Virginia-based AES Corp. last week said that its balance sheet will be hit with charges in the fourth quarter totaling an eye-popping $2.7 billion, or $4.96 per share, associated with asset and goodwill impairments. The charges reflect the impacts of changes in electricity markets and economic conditions in the U.K. and the U.S., as well as weak currency and economic conditions in Brazil during 2002, AES said.

“These non-cash charges will not impact AES’s parent company liquidity position or violate any covenants in our corporate financing agreements, or those of AES’s other operating subsidiaries,” noted AES CEO Paul Hanrahan. “Following on from the successful completion of AES’s corporate refinancing last month, we continue to move forward in our efforts to strengthen our balance sheet and improve the performance of our businesses around the world.”

In the U.K., AES said that the financial distress of certain TXU Europe companies during the fourth quarter of 2002 led to the termination of the long-term electricity sales hedging arrangement at AES Drax (a 4,000 MW coal-fired plant) and a tolling agreement at AES Barry (a 230 MW gas-fired combined cycle plant).

As a result of these terminations, AES will incur an asset impairment charge for these two facilities in the amount of $1 billion after income taxes.

Meanwhile, in Brazil, AES will incur goodwill and other asset impairment charges — after income taxes — related to its investment in Eletropaulo (an electric distribution company in Sao Paulo) of approximately $706 million. The company will also take an impairment charge of $587 million to reflect the write-down to fair value of AES’ equity method investment and a related deferred tax asset in Cemig, an integrated utility in Minas Gerais.

AES also announced additional charges, primarily in the U.S., stemming from efforts to strengthen the company’s balance sheet by restructuring certain businesses, reducing discretionary capital spending and selling or terminating the construction or operations of several businesses.

AES said that the most significant of these charges are related to Mountainview, a 1,182 MW gas-fired business in California and Lake Worth, a 205 MW gas-fired plant under construction in Florida. These actions result in estimated losses on sale and termination totaling $398 million after income taxes.

AES also announced that parent company operating cash flow for 2002 was $1.095 billion. Also, the company expects to report income from recurring operations for 2002 of approximately $0.78, reflecting the fourth quarter impacts of the loss of the TXU contracts at two businesses in the U.K. and continued slower recovery of electricity demand to pre-rationing levels in Brazil.

AES said that income from recurring operations excludes: (i) asset and goodwill impairments and losses from discontinued operations ($6.06); (ii) the cumulative effect of losses from accounting changes ($0.65); (iii) South America foreign currency transaction losses ($0.66); and (iv) mark to market gains from FAS No. 133 of $0.08.

As a result, the company currently expects to report a fully diluted loss per share of approximately $6.51 for 2002.

Later in the week, Standard & Poor’s Ratings Services (S&P) affirmed various credit ratings for AES following its announcement. Specifically, S&P affirmed its ‘B+’ corporate credit rating on AES, its ‘BB’ rating on AES’ senior secured bank facility and exchange notes, its ‘B-‘ rating on AES’ senior unsecured and subordinated debt and its ‘CCC+’ rating on AES’ trust preferred securities.

“While the magnitude of the charges are large, Standard & Poor’s had projected no cash flows from these assets in coming years, and attributed no value to these assets as collateral for the senior secured exchange notes and bank facility,” the ratings agency said.

Meanwhile, AES on Friday said that it completed the sale of its CILCORP unit to Ameren Corp. in a transaction valued at $1.4 billion. The transaction was announced on April 28, 2002 (see NGI, May 6, 2002).

“The approximately $500 million in net equity proceeds (after expenses) from this sale allows us to reduce parent debt by approximately $250 million and enhances our liquidity by $250 million, further demonstrating that earlier liquidity concerns are behind us,” said Paul Hanrahan, AES president.

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