SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

 

PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934

 

Date of Report (date of earliest event reported): June 13, 2003

 

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.)

 

 

 

 

 

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

 

The Company is filing the selected financial data for the five years ended December 31, 2002, certain sections of Management’s Discussion and Analysis for the three years ended December 31, 2002, and consolidated financial statements as of December 31, 2002 and 2001 and for the three years ended December 31, 2002 in order to report the impact of our classification of AES Barry, AES Haripur Private Ltd., and AES Meghnaghat Ltd., during the three months ended March 31, 2003, as discontinued operations pursuant to Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS No. 144”)

 

Forward-looking statements

 

Certain statements contained in this Form 8-K are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  These forward-looking statements speak only as of the date hereof.  Forward-looking statements can be identified by the use of forward-looking terminology such as “believe,” “expects,” “may,” “intends,” “will,” “should” or “anticipates” or the negative forms or other variations of these terms or comparable terminology, or by discussions of strategy.  Future results covered by the forward-looking statements may not be achieved.  Forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.  The most significant risks, uncertainties and other factors are discussed in the Company's Annual Report on Form 10-K.  You are urged to read this document and carefully consider such factors.

 

1



 

Selected Financial Data

 

Please note that acquisitions, disposals, reclassifications and changes in accounting principles affect the comparability of information included in the tables below. Please refer to the Notes to the consolidated financial statements for further explanation of the effect of such activities.

 

 

 

Year Ended December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

 

 

(in millions, except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

8,522

 

$

7,564

 

$

6,140

 

$

3,699

 

$

3,214

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(2,527

)

434

 

803

 

359

 

451

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax

 

(636

)

(161

)

(8

)

(2

)

(10

)

Cumulative effect of change in accounting principle, net of tax

 

(346

)

 

 

 

 

Net (loss) income

 

$

(3,509

)

$

273

 

$

795

 

$

357

 

$

441

 

Basic (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(4.68

)

$

0.82

 

$

1.67

 

$

0.85

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

(1.18

)

(0.30

)

(0.01

)

(0.01

)

(0.03

)

Cumulative effect of change in accounting principle

 

(0.65

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(6.51

)

$

0.52

 

$

1.66

 

$

0.84

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(4.68

)

$

0.81

 

$

1.61

 

$

0.83

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

(1.18

)

(0.30

)

(0.02

)

(0.01

)

(0.02

)

Cumulative effect of change in accounting principle

 

(0.65

)

 

 

 

 

Diluted (loss) earnings per share

 

$

(6.51

)

$

0.51

 

$

1.59

 

$

0.82

 

$

1.07

 

 

 

 

December 31,

 

 

 

2002

 

2001

 

2000

 

1999

 

1998

 

 

 

(in millions)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

34,260

 

$

36,812

 

$

33,038

 

$

23,222

 

$

12,900

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse debt (long-term)

 

10,550

 

11,224

 

9,303

 

5,921

 

4,283

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-recourse debt (long-term)—Discontinued operations

 

3,620

 

1,325

 

3,560

 

3,600

 

222

 

Recourse debt (long-term)

 

5,778

 

4,913

 

3,458

 

2,167

 

1,644

 

Mandatorily redeemable preferred stock of subsidiary

 

22

 

22

 

22

 

22

 

 

Company obligated convertible mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of AES

 

978

 

978

 

1,228

 

1,318

 

550

 

Stockholders’ (deficit) equity

 

(341

)

5,539

 

5,542

 

3,315

 

2,368

 

 

2



 

Discussion and Analysis of Financial Condition and Results of Operations

 

Recent Developments

The following sections reflect recent material developments that have occurred since the filing of the Company’s Form 10-Q for the three months ended March 31, 2003.

 

Asset sales

 

AES has announced a number of strategic initiatives designed to decrease its dependence on access to the capital markets, strengthen its balance sheet, reduce the financial leverage at the parent company and improve short-term liquidity. One of these initiatives involves the sale of all or part of certain of the Company’s subsidiaries. During 2002, the Company announced agreements to sell AES NewEnergy, CILCORP, AES Mt. Stuart, and AES Ecogen for net equity proceeds of approximately $819 million. The NewEnergy transaction closed in September 2002, CILCORP and AES Mt. Stuart closed in January 2003 and AES Ecogen closed in February 2003. Additionally, the Company has reached agreements to sell 100% of Songas Limited and AES Kelvin (Pty.) Ltd, two generation businesses in Africa, for net equity proceeds of approximately $116 million. These transactions are expected to close in early or mid-2003. In January 2003, the Company announced the sale of Mountainview for $30 million with another $20 million payment contingent on the achievement of project specific milestones. This transaction closed in March 2003. Additionally, the Company announced in March 2003, agreements to sell 100% of its ownership interest in two generation businesses in Bangladesh (AES Haripur Private Limited (“Haripur”) and AES Meghnaghat Limited (“Meghnaghat”)) and 32% of its ownership interest in AES Oasis Limited (“AES Oasis”), which includes two electric generation development projects and desalination plants in Oman and Qatar (AES Barka and AES Ras Laffan, respectively), and the oil-fired generating facilities, AES LalPir and AES PakGen in Pakistan. Proceeds from the sales of Haripur and Meghnaghat are expected to be approximately $127 million in cash plus assumption of debt, subject to certain closing adjustments. Cash proceeds from the sale of the minority interest in AES Oasis will be approximately $150 million. Completion of this sale is subject to certain conditions, including government and lender approvals.   The Company continues to evaluate which additional businesses it may sell.  However, there can be no guarantee that the proceeds from such sales transactions will cover the entire investment in such subsidiaries. Depending on which businesses are eventually sold, the entire or partial sale of any subsidiary may change the current financial characteristics of the Company’s portfolio and results of operations, and in the future may impact the amount of recurring earnings and cash flows the Company would expect to achieve.  In addition, any changes in the Company’s portfolio due to asset sales or the resolution of a number of the Company’s businesses currently under restructuring could also impact certain of the Company’s various regulatory approvals for certain of its projects.  In such event, the Company could address such impact either through petitions for other regulatory approvals, the sale of part or all of certain businesses, or the acquisition of other assets.

 

3



 

Brazil

 

Eletropaulo.  Due, in part, to the effects of power rationing, the decline of the value of the Brazilian real in U.S. dollar terms in 2001 and 2002 and the lack of access to the international capital markets, Eletropaulo Metropolitana Eletricidade de São Paulo S.A. (“Eletropaulo”), AES Elpa and AES Transgas continue to face significant near-term debt payment obligations that must be extended, restructured, refinanced or repaid. As a result of AES Elpa’s and AES Trangas’ failure to pay amounts due under the financing arrangements, BNDES has the right to call due all of AES Elpa’s outstanding obligation with BNDES, and BNDESPAR has the right to call due all of AES Transgas’ outstanding obligation with BNDESPAR.  In addition, as a result of a cross default provision, at March 31, 2003 BNDES has the right to call due approximately $234 million loaned to Eletropaulo under the program in Brazil established to alleviate the effects of rationing on electricity companies.  Due to BNDES’ right of acceleration and existing payment, financial covenant and other defaults under |the Eletropaulo loan agreements, Eletropaulo’s commercial lenders have the right to call due approximately $753 million of indebtedness as of March 31, 2003. Due to a cross-payment default provision, Eletropaulo received a waiver until September 15, 2003 with respect to $99 million of debentures.  At March 31, 2003, Eletropaulo, AES Elpa and AES Transgas have a combined $2.3 billion of debt classified as current on the consolidated balance sheet.

 

On May 20, 2003, Eletropaulo received a letter from the president of the Mines and Energy Commission of the House of Representatives of the National Congress.  The letter requested that Eletropaulo attend a Public Hearing  (the “Public Hearing”) at the National Congress to provide information concerning facts in connection with Eletropaulo's privatization.  No other specificity regarding the information sought by the Commission was provided in the May 20 letter.  On May 28, 2003, the Public Hearing was postponed until June 12, 2003.  On June 12, 2003, a representative of Eletropaulo attended the Public Hearing as requested by the Commission and discussed various issues regrding the electricity market and privatization.

 

In May 2003, there were press reports of allegations that in April 1998 Light Serviços de Eletricidade S.A. (“Light”) colluded with Enron in connection with the auction of the Brazilian group Eletropaulo Eletricidade de São Paulo S.A.  Enron and Light of which AES was a shareholder, were among three potential bidders for Eletropaulo.  At the time of the transaction in 1998, AES owned less than 15% of the stock of Light and shared representation in Light’s management and Board with three other shareholders.

 

Sul.  Sul and AES Cayman Guaiba, a subsidiary of the Company that owns the Company’s interest in Sul, are facing near-term debt payment obligations that must be extended, restructured, refinanced or paid. Sul had outstanding debentures of $55 million, at the March 31, 2003 exchange rate, that were restructured on December 1, 2002.  The restructured debentures have partial interest payments due in June 2003 and December 2003 and principal payments due in 12 equal monthly installments commencing on December 1, 2003.  On January 20, 2003 Sul and AES Cayman Guaiba signed a letter agreement with the agent for the banks under the $300 million AES Cayman Guaiba syndicated loan for the restructuring of the loan.  A $30 million principal payment due on January 24, 2003 under the syndicated loan was waived by the lenders through April 24, 2003 and has not been paid. While the lenders have not agreed to extend any additional waivers, they have not exercised their rights under the $50 million AES parent guarantee and have indicated their willingness to complete satisfactory final documentation in respect of the restructuring of such loan.  There can be no assurance, however, that a restructuring of this loan will be completed.

 

CEMIG.  An equity method affiliate of AES received a loan from BNDES to finance its investment in CEMIG, and the balance, including accrued interest, outstanding on this loan is approximately $717 million as of March 31, 2003. Approximately $57 million of principal and interest, which represents AES’s share, was scheduled to be repaid in May 2003. The equity method affiliate of the Company was not able to repay the amount due and has not yet reached an agreement to refinance or extend the maturities of the amounts due. BNDES may choose to seize the shares held as collateral. Additionally, the existing default on the debt used to finance the acquisition of CEMIG has resulted in a cross default to the BNDES debt used to finance the acquisition of Eletropaulo and the BNDES rationing loan.

 

May 29, 2003 Eletronet Bankruptcy Court Order.  In the Rio de Janeiro bankruptcy court proceedings for Eletronet, a company owned 51% by AES Bandeirantes Empreendimentos Ltda. (an entity formerly owned by  the Company) (“AES Bandeirantes”) and 49% by Lightpar (a subsidiary of state-owned Eletrobras), the judge, without a hearing, granted the request of the bankruptcy trustee for a preliminary injunction to attach the common and preferred shares of Eletropaulo held by AES Elpa and AES Transgas, respectively, and the common shares of Tiete held by AES Tiete Empreendimentos Ltda. (“TE”).  AES Elpa, AES Transgas and TE are indirect subsidiaries of the Company, but are wholly separate corporate entities from each other as well as AES Bandeirantes.  The

 

4



 

stated purpose of the bankruptcy court’s order was to assure the effectiveness of any future decision finding AES Bandeirantes responsible for Eletronet’s obligations. The Company believes there is no legal basis for the preliminary injunction.

 

Other Regulatory Matters.  In 2003 Brazil entered a major round of tariff resets. Eletropaulo’s tariff reset process is expected to be concluded by July 4, 2003.  On May 26, 2003, ANEEL released a preliminary proposed tariff increase of 9.62% for Eletropaulo.  A number of issues remain unresolved with respect to the methodologies to be utilized in the tariff reset process, certain of which have been challenged by the electric distribution companies in the Brazilian courts. In addition, on April 4, 2003, the Brazilian government issued a decree postponing for a 1-year period, the tracking account tariff increases.  According to this decree, the passing through to tariffs of the amounts accumulated on the tracking account for the distribution concessionaires which had been scheduled to occur from April 8, 2003 to April 7, 2004 will be postponed to the subsequent year’s tariff adjustment.  As a result, in the case of Eletropaulo, the pass-through of the tracking account balance, which would have occurred on July 4, 2003, has now been postponed to July 4, 2004.  This amount to be accumulated in the next twelve months, shall be recovered over a 24-month period rather than the usual 12-month period.  The eventual resolution of these issues could materially adversely affect the results of operations of the electricity distribution companies.  For these reasons, we are unable to predict the ultimate effect of the tariff reset process on Eletropaulo.

 

On April 19, 2003, Sul was granted a rate increase by ANEEL, the regulatory body in Brazil responsible for tariff changes.  Exclusive of the tracking account adjustment, the tariff revision will amount to a 16.38% increase in revenue without considering any growth or change in customer mix.  Sul is appealing several items from the tariff reset process on various levels.  Should all appeals fail, the 16.38% increase will remain in effect.

 

In addition, the Brazilian government has announced its intention to review the existing electric sector model.  The Ministry of Mines and Energy has formed a group for the purpose of designing a new model, the results of which have not been officially disclosed.

 

Venezuela

 

At March 31, 2003, EDC was not in compliance with two of its net worth covenants on $131 million and $9 million of non-recourse debt primarily due to the impact of the devaluation of the Venezuelan Bolivar. EDC has received a written waiver on the $131 million debt obligation which is effective through September 30, 2003, and EDC has received a written waiver on the $9 million debt obligation, which is effective

 

5



 

through June 30, 2003.  Of the above-mentioned debt, approximately $102 million is classified as non-recourse debt—long term. The remainder is classified as non-recourse debt—current portion.

 

United Kingdom

 

On December 12, 2002 Drax entered into an agreement (the “Standstill Agreement”) for the purpose of providing Drax and its senior creditors with a period of stability during which discussions regarding a consensual restructuring could take place.  Pursuant to the terms of the Standstill Agreement, on March 14, 2003 Drax presented to the steering committee (the “Steering Committee”) representing the syndicate of banks (the “Senior Lenders”), which financed the Eurobonds issued by Drax to finance the acquisition of the Drax power plant, and the ad hoc committee (the “Ad Hoc Committee” and, together with the Steering Committee, the “Senior Creditors Committee”) formed by holders of Drax’s Senior Bonds, proposals for a restructuring plan and an updated business plan.   On May 22, 2003, Drax was informed by the Senior Creditors Committee of a counterproposal for a restructuring plan (the “Senior Creditors’ Counterproposal”).  Drax reviewed and considered the terms of the Senior Creditors’ Counterproposal and conducted detailed discussions with the Senior Creditors Committee about the terms for a restructuring.  Although the full terms of a consensual restructuring remain to be agreed, based on negotiations through May 30, 2003, an agreement in principle was reached with the Senior Creditors Committee and will form the basis for further discussions during an extended standstill period.

 

In order to maintain stability during a period in which further discussions regarding consensual restructuring took place, Drax sought the requisite consents of the holders of its Senior Bonds and its Senior Lenders to enter into a new standstill agreement as the current Standstill Period terminated on May 31, 2003.  Accordingly, Drax reached an agreement in principle with the Senior Creditors' Committee regarding the terms of a further standstill agreement (the “Further Standstill Agreement”).  The Further Standstill Agreement became effective on June 9, 2003 and will expire on June 30, 2003 unless terminated earlier or extended in accordance with its terms.  The Standstill Agreement and the Further Standstill Agreement provide temporary and/or permanent waivers by certain of the senior lenders of defaults that have occurred or could occur up to the expiration of the standstill period on June 30, 2003 including a permanent waiver resulting from termination of the Hedging Agreement.

 

Since certain of Drax’s forward looking debt service cover ratios as of June 30, 2002 were below required levels, Drax, was not able to make any cash distributions to Drax Energy, the holding company high-yield note issuer, at that time. Drax expects that the ratios, if calculated as of December 31, 2002, would also have been below the required levels at December 31, 2002 since any improvement in the ratios for the period ended December 31, 2002 would have required a favorable change in the forward curve for electricity prices during the period from June 30, 2002 to December 31, 2002 and such favorable change did not occur.  In addition, as part of the Standstill Agreement, Drax deferred a certain portion of the principal payments due to its Senior Lenders and the debt service coverage ratios as of December 31, 2002 were not calculated by the bank group. As a consequence of the foregoing, Drax was not permitted to make any distributions to Drax Energy. As a result, Drax Energy was unable to make the full amount of the interest payment of $11.5 million and £7.6 million due on its high-yield notes on February 28, 2003. Drax Energy’s failure to make the full amount of the required interest payment constitutes an event of default under its high-yield notes, although pursuant to intercreditor agreements the holders of the high-yield notes had no enforcement rights until 90 days following the delivery of certain notices under the intercreditor arrangements.  The high yield note holders delivered a notice of acceleration on May 19, 2003 and delivered the required notices under the intercreditor arrangements on May 28, 2003.

 

6



 

RESULTS OF OPERATIONS

 

2002 COMPARED TO 2001 (prior year amounts have been restated for discontinued operations)

 

Revenues

 

Revenues increased $0.9 billion, or 12%, to $8.5 billion in 2002 from $7.6 billion in 2001. The increase in revenues is due to the acquisition of new businesses, new operations from greenfield projects and positive improvements from existing operations. Excluding businesses acquired or that commenced commercial operations in 2002 or 2001, revenues decreased 17% to $6.1 billion in 2002. AES is a global power company which operates in 31 countries around the world. The breakdown of AES’s revenues for the years ended December 31, 2002 and 2001, based on the business segment and geographic region in which they were earned, is set forth below.

 

 

 

Twelve Months Ended
December 31, 2002

 

Twelve Months Ended
December 31, 2001

 

%
Change

 

 

 

(in $millions)

 

Large Utilities:

 

 

 

 

 

 

 

North America

 

$

818

 

$

836

 

(2%

)

South America

 

1,685

 

 

NM

 

Caribbean*

 

634

 

806

 

(21%

)

Total Large Utilities

 

$

3,137

 

$

1,642

 

91

%

 

 

 

 

 

 

 

 

Growth Distribution:

 

 

 

 

 

 

 

South America

 

$

263

 

$

781

 

(66%

)

Caribbean*

 

559

 

635

 

(12%

)

Europe/Africa

 

358

 

197

 

82

%

Total Growth Distribution

 

$

1,180

 

$

1,613

 

(27%

)

 

 

 

 

 

 

 

 

 

 

Total Regulated Revenues

 

$

4,317

 

$

3,255

 

33

%

 


*                                         Includes Venezuela and Colombia

 

NM - Not Meaningful

 

7



 

Regulated revenues.  Regulated revenues increased 33% or $1.1 billion to $4.3 billion in 2002 compared to $3.3 billion in 2001. The $1.5 billion increase in large utilities revenues was offset by a $433 million decline in growth distribution revenues. Weather generally impacts the demand for electricity, and therefore, extreme temperatures will impact the amount of revenues recorded. Excluding businesses acquired or that commenced operations in 2002 or 2001, regulated revenues decreased 27% to $2.3 billion during 2002.

 

Large Utilities

 

Large utilities revenues increased 91% or $1.5 billion to $3.1 billion in 2002 compared to $1.6 billion in 2001. This change was primarily due to the consolidation of Eletropaulo in Brazil partially offset by an $18 million decrease in North America and a $172 million decrease in the Caribbean. The North America change was primarily due to lower revenues at IPALCO in Indiana resulting from low wholesale electricity prices. The Caribbean decline occurred at EDC in Venezuela and was primarily caused by the devaluation of the Venezuelan Bolivar. The Company began consolidating Eletropaulo in February 2002 when control of the business was obtained. Please see Note 2 to the Consolidated Financial Statements for a complete description of the Eletropaulo swap transaction. If Eletropaulo had been consolidated during the comparable period in 2001, revenues compared to the prior period would have been lower due to rationing in Brazil in early 2002. Although rationing ended in February 2002 customer demand has not returned to the level it was prior to rationing. As customer demand builds, Eletropaulo believes it will experience benefits through increased revenues.

 

Growth Distribution

 

Growth distribution revenues decreased 27% or $0.4 billion to $1.2 billion in 2002 compared to $1.6 billion in 2001. Growth distribution revenues decreased $518 million and $76 million in South America and the Caribbean, respectively. This was offset by a $161 million increase in Europe/Africa. South America revenues decreased due to the impact of the devaluation of the Argentine peso at Eden-Edes and Edelap, as well as due to the provision for the Brazilian regulatory decision at Sul. During the second quarter of 2002, ANEEL announced an order to retroactively change the calculation methods of the Wholesale Energy Markets (“MAE”). As a result the company recorded a provision for the Brazilian regulatory decision at Sul of approximately $146 million against revenues. The Caribbean decreased primarily due to lower revenues in El Salvador. Increases in Europe/Africa are due to the acquisitions of Sonel in Cameroon and Kievoblenergo and Rivnooblenergo in the Ukraine as well as improvements at Telasi in Georgia.

 

8



 

 

 

Twelve Months Ended December 31, 2002

 

Twelve Months Ended December 31, 2001

 

%
Change

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

Contract Generation:

 

 

 

 

 

 

 

North America

 

$

830

 

$

742

 

12

%

South America

 

738

 

807

 

(9

)%

Caribbean*

 

180

 

204

 

(12

)%

Europe/Africa

 

369

 

331

 

11

%

Asia

 

303

 

300

 

1

%

Total Contract Generation

 

$

2,420

 

$

2,384

 

2

%

 

 

 

 

 

 

 

 

Competitive Supply:

 

 

 

 

 

 

 

North America

 

$

443

 

$

513

 

(14

)%

South America

 

98

 

156

 

(37

)%

Caribbean*

 

195

 

196

 

(1

)%

Europe/Africa

 

960

 

977

 

(2

)%

Asia

 

89

 

83

 

7

%

Total Competitive Supply

 

$

1,785

 

$

1,925

 

(7

)%

 

 

 

 

 

 

 

 

 

 

Total Non-Regulated Revenues

 

$

4,205

 

$

4,309

 

(2

)%

 


*                                         Includes Venezuela and Colombia

 

Non-regulated revenues.  Non-regulated revenues decreased 2% or $104 million to $4.2 billion in 2002 compared to $4.3 billion in 2001 due to reductions in competitive supply revenues offset in part by an increase in contract generation revenues. Non-regulated revenues will continue to be impacted by weather and market prices for electricity in the United Kingdom and the Northeastern U.S. Excluding businesses acquired or that commenced operations in 2002 or 2001, non-regulated revenues decreased 10% to $3.8 billion in 2002.

 

Contract Generation

 

Contract generation revenues increased 2% or $36 million in 2002 from 2001. Increases in contract generation revenues during 2002 in North America, Europe/Africa and Asia were offset by declines in South America and the Caribbean. North America revenues increased $88 million mainly due to the start of operations at Ironwood in Pennsylvania, Red Oak in New Jersey, increased revenues from Warrior Run in Maryland and the acquisition of Mendota in California and Hemphill in New Hampshire as part of the Thermoecotek acquisition, offset by declines at Southland in California. South America revenues decreased $69 million mainly due to declines at the Gener plants in Chile and Tiete and Uruguaiana in Brazil. Caribbean revenues decreased $24 million due to lower revenues from Los Mina in the Dominican Republic and Merida III in Mexico. Europe/Africa revenues increased $38 million due to the acquisition of Ebute in Nigeria and Bohemia in the Czech Republic, and improved operations at Tisza in Hungary offset by lower revenues from Kilroot in Northern Ireland, which experienced an outage in the second quarter of 2002. Asia revenues increased $28 3 million most significantly at Jiaozuo in China.

 

Competitive Supply

 

Competitive supply revenues decreased 7% or $ 140 million to $1.8 billion in 2002 compared to $1.9 billion in 2001 due to decreases in all geographic regions except for Asia. North America revenues declined $70 million primarily due to lower market prices in the Northeastern U.S. combined with a decline in demand in California due to mild weather. The decline in California was partially offset by additional revenue associated with the acquisition of Delano in California. South America revenues

 

9



 

decreased $58 million primarily due to the devaluation of the Argentine peso in February 2002 offset slightly by the start of operations at Parana in Argentina. Caribbean revenues declined slightly due to declines at Colombia I and Panama offset in part by an increase at Chivor in Colombia. Europe/Africa revenues declined $ 17 million due to a decline in merchant energy prices in the United Kingdom that was driven by mild weather conditions, increased competition and the significant over-capacity that exists in the United Kingdom generation market, and reduced revenues from the closure of Belfast West in Northern Ireland offset slightly by the acquisition of Ottana in Italy. Asia revenues increased $6 million primarily due to increases at our business in Kazakhstan.

 

Gross Margin

 

Gross margin decreased $ 262 million, or 12%, to $1.9 billion in 2002 from $2.2 billion in 2001. Gross margin as a percentage of revenues decreased to 22% in 2002 from 28% in 2001. The decrease in gross margin is due to lower market prices in the U.S., the United Kingdom and elsewhere partially offset by the acquisition of new businesses and new operations from greenfield projects. Gross margin as a percentage of revenues declined for each segment except contract generation. Excluding businesses acquired or that commenced commercial operations in 2002 or 2001, gross margin decreased 27% to $1.6 billion in 2002. Gross margin in future periods will be negatively impacted by the expensing of stock options and other long-term incentive compensation.

 

 

 

Twelve Months
Ended
December 31, 2002

 

% of
Revenue

 

Twelve Months
Ended
December 31, 2001

 

% of
Revenue

 

%
Change

 

 

 

(in $millions)

 

 

 

(in $millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Utilities:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

302

 

37

%

$

290

 

35

%

4

%

South America

 

163

 

10

%

(14

)

 

NM

 

Caribbean*

 

220

 

35

%

342

 

42

%

(36

)%

Total Large Utilities:

 

$

685

 

22

%

$

618

 

38

%

11

%

 

 

 

 

 

 

 

 

 

 

 

 

Growth Distribution:

 

 

 

 

 

 

 

 

 

 

 

South America

 

(61

)

(23

)%

249

 

32

%

(124

)%

Caribbean*

 

53

 

9

%

31

 

5

%

71

%

Europe/Africa

 

16

 

4

%

(56

)

(28

)%

129

%

Asia

 

(3

)

NM

 

(3

)

NM

 

 

Total Growth Distribution

 

$

5

 

0

%

$

221

 

14

%

(98

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Regulated Gross Margin

 

$

690

 

16

%

$

839

 

26

%

(18

)%

 


*                                         Includes Venezuela and Colombia

 

NM - Not Meaningful

 

Regulated gross margin.  Regulated gross margin decreased 18% or $149 million to $690 million in 2002 compared to $839 million in 2001. The decrease is primarily due to weakening margins in our South American growth distribution businesses and our Caribbean large utility business offset by increases at our North and South American large utilities and Europe/Africa growth distribution businesses. Regulated gross margin as a percentage of revenues decreased to 16% in 2002 from 26% in 2001. Excluding businesses acquired or that commenced operations in 2002 or 2001, regulated gross margin decreased 42% to $499 million in 2002.

 

10



 

Large Utilities

 

Large utilities gross margin increased 11% or $67 million to $685 million in 2002 compared to $618 million in 2001 primarily due to increases in North and South America offset in part by a decrease in the Caribbean. North America increased $12 million due to increased contributions from IPALCO. South America increased $177 million due to the consolidation of Eletropaulo. The decrease of $122 million in the Caribbean is due to the devaluation of the Venezuelan Bolivar and its impacts on EDC. EDC’s tariff is adjusted semi-annually to reflect fluctuations in inflation and the currency exchange rate. However, a failure to receive such an adjustment to reflect changes in the exchange rate and inflation could adversely affect their results of operations in the future. The large utilities gross margin as a percentage of revenues decreased to 22% for 2002 from 38% in 2001. Eletropaulo’s 2002 gross margin was negatively impacted by the write off approximately $80 million of other receivables. Excluding this adjustment, the large utilities gross margin as a percentage of revenues would have been 24% in 2002. Our distribution concession contracts in Brazil provide for annual tariff adjustments based upon changes in the local inflation rates and, generally, significant devaluations are followed by increased local currency inflation. However, because of the lack of adjustment to the current exchange rate, the in arrears nature of the respective tariff adjustment, or the potential delays or magnitude of the resulting local currency inflation of the tariff, the future results of operations of Eletropaulo could be adversely affected by the continued devaluation of the Brazilian Real.

 

Growth Distribution

 

Growth distribution gross margin decreased 98% or $216 million to $5 million in 2002 compared to $221 million in 2001. The decline of $310 million in South America gross margin was offset in part by increases of $72 million and $22 million in Europe/Africa and the Caribbean, respectively. South America gross margin declined primarily due to devaluation of the Argentine peso and the reduction in gross margin from Sul due to the $146 million provision for the Brazilian Regulatory decision. Europe/Africa gross margin increased due to operational improvements at Telasi in Georgia and the acquisitions of Kievoblenergo and Rivnooblenergo in the Ukraine. Caribbean gross margin increased due primarily to operational improvements at EDE Este in the Dominican Republic. The growth distribution gross margin as a percentage of revenues decreased to 0% in 2002 from 14% in 2001. However, excluding the $146 million nonrecurring provision for the Brazilian Regulatory decision at Sul, growth distribution gross margin as a percentage of revenues would have been 13% in 2002.

 

 

 

Twelve Months Ended
December 31, 2002

 

% of
Revenue

 

Twelve Months Ended
December 31, 2001

 

% of
Revenue

 

%
Change

 

 

 

(in millions)

 

 

 

(in millions)

 

 

 

 

 

Contract Generation:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

426

 

51

%

$

368

 

50

%

16

%

South America

 

280

 

38

%

253

 

31

%

11

%

Caribbean*

 

32

 

18

%

27

 

13

%

19

%

Europe/Africa

 

147

 

40

%

96

 

29

%

53

%

Asia

 

146

 

47

%

91

 

29

%

60

%

Total Contract Generation

 

$

1,031

 

42

%

$

835

 

35

%

23

%

Competitive Supply:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

93

 

21

%

$

137

 

27

%

(32

)%

South America

 

15

 

15

%

37

 

24

%

(59

)%

Caribbean*

 

66

 

34

%

56

 

29

%

18

%

Europe/Africa

 

(23

)

(2

)%

234

 

24

%

(110

)%

Asia

 

19

 

21

%

15

 

18

%

27

%

Total Competitive Supply

 

$

170

 

10

%

$

479

 

25

%

(65

)%

Total Non-Regulated Gross Margin

 

$

1,201

 

28

%

$

1,314

 

30

%

(9

)%

 


*                                         Includes Venezuela and Colombia

NM - Not Meaningful

 

11



 

Non-regulated gross margin.  Non-regulated gross margin decreased 9% or $ 113 million to $1.2 billion in 2002 compared to $1.3 billion in 2001. This decrease is primarily due to lower margins at our North American, South American, European and African competitive supply businesses partially offset by increased margins in all regions of our contract generation segment. Non-regulated gross margin as a percentage of revenues decreased to 28% in 2002 from 30% in 2001. Excluding businesses acquired or that commenced operations in 2002 or 2001, non-regulated gross margin decreased 16% to $1.1 billion in 2002.

 

Contract Generation

 

Contract generation gross margin increased 24% or $196 million to $1.0 billion in 2002 compared to $0.8 billion in 2001 primarily due to improvements at existing businesses and operations from new businesses. The contract generation gross margin as a percentage of revenues increased to 42% in 2002 from 35% in 2001. Gross margin increased in all geographic regions. North America gross margin increased $58 million due to the start of commercial operations at Ironwood in Pennsylvania, Red Oak in New Jersey and improvements at Warrior Run in Maryland and Beaver Valley in Pennsylvania. South America gross margin increased $27 million due to increases at Gener, Tiete and Uruguaiana. Europe/Africa gross margin increased $51 million mainly due to the acquisition of Ebute in Nigeria and improvements at Kilroot in Northern Ireland and Tisza II in Hungary. Asia gross margin increased $55 million mainly due to increased contributions from Jiaozuo and Hefei in China.

 

Competitive Supply

 

Competitive supply gross margin decreased 65% or $309 million to $170 million in 2002 compared to $479 million in 2001. Decreases in North America, South America, Europe and Africa gross margins were offset slightly by increases from the Caribbean and Asia. North America gross margin decreased $44 million mainly due to the lower energy prices in New York and milder weather in California. South America gross margin decreased $22 million mainly due to the devaluation of the peso in Argentina. Europe/Africa gross margin decreased $ 257 million mainly due to lower energy prices in the United Kingdom Caribbean gross margin increased $10 million mainly due to increases from Panama and Chivor in Colombia. The competitive supply gross margin as a percentage of revenues decreased to 10% in 2002 from 25% in 2001. Gross margin at Drax in 2002 included the write off of approximately $215 million of trade receivables due to the bankruptcy of TXU Europe. Excluding this adjustment, the competitive supply gross margin as a percentage of revenues would have been 21% in 2002.

 

Selling, general and administrative expenses.  SG&A decreased $8 million, or 7%, to $112 million in 2002 from $120 million in 2001. SG&A as a percentage of revenues decreased to 1% in 2002 from 2% in 2001. The overall decrease in SG&A is due to the Company’s increased focus on cost cutting. However, the Company has undertaken several corporate initiatives that require additional personnel and infrastructure, and these may result in increased selling, general and administrative expenses in future periods. Additionally, the expensing of stock options and other long-term incentive compensation will increase selling, general and administrative expenses in future periods.

 

Severance and transaction costs.  During 2001, the Company incurred approximately $131 million of transaction and contractual severance costs related to the acquisition of IPALCO.

 

Interest expense.  Interest expense increased $ 443 million, or 28%, to $2.0 billion in 2002 from $1.6 billion in 2001. Interest expense as a percentage of revenues was 24% in 2002 and 21% in 2001. Overall interest expense increased primarily due to the consolidation of Eletropaulo in February 2002, issuance of senior secured notes at IPALCO, interest expense from new businesses, as well as additional corporate interest costs arising from a higher outstanding balance during 2002 on the Company’s revolving loan. During December 2002, the Company refinanced a significant amount of

 

12



 

debt at terms less favorable than the original debt. As a result, the amount of interest expense recorded in future periods is expected to increase.

 

Interest income.  Interest income increased $123 million, or 65%, to $312 million in 2002 from $189 million in 2001. Interest income as a percentage of revenues was 4% in 2002 and 2% in 2001. The increase in interest income during 2002 is due primarily to the consolidation of Eletropaulo partially offset by a decline in interest income from Thames due to the collection of its contract receivable.

 

Other income.  Other income increased $ 25 million, or 22%, to $141 million in 2002 from $116 million in 2001. Approximately $ 91 million of the amount recorded in 2002 is attributable to gains on the extinguishment of liabilities and market-to-market gains on commodity derivatives. See Note 16 to the consolidated financial statements for an analysis of other income.

 

Other expense.  Other expense increased $22 million, or 34%, to $87 million in 2002 from $65 million in 2001. Approximately $76 million of the amount recorded in 2002 is attributable to losses on the sale of assets or extinguishment of liabilities and other non-operating expenses. See Note 16 to the consolidated financial statements for an analysis of other expense.

 

Foreign currency transaction losses.  Foreign currency transaction losses increased $ 428 million to $456 million in 2002 from $ 28 million in 2001. Foreign currency transaction losses increased primarily due to a 50% devaluation in the Argentine peso from 1.65 at December 31, 2001 to 3.32 at December 31, 2002, which resulted in $143 million of foreign currency transaction losses for the year ended December 31, 2002. Additionally, a 32% devaluation occurred in the Brazilian Real during 2002 from 2.41 at December 31, 2001 to 3.53 at December 31, 2002. Furthermore, the Company recorded more foreign currency losses due to the consolidation of Eletropaulo, and since there was less allocation to the minority partners because their investment has been reduced to zero. As a result, the Company recorded net Brazilian foreign currency losses of $357 million during 2002, of which approximately $83 million is included in equity in pre-tax (losses) earnings of affiliates. These decreases were offset by $39 million of foreign currency transaction gains recorded at EDC during 2002 due to a 46% devaluation of the Venezuelan Bolivar from 758 at December 31, 2001 to 1,403 at December 31, 2002. EDC uses the U.S. dollar as its functional currency but a portion of its debt is denominated in the Venezuelan Bolivar.

 

Equity in pre-tax (losses) earnings of affiliates.  Equity in pre-tax (losses) earnings of affiliates declined by $379 million to a loss of $203 million in 2002 compared to income of $176 million in 2001. The overall decrease is due primarily to declines in equity in earnings of Brazilian large utility affiliates, including the impairment charge associated with the other than temporary decline in value of CEMIG.

 

Additionally, a share swap was completed during February 2002 which gave the Company control of Eletropaulo. In 2001, the Company recorded $134 million of equity in Eletropaulo’s pre-tax earnings; however, this amount decreased to $18 million due to consolidation of Eletropaulo’s results subsequent to the share swap and the ongoing devaluation of the Brazilian Real. Equity in pre-tax (losses) earnings of our large utilities included non-cash Brazilian foreign currency transaction losses of $83 million and $210 million during 2002 and 2001, respectively, due to the devaluation of the Brazilian Real during both periods.

 

Equity in (losses) earnings of growth distribution affiliates improved from a loss of $13 million in 2001 to $0 in 2002. The improvement is primarily due to a change in accounting for our investment in CESCO.

 

Equity in earnings of contract generation affiliates increased to $75 million in 2002 from $54 million in 2001. The increase is due primarily to contributions from several Chinese equity affiliates and from Elsta offset by a decrease from OPGC.

 

13



 

Equity in earnings of competitive supply affiliates improved from a loss of $9 million in 2001 to a loss of $3 million in 2002. The improvement is primarily due to the sale of Infovias, a Brazilian company, during the second quarter of 2002.

 

(Loss) gain on sale of assets and asset impairment expense. (Loss) gain on sale of assets and asset impairment expense changed from a gain of $18 million for 2001 to a loss of $1.4 billion in 2002 primarily resulting from impairment charges taken in 2002. Financial distress of certain TXU Europe companies during late 2002 resulted in the issuance of an administration order for TXU EET and TXU Group, and led to the termination of the long-term electricity sales hedging arrangement at Drax. As a result of this termination, the Company recorded pre-tax asset impairment charges of $955 million at Drax in the fourth quarter of 2002. Drax is a competitive supply business located in the United Kingdom. Additionally, the Company recorded pre-tax charges totaling approximately $357 million related to the sale or impairment of development projects and approximately $116 million related to the sale or impairment of investments during 2002.

 

Drax is the operator of Drax Power Plant, Britain’s largest power station. In November 2002, Drax terminated its Hedging Agreement with TXU EET. In November 2002, TXU Group, the guarantor under the power supply hedging agreement between Drax and TXU EET, filed for administration in the United Kingdom. As a result of the termination of the Hedging Agreement, which provided Drax above-market prices for the contracted output (equal to approximately 60 percent of the total output of the plant), Drax became fully exposed to power prices in the United Kingdom. The termination of the Hedging Agreement constituted a change in circumstance as defined by Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that indicated that the carrying value of Drax’s net assets may not be recoverable. Accordingly, in the fourth quarter of 2002, a pre-tax impairment charge of $955 million was taken to write-down the net assets to their fair value.

 

In the fourth quarter of 2002, the Company decided not to provide any further funding to Lake Worth and to sell the project. As a result, the carrying amount of AES’s investment in the Lake Worth project is not expected to be recovered. Accordingly, in accordance with SFAS No. 144, an impairment charge of $78 million was recorded to write-down the net assets of Lake Worth to their fair market value.

 

In September 2002, AES Greystone, LLC and its subsidiary Haywood Power I, LLC, sold the Greystone gas-fired peaker assets then under construction in Tennessee to Tenaska Power Equipment for $36 million including cash and assumption of certain obligations. With this sale, AES and its subsidiaries have eliminated any future capital expenditures related to the facility, and also settled all major outstanding obligations with parties involved in this project. AES recorded a loss of approximately $168 million associated with this sale. Greystone was previously recorded as a competitive supply business.

 

Additionally, during 2002, the Company recorded $86 million of other losses which resulted from the sale of assets to third parties, and $141 million of other asset impairment charges taken to reflect the net realizable value of discontinued development projects and other non-recoverable assets.

 

Goodwill impairment expense.  During 2002, the Company recorded a goodwill impairment charge of $612 million primarily related to all of the goodwill at Eletropaulo in Brazil. The Company recognizes as goodwill the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. The Company evaluates goodwill for impairment on an annual basis and

 

14



 

 

whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company’s annual impairment testing date is October 1st. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over the estimated benefit period, which ranged from 10 to 40 years, and total accumulated amortization amounted to $190 million at December 31, 2001. As of January 1, 2002, goodwill is no longer amortized.

 

Income taxes.  Income tax expense (including income taxes on equity in earnings) on continuing operations decreased to $2 million in 2002 from expense of $ 209 million in 2001. The Company’s tax position changed from tax expense at a 33% effective tax rate in 2001 to less than 1% in 2002. The 2002 effective tax rate resulted from a small tax expense on the pre-tax book loss, which was primarily due to the book write off of non-deductible foreign goodwill, and the recording of valuation allowances against deferred tax assets from translation losses and various capital losses.

 

Minority interest (income) expense.  Pre-tax minority interest changed $137 million, or 133%, to a benefit of $34 million in 2002 from an expense of $103 million in 2001. Increases in minority interest income in large utilities and competitive supply were somewhat offset by greater minority interest expense in growth distribution and contract generation.

 

Large utilities minority interest changed by $124 million to a benefit of $36 million for 2002 from expense of $88 million for 2001. Increases in minority interest income from EDC and CEMIG were slightly offset by increased expense from Eletropaulo. The change is mainly due to the sharing of losses that resulted from currency devaluations and impairment charges with the minority shareholders. The change in large utilities minority interest would have been somewhat greater; however, the minority interest in Eletropaulo was reduced to zero during the third quarter of 2002 and the Company began picking up all of the losses.

 

Growth distribution minority interest changed to an expense of $6 million for 2002 compared to a benefit of $16 million for 2001. The change in growth distribution minority interest is due to additional expense from Sonel, Kievoblenergo, and Ede Este partially offset by lower expense at Eden Edes, Edelap, and CAESS.

 

Contract generation minority interest expense increased $26 million to $48 million for 2002 compared to expense of $22 million for 2001. The change is due to the sharing of earnings by the minority partners of Tiete in Brazil and at several of our Chinese businesses.

 

Competitive supply minority interest changed by $60 million to a benefit of $51 million in 2002 compared to expense of $9 million in 2001. The change in competitive supply minority interest is primarily due to sharing of losses that resulted from the devaluation of the Argentine peso with the minority shareholders.

 

(Loss) income from continuing operations.  (Loss) income from continuing operations decreased $3.0 billion to a loss of $2.5 billion for 2002 from income of $434 million for 2001. The loss recorded in 2002 resulted primarily from asset and goodwill impairments as well as foreign currency transaction losses.

 

Discontinued operations.  Loss from operations of discontinued businesses, net of tax, were $636 million and $161 million, respectively, in 2002 and 2001. During the first quarter of 2003, the Company placed Barry, Haripur and Meghnaghat into discontinued operations. During 2002, the Company discontinued certain of its operations including Fifoots, CILCORP, NewEnergy, Eletronet, Mt. Stuart, Ecogen, two Altai businesses, Mountainview and Kelvin. The Company closed the sale of CILCORP in January 2003. Pursuant to SFAS No. 144, if any of these businesses are not sold or disposed of within one year of the date they were classified as discontinued operations they must be reclassified as continuing operations.

 

Accounting change.  On April 1, 2002, the Company adopted Derivative Implementation Group (“DIG”) Issue C-15 which established specific guidelines for certain contracts to be considered normal

 

15



 

purchases and normal sales contracts under SFAS No. 133. As a result of this adoption, the Company had two contracts which no longer qualified as normal purchases and normal sales contracts and were required to be treated as derivative instruments under SFAS No. 133. The adoption of DIG Issue C-15, effective April 1, 2002, resulted in a cumulative increase to income of $127 million, net of income tax effects.

 

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” which establishes accounting and reporting standards for goodwill and other intangible assets. The adoption of SFAS No. 142 resulted in a cumulative reduction to income of $473 million, net of income tax effects. SFAS No. 142 adopts a fair value model for evaluating impairment of goodwill in place of the recoverability model used previously. The Company wrote-off the goodwill associated with certain acquisitions where the current fair market value of such businesses is less than the current carrying value of the business, primarily as a result of reductions in fair value associated with lower than expected growth in electricity consumption compared to the original estimates made at the date of acquisition. The Company’s annual impairment testing date is October 1st.

 

Net (loss) income.  Net (loss) income decreased $3.8 billion to a loss of $3.5 billion in 2002 from net income of $273 million in 2001. This effect was due to lower gross margin from the growth distribution and competitive supply segments, increased interest expense, increased foreign currency losses due to devaluation in Brazil and Argentina, impairment charges taken on goodwill and other assets, and losses from discontinued operations offset by greater interest income, higher gross margin from the large utilities and contract generation segments, and greater sharing of losses with minority partners.

 

2001 COMPARED TO 2000 (prior year amounts have been restated for discontinued operations)

 

Revenues

 

Revenues increased $1.5 billion, or 23% to $7.6 billion in 2001 from $6.1 billion in 2000. The increase in revenues is due to the acquisition of new businesses, new operations from greenfield projects and positive improvements from existing operations. Excluding businesses acquired or that commenced commercial operations in 2001 or 2000, revenues increased 1% to $5.5 billion in 2001. AES is a global power company which operates in 31 countries around the world. The breakdown of AES’s revenues for the years ended December 31, 2001 and 2000, based on the business segment and geographic region in which they were earned, is set forth below.

 

 

 

Twelve Months Ended
December 31, 2001

 

Twelve Months Ended
December 31, 2000

 

%
Change

 

 

 

(in $millions)

 

(in $millions)

 

 

 

Large Utilities:

 

 

 

 

 

 

 

North America

 

$

836

 

$

892

 

(6

)%

Caribbean*

 

806

 

493

 

63

%

Total Large Utilities

 

$

1,642

 

$

1,385

 

19

%

 

 

 

 

 

 

 

 

Growth Distribution:

 

 

 

 

 

 

 

South America

 

$

781

 

$

767

 

2

%

Caribbean*

 

635

 

338

 

88

%

Europe/Africa

 

197

 

 

NM

 

Asia

 

 

171

 

NM

 

Total Growth Distribution

 

$

1,613

 

$

1,276

 

26

%

 

 

 

 

 

 

 

 

 

 

Total Regulated Revenues

 

$

3,255

 

$

2,661

 

22

%

 


*                                         Includes Venezuela and Colombia

NM - Not Meaningful

 

16



 

Regulated revenues.  Regulated revenues increased $594 million, or 22%, to $3.3 billion in 2001 from $2.7 billion in 2000. Regulated revenues increased in both the large utilities and growth distribution segments due to the contributions of acquired businesses as well as improved operations. Weather generally impacts the demand for electricity, and therefore, extreme temperatures will impact the amount of revenues recorded. Excluding businesses acquired or that commenced operations in 2001 or 2000, regulated revenues increased 8% to $2.1 billion during 2001.

 

Large Utilities

 

Large utilities revenues increased $257 million, or 19%, to $1.6 billion in 2001 from $1.4 billion in 2000 principally resulting from the addition of revenues attributable to businesses acquired during 2001 or 2000. The majority of the increase occurred within the Caribbean, offset by a decrease of $56 million in North America. In the Caribbean, revenues increased $313 million due to a full year of revenues from EDC, which was acquired in June 2000.

 

Growth Distribution

 

Growth distribution revenues increased $337 million, or 26%, to $1.6 billion in 2001 from $1.3 billion in 2000. Revenues increased most significantly in the Caribbean and to a lesser extent in South America and Europe/Africa. Revenues decreased in Asia. In the Caribbean, growth distribution segment revenues increased $297 million due primarily to a full year of operations at CAESS, which was acquired in 2000, and improved operations at EDE Este. In South America, growth distribution segment revenues increased $14 million due to the significant revenues at Sul from our settlement with the Brazilian government offset by declines in revenues at our Argentine distribution businesses. The settlement with the Brazilian government confirmed the sales price that Sul would receive from its sales into the southeast market (where rationing occurred) under its Itaipu contract. The Brazilian government reversed this decision retroactively in 2002. In Europe/Africa, growth distribution segment revenues increased $197 million primarily from the acquisition of SONEL. In Asia, growth distribution segment revenues decreased $171 million mainly due to the change in the way in which we are accounting for our investment in CESCO. CESCO was previously consolidated but was changed to equity method during 2001 when the Company was removed from management and the Board of Directors. This decline was partially offset by the increase in revenues from the distribution businesses that we acquired in Ukraine.

 

 

 

Twelve Months Ended
December 31, 2001

 

Twelve Months Ended
December 31, 2000

 

%
Change

 

 

 

(in $millions)

 

(in $millions)

 

 

 

Contract Generation:

 

 

 

 

 

 

 

North America

 

$

742

 

$

696

 

7

%

South America

 

807

 

286

 

182

%

Caribbean*

 

204

 

193

 

6

%

Europe/Africa

 

331

 

213

 

55

%

Asia

 

300

 

320

 

6

%

Total Contract Generation

 

$

2,384

 

$

1,708

 

40

%

 

 

 

 

 

 

 

 

Competitive Supply:

 

 

 

 

 

 

 

North America

 

$

513

 

$

506

 

1

%

South America

 

156

 

109

 

43

%

Caribbean*

 

196

 

74

 

165

%

Europe/Africa

 

977

 

1,011

 

(3%

)

Asia

 

83

 

71

 

17

%

Total Competitive Supply

 

$

1,925

 

$

1,771

 

9

%

Total Non-Regulated Revenues

 

$

4,309

 

$

3,479

 

24

%

 


*                                         Includes Venezuela and Colombia

 

17



 

Non-regulated revenues.  Non-regulated revenues increased $ 830 million, or 24%, to $4.3 billion in 2001 from $3.5 billion in 2000. Non-regulated revenues increased in both the contract generation and competitive supply segments due to the acquisition of new businesses as well as improved operations at existing businesses. Excluding businesses acquired or that commenced operations in 2001 or 2000, non-regulated revenues decreased 4% to $3.3 billion during 2001

 

Contract Generation

 

Contract generation revenues increased $ 676 million, or 40% to $2.4 billion in 2001 from $1.7 billion in 2000, principally resulting from the addition of revenues attributable to businesses acquired during 2001 or 2000. Contract generation revenues increased in all geographic regions, but most significantly in South America. South America revenues grew $521 million due mainly to the acquisition of Gener and the full year of operations at Uruguaiana offset by reduced revenues at Tiete from the electricity rationing in Brazil. In Europe/Africa, contract generation segment revenues increased $118 million, and the acquisition of a controlling interest in Kilroot during 2000 was the largest contributor to the increase. North America contract generation revenues increased $46 million. Caribbean contract generation revenues increased $11 million due to a full year of operations at Merida III offset by a lower capacity factor at Los Mina. Asia contract generation decreased $20 million.

 

Competitive Supply

 

Competitive supply revenues increased $ 154 million or 9% to $2.0 billion in 2001 from $1.8 billion in 2000. The most significant increases occurred within the Caribbean where revenues increased $122 million due primarily to the acquisition of Chivor. Slight increases were recorded within North America, South America and Asia. Europe/Africa reported a $ 34 million decrease due to lower pool prices in the United Kingdom offset by the acquisition of Ottana. In North America, competitive supply segment revenues increased $7 million due primarily to increased operations at Placerita offset by lower market prices at our New York businesses.

 

Gross Margin

 

Gross margin increased $ 265 million, or 14%, to $2.2 billion in 2001 from $1.9 billion in 2000. Gross margin as a percentage of revenues decreased to 28% in 2001 from 31% in 2000. The increase in gross margin is due to the acquisition of new businesses and new operations from greenfield projects offset by lower market prices in the United Kingdom. The decrease in gross margin as a percentage of revenues is due to a decline in the contract generation and competitive supply gross margin percentages offset slightly by increased gross margin percentages from large utilities and growth distribution. Excluding businesses acquired or that commenced commercial operations in 2001 or 2000, gross margin decreased 4% to $1.6 billion in 2001.

 

18



 

 

 

Twelve Months Ended
December 31, 2001

 

% of
Revenue

 

Twelve Months Ended
December 31, 2000

 

% of
Revenue

 

%
Change

 

 

 

(in $millions)

 

 

 

(in $millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large Utilities:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

290

 

35

%

$

262

 

29

%

11

%

South America

 

(14

)

 

(2

)

 

NM

 

Caribbean*

 

342

 

42

%

177

 

36

%

93

%

Total Large Utilities

 

$

618

 

38

%

$

437

 

32

%

41

%

 

 

 

 

 

 

 

 

 

 

 

 

Growth Distribution:

 

 

 

 

 

 

 

 

 

 

 

South America

 

$

249

 

32

%

$

169

 

22

%

47

%

Caribbean*

 

31

 

5

%

(8

)

(2

)%

NM

 

Europe/Africa

 

(56

)

(28

)%

 

 

NM

 

Asia

 

(3

)

NM

 

(30

)

(18

)%

90

%

Total Growth Distribution

 

$

221

 

14

%

$

131

 

10

%

69

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Regulated Gross Margin

 

$

839

 

26

%

$

568

 

21

%

48

%

 


*                                         Includes Venezuela and Colombia

 

NM - Not Meaningful

 

Regulated gross margin.  Regulated gross margin increased $271 million, or 48%, to $839 million in 2001 from $568 million in 2000. Regulated gross margin increased in both the large utilities and growth distribution segments.

 

Regulated gross margin as a percentage of revenues increased to 26% during 2001 from 21% for 2000. Excluding businesses acquired or that commenced operations in 2001 or 2000, regulated gross margin increased 36% to $545 million during 2001.

 

Large Utilities

 

Large utilities gross margin increased $181 million, or 41%, to $618 million in 2001 from $437 million in 2000. Large utilities gross margin as a percentage of revenues increased to 38% in 2001 from 32% in 2000. In the Caribbean, large utility gross margin increased $165 million and was due to a full year of contribution from EDC which was acquired in June 2000. Additionally, increased margins at IPALCO contributed to a $28 million improvement in North American gross margin.

 

Growth Distribution

 

Growth distribution gross margin increased $90 million, or 69%, to $221 million in 2001 from $131 million in 2000. Growth distribution gross margin as a percentage of revenue increased to 14% in 2001 from 10% in 2000. Growth distribution gross margin, as well as gross margin as a percentage of sales, increased in South America, the Caribbean, and Asia but decreased in Europe/Africa. In South America, growth distribution margin increased $80 million and was 32% of revenues. The increase is due primarily to Sul’s sales of excess energy at prices determined under an initial decision made by ANEEL into the southeast market where rationing was taking place; however, the Brazilian government reversed this decision retroactively in 2002. In the Caribbean, growth distribution margin increased $39 million and was 5% of revenues mainly due to lower losses at Ede Este and an increase in contribution from CAESS. In Europe/Africa, growth distribution margin decreased $56 million and was negative due to losses at SONEL. In Asia, growth distribution margin improved $27 million but remained negative. The improvement was primarily due to the change in accounting for CESCO.

 

19



 

CESCO was previously consolidated but was changed to equity method accounting in the third quarter of 2001 when the Company was removed from management and lost operational control.

 

 

 

Twelve Months Ended
December 31, 2001

 

% of
Revenue

 

Twelve Months Ended
December 31, 2000

 

% of
Revenue

 

%
Change

 

 

 

(in $millions)

 

 

 

(in $millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Generation:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

368

 

50

%

$

360

 

52

%

2

%

South America

 

253

 

31

%

189

 

66

%

34

%

Caribbean

 

27

 

13

%

16

 

8

%

69

%

Europe/Africa

 

96

 

29

%

46

 

22

%

109

%

Asia

 

91

 

29

%

136

 

43

%

(33

)%

Total Contract Generation

 

$

835

 

35

%

$

747

 

44

%

12

%

 

 

 

 

 

 

 

 

 

 

 

 

Competitive Supply:

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

137

 

27

%

$

145

 

29

%

(6

)%

South America

 

37

 

24

%

63

 

58

%

(41

)%

Caribbean

 

56

 

29

%

41

 

55

%

37

%

Europe/Africa

 

234

 

24

%

311

 

30

%

(25

)%

Asia

 

15

 

18

%

13

 

18

%

15

%

Total Competitive Supply

 

$

479

 

25

%

$

573

 

32

%

(16

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Regulated Gross Margin

 

$

1,314

 

30

%

$

1,320

 

38

%

0

%

 

 

Non-regulated gross margin.  Non-regulated gross margin remained relatively consistent at $1.3 billion in both 2001 and 2000. Non-regulated gross margin as a percentage of revenues decreased to 30% during 2001 from 38% in 2000 due to a decline in market prices in the United Kingdom and the U.S. which resulted in a decrease in competitive supply gross margin that was offset by an increase in contract generation gross margin. Excluding businesses acquired or that commenced operations in 2001 or 2000, non-regulated gross margin decreased 17% to $1.1 billion in 2001.

 

Contract Generation

 

Contract generation gross margin increased $88 million, or 12%, to $ 835 million in 2001 from $747 million in 2000. Contract generation gross margin increased in all geographic regions except Asia. The contract generation gross margin as a percentage of revenues decreased to 35% in 2001 from 44% in 2000. In South America, contract generation gross margin increased $64 million and was 31% of revenues. The increase is due to the acquisition of Gener offset by a decline at Tiete from the rationing of electricity in Brazil. In North America, contract generation gross margin increased $8 million and was 50% of revenues. The increase is due to improvements at Shady Point and Beaver Valley partially offset by a decrease at Thames from the contract buydown. In Europe/Africa, contract generation gross margin increased $50 million and was 29% of revenues. The increase is due primarily to our additional ownership interest in Kilroot and the acquisition of Ebute in Nigeria. In Asia, contract generation gross margin decreased $ 45 million and was 29% of revenues. The decrease is due mainly to additional bad debt provisions at Jiaozuo, Hefei and Aixi in China. The decrease in contract generation gross margin as a percentage of revenue is due to the acquisition of generation businesses with overall gross margin percentages lower than the overall portfolio of generation businesses. As a percentage of sales, contract generation gross margin declined in North America, South America and Asia, and increased in Europe/Africa and the Caribbean.

 

20



 

Competitive Supply

 

The competitive supply gross margin decreased $94 million, or 16%, to $479 million in 2001 from $570 million in 2000. The overall decrease is due to declines in North America, Europe/Africa and South America that were partially offset by slight increases in the Caribbean and Asia. The competitive supply gross margin as a percentage of revenues decreased to 25% in 2001 from 32% in 2000. In South America, competitive supply segment gross margin decreased $26 million and was 24% of revenues due to declines at several of our businesses in Argentina. In Europe/Africa, competitive supply segment gross margin decreased $ 74 million and was 24% of revenues. The decrease is due primarily to declines at Drax from the lower market prices in the United Kingdom In North America, competitive supply segment gross margin decreased $8 million and was 27% of revenues. The decrease was due to decreases at Somerset in New York and Deepwater in Texas. In the Caribbean, the competitive supply gross margin increased $15 million and was 29% of revenues. The increase is due primarily to the acquisition of Chivor offset by lower margin at Panama. As a percentage of sales, competitive supply gross margin declined in all regions except Asia where it remained relatively flat.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses increased $38 million, or 46%, to $120 million in 2001 from $82 million in 2000. Selling, general and administrative expenses as a percentage of revenues increased to 2% in 2001 from 1% in 2000. The overall increase in selling, general and administrative expenses was due to increased development activities.

 

Severance and transaction costs.  During the first quarter of 2001, the Company incurred approximately $94 million of transaction and contractual severance costs related to the acquisition of IPALCO. During the third quarter of 2001, the Company recorded an additional $37 million in contractual severance costs related to the IPALCO transaction.

 

Interest expense.  Interest expense increased $314 million, or 25%, to $1,562 million in 2001 from $1,248 million in 2000. Interest expense as a percentage of revenues increased to 21% in 2001 from 20% in 2000. Interest expense increased overall primarily due to interest expense at new businesses, additional corporate interest expense arising from senior debt issued during 2001 to finance new investments and mark-to-market losses on interest rate related derivative instruments. In December 2002, the Company refinanced $2.1 billion of bank debt and debt securities at terms less favorable than the original debt. As a result, the amount of interest expense recorded in future periods is expected to increase.

 

Interest income.  Interest income decreased $11 million, or 6%, to $189 million in 2001 from $200 million in 2000. Much of the decrease occurred at Thames due to receiving payment of the contract receivable from Connecticut Light and Power, plus generally lower interest rates in 2001.

 

Other income.  Other income increased $65 million, or 127%, to $116 million in 2001 from $51 million in 2000. See Note 16 to the consolidated financial statements for an analysis of other income.

 

Other expense.  Other expense increased $13 million, or 25%, to $65 million in 2001 from $52 million in 2000. See Note 16 to the consolidated financial statements for an analysis of other expense.

 

Foreign currency transaction losses.  Foreign currency transaction losses increased $ 24 million, or 650%, to $ 28 million in 2001 from $4 million in 2000. Foreign currency transaction losses increased primarily due to devaluations in Argentina and to a much lesser extent in the United Kingdom, offset by income received on foreign currency forward contracts.

 

Equity in pre-tax (losses) earnings of affiliates.  Equity in pre-tax earnings of affiliates decreased $299 million, or 63%, to $176 million in 2001 from $475 million in 2000. The overall decrease in equity in earnings is due primarily to declines in equity in earnings of Brazilian large utility affiliates which

 

21



 

primarily resulted from the devaluation of the Brazilian Real, as well as the rationing of electricity in Brazil.

 

Equity in earnings of large utilities decreased $282 million to $144 million in 2001 from $426 million in 2000 and included non-cash Brazilian foreign currency transaction losses on a pretax basis of $210 million and $64 million in 2001 and 2000, respectively. Our distribution concession contracts in Brazil provide for annual tariff adjustments based upon changes in the local inflation rates and generally significant devaluations are followed by increased local currency inflation. However, because of the lack of adjustment to the current exchange rate, the in arrears nature of the respective adjustment to the tariff or the potential delays or magnitude of the resulting local currency inflation of the tariff, the future results of operations of the company’s distribution companies in Brazil could be adversely affected by the continued devaluation of the Brazilian Real.

 

Equity in earnings of growth distribution affiliates decreased to an expense of $13 million in 2001 from $0 million in 2000. The decrease is primarily due to the change in the way in which we account for our investment in CESCO. CESCO was previously consolidated but was changed to equity method during 2001 when the Company was removed from management and the Board of Directors.

 

Equity in earnings of contract generation affiliates increased to $54 million in 2001 from $49 million in 2000. The increase is due primarily to contributions from equity affiliates of Gener and the contribution from Itabo offset by a decrease in Kilroot related to the Company’s purchase of an additional interest thereby making it a consolidated subsidiary.

 

Equity in earnings of competitive supply affiliates decreased to expense of $9 million in 2001 from $0 million in 2000. The decrease is due to losses incurred at Infovias, a Brazilian company.

 

Income taxes.  Income taxes (including income taxes on equity in earnings and minority interests) decreased $157 million to $209 million in 2001 from $366 million in 2000. The Company’s effective tax rate was 33% in 2001 and 31% in 2000.

 

Minority interest (income) expense.  Minority interest expense (before income taxes) decreased $17 million, or 14%, to $103 million in 2001 from $120 million in 2000. Minority interest expense decreased in contract generation and competitive supply. Minority interest income decreased in growth distribution, and large utilities minority interest expense increased.

 

Large utilities minority interest expense increased $3 million to $88 million in 2001 from $85 million in 2000. Increased expense at EDC was almost entirely offset by declines at CEMIG.

 

Growth distribution minority interest income decreased $15 million to $16 million in 2001 from $31 million in 2000. The decrease was mainly due to the deconsolidation of CESCO, and sharing the effect of a full year’s results of CAESS with our minority partners.

 

Contract generation minority interest expense decreased $14 million to $22 million in 2001 from $36 million in 2000. The decrease in contract generation minority interest expense was due primarily to lower contributions from Tiete and Jiaozuo.

 

Competitive supply minority interest expense decreased $21 million to $9 million in 2001 from $30 million in 2000. The decrease in competitive supply minority interest expense is due primarily to lower contributions from Panama and CTSN.

 

Discontinued operations.  During 2001, the Company discontinued certain of its operations, including Power Direct, Ib Valley, Power Northern, Geoutilities, TermoCandelaria and several telecommunications businesses in the United States and Brazil. . During the first quarter of 2003, the Company placed Barry, Haripur and Meghnaghat into discontinued operations. During 2002, the Company discontinued certain of its operations, including Fifoots, CILCORP, NewEnergy, Eletronet, Mt. Stuart, Ecogen, two Altai businesses, Mountainview and Kelvin. All of the operations for these businesses and the related write offs from dispositions in 2001 are reported in this line item. Results of discontinued operations in 2001 were a loss of approximately $ 161 million and the write off from dispositions was a loss of approximately $145 million, net of tax. All amounts in 2000 represent results from operations.

 

22



 

Net income.  Net income decreased $522 million to $273 million in 2001 from $795 million in 2000. The overall decrease in net income is due to decreased gross margin from competitive supply due to lower market prices in the United Kingdom and the decline in the Brazilian Real during 2001 resulting in foreign currency transaction losses of approximately $210 million. Additionally the Company recorded severance and transaction costs related to the IPALCO pooling-of- interest transaction and a loss from discontinued operations of $173 million. This decrease was partially offset by increased gross margins from large utilities, growth distribution and contract generation.

 

Off balance sheet arrangements

 

As of December 31, 2002, the Company’s known contractual obligations are as follows, excluding discontinued operations and businesses held for sale.

 

 

 

Payment due by period (amounts in millions)

 

Contractual obligations

 

Total

 

Less than 1 year

 

1 to 3 years

 

3 to 5 years

 

Over 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Indebtedness (excluding interest)

 

$

19,662

 

$

3,333

 

$

4,707

 

$

2,942

 

$

8,680

 

Trust preferred securities (excluding dividends)

 

$

978

 

 

 

 

$

978

 

Construction commitments

 

$

65

 

$

65

 

 

 

 

Operating lease obligations

 

$

1,719

 

$

86

 

$

155

 

$

143

 

$

1,335

 

Purchase obligations

 

$

14,991

 

$

1,654

 

$

2,512

 

$

1,433

 

$

9,392

 

Total

 

$

37,415

 

$

5,138

 

$

7,374

 

$

4,518

 

$

20,385

 

 

Please refer to Note 11 to the consolidated financial statements for additional disclosure regarding these obligations.

 

23



 

Parent company liquidity

 

While the Company believes that its sources of liquidity will be adequate to meet its needs through the end of 2003, this belief is based on a number of material assumptions, including, without limitation, assumptions about exchange rates, power market pool prices, the ability of its subsidiaries to pay dividends and the timing and amount of asset sale proceeds. In addition, there can be no assurance

 

24



 

that these sources will be available when needed or that its actual cash requirements will not be greater than anticipated.

 

The parent company’s non-contingent contractual obligations are set forth below:

 

 

 

Payment due by period (amounts in millions)

 

Non-contingent contractual obligation

 

Less than 1 year

 

1 to 3 years

 

Over 3 years

 

Total

 

 

 

 

 

 

 

 

 

 

 

Indebtedness (excluding interest)

 

$

26

 

$

1,810

 

$

3,968

 

$

5,804

 

Trust preferred securities (excluding dividends)

 

 

 

$

978

 

$

978

 

Construction commitments

 

$

65

 

 

 

$

65

 

Total

 

$

91

 

$

1,810

 

$

4,946

 

$

6,847

 

 

The parent company’s contingent contractual obligations are set forth below (in millions, except for number of agreements):

 

Contingent contractual obligations

 

Amount

 

Number of
Agreements

 

Exposure Range
for Each
Agreement

 

Recorded
On Balance
Sheet

 

 

 

 

 

 

 

 

 

 

 

Guarantees

 

$

652

 

52

 

<$1 - $100

 

$

273

 

Letters of credit-under the Revolver

 

$

104

 

14

 

<$1 - $36

 

$

51

 

Letters of credit-outside the Revolver

 

$

109

 

5

 

<$1 - $84

 

$

84

 

Surety bonds

 

$

6

 

6

 

<$1 - $3

 

 

Total

 

$

871

 

77

 

 

 

$

408

 

 

 

FINANCIAL POSITION AND CASH FLOWS

 

Consolidated cash flows

 

At December 31, 2002, AES had a consolidated net working capital deficit of $2.2 billion as compared to negative working capital of ($236) million at the end of 2001. The decrease in net working capital was due primarily to an increase in the current portion of debt, accounts payable, and accrued and other liabilities, partially offset by an increase in other current assets. Cash and short-term investments were $1.0 billion at December 31, 2002. Included in the net working capital deficit is approximately $3.3 billion from the current portion of long- term debt. The Company expects to refinance a significant amount of the current portion of long-term debt. There can be no guarantee that these refinancings will have terms as favorable as those currently in existence. There are some subsidiaries that issue short-term debt and commercial paper in the normal course of business and continually refinance these obligations.

 

Property, plant and equipment, net of accumulated depreciation, accounts for 54% of the Company’s total assets and was $18.4 billion at December 31, 2002. Net property, plant and equipment increased $677 million, or 4%, during 2002. The increase was due primarily to construction activities at the Company’s greenfield projects and the consolidation of Eletropaulo, offset by the reclassification of certain businesses to discontinued operations.

 

AES continuously monitors both actual and potential changes to environmental regulations and plans for the associated costs. As a result of such events, the Company expects to spend approximately $105 million in 2003 to comply with environmental laws and regulations and to raise our level of preparedness for future regulations that may be enacted. The Company expects to obtain third party financing for a portion of these capital expenditures. The planned 2003 capital expenditures include anticipated construction costs associated with new environmental standards imposed by the EPA relating to NOx emission reductions, as well as the installation of low NOx burners, additional monitoring equipment, and other environmental-related projects.

 

In total, the Company’s consolidated debt increased $1.1 billion, or 6%, to $19.7 billion at December 31, 2002. The increase is due primarily to the addition of debt held on the books of Eletropaulo which was consolidated during 2002, and borrowings used to fund the construction of the

 

25



 

Company’s greenfield projects. This increase was partially offset by the reclassification of certain businesses to discontinued operations.

 

At December 31, 2002, the Company had $ 769 million of cash and cash equivalents representing a decrease of $1 million from December 31, 2001. The $1.4 billion provided by operating activities and the $172 million of cash raised by financing activities was used to fund the $1.6 billion of investing activities.

 

Cash flows provided by operating activities totaled $1.4 billion during 2002. The decrease in cash provided by operating activities during 2002 is due to the one-time collection of a contract prepayment in 2001, partially offset by improved cash flows from operations at several North American businesses. Net cash used in investing activities totaled $1.6 billion during 2002. The cash used in investing activities includes $2.1 billion for property additions, primarily representing new greenfield construction efforts. Net cash provided by financing activities was $172 million during 2002, which primarily consists of net borrowings.

 

26



 

Financial Statements and Supplementary Data

 

INDEPENDENT AUDITORS’ REPORT

 

To the Stockholders of The AES Corporation:

 

We have audited the accompanying consolidated balance sheets of The AES Corporation and subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits. 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, for the years ended December 31, 2001 and 2000, which statements reflect total assets constituting 9% of consolidated total assets as of December 31, 2001, total revenues constituting 11% and 8% of consolidated total revenues and total income from continuing operations constituting  51% and 14% of consolidated total income from continuing operations for 2001 and 2000, respectively. Those statements were audited by other auditors who have ceased operations and 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 10 to the financial statements, the Company changed its method of accounting for derivative instruments and hedging activities effective January 1, 2001 to conform with Statement of Financial Accounting Standards No. 133. Also, as discussed in Note 10 to the financial statements, the Company changed its method of accounting for certain contracts for the purchase or sale of electricity effective April 1, 2002 to conform with Derivative Implementation Group Issue C-15. As discussed in Note 6 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective January 1, 2002 to conform with Statement of Financial Accounting Standards No. 142.

 

Deloitte & Touche LLP

 

McLean, VA

February 12, 2003 (March  31, 2003 as to Note 4,

March 21, 2003 as to Note 9, May 2, 2003 as to Note 11, and March 25, 2003 as to Note 22)

 

27



 

Due to the Company’s inability to obtain an accountants’ report from Porta, Cachafeiro, Laría Y Asociados (a Member Firm of Andersen), we have included this copy of their latest signed and dated accountants’ report on the financial position and results of operations of C.A. La Electricidad de Caracas and Corporación EDC, C.A. and their subsidiaries as of December 31, 2001 and 2000, the results of their operations and their cash flows for the year ended December 31, 2001, and the results of their operations and cash flows for the period from June 1 through December 31, 2000. This report is a copy of the original and has not been reissued by Porta, Cachafeiro, Laría Y Asociados. Porta, Cachafeiro, Laría Y Asociados has not provided a consent to the inclusion of its report in this Form 10-K. See Exhibit 23.2 for additional information regarding our inability to obtain this consent and the limitations imposed on investors as a result.

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To the Stockholders and the Board of Directors of

C.A. La Electricidad de Caracas and Corporación EDC, C.A.:

 

We have audited the accompanying combined balance sheets of C.A. La Electricidad de Caracas and Corporación EDC, C.A. and their Subsidiaries (Venezuelan corporations), translated into U.S. dollars, as of December 31, 2001 and 2000, and the related translated combined statements of income, stockholders’ investment and cash flows for the year ended December 31, 2001 and 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 audits.

 

We conducted our audits 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 as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

These translated combined financial statements have been prepared for use in the preparation of the consolidated financial statements of AES Corporation and, accordingly, they translate the assets, liabilities, stockholders’ investment, revenues and expenses of C.A. La Electricidad de Caracas and Corporación EDC, C.A. and their Subsidiaries for that purpose. The translated combined 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 Corporación EDC, C.A. and their Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the year ended December 31, 2001 and for the period from June 1 through December 31, 2000, in conformity with accounting principles generally accepted in the United States.

 

Porta, Cachafeiro, Laría

Y Asociados

A Member Firm of Andersen

 

Hector L. Gutierrez D.

Public Accountant CPC N° 24,321

 

Caracas, Venezuela

January 18, 2002 (except with respect
to the matter discussed in Note 18, as
to which the dates are February 20, 2002)

 

28



 

THE AES CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

 

 

 

2002

 

2001

 

 

 

(Amounts in Millions, Except
Shares and Par Value)

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

769

 

$

770

 

Restricted cash

 

160

 

357

 

Short-term investments

 

210

 

215

 

Accounts receivable - net of reserves of $424-2002; $239 -2001

 

1,119

 

1,114

 

Inventory

 

378

 

468

 

Receivable from affiliates

 

25

 

10

 

Deferred income taxes - current

 

130

 

244

 

Prepaid expenses

 

68

 

215

 

Other current assets

 

950

 

372

 

Current assets of discontinued operations and businesses held for sale

 

540

 

927

 

Total current assets

 

4,349

 

4,692

 

Property, Plant and Equipment:

 

 

 

 

 

Land

 

702

 

541

 

Electric generation and distribution assets

 

18,505

 

16,013

 

Accumulated depreciation and amortization

 

(4,070

)

(2,996

)

Construction in progress

 

3,222

 

4,123

 

Property, plant, and equipment — net

 

18,359

 

17,681

 

Other Assets:

 

 

 

 

 

Deferred financing costs – net

 

400

 

335

 

Project development costs

 

15

 

66

 

Investments in and advances to affiliates

 

678

 

3,031

 

Debt service reserves and other deposits

 

508

 

433

 

Goodwill – net

 

1,388

 

2,367

 

Deferred income taxes – noncurrent

 

943

 

 

Long-term assets of discontinued operations and businesses held for sale

 

5,852

 

7,400

 

Other assets

 

1,768

 

807

 

Total other assets

 

11,552

 

14,439

 

Total

 

$

34,260

 

$

36,812

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

1,130

 

$

714

 

Accrued interest

 

362

 

262

 

Accrued and other liabilities

 

1,148

 

655

 

Current liabilities of discontinued operations and businesses held for sale

 

537

 

851

 

Recourse debt - current portion

 

26

 

488

 

Non-recourse debt - current portion

 

3,308

 

1,960

 

Total current liabilities

 

6,511

 

4,930

 

Long-Term Liabilities:

 

 

 

 

 

Non-recourse debt

 

10,550

 

11,224

 

Recourse debt

 

5,778

 

4,913

 

Deferred income taxes

 

981

 

624

 

Pension liabilities

 

1,166

 

216

 

Long-term liabilities of discontinued operations and businesses held for sale

 

5,202

 

5,124

 

Other long-term liabilities

 

2,617

 

1,734

 

Total long-term liabilities

 

26,294

 

23,835

 

Minority Interest (including discontinued operations of $41 - 2002; $124 - 2001)

 

818

 

1,530

 

Commitments and Contingencies (Note 11)

 

 

 

Company-Obligated Convertible Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures of AES

 

978

 

978

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred stock, no par value - 50 million shares authorized; none issued

 

 

 

Common stock, $.01 par value - 1,200 million shares authorized for 2002 and 2001, 776 million issued and 558 million outstanding in 2002, 645 million issued and 533 million outstanding in 2001

 

6

 

5

 

Additional paid-in capital

 

5,312

 

5,225

 

Retained earnings (accumulated deficit)

 

(700

)

2,809

 

Accumulated other comprehensive loss

 

(4,959

)

(2,500

)

Total stockholders’ (deficit) equity

 

(341

)

5,539

 

Total

 

$

34,260

 

$

36,812

 

 

See notes to consolidated financial statements.

 

29



 

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

 

 

2002

 

2001

 

2000

 

 

 

(Amounts in Millions, Except Shares and Par Value)

 

Revenues

 

 

 

 

 

 

 

Regulated

 

$

4,317

 

$

3,255

 

$

2,661

 

Non-regulated

 

4,205

 

4,309

 

3,479

 

Total Revenues

 

8,522

 

7,564

 

6,140

 

Cost of sales

 

 

 

 

 

 

 

Regulated

 

(3,627

)

(2,416

)

(2,091

)

Non-regulated

 

(3,004

)

(2,995

)

(2,161

)

Total cost of sales

 

(6,631

)

(5,411

)

(4,252

)

Selling, general and administrative expenses

 

(112

)

(120

)

(82

)

Severance and transaction costs

 

 

(131

)

(79

)

 

 

 

 

 

 

 

 

Interest expense

 

(2,005

)

(1,562

)

(1,248

)

Interest income

 

312

 

189

 

200

 

Other income

 

141

 

116

 

51

 

Other expense

 

(87

)

(65

)

(52

)

 

 

 

 

 

 

 

 

(Loss) gain on sale of investments and asset impairment expense

 

(1,428

)

18

 

140

 

Goodwill impairment expense

 

(612

)

 

 

Foreign currency transaction losses

 

(456

)

(28

)

(4

)

Equity in pre-tax (loss) earnings of affiliates

 

(203

)

176

 

475

 

(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST

 

(2,559

)

746

 

1,289

 

Income tax expense

 

2

 

209

 

366

 

Minority interest (income) expense

 

(34

)

103

 

120

 

(LOSS) INCOME FROM CONTINUING OPERATIONS

 

(2,527

)

434

 

803

 

Loss from operations of discontinued businesses (net of income tax benefit of $119, $13 and $3, respectively)

 

(636

)

(161

)

(8

)

(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE

 

(3,163

)

273

 

795

 

Cumulative effect of change in accounting principle (net of income tax benefit of $72)

 

(346

)

 

 

Net (loss) income

 

$

(3,509

)

$

273

 

$

795

 

BASIC (LOSS) EARNINGS PER SHARE:

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(4.68

)

$

0.82

 

$

1.67

 

Discontinued operations

 

(1.18

)

(0.30

)

(0.01

)

Cumulative effect of accounting change

 

(0.65

)

 

 

BASIC (LOSS) EARNINGS PER SHARE

 

$

(6.51

)

$

0.52

 

$

1.66

 

DILUTED (LOSS) EARNINGS PER SHARE:

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(4.68

)

$

0.81

 

$

1.61

 

Discontinued operations

 

(1.18

)

(0.30

)

(0.02

)

Cumulative effect of accounting change

 

(0.65

)

 

 

DILUTED (LOSS) EARNINGS PER SHARE

 

$

(6.51

)

$

0.51

 

$

1.59

 

 

See notes to consolidated financial statements.

 

30



 

THE AES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

 

 

 

2002

 

2001

 

2000

 

 

 

(Amounts in Millions)

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,509

)

$

273

 

$

795

 

Adjustments to net (loss) income:

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle

 

418

 

 

 

Depreciation and amortization — continuing and discontinued operations

 

837

 

859

 

697

 

Loss (gain) from sale of investments and asset impairment expense

 

1,600

 

(18

)

(143

)

Goodwill impairment expense

 

612

 

 

 

Loss on disposal and impairment write-down associated with discontinued operations

 

784

 

193

 

27

 

Provision for deferred taxes

 

(315

)

47

 

(2

)

Minority interest (earnings) expense

 

(34

)

103

 

120

 

Foreign currency transaction losses

 

456

 

30

 

4

 

Loss (earnings) of affiliates, net of dividends

 

285

 

(140

)

(320

)

Other

 

16

 

(61

)

(56

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

128

 

712

 

(270

)

Decrease (increase) in inventory

 

129

 

(10

)

(56

)

Increase in prepaid expenses and other current assets

 

(301

)

(34

)

(156

)

Decrease (increase) in other assets

 

(160

)

295

 

(132

)

(Decrease) increase in accounts payable

 

286

 

(125

)

257

 

(Decrease) increase in accrued interest

 

98

 

(148

)

126

 

Increase (decrease) in accrued and other liabilities

 

73

 

(368

)

(225

)

Increase (decrease) in other liabilities

 

41

 

83

 

(160

)

Net cash provided by operating activities

 

1,444

 

1,691

 

506

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Property additions

 

(2,116

)

(3,173

)

(2,226

)

Acquisitions-net of cash acquired

 

(35

)

(1,365

)

(1,818

)

Increase in cash from Eletropaulo share swap

 

162

 

 

 

Proceeds from the sales of assets

 

375

 

505

 

234

 

Sale of short-term investments

 

70

 

670

 

81

 

Purchase of short-term investments

 

(166

)

(649

)

(96

)

Proceeds from sale of available-for-sale securities

 

92

 

59

 

114

 

Affiliate advances and equity investments

 

(29

)

(133

)

(515

)

Decrease (increase) in restricted cash

 

25

 

832

 

(1,110

)

Project development costs

 

(22

)

(105

)