-----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, FJG1JC5gnWJ+qK99t3feLXaGsFrj9QIi0jS0ucMTeBX46cXp5S7+nbCKZB5H5TB4 xnAd/r1G8DwdDkQARNMqMA== 0000893838-98-000053.txt : 19980304 0000893838-98-000053.hdr.sgml : 19980304 ACCESSION NUMBER: 0000893838-98-000053 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980302 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AES CHINA GENERATING CO LTD CENTRAL INDEX KEY: 0000916792 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 000000000 FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-05798 FILM NUMBER: 98554617 BUSINESS ADDRESS: STREET 1: ALLIED CAPITAL RESOURCES BLDG - 9TH FLRC STREET 2: 32-38 ICE HOUSE ST CITY: CENTRAL HONG KONG STATE: K3 BUSINESS PHONE: 8528425111 MAIL ADDRESS: STREET 1: ALLIED CAPITAL RESOURCES BLDG 9TH FL STREET 2: 32-38 ICE HOUSE STREET CITY: CENTRAL HOND KONG STATE: K3 ZIP: 00000 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 November 30, 1997 Commission file number 0-23148 AES CHINA GENERATING CO. LTD. (Exact name of registrant as specified in its charter) BERMUDA 98-0152612 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26/F, Entertainment Building 30 Queen's Road, Central Hong Kong Not Applicable (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 852-2842-5111 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None (Title of each class) --------------- 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 No X ---- ----- 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. [ ] --------------- Registrant is a wholly owned subsidiary of The AES Corporation. Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is filing this Annual Report on Form 10-K with the reduced disclosure format authorized by General Instruction I. DOCUMENTS INCORPORATED BY REFERENCE None Item 1. Business (a) General Development of Business The Registrant (hereinafter referred to as the "Company" or "AES Chigen"), a Bermuda Company, is a leading independent power generation company in the People's Republic of China (the "PRC" or "China") and one of the few international developers that has successfully completed the development of electric power projects in the country. AES Chigen was founded in December 1993 by The AES Corporation ("AES") to serve as the exclusive vehicle for AES to develop, acquire, finance, construct, own and operate electric power generation facilities in the PRC. The Company is currently a wholly owned subsidiary of AES. To respond to significant opportunities in China, AES, through a wholly owned subsidiary, opened an office in Hong Kong in early 1993. Following the incorporation of AES Chigen, AES purchased shares of AES Chigen Class B Common Stock for $50.0 million and, in early 1994, AES Chigen completed an initial public offering of shares of its Class A Common Stock, which provided AES Chigen with net proceeds, after underwriting commissions and discounts, of $151.9 million. The Company became a wholly owned subsidiary of AES on May 8, 1997 as a result of its amalgamation (the "Amalgamation") with a wholly owned subsidiary of AES pursuant to an Amended and Restated Agreement and Plan of Amalgamation, dated as of November 12, 1996 (the "Amalgamation Agreement"), between the Company and AES. Prior to the Amalgamation, the Company was a controlled affiliate of AES, which owned approximately 48% of the outstanding common stock of the Company. Since commencing business, AES Chigen has committed $357.8 million and as of January 31, 1998 has invested $234.2 million in nine power projects in operation or under construction in the PRC, having an aggregate nameplate capacity (the full load continuous rating of a generator, prime mover or other electrical equipment under specified conditions as designated by its manufacturer) of approximately 2,918 megawatts ("MW") (approximately 947 MW of which is attributable to AES Chigen's interests in certain sino-foreign joint venture enterprises (the "Joint Ventures")). These Joint Ventures' projects include coal, oil and natural gas-fired and hydropower plants located in seven different provinces in China. These projects are referred to as the "Current Projects." With a presence in over 35 countries, AES is a global power company committed to supplying electricity to customers world-wide in a socially responsible way. AES, based in Arlington, Virginia, markets power principally from electric generating facilities that it develops, owns and operates. AES was one of the original entrants in the independent power market and today is one of the world's largest global power companies, based on net equity ownership of generating capacity (in megawatts) in operation or under construction. On December 19, 1996, AES Chigen completed a $180 million public offering of its 10-1/8% Notes due December 2006 (the "2006 Notes") and received net proceeds of approximately $173.9 million. Pursuant to the terms of the indenture under which the 2006 Notes were issued (the "Indenture"), AES Chigen was required to deposit approximately $27.1 million in an interim reserve account to make interest payments on the 2006 Notes through June 15, 1998, and approximately $9.1 million in a debt payment reserve. As of February 28, 1998, the balance in the interim reserve account was $9.1 million. The 2006 Notes are redeemable at the option of AES Chigen on or after December 15, 2001. Net proceeds from the offering of the 2006 Notes will be used to fund investments in AES Chigen's Current Projects and for general corporate purposes. The Company is permitted, pursuant to the terms of the Indenture, to pay dividends to AES, provided that the Company satisfies certain conditions. The 2006 Notes have been rated BB- by Standard & Poor's Rating Group and Ba3 by Moody's Investors Service. On January 26, 1998, Standard & Poor's announced that it had placed its BB- rating of the 2006 Notes on CreditWatch with negative implications. Standard & Poor's noted a number of factors contributing to this action, including decline in growth rates in demand for power and construction of new capacity resulting in oversupply in some areas, failure of purchasers of power from the Company's Joint Ventures to purchase the minimum offtake of electricity they were contractually required to purchase, uncertainty concerning the performance by the power purchasers of their obligations to compensate the Company's Joint Ventures for their failure to purchase such minimum offtakes, receipt of dividends from the Company's joint ventures in 1997 that were less than the amounts expected, erosion of distributable profits of the Company's Joint Ventures due to higher than expected generating costs incurred by third party operators, higher than expected corporate overhead expenses in 1997 resulting from non-recurring charges and higher than expected expenditures on technical staffing at construction sites and development costs. In the event of a shortfall between the amount of the Company's commitments and the cash available, the shortfall may be made up by loans or equity contributions from AES, but AES is not obligated to provide any such loan or equity contribution for such purpose and there is no assurance that AES would decide to provide any such loans or equity contribution. As a result of the Amalgamation, the Company is subject to covenants (the "AES Debt Covenants") contained in the documents governing AES's 10-1/4% subordinated Notes due 2006, 8-3/8% Senior Subordinated Notes due 2007 and $425 million credit facility due 1999. Due to recent amendments to the terms of the AES Debt Covenants, certain material restrictions previously applicable to AES Chigen, including a prohibition on direct investments in future projects, are no longer applicable. However, no assurance can be given that AES Chigen will invest in any additional future projects. Both the AES Debt Covenants and the covenants contained in the Indenture for AES Chigen's 2006 Notes require the repayment or purchase of indebtedness under specified circumstances involving asset dispositions. Insofar as separate repayments are required at the AES and the Company levels with respect to a single asset sale, this covenant may tend to cause the Company not to make an asset sale under circumstances where it otherwise would. One of the results of the Amalgamation has been the termination of the Non-Competition and Non-Disclosure Agreement, dated as of December 29, 1993 and amended and restated as of February 1, 1994, between the Company and AES, which, among other things, prohibited the Company from developing, constructing, owning, managing and operating electric power generation projects in any part of Asia other than China. The Company may consider investing through its subsidiaries in power projects outside of China. The Company's operations, prospects, results of operations and financial condition are subject to significant risks and uncertainties, including those set forth in "Business-Narrative Description of Business" on pages 2 through 19 of the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996, which is incorporated herein by reference. Several countries in Southeast Asia, including Korea, Thailand and Indonesia, have experienced a significant devaluation of their currencies and a decline in the value of their capital markets. In addition, these countries have experienced a number of bank failures and consolidations. The Company cannot predict the effect that these conditions will ultimately have on its activities. Description of the Current Projects The following table presents certain summary information on the Company's Current Projects.
The Current Projects Company Company Investment Location Capacity Interest Commitment Project (Province) (MW) (MW) (%) Fuel Status - ------------------ ---------- -------- -------- ---------- ---- ---------------------------- Yangcheng Sun City Shanxi 2,100 525 25 Coal Under construction (first unit scheduled to be in operation by second quarter of 2000; last unit scheduled to be in operation by the second quarter of 2002) Jiaozuo Aluminum Henan 250 175 70 Coal First unit commenced Power commercial operation on August 17, 1997; second unit was synchronized with the power grid on February 22, 1998 and is scheduled to be in operation by the second quarter of 1998 Wuhu Grassy Lake Anhui 250 62.5 25 Coal In operation Hefei Prosperity Anhui 115.2 80.6 70 Oil Simple cycle unit commenced Lake commercial operation on August 1, 1997; combined cycle unit scheduled to be in operation in the third quarter of 1998 Wuxi Tin Hill Jiangsu 63 34.7 55 Oil In operation Aixi Heart River Sichuan 50 35 70 Coal Under construction (scheduled to be in operation in the second quarter of 1998) Chengdu Lotus City Sichuan 48 16.8 35 Natural Commenced commercial Gas operation on July 5, 1997 Cili Misty Mountain Hunan 26.2 13.4 51 Hydro In operation Yangchun Sun Spring Guangdong 15.1 3.8 25 Oil In operation ------- ------ TOTAL 2,917.5 946.8 ======= ======
Overview The Company, directly or through one of its wholly owned offshore subsidiaries, has formed Joint Ventures, each with one or more Chinese entities as partners, to develop, construct, own and operate each of the electric power plants described in this section. Two of the power plants -- Cili Misty Mountain and Yangchun Sun Spring -- are financed solely with registered capital (equity). Three of the power plants -- Aixi Heart River, Jiaozuo Aluminum Power and Chengdu Lotus City -- are financed with a combination of registered capital and shareholder loans. Four of the power plants -- Wuhu Grassy Lake, Hefei Prosperity Lake, Yangcheng Sun City and Wuxi Tin Hill -- are financed by registered capital, shareholder loans and third party debt. All of the Company's power plants are owned by cooperative joint ventures, except for one of the projects -- Wuhu Grassy Lake -- which is owned by an equity joint venture. The joint venture contracts for three of the cooperative joint ventures -- Wuxi Tin Hill, Aixi Heart River and Chengdu Lotus City -- provide for the liquidation of the project assets at the end of the term of the Joint Venture. The cooperative joint venture contracts relating to the remaining five projects provide for the transfer of all of the fixed assets of the Joint Venture to the Chinese partners without charge at the end of the Joint Venture term. Three of these five provide for the recovery of the Company's registered capital during the term of the Joint Venture. Revenues from the power plants are generally used to pay operating expenses, taxes and financing costs and allocated to provide reserves for employee social welfare benefits and other matters as required by law. Repayment of principal and interest of third party loans (if any) and shareholder loans (if any) of the Joint Ventures has priority over distributions of profit to the Joint Venture partners. Dividends are generally distributed to the Company and its partners by the Joint Ventures pursuant to board resolutions. In a number of cases with respect to the Joint Ventures described in this section, the Company has a priority in the payment of dividends over the Chinese partners to the Joint Venture. In certain cases, where the Company is not entitled to appoint a majority of the board of directors of a Joint Venture, the declaration of dividends or other equity distributions by such Joint Venture may depend on the assent of the other directors of the Joint Venture. Pursuant to certain shareholder loan contracts, the Company has committed to provide shareholder loans to several of the Joint Ventures. In each case the applicable Joint Venture has either registered the shareholder loan with the relevant branch of the State Administration of Foreign Exchange of the Central Government ("State Administration of Foreign Exchange" or "SAFE") if the loan has been drawn, or the Joint Venture will register the shareholder loan with the relevant branch of the SAFE when the loan is drawn by the Joint Venture. The payment of principal and interest to the Company with respect to its shareholder loans to the Joint Ventures is made in accordance with schedules established by the relevant shareholder loan contracts. Each of the Joint Ventures described in this section has entered into one or more power purchase contracts for the sale of the electricity from its power plant on a minimum take-or-pay basis. The power purchase contracts generally require that the power purchaser purchase a specified annual minimum amount of electricity generated by the power plant during the term of the power purchase contract at a fixed price or pursuant to a tariff formula set forth in the power purchase contract. In all but two cases -- Cili Misty Mountain and Yangchun Sun Spring -- the power purchase contracts also contain incentives to encourage the power purchaser to purchase greater than the agreed minimum amount of electricity. Payments for electricity sold under the power purchase contracts are generally made to the Joint Ventures on a monthly basis. All of the power purchase contracts have tariff formulas and other pricing provisions which are designed, based on the minimum take obligation of the power purchaser, to be sufficient to pay the operating costs and financing costs of the project and to enable the Company to realize a return on its investment. These tariff formulas are indexed to hedge against the risk of fluctuations in the exchange rate between the US dollar and the Renminbi Yuan, the official currency of the PRC ("RMB(Y)"), relating to repayment of principal and interest on debt and the conversion to US dollars of the Company's profits. In the event of a change in law which increases the Joint Ventures' costs, the power purchase contracts typically require an adjustment to the tariff formulas in order to pass through such increased costs. For 1997, the approved tariff for Wuhu Grassy Lake was less than the tariff requested by the Joint Venture, which was based on a formula set forth in the Power Purchase Contract. As a result, Wuhu Grassy Lake's revenue for 1997 was insufficient for the Joint Venture to pay the projected return to its shareholders. The joint venture plans to make up such shortfall by means of a tariff adjustment in 1998. However, there is no assurance that the relevant pricing bureau will approve it. In 1997, the approved tariff for Chengdu Lotus City was less than the tariff requested by the Joint Venture, which was based on a formula set forth in the Power Purchase Contract. Due to the priority return structure in the Joint Venture Agreement for Chengdu Lotus City, the Company's dividends from Chengdu Lotus City related to its 1997 operations will be as expected. The Joint Ventures in all cases except one -- Cili Misty Mountain -- have entered into dispatch contracts with the relevant dispatching entity for its power plant pursuant to which the dispatcher has agreed or plans to agree to dispatch the power plant at least the annual minimum amount of hours required under the power purchase contract. For the one case, the power purchaser, which is also the dispatcher, is responsible for dispatching the power plant. Each of the joint venture contracts for the projects described in this section may be terminated early, including on account of a termination of the relevant power purchase contract. In all cases except two -- Jiaozuo Aluminum Power and Yangcheng Sun City -- in the event of an early termination of a power purchase contract which results from a default of a power purchaser, the Joint Venture is entitled under the applicable power purchase contract to receive from the power purchaser payment intended to compensate the Joint Venture for the return it would have received had the power purchase contract continued to the end of its term. In two cases -- Yangchun Sun Spring and Wuxi Tin Hill -- projects directly managed by the Joint Ventures have been successfully constructed on time. For one of the Company's projects currently under construction -- Jiaozuo Aluminum Power -- the Joint Venture also directly manages the construction of the power plant. In these instances the Joint Venture has entered into arrangements with various construction and equipment procurement consortiums, including established foreign equipment manufacturers, in which certain responsibilities relating to construction and procurement have been allocated to members of the consortium. For the remaining three projects currently under construction, each relevant Joint Venture has entered into a fixed price, fixed schedule construction contract, two of which are turnkey arrangements. In all of the projects described in this section except Yangcheng Sun City, the electrical transmission and interconnection facilities are being financed by interest bearing loans from the Joint Venture to the relevant power purchaser who is responsible for constructing, owning, operating and maintaining the facilities. In the case of Wuhu Grassy Lake, Hefei Prosperity Lake and Yangcheng Sun City, the power purchasers have also agreed in the power purchase contracts to begin making payments under their respective power purchase contracts on a specified date if the power plant is completed, but cannot deliver electricity due to a delay in completing the transmission and interconnection facilities. Six of the nine power plants are or will be operated directly by the Joint Ventures -- Cili Misty Mountain, Wuxi Tin Hill, Aixi Heart River, Jiaozuo Aluminum Power, Chengdu Lotus City and Yangcheng Sun City -- and three -- Yangchun Sun Spring, Hefei Prosperity Lake and Wuhu Grassy Lake -- will be operated by the relevant power purchasers. Fuel for most of the power plants has been contracted for under long term fuel supply contracts with fuel suppliers or will be supplied by the power purchasers. In the latter case, the relevant power purchaser is not excused from its payment obligations under its power purchase contract if it is unable to provide fuel to the power plant. The power projects which are currently in operation or under construction have obtained insurance coverage for property loss and damage (including damage arising from natural calamities) and third party liability, except for Yangcheng Sun City, which is in the process of obtaining insurance coverage for property loss and damage and third party liability. Most force majeure risks which can be categorized as natural calamities are covered under the insurance policies. The Joint Ventures are in all cases relieved of their obligation to deliver electricity under their power purchase contracts for the power plants described in this section in the event of force majeure, including an event of force majeure caused by the PRC Government. In the case of all projects, except Wuhu Grassy Lake, Hefei Prosperity Lake and Yangcheng Sun City, the power purchaser is not relieved of its obligations under its applicable power purchase contract, including the obligation to make payments to the Company in such circumstances. In these three projects, the power purchaser is relieved of its obligation to purchase the minimum amount of electric power under its respective power purchase contract during periods in which the power plant is unable to generate electric power due to events of force majeure, including events of force majeure caused by the PRC Government. The State Council of the PRC, the highest administrative organ of the PRC's Central Government, has reserved to itself the authority to approve any project with a total investment which exceeds $100 million. Pursuant to various internal PRC Government notices, the State Council has delegated the authority to approve any project with a total investment of less than $100 million to various ministries and ministry level entities, including the State Planning Commission of the Central Government ("State Planning Commission" or "SPC"). The SPC and certain ministries and other ministry level entities have, in turn, adopted a policy, also by internal directives, of further delegating authority to approve projects with a total investment of less than $30 million to provincial governments, provincial level bureaus of the Central Government and certain municipalities. Separate from project approval, foreign investment must be approved by The Ministry of Foreign Trade and Economic Cooperation of the Central Government ("Ministry of Foreign Trade and Economic Cooperation or "MOFTEC"), or one of its departments at the provincial or local government level, should the total investment amount be below $30 million. In the case of all of the power plants described in this section, the Company and its Joint Venture partners have applied for and received PRC approvals for the project and for the establishment of the related foreign investment enterprise. In the case of three power plants -- Yangcheng Sun City, Jiaozuo Aluminum Power and Wuhu Grassy Lake -- the power plants have received project approvals at the Central Government level from the State Planning Commission and have received approvals from MOFTEC for the establishment of their related Joint Venture. Each of the remaining six power plants has received its project approval and foreign investment approval from provincial and local government entities. Two of the Company's power plants currently in operation or under construction -- Wuxi Tin Hill and Hefei Prosperity Lake -- have been structured as multiple projects and Joint Ventures, with each project and Joint Venture having a total investment not exceeding the $30 million approval authority threshold generally applicable to provincial and local governments. In two other cases -- Aixi Heart River and Chengdu Lotus City -the Company's projects and Joint Ventures have obtained local government approvals on the basis of anticipated total investments which did not exceed $30 million at the time the approvals were obtained, but will, when construction is completed, exceed the $30 million approval threshold. The tariff formulas set forth in the power purchase contracts of the Joint Ventures described in this section have been either approved or confirmed by the relevant provincial and local government pricing bureaus responsible for reviewing such tariffs. However, there can be no assurance that the relevant pricing bureaus will calculate and adjust tariffs in accordance with these tariff formulas. All of the joint venture contracts and project contracts of the Joint Ventures are governed by PRC law. Some of the joint venture contracts provide for arbitration of a dispute arising under the joint venture contracts in locations outside of the PRC, while some provide for arbitration in the PRC by PRC arbitration bodies. Most of the project contracts, including the power purchase contracts, provide for arbitration of disputes in the PRC by PRC arbitration bodies. Yangcheng Sun City The Power Plant. The Yangcheng Sun City power plant is a 6 x 350 MW coal-fired power plant located near Yangcheng, Shanxi Province. Construction of the power plant commenced in August 1997. The first unit of the power plant is scheduled to commence commercial operation by the second quarter of 2000. The last unit is scheduled to commence commercial operation by the second quarter of 2002. Joint Venture. The Yangcheng Sun City power plant is owned by Yangcheng International Power Generating Company Ltd. ("Yangcheng International Power"), a 20-year cooperative joint venture formed by North China Electric Power Group Corporation ("North China Power"), Jiangsu Province Investment Corporation ("Jiangsu Investment"), Shanxi Energy Enterprise (Group) Company ("Shanxi Energy"), Shanxi Provincial Power Company ("Shanxi Power"), Jiangsu Provincial Power Company ("Jiangsu Power") and a wholly owned subsidiary of the Company. Pursuant to the joint venture contract, the Company is entitled to a fixed priority return commencing in the year 2002. The board of directors of Yangcheng International Power consists of nine directors, of which two are appointed by the Company. The Company also appoints one of the three vice chairmen and a deputy general manager of the power plant. Financing. The approved total investment in Yangcheng International Power is approximately $1.6 billion. The approved registered capital of Yangcheng International Power is 25% of the total investment, equal to $392.9 million. The respective ownership interests of the shareholders in Yangcheng International Power are as follows: the Company-25%, North China Power-25%, Jiangsu Investment-20%, Shanxi Energy-16%, Shanxi Power-10% and Jiangsu Power-4%. Hence, the Company's registered capital contribution will be approximately $98.2 million. The difference between the total investment and the total registered capital of the joint venture is being financed through export credit agency loans, debt arranged or guaranteed by the Chinese parties and shareholder loans from the Chinese parties. Export credit agency loan guarantees from the Export-Import Bank of the United States and Hermes Kreditversicherungs-Aktiengesellschaft of approximately $800 million have been provided to Yangcheng International Power. The export credit agency loan guarantees are supported by guarantees from the Construction Bank of China. Power Purchase. The electric power from the power plant will be purchased by Jiangsu Provincial Power Company ("Jiangsu Power") pursuant to a 20-year power purchase contract dated as July 1997 between Yangcheng International and Jiangsu Power. Under the power purchase contract, Jiangsu Power has agreed to purchase from Yangcheng International at least 5,500 kilowatt hours of electricity for each calendar year prior to the year 2011, at least 5,386 hours for the calendar year 2011 and at least 5,000 hours for each year thereafter. In the event that Jiangsu Power fails in any calendar year to purchase such minimum amount, Jiangsu Power is required by the power purchase contract to make payment for any shortfall at the then current power price less fuel costs. Pursuant to the power purchase contract, if Yangcheng International fails to deliver electricity to Jiangsu Power by the construction completion date specified in the power purchase contract, it is obligated to pay a penalty to Jiangsu Power for each day of delay. Construction. Yangcheng International has entered into a lump sum, fixed price, fixed schedule, turnkey contract with Shanxi Provincial Power Company ("Shanxi Power") to design, engineer, procure and construct the power plant. Pursuant to the Engineering, Procurement and Construction Contract ("EPC"), Shanxi Power is the principal contractor and has subcontracted the design, construction, installation and commissioning work to subcontractors. The turbines and generators of the power plant will be provided by Siemens and boilers will be provided by Foster Wheeler Energy Corporation. Shanxi Power will provide a one-year warranty after the commencement of operation of a unit. If Shanxi Power fails to complete construction of the each unit of the power plant by the applicable guaranteed completion date, the contractor will be required to pay liquidated damages to Yangcheng International. Under the EPC, Shanxi Power has guaranteed all the performance specifications of the power plant, including output, heat rate, and emissions. If Shanxi Power fails to achieve the performance specifications, Shanxi Power will be obligated to pay liquidated performance damages to Yangcheng International. Interconnection and Dispatch. Jiangsu Power is responsible for the construction and has guaranteed the completion of the interconnection facility three months before the first unit of the power plant goes into commercial operation. If a delay in the completion of the interconnection facility results in delays in commencement of the commercial operation of the power plant, Jiangsu Power is obligated to pay Yangcheng International a penalty for each day of delay. Electric power for the plant will be transmitted over a 755 kilometer transmission line to Jiangsu Power in Jiangsu Province, on the eastern coast of China. When in commercial operation, the power plant will be dispatched by State Power Dispatch and Communication Centre ("State Power Dispatch"). State Power Dispatch will ensure that Yangcheng International's on-grid electricity is not less than the minimum take quantity. Fuel. Yangcheng International has entered into a 20-year coal supply contract with Shanxi Coal Sales and Transportation Corporation. The coal supplier will supply low-cost anthracite coal which is available from several coal mines located within 30 kilometers of the power plant site. The coal supplier will be obligated, under the contract, to pay damages for any failure to supply the power plant with adequate quantities of coal or coal not meeting certain specifications. The coal supplier is obligated to arrange for the transportation of the coal by truck or by train to the power plant. Operator. Yangcheng International will operate the power plant. Jiaozuo Aluminum Power The Power Plant. The Jiaozuo Aluminum Power plant is a 2 x 125 MW coal-fired power plant located adjacent to the Jiaozuo Aluminum Mill ("Jiaozuo Mill") aluminum production mills in Jiaozuo, Henan Province. Construction of the power plant commenced in the first quarter of 1995. The first unit of the power plant was completed and commenced commercial operation on August 17, 1997. The second unit is scheduled to commence commercial operation in the second quarter of 1998. Joint Venture. The Jiaozuo Aluminum Power plant is owned by Jiaozuo Wan Fang Power Company Ltd. ("Jiaozuo Wan Fang"), a 23-year cooperative joint venture formed by Jiaozuo Mill and a wholly owned subsidiary of the Company. Pursuant to the joint venture contract, the Company is entitled to recover its registered capital (equity) during the term of the Joint Venture. The Company, as the majority shareholder of Jiaozuo Wan Fang, is entitled to appoint four of the six members of the board of directors of the Joint Venture, including the chairman of the board and the general manager. Pursuant to a co-development agreement, an entity unaffiliated with the Company is entitled to no more than ten percent of the Company's equity distributions from Jiaozuo Wan Fang. Financing. The approved total investment in Jiaozuo Wan Fang is $151.3 million. The Joint Venture's approved registered capital is $53.7 million. As of November 30, 1997, it is estimated that the total cost of Jiaozuo Aluminum Power will be approximately $161.3 million. Any difference between the approved total investment and the actual total cost will be funded by additional equity or loans to be contributed pro rata by the shareholders of Jiaozuo Wan Fang. The Company has contributed $37.6 million to the registered capital of the Joint Venture. Jiaozuo Mill has contributed $16.1 million in land use rights and certain fixed assets to the registered capital of the Joint Venture. Power Purchase. Jiaozuo Wan Fang and Jiaozuo Mill have entered into a 23-year power purchase contract effective April 26, 1996. Pursuant to the power purchase contract, Jiaozuo Mill has agreed to purchase from Jiaozuo Wan Fang at least 5,500 hours each calendar year at 75 MW up to the amount required to operate Jiaozuo Mill's aluminum mill. Any remaining electricity from the power plant, but no less than 5,500 hours at 155 MW, will be purchased by the Henan Electric Power Corporation ("Henan Power") under a 23-year power purchase contract between Jiaozuo Wan Fang and Henan Power. Both power purchase contracts require the purchasers to pay for a minimum amount of electricity generated every calendar year and to compensate the Joint Venture for any shortfalls in purchases of such minimum amount based on the most recent approved tariff for power less fuel costs. Both power purchase contracts allow the Joint Venture to adjust the minimum amount of electricity required to be purchased by the power purchasers and Jiaozuo Mill may request the Joint Venture to adjust the minimum amount of electricity required to be purchased by Jiaozuo Mill, in all cases, upon prior notice. During 1997, Jiaozuo Mill and Henan Power failed to purchase the required minimum amounts of electricity under the power purchase contract, and accordingly, are required to compensate the Joint Venture for the shortfall. Jiaozuo Mill and Henan Power are negotiating with the Joint Venture about providing the compensation to the Joint Venture for the shortfall by purchasing excess on-grid electricity from the Joint Venture during the first half of 1998. There are no specific provisions regarding liquidated damages upon early termination of either power purchase contract. However, in the case of early termination due to Henan Power's default, Henan Power is obligated under the power purchase contract, to the extent permitted by law, to transmit electricity generated by the Joint Venture's power plant to any entity designated by the Joint Venture which is interconnected with Henan Power. Construction. Jiaozuo Wan Fang has directly managed the construction of Unit 1 of the power plant and is directly managing the construction of Unit 2 of the power plant. Jiaozuo Wan Fang has hired the Henan Power Design Institute for the project design and Henan Provincial No. 1 Power Construction Company and Henan Provincial No. 2 Power Construction Company as contractors for civil and installation work. Although no heat rate (the term "heat rate" refers to a power plant's thermal efficiency), output or completion guarantees are being provided by the contractors, these two contractors have built a number of similar power plants. In addition, more than 100 of such 125 MW units have been delivered by their manufacturer, Shanghai Electric Corporation ("Shanghai Electric"), which is providing a limited two-year warranty of the units. The construction risk in the case of this project is also mitigated by the tariff formula set forth in the power purchase contract which provides for an increase in the tariff payable by the power purchaser sufficient to compensate the Joint Venture for any reduction in heat rate and capacity resulting from the contractor's performance failure. Unit 2 of the power plant was synchronized with the power grid on February 22, 1998 and is expected to commence commercial operation in the second quarter of 1998. Interconnection and Dispatch. The interconnection facilities were completed by Henan Power in February 1998. Jiaozuo Wan Fang has provided a loan in the amount of approximately $9.9 million to Henan Power for the design and construction of the interconnection facilities. The power plant is currently dispatched by Henan Power. The Joint Venture is required under its dispatch contract with Henan Power to cause the power plant to maintain an annual minimum availability. If this annual minimum availability is not met, the minimum amount required to be purchased by Henan Power may be reduced proportionately. Fuel. Jiaozuo Wan Fang obtains fuel pursuant to short-term contracts for the purchase of anthracite coal from mines in Jiaozuo and mines located approximately 120 kilometers from the power plant. The price for coal is negotiated periodically with the mine owners. The coal supplier arranges for the transportation of the coal by truck to the power plant. Operation. Jiaozuo Wan Fang operates the power plant. Wuhu Grassy Lake The Power Plant. The Wuhu Grassy Lake power plant is a 2 x 125 MW coal-fired power plant located near Wuhu, Anhui Province. It is the phase IV expansion of an existing 325 MW coal-fired power station. The first unit of the power plant commenced commercial operation in September 1996. The second unit went into commercial operation in March 1997. Joint Venture. The Wuhu Grassy Lake power plant is owned by Wuhu Shaoda Electric Power Development Company Ltd. ("Wuhu Shaoda"), a 20-year equity joint venture formed by CPI, Anhui Liyuan Electric Power Development Company Limited ("Anhui Liyuan"), Wuhu Energy Development Company Limited ("Wuhu Energy") and a wholly owned subsidiary of the Company. The board of directors of Wuhu Shaoda consists of nine directors, of which two are appointed by the Company. The Company also appoints one of the two vice chairmen and the deputy general manager responsible for supervising the operation and maintenance of the power plant. Financing. The approved total investment in the Joint Venture is $118.4 million. The Joint Venture's approved registered capital is $30.0 million. The Joint Venture partners of Wuhu Shaoda have contributed their registered capital according to their respective ownership interests as follows: (i) CPI, $13.5 million (45%), (ii) the Company, $7.5 million (25%), (iii) Anhui Liyuan, $6.0 million (20%) and (iv) Wuhu Energy, $3.0 million (10%). As of November 30, 1997, the estimated total cost of this project was in the range of $118.2 million to $121.4 million. The difference between the total investment and the registered capital of Wuhu Shaoda is being financed through a bank facility and shareholder loans arranged by the Joint Venture partners. Wuhu Shaoda entered into a $65.0 million term loan facility (the "Term Loan") with a syndicate of lenders. The first drawdown of the Term Loan took place in August 1996. The Term Loan is to be repaid in 11 successive semi-annual installments beginning April 22, 1998. In addition to the Term Loan, the Company has provided a $17.5 million subordinated loan (the "AES Loan") and Anhui Liyuan has provided $4.6 million and Wuhu Energy has provided $2.3 million in subordinated shareholders' loans to the Joint Venture. The $6.9 million total amount of shareholder loans from Anhui Liyuan and Wuhu Energy were composed of cash in the amount of $4.6 million and accrued interest to the two partners on their early capital injections in the amount of $2.3 million. The recognition of this $2.3 million of accrued interest as part of the two partners' shareholder loans is still subject to the unanimous agreement by all the partners. The Company has guaranteed to the lenders of the Term Loan certain obligations of its wholly owned subsidiary under the joint venture contract, including the obligation to fund the AES Loan and certain other liabilities which, in the aggregate, do not exceed $6.0 million. Dividend payments are subject to certain restrictions under the Term Loan. No dividend distributions by the Joint Venture are permitted if certain debt service coverage ratios are not met. Power Purchase. The electric power from the power plant is purchased by Anhui Provincial Electric Power Corporation ("Anhui Power") pursuant to a 20-year operation and offtake contract dated as of July 5, 1996, between Wuhu Shaoda and Anhui Power. Under the operation and offtake contract, Anhui Power has agreed to purchase a minimum amount of electricity at a price based upon an agreed tariff formula. In the event that the power plant fails to generate electricity for a period in excess of that permitted for maintenance and repair in the operation and offtake contract and such failure is a result of force majeure or Wuhu Shaoda's failure to perform its obligations under the operation and offtake contract, the minimum amount required to be purchased by Anhui Power may be reduced in proportion to such excess shutdown period, provided that in no event will the electricity payments to be made under the operation and offtake contract be reduced below the amount necessary to allow Wuhu Shaoda to pay all applicable financing costs under the Term Loan, the AES Loan and the other shareholder loans. During 1997, Anhui Power failed to purchase the required minimum amount of electricity under the operation and offtake contract. Accordingly, Anhui Power is required pursuant to the operation and offtake contract to compensate the Joint Venture for the shortfall based on the 1997 approved tariff less approved generation cost. The relevant pricing bureau approved only the tariff and not the generation cost assumed for purposes of setting the tariff. The Joint Venture and Anhui Power, the operator of the plant, have disagreed over determination of the generation cost to be used for the calculation of the minimum take compensation. The minimum take compensation will be subject to finalization of the generation cost issue, which is currently under negotiation between Anhui Power and Wuhu Shaoda. Construction. The power plant was designed, engineered and constructed pursuant to a fixed price construction contract between Wuhu Shaoda and Anhui Power. Pursuant to the construction contract, Anhui Power is the principal contractor and is responsible for the timely and successful completion of the power plant. Anhui Power sub-contracted the design, construction, installation and commissioning work to several of its subsidiaries. The construction contract does not obligate Anhui Power to provide guarantees of heat rate or capacity. However, in the event that Anhui Power fails to achieve the design heat rate or nameplate capacity of the power plant, the tariff formula set forth in the operation and offtake contract increases the tariff payable by Anhui Power in a manner that compensates Wuhu Shaoda for the reduction in heat rate and capacity. An independent engineering company, Stone and Webster Management Consultants, was retained by the lenders of the Term Loan to monitor construction. As of November 30, 1997, the work remaining was completion of construction of an ash pond and living quarters. This work is scheduled to be completed by the end of 1998. Interconnection and Dispatch. The power plant is interconnected to the Anhui power grid and is subject to dispatch by Anhui Power pursuant to an interconnection contract between Wuhu Shaoda and Anhui Power. Fuel. As part of its obligations under the operation and offtake contract, Anhui Power is required to supply such fuel as may be necessary to allow the power plant to generate electricity purchased under the operation and offtake contract. Operation. Pursuant to the operation and offtake contract, Anhui Power is responsible for the operation, maintenance and management of the power plant and is responsible for satisfying all operating costs of the power plant. In return, Anhui Power is entitled to deduct the approved generation cost from the electricity fee to the Joint Venture. Due to disagreement between Anhui Power and the Joint Venture over the determination of generation cost as indicated above, the total electricity fee for 1997 has not yet been finalized. Anhui Power is responsible for ensuring that the power plant generates the minimum amount of electricity required to be purchased by Anhui Power and is required to compensate Wuhu Shaoda for any resulting shortfall in such minimum amount, unless, as indicated above, the shortfall is the result of force majeure or the failure of Wuhu Shaoda to perform its obligations under the operation and offtake contract. Hefei Prosperity Lake The Power Plant. The Hefei Prosperity Lake power plant is an oil-fired combined cycle power plant consisting of 2 x 38.2 MW gas turbine generating units ("gas turbine unit") and a 1 x 38.8 MW heat recovery steam turbine generating unit ("steam turbine unit"). It is located within the boundaries of an existing 325 MW coal fired power plant in Hefei, Anhui Province. Construction of the power plant commenced in November 1996. The gas turbine unit commenced commercial operation on August 1, 1997 as scheduled, and the steam turbine unit is scheduled to commence commercial operation in the third quarter of 1998. Joint Ventures. The Hefei Prosperity Lake power plant is owned by Anhui Liyuan AES Power Company Ltd. ("Liyuan-AES") and Hefei Zhongli Energy Company Ltd. ("Zhongli Energy"), two 16-year cooperative joint ventures formed among a wholly owned subsidiary of the Company, Hefei Municipal Construction and Investment Company ("Hefei Construction") and Anhui Liyuan. In accordance with the joint venture contracts, the Company is entitled to appoint four of the seven members of the board of directors and the general manager of each of the Joint Ventures. Financing. The approved total investment in each of Liyuan-AES and Zhongli Energy is $30.0 million. The approved registered capital of each of Liyuan-AES and Zhongli Energy is $15.0 million. The Joint Venture partners in Liyuan-AES and Zhongli Energy contributed registered capital to each Joint Venture according to their respective ownership interests as follows: (i) Anhui Liyuan, $3.0 million (20%), (ii) the Company, $10.5 million (70%) and (iii) Hefei Construction, $1.5 million (10%). As of November 30, 1997, it is estimated that the total cost of Hefei Prosperity Lake will be approximately $65.7 million. The difference between the estimated total cost and the registered capital of each Joint Venture will be financed through shareholder loans or third party debt arranged by the Joint Venture partners. The Company has entered into shareholder loan contracts with Liyuan-AES and with Zhongli Energy pursuant to which the Company has committed to provide loans to the Joint Ventures in an aggregate amount not to exceed $16.0 million, of which $14.7 million has been provided as of November 30, 1997. A PRC bank has entered into long-term loan contracts with Liyuan-AES and Zhongli Energy for the provision of loans totaling $14 million of which $7 million has been provided as of November 30, 1997. The loans were arranged and guaranteed by one of the PRC partners. Power Purchase. The power generated by the power plant is purchased by Anhui Power pursuant to a 16-year operation and offtake contract, dated September 26, 1996, between Liyuan-AES and Zhongli Energy, as the sellers, and Anhui Power as power purchaser. Under the operation and offtake contract, Anhui Power has agreed to purchase a minimum amount of electricity at an agreed upon tariff formula or to compensate the Joint Ventures for any shortfall in purchases of such minimum amount based on an approved tariff less approved generation costs. Anhui Power's minimum take obligation under the operation and offtake contract may be reduced in proportion to periods of power plant shutdown or curtailment of generation due to events of force majeure or breach of the operation and offtake contract by the Joint Ventures, provided that in no event will the payments to be made under the operation and offtake contract be reduced below the amount necessary to allow the Joint Ventures to pay all applicable financing costs under the Joint Ventures' loan agreements. Since the commencement of commercial operation of the simple cycle unit, Anhui Power has failed to purchase the required minimum amount of electricity under the operation and offtake contract. Accordingly, Anhui Power is required pursuant to the operation and offtake contract to compensate the Joint Ventures for the shortfall based on the 1997 approved tariff less approved generation cost. The relevant pricing bureau approved only the tariff and not the generation cost assumed for purposes of setting the tariff. The Joint Ventures and Anhui Power, the operator of the plant, have disagreed over determination of the generation cost to be used for the calculation of the minimum take compensation. The minimum take compensation will be subject to finalization of the generation cost issue, which is currently under negotiation between Anhui Power and the Joint Ventures. Construction. The power plant is being designed, engineered and constructed pursuant to a fixed-price construction contract between the Joint Ventures and Anhui Mingda Power EPC Contract Company ("Mingda"), a wholly owned subsidiary of Anhui Power. Pursuant to the construction contract, Anhui Power is the principal contractor and is responsible for the timely and successful completion of the power plant. Mingda is eligible for a bonus for on-time completion of the gas turbine unit and early or on-time completion of the steam turbine unit but must pay penalties in the event of late completion or not meeting performance guarantees, including heat rate and capacity guarantees. The gas turbine unit and steam turbine unit have been ordered from GEC Alsthom Centrales Energetiques S.A. ("GEC Alsthom"). GEC Alsthom will also provide the conceptual design as a subcontractor to Mingda. If Mingda fails to complete the gas turbine unit by August 1, 1997 and the steam turbine unit by July 1, 1998, Anhui Power's minimum take or pay obligation for the minimum amount under the operation and offtake contract nonetheless commences. An independent engineering company, Black & Veatch International Company, has been retained by the Joint Ventures to monitor construction. Interconnection and Dispatch. The power plant is interconnected to the Anhui power grid and is subject to dispatch by Anhui Power pursuant to an interconnection contract between the Joint Ventures and Anhui Power. Under the operation and offtake contract, Anhui Power, as the operator, is required to indemnify the Joint Ventures for any loss or cost as a result of the breach of the interconnection contract. Fuel. As part of its obligations under the operation and offtake contract, Anhui Power is required to supply such fuel as may be necessary to allow the power plant to generate electricity to be purchased under the operation and offtake contract. Operations. Pursuant to the operation and offtake contract, Anhui Power is responsible for the operation, maintenance and management of the power plant and is responsible for satisfying all operating costs of the power plant. In return, Anhui Power is entitled to deduct the approved generation cost from the electricity fee to the Joint Ventures. Due to disagreement between Anhui Power and the Joint Ventures over the determination of generation cost as indicated above, the total electricity fee for 1997 has not yet been finalized. Anhui Power is responsible for ensuring that the power plant generates the minimum amount and is required to compensate the Joint Ventures for any resulting shortfall in the minimum amount, unless, as indicated above, the shortfall is a result of force majeure or the failure of the Joint Ventures to perform their obligations under the operation and offtake contract. Wuxi Tin Hill The Power Plant. The Wuxi Tin Hill power plant is an oil-fired combined cycle power plant which consists of a 2 x 24 MW gas turbine generating plant and a 15 MW heat recovery steam turbine generating plant located in Xishan City (previously known as Wuxi County), Jiangsu Province. The gas turbine generating plant was completed and commenced commercial operation in March 1996 and the heat recovery steam turbine generating plant commenced commercial operation in the first quarter of 1997. Joint Ventures. The Wuxi Tin Hill power plant is owned by Wuxi-AES-CAREC Gas Turbine Power Company Ltd. ("Wuxi-AES-CAREC") and Wuxi-AES-Zhonghang Power Co. Ltd. ("Wuxi-AES-Zhonghang"), two 16-year cooperative joint ventures formed among the Company, China National Aero-Engine Corporation ("CAREC") and Wuxi Power Industry Company ("Wuxi Power"). In accordance with the joint venture contracts, the Company is entitled to appoint four of the eight members of the board of directors, including the chairman of the board, for each of the Joint Ventures, while CAREC and Wuxi Power each is entitled to appoint two members. The chairman of the board of directors of each Joint Venture has the right to break any tie board votes. Financing. The approved total investment in Wuxi-AES-CAREC is $29.5 million. The approved total investment in Wuxi-AES-Zhonghang is $10.5 million. The approved registered capital of Wuxi-AES-CAREC is $11.8 million and the approved registered capital of Wuxi-AES-Zhonghang is $5.0 million. As of November 30, 1996, the estimated total cost of this project was in line with the approved total investment. The Company has contributed $6.5 million to the registered capital of Wuxi-AES-CAREC and $2.8 million to the registered capital of Wuxi AES-Zhonghang. CAREC and Wuxi Power each has contributed $2.7 million to the registered capital of Wuxi-AES-CAREC and each has contributed $1.1 million to the registered capital of Wuxi-AES-Zhonghang. The Company, CAREC and Wuxi Power entered into shareholder loan agreements with the Joint Ventures pursuant to which they provided loans to the two Joint Ventures pro rata in accordance with their ownership interests. In January 1998, the Wuxi Tin Hill replaced the shareholder loans provided by the Company and CAREC with a $12.5 million loan from ING Bank, Shanghai Branch and RMB(Y)26 million (about $3.1 million) in loans from two local Chinese banks in Wuxi. The shareholder loans from the Company and CAREC were fully paid off, leaving a $4.4 million shareholder loan from Wuxi Power. Power Purchase. Power generated by the power plant is purchased by the Xishan Electricity Management Office ("Xishan Office") under a 16-year power purchase contract, effective May 1995, between Wuxi-AES-CAREC and Xishan Office. Wuxi-AES-CAREC sells the electricity generated by the steam generating plant to Xishan Office on behalf of Wuxi-AES-Zhonghang under a services agreement with Wuxi-AES-CAREC. The power purchase contract requires Xishan Office to purchase a minimum amount of 186 gigawatt hours ("GWh") of electricity per calendar year from the power plant and to compensate the Joint Ventures for any shortfalls in the purchase of such minimum amount based on the most recent tariff for electricity less fuel costs. Pursuant to the power purchase contract, the minimum amount of electricity which Xishan Office is required to purchase from the Joint Ventures may be reduced by the number of peak time shutdown hours which exceeds an agreed number of hours permitted for outages related to the power plant. During 1996, Xishan Office failed to purchase the required minimum amount of electricity under the power purchase contract and, accordingly, is required to compensate the Joint Venture for the shortfall. The parties had a disagreement over the amount of the required minimum take for 1996. Xishan Office paid 88% of the amount the Joint Venture believed was due but disputed the balance. In March 1997, the Joint Venture reached agreement with the power purchaser on the amount of payment for required minimum offtake of electricity for 1996. The agreement included the deferral of certain amounts scheduled to be paid in 1996 and a corresponding adjustment upward of future scheduled payments of capital return. During 1997, Xishan office also failed to purchase the required minimum amount of electricity and has paid 89% of the shortfall to the Joint Venture. The company expects settlement of the outstanding balance in the near future. Construction. The construction of the power plant has been managed by the Joint Ventures. The gas turbines were supplied by United Technologies Inc. ("United Technologies"). Pursuant to a maintenance contract with the Joint Ventures, United Technologies will provide 10 years of service and maintenance for the gas turbines. The balance of the plant has been provided by Chinese manufacturers. Interconnection and Dispatch. The interconnection facilities were completed in March 1996 and the power plant is connected to the East China Power Grid. The power plant is currently dispatched under an agreement between Wuxi AES-CAREC and Jiangsu Provincial Power Bureau Dispatch Center signed in August 1997. Fuel. Wuxi-AES-CAREC has signed 16-year fuel oil supply contracts with two local State-owned oil companies under the administrative control of the Xishan municipal government. The fuel suppliers are obligated, under the contracts, to pay damages for any failure to supply the power plant with adequate quantities of fuel or fuel not meeting certain specifications. The price of fuel oil to be supplied under these supply contracts is to be negotiated annually. The oil companies are obligated to arrange for the transportation of the fuel to the power plant. Operation. The power plant is operated by Wuxi-AES-CAREC. Aixi Heart River The Power Plant. The Aixi Heart River power plant is a 50 MW coal-fired circulating fluidized bed power plant located in Nanchuan, Sichuan Province. Construction of the power plant commenced in February 1996, and is expected to be completed in the second quarter 1998. Joint Venture. The Aixi Heart River power plant is owned by Sichuan Fuling Aixi Power Company Ltd. ("Fuling Aixi"), a 25-year cooperative joint venture formed by Sichuan Fuling Banxi Colliery ("Banxi Colliery") and a wholly owned subsidiary of the Company. The Company appoints three of the five members of the board of directors as well as the chairman, the general manager and financial controller. Financing. The approved total investment in the Joint Venture is $30.4 million ($30.0 million based on the Renminbi to US dollar exchange rate at the time the approval was granted). The Joint Venture's approved registered capital is $12.1 million. As of November 30, 1997, it is estimated that the total cost of Aixi Heart River will be approximately $39.1 million. The Company has contributed $8.5 million to the registered capital of Fuling Aixi and Banxi Colliery has committed to contribute $3.6 million to the Joint Venture's registered capital. As of January 30, 1998, Banxi Colliery has contributed $3.4 million to the registered capital of the Joint Venture. Pursuant to the construction and term loan agreement with Fuling Aixi, the Company has committed to provide a loan in the principal amount of up to $23.5 million to Fuling Aixi. Any difference between the estimated total cost and the committed shareholder loan and approved registered capital will be funded by additional equity contributed pro rata by the shareholders. Power Purchase. Electricity generated by the power plant will be sold to Sichuan Fuling Power Company ("Sichuan Power") under a 25-year power purchase contract. The power purchase contract requires Sichuan Power to purchase a minimum of 270 GWh of electricity per calendar year. In the event that Sichuan Power fails in any calendar year to purchase such minimum amount, Sichuan Power is required by the power purchase contract to make payment for any shortfall at the then current power price less fuel costs. Pursuant to the power purchase contract, if Fuling Aixi fails to deliver electricity to Sichuan Power by the construction completion date specified in the construction contract, it is obligated to pay a penalty to Sichuan Power for each day of delay. Construction. Fuling Aixi has entered into a construction contract with Shanghai Electric to construct the power plant. Certain critical components of the equipment of the power plant (including the coal fluidized bed boilers and their design) are being supplied by Pyropower, Inc. ("Pyropower") pursuant to a supply contract between Shanghai Electric and Pyropower. The balance of the plant is being provided by Chinese manufacturers. Shanghai Electric will provide a one-year warranty of its work. If Shanghai Electric fails to complete construction of the power plant by February 1998, the guaranteed completion date, the contractor will be required to pay liquidated damages to Fuling Aixi for each day of delay in an amount sufficient to compensate the Joint Venture for penalties due to Sichuan Power under the power purchase contract for delayed commercial operation of the power plant. Under the construction contract, Shanghai Electric has guaranteed all the performance specifications of the power plant, including output, heat rate and emissions. If the power plant fails to achieve the performance specifications, Shanghai Electric will be obligated to pay liquidated performance damages to Fuling Aixi. Interconnection and Dispatch. Sichuan Power is responsible for construction, and has guaranteed the completion, of the interconnection facility by the power plant's performance testing date. If a delay in the completion of the interconnection facility results in delays in commencement of the commercial operation of the power plant, Sichuan Power is obligated to pay Fuling Aixi a penalty for each day of delay. The dispatcher of the power plant has agreed to dispatch the power plant at 100% of its operational capacity during peak hours and at 75% of its operational capacity during off-peak hours. Fuel. Fuling Aixi has entered into a 25-year coal supply contract with Banxi Colliery. Any increase in the price of coal to be paid by Fuling Aixi will only become effective under the coal supply contract when the price of electricity payable by Sichuan Power has been increased to reflect the increased coal cost. The occurrence of a force majeure event will not excuse Banxi Colliery's obligations under the coal supply contract. Banxi Colliery is also obligated to supply coal to the power plant in the case of non-payment by Fuling Aixi for such coal if such non-payment was caused by a failure of Sichuan Power to make a payment to Fuling Aixi under the power purchase contract. If the coal supply contract is terminated by Fuling Aixi on account of Banxi Colliery's default, Banxi Colliery is required to pay a termination charge to Fuling Aixi. Operation. Fuling Aixi will operate the power plant. Chengdu Lotus City The Power Plant. The Chengdu Lotus City power plant is a 2 x 24 MW natural gas-fired power plant located in Chengdu, Sichuan Province. Construction of the power plant commenced in October 1996 and commercial operation commenced on July 5, 1997. Joint Venture. The Chengdu Lotus City power plant is owned by Chengdu-AES-Kaihua Gas Turbine Power Co. Ltd. ("Chengdu AES-Kaihua"), a 16-year cooperative joint venture formed by the Company, Chengdu Huaxi Electric Power (Group) Shareholding Company Ltd. ("Huaxi"), Huachuan Petroleum & Natural Gas Exploration Company ("Huachuan") and CAREC. The Company is entitled to appoint three members of the nine-member board of directors of Chengdu AES-Kaihua and the general manager. Financing. The approved total investment in the Joint Venture is $29.8 million. The Joint Venture's approved registered capital is $11.9 million. As of November 30, 1997, the estimated total cost of Chengdu Lotus City was approximately $34.2 million, $3.2 million less than the original budget. The Company has contributed $4.2 million to the registered capital of Chengdu AES-Kaihua. The Company's joint venture partners have contributed the following amounts to the registered capital of the Joint Venture: Huaxi has contributed $3.0 million; Huachuan has contributed $1.2 million; and CAREC has contributed $3.5 million. The Company, Huaxi and CAREC have entered into support contracts with Chengdu AES-Kaihua pursuant to which they have provided loans to Chengdu AES-Kaihua in the principal amount of $22.3 million in addition to their registered capital contributions. Power Purchase. Electricity generated by the power plant is to be sold to Huaxi under a 15-year power purchase contract. The power purchase contract requires Huaxi to purchase, in each calendar year, 3,000 hours of electric power based on the net station capacity of the power plant declared by Chengdu AES-Kaihua to be available in such year. If Huaxi fails, for any reason (including due to the failure of the interconnection facilities or natural gas pipeline to be completed), to accept electric power which is made available by Chengdu AES-Kaihua, Huaxi is required by the power purchase contract to pay Chengdu AES-Kaihua for the electricity made available at the then current power price less fuel costs. The tariff payable by Huaxi under the power purchase contract is established annually by the board of directors of Chengdu AES-Kaihua in accordance with a budget which estimates the costs of generating the minimum amount in the following year and the tariff adjustment method as specified in the power purchase contract. In 1997, the approved tariff for Chengdu Lotus City was less than the tariff requested by the Joint Venture, which was based on a formula set forth in the Power Purchase Contract. Due to the priority return structure in the Joint Venture Agreement for Chengdu Lotus City, the Company's dividends from Chengdu Lotus City related to its 1997 operations will be as expected. Construction. Chengdu AES-Kaihua entered into a construction contract with CAREC to construct the power plant. The principal equipment for the power plant, the gas turbine generator sets, was provided to Chengdu AES-Kaihua pursuant to a supply contract between CAREC and United Technologies. All performance guarantees (including damages for failures to meet heat rate and output guarantees) and warranties of United Technologies under the supply contract have been assigned by CAREC to Chengdu AES-Kaihua. The balance of the plant was provided by Chinese manufacturers. An independent engineering company, Duke/Fluor Daniel International, was retained by the Joint Venture to manage scheduling and to ensure equipment performance compliance. Interconnection and Dispatch. The interconnection facility was constructed by Huaxi. Chengdu AES-Kaihua has provided Huaxi with a loan of RMB(Y)14.0 million for the construction of the interconnection facilities. The Joint Venture has entered into a dispatch contract with the Sichuan Dispatch Center, pursuant to which the dispatcher of the power plant has agreed to dispatch the power plant. Fuel. Chengdu AES-Kaihua has entered into a 15-year gas supply contract with Huachuan for the supply of natural gas to the power plant. The gas supply contract requires Huachuan to provide a minimum annual quantity of natural gas to the Chengdu facility which meets certain specifications at a price set by the Chengdu municipal pricing bureau. Any increase in the price of gas to be paid by Chengdu AES-Kaihua will only become effective under the gas supply contract when the price of electricity payable by Huaxi under its power purchase contract has been increased to reflect the increased cost. If Huachuan fails, on any occasion, to deliver gas in the quantities and specifications required by Chengdu AES-Kaihua, Huachuan is obligated under the gas supply contract to indemnify Chengdu AES-Kaihua for the total revenue lost by Chengdu AES-Kaihua due to such failure. Huachuan is also obligated to continue supplying natural gas to the power plant in the case of non-payment by Chengdu AES-Kaihua for such natural gas if such non-payment was caused by a failure of Huaxi to make payment to Chengdu AES-Kaihua under the power purchase contract. Chengdu AES-Kaihua may terminate the gas supply contract for Huachuan's breach of contract, including its failure to deliver natural gas. If Chengdu AES-Kaihua terminates the contract, Huachuan must pay a termination charge similar to the termination charge payable under the power purchase contract. If Huachuan pays this termination charge, the termination charge for which Huaxi would be liable under the power purchase contract as a consequence of Huachuan's default is not applicable. Upon any such payment, Chengdu AES-Kaihua is obligated to transfer the power plant and related gas interconnection facility to Huachuan. Operation. Chengdu AES-Kaihua operates the power plant. Cili Misty Mountain The Power Plant. The Cili Misty Mountain power plant, located in Cili County, Hunan Province, consists of a 5.2 MW hydroelectric generating unit ("unit 1"), and two 10.5 MW hydroelectric generating units ("unit 2" and "unit 3"). Unit 1, the original power plant, has been in commercial operation since 1979. Unit 2 went into commercial operation in May 1996 and unit 3 went into commercial operation in February 1997. Joint Venture. The Cili Misty Mountain power plant is owned by Hunan Xiangci-AES Hydro Power Company Ltd. ("Xiangci-AES"), a 25-year joint venture formed by Hunan Cili Electric Power Company ("Cili Electric Power") and the Company. The Company appoints three of the five members of the Joint Venture's board of directors, and appoints the general manager and the chief accountant. Financing. The approved total investment and approved registered capital of Xiangci-AES is $14.7 million. The Company contributed $7.5 million to the registered capital of Xiangci-AES and Cili Electric Power contributed all of the assets of the previously existing and operating unit 1 and all of the equipment and materials purchased for the construction of unit 2 and unit 3 which, at the time of the Company's equity contribution to Xiangci-AES, were being incorporated into the project by Cili Electric Power. All liabilities of the power plant incurred prior to the establishment of Xiangci-AES are the sole obligation of Cili Electric Power. The estimated total cost of this project is in line with the approved total investment. Power Purchase. In 1994, Xiangci-AES and Cili Electric Power entered into a 25-year power purchase contract for the sale of electricity generated by the power plant. Cili Electric Power was required by the terms of the power purchase contract to purchase all of the electricity generated by the power plant and to use its best efforts to purchase electricity in excess of 120 GWh. Since the power plant utilizes hydro power, the extent to which the power plant is able to generate electric power depends upon the flow of river water. Cili Electric Power has indicated to the Joint Venture that load growth in Cili County is likely to be less than anticipated in the near future. Because the power plant is located in an area served by an isolated transmission grid, the Joint Venture has connected a 36 kilometer low voltage transmission line to the Hunan provincial grid and the larger market it serves. Since January 1998, Xiangci-AES has been selling electricity to Zhangjiajie Electricity Power Bureau ("Zhangjiajie Power"). Xiangci-AES and Zhangjiajie Power are negotiating a new power purchase contract. Zhangjiajie Power has been making payments at a tariff rate set in the power purchase contract with Cili Electric Power and the Company's expects the tariff set forth in the new power purchase contract to be the same as the one with Cili Electric Power, which is the higher of a minimum rate and a market rate. However, there can be no assurance that Xiangci-AES will successfully negotiate a new power purchase contract. As of January 31, 1998, the amount due from Cili Electric Power was $0.8 million for the electricity sold during 1997. The payment of the outstanding balance is in negotiation between the Joint Venture and Cili Electric Power. Construction. Pursuant to the terms of the joint venture contract, all of the capital contributed by the Company to Xiangci-AES was to be used to complete construction of unit 2 and unit 3. Cili Electric Power was responsible under the terms of the joint venture contract for completing the construction of unit 2 and unit 3. Xiangci-AES subsequently entered into an agreement with Cili Electric Power pursuant to which the Joint Venture directly assumed the work of completing the construction of unit 3 and Cili Electric Power was discharged from any further obligation to complete the power plant. Interconnection and Dispatch. The power plant was originally interconnected to the Cili County power grid and was dispatched by Cili Electric Power. Following the completion of the transmission line to connect the power plant with the Hunan provincial grid, the power plant is being dispatched by the Zhangjiajie Power. Operation. Xiangci-AES operates the power plant. Yangchun Sun Spring The Power Plant. The Yangchun Sun Spring power plant, located in Yangchun, Guangdong Province, consists of one existing 8.6 MW diesel engine generating facility which was constructed prior to the Company's involvement, and another 6.5 MW Stork-Wartsila diesel engine generating facility which commenced commercial operation in April 1996. Joint Venture. Yangchun Sun Spring is owned by Yangchun Fuyang Diesel Engine Power Co. Ltd. ("Yangchun Fuyang"), a 12-year cooperative joint venture formed by Yangchun Municipal Power Supply Company ("Yangchun Power Supply"), Shenzhen Futian Gas Turbine Power Co., Ltd. ("Shenzhen Futian") and a wholly owned subsidiary of the Company. The Company has the right to appoint one of the four members of the board of directors of the Joint Venture. Financing. The Company and Shenzhen Futian each has contributed $2.3 million in cash to Yangchun Fuyang for their respective 25% ownership interests. Yangchun Power Supply has contributed land use rights, and all the fixed assets of the existing plant and all the equipment and materials purchased for the unit then under construction as its registered capital for a 50% ownership interest in Yangchun Fuyang. Power Purchase. The electricity generated from the power plant is purchased by Yangchun Municipal Power Supply Bureau ("Yangchun Power Bureau") under a 12.5-year power purchase contract. The Yangchun Power Bureau is required by the power purchase contract to purchase at least 34.4 GWh each year commencing on January 1, 1995 and at least 58 GWh each year after December 31, 1995. The Yangchun Power Bureau is required to pay for such minimum amounts of electricity even if it does not or cannot purchase such minimum amounts. The Yangchun Power Bureau's payment obligation is secured by a pledge of the annual profit from a 13 MW hydro power plant owned by the Yangchun City People's Government. Construction and Management. Yangchun Fuyang and Yangchun Power Supply have entered into a 12.5-year construction and management contract. The contract calls for Yangchun Power Supply to assume full responsibility for the operation and maintenance of the power plant on behalf of Yangchun Fuyang in compliance with the power purchase contract, and to supply fuel to the power plant. The construction and management contract provides for scheduled distributions to the Company and Shenzhen Futian beginning on March 31, 1996 and continuing on a semi-annual basis for the remainder of the contract term. The amounts are adjusted if the foreign exchange rate between the U.S. dollar and Renminbi exceeds or falls below specified thresholds. Yangchun Power Supply has pledged its registered capital interest in Yangchun Fuyang as security for its obligations to make scheduled distributions to the Company and Shenzhen Futian under the construction and management contract. Interconnection and Dispatch. The power plant is interconnected to the Yangchun municipal power grid. The power plant is dispatched by the Yangchun Electric Dispatch Office pursuant to a dispatch contract between the Joint Venture and the Yangchun Power Bureau. Fuel. Fuel oil required for the power plant is supplied by Yangchun Power Supply. Operation. Yangchun Fuyang operates the power plant. Employees At January 31, 1998, the Company employed 33 people, who are involved in operations or construction. Item 2. Properties The Company leases its principal office in Hong Kong and its representative office in Beijing, People's Republic of China. The lease for the Company's office in Hong Kong expires in March 2000. The Beijing lease expires in July 1998. The following table shows the material properties which the Company's subsidiaries and other joint ventures in which the Company invests lease or for which they have land use rights.
Expiration or Approximate Plant Plant or Project Location Land Use Rights Term of Land Use Area Description Rights - --------------------- --------------------- ---------------- ------------------- -------------- --------------- Anhui Liyuan-AES 7 Dang Shan Road, Lease of Land March 28, 2012 13,850 m2* Oil-fired Power Company Ltd. Hefei City, Anhui Use Right Combined Province, People's Cycle Republic of China Gas-steam Turbine Facility Chengdu AES-Kaihua Sichuan Sino-US Acquisition of March 2045 21,722 m2 Natural Gas Turbine Power (Foreign) Medium & Land Use Right Gas-fired Co. Ltd. Small-sized Simple Cycle Enterprises Gas Turbine Development Zone, Facility Jin Tang County, Sichuan Province, People's Republic of China Hefei Zhongli 7 Dang Shan Road, Lease of Land March 17, 2012 13,850 m2* Oil-fired Energy Company Ltd. Hefei City, Anhui Use Right Combined Province, People's Cycle Republic of China Gas-steam Turbine Facility Hunan Xiangci-AES Chao Wang Ta Yi Transfer / October 7, 2019 48,110 m2 Hydroelectric Hydro Power Company Zu and Pi Pa Zhou Assignment of Facility Ltd. Tou, Chengguan, Land Use Right Cili County, Hunan Province, People's Republic of China Jiaozuo Wan Fang Zhao Zhang Gong Transfer / April 25, 2019 481,490 m2 Pulverized Power Company Ltd. Village, Dong Kong Assignment of Coal-fired Zhuang Village, Land Use Right Facility Daiwang Town, Machun District, Jiaozuo City, Henan Province, People's Republic of China Sichuan Fuling Aixi Qiaobang Village, Acquisition of March 24, 2026 140,977 m2 Coal-fired Power Company Ltd. Longhua Town, Land Use Right Circulating Nanchuan City, Fluidized Bed Sichuan Province, Boiler People's Republic Facility of China Wuhu Shaoda Xi He Shan, Wuhu Lease of Land July 10, 2008 + 41,658 m2 Coal-fired Electric Power City, Anhui Use Right Facility Development Company Province, People's Ltd. Republic of China Wuxi-AES-CAREC Gas Xi Zhang Village Acquisition of November 22, 2012 73,103 m2* Oil-fired Gas Turbine Power and Sheng Feng Land Use Right Turbine Company Ltd. Village, Qianqiao Facility Town, Xishan City, Jiangsu Province, People's Republic of China Wuxi-AES-Zhonghang Xi Zhang Village Acquisition of November 22, 2012 73,103 m2* Heat Recovery Power Company Ltd. and Sheng Feng Land Use Right Steam Turbine Village, Qianqiao Facility Town, Xishan City, Jiangsu Province, People's Republic of China Yangchun Fuyang Side of Kongdong Transfer / March 26, 2045 624 m2 Diesel Engine Diesel Engine Power 110kV Substation, Assignment of Facility Co. Ltd. Chuncheng Town, Land Use Right Yangchun City, Guangdong Province, People's Republic of China Yangcheng Jincheng City, Shanxi Acquisition of Application pending 870,000 m2 Coal-fired International Power Province, People's Land Use Rights for land use rights Facility Generating Co. Ltd. Republic of China
- --------------------------- * Land use rights shared by two plants or projects at the same location. + The lessor is Wuhu Energy Development Company ("WED") which is granted the land use rights of the site by the State for a term of 40 years up to April 16, 2036. WED guaranteed to extend the lease term with the joint venture prior to its expiration, and obtain the required registration with the Land Bureau to ensure that the joint venture has the land use right of the site for its entire term of operations. Item 3. Legal Proceedings The Company is not a party to any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters All outstanding equity securities of the Company are owned by The AES Corporation. Item 6. Selected Financial Data.
(in thousands, except per share data) - --------------------------------------------------- ------------------ ----------------- ------------------ ---------------- For the Years Ended November 30, 1997, 1996 and 1995 and For the Period from December 7, 1993 (inception) to November 30, 1994 1997 1996 1995 1994 - --------------------------------------------------- ------------------ ----------------- ------------------ ---------------- STATEMENT OF OPERATIONS DATA Revenue $ 18,703 $ 9,212 $ 1,382 $ 38 Operating costs and expenses 16,500 8,867 9,894 6,995 Operating income/(loss) 2,203 345 (8,512) (6,957) Income/(loss) before taxes and minority interest 9,276 4,804 2,223 (368) Net income/(loss) 9,470 4,140 2,138 (371) Net income/(loss) per share 789.17 345.00 178.17 (30.92) Cash dividend per share 181.42 - - - - --------------------------------------------------- ------------------ ----------------- ------------------ ---------------- As of November 30 1997 1996 1995 1994 - --------------------------------------------------- ------------------ ----------------- ------------------ ---------------- BALANCE SHEET DATA Total assets $ 512,798 $ 280,698 $ 229,871 $ 210,870 Long-Term Obligations 217,806 34,933 6,666 - Shareholders' equity 198,305 190,355 187,585 201,584
Item 7. Discussion and Analysis of Financial Condition and Results of Operations. The Company, directly and through its wholly owned offshore subsidiaries, engages in the development, construction, operation and ownership of electric power generating facilities in the PRC by means of its participation in joint ventures. The Company currently owns interests in nine power plants with an aggregate nameplate capacity of approximately 2,918 MW. See "Description of the Current Projects." Because of the significant magnitude and complexity of constructing electric power plants in the PRC, construction periods generally range from one to five years, depending on the size of the power plant, the technology utilized and the location. A power plant does not produce revenues until it is completed. If construction is delayed, revenues from the power plant will be similarly delayed and perhaps, if the delay is extended, lost. Additionally, the cost of developing power plants is substantial. The construction of an electric power generation plant, including its ancillary facilities such as a transmission line or substation, may be adversely affected by many factors commonly associated with the construction of infrastructure projects, including shortages of equipment, materials and labor, as well as labor disputes, adverse weather conditions, natural disasters, accidents and other unforeseen circumstances and problems. Any of these could cause completion delays and cost overruns. Delays in obtaining requisite licenses, permits or approvals from government agencies or authorities could also increase the cost or delay or prevent the commercial operation of a project. Construction delays can result in the loss or delayed receipt of revenues and, if completion is delayed beyond the completion date specified in the power purchase contract, the payment of penalties. Additionally, the failure to complete construction according to specifications can result in reduced plant efficiency, higher operating costs and reduced or delayed earnings. The economics of any electric power project, once in commercial operation, are primarily a function of the tariffs to be paid and the quantity of electricity which is purchased. The Company shares in the net income of the Joint Ventures for the duration of their terms. The Joint Ventures generate revenues through the sale of electricity to power purchasers pursuant to long-term power purchase contracts. These contracts require the power purchaser to purchase and pay for minimum quantities of electricity annually or to pay for such quantities if not purchased, in either case at prices determined according to tariff formulas set forth in the power purchase contracts. These tariff formulas are designed, based on the minimum take obligation of the power purchaser, to be sufficient to pay the operating costs and financing costs of the project and to enable the Company to realize a return on its investment. While the relevant PRC pricing bureaus have committed to utilize the Joint Ventures' formulas in establishing and adjusting tariffs, there can be no assurance that the relevant pricing bureaus will calculate and adjust tariffs in accordance with these tariff formulas. On April 1, 1996, a new law governing the electric power sector in the PRC came into effect. The law establishes, among other things, broad principles with respect to the methodology of calculating and setting electric power tariffs. Detailed regulations with respect to tariff calculation and tariff setting are expected to be promulgated in the near future by the Central Government. There can be no assurance that such regulations, when promulgated, will not adversely affect the tariff structures which the Company's Joint Ventures have adopted. The approved tariff for Wuhu Grassy Lake for 1997 was less than the tariff requested by the Joint Venture, which was based on a formula set forth in the Power Purchase Contract. As a result, Wuhu Grassy Lake's revenue for 1997 was insufficient for the Joint Venture to pay the projected return to its shareholders. The Joint Venture plans to make up such shortfall by means of a tariff adjustment in 1998. However, there is no assurance that the relevant pricing bureau will approve it. In 1997, the approved tariff for Chengdu Lotus City was less than the tariff requested by the Joint Venture, which was based on a formula set forth in the Power Purchase Contract. Due to the priority return structure in the Joint Venture Agreement for Chengdu Lotus City, the Company's dividends from Chengdu Lotus City related to its 1997 operations will be as expected. Demand for power produced by a power plant is determined by the demand for electric power in the area served by the power plant and the degree to which the power plant is dispatched. If the plant is dispatched above the minimum quantity required to be purchased under the power purchase contract, these sales will generate additional income for the joint venture and enhance its profitability. If demand is significantly below the minimum level, the joint venture can look only to the credit of the power purchaser to pay the required amount. Some regions or cities in the PRC have experienced slower economic development in recent years. As a consequence, load growth in the PRC, while generally increasing in the country overall, has exhibited uneven development. Some of the Joint Ventures' power plants are designed to provide peaking power. Such plants are dispatched only after base load power stations have been brought on-line and reached maximum capacity. If electric power demand proves less than expected in an area, additional peak or base load power may not be required in the area or may be required at lower than expected levels. The Company's Joint Ventures seek to mitigate this risk by entering into take-or-pay power purchase arrangements and by entering into dispatch contracts with PRC electric power dispatching authorities which obligate the dispatchers to dispatch the power plants at their full capacity for a minimum number of hours each year. There can be no assurance, however, that the Joint Ventures will not experience difficulty in enforcing take or pay contract obligations or such dispatch contract obligations if electric power in an area proves not to be needed by the affected power purchaser and dispatcher. In 1997, the growth rate in demand for power fell and the construction of additional electrical generation capacity resulted in over supply in certain areas. The electric power demand in Henan Province, Anhui Province and Xishan City has been less than expected and the power purchasers for Jiaozuo Aluminum Power, Wuhu Grassy Lake, Hefei Prosperity Lake and Wuxi Tin Hill have failed to purchase the minimum amount of electricity under their respective power purchase contracts. Accordingly, those power purchasers are required to compensate the Joint Ventures for any shortfall. The power purchasers have attempted to negotiate the payment of the shortfall or have disagreed over the generation cost to be used for the calculation of the minimum take compensation. The Joint Ventures are in negotiation with the power purchasers. The total minimum take compensation for 1997 for the four power plants, after adjustment for the Chinese partners' interests in the Joint Ventures, was approximately $4.5 million of which $2.8 million was outstanding as of January 31, 1998. The Company has recorded a provision of $0.7 million (net of the Chinese partners' interests) to reduce the receivables accrued for the balance of the minimum take compensation as of November 30, 1997. The Company is vigorously pursuing its rights under the contracts and believes the final resolution of these issues will not materially affect the Company's financial position or results of operations. The operation of an electric power generation plant may be adversely affected by many factors such as the breakdown or failure of equipment or processes, performance below expected levels of output or efficiency, labor disputes, operational errors, natural disasters, and the need to comply with the directions of the relevant government authorities, the dispatcher and power purchaser of a power plant. In addition, such operation may be hampered by insufficient or poor quality fuel caused by either inadequate supply or transportation or arrangements therefor. In all of its projects, the Company and its Joint Ventures are relying on the reliability and creditworthiness of PRC entities such as its partners, contractors, customers, suppliers, operators, guarantors, lenders and others who are parties to agreements with the Company or its Joint Ventures. While the Company believes that these counterparties have the ability to perform and will perform their obligations, the reliability and creditworthiness of PRC entities are difficult to ascertain. In most cases, the Company, in assessing the reliability and credit standing of counterparties, is relying on financial or other information provided to the Company or its Joint Ventures by such parties or others, or from information and sources publicly available in the PRC. The Company can offer no assurance that this information is accurate or that these counterparties will meet their contractual obligations. The failure of any one of these counterparties to fulfill its obligations to a Joint Venture could have a substantial negative impact on such Joint Venture's operations. In a number of cases, the Company's partner in a Joint Venture controls or is affiliated with the power purchaser, contractor, operator and/or fuel supplier of the project. It is possible, in these cases, that such arrangements may result in one or more of these parties having a conflict of interest in a project, which could have an adverse effect on the Joint Ventures' operations. Pursuant to the Operation and Offtake Contracts between Wuhu Grassy Lake and Anhui Power and between Hefei Prosperity Lake and Anhui Power, Anhui Power is the power purchaser as well as the operator of the power plants. Anhui Power is responsible for satisfying all operating costs and is entitled to deduct the approved generation costs from the electricity fees to the joint ventures. In 1997, the relevant pricing bureau approved only the tariffs but not the generation costs assumed for purposes of setting the tariffs. The Joint Ventures and Anhui Power have disagreed over the determinations of the generation costs. As of November 30, 1997, the aggregate amount of the generation costs in dispute after adjustment for the Chinese partners' interests in the Joint Ventures was approximately $0.5 million. The Company is vigorously pursuing its rights under the contracts and believes the final resolution of these issues will not materially affect the Company's financial position or results of operations. The Company receives cash from the Joint Ventures in the form of equity distributions and payments of principal and interest on shareholder loans made by the Company or by its wholly owned subsidiaries to the Joint Ventures. In a number of cases, the Company has, or anticipates having, priority in the payment of dividends over the Chinese partners to the Joint Venture. The Company's shareholder loans rank as general obligations of the Joint Ventures, except in some instances in which third party financing has been secured or will be secured for the Joint Venture. Under these circumstances the shareholder loans generally are, or will be, subordinated to such third party debt. As of January 30, 1998, the amount of approximately $0.1 million representing the recoupment of the Company's investment in Yangchun Sun Spring was outstanding. The Company's revenue growth will depend in large part on the Company's ability to bring the Joint Ventures' power plants currently under construction into commercial operation. On January 26, 1998, Standard & Poor's announced that it had placed its BB- rating of the 2006 Notes on CreditWatch with negative implications. Standard & Poor's noted a number of factors contributing to this action, including decline in growth rates in demand for power and construction of new capacity resulting in oversupply in some areas, failure of purchasers of power from the Company's Joint Ventures to purchase the minimum offtake of electricity they were contractually required to purchase, uncertainty concerning the performance by the power purchasers of their obligations to compensate the Company's Joint Ventures for their failure to purchase such minimum offtakes, receipt of dividends from the Company's joint ventures in 1997 that were less than the amounts expected, erosion of distributable profits of the Company's joint ventures due to higher than expected generating costs incurred by third party operators, higher than expected corporate overhead expenses in 1997 resulting from non-recurring charges and higher than expected expenditures on technical staffing at construction sites and development costs. Results of Operations The discussion set forth below relates to the results of operations and financial condition of the Company for, and as of the end of, the years ended November 30, 1997, 1996 and 1995 and the following should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere in this Annual Report on Form 10-K. Years ended November 30, 1997 and 1996 Revenues and Costs of Sales. Total revenues increased from $9.2 million to $18.7 million from 1996 to 1997. Costs of sales, which include fuel, operations and maintenance expenses, depreciation and amortization, increased from $5.4 million to $13.5 million from 1996 to 1997. The increases in revenues and costs of sales were due primarily to the Wuxi Tin Hill facility and Unit 2 of the Cili Misty Mountain facility having been in operation for all of 1997, Unit 3 of the Cili Misty Mountain facility having been in operation for almost all of 1997 and the commencement of operation in 1997 of Unit 1 of the Jiaozuo Aluminum Power facility and the simple cycle unit of the Hefei Prosperity Lake facility. Development, Selling, General and Administrative Expenses. Development, selling, general and administrative expenses decreased from $3.5 million in 1996 to $3.0 million in 1997. The decrease was primarily due to a reduction in the costs associated with development activities as a result of AES funding the development costs following the financial closing of Yangcheng Sun City, and a corresponding increase in costs associated with the operational management of the Company's existing projects in China. Interest Income. Interest income increased from $6.4 million to $13.1 million from 1996 to 1997. The increase was primarily due to the proceeds received from the public offering of the Company's 2006 Notes in December 1996 being available for investment in marketable securities in 1997, interest income earned on a note receivable with respect to Jiaozuo Aluminum Power and interest income earned on shareholder loans provided to Wuhu Grassy Lake and Chengdu Lotus City. Interest Expense. Interest expense increased from $1.1 million to $7.4 million from 1996 to 1997. The increase was primarily due to (i) the interest expense and amortization of costs associated with the issuance of the 2006 Notes in December of 1996, offset in part by capitalization of interest incurred during the development and construction of the Company's projects, and (ii) an increase in interest on two minority shareholder loans to Wuxi Tin Hill, interest on a minority shareholder loan to Jiaozuo Aluminum Power and interest on a bank loan to Hefei Prosperity Lake. The Company capitalizes interest accrued during the development and construction of the facilities of its Joint Ventures. Capitalized interest was approximately $17.9 million for 1997 and $3.2 million for 1996. Amalgamation Cost. The Company incurred amalgamation costs of $0.4 million and $1.4 million for 1997 and 1996, respectively, related to expenses incurred in connection with the Amalgamation. Years ended November 30, 1996 and 1995 Revenues and Costs of Sales. Total revenues increased from $1.4 million to $9.2 million from 1995 to 1996. Costs of sales, which include fuel, operations and maintenance expenses, depreciation and amortization, increased from $0.6 million to $5.4 million from 1995 to 1996. The increases in revenues and costs of sales were due primarily to the commencement of operations of the Wuxi Tin Hill project. The increase in revenues generated in 1996 from the operations of the Wuxi Tin Hill project was offset, in part, by a decrease in revenues generated pursuant to the payment of construction delay fees paid by the contractor of the Cili Misty Mountain project. The Company was entitled to construction delay payments from the contractor through March 11, 1996 to compensate for the lost generation. Development, Selling, General and Administrative Expenses. Development, selling, general and administrative expenses decreased from $9.3 million in 1995 to $3.5 million in 1996. The decrease was primarily due to the capitalization of a higher proportion of development costs associated with projects which have achieved financial closing or which have achieved certain project-related milestones. Interest Income. Interest income in 1996 and 1995 was primarily generated by income from marketable securities purchased with the proceeds received from the Company's 1994 initial public offering. Interest income in 1996 decreased $4.1 million from $10.5 million to $6.4 million compared with 1995. The decrease in interest income for 1996 was primarily due to a lower average amount of funds available for marketable securities investment due to capital investments in Joint Ventures, as well as the repurchase of a portion of the outstanding shares of the Company's Class A Common Stock. Interest Expense. In 1996, interest expense of $1.1 million related primarily to the interest on two minority shareholder loans to Wuxi-AES-CAREC. Amalgamation Cost. In 1996, amalgamation cost of $1.4 million related to expenses incurred in pursuing the proposed Amalgamation with AES announced in November 1996. Liquidity and Capital Resources The Company's business has required substantial investment associated with the development, acquisition and construction of electric power plants and related facilities through its joint ventures. Since commencing business, the Company has entered into commitments to invest a total of approximately $357.8 million in the form of equity contributions and loans to its joint ventures including approximately $17.7 million of interest during construction and provision for potential cost overruns, of which $234.2 million has been invested as of January 31, 1998. As of January 31, 1998, the Company had approximately $96.9 million available in cash and cash equivalents and marketable securities and expects to generate cash flow from operations over the course of the anticipated investment period to fund any such commitments. In the event of a shortfall between the amount of the Company's commitments and the foregoing sources of funds, the shortfall may be made up by loans or equity contributions from AES, but AES is not obligated to provide any such loan or equity contribution for such purpose and there are no assurances that AES would decide to provide any such loan or equity contribution. As a result of the Amalgamation, the Company is subject to the AES Debt Covenants, including those contained in the documents governing AES's 10-1/4% Subordinated Notes due 2006, 8-3/8% Senior Subordinated Notes due 2007 and $425 million credit facility due 1999. Due to recent amendments to the terms of the AES Debt Covenants, certain material restrictions previously applicable to AES Chigen, including a prohibition on direct investments in future projects, are no longer applicable. However, no assurance can be given that AES Chigen will invest in any additional future projects. Both the AES Debt Covenants and the covenants contained in the Indenture for AES Chigen's 2006 Notes require the repayment or purchase of indebtedness under specified circumstances involving asset dispositions. Insofar as separate repayments are required at the AES and the Company levels with respect to a single asset sale, this covenant may tend to cause the Company not to make an asset sale under circumstances where it otherwise would. The Company is permitted, pursuant to the terms of the Indenture under which its 2006 Notes were issued, to pay dividends to AES, provided that the Company satisfies certain conditions. One of the results of the Amalgamation has been the termination of the Non-Competition and Non-Disclosure Agreement, dated as of December 29, 1993 and amended and restated as of February 1, 1994, between the Company and AES, which, among other things, prohibited the Company from developing, constructing, owning, managing and operating electric power generation projects in any part of Asia other than China. The Company may consider investing through its subsidiaries in power projects outside of China. Years ended November 30, 1997 and 1996 Cash from Operations. Net cash used in operating activities totaled $8.1 million for 1997 as compared to $1.5 million for 1996. The increase in 1997 was primarily due to a higher proportion of net income being derived from undistributed earnings from affiliates, cash payments for interest on the 2006 Notes and an increase in the components of working capital. These factors offset an increase in net income before depreciation due to the commencement of operation of Jiaozuo Aluminum Power and Hefei Prosperity Lake in 1997. Cash from Investing Activities. Net cash used in investing activities totaled $173.0 million during 1997 as compared to $66.6 million during 1996. The 1997 amount primarily reflected the purchase of property, plant and equipment and other project related investments of $118.5 million, the purchase of short-term investments (net of any proceeds from the maturity or sale of short-term investments) of $27.2 million and the deposit (net of withdrawal) of $27.3 million in debt service reserves. Cash from Financing Activities. Net cash provided by financing activities aggregated $183.5 million during 1997 as compared to $1.4 million used in financing activities during 1996. During 1997, the Company received proceeds, net of underwriting discounts and commissions and offering costs, of $174.1 million from the issuance of the 2006 Notes, proceeds of $8.8 million from bank loans available to subsidiaries and $3.4 million of loans and contributions made to subsidiaries by minority shareholders, which were partially offset by repayment of bank loans of $1.7 million and repayment of $1.4 million of loans from minority shareholders. Years ended November 30, 1996 and 1995 Cash from Operations. Net cash used in operating activities totaled $1.5 million for 1996 as compared to $0.8 million used in operating activities for 1995. The increase in 1996 resulted primarily from an increase in net income due to the commencement of operations of Wuxi Tin Hill offset by an adjustment of the provision for project development costs and a net reduction in the components of working capital. Cash from Investing Activities. Net cash used in investing activities totaled $66.6 million during 1996 as compared to $22.8 million provided by investing activities during 1995. The 1996 amount primarily reflected the purchase of property, plant and equipment and other project related investments of $101.3 million which was partially offset by cash of $34.7 million provided by the maturity of short-term investments (net of purchases). The 1995 amount primarily reflected cash provided by the maturity of short-term investments (net of purchases) of $64.5 million. This amount was partially offset by the cash used in purchases of property, plant and equipment and other project related investments of $41.7 million. Cash from Financing Activities. Net cash used in financing activities aggregated $1.4 million during 1996 as compared to $8.2 million provided by financing activities during 1995. During 1996, the Company repurchased shares of its Class A Common Stock for $11.4 million which was partially offset by $8.5 million of loans and contributions made to subsidiaries by minority shareholders and net proceeds from notes payable of $1.9 million. The 1995 amount reflected cash of $13.5 million provided to the Company's subsidiaries by minority shareholders and $1.0 million from notes payable, less $6.4 million in cash used for the repurchase of shares of Class A Common Stock. Inflation Over the last few years, the PRC economy has registered high growth rates and high rates of inflation. In response, the PRC Government has taken measures to curb inflation. These measures, along with other factors, have reduced inflation in the PRC in 1996 and 1997. However, there can be no assurance that these austerity measures alone will succeed in controlling inflation, nor that they will not result in severe dislocations in the PRC economy in general. The Company will attempt, whenever possible, to take measures to hedge its projects against the effects of inflation. Generally, this will be done by structuring the tariff formulas in its power purchase contracts to pass through increased costs resulting from inflation. Foreign Currency Exchange The Company anticipates that its Joint Ventures will receive nearly all of their revenues in Renminbi. A significant portion of this revenue will need to be converted to other currencies, primarily US dollars, and remitted outside of the PRC to meet foreign currency obligations to equipment suppliers, to repay borrowings from foreign third party lenders and to make payments to the Company in respect of equity distributions and shareholder loans. However, the Renminbi is not freely convertible into US dollars. Although the receipt of approvals to convert Renminbi into foreign currencies and to remit foreign currencies outside of the PRC is routine for approved foreign investment enterprises such as the Joint Ventures, there can be no assurance that the PRC Government will continue to provide such approvals. Moreover, while in the last three years foreign currency has been readily available, no assurance can be given that the Joint Ventures will in the future be able to convert sufficient amounts of Renminbi to foreign currency in China's foreign exchange markets to meet their foreign currency obligations, or that the Joint Ventures will freely be able to remit foreign currency abroad. Prior to 1994, the Renminbi had experienced a significant net devaluation against most major currencies, and during certain periods, significant volatility in the market-based exchange rate. Since the beginning of 1994, the Renminbi to US dollar exchange rate has largely stabilized. While the Joint Ventures will receive nearly all of their revenues in Renminbi, the Company expects its Joint Ventures to have significant US dollar obligations with respect to distributions to the Company. Under the terms of all of their power purchase contracts, the Company's Joint Ventures are entitled to obtain tariff adjustments for future Renminbi devaluation. While the Company expects that its Joint Ventures will be able to pass on increased costs resulting from a devaluation of the Renminbi by means of such tariff adjustments, no assurance can be given that the Joint Ventures will be able to obtain approval for a sufficient tariff adjustment. Year 2000 The Company has developed plans to address issues related to the impact on its computer systems of the year 2000. Financial and operational systems have been assessed and plans have been developed to address systems modification requirements. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. Special Note Regarding Forward-Looking Statements Certain statements in this Discussion and Analysis of Financial Condition and Results of Operations and under the caption "Business" and elsewhere in this Annual Report on Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: political and economic considerations, restrictions on foreign currency convertibility and remittance abroad, exchange rate fluctuations and developing legal system, in each case pertaining to the PRC; holding company structure of the Company; regulation and restrictions; tariffs; governmental approval processes; environmental matters; construction, operating and fuel risks; load growth, dispatch and transmission constraints; reliance on and creditworthiness of PRC counterparties; conflict of interest of contracting parties; control by and reliance on AES; limitations resulting from the Amalgamation and adherence to the AES principles; and other factors referenced in this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data. The following financial statements of the Company and its consolidated subsidiaries are attached to this Annual Report on Form 10-K following the signature page: - Report of Independent Auditors. - Consolidated Statements of Operations for the fiscal years ended November 30, 1997, 1996 and 1995. - Consolidated Balance Sheets as of November 30, 1997 and 1996. - Consolidated Statements of Shareholders' Equity for the fiscal years ended November 30, 1997, 1996 and 1995. - Consolidated Statements of Cash Flows for the fiscal years ended November 30, 1997, 1996 and 1995. - Notes to Consolidated Financial Statements for the fiscal years ended November 30, 1997, 1996 and 1995. 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 Company. (a) Directors of the Company The current directors of the Company are listed below: Name Age Position Roger W. Sant*................... 66 Chairman of the Board and Director Dennis W. Bakke*................. 52 Vice Chairman and Director Robert F. Hemphill, Jr*.......... 54 Vice Chairman and Director Roger W. Sant has been the Chairman of the Board and a Director of the Company since December 1993. In 1981, Mr. Sant and Dennis Bakke co-founded AES. Mr. Sant has been Chairman of the Board and a Director of AES since its inception, and he held the additional office of Chief Executive Officer through 1993. He is currently Chairman of the Board of Directors of The World Wildlife Fund U.S. and serves on the Boards of Directors of Marriott International Inc., The World Resources Institute, and The World Wide Fund for Nature and serves on the National Council for The Environmental Defense Fund. He was Assistant Administrator for Energy Conservation and the Environment of the Federal Energy Administration ("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 has been Vice Chairman and a Director of the Company since December 1993. Mr. Bakke co-founded AES with Mr. Sant in 1981 and has been a Director of AES since 1986. He was named President and Chief Executive Officer of AES in January 1994, and from 1987 through 1993, Mr. Bakke held the office of President and Chief Operating Officer of AES. From 1982 to 1986, he served as Executive Vice President of AES and from 1985 to 1986 he also served as Treasurer of AES. Mr. Bakke served with Mr. Sant as Deputy Assistant Administrator of FEA from 1974 to 1976 and as Deputy Director of the Energy Productivity Center from 1978 to 1981. He is a trustee of Geneva College. Robert F. Hemphill has been Vice Chairman of the Company since February 1995 and has been a Director of the Company since December 1993. From December 1993 to February 1, 1995, Mr. Hemphill was President and Chief Executive Officer of the Company. Mr. Hemphill was named a Director of AES in June 1996. From 1987 to such appointment, Mr. Hemphill served as Executive Vice President of AES. From 1984 to 1987, he was Senior Vice President of AES and from 1982 to 1984 he served as Vice President for project development of AES. He also has served as President and Chief Executive Officer of AES Transpower Pvt. Ltd. ("Transpower"), a subsidiary of AES, since 1989. Prior to joining AES, he was the Deputy Manager of Power of the Tennessee Valley Authority, the largest electric utility in the United States. He also served with the U.S. Department of Energy as Deputy Assistant Secretary for Planning and Evaluation, and with the FEA where he assisted in drafting several major energy statutes, including the National Energy Act. He serves on the Board of Directors of the Friends of the U.S. National Arboretum and is a member of the Arlington County Transportation Commission. (b) Chief Executive Officer of the Company Paul T. Hanrahan, 40 years old, has been President and Chief Executive Officer of the Company since February 1995. From December 1993 until such appointment, Mr. Hanrahan was Executive Vice President and Chief Operating Officer of the Company. From December 1993 until April 1994, he was Secretary of the Company. He has been a Vice President of AES since December 1993. Prior to December 1993, he was the general manager of Transpower, leading development efforts in China, India, the Philippines and Eastern Europe. He has also played a leading role in development of several AES projects, including the Belfast West and Kilroot projects in Northern Ireland, the AES Barbers Point project in Hawaii and the AES Thames project in Connecticut. Mr. Hanrahan graduated with a mechanical engineering degree from the U.S. Naval Academy and with a Master of Business Administration from the Harvard Business School. Item 11. Executive Compensation. Not Applicable. Item 12. Security Ownership of Certain Beneficial Owners and Management. Not Applicable. Item 13. Certain Relationships and Related Transactions. Not Applicable. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) The following financial statements of the Company and its consolidated subsidiaries are attached to this Annual Report on Form 10-K following the signature page: - Report of Independent Auditors. - Consolidated Statements of Operations for the fiscal years ended November 30, 1997, 1996 and 1995. - Consolidated Balance Sheets as of Novembe 30, 1997 and 1996. - Consolidated Statements of Shareholders' Equity for the fiscal years ended November 30, 1997, 1996 and 1995. - Consolidated Statements of Cash Flows for the fiscal years ended November 30, 1997, 1996 and 1995. - Notes to Consolidated Financial Statements for the fiscal years ended November 30, 1997, 1996 and 1995. (2) Financial Statement Schedules - Schedule I - Condensed Financial Information. Schedules other than that listed above are omitted as the information is either not applicable, not required or has been furnished in the financial statements or notes thereto included in this Annual Report on Form 10-K. (3) Exhibits 3.1 Memorandum of Association of the Company is incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 33-73668). 3.2 Bye-laws of the Company, as revised effective May 8, 1997. 4.1 Indenture dated as of December 19, 1996 between the Company and Bankers Trust Company, as Trustee is incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1996. 4.2 Form of 2006 Note is incorporated herein by reference to Exhibit 4.2 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1996. 4.3 Security Agreement, dated as of December 19, 1996, among the Company, Bankers Trust Company, as Trustee, and Bankers Trust Company, as Collateral Agent is incorporated herein by reference to Exhibit 4.3 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1996. 10.1 Project Services Agreement, dated as of December 29, 1993, between the Company and AES is incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1 (Registration No. 33-73668). 10.2* Joint Venture Contract, dated August 1996, by and among North China Electric Power Group Corporation, Jiangsu Province Investment Corporation, Shanxi Energy Enterprise (Group) Company, Jiangsu Provincial Power Company ("Jiangsu Power") and the Company to establish Yangcheng International Power Generating Company Limited ("Yangcheng Power") is incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10.3 Assignment and Assumption dated as of December 29, 1993 between AES and certain subsidiaries of AES and the Company is incorporated herein by reference to Exhibit 10.11 to the Registration Statement on Form S-1 (Registration No. 33-73668). 10.4 AES China Generating Co. Ltd. Incentive Stock Option Plan, as amended March 27, 1995, is incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995. 10.5 Cooperative Joint Venture Contract for the Establishment of Sichuan Fuling Aixi Power Company Limited dated February 9, 1995 between Sichuan Fuling Banxi Colliery and AES Tian Fu Power Company Limited is incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1994. 10.6 Joint Venture Contract to Establish Xiangci-AES Hydro Power Company Ltd. dated July 21, 1994 between China Hunan Cili Power Company and the Company is incorporated herein by reference to Exhibit 10.19 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1994. 10.7 Power Purchase Contract dated as of July 21, 1994 between China Hunan Cili Electric Power Company and Xiangci-AES Hydro Power Company Ltd. (effectiveness certified on September 9, 1994) is incorporated herein by reference to Exhibit 10.20 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1994. 10.8 Cooperative Joint Venture Contract for the establishment of Yangchun Fuyang Diesel Engine Power Company Ltd. dated December 4, 1994 among Yangchun Municipal Power Supply Company, Shenzhen Futian Gas Turbine Power Company Ltd. and ABC Yangchun Company Limited is incorporated herein by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995. 10.9 Chengbao (Responsibility) Management Contract for Yangchun Fuyang Diesel Engine Power Company Ltd. dated December 31, 1994 between Yangchun Fuyang Diesel Engine Power Company Ltd. and Yangchun Municipal Power Supply Company and Supplemental Contract dated March 6, 1995 are incorporated herein by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995. 10.10 Power Purchase Contract dated May 24, 1995 between Wuxi County Sandianban and Wuxi-AES-CAREC Gas Turbine Power Company Limited is incorporated herein by reference to Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 10.11 Cooperative Joint Venture Contract for the establishment of Wuxi-AES-Zhonghang Power Company Ltd. dated May 4, 1995 among Wuxi Power Industry Company, China National Aero-engine Corporation and the Company is incorporated herein by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 10.12 Cooperative Joint Venture Contract for the establishment of Wuxi-AES-CAREC Gas Turbine Power Company Ltd. dated May 4, 1995 among Wuxi Power Industry Company, China National Aero-engine Corporation and the Company is incorporated herein by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995. 10.13* Power Purchase Contract dated December 11, 1995 among Power Supply Company of the Fuling Prefecture of Sichuan Province, Sichuan Fuling Grid Management Department and Sichuan Fuling Aixi Power Company Limited is incorporated herein by reference to Exhibit 10.21 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1995. 10.14 Addendum Number One of Cooperative Joint Venture Contract to Establish Sichuan Fuling Aixi Power Company Limited dated July 11, 1995 between Sichuan Fuling Banxi Colliery and AES Tian Fu Power Company Limited is incorporated herein by reference to Exhibit 10.22 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1995. 10.15 Addendum Number Two of Cooperative Joint Venture Contract to Establish Sichuan Fuling Aixi Power Company Limited dated August 29, 1995 between Sichuan Fuling Banxi Colliery and AES Tian Fu Power Company Limited is incorporated herein by reference to Exhibit 10.23 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1995. 10.16* Construction and Term Loan Agreement dated December 21, 1995 between AES Tian Fu Power Company (L) Ltd. and Sichuan Fuling Aixi Power Generating Company Limited is incorporated herein by reference to Exhibit 10.24 to the Annual Report on Form 10-K of the Company for the fiscal year ended November 30, 1995. 10.17* Cooperative Joint Venture Contract to Establish Jiaozuo Wan Fang Power Company Limited dated March 27, 1996 between Jiaozuo Power Partners, L.P. and Jiaozuo Aluminum Mill is incorporated herein by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.18* Shareholder Loan Contract dated April 26, 1996 between Jiaozuo Wan Fang Power Company Limited and Jiaozuo Aluminum Mill is incorporated herein by reference to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.19* Shareholder Loan Contract dated April 26, 1996 between Jiaozuo Wan Fang Power Company Limited and AES China Power Holding Co. (L), Ltd. is incorporated herein by reference to Exhibit 10.28 to Amendment No. 1 on Form 10-Q/A to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.20* Power Purchase and Sale Contract dated April 26, 1996 between Jiaozuo Wan Fang Power Company Limited and Jiaozuo Aluminum Mill is incorporated herein by reference to Exhibit 10.29 to Amendment No. 1 on Form 10-Q/A to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.21* Power Purchase and Sale Contract dated April 25, 1996 between Jiaozuo Wan Fang Power Company Limited and Henan Electric Power Corporation is incorporated herein by reference to Exhibit 10.30 to Amendment No. 1 on Form 10-Q/A to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.22 Assignment and Assumption Contract dated April 26, 1996 between Jiaozuo Wan Fang Power Company Limited and Jiaozuo Aluminum Mill is incorporated herein by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996. 10.23 Equity Joint Venture Contract dated February 12, 1996 among China Power International Holdings Limited, AES China Holding Company (L) Ltd., Anhui Liyuan Electric Power Development Company and Wuhu Energy Development Company is incorporated herein by reference to Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.24* Operation & Offtake Contract dated July 5, 1996 between Wuhu Shaoda Electric Power Development Company Limited and Anhui Provincial Electric Power Corporation is incorporated herein by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.25 Undertaking and Subordination Deed dated June 26, 1996 among AES China Holding Company (L) Limited, Anhui Liyuan Electric Power Development Company Limited, China Power International Holding Limited, Wuhu Energy Development Company, Wuhu Shaoda Electric Power Development Company Limited and CCIC Finance Limited is incorporated herein by reference to Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.26 Junior Subordination Agreement among China Power International Holding Limited, AES China Holding Company (L) Limited, Anhui Liyuan Electric Power Development Company Limited, Wuhu Energy Development Company and Wuhu Shaoda Electric Power Development Company Limited is incorporated herein by reference to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.27 Subordinated Insurance Assignment between Wuhu Shaoda Electric Power Development Company Limited and AES China Holdings Company (L) Limited is incorporated herein by reference to Exhibit 10.36 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.28 Subordinated Borrower Charge Over Accounts between Wuhu Shaoda Electric Power Development Company Limited and AES China Holdings Company (L) Limited is incorporated herein by reference to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.29 Subordinated Project Contracts Assignment between Wuhu Shaoda Electric Power Development Company Limited and AES China Holdings Company (L) Limited is incorporated herein by reference to Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.30 Subordinated Mortgage Contract between Wuhu Shaoda Electric Power Development Company Limited and AES China Holdings Company (L) Limited is incorporated herein by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996. 10.31* Cooperative Joint Venture Contract dated March 18, 1996 by and among Anhui Liyuan Electric Power Development Company Ltd., Hefei Municipal Construction and Investment Company and AES Anhui Power Company Ltd. establishing Anhui Liyuan-AES Power Company Ltd. is incorporated herein by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.32* AES Loan Contract by and between Anhui Liyuan-AES Power Company Limited and AES Chigen Company (L), Ltd. is incorporated herein by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.33* Cooperative Joint Venture Contract dated March 18, 1996 by and among Anhui Liyuan Electric Power Development Company Ltd., Hefei Municipal Construction and Investment Company and AES Anhui Power Company Ltd. establishing Hefei Zhongli Energy Company Ltd. is incorporated herein by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.34 AES Loan Contract by and between Hefei Zhongli Energy Company Limited and AES Chigen Company (L), Ltd. is incorporated herein by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.35 Operation and Offtake Contract between Anhui Provincial Electric Power Corporation, Anhui Liyuan-AES Power Company Ltd. and Hefei Zhongli Energy Company Ltd. is incorporated herein by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.36* Cooperative Joint Venture Contract by and among Chengdu Huaxi Electric Power (Group) Shareholding Company Ltd., China National Aero-engine Corporation and the Company is incorporated herein by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.37* Support Contract dated as of August 12, 1996 between AES Tian Fu Power Company (L) Ltd. and Chengdu AES KAIHUA Gas Turbine Power Co., Ltd. is incorporated herein by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.38 Power Purchase Contract between Chengdu Huaxi Electric Power (Group) Shareholding Company Ltd. and Chengdu AES KAIHUA Gas Turbine Power Co., Ltd. is incorporated herein by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.39* Agreement of Amendment to the Cooperative Joint Venture Contract and Articles of Association of Chengdu AES KAIHUA Gas Turbine Power Co., Ltd. is incorporated herein by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.40* On-lending Agreement on Using US Export Credit by Yangcheng International Power Company Ltd. by and between Yangcheng Power, as the borrower, and Shanxi Branch of China Construction Bank, as the lender is incorporated herein by reference to Exhibit 10.49 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10.41* On-lending Agreement on Using German Export Credit by Yangcheng International Power Company Ltd. (the "German Export Loan Contract") by and between Yangcheng Power, as the borrower, and Shanxi Branch of China Construction Bank, as the lender is incorporated herein by reference to Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10.42* On-Lending Agreement by and between Shanxi Branch of the China Construction Bank, as the lender, and Yangcheng Power, as the borrower is incorporated herein by reference to Exhibit 10.51 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10.43* RMB Fund Loan Contract of State Development Bank by and between the State Development Bank, as the lender, and Yangcheng Power, as the borrower is incorporated herein by reference to Exhibit 10.52 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 10.44* Power Purchase Contract between Yangcheng Power and Jiangsu Power is incorporated herein by reference to Exhibit 10.53 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997. 25.1 Power of Attorney. 27.1 Financial Data Schedule. 99.1 Statement Re: Computation of Fixed Charge Coverage Ratio 99.2 "Business-Narrative Description of Business" on pages 2-19 of the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1996, which is incorporated by reference in Item 1 hereof. - -------- * The Company has requested confidential treatment for certain identified information in this exhibit. In lieu of filing certain instruments with respect to long-term debt of the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K. No reports on Forms 8-K have been filed during the last quarter of the Company's fiscal year ended November 30, 1997. 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: February 27, 1998 AES CHINA GENERATING CO. LTD. (Company) By: /s/ Paul T. Hanrahan -------------------------- Paul T. Hanrahan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date - ---------------------------- -------------------------- ------------------- /s/ Roger W. Sant* - ---------------------------- Chairman of the Board and February 27, 1998 Roger W. Sant Director /s/ Dennis W. Bakke* - ---------------------------- Vice Chairman and February 27, 1998 Dennis W. Bakke Director - ---------------------------- Vice Chairman and Robert F. Hemphill, Jr. Director /s/ Paul T. Hanrahan.* - ---------------------------- President and February 27, 1998 Paul T. Hanrahan Chief Executive Officer /s/ Kitty, Fung Kin Yee - ---------------------------- Group Finance Director February 27, 1998 Kitty, Fung Kin Yee (Principal Financial and Accounting Officer) */s/ Jeffery A. Safford - ---------------------------- Jeffery A. Safford Attorney-in-Fact REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDER OF AES CHINA GENERATING CO. LTD. We have audited the accompanying consolidated balance sheets of AES China Generating Co. Ltd. and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended November 30, 1997. Our audits also included the financial statement schedule listed at Item 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 AES China Generating Co. Ltd. and subsidiaries as of November 30, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended November 30, 1997 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE TOUCHE TOHMATSU Hong Kong February 27, 1998 AES CHINA GENERATING CO. LTD. CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended November 30, ------------------------------- 1997 1996 1995 ---- ---- ---- (in thousands, except per share amounts) Revenues: Electricity sales............... $18,703 $8,812 $702 Construction delay fee.......... - 400 680 ------- ------- ------- Total revenues.............. 18,703 9,212 1,382 Operating costs and expenses: Costs of sales.................. 13,480 5,360 635 Development, selling, general and administrative expenses... 3,020 3,507 9,259 ------- ------- ------- Total operating costs and expenses.................. 16,500 8,867 9,894 ------- ------- ------- Operating income / (loss)......... 2,203 345 (8,512) Other income / (expense): Interest income................. 13,050 6,360 10,529 Interest expense................ (7,397) (1,120) - Equity in earnings of affiliates 1,838 663 206 Amalgamation cost .............. (418) (1,444) - ------- ------- ------- Income before income taxes and minority interest................ 9,276 4,804 2,223 Income taxes.................... (398) (387) - Minority interest............... 592 (277) (85) ------- ------- ------- Net income........................ $9,470 $4,140 $2,138 ------- ------- ------- Net income per share.............. $789.17 $345.00 $178.17 ------- ------- ------- Weighted average number of shares. 12 12 12 ------- ------- ------- See notes to consolidated financial statements. F-2 AES CHINA GENERATING CO. LTD. CONSOLIDATED BALANCE SHEETS As of November 30, 1997 1996 ---- ---- (in thousands) ASSETS Current Assets: Cash and cash equivalents........................ $58,576 $56,200 Debt service reserves - held-to-maturity......... 18,225 - Investments - held-to-maturity................... 35,324 8,995 Accounts receivable - The AES Corporation........ 363 - Accounts receivable from related parties......... 10,271 6,809 Accounts receivable - trade...................... 2,498 - Note receivable - current portion................ 1,427 - Interest receivable.............................. 1,962 286 Inventory........................................ 2,496 765 Prepaid expenses and other current assets........ 2,145 874 ------- ------- Total current assets......................... 133,287 73,929 Property, Plant and Equipment: Electric and steam generating facilities......... 194,159 64,185 Equipment, furniture and leasehold improvements.. 3,446 2,646 Accumulated depreciation and amortization........ (8,514) (3,143) Construction in progress......................... 82,778 98,912 ------- ------- Total property, plant and equipment, net..... 271,869 162,600 Other Assets: Deferred finance costs, net...................... 5,526 407 Project development costs........................ - 3,352 Investments in and advances to affiliates........ 79,887 33,202 Note receivable.................................. 8,476 6,626 Investment - available-for-sale.................. 3,002 - Debt service reserves - held-to-maturity......... 9,113 - Deposits and other assets........................ 1,638 582 ------- ------- Total other assets........................... 107,642 44,169 ------- ------- TOTAL........................................ $512,798 $280,698 ------- ------- See notes to consolidated financial statements. F-3 AES CHINA GENERATING CO. LTD. CONSOLIDATED BALANCE SHEETS (Continued) As of November 30, 1997 1996 ---- ---- (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - The AES Corporation............ $ - $1,185 Accounts payable.................................. 4,500 2,199 Accounts payable for construction................. 16,437 - Accrued liabilities............................... 2,892 2,618 Accrued interest for notes payable................ 8,264 - Accrued liabilities for construction.............. 8,804 4,259 Loans from minority shareholders - current portion 8,519 1,365 Bank loans........................................ 2,993 2,861 ------- ------- Total current liabilities..................... 52,409 14,487 Long-Term Liabilities: Notes payable, net................................ 179,844 - Loans from minority shareholders.................. 30,962 34,933 Bank loan......................................... 7,000 - Deferred income taxes............................. 785 387 ------- ------- Total long-term liabilities................... 218,591 35,320 Minority Interest................................... 43,493 40,536 Commitments and contingencies Shareholders' Equity: Common stock - par value $1 per share (authorized and issued shares: 1997 - 12,000; 1996 - Nil)...................... 12 - Class A common stock - par value $0.01 per share, (50,000,000 shares authorized; issued and outstanding: 1997 - Nil; 1996 - 8,134,100)...... - 81 Class B common stock - par value $0.01 per share, (50,000,000 shares authorized; issued and outstanding: 1997 - Nil; 1996 - 7,500,000)...... - 75 Additional paid-in capital........................ 184,566 183,980 Retained earnings................................. 13,200 5,907 Cumulative translation adjustment................. 527 312 ------- ------- Total shareholders' equity.................... 198,305 190,355 ------- ------- TOTAL......................................... $512,798 $280,698 ------- ------- See notes to consolidated financial statements. F-4 AES CHINA GENERATING CO. LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class A Class B Common Stock Common Stock Common Stock Shares Amount Shares Amount Shares Amount (in thousands, except share amounts) Balance at January 1, 1995................ - $ - 10,216,000 $ 102 7,500,000 $ 75 Purchase of treasury stock................ - - - - - - Foreign currency translation.............. - - - - - - Net income for the year................... - - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Balance at November 30, 1995.............. - - 10,216,000 102 7,500,000 75 Purchase of treasury stock................ - - - - - - Retirement of treasury stock ............. - - (2,081,900) (21) - - Foreign currency translation ............. - - - - - - Net income for the year .................. - - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Balance at November 30, 1996 ............. - - 8,134,100 81 7,500,000 75 Issuance of Class A common stock under benefit plans and exercise of stock options..... - - 37,168 1 - - Cancellation of Class A and B common stock upon effectiveness of the amalgamation.. - - (8,171,268) (82) (7,500,000) (75) Issuance of Common stock upon effectiveness of the amalgamation..................... 12,000 12 - - - - Foreign currency translation.............. - - - - - - Net income for the year .................. - - - - - - Dividends................................. - - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Balance at November 30, 1997.............. 12,000 $ 12 - $ - - $ - ---------- ---------- ---------- ---------- ---------- ----------
See notes to consolidated financial statements. F-5 AES CHINA GENERATING CO. LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - continued
Retained Additional Earnings Cumulative Paid-In (Accumulated Translation Treasury Stock Shareholders' Capital Deficit) Adjustment Shares Amount Equity (in thousands, except share amounts) $ 201,762 $ (371) $ 16 - $ - $ 201,584 - - - (1,912,600) (16,371) (16,371) - - 234 - - 234 - 2,138 - - - 2,138 --------- --------- --------- --------- --------- --------- 201,762 1,767 250 (1,912,600) (16,371) 187,585 - - - (169,300) (1,432) (1,432) (17,782) - - 2,081,900 17,803 - - - 62 - - 62 - 4,140 - - - 4,140 --------- --------- --------- --------- --------- --------- 183,980 5,907 312 - - 190,355 441 - - - - 442 157 - - - - - (12) - - - - - - - 215 - - 215 - 9,470 - - - 9,470 - (2,177) - - - (2,177) --------- --------- --------- --------- --------- --------- $ 184,566 $ 13,200 $ 527 - $ - $ 198,305 --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements. F-6 AES CHINA GENERATING CO. LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended November 30, 1997 1996 1995 ---- ---- ---- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities (note 13)............... (8,133) (1,507) (812) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of notes........................... 174,100 - - Contributions and loans from minority shareholders............ 3,435 8,497 13,535 Repayment of loans from minority shareholders................. (1,354) (270) - Proceeds from bank loans...................................... 8,812 2,861 1,000 Repayment of bank loans....................................... (1,680) (1,000) - Proceeds from issuance of Class A common stock upon exercise of stock options.............................. 224 - - Repurchase of Class A common stock............................ - (11,443) (6,360) ------- ------- ------- Net cash provided by / (used in) financing activities.............................................. 183,537 (1,355) 8,175 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and construction in progress............ (77,978) (69,205) (29,544) Purchase of investments - held-to-maturity.................... (48,945) (29,176) (154,630) Purchase of investments - available-for-sale.................. (14,361) (16,797) (14,557) Proceeds from the maturity of investments - held- to-maturity................................................. 24,569 63,656 219,086 Proceeds from the sales of investments - available- for-sale.................................................... 11,541 16,969 14,609 Investments in and advances to affiliates..................... (36,230) (22,990) (2,360) Recoupment of investment in affiliate......................... 253 216 - Project development costs and other assets.................... (1,313) (2,669) (2,269) Deposit to debt service reserves.............................. (36,248) - - Withdrawal from debt service reserves......................... 8,961 - - Investment in note receivable................................. (3,277) (6,626) (7,500) ------- ------- ------- Net cash (used in) / provided by investing activities.............................................. (173,028) (66,622) 22,835 ------- ------- ------- Increase / (decrease) in cash and cash equivalents............................................. 2,376 (69,484) 30,198 CASH AND CASH EQUIVALENTS,...................................... Beginning of year............................................. 56,200 125,684 95,486 ------- ------- ------- End of year................................................... $ 58,576 $ 56,200 $125,684 ------- ------- -------
F-7 AES CHINA GENERATING CO. LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS - continued Supplemental disclosure of non cash investing and financing activities: In 1997, the Company's joint venture partner in Jiaozuo Wan Fang contributed shareholder loans of $0.6 million in the form of construction in progress. In April 1996, the Company's joint venture partner in Jiaozuo Wan Fang contributed capital and shareholder loans of $38.4 million in the form of land use rights, construction in progress, equipment and receivables, net of accounts payable. In 1995, the Company's joint venture partners in Wuxi-AES-CAREC and Wuxi-AES-Zhonghang contributed capital in the form of work-in-progress and equipment of $5.3 million. At November 30, 1995, the Company had recorded the purchase of investments and the purchase of treasury stock for $3.0 million and $10.0 million, respectively. Payments for such purchases were made subsequent to year-end. See notes to consolidated financial statements. F-8 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AES China Generating Co. Ltd. ("AES Chigen" or the "Company"), a Bermuda company, was incorporated on December 7, 1993, to develop, acquire, finance, construct, own and manage electric power generation facilities in the People's Republic of China (the "PRC"). On May 8, 1997, the amalgamation of a wholly-owned subsidiary of The AES Corporation ("AES") with AES Chigen (the "Amalgamation") was completed and the Company became a wholly-owned subsidiary of AES. Prior to the Amalgamation, the Company was a controlled affiliate of AES, which owned approximately 48% of the outstanding common stock of the Company. Accounting Principles - The Company has prepared its financial statements on the basis of United States generally accepted accounting principles. Principles of Consolidation - The consolidated financial statements of the Company include the accounts of AES Chigen and its subsidiaries. Investments in 50% or less owned affiliates over which the Company exercises significant influence, but not control, are accounted for by the equity method. Intercompany transactions and balances have been eliminated. In the second quarter of 1996, a subsidiary of the Company acquired a controlling interest in Jiaozuo Wan Fang Power Company Limited ("Jiaozuo Wan Fang") for cash which approximated the fair value of net tangible assets acquired. The acquisition was accounted for as a purchase. The Company's joint venture partners in certain 50% or less owned affiliates have guaranteed a minimum return on the Company's investment. The Company recognizes such guaranteed return in excess of its equity in the earnings of the affiliates to the extent it believes it is probable that the guaranteed return will be realized. 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 to be cash and cash equivalents. Cash equivalents exclude amounts held as debt service reserves. Cash and cash equivalents consists mainly of short-term commercial paper and US Treasury bills. Investments - Debt and equity securities which the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Debt and equity securities which might be sold prior to maturity are classified as available-for-sale and carried at approximate fair value. Material unrealized gains and losses, if any, related to available-for-sale investments, net of applicable taxes, are reflected in a separate component of shareholders' equity. The Company determines the appropriate classification of securities at the time of purchase and evaluates such classification as of each balance sheet date. Transactions in investment securities are accounted for on the trade date. F-9 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Inventory - Inventory, valued at lower of cost (principally weighted average method) or market value, consists of coal, oil, raw materials, spare parts and supplies. 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 25 years. Maintenance and repairs are charged to expense as incurred. 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 related assets or group of assets are ready for their intended use. Capitalized interest during construction was $20.4 million in 1997, $3.2 million in 1996 and $0.3 million in 1995. Deferred finance 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 $0.6 million in 1997. Project Development Costs - Project development costs generally represent costs incurred after achieving certain project related milestones prior to the acquisition of generating assets or the start of physical construction. These costs represent amounts incurred for professional services, salaries, permits, options and other related costs. These costs are transferred to construction in progress during the construction phase and to electric and steam generating facilities after commencement of operations. Revenue Recognition - Revenues from the sale of electricity 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 48%, 23%, 13%, 10% and 6% of electricity sales revenues in 1997. Two customers accounted for 87% and 13% of electricity sales revenues in 1996 and one customer accounted for 100% of electricity sales revenues in 1995. The failure of any customer to fulfill its contractual obligations could have a substantial negative impact on AES Chigen's revenues. Fees for construction delay paid by Cili Power Company, the contractor of Xiangci-AES Hydro Power Company Ltd. ("Xiangci-AES"), to compensate the Company for lost generation in respect of an expansion facility, are recognized as revenue when earned. F-10 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Income Taxes - Income taxes are provided based on an asset and liability approach for financial accounting and reporting of income taxes. Deferred income tax liabilities or benefits are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion of, or all of, a deferred tax asset will not be realized. Net Income Per Share - Net income per share for each of the three years ended November 30, 1997 was computed based on the 12,000 shares outstanding after the Amalgamation. Foreign Currency Translation - The Company's financial reports are prepared using the United States dollar as the reporting currency. For subsidiaries whose functional currency is deemed to be other than the United States dollar, asset and liability accounts are translated at period-end rates of exchange and revenue and expenses are translated at average exchange rates prevailing during the year. Translation adjustments are included as a separate component of shareholders' equity. The functional currency of all the Company's current subsidiaries and affiliates is the Renminbi Yuan, the lawful currency of the PRC ("Renminbi"). 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 1997 presentation. 2. INVESTMENTS AND DEBT SERVICE RESERVES At November 30, 1997 and 1996, the Company's investments and debt service reserves were classified as either held-to-maturity or available-for-sale. The amortized cost and estimated fair value of the investments and debt service reserves at November 30, 1997 and 1996 classified as held-to-maturity and available-for-sale were approximately the same. All investments in debt securities had maturity dates within one year from the balance sheet date except for $3 million of available-for-sale investments which mature within three years. The investments were invested as follows: As of November 30, 1997 1996 ---- ---- (in thousands) Held-to-maturity US Treasury and government agency securities.. $ 37,449 $ 1,000 Foreign certificates of deposit............... 8,000 - Commercial paper - discounted................. 13,313 7,995 Corporate bonds............................... 3,900 - ------- ------- $ 62,662 $ 8,995 ------- ------- Available-for-sale US Treasury and government agency securities.. $ 3,002 $ - ------- ------- F-11 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 3. ACCOUNTS RECEIVABLE - TRADE AND FROM RELATED PARTIES During 1997, some of the power purchasers failed to purchase the required minimum amount of electricity under the respective power purchase contracts and, accordingly, are required to compensate the Company's joint ventures for the shortfall. The power purchasers have attempted to negotiate the payment of the shortfall or have disagreed over the generation cost to be used for the calculation of the minimum take compensation. The joint ventures are in negotiation with the power purchasers. The total minimum take compensation for 1997 for the projects after adjustment for the Chinese partners' interests in the joint ventures was approximately $4.5 million of which $2.8 million was outstanding as of January 31, 1998. The Company has recorded a provision of $0.7 million (net of the Chinese partners' interests) to reduce the receivables accrued for the balance of the minimum take compensation as of November 30, 1997. For two of the joint ventures the power purchaser is also the operator of the project and is entitled to deduct the approved generation cost from the electricity fee to the joint venture. In 1997, the relevant pricing bureau approved only the tariff but not the generation cost assumed for purposes of setting the tariff. The joint ventures and the power purchaser have disagreed over the determination of the generation cost. As of November 30, 1997, the aggregate amount of the generation cost in dispute, after adjustment for the Chinese partners' interests in the joint ventures, was approximately $0.5 million. The Company is vigorously pursuing its rights under the contracts and believes the final resolution of these issues will not materially affect the Company's financial position or results of operations. F-12 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES As of November 30, 1997 and 1996, the Company's investments in and advances to affiliates included a 25% ownership interest in Yangchun Fuyang Diesel Power Co. Ltd. ("Yangchun Fuyang") as well as a 25% and 35% ownership interest in, and loans to, Wuhu Shaoda Electric Power Development Company Ltd. ("Wuhu Shaoda") and Chengdu AES-Kaihua Gas Turbine Power Co. Ltd. ("Chengdu AES-Kaihua"), respectively. As of November 30, 1997, the Company's investments in and advances to affiliates also included a 25% ownership interest in Yangcheng International Power Generating Company Limited ("Yangcheng International Power"). Summarized financial information for equity method affiliates on a combined 100% basis is as follows (in thousands): 1997 1996 ---- ---- Sales........................... $ 37,434 $ 4,820 Operating income................ 12,354 1,672 Net income...................... 5,350 324 Current assets.................. 74,341 19,775 Non-current assets.............. 302,754 111,092 Current liabilities............. 8,264 13,291 Non-current liabilities......... 230,934 75,329 Stockholders' equity............ 137,897 42,247 The amount of consolidated retained earnings that represent undistributed earnings of affiliates was $1.6 million and $0.2 million for the years ended November 30, 1997 and 1996, respectively. F-13 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 5. NOTE RECEIVABLE As of November 30, 1997 and 1996, Jiaozuo Wan Fang had provided loans in the aggregate amount of $9.9 million and $6.6 million through Zhongyuan Trust and Investment Company to Henan Electric Power Corporation for the construction of interconnection and transmission facilities. The loans are unsecured and bear interest at 15.3% per annum. The interest is payable in arrears and the principal and interest are payable in 15 semi-annual installments, beginning in December 1997. 6. NOTES PAYABLE As of November 30, 1997, notes payable consisted of $180 million principal amount Notes due on December 15, 2006 (the "2006 Notes"), net of unamortized discount on issuance of the notes. The 2006 Notes bear interest at the rate of 10-1/8% per annum. Interest is payable on June 15 and December 15 of each year, commencing on June 15, 1997. The 2006 Notes rank at least pari passu in right of payment with all existing and future senior unsecured indebtedness of the Company. The holders of the 2006 Notes have a claim to amounts on deposit in debt service and interim reserve accounts that is prior to the claims of other creditors of the Company. The 2006 Notes are redeemable at the Company's option, in whole or in part, beginning December 15, 2001 at redemption prices in excess of par and are redeemable at par beginning December 15, 2003. The terms of the 2006 Notes contain certain covenants and restrictions. The most restrictive of these covenants include a requirement to maintain certain reserves and limitations on the payment of dividends, redemption of equity interests, redemption of subordinated indebtedness, making of certain investments, incurrence of certain indebtedness, certain assets sales and the incurrence of indebtedness to refinance existing indebtedness, among other things. F-14 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 7. LOANS FROM MINORITY SHAREHOLDERS As of November 30, 1997 and 1996, loans from minority shareholders included debt of $9.3 million and $10.6 million, respectively, provided by the Company's joint venture partners, Xishan City Power Industry Company and China National Aero-Engine Corporation ("CAREC") to Wuxi-AES-CAREC Gas Turbine Power Co. Ltd. ("Wuxi-AES-CAREC") and Wuxi-AES-Zhonghang Power Co. Ltd. ("Wuxi-AES-Zhonghang"). The loans are secured by the land use rights and all assets of the joint venture companies and bear interest at 13% per annum through the end of 1995 and 15% per annum thereafter. Principal and interest are repayable in 20 semi-annual installments beginning July 1, 1996. The balance of the loans consisted of a loan from Jiaozuo Aluminum Mill to Jiaozuo Wan Fang. This loan is unsecured and bears interest at 15.3% per annum plus a service fee to the lender of 3% per annum. The loan is divided into two tranches in equal amounts. Interest on the first tranche of the loan is payable quarterly in arrears from January 1997. Interest on the second tranche of the loan is payable quarterly in arrears following commercial operation of unit two. Principal of the first tranche is repayable in 27 quarterly installments beginning January 1, 1998 and the principal of the second tranche is payable in 25 quarterly installments beginning July 1, 1998. Scheduled maturities of loans from minority shareholders as of November 30, 1997 are as follows (in thousands): 1998.......................................... $ 8,519 1999.......................................... 5,188 2000.......................................... 5,188 2001.......................................... 5,188 2002.......................................... 5,188 Thereafter.................................... 10,210 ------- $ 39,481 ------- F-15 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 8. SHORT-TERM BANK LOANS At November 30, 1996, short-term bank loans totaling $0.4 million to Xiangci-AES were outstanding. The loans are secured by the buildings of the joint venture and bear interest from 10.7% to 14.5% per annum. In 1997, $0.2 million of the bank loans were renewed for another year with interest at 10.593% per annum. In addition, at November 30, 1996, a short-term bank loan of $1.5 million to Anhui Liyuan-AES Power Company Ltd. ("Anhui Liyuan-AES") was outstanding. The loan was unsecured, bore interest at the prevailing lending rates in the PRC which ranged at November 30, 1996 from 6.8125% to 7.49% per annum and was repaid in 1997. Short-term bank loans at November 30, 1996 also included a $1 million bank loan to Wuxi-AES-CAREC. The loan is guaranteed by Xishan City Power Fuel Company. In 1997, this short-term bank loan was renewed for another year with average interest at 7.7% per annum. At November 30, 1997, there were other short-term bank loans totalling $1.8 million to Wuxi-AES-CAREC outstanding. The loans are unsecured, bear interest at 11.088% per annum, are repayable within one year and are guaranteed by Xishan City Power Fuel Company and Xishan City Electricity Management Office. The accounts payable for construction are interest bearing. The interest rate at November 30, 1997 was 7.25% per annum. 9. LONG-TERM BANK LOAN As of November 30, 1997, a long-term bank loan of $7.0 million to Anhui Liyuan-AES Power Company Ltd., a joint venture of the Company, was outstanding. The loan is unsecured, bears interest at the prevailing lending rates in the PRC and is guaranteed by Anhui Liyuan Power Development Company. The interest rate for year ended November 30, 1997 was approximately 8.25% per annum. Scheduled maturities of the bank loan as November 30, 1997 are as follows (in thousands): 1999.......................................... $ 2,000 2000.......................................... 2,000 2001.......................................... 3,000 ------- $ 7,000 ------- F-16 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 10. INCOME TAXES The Company's PRC joint ventures are entitled to a two-year tax exemption from state and local income taxes commencing from the first profitable year of operations, after taking into account any losses brought forward from prior years, followed by a 50% reduction in tax rates for the next three years ("tax holidays"). No PRC income tax was incurred during 1997, 1996 and 1995 as the joint ventures were either within the exemption period of the tax holidays or had not yet commenced commercial operations. As of November 30, 1997 and 1996, a deferred tax liability amounting to approximately $0.8 million and $0.4 million, respectively, was provided for, mainly for timing differences arising from deferred expenses and accelerated depreciation of property, plant and equipment under the PRC tax rules. 11. COMMITMENTS AND CONTINGENCIES The Company leases premises under various operating leases which contain renewal options and escalation clauses. Rental expense under operating leases was $0.7 million, $0.6 million and $0.6 million for the years ended November 30, 1997, 1996 and 1995, respectively. Subsidiaries of the Company entered into various long-term contracts for the purchase of fuel subject to termination only in certain limited circumstances. These contracts have remaining terms of 13 years to 26 years. In April 1996, Wuhu Shaoda entered into a $65.0 million term loan facility (the "Term Loan") with a syndicate of lenders to finance the construction of the power plant. The Company has guaranteed to the lenders of the Term Loan certain obligations of its wholly owned subsidiary under the joint venture contract, including an obligation to fund an $18.0 million subordinated loan and certain other liabilities which, in the aggregate, do not exceed $6.0 million. Wuhu Shaoda had entered into a lease contract with Wuhu Energy Development Company, one of the PRC partners in the joint venture, for land use rights of the site over its entire term of operations at an annual lease fee of $0.2 million. As of November 30, 1997, total commitment under the land use rights lease contract amounted to $5.1 million. As at November 30, 1997, the Company was obligated under operating leases requiring minimum rentals as follows (in thousands): Year ending November 30, 1998...................................... $ 777 1999...................................... 603 2000...................................... 126 ------- Total $ 1,506 ------- F-17 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 11. COMMITMENTS AND CONTINGENCIES - continued Since the commencement of operations, the Company has entered into commitments to invest a total of approximately $357.8 million in the form of equity contributions and loans to its joint ventures. As of November 30, 1997, the total outstanding commitment to its joint ventures was $129.5 million. Pursuant to the Payment and Milestone Schedule agreed between Sichuan Fuling Aixi Power Company Ltd. ("Sichuan Fuling") and Shanghai Electric Corporation ("Shanghai Electric"), a portion of the price of the Engineering, Procurement and Construction Services Contract (the "EPC Contract") for Sichuan Fuling can be deferred. Interest shall accrue on the amount of the deferred payments as set forth in the Payment and Milestone Schedule. AES Chigen guaranteed to pay Shanghai Electric up to $19.2 million, representing 60% of the price of the EPC Contract, plus the interest accrued thereon. As of November 30, 1997, the amount of the deferred payment with interest accrued thereon was $16.4 million. 12. SHAREHOLDERS' EQUITY Common Stock Since May 8, 1997, the effective date of the Amalgamation, the capital of the Company has consisted of 12,000 authorized, issued and outstanding shares of Common Stock, par value $1.00 per share. Class A Common Stock On March 2, 1994, the Company issued 10,000,000 shares of Class A common stock in a public offering. On April 4, 1994, the underwriters for the offering exercised a portion of the over-allotment option granted to them in connection with the initial public offering and the Company sold an additional 216,000 shares of Class A common stock. In connection with the offering, the Company registered its Class A common stock with the United States Securities and Exchange Commission and its shares were approved for quotation on the National Association of Securities Dealers Automated Quotation National Market System. The net proceeds of the offering amounted to $151.9 million. Upon the effectiveness of the Amalgamation on May 8, 1997, each issued and outstanding share of Class A common stock of the Company was canceled in consideration of the right to receive 0.29 of a share of common stock of AES and cash in lieu of any fractional shares (the "Consideration"). All such shares of Class A common stock are no longer outstanding and were automatically canceled and retired and ceased to exist and each holder of a certificate representing any such shares of Class A common stock ceased to have any rights with respect thereto, except the right to receive the Consideration, without interest. F-18 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 12. SHAREHOLDERS' EQUITY - continued Class B Common Stock On December 29, 1993, AES, pursuant to a Stock Purchase and Shareholder's Agreement (the "Stock Purchase Agreement") between AES and the Company, purchased 7,500,000 shares of Class B common stock. The net proceeds of the sale amounted to $50.0 million. Upon the effectiveness of the Amalgamation on May 8, 1997, each share of the Class B common stock was automatically canceled and ceased to exist and no consideration was delivered in exchange therefor. Treasury Stock On April 4, 1995, the Company announced a plan to repurchase up to an additional 2,042,000 shares of its Class A common stock. Prior to the announcement of the plan, the Company had purchased 168,000 shares of Class A common stock through unsolicited block transactions. As of November 30, 1995, the Company had repurchased a total of 1,912,600 shares of its Class A common stock. During the year ended November 30, 1996, the Company repurchased a further 169,300 shares of Class A common stock. The aggregate repurchase of shares approximates 20% of the shares of Class A common stock issued and were acquired at an average price of $8.55 per share. As of November 30, 1996, the Company had retired all the shares of treasury stock. Transfer of Funds from Subsidiaries and Affiliates Nearly all of the monetary assets of the Company's subsidiaries and 50% or less owned affiliates are denominated in Renminbi. The conversion of Renminbi into US dollars and the remittance of US dollars abroad require PRC government approvals. At November 30, 1997, the Company's share of the net assets of its subsidiaries in the PRC amounted to $86.7 million. In addition, the ability of Wuhu Shaoda to pay dividends to the Company is subject to certain restrictions under the terms of a bank loan facility which has been entered into by the joint venture. No dividend distributions by the joint venture are permitted if certain debt service coverage ratios are not met. F-19 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 12. SHAREHOLDERS' EQUITY - continued Stock Options In 1994, the Company adopted the AES China Generating Co. Ltd. Incentive Stock Option Plan (the "Option Plan"). In March 1995, the Company's shareholders approved an increase in the total number of shares available for issuance upon exercise of options granted to employees from 875,000 to 2,000,000 shares of Class B common stock and an increase in the maximum number of shares issuable upon exercise of options that can be granted to an individual from 250,000 to 500,000 shares of Class B common stock. Upon the effectiveness of the Amalgamation on May 8, 1997, all outstanding options issued under the Option Plan automatically and without any action on the part of the holders thereof became options for shares of AES common stock. The Option Plan remains in full force and effect. A summary of stock option activity is as follows: Options on Class B common stock Year Ended November 30, ------------------------------- ----------------------- 1997 1996 1995 (in shares) Outstanding at beginning of year... 1,408,560 1,451,059 752,500 Exercised during the year.......... (23,995) - Forfeited during the year.......... (401) (290,388) - Granted during the year (from $8.50 to $16.00) .......... 161,641 247,889 698,559 Conversion to options on AES common stock................. (1,545,805) - - --------- --------- --------- Outstanding - end of year (from $8.50 to $16.00)........... - 1,408,560 1,451,059 --------- --------- --------- Eligible for exercise - end of year. - 379,112 150,500 --------- --------- --------- F-20 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 13. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
Year Ended November 30, 1997 1996 1995 ---- ---- ---- (in thousands) Net income............................................. $9,470 $4,140 $2,138 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization........................ 5,161 2,071 476 Provision for deferred taxes......................... 398 387 - Minority interest.................................... (592) 277 85 Equity in earnings of affiliates..................... (1,838) (663) (206) Dividend from affiliate.............................. 446 626 - Decrease in provision for project development costs.................................. - (2,298) - Loss on sale of property, plant and equipment.......................................... 26 - - Amortization of deferred costs....................... 608 - - Amortization of discount on issuance of notes.............................................. 17 - - Amortization of discount/premium on investments - net.................................. (2,186) (2,038) (3,543) Capitalization of interest on notes payable, net of amortization................................ (13,102) - - Changes in assets and liabilities: Accounts receivable from related parties........... (3,462) (6,346) (422) Interest receivable................................ (1,676) 7 683 Inventory, prepaid expenses and other current assets................................... (8,040) (1,186) (55) Accrued interest income from affiliates............ (2,158) (333) - Deposits........................................... (1,077) 28 (82) Accounts payable and accrued liabilities........... 9,872 3,821 114 ------- ------- ------- Net cash used in operating activities............ (8,133) (1,507) (812) ------- ------- -------
F-21 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 14. RELATED PARTIES AES Chigen has entered into a Project Services Agreement with AES (the "Services Agreement") whereby AES will exclusively provide development, construction management and operations services to the Company. The Services Agreement has an initial term of five years commencing December 1993 with three five-year renewal terms. Management fees under the Services Agreement totaled $0.2 million, $0.3 million and $0.1 million for the years ended November 30, 1997, 1996 and 1995, respectively. As of November 30, 1997 and 1996, accounts receivable from related parties consisted primarily of amounts due from Cili Power Company, for sale of electricity, amounts due from the Xishan City Electricity Management Office, an associated company of the joint venture partner in Wuxi-AES-CAREC, for sale of electricity, and a short-term loan to a Chinese partner in Wuxi-AES-CAREC bearing interest at an average rate of 7.7% per annum during 1997. As of November 30, 1996, accounts receivable from related parties also consisted of amounts due from Cili Power Company for the payment of construction delay fees. As of November 30, 1997, accounts receivable from related parties also included amounts due from Jiaozuo Aluminum Mill for sale of electricity. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of financial instruments, including cash and cash equivalents, debt service reserves, investments, note receivable and short-term bank loans were equal to their approximate fair values as of November 30, 1997 and 1996 because of the relatively short maturities of these investments. As of November 30, 1997 and 1996, the carrying value of loans from minority shareholders and the long-term bank loans approximated fair value determined by the estimated discount rate a prospective seller would pay to a credit-worthy third party to assume the obligation. At November 30, 1997 the fair value of notes payable was $177 million based on quoted market prices. F-22 AES CHINA GENERATING CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 16. SUBSEQUENT EVENTS The Company changed its accounting year end date to December 31, effective for the period ending December 31, 1998. In November 1997, the board of directors of Wuxi-AES-Zhonghang and Wuxi-AES-CAREC passed a resolution that would allow the replacement of the shareholder loans provided by the Company and CAREC with bank loans. The transaction was completed in early January 1998 with three bank loans of $5.6 million, $6.9 million and $3.1 million, respectively. The $5.6 million and $6.9 million bank loans are secured by the electric and steam generating facilities of the joint venture companies and bear interest at LIBOR plus 1.75% per annum. Principal and interest are repayable in 10 semi-annual installments beginning June, 1999. The $3.1 million bank loan is unsecured, bears interest at 9.5% per annum and repayable within one year, and is guaranteed by Xishan City Power Fuel Company. Accordingly, the shareholder loans from the Company and CAREC were fully paid off, leaving a $4.4 million shareholder loan from Xishan City Power Industry Company. In December 1997, Hefei Zhongli Energy Company Limited, a joint venture of the Company, raised a long term bank loan of $7 million. The loan is unsecured, bears interest at the prevailing lending rates in the PRC and is guaranteed by Anhui Liyuan Power Development Company. F-23 SCHEDULE 1 AES CHINA GENERATING CO. LTD. CONDENSED FINANCIAL INFORMATION STATEMENTS OF UNCONSOLIDATED OPERATIONS For the year ended November 30, 1997 1996 1995 ---- ---- ---- (in thousands) Revenues.............................. $ - $ 400 $ 680 Equity in earnings of subsidiaries.... 16,616 3,724 465 ------- ------- ------- Total revenues.................. 16,616 4,124 1,145 ------- ------- ------- Operating costs and expenses: Costs of sales and services......... 2,502 557 524 Development, selling, general and administrative expenses........... 3,077 3,463 8,616 ------- ------- ------- Total operating costs and expenses....................... 5,579 4,020 9,140 ------- ------- ------- Operating income (loss)............... 11,037 104 (7,995) Interest income....................... 3,515 5,480 10,133 Interest expense...................... (4,664) - - Amalgamation cost..................... (418) (1,444) - ------- ------- ------- Income before taxes................... 9,470 4,140 2,138 Income taxes.......................... - - - ------- ------- ------- Net income............................ $ 9,470 $ 4,140 $ 2,138 ------- ------- ------- See notes to Schedule 1 S-1 SCHEDULE 1 AES CHINA GENERATING CO. LTD. CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED BALANCE SHEETS As of November 30, 1997 1996 ---- ---- (in thousands) ASSETS Current Assets: Cash and cash equivalents......................... $ 1,241 $26,190 Debt service reserves - held-to-maturity.......... 18,225 - Investments - held-to-maturity.................... 1,529 8,995 Accounts receivable - The AES Corporation......... 363 - Accounts receivable from related parties.......... - 1,231 Prepaid expenses and other current assets......... 933 630 ------- ------- Total current assets.......................... 22,291 37,046 Investment in subsidiaries (on the equity method)... 350,534 153,024 Office Equipment: Cost.............................................. 1,429 1,220 Accumulated depreciation.......................... (604) (653) ------- ------- Total property, plant and equipment, net...... 825 567 Other Assets: Deferred finance costs, net....................... 5,526 407 Project development costs......................... - 3,352 Debt service reserves - held-to-maturity.......... 9,113 - Deposits and other assets......................... 636 565 ------- ------- Total other assets............................ 15,275 4,324 ------- ------- TOTAL............................................... $388,925 $194,961 ------- ------- See notes to Schedule 1 S-2 SCHEDULE 1 AES CHINA GENERATING CO. LTD. CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED BALANCE SHEETS As of November 30, 1997 1996 ---- ---- (in thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable - The AES Corporation.... $ - $ 1,185 Accounts payable.......................... 1,407 1,114 Accrued interest for notes payable........ 8,264 - Accrued liabilities....................... 1,105 2,307 ------- ------- Total current liabilities............. 10,776 4,606 Long-term Liability: Notes payable, net........................ 179,844 - Shareholders' Equity: Common stock.............................. 12 - Class A common stock...................... - 81 Class B common stock...................... - 75 Additional paid-in capital................ 184,566 183,980 Retained earnings......................... 13,200 5,907 Cumulative translation adjustment......... 527 312 ------- ------- Total shareholders' equity............ 198,305 190,355 ------- ------- TOTAL....................................... $388,925 $194,961 ------- ------- See notes to Schedule 1 S-3 SCHEDULE 1 AES CHINA GENERATING CO. LTD. CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended November 30, --------------------------------------------------------- 1997 1996 1995 --------------- ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities $ (12,583) $ (40) $ (1,370) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of notes 174,100 -- -- Proceeds from issuance of Class A common stock upon exercise of share options 224 -- -- Repurchase of Class A common stock -- (11,443) (6,360) --------------- ---------------- --------------- Net cash provided by / (used in) financing activities 174,324 (11,443) (6,360) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (510) (224) (445) Purchase of investments - held-to-maturity -- (29,176) (154,630) Purchase of investments - available-for-sale -- (16,797) (14,557) Proceeds from the maturity of investments - held-to-maturity 9,000 63,656 219,086 Proceeds from sales of investments - available-for-sale -- 16,969 14,609 Investments in and advances to subsidiaries (168,393) (104,714) (28,453) Recoupment of investment in subsidiaries 1,813 871 -- Project development costs and other assets (1,313) (2,625) (1,327) Deposit to debt service reserves (36,248) -- -- Withdrawal from debt service reserves 8,961 -- -- Investment in note receivable -- -- (7,500) --------------- ---------------- --------------- Net cash (used in) / provided by investing activities (186,690) (72,040) 26,783 --------------- ---------------- --------------- (Decrease ) / increase in cash and cash equivalents (24,949) (83,523) 19,053 CASH AND CASH EQUIVALENTS, Beginning of year 26,190 109,713 90,660 =============== ================ =============== End of year $ 1,241 $ 26,190 $ 109,713 =============== ================ =============== Supplemental disclosures: Cash dividends from: Consolidated subsidiaries $ -- $ -- $ -- Affiliates 446 626 --
See notes to Schedule 1 S-4 AES CHINA GENERATING CO. LTD. NOTES TO SCHEDULE 1 1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting for Subsidiaries - AES China Generating Co. Ltd. (the Company) has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information. Revenues - Construction and operation management fees earned by the parent from its consolidated subsidiaries are eliminated. 2. GUARANTEES The Company has guaranteed to the lenders of a $65.0 million term loan facility at Wuhu Shaoda certain obligations of its wholly owned subsidiary under the joint venture contract, including an obligation to fund an $18.0 million subordinated loan and certain other liabilities which, in the aggregate, do not exceed $6.0 million. The Company has guaranteed the payment of accrued interest on the construction payable at Aixi Heart River which amounted to $0.7 million at November 30, 1997. S-5 EXHIBIT INDEX Exhibit Sequentially Number Document Numbered Page - ------ -------- ------------- 3.2 Bye-laws of the Company, as revised effective May 8, 1997. 25.1 Power of Attorney. 27.1 Financial Data Schedule. 99.1 Statement Re: Computation of Fixed Charge Coverage Ratio 99.2 "Business-Narrative Description of Business" on pages 2-19 of the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1996, which is incorporated by reference in Item 1 hereof. EX-3 2 EXHIBIT 3.2 Exhibit 3.2 BYE-LAWS of AES CHINA GENERATING CO. LTD. (Revised Effective as of the Amalgamation) TABLE OF CONTENTS Bye-Law Page INTERPRETATION 1 Interpretation 1 BOARD OF DIRECTORS 2 Board of Directors 4 3 Management of the Company 4 4 Power to appoint managing director or chief executive officer 5 5 Power to appoint manager 5 6 Power to authorise specific actions 5 7 Power to appoint attorney 5 8 Power to delegate to a committee 5 9 Power to appoint and dismiss employees and provide benefits 6 10 Power to borrow and charge property 6 11 Power to purchase shares of or discontinue the Company 6 12 Number and election of Directors 7 13 Defects in appointment of Directors 7 14 Alternate Directors 7 15 Removal of Directors 8 16 Vacancies on the Board 8 17 Notice of meetings of the Board 9 18 Quorum at meetings of the Board 9 19 Meetings of the Board 10 20 Unanimous written resolutions 10 21 Contracts and disclosure of Directors' interests 10 22 Remuneration of Directors 12 OFFICERS 23 Officers of the Company 12 24 Appointment of Officers 12 25 Remuneration of Officers 13 26 Duties of Officers 13 27 Chairman of meetings 13 28 Register of Directors and Officers 13 MINUTES 29 Obligations of Board to keep minutes 14 INDEMNITY 30 Indemnification of Directors and Officers of the Company 14 31 Waiver of claim by Member 16 MEETINGS 32 Notice of annual general meeting 17 33 Notice of special general meeting 17 34 Accidental omission of notice of general meeting 17 35 Meeting called on requisition of Members 18 36 Short notice 18 37 Postponement of meetings 18 38 Quorum for general meeting 18 39 Adjournment of meetings 19 40 Attendance at meetings 19 41 Written resolutions 19 42 Attendance of Directors 20 43 Voting at meetings 20 44 Voting on show of hands 21 45 Decision of chairman 21 46 Demand for a poll 21 47 Joint holders voting 23 48 Proxies 23 49 Representation of Members which are not natural persons 24 SHARE CAPITAL AND SHARES 50 Rights of shares 24 51 Power to issue shares 25 52 Variation of rights and alteration of share capital 26 53 Registered holder of shares 27 54 Death of a joint holder 28 55 Share certificates 28 56 Calls on shares 28 57 Forfeiture of shares 29 REGISTER OF MEMBERS 58 Register of Members 29 59 Inspection of Register of Members 30 60 Determination of record dates 31 TRANSFER OF SHARES 61 Instrument of transfer 31 62 Transfer of Shares 32 63 Transfers by joint holders 32 TRANSMISSION OF SHARES 64 Representative of deceased Member 32 65 Registration on death or bankruptcy 33 DIVIDENDS AND OTHER DISTRIBUTIONS 66 Declaration of dividends by the Board 33 67 Other distributions 33 68 Reserve fund 34 69 Deduction of amounts due to the Company 34 CAPITALIZATION 70 Issue of bonus shares 34 ACCOUNTS AND FINANCIAL STATEMENTS 71 Records of account 34 72 Financial year end 35 73 Financial statements 35 AUDIT 74 Appointment of Auditor 36 75 Remuneration of Auditor 36 76 Vacation of office of Auditor 36 77 Access to books of the Company 36 78 Report of the Auditor 36 NOTICES 79 Notices to Members of the Company 37 80 Notices to joint holders 37 81 Service and delivery of notice 37 SEAL OF THE COMPANY 82 The seal 38 83 Manner in which seal is to be affixed 38 WINDING-UP 84 Winding-up/distribution by liquidator 38 ALTERATION OF BYE-LAWS 85 Alteration of Bye-laws 39 INTERPRETATION 1. Interpretation (1) In these Bye-laws the following words and expressions shall, where not inconsistent with the context, have the following meanings respectively:- (a) "Act" means the Companies Act 1981 as amended from time to time; (b) "Affiliate" of the Company means a Person which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with the Company, except that the Company shall not be deemed to control any Person other than a Subsidiary; (c) "Alternate Director" means an alternate Director appointed in accordance with these Bye-laws; (d) "Assistant Secretary" means the person appointed to perform any or all of the duties of assistant secretary of the Company and, in the Secretary's absence, any or all of the duties of the Secretary; (e) "Auditor" includes any individual or partnership; (f) "Board" means the Board of Directors appointed or elected pursuant to these Bye-laws and acting by resolution in accordance with the Act and these Bye-laws or the Directors present at a meeting of Directors at which there is a quorum; (g) "Capital Stock" has the meaning defined in Bye-law 50(1); (h) "Company" means AES China Generating Co. Ltd., an exempted company formed under the Act; (i) "control" with respect to any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; (j) "Director" means a director of the Company and shall include an Alternate Director; (k) "Member" means any Person registered in the Register of Members as the holder of shares in the Company and, in the case of shares registered jointly in the names of two or more Persons, means such Persons jointly and not severally; (l) "notice" means written notice as further defined in these Bye-laws unless otherwise specifically stated; (m) "Officer" means any individual appointed by the Board to hold an office in the Company; (n) "Person" means any unincorporated organization, association, company, corporation, individual, sole proprietorship, partnership, joint venture, trust, institution, entity, party or government (including any instrumentality, division, agency, body or department thereof); (o) "Register of Directors and Officers" means the Register of Directors and Officers referred to in these Bye-laws; (p) "Register of Members" means the Register of Members referred to in these Bye-laws; (q) "Secretary" means the person appointed to perform any or all the duties of secretary of the Company; (r) "Subsidiary" of any Person means any corporation or other entity of which such Person, or such Person and one or more Subsidiaries, or any one or more Subsidiaries, directly or indirectly own outstanding shares of capital stock or other ownership interests having voting power sufficient to elect, under ordinary circumstances (not dependent upon the happening of a contingency), a majority of the directors or other persons performing similar functions; (2) In these Bye-laws, where not inconsistent with the context:- (a) words denoting the plural number include the singular number and vice versa; (b) words denoting the masculine gender include the feminine gender; (c) the word:- (i) "may" shall be construed as permissive; (ii) "shall" shall be construed as imperative; (d) unless otherwise provided herein words or expressions defined in the Act shall have the same meaning in these Bye-laws; and (e) references to "$" shall be to United States dollars. (3) Expressions referring to writing or written shall, unless the contrary intention appears, include facsimile, printing, lithography, photography and other modes of representing words in a visible form. (4) Headings used in these Bye-laws and the Table of Contents are for convenience only and are not to be used or relied upon in the construction hereof. BOARD OF DIRECTORS 2. Board of Directors The business of the Company shall be managed and conducted by the Board. 3. Management of the Company (1) In managing the business of the Company, the Board may exercise all such powers of the Company as are not, by statute or by these Bye-laws, required to be exercised by the Company in general meeting subject, nevertheless, to these Bye-laws, the provisions of any statute and to such regulations as may be prescribed by the Company in general meeting. (2) No regulation or alteration to these Bye-laws made by the Company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation or alteration had not been made. (3) The Board may procure that the Company pays all expenses incurred in promoting and incorporating the Company. (4) Pursuant to the provisions of the Act, the Board shall appoint a Secretary who is ordinarily resident in Bermuda and a Resident Representative who is ordinarily resident in Bermuda, each to maintain all such records as may be required by law to be maintained in Bermuda, to make all necessary filings with the Ministry of Finance and Registrar of Companies in Bermuda as may be required by law and to take any other action as may be required by law. The Board shall not appoint the Secretary of the Company as a Director or the Resident Representative. 4. Power to appoint managing director or chief executive officer The Board may from time to time appoint one or more Directors to the office of managing director or chief executive officer of the Company who shall, subject to the control of the Board, supervise and administer all of the general business and affairs of the Company. 5. Power to appoint manager The Board may appoint a person to act as manager of the Company's day to day business and may entrust to and confer upon such manager such powers and duties as it deems appropriate for the transaction or conduct of such business. 6. Power to authorise specific actions The Board may from time to time and at any time authorise any Person to act on behalf of the Company for any specific purpose and in connection therewith to execute any agreement, document or instrument on behalf of the Company. 7. Power to appoint attorney The Board may from time to time and at any time by power of attorney appoint any Person, whether nominated directly or indirectly by the Board, to be an attorney of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board) and for such period and subject to such conditions as it may think fit. Any such power of attorney may contain such provisions for the protection and convenience of Persons dealing with any such attorney as the Board may think fit and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions so vested in the attorney. Such attorney may, if so authorised under the seal of the Company, execute any deed or instrument under such attorney's personal seal with the same effect as the affixation of the seal of the Company. 8. Power to delegate to a committee The Board may delegate any of its powers to a committee appointed by the Board and every such committee shall conform to such directions as the Board shall impose on them. 9. Power to appoint and dismiss employees and provide benefits (1) The Board may appoint, suspend or remove any manager, secretary, clerk, agent or employee of the Company and may fix their remuneration and determine their duties. (2) The Board on behalf of the Company may provide benefits, whether by the payment of gratuities or pensions or otherwise, for any person including any Director or former Director who holds or has held any executive office or employment with the Company or with any Person which is or has been a Subsidiary or Affiliate of the Company or a predecessor in the business of the Company or of any such Subsidiary or Affiliate, and to any member of his family or any person who is or was dependent on him, and may contribute to any fund and pay premiums for the purchase or provision of any such gratuity, pension or other benefit, or for the insurance of any such person. (3) Without prejudice to the general powers conferred by these Bye-laws, the Board is hereby authorised to give to any Directors, officers or employees of the Company an interest in any particular business or transaction or participation in the profits thereof or in the general profits of the Company either in addition to or in substitution for a salary or other remuneration. 10. Power to borrow and charge property The Board may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and may issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or any third party. 11. Power to purchase shares of or discontinue the Company (1) Subject to the provisions of Section 42A of the Act, the Board may exercise all the powers of the Company to purchase all or any part of its own shares. (2) The Board may exercise all the powers of the Company to discontinue the Company to a named country or jurisdiction outside Bermuda pursuant to Section 132G of the Act. 12. Number and election of Directors (1) The Board shall consist of not less than two Directors or such number in excess thereof as the Members may from time to time determine, PROVIDED THAT the number of Directors shall not be reduced so as to shorten the term of any Director at the time in office. (2) The Board of Directors shall consist of a single class and shall be elected thereafter, except in the case of casual vacancy, at the annual general meeting or at any special general meeting called for the purpose. Directors shall hold office for such term as the Members may determine or, in the absence of such determination, until the next annual general meeting or until their successors are elected or appointed or their office is otherwise vacated, and any general meeting may authorise the Board to fill any vacancy in their number left unfilled at a general meeting. (3) Any Member may nominate one or more persons for election as Director at a general meeting. 13. Defects in appointment of Directors All acts done bona fide by any meeting of the Board or by a committee of the Board or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director. 14. Alternate Directors (1) Any general meeting of the Company may elect a person or persons to act as a Director in the alternative to any one or more of the Directors of the Company or may authorise the Board to appoint such Alternate Directors. Absent specific authorisation of the Members, no Director may appoint a person or persons to act as a Director in the alternative to himself or herself. Any person so appointed shall have all the rights and powers of the Director or Directors for whom such person is appointed in the alternative provided that such person shall not be counted more than once in determining whether or not a quorum is present. (2) An Alternate Director shall be entitled to receive notice of all meetings of the Board and to attend and vote at any such meeting at which a Director for whom such Alternate Director was appointed in the alternative is not personally present and generally to perform at such meeting all the functions of such Director for whom such Alternate Director was appointed. (3) An Alternate Director shall cease to be such if the Director for whom such Alternate Director was appointed ceases for any reason to be a Director but may be re-appointed by the Board as alternate to the person appointed to fill the vacancy in accordance with these Bye-laws. 15. Removal of Directors (1) Subject to any provision to the contrary in these Bye-laws, the Members may, at any special general meeting convened and held in accordance with these Bye-laws, remove a Director provided that the notice of any such meeting convened for the purpose of removing a Director shall contain a statement of the intention so to do and be served on such Director not less than five days before the meeting and at such meeting such Director shall be entitled to be heard on the motion for such Director's removal. (2) A vacancy on the Board created by the removal of a Director under the provisions of subparagraph (1) of this Bye-law may be filled by the Members at the meeting at which such Director is removed and, in the absence of such election or appointment, the Board may fill the vacancy. 16. Vacancies on the Board (1) The Board shall have the power from time to time and at any time to appoint any person as a Director to fill a vacancy on the Board occurring as the result of the death, disability, disqualification or resignation of any Director or the failure of the Members to fill any vacancy and to appoint an Alternate Director to any Director so appointed. (2) The Board may act notwithstanding any vacancy in its number but, if and so long as its number is reduced below the number fixed by these Bye-laws as the quorum necessary for the transaction of business at meetings of the Board, the continuing Directors or Director may act for the purpose of (i) summoning a general meeting of the Company or (ii) preserving the assets of the Company. (3) The office of Director shall be vacated if the Director:- (a) is removed from office pursuant to these Bye-laws or is prohibited from being a Director by law; (b) is or becomes bankrupt or makes any arrangement or composition with his creditors generally; (c) is or becomes of unsound mind or dies; or (d) resigns his or her office by notice in writing to the Company. 17. Notice of meetings of the Board (1) The Chairman, Deputy Chairman, or President may, and the Secretary or the Assistant Secretary on the requisition of any two Directors shall, at any time summon a meeting of the Board upon not less than three days' prior notice. (2) Notice of a meeting of the Board shall be deemed to be duly given to a Director if it is given to such Director verbally in person or by telephone or otherwise communicated or sent to such Director by post, cable, telex, telecopier, facsimile or other mode of representing words in a legible and non-transitory form at such Director's last known address or any other address given by such Director to the Company for this purpose. 18. Quorum at meetings of the Board The quorum necessary for the transaction of business at a meeting of the Board shall be two Directors. 19. Meetings of the Board (1) The Board may meet for the transaction of business, adjourn and otherwise regulate its meetings as it sees fit. (2) Directors may participate in any meeting of the Board by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting. (3) A resolution put to the vote at a meeting of the Board shall be carried by the affirmative votes of a majority of the votes cast and in the case of an equality of votes the resolution shall fail. 20. Unanimous written resolutions A resolution in writing signed by all the Directors which may be in counterparts, shall be as valid as if it had been passed at a meeting of the Board duly called and constituted, such resolution to be effective on the date on which the last Director signs the resolution. For the purposes of this Bye-law only, "Director" shall not include an Alternate Director. 21. Contracts and disclosure of Directors' interests (1) Subject to the Act, a Director may hold any other office or place of profit with the Company (except that of Auditor) in addition to serving as a Director for such period and upon such terms as the Board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine, and such extra remuneration shall be in addition to any remuneration provided for, by or pursuant to any other Bye-law. (2) Any Director, or any Director's firm, partner or any company with whom any Director is associated, may act in a professional capacity for the Company and such Director or such Director's firm, partner or such company shall be entitled to remuneration for professional services as if such Director were not a Director, provided that nothing herein contained shall authorise a Director or Director's firm, partner or such company to act as Auditor of the Company. (3) A Director may be or become a director or other officer of, or otherwise interested in, any Person promoted by the Company or any other Person in which the Company may be interested. Any Director may be or become directly or indirectly interested in a contract or proposed contract or arrangement with the Company, and shall not be liable to account to the Company or the Members for any remuneration, profit or other benefits received by him as a director or officer of or from his interest in such other Person, contract, proposed contract or arrangement. The Board may also cause the voting power conferred by the shares in any other Person held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favour of any resolution appointing the Directors or any of them to be directors or officers of such other Person, or voting or providing for the payment of remuneration to the directors or officers of such other Person. (4) A Director who is a director or other officer of, or otherwise interested in, any Person promoted by the Company or any other Person in which the Company is interested or who is directly or indirectly interested in a contract or proposed contract or arrangement with the Company shall declare the nature of such interest as required by the Act. (5) Following a declaration being made pursuant to this Bye-law, and unless disqualified by the chairman of the relevant Board meeting, a Director may vote in respect of any matter involving a Person of which such Director is a director or other officer or otherwise interested or any contract or proposed contract or arrangement in which such Director is interested and may be counted in the quorum at such meeting. 22. Remuneration of Directors The remuneration (if any) of the Directors shall be determined from time to time by the Board and shall be deemed to accrue from day to day. The Directors may also be paid all travel, hotel and other expenses properly incurred by them in attending and returning from meetings of the Board, any committee appointed by the Board, general meetings of the Company, or in connection with the business of the Company or their duties as Directors generally. OFFICERS 23. Officers of the Company The Officers of the Company shall consist of a President and a Vice President or a Chairman and a Deputy Chairman (who may also use the title of Vice Chairman), a Secretary, an Assistant Secretary and such additional Officers as the Board may from time to time determine (including one or more additional Vice Presidents) all of whom shall be deemed to be Officers for the purposes of these Bye-laws. 24. Appointment of Officers (1) The Board shall, after each annual general meeting, appoint a President and Vice President or a Chairman and Deputy Chairman who shall be Directors. (2) The Secretary, the Assistant Secretary and additional Officers, if any, shall be appointed by the Board from time to time. (3) Any person elected or appointed pursuant to this Bye-law shall hold office for such period and upon such terms as the Board may determine and the Board may revoke or terminate any such election or appointment. Any such revocation or termination shall be without prejudice to any claim for damages that such officer may have against the Company or the Company may have against such officer for any breach of any contract of service between him and the Company which may be involved in such revocation or termination. 25. Remuneration of Officers The Officers shall receive such remuneration as the Board may from time to time determine. 26. Duties of Officers The Officers shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated to them by the Board from time to time. 27. Chairman of meetings Unless otherwise agreed by a majority of those attending and entitled to attend and vote thereat, the Chairman, if there be one, and if not the President, shall act as chairman at all meetings of the Members and of the Board at which such person is present. In their absence the Deputy Chairman or Vice President, if present, shall act as chairman and in the absence of all of them a chairman shall be appointed or elected by those present at the meeting and entitled to vote. 28. Register of Directors and Officers (1) The Board shall cause to be kept in one or more books at its registered office a Register of Directors and Officers and shall enter therein the following particulars with respect to each Director and the President, each Vice-President, the Chairman, and each Deputy Chairman, provided that each such person is a Director, and the Secretary and the Assistant Secretary, that is to say: (a) first name and surname; and (b) address. (2) The Board shall, within the period of fourteen days from the occurrence of - (a) any change among its Directors, the President, any Vice-President, the Chairman, and any Deputy Chairman, provided that each such person is a Director, and in the Secretary and the Assistant Secretary; or (b) any change in the particulars contained in the Register of Directors and Officers, cause to be entered on the Register of Directors and Officers the particulars of such change and the date on which such change occurred. (3) The Register of Directors and Officers shall be open to inspection at the registered office of the Company on every business day, subject to such reasonable restrictions as the Board may impose, so that not less than two hours in each business day be allowed for inspection. MINUTES 29. Obligations of Board to keep minutes The Board shall cause minutes to be duly entered in books provided for the purpose:- (a) of all elections and appointments of Officers; (b) of the names of the Directors present at each meeting of the Board and of any committee appointed by the Board; and (c) of all resolutions and proceedings of general meetings of the Members, meetings of the Board, meetings of managers and meetings of committees appointed by the Board. INDEMNITY 30. Indemnification of Directors and Officers of the Company (1) The Directors, the Secretary, the Assistant Secretary and other Officers for the time being of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company and every one of them (individually, an "Indemnified Party," and collectively, the "Indemnified Parties"), and their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets of the Company to the fullest extent authorised by the laws of Bermuda as the same exist or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than such laws permitted prior to such amendment) from and against all actions, costs, charges, losses, damages and expenses ("Losses") which the Indemnified Parties or any of them, or their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts with respect to the Company or in or about the execution of their duty, or supposed duty, or in their respective offices or trusts with respect to any other Person for whom any of them acted as director, secretary or other officer, liquidator, trustee, employee or agent at the request of the Company, and none of them shall be answerable for the acts, receipts, neglects or defaults of the others of them or for joining in any receipts for the sake of conformity, or for any bankers or other Persons with whom any moneys or effects belonging to the Company or any other such Person shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company or any other such Person shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, PROVIDED THAT, with respect to an Indemnified Party, this indemnity shall not extend to any Losses to the extent they arise from or in respect of any fraud or dishonesty of which the Indemnified Party may be guilty with respect to the Company. (2) The right to indemnification conferred in this Bye-law 30 is and shall be a contract right. The right to indemnification conferred in this Bye-law 30 shall include the right to be paid by the Company the expenses (including attorneys' fees and retainers therefor) reasonably incurred in connection with any proceeding for which indemnity is asserted in advance of its final disposition, such advances to be paid by the Company within 20 days after the receipt by the Company of a statement or statements from an Indemnified Party or his or her heirs, executors or administrators requesting such advance or advances from time to time; provided, however, the payment of such expenses incurred by an Indemnified Party or his or her heirs, executors or administrators in advance of the final disposition of a proceeding shall be made only upon delivery to the Company of an undertaking by or on behalf of such Indemnified Party or his heirs, executors or administrators to repay all amounts so advanced if it shall ultimately be determined that such Person is not entitled to be indemnified under this Bye-law 30 or otherwise. (3) To obtain indemnification under this Bye-law 30, an Indemnified Party or his heirs, executors or administrators shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to such Person and is reasonably necessary to determine whether and to what extent such Person is entitled to indemnification. (4) The Company may maintain insurance, at its expense, to protect itself and any Indemnified Party and his or her heirs, executors and administrators from and against any and all Losses, whether or not the Company would have the power to indemnify such person against any such Loss under the Act. To the extent that the Company maintains any policy or policies providing such insurance, each such Indemnified Party and his or her heirs, executors and administrators, and each such employee or agent to which rights to indemnification have been granted as provided in paragraph (5) of this Bye-law 30, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such Person. (5) The Company may, to the extent authorized from time to time by the Board, grant rights to indemnification, and rights to be paid by the Company the expenses incurred in connection with any proceeding in advance of its final disposition, to any employee or agent of the Company to the fullest extent of the provisions of this Bye-law 30 with respect to the indemnification and advancement of expenses of the Indemnified Parties. 31. Waiver of claim by Member Each Member agrees to waive any claim or right of action such Member might have, whether individually or by or in the right of the Company, against any Director, the Secretary, the Assistant Secretary or other Officer for the time being of the Company or the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company, and their heirs, executors and administrators, on account of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty or in their respective offices or trusts PROVIDED THAT, with respect to any such person such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such person. MEETINGS 32. Notice of annual general meeting The annual general meeting of the Company shall be held in each year other than the year of incorporation at such time and place as the President or the Chairman or, the Deputy Chairman or the Board shall appoint. At least five days' notice of such meeting shall be given to each Member stating the date, time and place at which the meeting is to be held, that the election of Directors will take place thereat, and as far as practicable, the general nature of the other business to be conducted at the meeting. 33. Notice of special general meeting The President or the Chairman or the Deputy Chairman or the Board may convene a special general meeting of the Company whenever in their judgment such a meeting is necessary, upon not less than five days' notice which shall state the date, time and place at which the meeting is to be held and the general nature of the business to be considered at the meeting. 34. Accidental omission of notice of general meeting (1) The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a general meeting by, any Person entitled to receive notice shall not invalidate the proceedings, at that meeting. (2) In the case where instruments of proxy are sent out with notice of any general meeting, the accidental omission to send such instrument of proxy to, or the non-receipt of such instrument of proxy by, any Person entitled to receive notice shall not invalidate the proceedings at that meeting. 35. Meeting called on requisition of Members Notwithstanding anything herein, the Board shall, on the requisition of Members holding at the date of the deposit of the requisition not less than one-tenth of such of the paid-up share capital of the Company as at the date of the deposit that carries the right to vote at general meetings of the Company, forthwith proceed to convene a special general meeting of the Company and the provisions of Section 74 of the Act shall apply. 36. Short notice A general meeting of the Company shall, notwithstanding that it is called by shorter notice than that specified in these Bye-laws, be deemed to have been properly called if it is so agreed by (i) all the Members entitled to attend and vote thereat in the case of an annual general meeting; and (ii) by a majority in number of the Members having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving a right to attend and vote thereat in the case of a special general meeting. 37. Postponement of meetings The Board may postpone any general meeting called in accordance with the provisions of these Bye-laws (other than a meeting requisitioned under these Bye-laws) provided that notice of postponement is given to each Member before the time for such meeting. Fresh notice of the date, time and place for the postponed meeting shall be given to each Member in accordance with the provisions of these Bye-laws. 38. Quorum for general meeting (1) At any general meeting of the Company two Persons present in person and representing in person or by proxy in excess of 50% of the total issued voting shares in the Company throughout the meeting shall form a quorum for the transaction of business, PROVIDED THAT if the Company shall at any time have only one Member, one Member present in person or by proxy shall form a quorum for the transaction of business at any general meeting of the Company held during such time. (2) If within half an hour from the time appointed for the meeting any required quorum is not present (or such longer time as the chairman of the meeting may determine to wait) the meeting, if convened on the requisition of a Member or Members, shall be dissolved. In any other case, the meeting shall stand adjourned to the same day one week later, at the same time and place or to such other day, time or place as the Board may determine. Notwithstanding the foregoing, prior to dissolution or adjournment of any such meeting, the chairman of the meeting may permit the transaction of any business by the Company or by any class of the Company's shares if the required quorum for the transaction of such business is present and acting throughout. 39. Adjournment of meetings The chairman of a general meeting may, with the consent of the Members at any general meeting at which a quorum is present (and shall if so directed), adjourn the meeting. Unless the meeting is adjourned to a specific date, time and place, fresh notice of the date, time and place for the resumption of the adjourned meeting shall be given to each Member in accordance with the provisions of these Bye-laws. 40. Attendance at meetings If specifically authorised by the Board at any particular meeting, Members may participate in any general meeting by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting. 41. Written resolutions (1) Subject to subparagraph (6), anything which may be done by resolution of the Company in general meeting or by resolution of a meeting of the holders of any class of the shares of the Company, may, without a meeting and without any previous notice being required, be done by resolution in writing signed by, or, in the case of a Member that is not a natural person whether or not a company within the meaning of the Act, on behalf of, all the Members who at the date of the resolution would be entitled to attend the meeting and vote on the resolution. (2) A resolution in writing may be signed by, or, in the case of a Member that is not a natural person whether or not a company within the meaning of the Act, on behalf of, all the Members, or any class thereof, in as many counterparts as may be necessary. (3) For the purposes of this Bye-law, the date of the resolution is the date when the resolution is signed by, or, in the case of a Member that is not a natural person whether or not a company within the meaning of the Act, on behalf of, the last Member to sign and any reference in any Bye-law to the date of passing of a resolution is, in relation to a resolution made in accordance with this Bye-law, a reference to such date. (4) A resolution in writing made in accordance with this Bye-law is as valid as if it had been passed by the Company in general meeting or by a meeting of the holders of the relevant class of shares of the Company, as the case may be, and any reference in any Bye-law to a meeting at which a resolution is passed or to Members voting in favour of a resolution shall be construed accordingly. (5) A resolution in writing made in accordance with this Bye-law shall constitute minutes for the purposes of Sections 81 and 82 of the Act. (6) This Bye-law shall not apply to:- (a) a resolution passed pursuant to Section 89(5) of the Act; or (b) a resolution passed for the purpose of removing a Director before the expiration of his term of office under these Bye-laws. 42. Attendance of Directors The Directors of the Company shall be entitled to receive notice of and to attend and be heard at any general meeting. 43. Voting at meetings (1) Notwithstanding any provision of the Act to the contrary and subject to the provisions of these Bye-laws, any question proposed for the consideration of the Members at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the provisions of these Bye-laws and in the case of an equality of votes the question shall fail. (2) No Member shall be entitled to vote at any general meeting unless such Member has paid all the calls on all shares held by such Member. (3) A Member who is a patient for any purpose of any statute or applicable law relating to mental health or in respect of whom an order has been made by any court having jurisdiction for the protection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver, committee, curator bonis or other Person in the nature of a receiver, committee or curator bonis appointed by such court and such receiver, committee, curator bonis or other Person may vote on a poll by proxy, and may otherwise act and be treated as such Member for the purpose of general meetings. 44. Voting on show of hands At any general meeting a resolution put to the vote of the meeting shall, in the first instance, be voted upon by a show of hands and, subject to any rights or restrictions for the time being lawfully attached to any class of shares and subject to the provisions of these Bye-laws, every Member present in person and every Person holding a valid proxy at such meeting shall be entitled to one vote and shall cast such vote by raising his or her hand. 45. Decision of chairman At any general meeting a declaration by the chairman of the meeting that a question proposed for consideration has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in a book containing the minutes of the proceedings of the Company shall, subject to the provisions of these Bye-laws, be conclusive evidence of that fact. 46. Demand for a poll (1) Notwithstanding the provisions of the immediately preceding two Bye-laws, at any general meeting of the Company, in respect of any question proposed for the consideration of the Members (whether before or on the declaration of the result of a show of hands as provided for in these Bye-laws), a poll may be demanded by any of the following Persons:- (a) the chairman of such meeting; or (b) at least three Members present in person or represented by proxy; or (c) any Member or Members present in person or represented by proxy and holding between them not less than one-tenth of the total voting rights of all the Members having the right to vote at such meeting; or (d) any Member or Members present in person or represented by proxy holding shares in the Company conferring the right to vote at such meeting, being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all such shares conferring such right. (2) Where, in accordance with the provisions of subparagraph (1) of this Bye-law, a poll is demanded, subject to any rights or restrictions for the time being lawfully attached to any class of shares, every Person present at such meeting shall have one vote for each share of which such Person is the holder or for which such Person holds a proxy and such vote shall be counted in the manner set out in subparagraph (4) of this Bye-Law or in the case of a general meeting at which one or more Members are present by telephone in such manner as the chairman of the meeting may direct and the result of such poll shall be deemed to be the resolution of the meeting at which the poll was demanded and shall replace any previous resolution upon the same matter which has been the subject of a show of hands. (3) A poll demanded in accordance with the provisions of subparagraph (1) of this Bye-law, for the purpose of electing a chairman or on a question of adjournment, shall be taken forthwith and a poll demanded on any other question shall be taken in such manner and at such point in the meeting as the chairman may direct and any business other than that upon which a poll has been demanded may be proceeded with pending the taking of the poll. (4) Where a vote is taken by poll, each Person present and entitled to vote shall be furnished with a ballot paper on which such Person shall record his or her vote in such manner as shall be determined at the meeting having regard to the nature of the question on which the vote is taken, and each ballot paper shall be signed or initialized or otherwise marked so as to identify the voter and the registered holder in the case of a proxy. At the conclusion of the poll, the ballot papers shall be examined and counted by a committee of not less than two Members or proxy holders appointed by the chairman for the purpose and the result of the poll shall be declared by the chairman. 47. Joint holders voting If two or more Persons are registered as joint holders of any shares, the Company shall be entitled to require that all of such persons tender their vote jointly if they are voting in person or that all of such Persons execute a proxy if they are submitting a proxy. 48. Proxies Any Member of the Company entitled to attend and vote at a meeting of the Company or a meeting of the holders of any class of shares in the Company shall be entitled to appoint another Person as his proxy to attend and vote instead of him. A Member may appoint more than one proxy to attend on the same occasion. The instrument appointing a proxy shall be in writing in a form approved by the Board and under the hand of the appointor or of the appointor's attorney duly authorised in writing, or if the appointor is not a natural person, either under its seal, or under the hand of a duly authorised officer or attorney. A Member may revoke his proxy prior to its exercise by delivering written notice of revocation to the Secretary or the Assistant Secretary, by executing a later dated proxy or by attending the meeting to which the proxy relates and voting in person. The decision of the chairman of any general meeting as to the validity of any instrument of proxy shall be final. 49. Representation of Members which are not natural persons A Member which is not a natural person may, by written instrument, authorise such person as it thinks fit to act as its representative at any meeting of the Members and the person so authorised shall be entitled to exercise the same powers on behalf of the Member which such person represents as that Member could exercise if it were a natural person. Notwithstanding the foregoing, the chairman of the meeting may accept such assurances as he or she thinks fit as to the right of any person to attend and vote at general meetings on behalf of a Member which is not a natural person. SHARE CAPITAL AND SHARES 50. Rights of shares (1) The authorised share capital of the Company at the date of the adoption of these Bye-laws is $1,000,000 comprised of 100,000,000 shares, par value $.01 per share (the "Capital Stock"). (2) The voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions of the Capital Stock are as follows: (a) Voting Rights. Except as otherwise provided by law or by these Bye-laws , the holders of shares of the Capital Stock shall be entitled to one vote per share. (b) Dividends. The holders of shares of Capital Stock shall be entitled to receive, out of assets or funds legally available therefor, such dividends and distributions, payable in cash or otherwise, as may be declared thereon by the Board from time to time. (c) Winding Up. In the event of the winding up or dissolution of the Company, whether voluntary or involuntary or for the purpose of reorganisation or otherwise, or upon any distribution of capital, all of the surplus assets of or capital distributed by the Company shall belong to and be distributable in equal amounts per share to the holders of shares of Capital Stock. 51. Power to issue shares (1) Subject to these Bye-laws and to any resolution of the Members to the contrary and without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, the Board shall have power to issue and to grant options over any authorised but unissued shares of the Company and to issue securities convertible into or exchangeable or exercisable for authorised but unissued shares of the Company on such terms and conditions as it may determine and any shares or class of shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time to time by resolution of the Members prescribe. (2) The Board shall, in connection with the issue of any share, have the power to pay such commissions and brokerage fees as may be permitted by law. (3) Subject to the Act: (a) the Company may in accordance with any scheme for the time being in force and approved by the Members in general meeting provide directly or indirectly money or other financial assistance for the purpose of or in connection with the purchase of, or subscription for, fully or partly paid shares in the Company or any holding company of the Company by a trustee of or to be held by or for the benefit of employees of the Company, any of its Subsidiaries, any holding company of the Company or any Subsidiary of any such holding company including any Director holding a salaried employment or office with or in any such company and so that the residual beneficiary of any such trust may be or include a charitable object; and (b) the Company may give financial assistance on such terms as the Board may approve to bona fide employees of the Company (including Directors who are also bona fide employees), any of its Subsidiaries, any holding company of the Company and/or any Subsidiary of any such holding company in order that they may buy shares (fully or partly paid) of the Company or any holding company of the Company and such terms may include a reference that, when an employee ceases to be employed by the Company or such other company, shares bought with such financial assistance shall or may be sold to the Company or such other company on such terms as the Board may approve. (4) Without prejudice to the general powers conferred by these Bye-laws, the Board is authorised to give to any Person the right or option of requiring at a future date that an allotment shall be made to such Person of any shares at par or at such premium as may be agreed. (5) Neither the Company nor the Board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or disposal to Members or others with registered addresses in any particular territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the Board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, holders of a separate class of shares for any purpose whatsoever. 52. Variation of rights and alteration of share capital (1) Subject to the provisions of Sections 42 and 43 of the Act any preference shares may be issued or converted into shares that, at a determinable date or at the option of the Company, are liable to be redeemed on such terms and in such manner as the Company before the issue or conversion may by resolution of the Members determine. (2) If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound-up, be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by a majority of the votes cast at a separate general meeting of the holders of the shares of the class in accordance with Section 47(7) of the Act. (3) The Company may from time to time by resolution of the Members change the currency denomination of, increase, alter or reduce its share capital in accordance with the provisions of Sections 45 and 46 of the Act. Where, on any alteration of share capital, fractions of shares or some other difficulty would arise, the Board may deal with or resolve the same in such manner as it thinks fit including, without limiting the generality of the foregoing, the issue to Members, as appropriate, of fractions of shares and/or arranging for the sale or transfer of the fractions of shares of Members. 53. Registered holder of shares (1) The Company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other Person. (2) Any dividend, distribution, interest or other moneys payable in cash in respect of shares may be paid by cheque or draft made payable to such Member as such Member's name appears in the Register of Members (in the case of joint holders, made payable jointly to such joint holders as their names appear in the Register of Members) sent by first class mail, postage prepaid, directed to the Member at such Member's address in the Register of Members or to such Person and to such address as the Member may in writing direct. If two or more Persons are registered as joint holders of any shares any one can give an effectual receipt for any dividend paid in respect of such shares. 54. Death of a joint holder Where two or more Persons are registered as joint holders of a share or shares under a tenancy in which the estate of a deceased holder does not retain an interest in the share or shares, then in the event of the death of any joint holder or holders the remaining joint holder or holders shall be absolutely entitled to the said share or shares and the Company shall recognize no claim in respect of the estate of any joint holder except in the case of the last survivor of such joint holders. 55. Share certificates (1) Every Member shall be entitled to a certificate under the seal of the Company (or a facsimile thereof) specifying the number and, where appropriate, the class of shares held by such Member and whether the same are fully paid up and, if not, how much has been paid thereon. The Board may by resolution determine, either generally or in a particular case, that any or all signatures on certificates may be printed thereon or affixed by mechanical means and that a facsimile of the seal of the Company be placed thereon. (2) The Company shall be under no obligation to complete and deliver a share certificate unless specifically called upon to do so by the Person to whom such shares have been allotted. (3) If any such certificate shall be proved to the satisfaction of the Company to have been worn out, lost, mislaid or destroyed the Company may cause a new certificate to be issued and request an indemnity for the lost certificate if it sees fit. 56. Calls on shares (1) The Board may from time to time make such calls as it thinks fit upon the Members in respect of any monies unpaid on the shares allotted to or held by such Members and, if a call is not paid on or before the day appointed for payment thereof, the Member may at the discretion of the Board be liable to pay the Company interest on the amount of such call at such rate as the Board may determine, from the date when such call was payable up to the actual date of payment. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. (2) The Board may, on the issue of shares, differentiate between the holders as to the amount of calls to be paid and the times of payment of such calls. 57. Forfeiture of shares (1) If any Member fails to pay, on the day appointed for payment thereof, any call in respect of moneys unpaid on any share allotted to or held by such Member, the Board may, at any time thereafter during such time as the call remains unpaid, direct the Secretary or the Assistant Secretary to forward to such Member a notice in the form, or as near thereto as circumstances admit, of Form "A" in the Schedule hereto. (2) If the requirements of such notice are not complied with, any such share may at any time thereafter before the payment of such call and the interest due in respect thereof be forfeited by a resolution of the Board to that effect, and such share shall thereupon become the property of the Company and may be disposed of as the Board shall determine. (3) A Member whose share or shares have been forfeited as aforesaid shall, notwithstanding such forfeiture, be liable to pay to the Company all calls owing on such share or shares at the time of the forfeiture and all interest due thereon. REGISTER OF MEMBERS 58. Register of Members (1) The Board shall cause to be kept in one or more books a Register of Members andshall enter therein the following particulars:- (a) the name and address of each Member, the number and, where appropriate, the class of shares held by such Member and the amount paid or agreed to be considered as paid on such shares; (b) the date on which each Person was entered in the Register of Members; and (c) the date on which any Person ceased to be a Member for one year after such Person so ceased. (2) Subject to the provisions of the Act, if the Board considers it necessary or appropriate, the Company may establish and maintain a local or branch register at such location or locations outside Bermuda as the Board thinks fit and, while the issued share capital of the Company is, with the consent of the Board, listed on any stock exchange, or quoted on any interdealer quotation system, the Company shall keep a branch register in any place required by the rules of such stock exchange or interdealer quotation system. (3) The Board may, in its absolute discretion, at any time and from time to time transfer any share upon the principal Register of Members maintained at the registered office of the Company to any local or branch register or any share on any local or branch register to the principal Register of Members or any other local or branch register. Unless the Board otherwise agrees (which agreement may be on such terms and subject to such conditions as the Board in its absolute discretion may from time to time stipulate, and which agreement it shall, without giving any reason therefor, be entitled in its absolute discretion to give or withhold) no shares on the principal Register of Members shall be transferred to any local or branch register nor shall shares on any local or branch register be transferred to the principal Register of Members or any other local or branch register and all transfers and other documents of title shall be lodged for registration, and registered, in the case of any shares on a local or branch register, at such local or branch register, and, in the case of any shares on the principal Register of Members, at the registered office of the Company. 59. Inspection of Register of Members The Register of Members shall be open to inspection at the registered office of the Company on every business day, subject to such reasonable restrictions as the Board may impose, so that not less than two hours in each business day be allowed for inspection. The Register of Members may, after notice has been given by advertisement in an appointed newspaper to that effect, be closed for any time or times not exceeding in the whole thirty days in each year. 60. Determination of record dates Notwithstanding any other provision of these Bye-laws, the Board may fix any date as the record date for:- (a) determining the Members entitled to receive any dividend or other distribution or allotment of any rights or the Members entitled to exercise any rights in respect of any change, conversion or exchange of shares, or for any other lawful action not expressly addressed in this Bye-law 60; (b) determining the Members entitled to receive notice of and to vote at any general meeting of the Company; and (c) determining the Members entitled to receive notice of and to consent to any action by written resolution without a general meeting of the Company. TRANSFER OF SHARES 61. Instrument of transfer (1) An instrument of transfer shall be in the usual common form or any other form which the Board may approve. Such instrument of transfer shall be signed by or on behalf of the transferor and transferee provided that, in the case of a fully paid share, the Board may accept the instrument signed by or on behalf of the transferor alone. The transferor shall be deemed to remain the holder of such share until the same has been transferred to the transferee in the Register of Members. (2) The Board may refuse to recognize any instrument of transfer unless it is accompanied by the certificate in respect of the shares to which it relates and by such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer. 62. Transfer of Shares (1) Subject to the restrictions contained in these Bye-laws as may be applicable, the Act, such laws or regulations as may govern the transfer of shares of the Company, including, without limitation, the United States Securities Act of 1933, as amended, and the United States Securities Exchange Act of 1934, as amended, or any agreement between any Member and the Company, any Member may transfer all or any of his shares. (2) The Board may, in its absolute discretion and without assigning any reason therefor, decline to register any transfer of any share which is not a fully-paid share. (3) The Board may refuse to register any transfer if all applicable consents, authorisations and permissions of any governmental body or agency in Bermuda have not been obtained. (4) If the Board refuses to register a transfer of any share the Secretary or the Assistant Secretary shall, within three months after the date on which the transfer was lodged with the Company, send to the transferor and transferee notice of the refusal. 63. Transfers by joint holders The joint holders of any share or shares may transfer such share or shares to one or more of such joint holders, and the surviving holder or holders of any share or shares previously held by them jointly with a deceased Member may transfer any such share to the executors or administrators of such deceased Member. TRANSMISSION OF SHARES 64. Representative of deceased Member In the case of the death of a Member, the survivor or survivors where the deceased Member was a joint holder, and the legal personal representative of the deceased Member where the deceased Member was a sole holder or a joint holder under a tenancy in which the estate of the deceased holder retains an interest in the shares, shall be the only Persons recognized by the Company as having any title to the deceased Member's interest in the shares. Nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by such deceased Member with other Persons. Subject to the provisions of Section 52 of the Act, for the purpose of this Bye-law, legal personal representative means the executor or administrator of a deceased Member or such other Person as the Board may in its absolute discretion decide as being properly authorised to deal with the shares of a deceased Member. 65. Registration on death or bankruptcy Any Person becoming entitled to a share in consequence of the death or bankruptcy of any Member may be registered as a Member upon such evidence as the Board may deem sufficient or may elect to nominate some Person to be registered as a transferee of such share, and in such case the Person becoming entitled shall execute in favour of such nominee an instrument of transfer in the usual common form or any other form which the Board may approve. On the presentation thereof to the Company, accompanied by such evidence as the Company may require to prove the title of the transferor, the transferee shall be registered as a Member but the Company shall, in either case, have the same right to decline or suspend registration as it would have had in the case of a transfer of the share by that Member before such Member's death or bankruptcy, as the case may be. DIVIDENDS AND OTHER DISTRIBUTIONS 66. Declaration of dividends by the Board The Board may, subject to these Bye-laws and in accordance with Section 54 of the Act, declare a dividend to be paid to the Members, in proportion to the number of shares held by them, and such dividend may be paid in cash or wholly or partly in other assets in which case the Board may fix the value for distribution of any assets. 67. Other distributions The Board may declare and make such other distributions (in cash or in other assets) to the Members as may be lawfully made out of the assets of the Company. 68. Reserve fund The Board may from time to time before declaring a dividend set aside, out of the surplus or profits of the Company, such sum as it thinks proper as a reserve fund to be used to meet contingencies or for equalizing dividends or for any other special purpose. 69. Deduction of amounts due to the Company The Board may deduct from the dividends or distributions payable to any Member all monies due from such Member to the Company on account of calls or otherwise. CAPITALIZATION 70. Issue of bonus shares (1) The Board may resolve to capitalise any part of the amount for the time being standing to the credit of any of the Company's share premium or other reserve accounts or to the credit of the profit and loss account or otherwise available for distribution by applying such sum in paying up unissued shares to be allotted as fully paid bonus shares pro rata to the Members. (2) The Company may capitalise any sum standing to the credit of a reserve account or sums otherwise available for dividend or distribution by applying such amounts in paying up in full partly paid shares of those Members who would have been entitled to such sums if they were distributed by way of dividend or distribution. ACCOUNTS AND FINANCIAL STATEMENTS 71. Records of account (1) The Board shall cause to be kept proper records of account with respect to all transactions of the Company and in particular with respect to:- (a) all sums of money received and expended by the Company and the matters in respect of which the receipt and expenditure relates; (b) all sales and purchases of goods by the Company; and (c) the assets and liabilities of the Company. Such records of account shall be kept at the registered office of the Company or, subject to Section 83(2) of the Act, at such other place as the Board thinks fit and shall be available for inspection by the Directors during normal business hours, PROVIDED THAT if the records of account are kept at some place outside Bermuda, there shall be kept at an office of the Company in Bermuda such records as will enable the Directors to ascertain with reasonable accuracy the financial position of the Company at the end of each three month period. No Member (other than an Officer or Director of the Company) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorised by the Board or the Company in general meeting. (2) No Member (not being a Director) shall be entitled to require discovery of or any information respecting any detail of the Company's trading or any matter which is or may be in the nature of a trade secret, mystery of trade or secret process which may relate to the conduct of the business of the Company which in the opinion of the Board it will be inexpedient in the interests of the Members or the Company to communicate to the public. 72. Financial year end The financial year end of the Company may be determined by resolution of the Board and failing such resolution shall be 30th November in each year. 73. Financial statements Subject to any rights to waive laying of accounts pursuant to Section 88 of the Act, financial statements as required by the Act shall be laid before the Members in general meeting. AUDIT 74. Appointment of Auditor Subject to Section 88 of the Act, at the annual general meeting or at a subsequent special general meeting in each year, an independent representative of the Members shall be appointed by them as Auditor of the accounts of the Company. Such Auditor may be a Member but no Director, Officer or employee of the Company shall, during his or her continuance in office, be eligible to act as an Auditor of the Company. 75. Remuneration of Auditor The remuneration of the Auditor shall be fixed by the Board or in such other manner as the Members may determine. 76. Vacation of office of Auditor If the office of Auditor becomes vacant by the resignation or death of the Auditor, or by the Auditor becoming incapable of acting by reason of illness or other disability at a time when the Auditor's services are required, the Board shall, as soon as practicable, convene a special general meeting to fill the vacancy thereby created. 77. Access to books of the Company The Auditor shall at all reasonable times have access to all books kept by the Company and to all accounts and vouchers relating thereto, and the Auditor may call on the Directors or Officers of the Company for any information in their possession relating to the books or affairs of the Company. 78. Report of the Auditor (1) Subject to any rights to waive laying of accounts or appointment of an Auditor pursuant to Section 88 of the Act, the accounts of the Company shall be audited at least once in every year. (2) The financial statements provided for by these Bye-laws shall be audited by the Auditor in accordance with generally accepted auditing standards. The Auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the Auditor shall be submitted to the Members in general meeting. (3) The generally accepted auditing standards referred to in subparagraph (2) of this Bye-law shall be those of the United States of America or of Bermuda or of another country or jurisdiction other than Bermuda. If such standards are not those of Bermuda, the financial statements and the report of the Auditor must disclose this fact and name such country or jurisdiction. NOTICES 79. Notices to Members of the Company A notice may be given by the Company to any Member either by delivering it to such Member in person or by sending it to such Member's address in the Register of Members or to such other address given by such Member for the purpose. For the purposes of this Bye-law, a notice may be sent by first class mail, courier service, cable, telex, telecopier, facsimile or other mode of representing words in a legible and non-transitory form. 80. Notices to joint holders Any notice required to be given to a Member shall, with respect to any shares held jointly by two or more Persons, be given to such Persons jointly in the names and to the address of such Member in the Register of Members. 81. Service and delivery of notice (1) Any notice shall be deemed to have been served at the time when the same is mailed, delivered to the courier or to the cable company or transmitted by telex, facsimile or other method as the case may be, and, in proving such service, it shall be sufficient to prove that the notice was properly addressed and prepaid, if mailed, and the time when it was mailed, delivered to the courier or to the cable company or transmitted by telex, facsimile or other method as the case may be. (2) In computing the period of time required in connection with any notice given hereunder, the day upon which such notice is given shall be the first day of such period. SEAL OF THE COMPANY 82. The seal The seal of the Company shall be in such form as the Board may from time to time determine. The Board may adopt one or more duplicate seals for use outside Bermuda and may authorise the use of a facsimile seal on certificates for the Company's shares or other securities. 83. Manner in which seal is to be affixed The seal of the Company shall not be affixed to any instrument except attested by the signature of a Director and either the Secretary or the Assistant Secretary, or by the signature of any two Directors, or by the signature of any one or more other Persons authorised by the Board for the purpose, provided that any Director, or Officer, may affix the seal of the Company attested by such Director or Officer's signature only to any authenticated copies of these Bye-laws, the incorporating documents of the Company, the minutes of any meetings or any other documents required to be authenticated by such Director or Officer. Signatures attesting the seal on certificates for the Company's shares or other securities may be printed thereon or affixed by mechanical means. WINDING-UP 84. Winding-up/distribution by liquidator If the Company shall be wound up, the liquidator may, with the sanction of a resolution of the Members, divide amongst the Members in cash or in other assets the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as he or she deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the Members as the liquidator shall think fit, but so that no Member shall be compelled to accept any shares or other securities or assets whereon there is any liability. ALTERATION OF BYE-LAWS 85. Alteration of Bye-laws No Bye-law shall be rescinded, altered or amended and no new Bye-law shall be made until the same has been approved by a resolution of the Board and by a resolution of the Members at meetings of the Board and the Members, as the case may be, for which the notice of meeting contained notice of such proposed rescission, alteration, amendment or new Bye-law. Any such rescission, alteration or amendment or making of a new Bye-law shall be approved as provided in Bye-law 43. SCHEDULE - FORM A (Bye-law 57) - -------------------------------------------------------------------------------- NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL You have failed to pay the call of [amount of call] made on the .... day of ......, 19.. last, in respect of the [number] share(s) [numbers in figures] standing in your name in the Register of Members of the Company, on the .... day of ......., 19.. last, the day appointed for payment of such call. You are hereby notified that unless you pay such call together with interest thereon at the rate of ...... per annum computed from the said .... day of ......, 19.. last, on or before the.... day of......, 19.. next at the place of business of the said Company the share(s) will be liable to be forfeited. Dated this day of , 19... [Signature of Secretary or Assistant Secretary] By order of the Board EX-25 3 EXHIBIT 25.1 Exhibit 25.1 POWER OF ATTORNEY The undersigned, acting in the capacity or capacities stated opposite their respective names below, hereby severally constitute and appoint Jeffery A. Safford, William R. Luraschi and Peter K. Ingerman and each of them with full power to act alone, our true and lawful attorneys and agents to do any and all acts and things and to execute any and all instruments which they deem necessary or advisable to enable AES China Generating Co. Ltd., a Bermuda company, to comply with the Securities Exchange Act of 1934, as amended, in connection with Section l3 or l5(d) of the Securities Exchange Act of 1934, as amended, the Form 10K Annual Report and any related registration statements, amendments, post-effective amendments or supplements thereto, including specifically, but without limiting the generality of the foregoing, the power and authority to sign the name of the Company and the names of the undersigned directors and officers in the capacities indicated below. This Power of Attorney may be executed in counterparts, which together shall constitute one and the same instrument. Signature Title Date /s/ Roger W. Sant Chairman of the Board and February 27, 1998 - ---------------------- Director Roger W. Sant /s/ Dennis W. Bakke Vice Chairman and February 27, 1998 - ---------------------- Director Dennis W. Bakke Vice Chairman and - ----------------------- Director Robert F. Hemphill, Jr. /s/ Paul Hanrahan President and Chief February 27, 1998 - ---------------------- Executive Officer Paul Hanrahan /s/ Kitty, Fung Kin Ye Group Finance Director February 27, 1998 - ---------------------- Kitty, Fung Kin Ye EX-27 4 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS NOV-30-1997 NOV-30-1997 58,576 35,324 2,498 0 2,496 133,287 263,355 8,514 512,798 52,409 217,806 0 0 12 198,293 512,798 18,703 18,703 13,480 13,480 0 0 7,397 9,276 398 9,470 0 0 0 9,470 789.17 789.17
EX-99 5 EXHIBIT 99.1 Exhibit 99.1 AES CHINA GENERATING CO. LTD. STATEMENT RE: COMPUTATION OF FIXED CHARGE COVERAGE RATIO (in thousands except ratio amounts)
Year ended November 30, ------------------------------------------------ 1997 1996 1995 ---------- ---------- ------- Adjusted Cash Flow (A) Cash Inflow: (i) Dividend, distribution, payment of interest and scheduled repayment of loan received by the Company and its Wholly Owned Subsidiaries from the Project Companies $ 5,168 $ 2,420 $ - (ii) 50% of the combined interest income of the Company and its Wholly Owned Subsidiaries from cash, cash equivalents and investments in marketable securities 3,960 2,751 5,090 -------- -------- ------- 9,128 5,171 5,090 -------- -------- ------- (B) Cash Outflow: (i) Selling, general and administrative expenses of the Company and its Wholly Owned Subsidiaries 1,352 994 1,779 (ii) Company Designated Costs 6,046 10,312 9,880 -------- -------- ------- 7,398 11,306 11,659 -------- -------- ------- $ 1,730 $ (6,135) $ (6,569) =========== =========== ========= Adjusted Interest Expenses $ 17,849 - - =========== =========== ========= Fixed Charge Coverage Ratio 0.1:1.0 - - =========== =========== =========
EX-99 6 EXHIBIT 99.2 Exhibit 99.2 Business Strategy The Company's mission is to help meet China's need for electricity in a socially responsible manner, balancing the interests of customers, partners, communities, suppliers, investors and its people. After the Amalgamation, the Company's operations will be subject to certain limitations under the AES Debt Covenants. The Company's business strategy focuses on: Experience in the China Market. The Company currently employs 47 people in the PRC with 25 people in Beijing and 22 people in other parts of the country. The Company's principal office is in Beijing. The Company also maintains an office in Hong Kong with 22 people. This commitment to the PRC has enabled the Company to build an expertise in the China power market. Diversified Project Portfolio. The Company believes that national diversification of projects in different provinces reduces the risk of being overly dependent on a single power purchaser or the demand for power in a single region. The Company's Current Projects are located in six provinces. Certain of the Company's Current Projects include smaller projects that have been developed on a rapid time schedule. These projects have enabled the Company to establish its position in the market, develop strategic relationships and generate immediate cash flow. Certain other of the Current Projects and the Potential Projects have high visibility and the support of the national government of the PRC and its various ministries, agencies and commissions ("Central Government"). These projects are expected to generate substantial cash flow following the commencement of their operation. Strategic Relationships with Strong Partners. The Company believes that its presence in China, its available capital and the well-regarded reputation of AES have allowed the Company to develop strategic relationships with key Chinese partners. The Company has included ministry level companies and affiliates of provincial and local economic commissions as well as affiliates of regional, provincial and local power bureaus as partners in its Joint Ventures. These partners participate in the construction and operation of the Company's Current Projects, expedite the approval process and mitigate project construction, operation and tariff adjustment risks. Similarly, the Company will seek to develop the Potential Projects and other future projects in the PRC in cooperation with strong Chinese business partners that have comparable economic interests and a variety of complementary strengths, including business experience and political relationships. In a number of cases, AES Chigen's partner in a Joint Venture controls or is affiliated with the power purchaser, contractor, operator and/or fuel supplier of the project. It is possible, in these cases, that such arrangements may result in one or more of these parties having a conflict of interest in a project, which could have an adverse effect on the Joint Ventures' operations. Location in Regions of High Power Demand. The Company believes that its Current Projects and the Potential Projects are located in regions of high power demand. In the course of developing its projects, the Company carefully reviews the regional and local demand and supply for power. In addition, in the course of project development, the Company evaluates the proposed power purchaser, usually a provincial or local government power bureau, to determine its economic resources and credit profile. One important criterion for any project developed by the Company is that the tariff to be charged by the proposed project must be affordable in light of the overall rates charged in the region, while also being competitive with the cost of new electric power. Some regions or cities in the PRC have experienced slower economic development in recent years. As a consequence, load growth in the PRC, while generally increasing in the country overall, has exhibited uneven development. Some of the Joint Ventures' power plants are designed to provide peaking power. Such plants are dispatched only after base load power stations have been brought on-line and reached maximum capacity. If electric power demand proves less than expected in an area, additional peak or base load power may not be required in the area or may be required at lower than expected levels. AES Chigen's Joint Ventures seek to mitigate this risk by entering into take-or-pay power purchase arrangements and by entering into dispatch contracts with PRC electric power dispatching authorities which obligate the dispatchers to dispatch the power plants at their full capacity for a minimum number of hours each year. There can be no assurance, however, that the Joint Ventures will not experience difficulty in enforcing take or pay contract obligations or such dispatch contract obligations if electric power in an area proves not to be needed by the affected power purchaser and dispatcher. The term "dispatch" refers to the schedule of production for all the generating units on a power system, which generally varies from moment to moment to match production with demand. As a verb, "dispatch" means to direct a plant to run. Significant Participation in Operational Management. The Company seeks to obtain, and has obtained in the case of the Current Projects and the Potential Projects, significant rights to participate in major decisions of the project companies that own the power plants. The Company typically exerts its influence through directors appointed to the board of directors of the project companies and by appointing either the general manager of the power plants and/or a deputy general manager in charge of finance or operations for the power plants. Several of the Company's officers have significant prior experience with AES in the development and operation of power plants in other countries. The Company is also developing a core group of local managers who will be focused on constructing and operating projects in China. AES's Capabilities. The Company draws on AES's people and expertise in development, construction oversight and operation of independent electric power generation projects. In particular, the Company draws on AES's extensive experience operating coal-fired power plants around the world. The Company believes this relationship has provided it with a competitive advantage in the China power market, which relies primarily on coal-fired power plants. Principles and Practices A core part of the AES Chigen culture is a commitment to "shared principles." The Company tries to adhere to these principles -- even though doing so might result in diminished or foregone opportunities. These principles are: Integrity - The Company will strive to act with integrity, or "wholeness." The Company will seek to honor its commitments. The goal is that the things people say and do in all parts of the Company should fit together with truth and consistency. Fairness - The Company wants to treat fairly its people, its customers, its suppliers, its shareholders, governments and the communities in which it operates. Defining what is fair is often difficult, but the Company believes it is helpful to routinely question the relative fairness of alternative courses of action. Fun - The Company desires that people employed by the Company and those people with whom the Company interacts have fun in their work. The Company's goal is to create and maintain an environment in which each person can flourish in the use of his or her gifts and skills and thereby enjoy the time spent at the Company. Social Responsibility - The Company believes that the Company has a responsibility to be involved in projects that provide social benefits, such as lower costs to customers, a high degree of safety and reliability, increased employment and a cleaner environment. The Company and AES seek to adhere to these principles not as a means to achieve economic success, but because adherence is a worthwhile goal in and of itself. However, if the Company and AES perceive a conflict between these principles and profits, the Company and AES will try to adhere to these principles -- even though doing so might result in diminished or foregone opportunities. Project Specific Strategies Subject to the limitations that would be imposed by the AES Debt Covenants following the Amalgamation, the Company will continue to seek, when evaluating or developing project opportunities in the PRC, to utilize project structures and contractual terms which generally have been proven to be effective in international independent power projects for reducing risks, obtaining financing and achieving commercially sound projects. The Company realizes, however, that projects in China will often differ significantly from the typical project finance model. In addition, the Company recognizes that, because foreign investment in PRC power projects is in its early stages, in order to finalize binding contractual documentation with respect to any project, the Company is sometimes required or elects to assume certain risks not typically assumed by project sponsors in an international independent power project. These risks may be associated with construction (such as completion risk), operations (such as fuel supply or transportation risks), foreign exchange convertibility and, to the extent that the Company cannot negotiate contracts that adjust its revenues for changes in exchange rates, exchange rate fluctuations. Accordingly, while the Company utilizes, where possible, the strategies summarized below, it also seeks to maintain flexibility in negotiations and to adopt alternative strategies where appropriate. Long-Term Power Purchase. It is planned that each project company in which the Company invests will sell electricity under one or more long-term power purchase contracts to regional, provincial, municipal or county electric power organizations, including power bureaus and electricity management offices, or industrial customers which the Company believes will be able to perform their obligations under the power purchase contracts. It is planned that the power purchaser will be required to purchase a specified minimum amount of electricity generated by the plant during the term of the power purchase contract based on an agreed pricing formula. These tariff formulas are designed, based on the minimum take obligation of the power purchaser, to be sufficient to pay the operating expenses and the financing costs of the project and to enable the Company to realize a return on its investment. The Company attempts to negotiate power purchase contracts that contain provisions requiring the purchaser to purchase a specified minimum number of kilowatt hours ("kWh") or to make specified minimum payments even if the power is not dispatched. The Company seeks to include in its power purchase contracts incentives to encourage the purchase of additional kWh over an agreed minimum amount. The Company attempts, whenever possible, to structure changes in the revenue component of a power purchase contract to correspond, as closely as possible, to changes in operating (primarily fuel) and capital costs of a power plant and fluctuations in foreign exchange rates. Construction and Equipment Procurement. The Company seeks to arrange construction and equipment procurement contracts with experienced, creditworthy international or Chinese contractors and suppliers. In a typical international independent power project one contractor assumes responsibility under a fixed-price, fixed-schedule turnkey contract for the design, engineering, equipment procurement, construction, installation, commissioning, staff training and start-up of a project. While the Company seeks this type of arrangement when possible, such a turnkey arrangement is often not available for PRC power projects. Therefore, where possible, the Company seeks to have its project companies enter into arrangements with construction and equipment procurement consortiums in which the various major responsibilities typically assumed by one turnkey contractor in the international model are allocated to individual members of the consortium. The Company seeks to negotiate contracts pursuant to which equipment suppliers and contractors agree to pay liquidated damages for delays and non-performance. The Company also attempts, where appropriate, to utilize established foreign equipment manufacturers who are able to provide warranties and service contracts for their equipment as well as to utilize proven Chinese technology from well-established Chinese equipment manufacturers. In some cases, the Company may elect to have its Joint Ventures manage the construction directly, possibly with the assistance of reputable Chinese or international engineering companies. The construction of an electric power generation plant, including its ancillary facilities such as a transmission line or substation, may be adversely affected by many factors commonly associated with the construction of infrastructure projects, including shortages of equipment, materials and labor, as well as labor disputes, adverse weather conditions, natural disasters, accidents and other unforeseen circumstances and problems. Any of these could cause completion delays and cost overruns. Delays in obtaining requisite licenses, permits or approvals from government agencies or authorities could also increase the cost or delay or prevent the commercial operation of a project. Construction delays can result in the loss or delayed receipt of revenues and, if completion is delayed beyond the completion date specified in the power purchase contract, the payment of penalties. Additionally, the failure to complete construction according to specifications can result in reduced plant efficiency, higher operating costs and reduced or delayed earnings. AES Chigen's Joint Ventures all rely on PRC contractors for the construction of their electric power plants. While there are a number of PRC contractors with substantial construction experience, there are only a limited number that have experience constructing plants on a turnkey basis. In only a few cases has AES Chigen been able to enter into a turnkey contract with a Chinese contractor which includes a guaranteed fixed price and/or contractor obligations to pay liquidated damages for delays in completion or for shortfalls in performance. In the case of one project, AES Chigen's Joint Venture has experienced delays in installation and defects in the quality of equipment. The delays have been mitigated by the payment of damages by the contractor. AES Chigen seeks to mitigate construction risk in a number of ways: carefully choosing its contractors; closely supervising the construction of its projects or retaining internationally recognized construction managers to supervise construction; and, in some cases, by utilizing established foreign equipment manufacturers and vendors who are able to directly pass through to the Joint Ventures their equipment and performance warranties or, where appropriate, by utilizing proven Chinese equipment and technology. Despite such mitigation efforts, no assurance can be given that AES Chigen's Joint Ventures will not experience construction delays or difficulties, or that any such delays or difficulties will not have a material adverse effect on the operations of AES Chigen's Joint Ventures. Fuel Supply. Whenever possible, fuel for the Company's operating plants is purchased under long-term supply contracts with suppliers that have sufficient, and preferably dedicated, reserves of fuel stock to meet the project's operating requirements and that have economic interests aligned with the joint venture partners. In certain circumstances, including where a plant is located in close proximity to a reliable fuel source, the Company may deem it advisable for a project company to purchase its fuel on the spot market in order to take advantage of lower fuel prices. In such circumstances, the Company may contract with fuel brokers or government companies with appropriate guarantees or other performance supports. In other circumstances, the power purchaser may be obligated to supply a project's fuel requirements. The Company attempts, when possible, to have its fuel supply contracts set out delivery and testing procedures and penalties for delays or non-performance. Approval of a project by the State Planning Commission of the Central Government ("State Planning Commission" or "SPC"), which is required for larger projects, ordinarily includes a provision for the allocation of fuel, which reduces the fuel supply risk for such projects. Most of the Joint Ventures' power projects utilize coal, fuel oils or natural gas for the generation of electricity. The power purchase contracts which have been entered into by the Joint Ventures provide for a pass-through to the power purchasers of increases in the cost of fuel. In the case of most of the Joint Ventures, under normal circumstances, the procedures of the local government pricing bureaus allow tariff adjustments reflecting fuel cost changes to be made only once a year. As a result, in these cases AES Chigen's Joint Ventures may not be able to receive compensation for increased fuel costs until sometime after the date they are incurred. Fuel Transportation. Whenever possible, the Company arranges with a carrier for transportation of fuel from the fuel source to the Company's operating plants under long-term transportation contracts or the Company will obtain satisfactory assurances that transportation services will be available to the project. Due to the underdeveloped transportation infrastructure in China, the Company sometimes considers more favorably projects located in fuel-rich regions, such as projects located near coal mines. Approval of a project by the State Planning Commission, which is required for larger projects, ordinarily includes a provision for fuel transportation, which reduces the fuel transportation risk for such projects. For coal projects which are not "mine mouth" projects, coal must be supplied to the project site from the interior provinces of China. The affected Joint Ventures seek to mitigate this transportation risk by entering into long term contracts for the transportation of coal. However, where rail is utilized as the means of coal transportation, the coal transporters may experience significant delays due to the limited capacity of the PRC's rail system. Because of this lack of capacity, the Central Government rations the allocation of rail cars. In one project which requires the transportation of coal by rail, AES Chigen's Joint Venture has obtained an administrative allocation of rail cars from the Central Government. However, there can be no assurance that a satisfactory allocation of rail cars will be available in all future cases to ensure that the coal supply requirements of the affected projects will be timely met. Electricity Transmission. The Chinese electric power transmission system is not fully interconnected. Some parts of the transmission system contain isolated grids. Three of AES Chigen's Joint Ventures are located in areas served by isolated transmission grids. As a result, if demand in these areas is less than forecasted, it may be difficult or impossible for the affected Joint Venture to transmit the project's available power to a region which has a demand for it. The Company does not intend to bear the risk of the construction of transmission lines. Although PRC law prohibits foreign investment enterprises from constructing, owning or maintaining a transmission line, in many cases, it may be necessary for a project company to finance the construction of the transmission line which is required to connect the power plant to a nearby electric power grid. In these cases, in addition to providing financing, the Company will seek to structure its power purchase contracts in a manner which places the risk of delays and failure to complete the construction of the transmission line on the power purchaser. In order to take advantage of a broader market and an additional power purchaser, one of the Joint Ventures is planning to incur additional costs to build a low-voltage local transmission line to interconnect its power plant with a larger grid. Government Approvals. The Company seeks to ensure that its joint ventures and joint venture partners obtain and comply with all PRC approvals and laws and regulations and that project budgets reflect compliance with all then-existing and applicable PRC environmental protection laws and regulations. In each case prior to funding its equity portion of the registered capital of a joint venture, the Company seeks to obtain a legal opinion from counsel qualified to practice PRC law regarding, among other things, the validity and sufficiency of all approvals for the project and joint venture. The Company also seeks to receive letters of support from the local governments in areas in which its projects are located. Foreign Exchange. The Company attempts to mitigate its foreign exchange risks by structuring its joint venture contracts and power purchase contracts to include hedges which provide for adjustments in equity distributions to joint venture partners and in electricity payments for changes in the exchange rate between the Renminbi Yuan, the lawful currency of the PRC ("Renminbi," and "RMB(Y)"), and the US dollar. In instances in which the Company seeks State Planning Commission approvals for a project, the Company will also seek to receive an approval which includes an allocation of foreign exchange to the project. Power Plant Management. The Company wants its power plants to be managed efficiently, as well as in a manner consistent with Company principles and practices. In pursuit of this goal, the Company seeks to appoint experienced general managers and/or deputy general managers with significant decision making authority at the power plants and to install operating systems at the power plants which are consistent with AES's operating approach. The Company also seeks to have key members of a plant's management team, including the general manager and deputy general manager, acquire specific AES experience by working at AES facilities worldwide. The operation of an electric power generation plant may be adversely affected by many factors such as the breakdown or failure of equipment or processes, performance below expected levels of output or efficiency, labor disputes, operational errors, natural disasters, and the need to comply with the directions of the relevant government authorities, the dispatcher and power purchaser of a power plant. In addition, such operation may be hampered by insufficient or poor quality fuel caused by either inadequate supply or transportation or arrangements therefor. AES Chigen is not the operator of any of its power plants either directly or by means of traditional operation and maintenance agreements with internationally recognized power plant operators. In some cases, AES Chigen's Joint Ventures have contracted with the power purchaser to operate a power plant. In such instances, the power purchaser is obligated under the power purchase contract to purchase the annual minimum quantity of electric power regardless of the power plant being unavailable due to the fault of the operator. In other cases, the Joint Ventures themselves are operating the plant. In these instances, AES Chigen may affect the operation of a power plant through the appointment of a general manager and/or deputy general manager of the plant. Insurance. The Company seeks to obtain insurance for its projects from reputable insurance companies permitted to insure projects in China for risks during construction and operation, including business interruption insurance. The Company typically retains an international insurance consultant to advise the Company on the insurance coverage and limits which are appropriate for the relevant hazards. Where appropriate, the Company may seek to obtain Multilateral Investment Guarantee Agency insurance coverage of certain political risks associated with the PRC. Water Usage Rights. The Company seeks to obtain long-term water usage rights for the Company's operating plants. In all of its projects, AES Chigen and its Joint Ventures are relying on the reliability and creditworthiness of PRC entities such as its partners, contractors, customers, suppliers, operators, guarantors, lenders and others who are parties to agreements with AES Chigen or its Joint Ventures. While AES Chigen believes that these counterparties have the ability to perform and will perform their obligations, the reliability and creditworthiness of PRC entities are difficult to ascertain. In most cases, AES Chigen, in assessing the reliability and credit standing of counterparties, is relying on financial or other information provided to AES Chigen or its Joint Ventures by such parties or others, or from information and sources publicly available in the PRC. AES Chigen can offer no assurance that this information is accurate or that these counterparties will meet their contractual obligations. The failure of any one of these counterparties to fulfill its obligations to a Joint Venture could have a substantial negative impact on such Joint Venture's operations. The People's Republic of China The statistics set out in this section have been extracted from various international organization, government and private publications. The Company makes no representation as to the accuracy of the information contained in this section. Furthermore, no representation is made that any correlation exists between China or its economy in general and the performance of the Company or the Company's Joint Ventures. Although statistics with respect to the economy of China generally accord with observed economic trends, some statistics may not correspond to Western measures, or may be flawed by ineffective collection methods or other problems. Due to such factors, statistical information regarding the economy of China may be inaccurate or not comparable to statistical information with respect to other economies. General Since 1978, the Central Government and local governments of China (together with the Central Government, the "PRC Government") have been implementing market oriented economic reforms in an effort to revitalize the PRC's economy and improve its citizens' standard of living. The reforms have marked a shift from a more rigid, centrally-planned economy to a more mixed economy in which market forces play an increased role and the government has a reduced role. Enterprises owned or under the administrative control of the Central Government ("State-owned") still constitute the largest sector of the economy, but implementation of the economic reforms has led to, among other things, the delegation to managers of enterprises of more decision-making powers and responsibilities regarding matters such as production, marketing, use of funds and employment of people. Other reform measures have included the conversion of selected State-owned enterprises into joint stock limited companies which have issued shares to the public and private investors (including their employees); the gradual reduction of PRC Government control over producer prices; and the designation of certain coastal areas and cities as special economic development zones with greater local autonomy. The PRC Government has also implemented policies designed to attract foreign investment and technology. The PRC Government's reforms have resulted in significant economic growth. The gross domestic product of China increased at an average annual rate of 12.1% during the period from 1991 to 1995. The growth rate of gross domestic product was 9.7%. General economic conditions in the PRC could have a significant impact on the business prospects of AES Chigen. The economy of the PRC differs from the economies of most countries belonging to the Organization for Economic Co-operation and Development in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position, among others. For over 40 years, the economy of the PRC has been primarily a planned economy characterized by state ownership and control of productive assets and the management of such assets through a series of economic and social development plans. Although the majority of the PRC's productive assets are still owned by the PRC Government, the adoption of economic reform policies since 1978 has resulted in a gradual reduction in the role of state economic plans in the allocation of resources, pricing and management of such assets, an increased emphasis on the utilization of market forces, and rapid growth in the PRC economy. However, such growth has been uneven among various regions of the country and among various sectors of the economy. The success of AES Chigen depends in part on the continued economic growth of the regions where the Joint Ventures are located. At times, the economic reform measures adopted by the PRC Government may be inconsistent or ineffectual, and therefore the Joint Ventures may not be able to enjoy the potential benefits of such reforms. Further, these measures may be adjusted or modified in particular ways in particular areas, possibly resulting in such economic liberalization measures being inconsistent from time to time or from industry to industry or across different regions of the PRC. AES Chigen may also be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, methods to address inflation, currency conversion, rates and methods of taxation, or the method by which electricity tariffs are set and approved, among other things. While the PRC Government is expected to continue its economic reform policies, many of the reforms are new or experimental and may be refined or changed. It is also possible that a change in the PRC Government leadership could lead to changes in economic policy. The PRC economy has experienced rapid growth in the past five years. This growth has also been accompanied by rising inflation, which reached an annual rate of 21.7% in 1994. The PRC Government has implemented policies from time to time to restrain the rate of such economic growth and control inflation in order to achieve coordinated economic development. In July 1993, the Central Government began implementation of a number of austerity measures to control economic growth and curb inflation, including increasing interest rates on bank loans and deposits and postponing certain planned price reforms. While inflation has since moderated to 6.1% for 1996, there can be no assurance that such austerity measures will will not be discontinued or result in future severe dislocations in the PRC economy. Austerity measures intended to slow economic growth may affect the demand for electricity and the prospects for the financing of some of the Joint Ventures. Depending on the nature and implementation of such additional measures, the Joint Ventures' economic prospects at times may be adversely affected through, among other possible measures, placing additional controls on the increase of electric power rates. Any such development could also adversely affect the Joint Ventures' operations or the ability of the Joint Ventures' customers to honor their obligations under their power purchase contracts, which could adversely affect AES Chigen. A significant portion of the economic activity in the PRC is related to exports and may therefore be affected by developments in the economies of the PRC's principal trading partners. Trade sanctions imposed by the PRC's main trading partners, including the revocation or conditional extension by the United States of China's Most Favored Nation trading status, could adversely affect the trade and economic development of the PRC and the ability of the Joint Ventures' customers to honor their obligations under their power purchase contracts with the Joint Ventures. In addition, current or future disputes between the PRC and its main trading partners over specific trade issues, such as intellectual property, the balance of trade or other political issues, such as regional affairs or arms sales policies, could lead to the imposition of trade or other sanctions which could adversely affect the demand for power in the PRC. China's legal system is relatively new, and the government is still in the process of developing a comprehensive system of laws, a process that has been ongoing since 1979. Considerable progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. Such legislation has significantly enhanced the protection afforded to foreign investors. However, foreign investors may be adversely affected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local regulations by national laws or regulations. Moreover, experience with respect to the implementation, interpretation and enforcement of such laws and regulations is limited. Such administrative and judicial interpretation and implementation and the enforcement of commercial claims and resolution of commercial disputes may be subject to the exercise of considerable discretion by both administrative and judicial organs and may be influenced by external forces unrelated to the legal merits of a particular matter or dispute. Even where adequate laws exist and contractual terms are clearly stated, there can be no assurance that AES Chigen or a Joint Venture will obtain swift and equitable enforcement of its rights. The China Power Market At the end of 1995, China had an aggregate installed electric power generation capacity of approximately 217,220 MW, making China's electric power generation capacity the second largest in the world. In 1995, about 17,323 MW of installed capacity was added. China's electric power industry produced approximately 1,007 terawatt (one million megawatts) hours ("TWh") of electricity in 1995. This represents an addition of nearly 80 TWh from 1994, making China's electricity industry one of the fastest growing in the world. Despite its size, China's electric power system is inadequate to meet current and expected demand, and the consequent shortage is one of the major obstacles to economic growth in the PRC. In addition, approximately 110 million people do not yet have access to electricity. The following table highlights this situation on a comparative basis, indicating with respect to the PRC that, while its economic growth rate is among the highest of the countries mentioned, the PRC is considerably below average in installed capacity and consumption of electricity.
1994 1994 1994 Per Capita Per Capita Per Capita Installed Electricity GDP -- Capacity(1) Consumption(1) Nominal Real GDP Growth Rate% (3) -------------------------------------------------------------- (Watts) (kWh) US$(2) 1991 1992 1993 1994 1995 1996 -------------- -------------- ----------- ---- ---- ---- ---- ---- ---- (projected) - -------------- U.S 2,812 11,256 25,850 (1.0) 2.7 2.7 3.5 2.0 2.4 - -------------- Japan 1,552 6,837 36,845 4.0 1.1 1.1 0.5 0.9 3.5 - -------------- Singapore 1,222 5,696 16,700 6.7 6.0 10.1 10.1 8.9 7.5 - -------------- Hong Kong 1,492 4,546 21,750 5.1 6.3 6.4 5.4 5.0 5.0 - -------------- South Korea 687 3,261 8,528 9.1 5.1 5.8 8.6 9.0 7.2 - -------------- Malaysia 352 1,669 3,627 8.6 7.8 8.3 9.2 9.5 8.8 - -------------- Thailand 233 1,080 2,423 8.1 8.1 8.3 8.8 8.7 8.3 - -------------- PRC 153 671 430 9.3 14.2 13.5 12.6 10.2 9.0 - -------------- Philippines 101 290 937 (0.6) 0.3 2.1 4.4 4.8 5.9 - -------------- Indonesia 83 278 874 8.9 7.2 7.3 7.5 8.1 7.8
- --------------------------- Sources: (1) U.S. Department of Energy, Energy Information Administration, Office of Energy Markets and End Use, International Database (August 1996). (2) U.S. Department of Commerce, Economics and Statistics Administration, Office of Business Analysis, National Data Bank (August 1996). (3) International Monetary Fund, World Economic Outlook (October 1996). Developments in the PRC's Power Industry Under the PRC's Eighth Five-Year Plan (1991-1995), increasing demands for electricity resulted in the rapid increase in the PRC's total annual electricity generation. A total of 65,747 MW of electric power generating capacity was installed during the five-year period from 1991-1995, representing an average annual increase of more than 16,000 MW. Notwithstanding such increase, the PRC's average annual growth rate for electricity generation between 1991 and 1995 (approximately 10.4%) did not keep pace with the average annual growth rate of the PRC's Gross Domestic Product ("GDP") (approximately 12.1%) during such time. The following table sets forth figures for installed capacity, increases in installed capacity, electricity generation and percentage increases in electric power generation in China for the years 1986 to 1995.
Increase in Increase in Installed Installed Electricity Electricity Capacity Capacity Generation Generation Year (MW) (MW) (TWh) (%) ------------------- ---------- ----------- ----------- ------------- 1986 93,818.5 6,795.3 449.6 9.5% 1987 102,897.0 9,078.5 497.3 10.6 1988 115,497.1 12,600.1 545.2 9.6 1989 126,638.6 11,141.5 584.8 7.3 1990 137,890.0 11,251.4 621.2 6.3 1991 151,473.1 13,583.1 677.5 9.0 1992 166,532.4 15,059.3 754.2 11.3 1993 182,910.7 16,378.3 836.4 10.9 1994 199,897.2 16,986.5 927.9 10.9 1995 (estimated)(1) 217,220.0 17,322.8 1,007.0 8.5
- --------------------------- Source: Ministry of Electric Power, Electric Power Industry in China (1996). (1) Based on various published statements from MOEP officials. Based on statements by the Ministry of Electric Power ("MOEP" or the "Ministry of Electric Power"), China will need an average of approximately 16,000 MW of new electric generating capacity annually through the year 2000 (or an aggregate of approximately 80,000 MW of new electric generating capacity in the Ninth Five-Year Plan period ending 2000). Since domestic savings are insufficient to fund the PRC's requirements, the Ministry of Electric Power has adopted plans to attract foreign capital and projects that 20% of the capital for power industry development will come from foreign investors, 40% from local governments and enterprises and the remaining 40% from the Central Government during the five-year period ending December 31, 2000. MOEP estimates that approximately $20 billion of overseas investment will be needed to reach the MOEP's target of increasing installed capacity to 290,000 MW by 2000. Energy Resources China's main energy resources for power generation, coal and hydropower, are not evenly dispersed geographically. Two-thirds of China's coal reserves are located in the northern provinces of Shanxi, Shaanxi and the Inner Mongolia Autonomous Region, and more than 90% of the PRC's hydropower resources are concentrated in the western part of the country. Because China's economically developed regions are principally located in the eastern and southern coastal areas, the Ministry of Electric Power plans to expand the interconnected power networks by installing high voltage transmission lines to facilitate the transmission of power from the west to the east, as well as from the north to the south. The Ministry of Electric Power has also indicated that an increased focus should be placed on coal-fired electric power generating projects which are located in close proximity to coal mines. The Company's proposed Yangcheng Sun City power plant is an example of such a project. See "Description of the Potential Projects -- Yangcheng Sun City." China is rich in coal resources, with proven coal reserves of 966.7 billion tons. The PRC leads the world in coal production, with 1995 production of approximately 1.3 billion tons. Coal accounted for approximately 75% of electricity production in 1995, and approximately 77% of aggregate domestic commercial energy consumption. The PRC intends to continue to rely on coal as its primary fuel resource for electric power generation. However, the PRC is also increasing its utilization of other fuels. Of the 16,987 MW of electric power generation capacity added in 1994, hydropower accounted for approximately 24.0%, nuclear power accounted for approximately 14.0% and fossil fuels accounted for approximately 61.0%. Organization of the PRC's Electric Power Industry The PRC's electricity industry is controlled by the Ministry of Electric Power, which was established by the Eighth National People's Congress at its first session held in March 1993. Prior to March 1993, the electric power industry was under the jurisdiction of the Ministry of Energy, which itself was created in 1988 from parts of the former ministries which oversaw the coal industry, the nuclear industry, the petroleum industry, water resources and electric power. The Ministry of Electric Power is responsible for formulating development strategies and policies, including: investment, technical and production and consumption policies relating to electric power development; formulating unified electric power industry planning in collaboration with the State Planning Commission and other government agencies; overseeing the implementation of such planning; supervising the implementation of related national policies, decrees and plans; and providing services to electric power enterprises. The Ministry of Electric Power manages five interprovincial power groups ("Regional Power Groups") and ten provincial power bureaus. The Regional Power Groups (i) manage their respective regional power grids, (ii) dispatch, either directly or indirectly through lower level power bureaus, the power plants connected to such grids and (iii) supervise the power bureaus at lower administrative levels (primarily provincial but also certain large municipalities and other areas). The Regional Power Groups also act through power companies which develop, construct, own and operate certain power plants and transmission facilities within their respective jurisdictions. A similar structure exists for the provincial power bureaus under the Regional Power Groups and the ten provincial power bureaus directly managed by the Ministry of Electric Power. Each provincial power bureau manages its provincial power grid and dispatches the power plants connected to such grid to meet local demand. Many provincial power bureaus also act through power companies which operate certain power plants and transmission facilities within their respective provinces. Counties and municipalities directly under the administration of the provinces may have power bureaus which perform, under the administration of the power bureau at the next higher level of government, similar functions within their respective jurisdictions. The key personnel of the Regional Power Groups are appointed by the Ministry of Electric Power, and the key personnel of the provincial power bureaus are appointed by the provincial governments in consultation with the Ministry of Electric Power. In January 1996, the China National Power Corporation ("CNPC") and the China Federation of Power Enterprises ("CFPE") were established pursuant to the Central Government's policy to separate the regulatory and commercial functions of the electric power industry. The PRC Government has announced plans that the Ministry of Electric Power will be dissolved and its functions transferred to CFPE and CNPC. CFPE will assume the Ministry of Electric Power's regulatory functions. CNPC will serve as the PRC's principal investor in and/or operator of wholly or partially State-owned facilities in the electric power industry. CNPC also will be responsible for the operation of interregional transmission facilities and the development of a national power grid. Investment in the Electric Power Industry Prior to 1985, virtually all investment in China's electric power industry was financed by the Central Government. In 1985, the Central Government began to implement a policy of using a variety of financing methods to develop the PRC's electric power industry. Such policies included: (i) allowing local governments to participate in the development and ownership of power generating facilities in their areas, (ii) loaning (as opposed to directly allocating) funds to local and provincial power bureaus for the development and construction of such projects, and (iii) permitting foreign investment and participation in the development and operation of power plants in China. Hong Kong investment companies and developers were the first foreign companies to invest in the industry. More recently, however, developers and investors from other countries have begun pursuing investment opportunities in various electric power projects in China. Between 1979 and 1995, 77 large and medium-sized foreign-invested power projects were constructed, with a total installed capacity of 49,740 MW, of which 24,290 MW had been put into operation by the end of 1995. The total contracted foreign investment in power projects has reached $17.2 billion, of which $11.5 billion had been invested by the end of 1995. In 1995, China launched the first Central Government sponsored pilot build, own and transfer program to attract foreign investment in infrastructure projects. The first project under this competitive bidding program is the proposed $600 million, 700 MW coal-fired Laibin project in Laibin County, Guangxi Zhuang Autonomous Region. In 1988, as part of the system of investment reform in power development, the State Council of the PRC (the "State Council"), the highest administrative organ of the Central Government, organized the State Energy Investment Corporation (the "SEIC") to represent the PRC Government in the development and financing of large power plants. Also in 1988, the China Huaneng Group was formed primarily as a developer and operator of power plants. In March 1994, the State Council announced the absorption of the SEIC into the State Development Bank ("State Development Bank"), as well as its intention to transfer the SEIC's personnel to various Central Government enterprises and to the State Development Investment Company under the State Development Bank. To finance the expansion of the electric power industry, the State Council, in 1995, approved the establishment of China Power Investment Corporation ("CPIC") in China and China Power International Holdings Limited ("CPI"), CPIC's wholly owned subsidiary, in Hong Kong. CPIC was established by the Ministry of Electric Power to raise funds in the international capital markets to invest in PRC power projects. CPI has been authorized to sell interests in State-owned power utilities, issue debt, establish investment funds for the electric power industry and raise foreign funds for investment in the electric power industry. CPI is one of the Company's Joint Venture partners in the Wuhu Grassy Lake project and one of the Company's project partners in the Nanpu Southern Delta project. See "Description of the Current Projects" and "Description of the Potential Projects." With appropriate PRC Government approvals, power bureaus may form directly managed power companies, which may develop, construct, own and operate power plants in their respective territories. Tariff Setting Mechanisms For power plants that the Ministry of Electric Power directly or indirectly manages, the tariff is generally set under the plans devised and implemented by the PRC Government in relation to the economic and social development of the PRC ("State Plan"). The tariff varies according to the category and location of the users. Thus, most electricity has been purchased from power plants at State Plan tariffs. These State Plan tariffs have been maintained at a low level, due to subsidization by the PRC Government. One of the stated goals of the Ministry of Electric Power is to reform power pricing consistent with the development of the market economy in the PRC. The Ministry of Electric Power has commenced the trial implementation of a pricing policy which charges consumers higher tariffs for peak load periods and lower tariffs for off-peak load periods. Allowing the market to influence the setting of power tariffs is intended to provide incentives for greater efficiency in energy production, reduction of energy use per unit of industrial output and promotion of conservation technologies. As of 1994, more than ten power grids have implemented this pricing policy. The tariffs of sino-foreign joint venture power projects generally have been established by negotiations among the sino-foreign joint ventures, the prospective power purchasers, the relevant local governments, planning commissions, pricing bureaus and power bureaus. The tariffs or tariff formulas are typically set forth in power purchase contracts. The pricing bureaus are responsible for approving and adjusting the tariffs, usually on an annual basis. Electric Power Law In April 1996, a new national law governing the electric power sector in the PRC came into effect. The law is intended to protect the legitimate interests of investors, operators and consumers. It provides a framework within which the PRC Government intends to guide investment in the electric power sector. The law also establishes, among other things, broad principles with respect to the methodology of calculating and setting electric power tariffs. The principles state that electricity tariffs shall be based on reasonable compensation for the costs of generation and payment of taxes, the recovery of reasonable profits and the promotion of the construction of electric power generating facilities. Detailed regulation with respect to tariff calculation and tariff setting are expected to be promulgated by the Ministry of Electric Power in the near future. The impact of the new law will depend on its implementing regulations and the manner in which the law is interpreted. Transmission and Dispatch The main system for the dispatch, transmission and distribution of electric power in China consists of the five interprovincial power grids managed by their respective Regional Power Groups, one interprovincial power grid, which consists of four semi-independent provincial grids managed by their respective four provincial power bureaus, and the six independent provincial power grids managed by their respective provincial power bureaus. The table below shows the aggregate installed capacity of the power plants connected to the grids managed by such power bureaus and the total electricity generated on those grids in 1994.
1994 1994 Installed Total Electricity Capacity Generation Power Grids (MW) (TWh) --------------------------- --------- ------------------ East China Power Grid 31,673.2 164.358 Northeast Power Grid 26,534.4 124.531 Central China Power Grid 27,602.2 132.047 North China Power Grid 27,146.4 140.087 Northwest Power Grid 11,483.0 60.423 Guangdong Power Grid(1) 19,009.7 73.916 Shandong Power Grid 11,518.2 67.183 Sichuan Power Grid 10,095.8 47.328 Guangxi Power Grid(1) 4,230.7 16.854 Fujian Power Grid 4,960.3 21.605 Yunnan Power Grid(1) 4,082.9 16.939 Guizhou Power Grid(1) 3,253.8 15.206 Xinjiang Autonomous Region 2,865.1 10.617 Hainan Power Grid 1,057.3 2.869 Tibet Autonomous Region 176.6 0.427
- --------------------------- Source: Ministry of Electric Power, Electric Power Industry in China (1996). (1) Part of the Southern Interconnected Power Grid established in 1993. In 1994, the PRC had almost 540,000 kilometers of transmission lines with a capacity of 35 kilovolts ("kV") or greater. The power grids primarily use 500, 330, 220 and 110 kV transmission lines. All electricity produced in China is dispatched by the power bureaus, except for that generated by units not connected to a grid. The grids and the electric power dispatched to each grid are administered by dispatch centers ("Dispatch Centers") operated by the power bureaus. In November 1993, the State Council issued the Administrative Regulations Concerning Grid Dispatch ("Dispatch Regulations"), the first nationwide regulations in China governing the dispatch of electric power. The Dispatch Regulations are intended to help the PRC achieve a more efficient and rational dispatch of electric power. Under the Dispatch Regulations, Dispatch Centers were established at each of five levels: the National Dispatch Center, the Dispatch Centers of the Regional Power Groups, the Dispatch Centers of the provincial power bureaus, the Dispatch Centers of the power bureaus of municipalities under provinces and the Dispatch Centers of the county power bureaus. Pursuant to the principles of unified dispatch, set forth in the Dispatch Regulations, Dispatch Centers at lower levels are required to comply with the dispatch instructions of higher level Dispatch Centers. Dispatch Centers are charged with setting production levels for the various power plants connected to the grid. To effect this determination, each power plant receives daily from its local Dispatch Center an expected hour-by-hour output schedule for the following day, based on expected demand, the weather and other factors. The Dispatch Centers must dispatch electric power according to, among other things, (i) power supply agreements entered into between a power bureau and certain large or primary electricity customers, where such agreements take into account the electric power generation and consumption plans formulated annually by the PRC Government and set forth in the State Plan, (ii) agreements entered into between a Dispatch Center and each power plant subject to its dispatch, (iii) interconnection agreements between power bureaus, and (iv) the actual conditions of the grid, including equipment capabilities and safety reserve margins. Peak and Seasonal Demands The demand for electric power experiences fairly predictable daily and other periodic cycles. The peak periods of power use in China are in the early morning and evening when industrial, commercial and residential use is highest. Peak power is in great demand in many cities which have rapid economic growth. Because the PRC has a significant shortage of electric generating capacity, the Dispatch Centers restrict the access to electricity of certain users during peak periods of demand. As a result, the peak load demand in China does not accurately reflect the extent of the total demand for power. While power plants operate at less than full capacity during off-peak periods, virtually all available power plants operate at or near full capacity during peak periods, subject to grid-wide safety reserve margins. Four of the Joint Ventures' power plants currently in operation or under construction -- Chengdu Lotus City, Hefei Prosperity Lake, Wuxi Tin Hill and Yangchun Sun Spring -- are designed to provide peaking power. The Company believes that each of these plants will be able to take advantage of the demand for peak power in its region. However, such plants are typically dispatched only after base load power plants have been brought on-line and reached maximum capacity. If electric power demand proves less than expected in an area, additional peak or base load power may not be required in the area or may be required at lower than expected levels. Because the combustion of coal provides most of China's space-heating needs and because air conditioning is not yet prevalent in most regions of China, seasonal variations in the demand for electricity are less than in many developed countries. Joint Venture Companies Foreign investment in the PRC may take a number of forms, including joint ventures, wholly foreign-owned enterprises, branches of foreign companies and shareholdings in limited liability companies and joint stock limited companies. The Company currently invests through the joint venture structure. The Company's current joint venture partners are PRC entities. The Company anticipates that its future joint venture partners will be PRC entities although non-Chinese partners may be included as partners, if appropriate. Joint ventures between Chinese and foreign parties in the PRC take two basic forms: equity joint ventures and cooperative joint ventures. Equity joint ventures are governed by the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment and the implementing regulations related thereto. Cooperative joint ventures are governed by the Law of the People's Republic of China on Chinese and Foreign Cooperative Joint Venture Enterprises and the implementing regulations related thereto ("Cooperative Joint Venture Law"). A cooperative joint venture may be structured as an entity similar to a partnership (in which case it will not be separately qualified as a legal person under Chinese law) or it may be structured as a limited liability company (in which case it will be qualified as a legal person under Chinese law). In most cases, cooperative joint ventures are formed as limited liability companies. Cooperative joint ventures allow more flexibility than equity joint ventures in structuring the terms of the joint venture arrangement. For example, in a cooperative joint venture the rights of a party to share in the profits of the joint venture need not correspond to its contributions to the registered capital (equity) of the joint venture relative to other parties. In addition, subject to government approval, the Cooperative Joint Venture Law permits recovery of the foreign party's registered capital during the venture term. However, the Cooperative Joint Venture Law requires that the fixed assets of the joint venture be transferred to the Chinese parties without charge at the end of the venture term if the foreign party recovers all of its equity capital during the term of the venture. Cooperative joint ventures are subject to laws and regulations with respect to such matters as the contribution of registered capital, debt-equity leverage ratios, accounting, taxation, foreign exchange, labor and liquidation and dissolution. Transfer of an interest in a cooperative joint venture requires government approval and unanimous agreement among the parties. An equity joint venture enterprise is a distinct legal entity established and registered as a limited liability company. The parties to an equity joint venture have rights to share in the profits of the joint venture in proportion to their respective contributions to the registered capital of the joint venture. The operations of equity joint ventures are subject to many of the same laws and regulations as cooperative joint ventures. Transfer of an interest in an equity joint venture requires government approval and unanimous agreement among the parties. In addition, in an equity joint venture, the parties may not reduce the amount of their registered capital until the expiration of the term of the joint venture or its dissolution in accordance with PRC law. Typically, dividends are paid by a joint venture in accordance with the profit distribution plan adopted by the joint venture's board of directors. Except as mentioned above, PRC laws and regulations provide that only accounting profits (after payment of taxes, provision for losses for prior years and contributions to special funds for enterprise expansion, employee welfare and bonuses and a general reserve) are available for dividend distributions to the parties of a joint venture. In addition to contributions of registered capital, joint ventures may be financed by debt, including shareholder loans. Foreign currency loans to a joint venture, however, must be registered with the local branch of the State Administration of Foreign Exchange of the Central Government ("State Administration of Foreign Exchange" or "SAFE") in the location in which the joint venture is situated. Foreign investment enterprises are permitted under PRC laws and regulations to convert their Renminbi earnings into foreign exchange for certain purposes, including to pay their foreign currency obligations, to pay dividends and other distributions to foreign shareholders and to make payment of interest and principal with respect to foreign currency loans (both third party and shareholder debt) incurred by the joint venture. To effect such conversions, joint ventures must comply with certain procedures required by PRC laws and regulations. Government Approvals China's electric power industry is highly regulated, both in terms of operating existing power plants and developing new power projects. All electric power projects in China and all foreign investments are required to obtain approvals from one or more central, provincial or local government authorities. While the regulations governing and the procedures for obtaining approvals for foreign investment projects are generally well-understood, the specific regulations and procedures for the approval of electric power projects with foreign investment in the PRC and associated foreign investment enterprises are not entirely transparent. Project approvals and foreign investment approvals are required, but follow separate procedures. At the highest level, the right to approve projects in the PRC is vested in the State Council. The State Council has reserved to itself the authority to approve any project with a total investment which exceeds $100 million. Pursuant to various internal PRC Government notices, the State Council has delegated the authority to approve any project with a total investment of less than $100 million to various ministries and ministry level entities, including the SPC. The SPC and certain ministries and other ministry level entities have, in turn, adopted a policy, also by internal directives, of further delegating authority to approve projects with a total investment of less than $30 million to provincial governments, provincial level bureaus of the Central Government and certain municipalities. The project approval authority of local governments is, therefore, generally limited to not more than $30 million. Separate from project approval, foreign investment must be approved by The Ministry of Foreign Trade and Economic Cooperation of the Central Government ("Ministry of Foreign Trade and Economic Cooperation or "MOFTEC"), or one of its departments at the provincial or local government level, should the total investment amount be below $30 million. Accordingly, foreign investment enterprises proposing to undertake projects must obtain approvals for the projects from the appropriate government level planning authorities and approvals for the foreign investment from a similar level department of MOFTEC. Generally, the approval process can be divided into three major stages. First, following preliminary planning by the Chinese party and, in some instances, initial negotiations with the foreign party and the execution of a letter of intent by the parties, a project proposal (including a preliminary feasibility study report and an environmental impact report) is submitted to the appropriate level planning authorities for approval. In the second stage, a more detailed joint feasibility study report and a more detailed environmental impact report will be prepared. During this stage, the foreign and local parties will negotiate and execute a legally binding joint venture contract and articles of association. The approval of the local government authorities for both the project and the foreign investment is required. Additionally, as stated above, depending on the amount of total investment in the proposed project and joint venture, the approval of the Central Government may be required. Approval may also be required from other central, provincial and local government ministries and agencies, with respect to, among other matters, foreign exchange plans, allocations of fuel supplies and related transportation, land use, tax preferences, electricity pricing, grid access, operations and maintenance arrangements, loan and guarantee arrangements and design and engineering arrangements. In the final stage, following approval of the joint venture by the relevant department of MOFTEC, the joint venture must register with and obtain a preliminary business license from the State Administration of Industry and Commerce ("SAIC") or a branch thereof. Following the completion of these formalities, the parties are required to contribute their agreed upon registered capital and, upon verification thereof, the joint venture is issued a permanent business license by the SAIC. The approval process outlined above could take several years. Therefore, in some instances, the Company may pursue opportunities for investments in power projects that are in advanced stages of development or for which significant approvals have already been obtained or construction has commenced or been completed. Two of AES Chigen's power plants have been structured as multiple projects and joint ventures, each project and joint venture with a total investment below the $30 million threshold, and have obtained local government approvals on this basis. It is possible that projects structured in this fashion could be viewed by the Central Government approval authorities as a single project. In several other cases, AES Chigen's projects and Joint Ventures have obtained local government approvals on the basis of anticipated total investments which were less than $30 million at the time the approvals were obtained, but will, when construction is completed, exceed the $30 million approval threshold. While it is common in the PRC for projects and joint ventures such as these to obtain and rely on only local government approvals, it is unclear whether such approvals are sufficient. There can be no assurance, therefore, that the absence of Central Government approvals will not adversely affect the Joint Ventures and their projects in any of such cases. In addition to such project and foreign investment approvals, the tariffs payable under the relevant power purchase contract is established on the basis of a tariff formula agreed upon through discussions among the Company, its partners, the prospective power purchaser, the relevant local government, the relevant pricing bureaus and the relevant planning commission. Once established, the tariffs are subject to annual review by the relevant local pricing bureaus and adjustment in accordance with the formula. The tariff formulas contained in the power purchase contracts entered into by AES Chigen's Joint Ventures are structured to permit the Joint Ventures to pay the operating expenses of the plant, the financing costs of each particular project and to enable AES Chigen to realize a return on its investment. While the relevant PRC pricing bureaus have committed to utilize the Joint Ventures' formulas in establishing and adjusting tariffs, there can be no assurance that the relevant pricing bureaus will calculate and adjust tariffs in accordance with these tariff formulas. On April 1, 1996, a new law governing the electric power sector in the PRC came into effect. The law establishes, among other things, broad principles with respect to the methodology of calculating and setting electric power tariffs. Detailed regulations with respect to tariff calculation and tariff setting are expected to be promulgated in the near future by the Central Government. There can be no assurance that such regulations, when promulgated, will not adversely affect the tariff structures which AES Chigen's Joint Ventures have adopted. Environmental Regulation The Joint Ventures are subject to various PRC environmental laws and regulations which are administered by both Central Government and local government environmental protection bureaus. Approval or review by the relevant environmental protection bureaus is required at each of the project proposal, feasibility study, design and commissioning stages of a project. Filing of an environmental impact statement or, in some cases, an environmental impact assessment outline is required before the planning commission for the same level of government can issue its approval. The filing must demonstrate that the project conforms to applicable environmental standards. Approvals and permits generally have been issued for projects utilizing modern pollution control technology. Pollution sources are also required to report their pollution discharges in terms of types and amounts of pollutants discharged into the water and air, and to secure discharge permits for their wastewater discharges, airborne emissions and, from April 1, 1996, solid waste shipments to ensure compliance with relevant emissions standards. The PRC's environmental laws and regulations establish standards for the discharge of emissions into the air and water. The rules set forth schedules of base-level discharge fees for various polluting substances and specify that, if such levels are exceeded, the polluting entity will be required to pay an excess discharge fee to the local government. The local environmental rules do not make it a violation to exceed these limits, but rather set forth a set of graduated scale of fees that are required for each incremental unit of excess discharge. Up to a certain level, as the discharge levels increase, the fee per unit also increases. Above a certain limit, local governments may issue orders to cease or reduce such discharge levels which, if not complied with, will after three years from the date of the order, result in an annual increase of 5% in the pollution fees assessed. Where pollution is causing environmental damage, the local governments also have the authority to issue orders requiring the polluting entities to cure the problem within a certain period of time. Non-compliance with such orders may result in the entities being shut down. The PRC is a party to the Climate Change Convention ("Climate Change Convention"), which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide. Ceilings on such emissions could limit the production of electricity from fossil fuels, particularly coal, or increase the costs of such production. Ceilings on the emissions of greenhouse gases have not been assigned to developing countries such as the PRC under the Climate Change Convention and the PRC has objected to the possibility of the imposition of such ceilings. If the PRC were to agree to such ceilings, or otherwise reduce its reliance on coal-fired power plants, the business prospects of AES Chigen could be adversely affected. Under the Air Pollution Prevention and Control Law of the PRC, as amended in 1995, regulatory preferences are given to the use of low sulfur-content, low ash coal, and to plants in urban areas that generate steam as well as electricity. The SPC also has stated that it favors the construction of more plants relying on clean fuels. MOEP has established technical standards for environmental monitoring and exercises certain disciplinary functions with regard to environmental compliance in connection with the construction and operation of power plants. Environmental protection equipment is required to be designed, installed and commissioned in tandem with the design, construction and commissioning of the generator or plant. Before commencing operations, each plant or generator must be tested and qualified with regard to emissions levels and abatement equipment. The Company believes the environmental protection systems and facilities of its Current Projects are in compliance with applicable PRC national and local environmental protection requirements. AES Chigen's Joint Ventures with power plants in operation have received the environmental approvals from the PRC Government environmental authorities required for them to operate their respective electric power plants. Inasmuch as the Joint Ventures' electric power plants currently under construction are typically among the most modern in the areas in which they are located, AES Chigen believes that these plants will also receive all required environmental approvals. There can be no assurance, however, that the requirements to obtain such approvals may not be made more stringent in the future. If such a change in policy occurs, there can be no assurance that all such requirements will be met and that future approvals for existing or potential projects will be granted. If a change in environmental requirements leads to an increase in costs, an affected Joint Venture is able to receive an adjustment in the tariff it charges for electric power pursuant to its power purchase contract. -----END PRIVACY-ENHANCED MESSAGE-----