SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): March 27, 2001
THE AES CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 0-19281 54-1163725
(State of Incorporation) (Commission File No.) (IRS Employer Identification No.)
1001 North 19th Street
Arlington, Virginia 22209
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(703) 522-1315
NOT APPLICABLE
(Former Name or Former Address, if changed since last report)
ITEM 5. OTHER EVENTS.
Consolidated Financial Statements
On March 27, 2001, The AES Corporation (the "Company") merged with
IPALCO Enterprises, Inc. ("IPALCO") in a pooling of interests transaction. The
accompanying consolidated financial statements have been retroactively restated
to reflect the combined financial position and combined results of operations
and cash flows of the Company and IPALCO for all periods presented, giving
effect to the merger of IPALCO as if the combination had occurred at the
beginning of the earliest period presented.
2
INDEPENDENT AUDITORS' REPORT
To the Stockholders of The AES Corporation:
We have audited the accompanying consolidated balance sheets of The
AES Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
financial statements based on our audits. The accompanying consolidated
financial statements give retroactive effect to the merger of The AES
Corporation and IPALCO Enterprises, Inc., which has been accounted for as a
pooling of interests as described in Note 2 to the consolidated financial
statements. We did not audit the financial statements of C.A. La Electricidad
de Caracas and Corporation EDC, C.A. and their subsidiaries ("EDC"), a
majority-owned subsidiary, which statements reflect total assets constituting
10% of consolidated total assets as of December 31, 2000, total revenues
constituting 7% of consolidated total revenues and total net income
constituting 14% of consolidated net income for 2000. Those financial
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for EDC,
is based solely on the report of such other auditors.
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, and the report of
the other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in all
material respects, the financial position of The AES Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
McLean, VA
January 29, 2001
(May 23, 2001 as to Note 20)
3
THE AES CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
(AMOUNTS IN MILLIONS,
EXCEPT SHARES AND PAR VALUE)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 950 $ 693
Short-term investments ....................................................................... 1,297 339
Accounts receivable - net of reserves of $203 - 2000; $105 - 1999 ............................ 1,564 986
Inventory .................................................................................... 571 408
Receivable from affiliates ................................................................... 27 2
Deferred income taxes ........................................................................ 167 185
Prepaid expenses and other current assets .................................................... 1,208 337
-------- --------
Total current assets ......................................................................... 5,784 2,950
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................................................... 657 256
Electric generation and distribution assets .................................................. 18,627 15,530
Accumulated depreciation and amortization .................................................... (2,651) (2,078)
Construction in progress ..................................................................... 2,874 1,558
-------- --------
Property, plant, and equipment - net ......................................................... 19,507 15,266
-------- --------
OTHER ASSETS:
Deferred financing costs - net ............................................................... 381 243
Project development costs .................................................................... 114 53
Investments in and advances to affiliates .................................................... 3,122 1,575
Debt service reserves and other deposits ..................................................... 517 328
Excess of cost over net assets acquired - net ................................................ 2,307 1,851
Other assets ................................................................................. 1,306 956
-------- --------
Total other assets ........................................................................... 7,747 5,006
-------- --------
Total ........................................................................................ $ 33,038 $ 23,222
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................................. $ 833 $ 479
Accrued interest ............................................................................. 417 233
Accrued and other liabilities ................................................................ 1,318 763
Recourse debt - current portion .............................................................. -- 335
Non-recourse debt - current portion .......................................................... 2,471 991
-------- --------
Total current liabilities .................................................................... 5,039 2,801
-------- --------
LONG-TERM LIABILITIES:
Non-recourse debt ............................................................................ 12,863 9,521
Recourse debt ................................................................................ 3,458 2,167
Deferred income taxes ........................................................................ 1,863 2,139
Other long-term liabilities .................................................................. 1,603 754
-------- --------
Total long-term liabilities .................................................................. 19,787 14,581
-------- --------
MINORITY INTEREST ............................................................................ 1,442 1,207
COMMITMENTS AND CONTINGENCIES (NOTE 7) ....................................................... -- --
COMPANY-OBLIGATED CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF AES ......................................... 1,228 1,318
STOCKHOLDERS' EQUITY:
Preferred stock, no par value - 50 million shares authorized; none issued .................... -- --
Common stock, $.01 par value - 1,200 million and 1,000 million shares authorized for 2000 and
1999, respectively, 535 million issued and 522 million outstanding in 2000, 468 million issued
and 453 million outstanding in 1999 .......................................................... 5 4
Additional paid-in capital ................................................................... 5,172 3,052
Retained earnings ............................................................................ 2,551 1,811
Accumulated other comprehensive loss ......................................................... (1,679) (995)
Treasury Stock, at cost: 2000 - 13 million shares, 1999 -15 million shares.................... (507) (557)
-------- --------
Total stockholders' equity ................................................................... 5,542 3,315
-------- --------
Total ........................................................................................ $ 33,038 $ 23,222
======== ========
See notes to consolidated financial statements.
4
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------------- -------------- --------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES ............................................................. $ 7,582 $ 4,124 $ 3,257
Cost of Sales ........................................................ (5,615) (2,858) (2,213)
Selling, General and Administrative Expenses ......................... (85) (71) (56)
Severance and Transaction Costs ...................................... (84) -- --
Interest Expense ..................................................... (1,356) (705) (550)
Interest and Other Income ............................................ 249 88 68
Gain on Contract Buyout/Termination and Sale of Assets ............... 31 91 13
Gain on Sale of Available for Sale Securities ........................ 112 -- --
Impairment Loss ...................................................... -- (62) --
Environmental Fine ................................................... (17) -- --
Equity in Pre-tax Earnings of Affiliates ............................. 475 21 232
------- ------- -------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY ITEMS 1,292 628 751
Income Taxes ......................................................... 366 190 220
Minority Interest .................................................... 119 64 94
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEMS .................................... 807 374 437
Extraordinary Items - (loss) gain on early extinguishment of debt -
net of applicable income tax ....................................... (11) (17) 4
------- ------- -------
NET INCOME ........................................................... $ 796 $ 357 $ 441
======= ======= =======
BASIC EARNINGS PER SHARE:
Before extraordinary items ........................................... $ 1.67 $ 0.88 $ 1.10
Extraordinary items .................................................. (0.02) (0.04) 0.01
------- ------- -------
BASIC EARNINGS PER SHARE ............................................. $ 1.65 $ 0.84 $ 1.11
======= ======= =======
DILUTED EARNINGS PER SHARE:
Before extraordinary items ........................................... $ 1.61 $ 0.86 $ 1.06
Extraordinary items .................................................. (0.02) (0.04) 0.01
------- ------- -------
DILUTED EARNINGS PER SHARE ........................................... $ 1.59 $ 0.82 $ 1.07
======= ======= =======
See notes to consolidated financial statements.
5
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---------- ---------- ----------
(AMOUNTS IN MILLIONS)
OPERATING ACTIVITIES:
Net income ........................................................ $ 796 $ 357 $ 441
Adjustments to net income:
Depreciation and amortization ..................................... 697 388 299
Gain from sale of available-for-sale securities ................... (112) -- --
Gain from sale of assets .......................................... (31) -- --
Provision for deferred taxes ...................................... (13) 11 68
Minority interest earnings ........................................ 119 64 94
Undistributed earnings of affiliates .............................. (320) 30 (58)
Other ............................................................. (34) 38 (77)
Changes in operating assets and liabilities:
Increase in accounts receivable ................................... (270) (154) (2)
Increase in inventory ............................................. (56) (45) (12)
Decrease in other current assets .................................. (156) (87) 2
Decrease in other assets .......................................... (132) (31) 5
Increase (decrease) in accounts payable ........................... 257 (61) (5)
Increase in accrued interest ...................................... 126 85 44
Decrease in accrued and other liabilities ......................... (225) (184) (36)
------- ------- -------
Net cash provided by operating activities ......................... 646 411 763
------- ------- -------
INVESTING ACTIVITIES:
Property additions ................................................ (2,226) (938) (597)
Acquisitions-net of cash acquired ................................. (1,818) (5,713) (1,623)
Proceeds from the sales of assets ................................. 234 650 301
Sale of short-term investments .................................... 195 49 98
Purchase of short-term investments ................................ (96) (98) (2)
Affiliate advances and equity investments ......................... (515) (193) (69)
Increase in short-term investments ................................ (1,110) (80) (4)
Project development costs ......................................... (96) (84) (57)
Debt service reserves and other assets ............................ (101) (94) 32
------- ------- -------
Net cash used in investing activities ............................. (5,533) (6,501) (1,921)
------- ------- -------
FINANCING ACTIVITIES:
(Repayments) borrowings under the revolver, net ................... (195) 102 206
Issuance of non-recourse debt and other coupon bearing securities . 7,081 6,427 2,115
Repayments of non-recourse debt and other coupon bearing securities (2,831) (1,289) (1,075)
Payments for deferred financing costs ............................. (136) (119) (47)
Repayments of other long-term liabilities ......................... (174) (46) (67)
(Distributions to) contributions by minority interests, net ....... (54) 32 90
Issuance of common stock, net ..................................... 1,508 1,226 165
Common stock dividends paid ....................................... (55) (51) (48)
------- ------- -------
Net cash provided by financing activities ......................... 5,144 6,282 1,339
INCREASE IN CASH AND CASH EQUIVALENTS ............................. 257 192 181
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................... 693 501 320
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................ $ 950 $ 693 $ 501
======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest-net of amounts capitalized ............. $ 1,191 $ 608 $ 477
Cash payments for income taxes-net of refunds ..................... 216 112 106
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisitions .............................. 67 48 --
Liabilities assumed in purchase transactions ...................... 2,098 3,570 139
Conversion of AES Trust I and AES Trust II (see Note 8) ........... 550 -- --
See notes to consolidated financial statements.
6
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------- PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK INCOME (LOSS)
------ ------ ---------- -------- ------------- --------- -------------
(AMOUNTS IN MILLIONS)
Balance at January 1, 1998 .. 391.4 4 1,426 1,113 (131) (404)
Net income .................. -- -- -- 441 -- -- $ 441
Foreign currency translation
adjustment ................. -- -- -- -- (212) -- (212)
---------
Comprehensive income ........ $ 229
=========
Dividends declared .......... -- -- -- (49) -- --
Issuance of common stock
through public offerings ... 8.6 -- 184 -- -- --
Purchase of treasury stock .. (1.1) -- -- -- -- (65)
Issuance of common stock
under benefit plans and
exercise of stock options and
warrants ................... 3.1 -- 42 -- -- --
Tax benefit associated with
the exercise of options .... -- -- 19 -- -- --
------- ------- ------- ------- ------- ------
Balance at December 31, 1998 402.0 4 1,671 1,505 (343) (469)
------- ------- ------- ------- ------- ------
Net income .................. -- -- -- 357 -- -- $ 357
Foreign currency translation
adjustment ................. -- -- -- -- (759) -- (759)
Unrealized gains on
marketable securities ...... -- -- -- -- 107 -- 107
---------
Comprehensive loss .......... $ (295)
=========
Dividends declared .......... -- -- -- (51) -- --
Issuance of common stock
through public offerings ... 48.0 -- 1,280 -- -- --
Issuance of common stock
pursuant to acquisitions ... 1.8 -- 48 -- -- --
Purchase of treasury stock... (1.6) -- -- -- -- (88)
Issuance of common stock
under benefit plans and
exercise of stock options and
warrants ................... 3.2 -- 30 -- -- --
Tax benefit associated with
the exercise of options .... -- -- 23 -- -- --
------- ------- ------- ------- ------- ------
Balance at December 31, 1999 453.4 4 3,052 1,811 (995) (557)
======= ======= ======= ======= ======= ======
7
THE AES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(CONT'D)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------- PAID-IN RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK INCOME (LOSS)
------ ------ ---------- -------- ------------- --------- -------------
(AMOUNTS IN MILLIONS)
Balance at December 31, 1999 453.4 4 3,052 1,811 (995) (557)
------- ------- -------- -------- -------- -------
Net income .................... -- -- -- 796 -- -- $ 796
Foreign currency translation
adjustment ................. -- -- -- -- (575) -- (575)
Unrealized losses and
realized gains on marketable
securities ................. -- -- -- -- (107) -- (107)
Minimum pension liability
adjustment ................. -- -- -- -- (2) -- (2)
-------
Comprehensive income ........ $ 112
=======
Dividends declared .......... -- -- -- (56) -- --
Issuance of common stock
through public offerings and
Tecon conversions .......... 59.2 1 1,946 -- -- --
Issuance of common stock
pursuant to acquisitions ... 1.3 -- 67 -- -- --
Issuance of common stock
under benefit plans and
exercise of stock options and
warrants ................... 7.8 -- 50 -- -- 50
Tax benefit associated with
the exercise of options .... -- -- 57 -- -- --
------- ------- -------- -------- -------- -------
Balance at December 31, 2000 521.7 $ 5 $ 5,172 $ 2,551 $(1,679) $ (507)
======= ======= ======== ======== ======== =======
See notes to consolidated financial statements.
8
THE AES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The AES Corporation and its subsidiaries and affiliates, (collectively
"AES" or "the Company") is a global power company primarily engaged in owning
and operating electric power generation and distribution businesses in many
countries around the world.
The consolidated financial statements have been prepared to give
retroactive effect to the merger with IPALCO Enterprises, Inc. ("IPALCO"),
which has been accounted for as a pooling of interests ("pooling") as more
fully discussed in Note 2.
PRINCIPLES OF CONSOLIDATION-The consolidated financial statements of
the Company include the accounts of The AES Corporation, its subsidiaries,
and controlled affiliates. Investments in 50% or less owned affiliates, over
which the Company has the ability to exercise significant influence but not
control, are accounted for using the equity method. Intercompany transactions
and balances have been eliminated.
CASH AND CASH EQUIVALENTS-The Company considers unrestricted 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.
INVESTMENTS-Securities that the Company has both the positive intent
and ability to hold to maturity are classified as held-to-maturity and are
carried at historical cost. Other investments that the Company does not intend
to hold to maturity are classified as available-for-sale or trading. Unrealized
gains or losses on available-for-sale investments are recorded as a separate
component of stockholders' equity. Investments classified as trading are marked
to market on a periodic basis through the statement of operations. Interest and
dividends on investments are reported in interest income. Gains and losses on
sales of investments are recorded using the specific identification method.
Short-term investments consist of investments with original maturities in excess
of three months but less than one year. Short-term investments also include $1.2
billion of restricted cash. Debt service reserves and other deposits, which
might otherwise be considered cash and cash equivalents, are treated as
non-current assets (see Note 5).
INVENTORY-Inventory, valued at the lower of cost or market (first in,
first out method), consists of coal, fuel oil, other raw materials, spare parts
and supplies. Inventory consists of the following (in millions):
DECEMBER 31,
----------------
2000 1999
------- ------
Coal, fuel oil, and other raw materials................................................. $298 $243
Spare parts and supplies................................................................ 273 165
------- ------
Total................................................................................... $571 $408
======= ======
PROPERTY, PLANT, AND EQUIPMENT-Property, plant, and equipment is stated
at cost. The cost of renewals and betterments that extend the useful life of
property, plant and equipment are also capitalized. Depreciation, after
consideration of salvage value, is computed using the straight-line method over
the estimated composite useful lives of the assets. Depreciation expense stated
as a percentage of average cost of depreciable property, plant and equipment
was, on a composite basis, 3.70%, 3.73% and 3.41% for the years ended December
31, 2000, 1999 and 1998, respectively. The components of our electric generation
and distribution assets and the related rates of depreciation are as follows.
9
COMPOSITE USEFUL
RATE LIFE
------------ ------------
Generation and Distribution Facilities............................ 2.0% - 10.0% 10 - 50 yrs
Other Buildings................................................... 2.5% - 5.0% 20 - 40 yrs.
Leasehold Improvements............................................ 3.3% - 10.0% 10 - 30 yrs.
Furniture and Fixtures............................................ 14.3% - 50.0% 2 - 7 yrs
Maintenance and repairs are charged to expense as incurred. Emergency and
rotable spare parts inventories are included in electric generation and
distribution assets and are depreciated over the useful life of the related
components.
CONSTRUCTION IN PROGRESS-Construction progress payments, engineering
costs, insurance costs, salaries, interest, and other costs relating to
construction in progress are capitalized. Construction in progress balances are
transferred to electric generation and distribution assets when each asset is
ready for its intended use. Interest capitalized during development and
construction totaled $225 million, $105 million, and $80 million in 2000, 1999,
and 1998, respectively.
EXCESS OF COST OVER NET ASSETS ACQUIRED-Excess of cost over net assets
acquired is amortized on a straight-line basis over the estimated benefit period
which ranges from 10 to 40 years. Excess of cost over net assets acquired at
December 31, 2000 and 1999 are shown net of accumulated amortization of $128
million and $70 million, respectively.
LONG-LIVED ASSETS-In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company evaluates the
impairment of long-lived assets, as well as excess of cost over net assets
acquired, based on the projection of undiscounted cash flows whenever events or
changes in circumstances indicate that the carrying amounts of such assets may
not be recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded value of the assets, the assets are written
down to their estimated fair values (see Note 12) based on discounted cash flow
analysis.
DEFERRED FINANCING COSTS-Financing costs are deferred and amortized
over the related financing period using the effective interest method or the
straight-line method when it does not differ materially from the effective
interest method. Deferred financing costs are shown net of accumulated
amortization of $105 million and $89 million as of December 31, 2000 and 1999,
respectively.
PROJECT DEVELOPMENT COSTS-The Company capitalizes the costs of
developing new construction projects after achieving certain project-related
milestones that indicate that the project is probable of completion. These costs
represent amounts incurred for professional services, permits, options,
capitalized interest, and other costs directly related to construction. These
costs are transferred to property when significant construction activity
commences, or expensed at the time the Company determines that development of a
particular project is no longer probable. The continued capitalization of such
costs is subject to ongoing risks related to successful completion, including
those related to government approvals, siting, financing, construction,
permitting, and contract compliance.
INCOME TAXES-The Company follows SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of the existing
assets and liabilities, and their respective income tax bases.
FOREIGN CURRENCY TRANSLATION-Subsidiaries and affiliates whose
functional currency is other than the U.S. Dollar translate their assets and
liabilities into U.S. Dollars at the current exchange rates in effect at the end
of the fiscal period. The revenue and expense accounts of such subsidiaries and
affiliates are translated into U.S. Dollars at the average exchange rates that
prevailed during the period. The gains or losses that result from this process,
and gains and losses on intercompany foreign currency transactions which are
long-term in nature, and which the Company does not intend to settle in the
foreseeable future, are shown in accumulated other comprehensive loss in the
stockholders' equity section of the balance sheet. Gains and losses that arise
from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency (except those that are accounted for as hedges) are
included in determining net income. Foreign currency transaction gains and
losses that are intended to hedge an identifiable foreign currency commitment
are deferred and included
10
in the measurement of the related foreign currency transaction. For subsidiaries
operating in highly inflationary economies, the U.S. Dollar is considered to be
the functional currency, and transaction gains and losses are included in
determining net income.
During 1999, the Brazilian Real experienced a significant devaluation
relative to the U.S. Dollar, declining from 1.21 Reais to the Dollar at December
31, 1998 to 1.81 Reais at December 31, 1999. The exchange rate was 1.96 Reais to
the Dollar at December 31, 2000. This continued devaluation resulted in
significant foreign currency translation and transaction losses particularly
during 1999. The Company recorded $64 and $203 million before income taxes of
non-cash foreign currency transaction losses on its investments in Brazilian
equity-method affiliates during 2000 and 1999, respectively.
REVENUE RECOGNITION AND CONCENTRATION-Revenues from the sale of
electricity and steam generation are recorded based upon output delivered and
capacity provided at rates as specified under contract terms or prevailing
market rates. Electricity distribution revenues are recognized when power is
provided. Revenues from power sales contracts entered into after 1991 with
escalating scheduled rates are recognized based on the output delivered at the
lower of the amount billed or the average rate over the contract term. Several
of the Company's power plants rely primarily on one power sales contract with a
single customer for the majority of revenues (see Note 7). No single customer
accounted for at least 10% of revenues in 2000, 1999 or 1998. The prolonged
failure of any of the Company's customers to fulfill contractual obligations or
make required payments could have a substantial negative impact on AES's
revenues and profits.
REGULATION-The Company has investments in electric distribution
businesses located in the United States and certain foreign countries that are
subject to regulation by the applicable regulatory authority. Our distribution
businesses operate in markets that are subject to price-cap regulation, which
means the price of electricity is regulated as opposed to the investors' rate of
return. For the regulated portion of these businesses, the Company capitalizes
incurred costs as deferred regulatory assets when there is a probable
expectation that future revenue equal to the costs incurred will be billed and
collected as a direct result of the inclusion of the costs in an increased
tariff set by the regulator. The deferred regulatory asset is eliminated when
the Company collects the related costs through billings to customers. Regulators
in the respective jurisdictions typically perform a tariff review for the
distribution companies on an annual basis. If a regulator excludes all or part
of a cost from recovery, that portion of the deferred regulatory asset is
impaired and is accordingly reduced to the extent of the excluded cost. The
Company has recorded deferred regulatory assets of $291 million and $162 million
at December 31, 2000, and 1999, respectively, that it expects to pass through to
its customers in accordance with and subject to regulatory provisions. The
regulatory assets include $110 million and $30 million at December 31, 2000, and
1999, respectively, that were recorded by the Company's equity method affiliates
in Brazil. The deferred regulatory assets at entities which are controlled and
consolidated by the Company are recorded in other assets on the consolidated
balance sheets.
DERIVATIVES-The Company enters into various derivative transactions in
order to hedge its exposure to certain market risks. The Company currently has
outstanding interest rate swap, cap, and floor agreements that hedge against
interest rate exposure on floating rate non-recourse debt. These transactions,
which are classified as other than trading, are accounted for using settlement
accounting, and any gain or loss is included in interest cost. Any fees are
amortized as yield adjustments. Written interest rate options are
marked-to-market through earnings.
The Company enters into currency swaps and forwards to hedge against
foreign currency risk on certain non-functional currency-denominated
liabilities. Gains and losses on each contract are computed by multiplying the
foreign currency amount of the contract by the difference between the spot rate
at the balance sheet date and the spot rate at the date of inception of the
contract and recognized in the statement of operations. Any discount or premium
on a currency swap or forward is accounted for separately from gains and losses
on the contract and is amortized to net income over the life of the contract.
The Company enters into electric and gas derivative instruments,
including swaps, options, forwards and futures contracts to manage its risks
related to electric and gas sales and purchases. Gains and losses arising from
derivative financial instrument transactions that hedge the impact of
fluctuations in energy prices are recognized in income concurrent with the
related purchases and sales of the commodity. If a derivative financial
instrument is entered into for trading purposes, it is marked-to-market with net
gains reported within revenues or net losses reported within cost of sales. If a
derivative financial instrument contract is terminated because it is probable
that a transaction or forecasted transaction will not occur, any gain or loss as
of such date is immediately recognized. If a derivative financial instrument
contract is terminated early for other
11
economic reasons, any gain or loss as of the termination date is deferred and
recorded concurrently with the related energy purchase or sale.
EARNINGS PER SHARE-Basic and diluted earnings per share are based on
the weighted average number of shares of common stock and potential common stock
outstanding during the period, after giving effect to stock splits (see Note
11). Potential common stock, for purposes of determining diluted earnings per
share, includes the effects of dilutive stock options, warrants, deferred
compensation arrangements, and convertible securities. The effect of such
potential common stock is computed using the treasury stock method or the
if-converted method, as applicable.
USE OF ESTIMATES-The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant items subject to such estimates
and assumptions include the carrying value of long-lived assets; valuation
allowances for receivables, the recoverability of deferred regulatory assets and
the valuation of certain financial instruments, deferred tax assets,
environmental liabilities and potential litigation claims and settlements (see
Note 7).
RECLASSIFICATIONS-Certain reclassifications have been made to
prior-period amounts to conform with the 2000 presentation.
2. BUSINESS COMBINATIONS
On March 27, 2001, AES completed its merger with IPALCO through a
share exchange transaction in accordance with the Agreement and Plan of Share
Exchange dated as of July 15, 2000, between AES and IPALCO and IPALCO became a
wholly-owned subsidiary of AES. The Company accounted for the combination as a
pooling. IPALCO is an Indianapolis-based utility with approximately 3,000 MW of
generation and 433,000 customers in and around Indianapolis.
At the effective date of the share exchange, each of the outstanding
shares of IPALCO common stock was converted into the right to receive 0.463
shares of AES common stock. The Company issued approximately 41.5 million shares
of AES common stock to complete the transaction.
The table below sets forth combined revenues, extraordinary items, and
net income of AES and IPALCO for the years ended December 31, 2000, 1999, and
1998:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
Revenues:
AES .................... $6,691 $ 3,253 $ 2,398
IPALCO.................. 891 871 859
------- ------- -------
$7,582 $ 4,124 $ 3,257
======= ======= =======
Extraordinary items:
AES..................... $ (7) $ (17) $ 4
IPALCO.................. (4) - -
------- ------- -------
$ (11) $ (17) $ 4
======= ======= =======
Net Income:
AES................. $ 641 $ 228 $ 311
IPALCO.............. 155 129 130
------- ------- -------
$ 796 $ 357 $ 441
======= ======= =======
12
No AES or IPALCO accounting policies were required to be conformed as a
result of the merger. Both AES and IPALCO have the same fiscal years. There were
no intercompany transactions between the two companies.
The Company has accounted for the following transactions using the
purchase method of accounting as of the effective date of each transaction.
Accordingly, the purchase price of each transaction has been allocated based
upon the estimated fair value of the assets and the liabilities acquired as of
the acquisition date, with any excess reflected as excess of cost over net
assets acquired.
In June 2000, pursuant to its tender offer for American Depositary
Shares ("ADSs"), a subsidiary of the Company purchased for cash approximately 35
million ADSs, each representing 50 shares, of C.A. La Electricidad de Caracas
and Corporacion EDC, C.A. (together, "EDC") at $28.50 per ADS. Also in June,
pursuant to its tender offer for all outstanding shares of EDC, a subsidiary of
the Company purchased approximately 1.1 billion shares of EDC at $0.57 per
share. The purchases brought the Company's ownership interest in EDC to
approximately 81%. Subsequently, the Company's total ownership reached
approximately 87% due to a stock buyback program initiated by EDC in July. The
total purchase price was $1.7 billion of cash. EDC is the largest private
integrated utility in Venezuela, covering the capital region of Caracas. It has
interests in distribution businesses in Venezuela, as well as El
Salvador-together serving over 1 million customers. EDC also provides 2,265 MW
of installed capacity through its generation facilities in Venezuela. The
purchase price allocation was as follows (in millions):
Purchase price............................................................................. $ 1,700
Less: Stockholders' equity of Grupo EDC
Capital stock.............................................................................. (508)
Paid-in surplus............................................................................ (245)
Retained earnings.......................................................................... (1,353)
Treasury stock............................................................................. 323
Adjustment of assets and liabilities to fair value:
Property and equipment..................................................................... (1,578)
Contractually obligated losses on assets to be sold........................................ 185
Deferred income tax asset.................................................................. 231
Employee severance plan.................................................................... 157
Investment in subsidiaries................................................................. 36
Elimination of intangible asset - goodwill................................................. 7
Other net assets........................................................................... 25
-------------
Excess of fair value of net assets acquired over purchase price-
Negative goodwill.......................................................................... $(1,020)
Property and equipment was reduced by the excess of the fair value of the net
assets acquired over the purchase price. The cost of the acquisition was
allocated on the basis of estimated fair value of the assets acquired and
liabilities assumed, primarily based upon an independent appraisal. As of
December 31, 2000, the severance plan was completed and the workforce was
reduced by approximately 2,500 people. All of the costs associated with the plan
were recorded during 2000, and all of the cash payments were made in 2000.
In August 2000, a subsidiary of the Company completed the acquisition
of a 59% equity interest in a Hidroelectrica Alicura S.A. ("Alicura") in
Argentina from Southern Energy, Inc. and its partners. Alicura operates a 1,000
MW peaking hydro facility located in the province of Neuquen, Argentina. The
purchase price of approximately $205 million includes the assumption of existing
non-recourse debt. In December, a subsidiary of the Company acquired an
additional 39% ownership interest in Alicura, 19.5% ownership interests each
from the Federal Government of Argentina and the Province of Neuquen, for
approximately $9 million. At December 31, 2000, the Company's ownership interest
was 98%. The employees of Alicura own the remaining 2%. All of the purchase
price was allocated to property, plant and equipment and is being depreciated
over the useful life.
In October 2000, a subsidiary of the Company completed the acquisition
of Reliant Energy International's 50% interest in El Salvador Energy Holdings,
S.A. ("ESEH") which owns three distribution companies in El Salvador. The
13
purchase price for this interest in ESEH was approximately $175 million. The
three distribution companies, Compania de Alumbrado Electrico de San Salvador,
S.A. de C.V., Empresa Electrica de Oriente, S.A. de C.V. Distribuidora Electrica
de Usulutan, S.A. De C.V. serve 3.5 million people, approximately 60 percent of
the population of El Salvador, including the capital city of San Salvador. A
subsidiary of the Company had previously acquired a 50% interest in ESEH through
its acquisition of EDC. Through the purchase of Reliant Energy International's
ownership interest, the Company owns a controlling interest in the three
distribution companies. The total purchase price for 100% of the interest in
ESEH approximated $302 million, of which approximately $200 million was
allocated to excess of costs over net assets acquired and is being amortized
over 40 years.
In December 2000, the Company acquired all of the outstanding shares of
KMR Power Corporation ("KMR"), including the buyout of a minority partner in one
of KMR's subsidiaries, for approximately $85 million. The acquisition was
financed through the issuance of approximately 949,000 shares of AES common
stock and cash. KMR owns a controlling interest in two gas-fired power plants
located in Cartagena, Colombia: a 100% interest in the 314 MW TermoCandelaria
power plant and a 66% interest in the 100 MW Mamonal plant. Approximately $59 of
the purchase price was allocated to excess of cost over net assets acquired and
is being amortized over 40 years.
In January 1999, a subsidiary of the Company acquired a 49% interest in
AES Panama, an entity resulting from the merger of Empresa de Generacion
Electrica Chiriqui and Empresa de Generacion Electrica Bayano, two generation
companies in Panama with four facilities representing a total of 283 MW. The
acquisition was completed for approximately $91 million, including $46 million
of non-recourse debt. AES controls the board of directors of AES Panama, and
therefore, consolidates it.
In July 1999, a subsidiary of the Company acquired all of the
outstanding shares of NewEnergy Ventures, Inc. ("NewEnergy"), a retail energy
distribution company, for approximately $90 million plus assumed liabilities of
approximately $183 million. NewEnergy provides electric energy to customers in
deregulated energy markets in the United States. The acquisition was financed
through a combination of cash, debt and approximately 1.7 million shares of AES
common stock. Approximately $152 million of the purchase price was allocated to
excess of cost over net assets acquired.
In August 1999, a subsidiary of the Company acquired a controlling 51%
interest in Eletronet in Brazil for approximately $155 million. The purchase
price is to be paid in annual installments through 2002. The remaining 49% is
owned by a subsidiary of Centrais Electricas Brasileiras, S.A. ("Eletrobras"), a
Brazilian government-owned utility. Eletronet was created in 1998 by the
minority owner to construct a national broadband telecommunications network
attached to the existing national transmission grid in Brazil. The business
activities of Eletronet currently represent construction activities, preparing
the network for its intended use. Therefore, no results of operations have been
included in the table below for this acquisition.
In August 1999, a subsidiary of the Company completed the acquisition
of 50% of Empresa Distribuidora de Electricidad del Este, S.A. ("EDE Este"), for
approximately $109 million. EDE Este is the distribution company providing
electricity to approximately 400,000 customers in the eastern portion of the
Dominican Republic. Approximately $76 million of the acquisition cost represents
the excess of cost over net assets acquired and it is being amortized over 40
years. The Company controls the board of directors, and therefore, consolidates
EDE Este.
In November 1999, a subsidiary of the Company acquired a controlling
interest in Companhia de Geracao de Energia Eletrica Tiete ("Tiete"), a
generating company in the State of Sao Paulo, Brazil, with 2,644 MW of capacity
comprised of nine hydroelectric generating facilities, for approximately $498
million. AES acquired approximately 62% of the voting stock and approximately
14% of the preferred stock representing approximately 39% of the total capital
stock of Tiete. In December 1999, a subsidiary of the Company acquired an
additional 10% of the voting stock of Tiete, representing approximately 5% of
total capital, for approximately $50 million. The Company owns approximately 71%
of voting stock and approximately 44% of total capital.
In November 1999, a subsidiary of the Company completed its acquisition
of CILCORP for approximately $886 million in cash. CILCORP is an integrated
electric and gas utility based in Central Illinois that combines three
coal-fired generation plants producing an aggregate 1,157 MW of capacity and an
extensive transmission and distribution network that serves electricity and gas
customers. In August 1999, AES received from the Securities and Exchange
Commission an
14
exemption from certain requirements of the Public Utility Holding Company Act of
1935 allowing it to purchase CILCORP while maintaining its existing ownership
interest in its Qualifying Facilities, as defined thereunder. The cost of the
acquisition was allocated on the basis of estimated fair value of the assets
acquired and liabilities assumed. The liabilities assumed in the transaction
consisted of $14 million in merger-related personnel costs. Approximately $573
million of the purchase price represent the excess of cost over net assets
acquired and is being amortized over 40 years.
The table below presents unaudited pro forma operating results as if
all of the acquisitions had occurred at the beginning of the periods shown
(in millions, except per share amounts). The pro forma amounts include
certain adjustments, primarily for depreciation and amortization based on the
allocated purchase price and additional interest expense:
YEARS ENDED DECEMBER 31, 2000 1999
------------------------ --------- --------
Revenues........................................................................... $8,137 $6,181
Income before extraordinary items.................................................. 833 574
Net income......................................................................... 822 557
Basic earnings per share........................................................... $1.67 $1.25
Diluted earnings per share......................................................... $1.61 $1.21
The pro forma results are based upon assumptions and estimates that the
Company believes are reasonable. The pro forma results do not purport to be
indicative of the results that actually would have been obtained had the
acquisitions occurred at the beginning of the periods shown, nor are they
intended to be a projection of future results.
The purchase price allocations for EDC, Alicura, ESEH, Nigen (see Note
4) and KMR have been completed on a preliminary basis, subject to adjustments
resulting from engineering, environmental, legal and other analyses during the
respective allocation periods. The accompanying consolidated financial
statements include the operating results of EDC from June 2000, Alicura from
August 2000, ESEH from October 2000, KMR from December 2000, AES Panama from
January 1999, NewEnergy from July 1999, Eletronet and EDE Este from August 1999,
and CILCORP and Tiete from November 1999.
In January 2001, following the expiration on December 28, 2000 of a
Chilean tender offer, Inversiones Cachagua Limitada, a Chilean subsidiary of
AES, paid cash for 3,466,600,000 shares of common stock of Gener S.A ("Gener").
Also in January 2001, following the expiration on December 29, 2000, of the
simultaneous United States offer to exchange all ADSs of Gener for AES common
stock, AES issued shares of common stock in exchange for Gener ADSs tendered
pursuant to the United States offer, which, together with the shares acquired in
the Chilean offer, resulted in AES's acquisition of approximately 96.5% of the
capital stock of Gener. The purchase price for the acquisition of Gener is
approximately $1.4 billion plus the assumption of approximately $700 million of
non-recourse debt. At December 31, 2000, $848 million of cash had been raised by
AES through the issuance of debt and equity for the purchase of Gener. This
amount is recorded as restricted cash in short-term investments in the
accompanying December 31, 2000 balance sheet.
PENDING BUSINESS COMBINATIONS
In April 2000, a subsidiary of the Company announced its intention to
launch a tender offer to acquire all outstanding common and preferred shares of
Tiete. This transaction must be approved by the local regulatory authority. The
acquisition price has not been determined.
In May 2000, a subsidiary of the Company won a bid to purchase a
controlling interest in the 1,580 MW Mohave Generating Station ("Mohave") in
Laughlin, Nevada from Southern California Edison Company ("Edison") and Nevada
Power Company for $667 million. Mohave provides power to Phoenix, Arizona, Las
Vegas, Nevada and Southern California. The approval to permit AES to purchase
the 56% interest currently held by Edison was denied by the California Public
Utility Commission. AES continues to pursue the purchase but there can be no
assurance that the Company will be successful in acquiring the ownership
interest on the terms determined in the original competitive bid.
In February 2001, a subsidiary of the Company entered into an agreement
to acquire Thermo Ecotek Corporation
15
("Thermo Ecotek"), a wholly owned subsidiary of Thermo Electron Corporation. The
purchase price for the transaction is approximately $195 million in cash, plus
additional closing adjustments to reimburse the seller for project development
expenses incurred between September 30, 2000, and the closing date of the
transaction. Thermo Ecotek is a developer and operator of gas-fired,
biomass-fired (agricultural and wood waste) and coal-fired power plants. The
portfolio of assets to be acquired by AES includes 516 gross MW of operating
power assets in the United States, the Czech Republic, and Germany, a natural
gas storage project in the United States, and over 1,250 MW of advanced
development power projects in the United States. The transaction is subject to a
number of closing conditions, including anti-trust and other state and federal
regulatory approvals, as well as customary conditions. The closings will be
structured in two phases, both of which are expected to close by the end of
2001.
3. ASSET ACQUISITIONS
In May 1999, a subsidiary of the Company acquired the assets of Ecogen
Energy ("Ecogen"), which consists of two gas-fired power stations in Victoria,
Australia, for approximately $100 million. The power stations, Yarra and
Jeeralang, have a total installed capacity of 966 MW. They provide peaking
capacity for the Australian national electricity market.
Also in May 1999, a subsidiary of the Company completed the acquisition
of six electric generating stations from New York State Electric and Gas
("NYSEG") for approximately $962 million. Concurrently, the subsidiary sold two
of the plants to an unrelated third party for $650 million and simultaneously
entered into a leasing arrangement with the unrelated party (see Note 7). These
six coal-fired electric generating plants have a total installed capacity of
1,424 MW.
In November 1999, a subsidiary of the Company completed its acquisition
of the Drax Power Station ("Drax") for approximately $3 billion. The Drax
station is a 3,960 MW coal-fired power station in northern England. The purchase
price was paid in cash and was financed with a mixture of non-recourse senior
bank lending, subordinated bridge lending and equity provided by AES. In
conjunction with this acquisition, the Company assumed $1.3 billion of
liabilities of which $1.1 billion relate to deferred income taxes and the
remainder consists of the fair value of assumed liabilities.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company is a party to joint venture/consortium agreements through
which the Company has equity investments in Companhia Energetica de Minas Gerais
("CEMIG"), Light-Servicos de Eletricidade S.A. ("Light") and Eletropaulo
Metropolitana Electricidade de Sao Paulo S.A. ("Eletropaulo"). The joint
venture/consortium parties generally share operational control of the investee.
The agreements prescribe ownership and voting percentages as well as other
matters. The Company records its share of earnings from its equity investees on
a pre-tax basis. The Company's share of the investee's income taxes is recorded
in income tax expense.
Effective May 1, 2000, the Company disposed of its investment in
Northern/AES Energy. The disposition of the investment did not have a material
effect on the Company's financial condition or results of operations.
In May 2000, the Company completed the acquisition of 100% of Tractebel
Power Ltd ("TPL") for approximately $67 million and assumed liabilities of
approximately $200 million. TPL owned 46% of Nigen. The Company also acquired an
additional 6% interest in Nigen from minority stockholders during the year ended
December 31, 2000 through the issuance of approximately 99,000 common shares of
AES stock valued at approximately $4.9 million. With the completion of these
transactions, the Company owns approximately 98% of Nigen's common stock and
began consolidating its financial results beginning May 12, 2000. Approximately
$100 million of the purchase price was allocated to excess of costs over net
assets acquired and is being amortized over 23 years.
In May 2000, a subsidiary of the company acquired an additional 5% of
the preferred, non-voting shares of Eletropaulo for approximately $90 million.
In January 2000, 59% of the preferred non-voting shares were acquired for
approximately $1 billion at auction from BNDES, the National Development Bank of
Brazil. The price established at auction was approximately $72.18 per 1,000
shares, to be paid in four annual installments commencing with a payment of
18.5% of the total price upon closing of the transaction and installments of
25.9%, 27.1% and 28.5% of the total price to be paid annually thereafter. At
December 31, 2000, the Company had a total economic interest of 49.6% and a
voting interest of 17.35% in Eletropaulo. The Company accounts for this
investment using the equity-method based on the related consortium
16
agreement that allows the exercise of significant influence.
In August 2000, a subsidiary of the Company acquired a 49% interest in
Songas Limited for approximately $40 million. Songas Limited owns the Songo
Songo Gas-to-Electricity Project in Tanzania. Under the terms of a project
management agreement, the Company has assumed overall project management
responsibility. The project consists of the refurbishment and operation of five
natural gas wells in coastal Tanzania, the construction and operation of a 65
mmscf/day gas processing plant and related facilities, the construction of a 230
km marine and land pipeline from the gas plant to Dar es Salaam and the
conversion and upgrading of an existing 112 MW power station in Dar es Salaam to
burn natural gas, with an optional additional unit to be constructed at the
plant. Since the project is currently under construction, no revenues or
expenses have been incurred, and therefore no results are shown in the following
table.
In December 2000, a subsidiary of the Company with EDF International
S.A. ("EDF") completed the acquisition of an additional 3.5% interest in Light
from two subsidiaries of Reliant Energy for approximately $136 million. Pursuant
to the acquisition, the Company acquired 30% of the shares while EDF acquired
the remainder. With the completion of this transaction, the Company owns
approximately 21.14% of Light.
In December 2000, a subsidiary of the Company entered into an
agreement with EDF to jointly acquire an additional 9.2% interest in Light,
which is held by a subsidiary of Companhia Siderurgica Nacional ("CSN").
Pursuant to this transaction, the Company acquired an additional 2.75%
interest in Light for $114.6 million. This transaction closed in January 2001.
Following the purchase of the Light shares previously owned by CSN, AES
and EDF will together be the controlling shareholders of Light and Eletropaulo.
AES and EDF have agreed that AES will eventually take operational control of
Eletropaulo and the telecom businesses of Light and Eletropaulo, while EDF will
eventually take operational control of Light and Eletropaulo's electric workshop
business. AES and EDF intend to continue to pursue a further rationalization of
their ownership stakes in Light and Eletropaulo, the result of which AES would
become the sole controlling shareholder of Eletropaulo and EDF would become the
sole controlling shareholder of Light. Upon consummation of the transaction, AES
will begin consolidating Eletropaulo's operating results. The structure and
process by which this rationalization may be effected, and the resulting timing,
have yet to be determined and will likely be subject to approval by various
Brazilian regulatory authorities and other third parties. As a result, there can
be no assurance that this rationalization will take place.
In May 1999, a subsidiary of the Company acquired subscription rights
from the Brazilian state-controlled Eletrobras, which allowed it to purchase
preferred, non-voting shares in Light and Eletropaulo. The aggregate purchase
price of the subscription rights and the underlying shares in Light and
Eletropaulo was approximately $53 million and $77 million, respectively, and
represented 3.7% and 4.4% economic ownership interest in their capital stock,
respectively.
The following table presents summarized financial information (in
millions) for the Company's investments in 50% or less owned investments
accounted for using the equity method:
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
------------------------------------------ ---- ---- ----
Revenues............................................................ $6,241 $5,960 $8,091
Operating Income.................................................... 1,989 1,839 2,079
Net Income.......................................................... 859 62 1,146
Current Assets...................................................... 2,423 2,259 2,712
Noncurrent Assets................................................... 13,080 15,359 19,025
Current Liabilities................................................. 3,370 3,637 4,809
Noncurrent Liabilities.............................................. 5,927 7,536 7,356
Stockholder's Equity................................................ 6,206 6,445 9,572
17
Relevant equity ownership percentages for these investments are presented below:
AFFILIATE COUNTRY 2000 1999 1998
--------- ------- ---- ---- ----
CEMIG............................................ Brazil 21.62% 21.62% 21.62%
Elsta............................................ Netherlands 50.00 50.00 50.00
Kingston......................................... Canada 50.00 50.00 50.00
Light............................................ Brazil 21.14 17.68 13.75
Eletropaulo...................................... Brazil 49.60 9.90 4.10
Medway Power, Ltd................................ United Kingdom 25.00 25.00 25.00
Nigen............................................ United Kingdom - 46.17 46.51
Northern/AES Energy.............................. United States - 50.00 45.37
OPGC............................................. India 49.00 49.00 n/a
Chigen Affiliates................................ China 30.00 30.00 30.00
Songas Limited................................... Tanzania 49.00 n/a n/a
In 2000 and 1999, the results of operations and the financial position
of the Brazilian affiliates, Light, Eletropaulo and CEMIG, were negatively
impacted by the devaluation of the Brazilian Real.
The Company's after tax share of undistributed earnings of affiliates
included in consolidated retained earnings was $370 million, $96 million, and
$139 million at December 31, 2000, 1999 and 1998, respectively. The Company
charged and recognized construction revenues, management fee and interest on
advances to its affiliates which aggregated $11 million, $21 million, and $19
million for each of the years ended December 31, 2000, 1999, and 1998,
respectively.
5. INVESTMENTS
The short-term investments and debt service reserves and other deposits
were invested as follows (in millions):
DECEMBER 31,
-------------
2000 1999
---- ----
RESTRICTED CASH AND CASH EQUIVALENTS (1).............................................. $1,718 $384
------ -----
HELD-TO-MATURITY:
U.S. treasury and government agency securities........................................ - 12
Certificates of deposit............................................................... 86 -
Commercial paper...................................................................... 7 91
------ -----
Subtotal.............................................................................. 93 103
------ -----
AVAILABLE-FOR-SALE:
Equity securities..................................................................... - 175
Certificates of deposit............................................................... 1 -
Commercial paper...................................................................... - 5
------ -----
Subtotal.............................................................................. 1 180
------ -----
TRADING:
Equity securities..................................................................... 2 -
------ -----
TOTAL................................................................................. $1,814 $667
====== =====
(1) Amounts required to be maintained in cash in accordance with certain
covenants of various project financing agreements and lease contracts.
Restricted cash at December 31, 2000, also includes certain cash deposited
in escrow
18
for pending acquisitions (See Note 2).
The Company's investments are classified as held-to-maturity,
available-for-sale or trading. The amortized cost and estimated fair value of
the held-to-maturity and available-for-sale investments (other than the equity
securities discussed below) were approximately the same. The trading investments
are recorded at fair value.
Short-term investments classified as held-to-maturity and
available-for-sale were $93 million and $1 million, respectively, at December
31, 2000, and short-term investments classified as held-to-maturity and
available for-sale were $75 million and $180 million, respectively, at December
31, 1999. Short-term investments classified as trading were $2 million and $0,
respectively, at December 31, 2000 and 1999. Also included in short-term
investments at December 31, 2000 and 1999 was restricted cash of approximately
$1.2 billion and $84 million, respectively.
During 1999, a subsidiary of the Company recorded directly to
shareholders' equity an unrealized after-tax gain of approximately $107 million
resulting from its investment in Internet Capital Group, Inc. ("ICGE"), an
internet holding company, which went public in August 1999. The gross unrealized
gain on these available-for-sale securities was $174 million and the related
taxes were approximately $67 million. The cost basis and the market value for
the investment were approximately $1 million and $175 million respectively, at
December 31, 1999 (1 million shares). In 2000, a subsidiary of the Company sold
approximately one million shares of ICGE resulting in a realized gain of
approximately $112 million. The after-tax proceeds from these sales were applied
primarily to the reduction of the Company's outstanding unsecured debt. During
2000, unrealized losses of approximately $62 million ($38 million after-tax)
were recorded to reflect the decrease in market price for the unsold shares.
6. LONG-TERM DEBT
NON-RECOURSE DEBT-Non-recourse debt at December 31, 2000, and 1999
consisted of the following (in millions):
DECEMBER 31,
INTEREST FINAL ----------------------
RATE(1) MATURITY 2000 1999
-------- -------- ------ -------
VARIABLE RATE:
Bank loans.................................................................. 9.70% 2022 $ 7,037 $5,099
Commercial paper............................................................ 8.89 2008 637 812
Debt to (or guaranteed by) multilateral or export credit agencies........... 7.37 2018 649 564
Other....................................................................... 14.34 2030 837 865
FIXED RATE:
Bank loans.................................................................. 5.00 2025 2,003 1,176
Notes and bonds............................................................. 9.46 2029 3,994 1,823
Debt to (or guaranteed by) multilateral or export credit agencies........... 5.76 2007 164 128
Other....................................................................... 8.92 2003 13 45
------- ------
SUBTOTAL.................................................................... 15,334 10,512
Less: Current maturities.................................................... (2,471) (991)
------- ------
TOTAL....................................................................... $12,863 $9,521
======= ======
(1) Weighted average interest rate at December 31, 2000.
Non-recourse debt borrowings are primarily collateralized by the
capital stock of the relevant subsidiary and in certain cases the physical
assets of, and all significant agreements associated with, such business. Such
debt is not a direct obligation of the AES parent corporation. These
non-recourse financings include structured project financings, acquisition
financings, working capital facilities and all other consolidated debt of the
subsidiaries. The Company has issued shares of common stock to consolidated
subsidiaries as collateral under various borrowing arrangement (see Note 10).
The Company has interest rate swap and forward interest rate swap
agreements in an aggregate notional principal
19
amount of $2.5 billion at December 31, 2000. The swap agreements effectively
change the variable interest rates on the portion of the debt covered by the
notional amounts to weighted average fixed rates ranging from approximately
5.21% to 9.90%. The agreements expire at various dates from 2001 through 2023.
In the event of nonperformance by the counterparties, the Company may be exposed
to increased interest rates; however, the Company does not anticipate
nonperformance by the counterparties, which are multinational financial
institutions.
Certain commercial paper borrowings of subsidiaries are supported by
letters of credit or lines of credit issued by various financial institutions.
In the event of nonperformance or credit deterioration of the institutions, the
Company may be exposed to the risk of higher effective interest rates. The
Company does not believe that such nonperformance or credit deterioration is
likely.
RECOURSE DEBT-Recourse debt obligations are direct borrowings of the
AES parent corporation and at December 31, 2000 and 1999, consisted of the
following (in millions):
INTEREST FINAL FIRST CALL
RATE MATURITY DATE 2000 1999
---- -------- ---- ---- ----
Corporate revolving bank loan.................................. 8.70% 2003 2000 $ 140 $ 335
Senior notes................................................... 8.75% 2002 - 300 -
Senior notes................................................... 8.00% 2008 2000 200 200
Senior notes................................................... 9.50% 2009 - 750 750
Senior notes................................................... 9.38% 2010 - 850 -
Senior subordinated notes...................................... 10.25% 2006 2001 250 250
Senior subordinated notes...................................... 8.38% 2007 2002 325 325
Senior subordinated notes...................................... 8.50% 2007 2002 375 375
Senior subordinated debentures................................. 8.88% 2027 2004 125 125
Convertible junior subordinated notes.......................... 4.50% 2005 2001 150 150
Unamortized discounts.......................................... (7) (8)
------ ------
SUBTOTAL....................................................... 3,458 2,502
Less: Current maturities....................................... - (335)
------ ------
Total.......................................................... $3,458 $2,167
====== ======
In March 2000, the Company entered into an $850 million revolving
credit agreement with a syndicate of banks, which provides for a combination of
either loans or letters of credit up to the maximum borrowing capacity. Loans
under the facility bear interest at either Prime plus a spread of 0.50% or LIBOR
plus a spread of 2%. Such spreads are subject to adjustment based on the
Company's credit ratings and the term remaining to maturity. This facility
replaced the Company's then existing separate $600 million revolving credit
facility and $250 million letter of credit facilities. As of December 31, 2000,
$365 million was available.
In December 2000, the Company obtained a $600 million bank commitment
with the same terms as the $850 million revolving credit agreement. There were
no amounts outstanding under this facility at December 31, 2000. The facility
was terminated upon issuance of Senior Notes in February 2001 (see Note 20).
Commitment fees on both facilities at December 31, 2000 are .50% per
annum. The Company's recourse debt borrowings are unsecured obligations of the
Company.
FUTURE MATURITIES OF DEBT-Scheduled maturities of total debt at
December 31, 2000, are (in millions):
20
2001......................................................................................... $ 2,471
2002......................................................................................... 2,824
2003......................................................................................... 1,563
2004......................................................................................... 899
2005......................................................................................... 890
Thereafter................................................................................... 10,145
----------
Total........................................................................................ $18,792
==========
COVENANTS-The terms of the Company's revolving bank loan, senior and
junior subordinated notes, and non-recourse debt agreements contain certain
restrictive covenants. The covenants provide for, among other items, maintenance
of certain reserves, and require that minimum levels of working capital, net
worth, and certain financial ratio tests are met. The most restrictive of these
covenants include limitations on incurring additional debt and on the payment of
dividends to stockholders.
As of December 31, 2000, approximately $486 million of restricted cash
was maintained in accordance with certain covenants of the debt agreements, and
these amounts were included within short-term investments and debt service
reserves and other deposits in the consolidated balance sheet.
Various lender and governmental provisions restrict the ability of the
Company's subsidiaries to transfer retained earnings to the parent company. Such
restricted retained earnings amounted to approximately $5 billion at December
31, 2000.
7. COMMITMENTS, CONTINGENCIES AND RISKS
OPERATING LEASES-As of December 31, 2000, the Company was obligated
under long-term non-cancelable operating leases, primarily for office rental and
site leases. Rental expense for operating leases, excluding amounts related to
the sale/leaseback discussed below, was $13 million, $7 million, and $4 million
in the years ended December 31, 2000, 1999 and 1998, respectively. The future
minimum lease commitments under these leases are $13 million for 2001, $8
million for 2002, $7 million for 2003, $6 million for 2004, $6 million for 2005,
and a total of $66 million for the years thereafter.
SALE/LEASEBACK-In May 1999, a subsidiary of the Company acquired six
electric generating stations from NYSEG (See Note 3). Concurrently, the
subsidiary sold two of the plants to an unrelated third party for $650 million
and simultaneously entered into a leasing arrangement with the unrelated party.
This transaction has been accounted for as a sale/leaseback with operating lease
treatment. Rental expense was $54 million and $26 million in 2000 and 1999,
respectively. Future minimum lease commitments are $58 million for 2001, $63
million for 2002, $58 million for 2003, $63 million for 2004, $59 million for
2005 and a total of $1.4 billion for the years thereafter.
In connection with the lease of the two power plants, the subsidiary is
required to maintain a rent reserve account equal to the maximum semi-annual
payment with respect to the sum of the basic rent and fixed charges expected to
become due in the immediately succeeding three-year period. At December 31, 2000
and 1999, the amount deposited in the rent reserve account approximated $31
million and $30 million, respectively. This amount is included in restricted
cash and can only be utilized to satisfy lease obligations.
The agreements governing the leases restrict the subsidiary's ability
to incur additional indebtedness, sell its assets or merge with another entity.
The ability of the subsidiary to make distributions is restricted unless certain
covenants, including the maintenance of certain coverage ratios, are met. The
subsidiary is also required to maintain an additional liquidity account
initially equal to $65 million less the balance of the rent reserve account. A
letter of credit from a bank for $36 million has been obtained to satisfy this
requirement.
CONTRACTS-Operating subsidiaries of the Company have entered into
"take-or-pay" contracts for the purchase of electricity from third parties.
Purchases in 2000 were approximately $189 million. The future commitments under
these contracts are $244 million for 2001, $226 million for 2002, $205 million
for 2003, $167 million for 2004, $144 million for 2005 and a total of $840
million for the years thereafter.
21
Operating subsidiaries of the Company have entered into various
long-term contracts for the purchase of fuel subject to termination only in
certain limited circumstances. Purchases in 2000 were approximately $689
million. The future commitments under contracts are $782 million for 2001, $490
million for 2002, $642 million for 2003, $580 million for 2004, $460 million for
2005, and $2.1 billion thereafter.
In connection with the acquisition of the assets of Ecogen in May 1999,
a subsidiary of the Company assumed contingent liabilities related to the
plants' performance. If plant availability and contract performance
specifications are not met, then a subsidiary of the Company may be required to
make payments of up to $141 million to a third party under the terms of an
electricity price hedge agreement.
Several of the Company's power plants rely on power sales contracts
with one or a limited number of entities for the majority of, and in some cases
all of, the relevant plant's output over the term of the power sales contract.
The remaining term of power sales contracts related to the Company's power
plants range from 5 to 29 years. However, the operations of such plants are
dependent on the continued performance by customers and suppliers of their
obligations under the relevant power sales contract, and, in particular, on the
credit quality of the purchasers. If a substantial portion of the Company's
long-term power sales contract were modified or terminated, the Company would be
adversely affected to the extent that it was unable to find other customers at
the same level of contract profitability. Some of the Company's long-term power
sales agreements are for prices above current spot market prices. The loss of
one or more significant power sales contracts or the failure by any of the
parties to a power sales contract to fulfill its obligations thereunder could
have a material adverse impact on the Company's business, results of operations
and financial condition.
During 2000, the wholesale electricity market in California experienced
a significant imbalance in the supply of, and demand for electricity, which
resulted in significant electricity price increases and volatility. California's
two largest utilities are required to purchase wholesale power and to sell it at
fixed prices to retail end users. Because the cost of wholesale power has
exceeded the price the utilities can charge their retail customers, these
utilities are facing severe financial difficulties. There can be no assurances
that such utilities can, or will choose to, honor their financial commitments.
In the event that such utilities become insolvent or otherwise choose not to
honor their commitments, creditors (including certain of the Company's
subsidiaries) may seek to exercise whatever remedies may be available,
including, among other things, placing the utilities into involuntary
bankruptcy. There can be no assurances that amounts owing directly or indirectly
from such utilities will be recovered. In addition, the California Independent
System Operator has sought a Temporary Restraining Order over some of the
generators, including AES subsidiaries, arguing that, in times of declared
emergencies, generators are required to continue to provide electricity to the
market even if there is no credit-worthy purchaser for the electricity. The bulk
of the Company's revenues in California are not subject to this credit risk,
because they are generated under the tolling agreement entered into by AES
Southland. But the Company's other subsidiaries have some exposure to this risk.
At December 31, 2000 the Company had receivables of approximately $27 million
that are subject to this credit risk. In addition, because these utilities have
defaulted on amounts due in the state sanctioned markets, the markets have
sought to recover those amounts pro rata from other market participants,
including certain of the Company's subsidiaries.
ENVIRONMENTAL-As of December 31, 2000, the Company has recorded
cumulative liabilities associated with acquired generation plants of
approximately $37 million for projected environmental remediation costs. During
2000, the Company incurred a $17 million environmental fine and will be required
to incur capital expenditures related to excess nitrogen oxide air emissions at
certain of its generating facilities in California.
In May 2000, the New York State Department of Environmental
Conservation ("DEC") issued a Notice of Violation ("NOV") to NYSEG for
violations of the Federal Clean Air Act and the New York Environmental
Conservation Law at the Greenidge and Westover plants related to NYSEG's alleged
failure to undergo an air permitting review prior to making repairs and
improvements during the 1980s and 1990s. Pursuant to the agreement relating to
the acquisition of the plants from NYSEG, AES Eastern Energy agreed with NYSEG
that AES Eastern Energy will assume responsibility for the NOV, subject to a
reservation of AES Eastern Energy's right to assert any applicable exception to
its contractual undertaking to assume pre-existing environmental liabilities.
The Company believes it has meritorious defenses to any actions asserted against
it and expects to vigorously defend itself against the allegations; however, the
NOV issued by the DEC, and any additional enforcement actions that might be
brought by the New York State Attorney General, the DEC or the U.S.
Environmental Protection Agency ("EPA"), against the Somerset, Cayuga, Greenidge
or Westover plants, might result in the
22
imposition of penalties and might require further emission reductions at those
plants.
The EPA has commenced an industry-wide investigation of coal-fired
electric power generators to determine compliance with environmental
requirements under the Federal Clean Air Act associated with repairs,
maintenance, modifications and operational changes made to the facilities over
the years. The EPA's focus is on whether the changes were subject to new source
review or new performance standards, and whether best available control
technology was or should have been used. On August 4, 1999, the EPA issued a NOV
to the Company's Beaver Valley plant, generally alleging that the facility
failed to obtain the necessary permits in connection with certain changes made
to the facility in the mid-to-late 1980s. The Company believes it has
meritorious defenses to any actions asserted against it and expects to
vigorously defend itself against the allegations.
The Company's generating plants are subject to emission regulations.
The regulations may result in increased operating costs or the purchase of
additional pollution control equipment if emission levels are exceeded.
The Company reviews its obligations as it relates to compliance with
environmental laws, including site restoration and remediation. Because of the
uncertainties associated with environmental assessment and remediation
activities, future costs of compliance or remediation could be higher or lower
than the amount currently accrued. Based on currently available information, the
Company does not believe that any costs incurred in excess of those currently
accrued will have a material effect on the financial condition and results of
operations of the Company.
DERIVATIVES-Certain subsidiaries and an affiliate of the Company enter
into interest rate, foreign currency, electricity and gas derivative contracts
with various counterparties, and as a result, the Company is exposed to the risk
of nonperformance by it's counterparties. The Company does not anticipate
nonperformance by the counterparties.
The Company is exposed to market risks on derivative contracts and on
other unmatched commitments to purchase and sell energy on a price and quantity
basis. Such market risks are monitored to limit the Company's exposure.
GUARANTEES-In connection with certain of its project financing,
acquisition, and power purchase agreements, AES has expressly undertaken limited
obligations and commitments, most of which will only be effective or will be
terminated upon the occurrence of future events. These obligations and
commitments, excluding those collateralized by letter-of-credit obligations
discussed below, were limited as of December 31, 2000, by the terms of the
agreements, to an aggregate of approximately $659 million. The Company is also
obligated under other commitments, which are limited to amounts, or percentages
of amounts, received by AES as distributions from its project subsidiaries.
These amounts aggregated $71 million as of December 31, 2000. In addition, the
Company has commitments to fund its equity in projects currently under
development or in construction. At December 31, 2000, such commitments to invest
amounted to approximately $111 million.
LETTERS OF CREDIT-At December 31, 2000, the Company had $603 million in
letters of credit outstanding, which operate to guarantee performance relating
to certain project development activities and subsidiary operations. The Company
pays a letter-of-credit fee ranging from 0.50% to 2.0% per annum on the
outstanding amounts. In addition, the Company had $134 million and a subsidiary
of the Company had $220 million in surety bonds outstanding at December 31,
2000.
LITIGATION-In September 1999, an appellate judge in the Minas Gerais,
Brazil state court system granted a temporary injunction that suspends the
effectiveness of a shareholders' agreement for CEMIG. This appellate ruling
suspends the shareholders' agreement while the action to determine the validity
of the shareholders' agreement is litigated in the lower court. In early
November 1999, the same appellate court judge reversed this decision and
reinstated the effectiveness of the shareholders' agreement, but did not restore
the super majority voting rights that benefited the Company. In March 2000, a
state court in Minas Gerais again ruled that the shareholders' agreement was
invalid. The Company has appealed this decision. AES must exhaust all
state-level appeals before the matter is heard before the Brazilian federal
court. The Company intends to vigorously pursue its legal rights in this matter
and to restore all of its rights regarding CEMIG, and does not anticipate that
this temporary suspension of the shareholders' agreement will have a significant
effect on its financial condition or results of operations. Failure to prevail
in this matter would limit the Company's influence on the daily operations of
CEMIG. However, the Company would still own approximately 21.6% of the voting
common stock of CEMIG.
23
In November 2000, the Company was named in a purported class action
suit along with six other defendants alleging unlawful manipulation of the
California wholesale electricity market, resulting in inflated wholesale
electricity prices throughout California. Alleged causes of action include
violation of the Cartwright Act, the California Unfair Trade Practices Act and
the California Consumers Legal Remedies Act. In December 2000, the case was
removed from the San Diego County Superior Court to the U.S. District Court for
the Southern District of California. The Company believes it has meritorious
defenses to any actions asserted against it and expects that it will defend
itself vigorously against the allegations.
In addition, the crisis in the California wholesale power markets has
directly or indirectly resulted in several administrative and legal actions
involving the Company's businesses in California. Each of the Company's
businesses in California (AES Southland, AES Placerita and AES New Energy) are
subject to overlapping state investigations by the California Attorney General's
Office, the Market Oversight and Monitoring Committee of the California
Independent System Operator ("ISO"), and the California Public Utility
Commission. Each of these investigations are currently in the document gathering
stage, and the businesses have responded to multiple requests for the production
of documents and data surrounding the operation and bidding behavior of the
plants.
In August 2000, the Federal Energy Regulatory Commission ("FERC")
announced an investigation into the national wholesale power markets, with
particular emphasis upon the California wholesale electricity market, in order
to determine whether there has been anti-competitive activity by wholesale
generators and marketers of electricity. The FERC has requested documents from
each of the AES Southland plants. Similar to the state investigation, the FERC
investigation has focused their attention to date upon the forced and planned
maintenance outages taken by the plants in 2000.
AES Drax Power Ltd. ("AES Drax") is currently in arbitration
proceedings involving a financial hedge agreement entered into with a subsidiary
of Texas Utilities, Inc. ("TXU"), in which TXU pays to AES Drax capacity and
variable payments and in turn receives the Pool Purchase Price in respect of the
volume of MWs that they request to be delivered. The Pool was replaced by the
New Energy Trading Arrangements ("NETA"), and therefore the Pool Purchase Price
no longer exists. AES believes that the hedging agreement contemplated this
transition by providing a mechanism for converting the agreement so that it can
function for its full 15-year term. TXU disagrees with this position. In
December 2000, AES Drax commenced an arbitration seeking an Expert Determination
regarding what changes to the agreement must be made to reflect the introduction
of NETA. AES believes that the expert panel is empowered to determine such
changes, and only such changes, to preserve the commercial intent of the
agreement (which is defined in the agreement), but TXU has requested the panel
to terminate the hedging agreement. The Company believes that it has meritorious
defenses, and it expects to vigorously pursue its interests. AES Drax and TXU
suspended the arbitration and negotiated mutually acceptable changes to the
hedging agreement. AES Drax was required to obtain the approval of its project
lenders for such an amendment. AES Drax has obtained the approval of the project
lenders and rating agencies for the amendment.
RISKS RELATED TO REGULATED AND FOREIGN OPERATIONS-AES operates
businesses in many regulated and foreign environments. There are certain
economic, political, technological and regulatory risks associated with
operating in these environments. Investments in foreign countries may be
impacted by significant fluctuations in foreign currency exchange rates. During
2000 and 1999, the Company's financial position and results of operations were
adversely affected by a significant devaluation of the Brazilian Real relative
to the U.S. Dollar.
The distribution businesses, which the Company owns or has investments
in are subject to regulatory review or approval which could limit electricity
tariff rates charged to customers or require the return of amounts previously
collected. These regulatory environments are also subject to change, which could
impact the results of operations.
24
In certain locations, particularly developing countries or countries
that are in a transition from centrally planned to market-oriented economies,
the electricity purchasers, both wholesale and retail, may be unable or
unwilling to honor their payment obligations. Collection of receivables may be
hindered in these countries due to ineffective systems for adjudicating contract
disputes.
In June 1999, a subsidiary of the Company assumed long-term managerial
and voting control of two regional electric distribution companies ("RECs") in
Kazakhstan as part of a settlement of receivables outstanding from the
government of Kazakhstan. The Company's claim against the government was for
electricity previously provided. The contractual rights to control the
operations of the RECs received in this transaction were valued at approximately
$26 million, based on the net present value of incremental cash flows expected
to be received as a result of operating the RECs. The value of the contract
rights was recorded in the statement of operations in 1999. The two distribution
businesses serve approximately 1.8 million people. The Company expects that the
government of Kazakhstan will abide by the terms and periods agreed to in the
original memorandum of understanding that currently governs the Company's
operating control of the RECs. However, the contract is subject to economic,
political and regulatory risks associated with operating in Kazakhstan. The
Company does not consolidate the RECs because it operates them under a
management agreement and does not have a controlling ownership interest in them.
LEVERAGED LEASE INVESTMENTS-One of the Company's subsidiaries has
investments in leveraged leases totaling $141 million. Related deferred tax
liabilities total $106 million. The investment includes estimated residual
values totaling $88 million. Leveraged lease residual value assumptions are
adjusted on a periodic basis, based on independent appraisals.
SALE OF ACCOUNTS RECEIVABLE - A subsidiary of the Company has sold, on
a revolving basis, an undivided interest in $50 million of its accounts
receivable.
8. COMPANY-OBLIGATED CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS
During 1997, two wholly owned special purpose business trusts (AES
Trust I and AES Trust II) issued Term Convertible Preferred Securities
("Tecons"). On March 31, 1997, AES Trust I issued 5 million of $2.6875 Tecons
(liquidation value $50) for total proceeds of $250 million and concurrently
purchased $250 million of 5.375% junior subordinated convertible debentures due
2027 of AES (individually the 5.375% Debentures). On October 29, 1997, AES Trust
II issued 6 million of $2.75 Tecons (liquidation value $50) for total proceeds
of $300 million and concurrently purchased $300 million of 5.5% junior
subordinated convertible debentures due 2012 of AES (individually the 5.5%
Debentures). During 2000, the Company called for redemption of AES Trust I and
AES Trust II. Substantially all of AES Trust I Tecons were converted into
approximately 14 million shares of AES common stock and substantially all of AES
Trust II Tecons were converted into approximately 11 million shares of AES
common stock.
During 1999, AES Trust III, a wholly owned special purpose business
trust, issued 9 million of $3.375 Tecons (liquidation value $50) for total
proceeds of approximately $518 million and concurrently purchased approximately
$518 million of 6.75% junior subordinated convertible debentures due 2029
(individually, the 6.75% Debentures).
During 2000, AES Trust VII, a wholly owned special purpose business
trust, issued 9.2 million of $3.00 Tecons (liquidation value $50) for total
proceeds of approximately $460 million and concurrently purchased approximately
$460 million of 6% junior subordinated convertible debentures due 2008
(individually, the 6% Debentures and collectively with the 6.75% Debentures, the
Junior Subordinated Debentures). The sole assets of AES Trust III and VII
(collectively, the Tecon Trusts) are the Junior Subordinated Debentures.
AES, at its option, can redeem the 6.75% Debentures after October 17,
2002, which would result in the required redemption of the Tecons issued by AES
Trust III, for $52.10 per Tecon, reduced annually by $0.422 to a minimum of $50
per Tecon, and can redeem the 6% Debentures after May 18, 2003, which would
result in the required redemption of the Tecons issued by AES Trust VII, for
$51.88 per Tecons, reduced annually by $0.375 to a minimum of $50 per Tecon. The
Tecons must be redeemed upon maturity of the Junior Subordinated Debentures.
The Tecons are convertible into the common stock of AES at each
holder's option prior to October 15, 2029 for AES
25
Trust III and May 14, 2008 for AES Trust VII at the rate of 1.4216 and 1.0811,
respectively, representing a conversion price of $35.171 and $46.25 per share,
respectively.
On November 30, 1999, three wholly owned special purpose business
trusts (individually, AES RHINOS Trust I, II, and III, collectively, the Rhinos
Trusts and with the Tecon Trusts, collectively the Trusts) issued trust
preferred securities ("Rhinos"). The aggregate amount of Rhinos issued was
approximately $250 million. Concurrent with the issuance of the Rhinos, the
Rhinos Trusts purchased approximately $258 million of junior subordinated
convertible notes due 2007. The Rhinos Trusts may be dissolved and the notes
distributed to the holders of the Rhinos at any time at the Company's option.
The obligations of the Trusts are fully and unconditionally guaranteed by AES.
Under the terms of a remarketing agreement, the initial purchaser of
the Rhinos has the right to cause a remarketing of the Rhinos if they remain
outstanding on November 30, 2002, or if certain other conditions are met.
In connection with the issuance of the Rhinos and related notes, the
Company has entered into a forward underwriting agreement for the future
placement of approximately $250 million of the Company's common stock, preferred
stock, notes or trust preferred securities.
Prior to a successful remarketing, the Rhinos are redeemable at par in
whole at any time or in part from the proceeds of a qualifying offering under
the forward underwriting commitment. The holder can require redemption only at
maturity (November 15, 2007).
Prior to February 28, 2003, the Rhinos are not convertible. On and
after February 28, 2003, the Rhinos are convertible at any time at the option of
the holder into the common stock of AES. The conversion price of the Rhinos
depends on whether or not the Trusts have completed a successful remarketing of
the Rhinos. Prior to a successful remarketing, the conversion price is equal to
the then current market price of the Company's common stock. After a successful
remarketing, the conversion price will be equal to the price specified in the
winning remarketing bid which cannot be less than the current market price of
AES common stock at the time of remarketing.
Dividends on the Tecons and Rhinos are payable quarterly at an annual
rate of 6.75% by AES Trust III, 6% by AES Trust VII and LIBOR plus 2.50% by the
Rhinos Trusts. Dividend rates for the Rhinos are subject to increase upon a
failed remarketing of the Rhinos. The Trusts are each permitted to defer payment
of dividends for up to 20 consecutive quarters, provided that the Company has
exercised its right to defer interest payments under the corresponding
debentures or notes. During such deferral periods, dividends on the Tecons and
Rhinos will accumulate quarterly and accrue interest and the Company may not
declare or pay dividends on its common stock.
Interest expense for each of the years ended December 31, 2000, 1999
and 1998, includes approximately $71 million, $38 million and $31 million for
2000, 1999 and 1998, respectively, related to the Tecon Trusts and approximately
$21 million and $2 million for 2000 and 1999, respectively, related to the
Rhinos Trusts.
9. MINORITY INTEREST
Minority interest includes $100 million and $125 million of cumulative
preferred stock of subsidiaries at December 31, 2000 and 1999, respectively.
During 1998 a subsidiary of the Company issued $50 million of its 5.65%
non-redeemable, cumulative preferred stock. In 2000 a subsidiary of the Company
retired $25 million of its cumulative preferred stock at par value. The total
annual dividend requirement was approximately $5 million at December 31, 2000.
$22 million of the preferred stock is subject to mandatory redemption
requirements over the period 2003-2008. Except for the series of preferred stock
subject to mandatory redemption discussed above, each series of preferred stock
is redeemable solely at the option of the issuer at prices between $101 and $118
per share.
10. STOCKHOLDERS' EQUITY
SALE OF STOCK-In May 2000, the Company sold 24.725 million shares of
common stock at $37.00 per share. Net proceeds from the offering were $886
million. In November 2000, the Company sold 10 million shares of common stock at
26
$52.50 per share. Net proceeds from the offering were $520 million.
STOCK SPLIT AND STOCK DIVIDEND-On April 17, 2000, the Board of
Directors authorized a two-for-one stock split, effected in the form of a stock
dividend, payable to stockholders of record on May 1, 2000. Accordingly, all
outstanding share, per share and stock option data in all periods presented have
been restated to reflect the stock split.
SHARES ISSUED FOR ACQUISITIONS-During December 2000, the Company issued
approximately 949,000 shares, valued at $51 million to fund the acquisition of
KMR. Also, during 2000, the Company issued approximately 343,000 shares, valued
at $16 million in various other acquisitions.
RESTRICTED STOCK-The Company issued restricted stock under various
incentive stock option plans. Generally, under each plan, shares of restricted
common stock with value equal to a stated percentage of participants' base
salary are initially awarded at the beginning of a three-year performance
period, subject to adjustment to reflect the participants' actual base salary.
The shares remain restricted and nontransferable throughout each three-year
performance period, vesting in one-third increments in each of the three years
following the end of the performance period. At the end of a performance period,
awards are subject to adjustment to reflect the Company's performance compared
to peer companies. Final awards under the plans can range from zero up to 400%
of the initial awards. Vested shares are no longer restricted and may be held or
sold by the participant. Compensation expense of $8 million, $1 million and $5
million for 2000, 1999 and 1998, respectively, as measured by the market value
of the common stock at the balance sheet date, has been recognized. As of
December 31, 2000, approximately 111,000 shares of restricted stock were
outstanding.
In January 2001, the final performance evaluation was completed for one
of the restricted stocks plans resulting in final awards of an additional
199,000 shares with approximately 101,000 shares becoming fully vested. All
shares of restricted stock became fully vested on the date of merger with
IPALCO.
STOCK OPTIONS-The Company has granted options to purchase shares of
common stock under its stock option plans. Under the terms of the plans, the
Company may issue options to purchase shares of the Company's common stock at a
price equal to 100% of the market price at the date the option is granted. The
options become eligible for exercise under various schedules. At December 31,
2000, there were approximately 1.5 million shares reserved for future grants
under the plans.
A summary of the option activity follows (in thousands of shares):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ --------- ------ --------
Outstanding-beginning of year...................... 16,698 $10.72 17,065 $ 8.83 19,686 $8.95
Exercised during the year.......................... (5,069) 14.11 (2,817) 7.45 (2,884) 11.57
Forfeited during the year.......................... (129) 30.85 (14) 21.83 (20) 16.00
Granted during the year............................ 4,075 36.98 2,464 20.16 283 28.95
------- ------ ------- ------ ------ -----
Outstanding-end of year............................ 15,575 $16.32 16,698 $10.72 17,065 $8.83
======= ====== ======= ====== ====== =====
Eligible for exercise-end of year.................. 11,449 $10.51 14,086 $9.44 14,900 $8.30
======= ====== ======= ====== ====== =====
27
The following table summarizes information about stock options
outstanding at December 31, 2000 (in thousands of shares):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF TOTAL REMAINING LIFE EXERCISE TOTAL EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- --------------- ---------- ----------- -----------
$ 0.78 - $ 3.24..... 34 0.1 $ 1.61 34 $ 1.61
$ 3.25 - $ 9.88..... 6,982 4.2 7.10 6,977 7.06
$ 9.89 - $14.40..... 2,038 5.6 12.51 2,034 12.52
$14.41 - $22.85..... 3,144 7.5 17.90 2,211 18.21
$22.86 - $58.00..... 3,368 9.0 36.34 193 26.99
$58.01 - $80.00..... 9 9.7 62.16 - -
------ ------- ------- ------- -------
Total............... 15,575 6.1 $16.32 11,449 $10.51
====== ======= ======= ======= =======
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, for disclosure purposes. No compensation expense has been
recognized in connection with the options, as all options have been granted only
to AES people, including Directors, with an exercise price equal to the market
price of the Company's common stock on the date of grant. For SFAS No. 123
disclosure purposes, the weighted average fair value of each option grant has
been estimated as of the date of grant primarily using the Black-Scholes option
pricing model with the following weighted average assumptions:
FOR THE YEARS ENDED
---------------------
2000 1999 1998
---- ---- ----
Interest rate (risk-free)........................................................ 5.4% 6.5% 5.1%
Volatility....................................................................... 41% 46% 33%
Dividend yield................................................................... 1% - 1%
Using these assumptions, and an expected option life of approximately 7
years, the weighted average fair value of each stock option granted was $14.40,
$22.43 and $18.99, for the years ended December 31, 2000, 1999 and 1998,
respectively.
Had compensation expense been determined under the provisions of SFAS
No. 123, utilizing the assumptions detailed in the preceding paragraph, the
Company's net income and earnings per share for the years ended December 31,
2000, 1999 and 1998 would have been reduced to the following pro forma amounts
(in millions except per share amounts):
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---- ---- ----
NET INCOME:
As reported................................................................. $ 796 $ 357 $ 441
Pro forma................................................................... 753 341 431
BASIC EARNINGS PER SHARE:
As reported................................................................. $1.65 $0.84 $1.11
Pro forma................................................................... 1.56 0.81 1.09
DILUTED EARNINGS PER SHARE:
As reported................................................................. $1.59 $0.82 $1.07
Pro forma................................................................... 1.50 0.79 1.05
The disclosures of such amounts and assumptions are not intended to
forecast any possible future appreciation of the Company's stock or change in
dividend policy.
As of December 31, 1999, the Company had warrants outstanding to
purchase up to 2.6 million shares of common stock at $7.36 a share. These
warrants expired in July 2000. Substantially all of the warrants were exercised
prior to expiration.
COMMON STOCK HELD BY SUBSIDIARIES-As of December 31, 2000,
approximately 81 million shares of the Company's
28
common stock had been issued to consolidated subsidiaries. These shares were
issued as collateral under various borrowing agreements and are not considered
outstanding. They have been excluded from the calculation of earnings per share.
11. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for income
before extraordinary item. In the table below, Income represents the numerator
(in millions) and Shares represent the denominator (in millions):
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- ------------------------- --------------------------
$ PER $ PER $ PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ ----- ------ ------ ----- ------ ------ -----
BASIC EPS
Income before extraordinary items.. $807 482.1 $1.67 $374 422.8 $0.88 $437 396.6 $1.10
EFFECT OF DILUTIVE SECURITIES:
Stock options and warrants......... - 9.8 (0.03) - 9.4 (0.02) - 9.2 (0.02)
Stock units allocated to deferred
compensation plans................ - 0.5 - - 0.5 - - 0.5 -
Tecons and other convertible debt,
net of tax........................ 22 21.1 (0.03) - - - 9 13.9 (0.02)
------ ------ ------ ----- ------ ------ ----- ------ ------
DILUTED EARNINGS PER SHARE......... $829 513.5 $1.61 $374 432.7 $0.86 $446 420.2 $1.06
====== ====== ====== ===== ====== ====== ===== ====== ======
12. BUYOUT AND BUYDOWN OF POWER SALES AGREEMENTS
In October 1999, AES Placerita Inc. ("Placerita"), a wholly owned
subsidiary of the Company, received proceeds of approximately $110 million to
complete the buyout of its long-term power sales agreement. In connection with
the buyout, the Company incurred transaction related costs of approximately $19
million and recorded a gain on contract buyout of $91 million. The buyout of the
power sales agreement resulted in the loss of a significant customer and
required the Company to assess the recoverability of the carrying amount of
Placerita's electric generation assets. The Company recorded an impairment loss
of approximately $62 million to reduce the carrying value of the electric
generation assets to their estimated fair value after termination of the
contract. The estimated fair value was determined by an independent appraisal.
Concurrent with the buyout of the power sales contract, the Company extinguished
certain liabilities under the related project financing debt prior to their
scheduled maturity. As a result, the Company has recorded an extraordinary loss
of approximately $11 million, net of income tax of approximately $5 million.
In September 1999, AES Thames Inc. ("Thames"), a wholly owned
subsidiary of the Company, amended its power sales agreement with Connecticut
Light and Power ("CL&P"), its sole customer. The amendment, which was subject to
regulatory approval, includes a partial prepayment for certain electricity to be
delivered by Thames to CL&P in the years 2001-2014. According to the terms of
the amendment, the Company will receive $532 million plus accrued interest in
return for a reduction in future electricity rates. Interest accrues on the
prepayment at a rate of 8.3% per annum from the date of regulatory approval. In
March 2000, the Connecticut Department of Public Utility Control ("DPUC")
approved the amendment to the power sales agreement. In July 2000, CL&P
requested and subsequently received approval from the DPUC to issue bonds to
fund the prepayment. The contractual receivable is recorded in other current
assets with a corresponding amount of deferred revenue in other liabilities in
the accompanying December 31, 2000 balance sheet. The deferred revenue will be
amortized into income on a ratable basis over the contract term based on
kilowatt hours provided.
13. SALE OF ASSETS
On November 20, 2000, a subsidiary of the Company sold certain assets
("the Thermal Assets") for approximately $162 million. The transaction resulted
in a gain to the Company of approximately $31 million ($19 million after tax).
Of the net proceeds, $88 million was used to retire debt specifically assignable
to the Thermal Assets. The related notes were retired in November 2000.
29
In connection with the retirement of the debt, the Company incurred make-whole
payments and wrote off debt issuance costs of approximately $4 million, which
was recorded as an extraordinary loss in 2000.
14. INCOME TAXES
INCOME TAX PROVISION-The provision for income taxes consists of the
following (in millions):
FOR THE YEARS ENDED
2000 1999 1998
------ ------ ------
Federal:
Current.......................................................................... $151 $70 $57
Deferred......................................................................... (38) 45 59
State:
Current.......................................................................... 20 11 13
Deferred......................................................................... (4) 14 (5)
Foreign:
Current.......................................................................... 208 98 82
Deferred......................................................................... 29 (48) 14
---- ---- ----
Total............................................................................ $366 $190 $220
==== ==== ====
The Company records its share of earnings of its equity investees on a
pre-tax basis. The Company's share of the investees' income taxes is recorded in
income tax expense.
EFFECTIVE AND STATUTORY RATE RECONCILIATION-A reconciliation of the
U.S. statutory Federal income tax rate to the Company's effective tax rate as a
percentage of income before taxes (after minority interest) is as follows:
FOR THE YEARS ENDED
2000 1999 1998
------ ------ ------
Statutory Federal tax rate...................................................... 35% 35% 35%
State taxes, net of Federal tax benefit......................................... 1 4 1
Taxes on foreign earnings....................................................... (3) (4) (1)
Other-net....................................................................... (2) (1) (2)
------ ------ ------
Effective tax rate.............................................................. 31% 34% 33%
====== ====== ======
DEFERRED INCOME TAXES-Deferred income taxes reflect the net tax effects
of (a) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss and tax credit carryforwards. These items are
stated at the enacted tax rates that are expected to be in effect when taxes are
actually paid or recovered.
As of December 31, 2000, the Company had Federal net operating loss
carryforwards for tax purposes of approximately $192 million expiring from 2008
through 2020, Federal general business tax credit carryforwards for tax purposes
of approximately $51 million expiring in years 2001 through 2020, and Federal
alternative minimum tax credits of approximately $53 million that carryforward
without expiration. As of December 31, 2000, the Company had foreign net
operating loss carryforwards of approximately $740 million that expire at
various times beginning in 2001, and some of which carryforward without
expiration, and foreign investment and assets tax credits of approximately $51
million that expire at various times beginning in 2001 through 2005. The Company
had state net operating loss carryforwards as of December 31, 2000, of
approximately $374 million expiring in years 2000 through 2020, and state tax
credit carryforwards of approximately $7 million expiring in years 2001 through
2009.
The valuation allowance increased by $77 million during 2000 to $119
million on December 31, 2000. This increase was the result of certain foreign
net operating loss carryforwards and Federal and state tax credits, the ultimate
realization of which is not known at this time. The Company believes that it is
more likely than not that the remaining deferred tax assets as shown below will
be realized.
30
Deferred tax assets and liabilities are as follows (in millions):
DECEMBER 31,
2000 1999
------ ------
Differences between book and tax basis of property and total deferred tax liability........................ $2,562 $2,591
------ ------
Operating loss carryforwards............................................................................... (328) (180)
Bad debt and other book provisions......................................................................... (104) (168)
Retirement costs........................................................................................... (75) (33)
Tax credit carryforwards................................................................................... (162) (96)
Other deductible temporary differences..................................................................... (316) (202)
------ ------
Total gross deferred tax asset............................................................................. (985) (679)
Less: Valuation allowance.................................................................................. 119 42
------ ------
Total net deferred tax asset............................................................................... (866) (637)
------ ------
Net deferred tax liability................................................................................. $1,696 $1,954
====== ======
Undistributed earnings of certain foreign subsidiaries and affiliates
aggregated approximately $777 million at December 31, 2000. The Company
considers these earnings to be indefinitely reinvested outside of the United
States and, accordingly, no U.S. deferred taxes have been recorded with respect
to such earnings. Should the earnings be remitted as dividends, the Company may
be subject to additional U.S. taxes, net of allowable foreign tax credits. It is
not practicable to estimate the amount of any additional taxes which may be
payable on the undistributed earnings. A deferred tax asset of $155 million has
been recorded as of December 31, 2000 for the cumulative effects of certain
foreign currency translation losses.
Income from operations in certain countries is subject to reduced tax
rates as a result of satisfying specific commitments regarding employment and
capital investment. The reduced tax rates for these operations will be in effect
for the life of the related businesses, at the end of which ownership transfers
back to the local government. The income tax benefit related to the tax status
of these operations are estimated to be $29 million, $27 million and $31 million
for the year ended December 31, 2000, 1999 and 1998, respectively.
Income from continuing operations before income taxes and extraordinary
items consisted of the following:
FOR THE YEARS ENDED
2000 1999 1998
---- ---- ----
U.S.............................................................................. $ 605 372 416
Non U.S.......................................................................... 568 192 241
------ ---- ----
Total............................................................................ $1,173 $564 $657
====== ==== ====
15. BENEFIT PLANS
PROFIT SHARING AND STOCK OWNERSHIP PLANS-The Company sponsors two
profit sharing and stock ownership plans, qualified under section 401 of the
Internal Revenue Code, which are available to eligible AES people. The plans
provide for Company matching contributions, other Company contributions at the
discretion of the Compensation Committee of the Board of Directors, and
discretionary tax deferred contributions from the participants. Participants are
fully vested in their own contributions and the Company's matching
contributions. Participants vest in other Company contributions over a five-year
period ending on the 5th anniversary of their hire date. Company contributions
to the plans were approximately $11 million, $7 million and $5 million for the
years ended December 31, 2000, 1999 and 1998.
DEFERRED COMPENSATION PLANS-The Company sponsors a deferred
compensation plan under which directors of the Company may elect to have a
portion, or all, of their compensation deferred. The amounts allocated to each
participant's
31
deferred compensation account may be converted into common stock units. Upon
termination or death of a participant, the Company is required to distribute,
under various methods, cash or the number of shares of common stock accumulated
within the participant's deferred compensation account. Distribution of stock is
to be made from common stock held in treasury or from authorized but previously
unissued shares. The plan terminates and full distribution is required to be
made to all participants upon any change of control of the Company (as defined
in the plan document). No stock associated with distributions was issued during
2000 under such plan.
In addition, the Company sponsors an executive officers' deferred
compensation plan. At the election of an executive officer, the Company will
establish an unfunded, nonqualified compensation arrangement for each officer
who chooses to terminate participation in the Company's profit sharing and
employee stock ownership plans. The participant may elect to forego payment of
any portion of his or her compensation and have an equal amount allocated to a
contribution account. In addition, the Company will credit the participant's
account with an amount equal to the Company's contributions (both matching and
profit sharing) that would have been made on such officer's behalf if he or she
had been a participant in the profit sharing plan. The participant may elect to
have all or a portion of the Company's contributions converted into stock units.
Dividends paid on common stock are allocated to the participant's account in the
form of stock units. The participant's account balances are distributable upon
termination of employment or death.
The Company also sponsors a supplemental retirement plan covering
certain highly compensated AES people. The plan provides incremental profit
sharing and matching contributions to participants that would have been paid
to their accounts in the Company's profit sharing plan if it were not for
limitations imposed by income tax regulations. All contributions to the plan
are vested in the manner provided in the Company's profit sharing plan, and
once vested are nonforfeitable. The participant's account balances are
distributable upon termination of employment or death.
DEFINED BENEFIT PLANS-Certain of the Company's subsidiaries have
defined benefit pension plans covering substantially all of their respective
employees. Pension benefits are based on years of credited service, age of the
participant and average earnings.
Significant weighted average assumptions used in the calculation of
pension benefits expense and obligation are as follows:
PENSION BENEFITS
YEARS ENDED DECEMBER 31, ----------------
------------------------ 2000 1999
------ ------
Discount rates........................................................................... 8% 8%
Rates of compensation increase........................................................... 3% 4%
Expected long-term rate of return on plan assets......................................... 9% 9%
A subsidiary of the Company has a defined benefit plan, which has a
benefit obligation of $320 million and $261 million at December 31, 2000 and
1999, and uses salary bands to determine future benefit costs rather than rate
of compensation increases. As such, rates of compensation increase in the table
above do not include amounts relating to this specific defined benefit plan.
Total pension cost for the years ended December 31, 2000 and 1999
includes the following components (in millions):
PENSION BENEFITS
----------------
YEARS ENDED DECEMBER 31, 2000 1999
------------------------ ------ ------
Service cost............................................................................. $14 $13
Interest cost on projected benefit obligation............................................ 55 29
Expected return on plan assets........................................................... 9 (16)
Amount of curtailment loss recognized.................................................... 6 -
VERP benefits............................................................................ 57 -
Other.................................................................................... (3) (3)
---- ----
Total pension cost....................................................................... $138 $23
==== ====
32
The changes in the benefit obligation of the plans combined for the
years ended December 31, 2000 and 1999 are as follows (in millions):
PENSION BENEFITS
2000 1999
------ ------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.................................................. $650 $357
Effect of foreign currency exchange rate change on beginning balance..................... (10) (21)
Service cost............................................................................. 13 10
Interest cost............................................................................ 55 29
Assumed in acquisitions.................................................................. 71 317
VERP benefits............................................................................ 57 -
Benefits paid............................................................................ (48) (24)
Other.................................................................................... 22 (18)
----- -----
Benefit obligation as of December 31..................................................... $810 $650
===== =====
The changes in the plan assets of the plans combined for the years
ended December 31, 2000 and 1999 are as follows (in millions):
PENSION BENEFITS
2000 1999
------ ------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year........................................... $714 $324
Effect of foreign currency exchange rate change on beginning balance..................... (6) (9)
Actual return on plan assets............................................................. 12 88
Assumed in acquisitions.................................................................. - 326
Benefits paid............................................................................ (48) (24)
Other.................................................................................... 13 9
----- -----
Fair value of plan assets as of December 31.............................................. $685 $714
===== =====
The funded status of the plans combined for the years ended as of
December 31, 2000 and 1999 are as follows (in millions):
PENSION BENEFITS
2000 1999
------ ------
Funded status...................................................................... $(125) $ 64
Unrecognized net actuarial gain.................................................... (84) (120)
Other.............................................................................. 3 7
------ ------
Accrued benefit cost as of December 31............................................. $(206) $ (49)
====== ======
All of the Company's pension plans have been aggregated in the table
above. Certain of the Company's plans at December 31, 2000, had benefit
obligations exceeding the fair value of the related plan's assets. As of
December 31, 2000, the Company had plans with benefit obligations exceeding the
fair value of plan assets by approximately $165 million.
In November 2000, a subsidiary of the Company implemented a one-time
Voluntary Early Retirement Program ("VERP"). This program offers enhanced
retirement benefits upon early retirement to eligible employees. The VERP was
available to all employees, except officers, whose combined age and years of
service will total at least 75 on June 30, 2001.
33
Participation was limited to, and subsequently accepted by 400 qualified
employees. Participants elected actual retirement dates in 2001. Additionally,
the post-retirement benefits will be provided to VERP retirees until age 55 at
which time they will be eligible to receive benefits from the independent VEBA
trustee. The subsidiary recognized the $57 million pre-tax non-cash pension
benefit costs of the VERP in December 2000.
During 2000, a subsidiary of the Company curtailed one of its defined
benefit plans. In connection with the curtailment, the subsidiary paid
approximately $8 million and transferred approximately $145 million of plan
assets to an independent trustee.
16. SEGMENTS
The Company operates in two business segments: generation and
distribution. Generation consists of the operation of electric power plants and
sales of electricity to nonaffiliated wholesale customers for further resale to
end-users. Distribution consists of electricity sales to end-users. Generation
and distribution are strategic business areas pursued by the Company. Although
the nature of the product is the same, segments are differentiated by the nature
of the customers and the operational differences. Within the Company's
organizational structure, the business units within each segment are
individually managed. Resources are allocated to each segment based on the
performance of the business units and the projects within each segment.
The accounting policies of the two business segments are the same as
those described in Note 1-General and Summary of Significant Accounting
Policies. The Company uses gross margin to evaluate the performance of
generation and distribution businesses that it controls and consolidates.
Depreciation and amortization at the generation and distribution businesses are
included in the calculation of gross margin. Corporate depreciation and
amortization is reported within selling, general and administrative expenses in
the consolidated statements of operations. Pre-tax equity in earnings is used to
evaluate the performance of generation and distribution businesses that are
significantly influenced by the Company. Sales between generation and
distribution are accounted for at fair value as if the sales were to third
parties. All intersegment activity has been eliminated with respect to revenue
and gross margin. Information about the Company's operations and assets by
segment is as follows (in millions):
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES (1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
------------ ------------ -------- -------- --------- ------------- ---------
Year Ended
December 31, 2000
Generation........ $3,546 $329 $1,350 $ 49 $17,627 $ 584 $1,909
Distribution...... 4,036 367 617 426 14,200 2,508 317
Corporate......... - 1 - - 1,211 30 -
-------- ------- ------- ------ ------- -------- -------
Total............. $7,582 $697 $1,967 $475 $33,038 $3,122 $2,226
======== ======= ======= ====== ======= ======== =======
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES (1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
------------ ------------ -------- -------- --------- ------------- ---------
Year Ended
December 31, 1999
Generation........ $1,970 $180 $ 793 $52 $14,250 $ 524 $688
Distribution...... 2,154 207 473 (31) 8,693 1,051 250
Corporate......... - 1 - - 279 - -
-------- ------- ------- ------ ------- -------- -------
Total............. $4,124 $388 $1,266 $21 $23,222 $1,575 $938
======== ======= ======= ====== ======= ======== =======
34
PRE-TAX INVESTMENT
DEPRECIATION EQUITY IN AND
AND GROSS IN TOTAL ADVANCES PROPERTY
REVENUES (1) AMORTIZATION MARGIN EARNINGS ASSETS TO AFFILIATES ADDITIONS
------------ ------------ -------- -------- --------- ------------- ---------
Year Ended
December 31, 1998
Generation........ $1,413 $126 $566 $33 $5,682 $495 $369
Distribution...... 1,844 173 478 199 6,806 1,438 228
Corporate......... - - - - 412 - -
-------- ------- ------- ------ ------- -------- -------
Total............. $3,257 $299 $1,044 $232 $12,900 $1,933 $597
======== ======= ======= ====== ======= ======== =======
(1) Intersegment revenues for the years ended December 31, 2000, 1999, and
1998 were $81 million, $76 million and $69 million, respectively.
Revenues are recorded in the country in which they are earned
and assets are recorded in the country in which they are located.
Information about the Company's operations and long-lived assets by
country are as follows (in millions):
UNITED TOTAL
U.S. ARGENTINA BRAZIL HUNGARY PAKISTAN KINGDOM OTHER(1) NON-U.S. TOTAL
------ --------- ------ ------- -------- ------- -------- -------- -------
REVENUES:
2000................ $3,397 $ 482 $ 699 $177 $232 $1,110 $1,485 $ 4,185 $ 7,582
1999................ 2,063 452 376 212 206 207 608 2,061 4,124
1998................ 1,514 423 478 227 213 40 362 1,743 3,257
LONG LIVED ASSETS:
2000................ $7,134 $1,624 $2,359 $ 91 $428 $4,483 $4,674 $13,659 $20,793
1999................ 6,200 1,061 2,588 121 492 4,600 1,375 10,237 16,437
1998................ 4,297 1,017 848 154 505 224 756 3,504 7,801
(1) AES has operations in 18 countries, which are included in the other
category above. Among these countries are Venezuela, China, the
Dominican Republic and the Republic of Georgia.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of current financial assets, current financial
liabilities, and debt service reserves and other deposits, are estimated to be
equal to their reported carrying amounts. The fair value of non-recourse debt,
excluding capital leases, is estimated differently based upon the type of loan.
For variable rate loans, carrying value approximates fair value. For fixed rate
loans and preferred stock with mandatory redemption, other than securities
registered and publicly traded, the fair value is estimated using discounted
cash flow analyses based on the Company's current incremental borrowing rates.
The fair value of interest rate swap, cap and floor agreements, foreign currency
forwards and swaps, and energy derivatives is the estimated net amount that the
Company would receive or pay to terminate the agreements as of the balance sheet
date. The estimated fair values for certain of the notes and bonds included in
non-recourse debt, and certain of the recourse debt and Tecons, which are
registered and publicly traded, are based on quoted market prices. The carrying
value of Rhinos approximates fair value as they include a rate adjustment
feature that is linked to the interbank market for credit.
The estimated fair values of the Company's assets and liabilities have
been determined using available market information. The estimates are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair values of the Company's debt and derivative
financial instruments as of December 31, 2000 and 1999, are as follows (in
millions):
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Non-recourse debt............................................................. $15,334 $15,560 $10,512 $10,465
Recourse debt................................................................. 3,458 3,343 2,502 2,495
Tecons and Rhinos............................................................. 1,228 1,624 1,318 1,770
Interest rate swaps........................................................... (2) (141) - (23)
Interest rate caps and floors, net............................................ (2) (7) - 13
Foreign currency forwards and swaps, net...................................... 10 14 - -
Preferred stock with mandatory redemption..................................... 22 20 22 20
Energy derivatives, net....................................................... 25 (2) 4 4
35
The fair value estimates presented herein are based on pertinent
information as of December 31, 2000 and 1999. The Company is not aware of any
factors that would significantly affect the estimated fair value amounts since
December 31, 2000.
18. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which, as amended, established
new accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
(including derivatives embedded in other contracts) as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Changes in the derivative's fair value are to be recognized currently in
earnings, unless specific hedge accounting criteria are met. Hedge accounting
allows a derivative's gains or losses in fair value to offset related results of
the hedged item in the statement of operations and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. Prior to the adoption of SFAS No. 133, derivatives
that are classified as other than trading are accounted for using settlement
accounting, and any gain or loss is included in interest cost.
SFAS No. 133 allows hedge accounting for fair value and cash flow
hedges. SFAS No. 133 provides that the gain or loss on a derivative instrument
designated and qualifying as a fair value hedge as well as the offsetting gain
or loss on the hedged item attributable to the hedged risk be recognized
currently in earnings in the same accounting period. SFAS No. 133 provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedge be reported as a component of other
comprehensive income in stockholders' equity and be reclassified into earnings
in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative, if any, must be
recognized currently in earnings.
The Company utilizes derivative financial instruments to manage
interest rate risk, foreign exchange risk and commodity price risk. The Company
utilizes interest rate swap, cap, and floor agreements, to manage interest rate
risk on floating rate debt. Currency forward and swap agreements are utilized to
manage foreign exchange rate risk which is a result of AES or one of its
subsidiaries entering into monetary obligations in currencies other than its own
functional currency. The Company utilizes electric and gas derivative
instruments, including swaps, options, forwards and futures, to manage the risk
related to electricity and gas sales and purchases.
The Company believes its electricity purchase contracts that meet the
definition of a derivative under SFAS No. 133, but are settled by physical
delivery, qualify for the normal purchases and sales exception and thus are not
required to be accounted for as derivatives. The Derivatives Implementation
Group ("DIG") of the Financial Accounting Standards Board is currently
discussing the accounting treatment under SFAS No. 133 for certain of these
contracts, which contain features that may be viewed as options. The DIG may
conclude that such contracts are required to be accounted for as derivatives.
The majority of the Company's derivative instruments qualify as fair
value or cash flow hedges, as defined by SFAS No. 133. As required by SFAS No.
133 for these instruments the Company has documented the effectiveness of the
hedges by performing tests to demonstrate the high correlation between the
derivative instruments and the underlying hedged commitments or transactions.
These effectiveness tests will be updated quarterly. The Company intends to
exclude the change in the time value of option contracts from its assessment of
hedge effectiveness. Although the majority of the Company's derivative
instruments qualify as fair value or cash flow hedges, adoption of SFAS No. 133
will increase volatility in reported earnings.
Adoption of SFAS No. 133 resulted in the recognition of $81.7 million
of derivative assets and $226.6 million of derivative liabilities on the
Company's balance sheet as of January 1, 2001. The derivative assets consist
primarily of commodity hedges and foreign currency swaps, but also include some
interest rate swaps. The derivative liabilities consist primarily of interest
rate swaps and commodity hedges. Additionally, adoption of SFAS No. 133 resulted
in the recognition of a charge of approximately $1 million, net of deferred
income tax effects, which was included in the first quarter 2001 income
statement as a cumulative effect of a change in accounting principle. Adoption
of the standard also resulted in a reduction of other comprehensive income in
stockholders' equity of approximately $99 million, net of deferred income tax
effects, which was included in the first quarter 2001 balance sheet as a
cumulative effect of a change in accounting principle.
36
Approximately $19 million of other comprehensive income related to derivative
instruments as of January 1, 2001, is expected to be recognized as income in
earnings over the next twelve months. A portion of this amount is expected to be
offset by the effects of hedge accounting that will be recognized in 2001.
The Company adopted Staff Accounting Bulletin No. 101, "REVENUE
RECOGNITION IN FINANCIAL STATEMENTS", during the first quarter of 2000. The
adoption of this standard did not impact its financial condition or results of
operations.
The Company adopted FASB Interpretation No. 44, "ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION", during the second quarter of 2000.
The adoption of this standard did not impact its financial condition or results
of operations.
19. QUARTERLY DATA (UNAUDITED)
The following table summarizes the unaudited quarterly statements of
operations for the Company for 2000 and 1999, giving effect to the acquisition
of IPALCO as if it had occurred at the beginning of the earliest period
presented (in millions, except per share amounts):
QUARTER ENDED 2000
-------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31
------ ------ ------ ------
Revenues (1)......................................................................... $1,696 $1,751 $1,995 $2,141
Gross margin......................................................................... 476 397 520 574
Income before extraordinary items.................................................... 274 140 164 229
Extraordinary items, net of tax benefit.............................................. (7) - - (4)
Net income .......................................................................... 267 140 164 225
Basic earnings per share (1):
Before extraordinary items........................................................... $0.60 $0.30 $0.33 $0.45
Extraordinary items.................................................................. (0.01) - - (0.01)
------ ------ ------ ------
Basic earnings per share............................................................. $0.59 $0.30 $0.33 $0.44
====== ====== ====== ======
Diluted earnings per share:
Before extraordinary items........................................................... $0.57 $0.28 $0.32 $0.44
Extraordinary items.................................................................. (0.01) - - (0.01)
------ ------ ------ ------
Diluted earnings per share........................................................... $0.56 $0.28 $0.32 $0.43
====== ====== ====== ======
QUARTER ENDED 1999
-------------------------------------
MAR 31 JUN 30 SEP 30 DEC 31
------ ------ ------ ------
Revenues............................................................................. $849 $852 $1,085 $1,338
Gross margin......................................................................... 283 300 310 373
Income before extraordinary items.................................................... 17 106 93 158
Extraordinary items, net of tax benefit.............................................. - - - (17)
Net income........................................................................... 17 106 93 141
Basic earnings per share: (1)
Before extraordinary items........................................................... $0.04 $0.25 $0.22 $0.35
Extraordinary items.................................................................. - - - (0.04)
------ ------ ------ ------
Basic earnings per share............................................................. $0.04 $0.25 $0.22 $0.31
====== ====== ====== ======
Diluted earnings per share:(1)
Before extraordinary items........................................................... $0.04 $0.24 $0.21 $0.34
Extraordinary items.................................................................. - - - (0.04)
------ ------ ------ ------
Diluted earnings per share........................................................... $0.04 $0.24 $0.21 $0.30
====== ====== ====== ======
-----------
(1) The sum of these amounts does not equal the annual amount due to
rounding or because the quarterly calculations are based on varying
numbers of shares outstanding.
37
20. SUBSEQUENT EVENTS
Through May 2, 2001, the Company issued approximately $800 million of
recourse debt in U.S. dollars and the U.K. pounds sterling maturing in 2011.
Such debt consisted of $600 million of 8.875% Senior Notes and L135
million of 8.375% Senior Notes.
On March 27, 2001, the Company merged with IPALCO in a pooling of
interests transaction. The accompanying consolidated financial statements
have been retroactively restated to reflect the combined financial position
and combined results of operations and cash flows the Company and IPALCO for
all periods presented, giving effect to the merger of IPALCO as if the
combination had occurred at the beginning of the earliest period presented
(see Note 2).
In May 2001, the Department of Justice commenced an antitrust
investigation pursuant to Section 1 of the Sherman Act relating to an
agreement between AES Southland LLC and Williams Energy Services Company
which the Department of Justice alleges limits the expansion of electric
generating capacity at or near certain plants owned by AES Southland LLC. In
connection therewith, the Department sent a Civil Investigative Demand
("CID") to AES Southland LLC requesting the answer to certain interrogatories
and the production of documents. AES Southland LLC is cooperating with the
terms of the CID.
On May 23, 2001, AES Drax received bank lender and rating agency
approval for its amendment to the TXU hedging agreement (see Note 7).
On February 12, 2001, a subsidiary of the Company entered into an
agreement to acquire Thermo Ecotek (see Note 2).
Subsequent to December 31, 2000, the Company issued approximately 2
million options to purchase shares at a price of $55.61 per share.
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
C.A. La Electricidad de Caracas and Corporation EDC, C.A.:
We have audited the accompanying combined balance sheet of C.A. La
Electricidad de Caracas and Corporation EDC, C.A. (Venezuelan corporations)
and their Subsidiaries, translated into U.S. dollars, as of December 31,
2000, and the related translated combined statements of income, stockholders'
equity and cash flows for the period from June 1 through December 31, 2000.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. 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 we
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
These translated financial statements have been prepared for use in
the preparation of the consolidated financial statements of The AES
Corporation and, accordingly, they translate the assets, liabilities,
stockholders' investment and revenues and expenses of C.A. La Electricidad de
Caracas and Corporation EDC, C.A. and their Subsidiaries for that purpose.
The translated financial statements have not been prepared for use by other
parties and may not be appropriate for such use.
In our opinion, the translated financial statements referred to
above present fairly, in all material respects and for the purpose described
in the preceding paragraph, the financial position of C.A. La Electricidad de
Caracas and Corporation EDC, C.A. and their Subsidiaries as of December 31,
2000, and the results of their operations and their cash flows for the period
from June 1 through December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
PIERNAVIEJA, PORTA, CACHAFEIRO Y ASOCIADOS
A MEMBER FIRM OF ARTHUR ANDERSEN
Hector L. Gutierrez D.
Public Accountant CPC No. 24, 321
Caracas, Venezuela
January 23, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE AES CORPORATION
Date: June 5, 2001 By /s/ William R. Luraschi
-----------------------------
William R. Luraschi
Vice President and Secretary
39