AES Corporation Annual Report 2003 Our Business Growth Strategies AES is a leading global power company. We generate and Our global approach and unsurpassed global footprint also distribute electricity worldwide from 114 power plants and afford some unique advantages in terms of growth prospects: 17 distribution businesses in 27 countries. We also seek to • Greenfield development skills and regional market presence grow our diversified portfolio by developing and construct- offer distinctive opportunities for new capacity additions ing new power plants and through selective acquisitions. • Substantial foundation of existing businesses offers exclu- sive opportunities for expansion Global Approach • Acquisition and restructuring skills position AES well for The generation and distribution of electricity is an essential future privatizations and acquisitions service, and one of the largest industries in the world. AES • Market knowledge allows targeting of countries where is committed to helping meet the growing demand for regulatory and business environments can provide power. Our position as one of the few truly global power attractive returns companies has several distinct advantages: • A stable and diversified base of operating businesses and Our People cash flows High quality people throughout our organization and our • Higher growth potential from the rapidly expanding demand entrepreneurial culture remain the driving force behind con- for electricity in transitioning and emerging economies tinued progress. AES people are motivated and focused on • Global economies of scope and scale creating the best power company in the world. • A unique process to transfer knowledge allowing best practices to be shared among our business units across five continents Risk Management We manage the risks associated with being one of the largest global power companies through: • Geographic diversification • Fuel diversification • Technology diversification • Utilization of non-recourse financing for our businesses, limiting the parent company‘s financial risk • Commodity, currency and interest rate hedging Financial Highlights IN MILLIONS, EXCEPT PER SHARE DATA, YEAR ENDED DECEMBER 31 2002 2003 Revenues $7,380 $8,415 Revenues Less Cost of Sales $1,950 $2,433 Net Income From Continuing Operations ($1,609) $ 336 Earnings Per Diluted Share From Continuing Operations ($ 2.99) $ 0.56 Net Cash Provided by Operating Activities $1,444 $1,576 Sales by Business Operating Capacity Segment (MW) by Fuel Mix CONTRACT GENERATION 37% COAL 41% LARGE UTILITIES 40% NATURAL GAS 39% GROWTH DISTRIBUTION 13% HYDRO & OTHER 16% COMPETITIVE SUPPLY 10% OIL 4% Cover: AES Gener transmission line crossing the Atacama Desert in northern Chile near the Argentina border. Chairman and CEO Letter To o u r s h a r e h o l d e r s : 2003 was a year of solid performance for AES. We difficult market, these facilities sold at attractive prices, began the year with a number of ambitious goals. And bringing in proceeds of $1.1 billion. The key, however, then, we met them. We strengthened our financial posi- was not just selling businesses that could realize good tion and balance sheet well ahead of schedule. We value in a difficult market. It was also avoiding the sale of restructured key elements of our business portfolio and businesses that are essential to our business strategy. challenged our operating units to improve their perfor- We met that test. Our asset sale program helped our mance dramatically. Now, while keeping an eye on the short-term liquidity – and clearly affirmed the substantial lessons of the past, a reenergized AES is focused on a market value of our global portfolio. promising future. Several of our businesses required significant Our business is one of creating and managing valu- restructuring. Eletropaulo, our distribution company in able long-term assets. Yet in the past few years, AES’s São Paulo, Brazil, had a complex business structure and rapid growth left it with too much near-term debt, matur- a heavy short-term debt burden. The restructuring ing faster than could be supported by operating cash process was prolonged and volatile. However, the agree- flow. Our response was to raise $3.1 billion in debt and ment reached in the last days of 2003 preserves material equity, extending our debt maturities more evenly value for AES and gives our Brazilian businesses a capi- through 2015. Overall, AES parent company debt was tal structure more suited to their cash flow profile. Brazil’s reduced by $1.2 billion last year. As a result, our publicly government demonstrated its commitment to the fair traded debt rallied to par or better by year-end. We are treatment of foreign investors, who will play a crucial role pleased with how quickly AES achieved these results. in meeting the growing demand for power in Brazil. And we welcome the recent recognition of our improve- Similarly, important progress was made in develop- ment by the rating agencies despite the continued tur- ing a refinancing plan for Gener, our generation business moil facing much of the electric power industry. We in Chile. This is a solid business and the second-largest expect to continue to reduce debt at the parent level, as electricity generator in a country with bright long-term our debt progresses toward investment grade. prospects. The equity injected into Gener will strengthen This rapid turnaround required tough decisions its balance sheet and help it return to financial health. about our business portfolio. To improve our liquidity and The reinvigorated company is now poised to capitalize on reduce our debt load, we sold 14 facilities in Africa, the the growth in the Chilean electricity sector and to be an Middle East, Asia, Europe, and the US. Despite the important contributor in our global portfolio. Debt Maturities $1,801 Before ($ millions) (as of December 2002) Reduced parent debt* from $7.1 to $5.9 billion in 2003 and significantly extended maturities $1,059 $129 $231 $893 $750 $850 $754 $642 20032004 200520062007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and beyond After (as of March 2004)** $1,200 $1 $298 $469 $636 $469 $423 $483 $500 $600 $629 2004 200520062007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and beyond * Parent debt includes consolidated recourse debt plus New York Secured Equity Linked Loan and Drax credit obligations paid off in 2003 ** Includes previously announced call and repayment of securities totaling $231 million through March 15, 2004 Sales Plant $8.4 91% ($ billions) Top Decile $7.4 Availability Factor 88% 13% growth rate $6.3 Top qu a r t i l e Top Quartile in 2001–2003 performance in 2003 85% *AES rolling 12 month average 2001 2002 2003 DEC DEC Goal 2002* 2003* Our repositioning also demanded painful but nec- achievements of AES people last year, we are confident essary write-offs of past investments. These decisions that industry-leading performance will be reached. were made to establish a sound business portfolio on In the generation business, for example, an impor- which to build successfully in the future. For example, we tant driver of performance is high availability of our wrote off our investment in Drax, a large merchant power power plants. AES started the year with plant availability plant in the United Kingdom. We originally had hoped to of 85%, which is about average performance in the US. refinance Drax in a way that maintained an ownership So our people went to work to do better. We ended the interest for AES. In the end, however, the right decision year with plant availability of 88%, which moved us was to turn over our ownership to the lenders when it to top quartile performance. And we think we can still became clear that no other scenario would produce go further. acceptable returns for us. This kind of strict, disciplined One of the main drivers of performance in the decision-making is a critical dimension for us to maintain, distribution business is reducing commercial losses. particularly as we look toward renewed growth. These losses result, for example, when customers con- Our portfolio restructuring is largely completed. nect to our system without paying. Our distribution busi- Our focus is now on improving operating performance. nesses in El Salvador alone reduced commercial losses by To do this, we have made a number of important changes $2 million last year, so we know that dramatic improvement in the past year. We have realigned our business leader- is possible. Many of our non-US utilities still have room for ship under two Chief Operating Officers, John Ruggirello major improvement that could yield hundreds of millions for the Generation group, and Joe Brandt for the of dollars of additional revenue with no additional costs. Integrated Utilities group. Additionally, new leaders have We will seize every opportunity for such improvement. been appointed to senior positions across the enterprise. We are well along with the three-phase recovery We have carefully identified the key drivers of plan we launched last year. The first phase, to stabilize performance for our businesses and have set demanding our finances, is complete. The second phase, to improve goals. Success will mean that each AES business operating performance, is well underway. Now, AES is operates at top-quartile performance by 2006 and moving into the third phase, to begin growing again top-decile performance by 2008. Given the impressive through disciplined investments. 2003 AES vs. S&P 500 213% Shareholder Returns AES 7th highest return in S&P 500 S&P 500 26% JAN DEC 2003 2003 Capitalizing on global investment opportunities will should be a meaningful contributor to favorable stock enhance future growth and value creation. In the develop- price performance. ment of these opportunities, we have consciously decided Thank you for the trust you have shown by investing to refocus our efforts under new, dedicated leadership.