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dollar amount. Because each of the Company's
businesses are distinct entities and geographically diverse
and because the obligations related to a single business are
based on contingencies of varying types, the Company believes
it is unlikely that it will be called upon to perform under
several of such obligations at any one time.
At
December 31, 1999, the Company and its subsidiaries have future
commitments to fund investments in its projects under construction
and in development of 8175 million. Of this amount, $50 million
in letters of credit under the Revolver have been issued to
support a portion of these obligations. The remaining future
capital commitments are expected to be funded by internally-generated
cash flows and by external financings as may be necessary.
Market Risks
The Company generally attempts to hedge certain aspects of
its projects against the effects of fluctuations in inflation,
interest rates, energy prices, and in certain instances, exchange
rates. Because of the complexity of hedging strategies and
the diverse nature of AES's operations, its results, although
significantly hedged, will likely be somewhat and in certain
cases, such as Brazil, materially affected by fluctuations
in these variables and such fluctuations may result in material
improvement or deterioration of operating results. Results
of operations would generally improve with higher oil and
natural gas prices and with lower interest rates. Operating
results are also sensitive to the difference between inflation
and interest rates, and would generally improve when increases
in inflation are higher than increases in interest rates.
AES
has generally structured the energy payments under its power
generation sales contracts to adjust with similar price indices
as do its contracts with the fuel suppliers for the corresponding
power plants. In some cases a portion of revenues is associated
with operations and maintenance costs, and as such is usually
indexed to adjust with inflation.
AES
primarily consists of businesses with long- term contracts
or retail sales concessions. While the contract-based portfolio
is expected to be an effective hedge against future energy
and electricity market price risks, an increasing proportion
of AES's current and expected future revenues (particularly
those related to certain portions of its generation businesses
in Kazakhstan, the UK, Argentina, and the United States) are
derived from businesses without significant long-term revenue
contracts. In some of these businesses, AES has taken additional
steps to improve their predictability, in the Company's opinion,
by using other contractual hedging provisions such as financially
settled electricity swaps or entering into fuel supply contracts
that absorb a significant
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portion of the variability in electricity sales
prices. Despite these mitigating factors, increasing reliance
on non-contract businesses in AES's portfolio subjects the Company's
results of operations to the volatility and unpredictability
of electricity prices in competitive markets.
The
hedging approaches and methodologies utilized by the Company
are implemented through contractual provisions with fuel suppliers,
international financial institutions and several of the Company's
customers. As a result, their effectiveness is dependent, in
part, on each counterparty's ability to perform in accordance
with the provisions of the relevant contract. The Company has
sought to reduce this credit risk in part by entering into contracts,
where possible, with creditworthy organizations. In certain
instances, where the Company determines that additional credit
support is necessary, AES will seek to execute (either concurrently
or subsequently) stand- by, guarantee or option agreements with
creditworthy third parties. In particular, AES has executed
and is the beneficiary of fuel purchase option agreements, corporate
and governmental guarantees to support the obligations of local
fuel suppliers in several locations and sovereign governmental
guarantees supporting the electricity purchase obligation of
govemment- owned power authorities, such as in the Dominican
Republic and Pakistan.
AES
has also used a hedging strategy in an attempt to insulate each
plant's financial performance, where appropriate, against the
risk of fluctuations in interest rates. Depending on whether
capacity pay- merits are fixed or vary with inflation, the Company
generally attempts to hedge against interest rate fluctuations
by arranging fixed rate or variable rate financing, respectively.
In certain cases, the Company executes interest rate swap, cap
and floor agreements to effectively fix or limit the interest
rate exposure on the underlying variable rate financing. At
December 31, 1999, the Company and its subsidiaries had approximately
$4,820 million of fixed rate debt obligations. In addition,
the Company had entered into interest rate swap agreements and
forward interest rate swap agreements aggregating approximately
$1,083 million at December 31, 1999, which the Company used
to hedge its interest rate exposure on variable rate debt.
Through
its equity investments in foreign subsidiaries and affiliates,
AES operates in jurisdictions dealing in currencies other than
the Company's consolidated reporting currency, the U.S. Dollar.
Such investments and advances were made to fund capital investment
or acquisition requirements, to provide working capital, or
to provide collateral for contingent obligations. Due primarily
to the long-term nature of certain investments and advances,
the Company accounts for any adjustments resulting from
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