At December 31, 1996, the Company had future commitments to fund investments in its projects under construction and in development of $106 million. Of this amount, letters of credit in the amount of $76 million have been issued to support these obligations. In February 1997, the Company agreed to acquire the international assets of Destec at a total price to AES of $407 million (including approximately $42 million of net monetized assets), which price is subject to adjustment to reflect net cash flow between the international assets and the rest of Destec from January 1, 1997 to the closing date. The Company has not yet purchased such assets, but at the time of any such purchase, expects to assume certain obligations which require the funding of equity investments in some of these projects in the amount of approximately $82 million over the ensuing two years. These future capital commitments are expected to be funded by internally-generated cash flows and by external financings as may be necessary. 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, exchange rates and energy prices. AES has generally structured the energy payments in its power sales contracts to adjust with similar price indices as 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 and interest rate cap agreements to effectively fix or limit the interest rate on the underlying variable rate financing. Such swaps effectively increased the total weighted average borrowing rate on the portion of the Company's hedged debt by 4.1 percentage points, 3.5 percentage points and 4.5 percentage points for the years ended December 31, 1994, 1995 and 1996, respectively. Swap payments in excess of variable interest paid for those same periods were $44 million, $24 million and $29 million, respectively. The following table presents (in millions) the aggregate notional principal amount of interest rate swaps categorized by annual maturity at December 31, 1996 and the weighted average interest rates paid and received (based on market conditions at December 31, 1996): PAY FIXED RATE SWAPS
---------------------------------------------- WEIGHTED AVERAGE AGGREGATE NOTIONAL INTEREST RATE ANNUAL MATURITY PRINCIPAL AMOUNT PAID RECEIVED - ---------------------------------------------------- ------------------- ------ --------- 1997................................................ $ 137 12.48% 5.46% 1998................................................ $ 15 9.90% 5.43% 1999................................................ $ 167 10.40% 5.45% 2000................................................ $ 17 9.90% 5.43% 2001 through 2007................................... $ 214 9.90% 5.43%
In addition, certain subsidiaries of the Company have interest rate cap agreements with terms ranging from three to six years in an aggregate notional amount of $280 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, interest rates and energy prices. For example, AES's current portfolio of operating plants generally performs better 10 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 and subsidiaries, AES operates in jurisdictions dealing in currencies other than the Company's consolidated functional currency, the U.S. dollar. Such investments and advances were made to fund equity requirements and to provide collateral for contingent obligations. Due primarily to the long-term nature of the investments and advances, the Company accounts for any adjustments resulting from translation as a charge or credit directly to a separate component of stockholders' equity until such time as the Company realizes such charge or credit. At that time any differences would be recognized in the statement of operations as gains or losses. In addition, certain of the Company's foreign subsidiaries have entered into obligations in currencies other than their own functional currencies or the U.S. dollar. These subsidiaries have attempted to limit potential foreign exchange exposure by entering into revenue contracts which adjust to changes in the foreign exchange rates. Certain foreign affiliates and subsidiaries operate in countries where the local inflation rates are greater than U.S. inflation rates. In such cases the foreign currency tends to devalue relative to the U.S. dollar over time. The Company's subsidiaries and affiliates have entered into revenue contracts which attempt to adjust for these differences; however, there can be no assurance that such adjustments will compensate for the full effect of currency devaluation, if any. The Company had approximately $33 million in cumulative translation adjustment losses at December 31, 1996. Because of the nature of AES's operations and previous operations by others at certain of its current and future facilities, its activities are subject to stringent environmental regulation by relevant authorities at each plant location and the risk of claims under environmental laws. If environmental laws or regulations were to change in the future, there can be no assurance that AES would be able to recover all or any increased costs from its customers or that its business and financial condition would not be materially and adversely affected. In addition, the Company will be required to make significant capital or other expenditures in connection with environmental matters. Although the Company is not aware of non-compliance with environmental laws which would have a material adverse effect on the Company's business or financial condition, at times the Company has been in non-compliance, although no such instance has resulted in revocation of any permit or license. 11 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements: The Company's consolidated balance sheets as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996. (b) Exhibits: 11 Statement of Computation of Earnings per Share 12 Calculations of Ratio of Earnings to Fixed Charges 23 Consent of Deloitte & Touche LLP 27 Financial Data Schedule 12 INDEPENDENT AUDITORS' REPORT To the Stockholders Of The AES Corporation: We have audited the accompanying consolidated balance sheets of The AES Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Washington, DC January 30, 1997, except for Note 13, as to which the date is February 18, 1997 13 CONSOLIDATED BALANCE SHEETS
--------------- DECEMBER 31 In millions, except par values 1996 1995 ------ ------ ASSETS Current Assets: Cash and cash equivalents........................................................... $ 185 $ 239 Short-term investments.............................................................. 20 58 Accounts receivable, net............................................................ 95 54 Inventory........................................................................... 81 36 Receivable from affiliates.......................................................... 9 11 Deferred income taxes............................................................... 65 21 Prepaid expenses and other current assets........................................... 47 27 ------ ------ Total current assets.................................................................. 502 446 Property, Plant and Equipment: Land................................................................................ 30 9 Electric and steam generating facilities............................................ 1,884 1,594 Furniture and office equipment...................................................... 14 11 Accumulated depreciation and amortization........................................... (282) (222) Construction in progress............................................................ 574 158 ------ ------ Property, plant and equipment, net.................................................... 2,220 1,550 Other Assets: Deferred costs, net................................................................. 47 32 Project development costs........................................................... 53 41 Investments in and advances to affiliates........................................... 491 48 Debt service reserves and other deposits............................................ 175 168 Goodwill & other intangible assets, net............................................. 52 37 Other assets........................................................................ 82 19 ------ ------ Total other assets.................................................................... 900 345 ------ ------ Total................................................................................. $3,622 $2,341 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.................................................................... $ 64 $ 33 Accrued interest.................................................................... 25 12 Accrued and other liabilities....................................................... 95 49 Other notes payable -- current portion.............................................. 88 50 Project financing debt -- current portion........................................... 110 84 ------ ------ Total current liabilities............................................................. 382 228 Long-Term Liabilities: Project financing debt.............................................................. 1,558 1,098 Other notes payable................................................................. 450 125 Deferred income taxes............................................................... 243 170 Other long-term liabilities......................................................... 55 13 ------ ------ Total long-term liabilities........................................................... 2,306 1,406 Minority Interest..................................................................... 213 158 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: 1996 -- 77.4 million; 1995 -- 74.8 million).......................... 1 1 Additional paid-in capital.......................................................... 360 293 Retained earnings................................................................... 396 271 Cumulative foreign currency translation adjustment.................................. (33) (10) Less treasury stock at cost (1996 -- .1 million shares; 1995 -- .3 million shares).... (3) (6) ------ ------ Total stockholders' equity............................................................ 721 549 ------ ------ Total................................................................................. $3,622 $2,341 ====== ======
See notes to consolidated financial statements. 14 CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------- FOR THE YEARS ENDED DECEMBER 31 In millions, except per share amounts 1996 1995 1994 ----- ----- ----- REVENUES: Sales................................................................ $ 824 $ 672 $ 514 Services............................................................. 11 7 19 ----- ----- ----- Total revenues......................................................... 835 679 533 OPERATING COSTS AND EXPENSES: Cost of sales........................................................ 495 388 252 Cost of services..................................................... 7 6 13 Selling, general and administrative expenses......................... 35 32 32 Provision to reduce contract receivable.............................. 20 -- -- ----- ----- ----- Total operating costs and expenses..................................... 557 426 297 ----- ----- ----- OPERATING INCOME....................................................... 278 253 236 OTHER INCOME AND (EXPENSE): Interest expense..................................................... (144) (127) (125) Interest income...................................................... 24 27 22 Equity in earnings of affiliates (net of income tax)................. 35 14 12 ----- ----- ----- INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY ITEM................................................................. 193 167 145 INCOME TAXES........................................................... 60 57 44 MINORITY INTEREST...................................................... 8 3 3 ----- ----- ----- INCOME BEFORE EXTRAORDINARY ITEM....................................... 125 107 98 Extraordinary item -- net gain on extinguishment of debt (less applicable income taxes of $1)....................................... -- -- 2 ----- ----- ----- NET INCOME............................................................. $ 125 $ 107 $ 100 ===== ===== ===== NET INCOME PER SHARE: Before extraordinary gain............................................ $1.62 $1.41 $1.30 Extraordinary gain................................................... -- -- 0.02 ----- ----- ----- NET INCOME PER SHARE................................................... $1.62 $1.41 $1.32 ===== ===== =====
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------ FOR THE YEARS ENDED DECEMBER 31 In millions 1996 1995 1994 ------- ----- ----- OPERATING ACTIVITIES: Net income........................................................... $ 125 $ 107 $ 100 Adjustments to net income: Depreciation and amortization...................................... 65 55 43 Provision for deferred taxes....................................... 26 48 39 Undistributed earnings of affiliates............................... (20) 3 (3) Payments for deferred financing costs................................ (13) (3) (6) Other................................................................ 6 4 -- Changes in working capital........................................... (7) (17) (9) ------- ----- ----- Net cash provided by operating activities............................ 182 197 164 INVESTING ACTIVITIES: Property additions................................................... (506) (171) (10) Acquisitions, net of cash acquired................................... (148) (121) -- Sale of short-term investments....................................... 103 254 132 Purchase of short-term investments................................... (66) (218) (204) Affiliate advances and investments................................... (430) (10) -- Project development costs............................................ (16) (22) (17) Debt service reserves and other assets............................... (72) (55) (21) ------- ----- ----- Net cash used in investing activities................................ (1,135) (343) (120) FINANCING ACTIVITIES: Net borrowings under the revolver.................................... 163 50 -- Issuance of project financing debt and other notes payable........... 802 133 -- Repayments of project financing debt................................. (75) (63) (72) Other liabilities.................................................... (3) 8 -- Contributions by minority interests.................................. 10 7 152 Sale (repurchase) of common stock.................................... 2 (5) -- ------- ----- ----- Net cash provided by financing activities............................ 899 130 80 INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................... (54) (16) 124 CASH AND CASH EQUIVALENTS, BEGINNING................................. 239 255 131 ------- ----- ----- CASH AND CASH EQUIVALENTS, ENDING.................................... $ 185 $ 239 $ 255 ====== ===== ===== SUPPLEMENTAL DISCLOSURES: Cash payments for interest........................................... $ 134 $ 120 $ 127 Cash payments for income taxes....................................... 32 6 3
See notes to consolidated financial statements. 16 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 consolidated based on its 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 -- 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 1996 1995 ---- ---- Coal and other raw materials................................... $57 $24 Spare parts, materials and supplies............................ 24 12 --- --- Total.......................................................... $81 $36 === ===
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. INTANGIBLE ASSETS -- Goodwill and other intangible assets are amortized on a straight-line basis over their estimated periods of benefit or their estimated lives, which range from 30 to 40 years. Intangible assets at December 31, 1996 and 1995 are shown net of accumulated amortization of $3 million and $1 million, respectively. 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. Interest capitalized during development and construction totaled $27 million, $8 million and $2 million in 1996, 1995 and 1994, respectively. DEFERRED COSTS -- Financing costs are deferred and amortized using the straight-line method over the related financing period, which does not differ materially from the effective interest method of amortization. Deferred costs are shown net of accumulated amortization of $36 million and $31 million for 1996 and 1995, respectively. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 direct costs. These costs are included in investments 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. Certain reimbursable costs related to one of the projects have been classified as other assets at December 31, 1996. 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, and gains and losses on intercompany transactions which are long-term in nature, and which the Company does not intend to repatriate are shown in the cumulative foreign currency translation adjustment balance in the stockholders' equity section of the balance sheet. 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. Five customers accounted for 20%, 16%, 16%, 11% and 10% of revenues in 1996, four customers accounted for 24%, 18%, 18% and 13% of revenues in 1995, and four customers accounted for 31%, 23%, 22% and 11% of revenues in 1994. The prolonged failure of any of these customers to fulfill its contractual obligations could have a substantial negative impact on AES's revenues and profits. 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. 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 77.3 million, 75.9 million, and 75.8 million for 1996, 1995 and 1994, 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 1996 presentation. 2. ACQUISITIONS In March 1996, the Company, through a subsidiary acquired a 98% interest in Hidrotermica San Juan, S.A., ("AES San Juan"), which is the owner and operator of a 78 megawatt power generation facility in the province of San Juan, Argentina. The facility, which sells electricity into the Argentine spot market, includes a 45 megawatt hydroelectric power plant and a 33 megawatt gas combustion plant. As a result of this acquisition, the Company acquired intangible assets of $17 million which are being amortized over the life of the hydroelectric concession of 30 years. In May 1996, AES, through certain subsidiaries, acquired for approximately $393 million, common shares representing an 11.35% interest in Light Servicos de Electricidade S. A. ("Light"), a publicly-held Brazilian corporation 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) that operates as the concessionaire of an approximately 3,800 megawatt integrated electric power generation, transmission and distribution system which serves Rio de Janeiro, Brazil. The AES subsidiary which owns an interest in Light is participating in a consortium established through a shareholders' agreement that owns a 50.44% controlling interest. As a result, the Company has the ability to exert significant influence over the operation of Light, and is recording its investment using the equity method. In August 1996, the Company, through a subsidiary, acquired a controlling interest in three power plants totaling 1,281 megawatts and a coal mine through the purchase of an 81% share of Tiszai Eromu Rt. ("AES Tiszai") an electricity generation company in Hungary for $110 million, and in December 1996 acquired an additional 13% for $17 million. Also, in August 1996, the Company acquired, through a subsidiary, a majority controlling interest in a 4,000 megawatt coal-fired facility in Kazakstan, ("AES Ekibastuz"), for approximately $3 million. The facility sells power to a government-owned utility under a 35 year power purchase agreement. Through December 31, 1996, approximately $35 million (excluding VAT) has been billed under the power sales contract for electricity delivered of which the purchaser has paid approximately $5 million. The Company has recorded a provision of $20 million to reduce the carrying value of the contract receivable at December 31, 1996 to $10 million. As of December 31, 1996, the net assets of the project were $24 million, a portion of which was represented by the contract receivable referred to above. There can be no assurance as to the ultimate collectibility of amounts owed to AES as of December 31, 1996 or additional amounts related to future deliveries of electricity under the power sales contract. In January 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 or significant influence 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. ("AES 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 AES 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 purchase price allocations for Light, AES Tiszai and AES Ekibastuz have been completed on a preliminary basis, subject to adjustments resulting from new or additional facts that may come to light when the engineering, environmental, and legal analyses are completed during the allocation period. The accompanying financial statements include the operating results of AES Tiszai from August 1, 1996, the operating results of AES Ekibastuz from August 10, 1996, equity earnings from Light from June 10, 1996, and the operating results of AES Deepwater from January 20, 1995, the operating results of AES San Nicolas from January 1, 1995 and the operating results of AES Rio Juramento from December 1, 1995. The 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) following table presents supplemental unaudited proforma operating results as if all of the acquisitions had occurred at the beginning of 1995 (in millions, except per share amounts):
------------------ FOR THE YEARS ENDED DECEMBER 31 1996 1995 ------ ----- Revenues.................................................. $1,013 $ 892 Net income................................................ 100 91 Earnings per share........................................ $ 1.29 $1.20
The proforma 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, 1995, nor are they intended to be a projection of future results. 3. INVESTMENTS At December 31, 1996 and 1995, 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, 1996 and 1995 classified as held-to-maturity and available-for-sale were approximately the same. The short-term investments and debt service reserves and other deposits were invested as follows (in millions):
------------ DECEMBER 31 1996 1995 ---- ---- Restricted cash and cash equivalents........................................... $104 $144 Held-to-maturity US treasury and government agency securities................................... 1 33 Foreign certificates of deposit................................................ -- 3 Commercial paper............................................................... 39 3 Floating rate notes............................................................ -- 6 ---- ---- Subtotal....................................................................... 40 45 Available-for-sale US treasury and government agency securities................................... 43 30 Certificates of deposit........................................................ 3 4 Commercial paper............................................................... 5 -- Foreign certificates of deposit................................................ -- 3 ---- ---- Subtotal....................................................................... 51 37 ---- ---- Total.......................................................................... $195 $226 ==== ====
Short-term investments classified as held-to-maturity and available-for-sale were $9 and $11 million, respectively, at December 31, 1996 and $44 million and $14 million, respectively at December 31, 1995. 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), Medway Power Ltd. (25% owned UK affiliate), Light (11.35% owned Brazilian affiliate) and AES Chigen's affiliates at December 31, 1996, and for the year then ended, the accounts of NIGEN, Ltd. and Medway Power Ltd. at 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED) December 31, 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.
------------------------ 1996 1995 1994 ------ ---- ------ Sales................................................................ $1,960 $276 $ 335 Operating income..................................................... 498 86 75 Net income........................................................... 383 49 33 Current assets....................................................... 891 171 156 Noncurrent assets.................................................... 4,928 949 1,030 Current liabilities.................................................. 868 70 133 Noncurrent liabilities............................................... 2,111 973 945 Stockholders' equity................................................. 2,840 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 $33 million and $13 million at December 31, 1996 and 1995, respectively. The Company charged and recognized management fees and interest on advances to its affiliates which aggregated $9 million, $8 million and $18 million for each of the years ended December 31, 1996, 1995 and 1994, respectively. 5. DEBT PROJECT FINANCING DEBT -- Project financing debt at December 31, 1996 and 1995 consisted of the following (in millions):
----------------------------------------- INTEREST RATE FINAL @ 12/31/96 MATURITY 1996 1995 ------------- -------- ------ ------ Senior Debt -- floating AES Beaver Valley....................................... 7.4% 1998 $ 21 $ 33 AES Thames.............................................. 6.8% 2004 163 181 AES Shady Point......................................... 7.4% 2004 306 320 AES Barbers Point....................................... 6.5% 2007 325 340 AES Lal Pir............................................. 5.0% 2008 135 28 AES Pak Gen............................................. 5.1% 2010 90 -- AES Coral Reef.......................................... 10.1% 2003 168 -- AES Warrior Run......................................... 6.7% 2014 37 22 Other................................................... 10.4% 2001 8 -- Senior Debt -- fixed AES Placerita -- capital lease.......................... 8.1% 2009 105 111 AES Warrior Run -- tax exempt bonds..................... 7.4% 2019 74 74 AES Pak Gen............................................. 4.3% 2007 85 -- AES San Nicolas......................................... 10.4% 2000 80 -- Subordinated Debt....................................... 13.6% 2010 71 73 ------ ------ Subtotal................................................ 1,668 1,182 Less current maturities................................. (110) (84) ------ ------ Total................................................... $1,558 $1,098 ====== ======
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT (CONTINUED) 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 $550 million at December 31, 1996. 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, 1996, subsidiaries of the Company have interest rate cap agreements at a ceiling of approximately 12.5% with remaining terms ranging from three to six years in an aggregate notional amount of $280 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. OTHER NOTES PAYABLE -- Other notes payable at December 31, 1996 and 1995 consisted of the following (in millions):
-------------------------------------- INTEREST RATE FINAL @ 12/31/96 MATURITY 1996 1995 ------------- -------- ---- ---- Corporate revolving bank loan*............................. 7.40% 1998 $213 $ 50 Senior subordinated notes.................................. 9.75% 2000 75 75 Convertible subordinated debentures........................ 6.50% 2002 -- 50 Senior subordinated notes.................................. 10.25% 2006 250 -- ---- ---- Subtotal................................................... 538 175 Less current maturities.................................... (88) (50) ---- ---- Total...................................................... $450 $125 ==== ====
- --------------- * floating rate loan Under the terms of the $425 million corporate revolving bank loan and letter of credit facility ("Revolver"), the Company must reduce its direct borrowings to $125 million for 30 consecutive days annually to obtain additional loans. Commitment fees on the unused portion at December 31, 1996 are .375% per annum, and as of that date $89 million was available. The Company's 9 3/4% senior subordinated notes due 2000 ("9 3/4% Notes") and 10 1/4% senior subordinated notes due 2006 ("10 1/4% Notes") are general unsecured obligations of the Company. The 9 3/4% 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 10 1/4% Notes are redeemable at the Company's option, in whole or in part, beginning July 2001 at redemption prices in excess of par and are redeemable at par beginning July 2003. The Company's convertible subordinated debentures ("Debentures") were converted into common stock of the Company at the rate of $26.16 per common share on August 30, 1996. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT (CONTINUED) FUTURE MATURITIES OF DEBT -- Scheduled maturities of total long-term debt at December 31, 1996 are (in millions):
------------------------------------------------------------- 1997................................................ $ 198 1998................................................ 132 1999................................................ 303 2000................................................ 269 2001................................................ 202 Thereafter.......................................... 1,102 ------ Total............................................... $2,206 ======
COVENANTS -- The terms of the Company's Revolver, 9 3/4% Notes, 10 1/4% Notes, 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, 1996, approximately $63 million was available under project loan documents for distribution by U.S. subsidiaries. AES CHIGEN NOTES -- Subsequent to its fiscal year end, AES Chigen issued $180 million of 10 1/8% Notes due 2006. 6. COMMITMENTS AND CONTINGENCIES As of December 31, 1996, 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 $4 million, $3 million and $2 million in the years ended 1996, 1995 and 1994, respectively. The future minimum lease commitments under these leases are $6 million each year for 1997 and 1998, $5 million for 1999, $2 million each year for 2000 and 2001, and $56 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 3 to 11 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, 1996, by the terms of the agreements, to an aggregate of approximately $176 million. 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 $33 million as of December 31, 1996. LETTERS OF CREDIT -- At December 31, 1996 and 1995, the Company had $123 million and $56 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 -- On February 25, 1993, an action was filed, jointly and severally, 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, four Texas cities, McGinnes Industrial Maintenance Corpora- 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) tion, 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 results of operations or financial position. On December 17, 1996, AES was named defendant in a complaint filed in the Court of Chancery in Delaware. The suit was brought by the holder of 750 shares of AES Chigen Class A Common Stock individually and on behalf of a purported class of public shareholders of AES Chigen in response to an amalgamation to be entered into between AES Chigen and AES. The complaint alleges, among other things, that AES breached its alleged fiduciary duty as a controlling shareholder to treat the class with fairness, and questions the sufficiency of the consideration to be paid to AES Chigen shareholders. The complaint seeks damages and injunctive relief. AES Chigen was not named in the suit. 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 results of operations or financial position. 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 financial position. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY
-------------------- (In millions) 1996 1995 1994 ---- ---- ---- Common stock Balance at January 1 and December 31.................................. $ 1 $ 1 $ 1 ==== ==== ==== Additional paid-in capital Balance at January 1.................................................. $293 $240 $203 Issuance of common stock under benefit plans and exercise of stock options ........................................................... 3 2 2 Tax benefit associated with the exercise of options................... 15 -- -- Issuance of common stock on conversion of 6.5% subordinated debentures, net ($26.16 per share)................................. 49 -- -- Common stock dividends (1994-3% per share)............................ -- -- 47 AES Chigen Class A redeemable common stock............................ -- 51 (12) ---- ---- ---- Balance at December 31.................................................. $360 $293 $240 ==== ==== ==== Retained earnings Balance at January 1.................................................. $271 $164 $111 Net income for the year............................................... 125 107 100 Common stock dividends (1994-3% per share)............................ -- -- (47) ---- ---- ---- Balance at December 31.................................................. $396 $271 $164 ==== ==== ==== Cumulative foreign currency translation adjustment Balance at December 31................................................ $(33) $(10) $ (3) ==== ==== ==== Treasury stock Balance at December 31.................................................. $ (3) $ (6) $ -- ==== ==== ====
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. On July 30, 1996, the Company exercised its right to redeem the Debentures at a redemption price equal to approximately 104% of the principal amount of the debentures, together with accrued interest through the date of redemption. As a result, $49.7 million of the debentures were converted into 1.9 million shares of common stock of the Company at a conversion price of $26.16 per share. Stock Options and Warrants -- The Company has granted options for shares of common stock under its stock option plans. 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 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY (CONTINUED) for exercise under various schedules. At December 31, 1996, there were approximately 2 million shares reserved for future grants under the plans. A summary of the option activity follows (in thousands of shares):
----------------------------------------------------------------- DECEMBER 31 1996 1995 1994 ------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ --------- ------ --------- Options outstanding -- beginning of year.................................... 4,063 $ 14.56 3,540 $ 12.07 2,999 $ 9.78 Exercised during the year................. (480) 10.69 (355) 17.71 (187) 2.65 Forfeitures during the year............... (216) 20.55 (57) 18.36 (12) 13.17 Granted during the year................... 643 38.78 935 20.04 740 18.91 ----- ------- ----- ------- ----- ------- Outstanding -- end of year................ 4,010 18.59 4,063 14.56 3,540 12.07 ===== ======= ===== ======= ===== ======= Eligible for exercise -- end of year...... 2,132 12.86 1,209 9.03 1,059 6.02 ===== ======= ===== ======= ===== =======
The following table summarizes information about stock options outstanding at December 31, 1996 (in thousands of shares):
----------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------ WEIGHTED- AVERAGE REMAINING WEIGHTED- WEIGHTED- LIFE AVERAGE AVERAGE TOTAL (IN EXERCISE TOTAL EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE - ----------------------------------------- ----------- --------- --------- ----------- --------- $1.55 to $6.47........................... 1,013 3.3 $ 5.14 1,011 $ 5.14 $11.65 to $19.75......................... 1,261 6.9 17.54 492 17.44 $20.00 to $28.88......................... 1,248 8.3 20.97 593 20.79 $31.75 to $44.13......................... 488 10.0 43.14 36 36.31 ----- ----- Total.................................... 4,010 2,132 ===== =====
The Company accounts for its stock-based compensation plans under APB No. 25, and as a result, no compensation expense has been recognized in connection with the options, as all options have been granted only to AES people, including Directors, with an exercise price equal to the market price of the Company's common stock on the date of grant. The Company adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.5%, 5.5%, and 7.5% and expected volatility of 28%, 24%, and 22% for the years ended 1996, 1995 and 1994, respectively, a dividend payout rate of zero for each year and an expected option life of 7 years. Using these assumptions, the weighted average fair value of the stock options granted is $17.61 and $8.17 for 1996 and 1995, respectively. There were no adjustments made in calculating the fair value to account for vesting provisions or for non-transferability or risk of forfeiture. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY (CONTINUED) Had compensation expense been determined consistent with SFAS No. 123, utilizing the assumptions detailed above, the Company's net income and earnings per share for the year ended December 31, 1996, 1995 and 1994 would have been reduced to the following pro forma amounts (in millions):
---------------------- FOR THE YEARS ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ----- ----- ----- Net Income: As Reported.................................. $ 125 $ 107 $ 100 Pro forma.................................... 121 106 100 Net income per common share: As Reported.................................. $1.62 $1.41 $1.32 Pro forma.................................... 1.57 1.40 1.32
The use of such amounts and assumptions are not intended to forecast any possible future appreciation of the Company's stock price or change in dividend policy. In addition to the options described above, the Company has outstanding warrants to purchase up to 0.7 million shares of its common stock at $29.43 per share through July 2000, which were issued as partial settlement of a shareholder class action suit and were expensed in 1995. Warrants exercised under this settlement were not significant at December 31, 1996. 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. In November 1996, the Company and AES Chigen signed a definitive agreement for the Company to acquire the approximately 8.2 million outstanding Class A shares of AES Chigen. The acquisition will be accomplished by amalgamating AES Chigen with a wholly owned subsidiary of the Company. Subject to approval of the holders of the Class A common stock, AES Chigen shareholders will receive shares of the Company common stock at an exchange rate of 0.29 shares of the Company's common stock for each share of AES Chigen common stock. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES Income Tax Provision -- The provision for income taxes attributable to continuing operations consists of the following (in millions):
-------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ---- ---- ---- Federal Current........................................ $19 $ 4 $ 2 Deferred....................................... 27 47 35 State Current........................................ 12 5 4 Deferred....................................... (2) 1 3 Foreign Current........................................ 3 -- -- Deferred....................................... 1 -- -- --- --- --- Total............................................ $60 $57 $44 === === ===
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 (excluding earnings and taxes from affiliates accounted for on the equity method, and minority interests) is as follows:
-------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ---- ---- ---- Statutory federal tax rate............................................... 35% 35% 35% Change in valuation allowance............................................ (2) (6) (2) State taxes, net of federal tax benefit.................................. 6 6 5 Foreign taxes............................................................ 2 -- -- Other -- net............................................................. (1) 3 (4) -- -- -- Effective tax rate....................................................... 40% 38% 34% == == ==
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 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) be in effect when taxes are actually paid or recovered. Deferred tax assets and deferred tax liabilities are as follows (in millions):
----------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ----- ----- ----- Differences between book and tax basis of property and total deferred tax liability........................................................ $ 379 $ 379 $ 219 ----- ----- ----- Operating loss carryforwards........................................... (124) (167) (231) Tax credit carryforwards............................................... (97) (71) (68) Other deductible temporary differences................................. (13) (1) (15) ----- ----- ----- Total gross deferred tax asset......................................... (234) (239) (314) Less: valuation allowance.............................................. 33 9 168 ----- ----- ----- Total net deferred tax asset........................................... (201) (230) (146) ----- ----- ----- Net deferred tax liability............................................. $ 178 $ 149 $ 73 ===== ===== =====
As of December 31, 1996, the Company had federal net operating loss carryforwards for tax purposes of approximately $295 million expiring from 2001 through 2010, federal investment tax credit carryforwards for tax purposes of approximately $54 million expiring in years 2001 through 2006, foreign tax credit carryforwards of $3 million expiring in 2001 and federal alternative minimum tax credits of approximately $30 million which carryforward without expiration. The valuation allowance increased during the current year by approximately $24 million to $33 million at December 31, 1996. This increase resulted primarily from the acquisition of foreign entities with certain pre-existing deferred tax assets, the ultimate realization of which cannot be determined on a more likely than not basis. The valuation allowance for these pre-existing deferred tax assets was recorded as acquisition adjustments and had no effect on the current year income tax expense. The $33 million valuation allowance at December 31, 1996 relates primarily to state and foreign tax credits, state operating losses, and deferred tax assets, 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. The valuation allowance decreased during 1995 by approximately $159 million to $9 million. 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 related 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 $85 million on December 31, 1996. 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 of any additional taxes which may be payable on the undistributed earnings. 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 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. PROFIT SHARING AND DEFERRED COMPENSATION PLANS (CONTINUED) other Company contributions over a five-year period. Company contributions to the plan were $4 million for each of the years ended 1996, 1995 and 1994. 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. 10. QUARTERLY DATA (UNAUDITED) The following table summarizes the unaudited quarterly statements of operations (in millions, except per share amounts):
----------------------------------- QUARTERS ENDED 1996 MAR 31 JUN 30 SEP 30 DEC 31 ------ ------ ------ ------ Sales and services........................................... $ 172 $ 174 $ 205 $ 284 Gross margin................................................. 74 76 85 98 Net income................................................... 29 28 32 36 Net income per share......................................... $0.38 $0.37 $0.42 $0.46 ----------------------------------- QUARTERS ENDED 1995 MAR 31 JUN 30 SEP 30 DEC 31 ----- ----- ----- ----- Sales and services........................................... $ 169 $ 166 $ 173 $ 171 Gross margin................................................. 69 69 73 74 Net income................................................... 25 27 27 28 Net income per share......................................... $0.33 $0.35 $0.36 $0.37
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. GEOGRAPHIC SEGMENTS Information about the Company's operations in different geographic areas is as follows (in millions):
-------------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ------ ------ ------ REVENUES North America....................................................... $ 554 $ 542 $ 523 South America....................................................... 146 131 2 Asia................................................................ 45 1 -- Europe.............................................................. 90 5 8 ------ ------ ------ Total............................................................... $ 835 $ 679 $ 533 ====== ====== ====== -------------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ------ ------ ------ OPERATING INCOME North America....................................................... $ 258 $ 251 $ 245 South America....................................................... 21 14 -- Asia................................................................ (9) (8) (11) Europe.............................................................. 8 (4) 2 ------ ------ ------ Total............................................................... $ 278 $ 253 $ 236 ====== ====== ====== -------------------------- FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 ------ ------ ------ IDENTIFIABLE ASSETS North America....................................................... $1,831 $1,693 $1,569 South America....................................................... 683 230 46 Asia................................................................ 744 328 221 Europe.............................................................. 364 90 79 ------ ------ ------ Total............................................................... $3,622 $2,341 $1,915 ====== ====== ======
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, 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 at which similar borrowing arrangements would be made under current conditions, or by the estimated discount rate a prospective seller would pay to a credit-worthy third party to assume the obligations. The carrying value and fair value of the AES Placerita capital lease have been excluded from this disclosure. The fair value of swap agreements is the estimated net amount that the Company would pay to terminate 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) the agreements at the balance sheet date. The estimated fair values of the Debentures, 9 3/4% Notes and 10 1/4% Notes are based on the quoted market prices at December 31, 1996 and 1995. The estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows (in millions):
-------------------------------------- 1996 1995 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ Project financing debt..................................... $1,562 $1,562 $1,071 $1,078 Other notes payable........................................ 538 560 175 180 Interest rate swaps........................................ -- 68 -- 137
The fair value estimates presented herein are based on pertinent information available as of December 31, 1996 and 1995. The Company is not aware of any factors that would significantly affect the estimated fair value amounts since that date. 13. SUBSEQUENT EVENT In February 1997, AES agreed to acquire the international assets of Destec Energy, Inc. ("Destec") for a total of $407 million (including approximately $42 million of net monetized assets). The purchase will include five electric generating plants and a number of power projects in development. The plants to be acquired by AES (with ownership percentages in parenthesis) include a 110 MW gas-fired combined cycle plant in Kingston, Canada (50%); a 405 MW gas-fired combined cycle plant in Terneuzen, Netherlands (50%); a 140 MW gas-fired simple cycle plant in Cornwall, England (100%); a 235 MW oil-fired simple cycle plant in Santo Domingo, Dominican Republic (99%); and a 1600 MW coal-fired plant in Victoria, Australia (20%). The acquisition remains subject to certain governmental approvals. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE AES CORPORATION ------------------------- (Registrant) Date: March 12, 1997 By /s/ BARRY J. SHARP ----------------------- Barry J. Sharp Chief Financial Officer EXHIBIT 11 THE AES CORPORATION AND SUBSIDIARIES STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (In millions, except per share amounts)
For Years ended December 31 - -------------------------------------------------------------------------------------------------- 1994 1995 1996 PRIMARY Weighted Average Number of Shares of Common Stock Outstanding 74.6 74.9 75.7 Net Effect of Dilutive Stock Options and Warrants-Based on the Treasury Stock Method Using Average Market Price 1.0 0.7 1.3 Stock Units Allocated to the Deferred Compensation Plans for Executives and Directors 0.2 0.3 0.3 - -------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding 75.8 75.9 77.3 - -------------------------------------------------------------------------------------------------- Net Income $100 $107 $125 - -------------------------------------------------------------------------------------------------- Per Share Amount $1.32 $1.41 $1.62 - -------------------------------------------------------------------------------------------------- FULLY DILUTED Weighted Average Number of Shares of Common Stock Outstanding 74.6 74.9 75.7 Net effect of Dilutive Stock Options and Warrants - Based on the Treasury Stock Method Using Ending Market Price 1.0 1.0 1.9 Stock Units Allocated to the Deferred Compensation Plans for Executives and Directors 0.2 0.3 0.3 Effect of Convertible Debt - Based on the If- Converted Method 1.9 1.9 1.3 - -------------------------------------------------------------------------------------------------- Weighted Average Shares Outstanding 77.7 78.1 79.2 - -------------------------------------------------------------------------------------------------- Net Income $100 $107 $125 Additional Contribution to Net Income if Convertible Debt is Fully Converted 2 2 1 - -------------------------------------------------------------------------------------------------- Adjusted Net Income $102 $109 $126 - -------------------------------------------------------------------------------------------------- Per Share Amount $1.31 $1.40 $1.59 - --------------------------------------------------------------------------------------------------
NOTE: All net income per share and share data have been adjusted to reflect the three percent stock dividend declared February 17, 1994. THE AES CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CALCULATIONS OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (in thousand, unaudited) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- AS DEFINED: Income from continuing operations before income taxes $ 65.2 $ 89.4 $ 141.8 $ 163.7 $ 185.3 Adjustment for undistributed income, net of distributions (2.5) (10.6) (5.9) 3.2 (19.9) Interest expense 97.1 125.0 121.8 121.9 137.7 Depreciation of previously capitalized interest 4.0 4.5 4.5 4.5 4.5 Net amortization of issuance costs 2.8 2.6 3.5 4.6 5.8 ------ ------- ------- ------- ------- Earnings $ 166.6 $ 210.9 $ 265.7 $ 297.9 $ 313.4 ====== ======= ======= ======= ======= Interest expensed and capitalized amounts (including construction related fixed charges) $ 118.2 $ 127.0 $ 123.9 $ 131.9 $ 164.7 Net amortization of issuance costs (including capitalized amounts) 3.1 2.5 3.5 4.6 5.8 ------ ------- ------- ------- ------- Fixed charges $ 121.3 $ 129.5 $ 127.4 $ 136.5 $ 170.5 ====== ======= ======= ======= ======= Ratio of earnings to fixed charges 1.37 x 1.63 x 2.08 x 2.18 x 1.84 x
EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-15487 of The AES Corporation (the "Company") on Form S-3 of our report on the consolidated financial statements of the Company as of December 31, 1996 and 1995 and for the three years in the period ended December 31, 1996, dated January 30, 1997, except for Note 13, as to which the date is February 18, 1997, appearing in this Current Report on Form 8-K of The AES Corporation dated March 12, 1997. We also consent to the reference to us under the heading "Experts" in the Prospectus and Prospectus Supplement which are a part of Registration Statement No. 333-15487. DELOITTE & TOUCHE LLP Washington, D.C. March 12, 1997 EX-27 7 ART. 5 FDS FOR FORM 10-K
5 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 185 20 115 (20) 81 502 2502 (282) 3622 382 2008 0 0 1 720 3622 824 835 495 557 0 0 144 193 60 125 0 0 0 125 1.62 1.59
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