The top executives of AES Corp., managers of power plants from New Jersey to California, and Brazil to China, gathered at a Dulles corridor conference center last week to plan their future.
In another few weeks, they'll find out if they have one.
AES's fortunes hinge on a single date: Dec. 16, when AES is scheduled to pay $300 million plus interest to bondholders. It is part of a $2.1 billion cloud of corporate debt that is due in the next year, the price of dramatic growth in the past two decades that made the Arlington-based company the world's biggest producer of electricity.
With its power-generating business wracked by currency devaluations in Venezuela and Argentina, drought in Brazil and rock-bottom electricity prices in Britain and the United States, AES signaled that it cannot pay its debts and stay in business.
Now, it must persuade bondholders and bankers to stretch out debt payments another three years. "It's the survival of the company in its current form that's at stake," said Paul B. Fremont, a research analyst at Jefferies & Co.
AES is asking bondholders to extend the $300 million debt due next month in exchange for a partial cash payment and new notes for the rest of the debt at a higher interest rate and due in 2005.
The offer deadline is Dec. 3. If 80 percent of the December bonds and another issue of notes have been exchanged in the new debt deal by then, AES bankers, led by Citigroup Inc., will roll over $1.6 billion in debt due next year, the company says. The new secured loans, at higher interest rates, would also be due in 2005.
"Without this deal, there is not much to talk about. December is a very, very key deadline," said Mona Yee, a director of the Fitch Inc. bond-rating service.
Paul T. Hanrahan, the AES veteran who was elevated to chief executive last June in the face of the debt crisis, warned financial analysts of the stakes during a conference call last month.
"While we are optimistic about the future of AES, this optimism is based on the success of our current refinancing effort," he said.
The offer should go through, according to a number of analysts, who calculate that AES is worth more alive than dead to its lenders and bankers.
"If they can extend the deadlines, I suspect they'll be okay," said financial analyst Christopher R. Ellinghaus of Williams Capital Group LP in New York.
But the outcome is not certain, the analysts say.
Under founders Roger W. Sant and Dennis W. Bakke, AES ranged around the globe in the 1980s and 1990s, buying and building generating plants as foreign governments privatized power operations. In the United States, it bought or built plants in deregulated energy markets. By this year AES owned all or part of 177 power plants in 33 countries. Investors got in step, pushing AES stock to a peak price of $70.63 a share on Oct. 2, 2000.
Its downward slide began last year. AES reported a $314 million loss in the third quarter, most of it from sold or abandoned projects. On Friday, its stock closed at $1.52 a share.
Now, managers are hoarding money, closing unprofitable ventures and putting troubled power plants up for sale for whatever the market will pay.
Around them circle bankers and institutional lenders, once a faithful claque of professional boosters and believers, now sharp calculators of life expectancy and death benefits.
AES must persuade most of its bondholders and all of its lenders to let it keep going.
"Basically, the banks have laid the cards on the table," said Lasan Johong, an analyst with Blaylock & Partners LP. Their message to bondholders: "If you go through with the debt exchange, we'll do what we need to do to make sure AES doesn't go belly-up," Johong said.
A similar challenge confronts another regional power company, Allegheny Energy Inc. in Hagerstown, Md. In technical default on bank loans, it is trying to raise $2 billion from lenders, of which $1.6 billion would pay current debt and $400 million would replenish its capital.
Allegheny will back the new loans using part of its mainstay power plants as collateral, giving the banks more security than before. No deadline for the refinancing has been announced, but those close to the negotiations say the deal has to be done by early next year. Otherwise, the momentum toward closure may be lost.
AES is also offering collateral, a share of its equity in its power projects. But AES's offer is harder to evaluate, one investment fund executive said. AES's power plants around the world were financed individually, with each project or operating unit issuing its own debt to its own group of bondholders.
"There is such a huge volume of debt out there" with AES, Fremont said. "That's why this is so difficult -- the sheer volume of parties they need to convince. There are not very many examples of where this has been successful."
Initially, AES and its bankers aimed too low with the exchange offer for the debt that is due in December. Investors holding $1,000 notes paying 8.75 percent interest were to get $500 cash payments and $500 in new notes paying 10 percent, due in 2005.
Not enough, the bondholders said, and last week, AES sweetened the offer. Each $1,000 current note will now be replaced with $650 in cash up front and $350 in a 10 percent note maturing in 2005, with a bonus for acting promptly.
Another hurdle for AES is the sheer complexity of its business.
AES managed its rapid growth by having each project stand mainly on its own feet.
sMost costs were financed locally, with debt tied to the local project rather than AES, the parent company. The projects carry more $17 billion in loans and notes, compared with about $6 billion in parent company debt.
The projects sent dividends upstream to AES, the parent company, which used the money to pay its own debt.
The initial strategy was sound enough, analysts say. With projects worldwide, dangers of downturns in a particular region seemed limited.
Overseas, AES signed long-term delivery contracts for most projects, assuring a stream of electricity payments to cover the projects' local debts.
If the price was right and AES could run the operations more efficiently, the profits would follow, AES executives said.
But by the end of the 1990s, the industry-wide boom mentality took hold, Fremont and other analysts said. AES began to open plants without the full protection of long-term supply contracts and invested heavily in Latin America.
When AES went into Argentina, few would have predicted that runaway government spending would trigger a financial crisis, leading to devaluation of Argentina's currency in January and a brutal cut in AES profits there.
In Brazil, the enemy was drought, which forced rationing of AES power plant operations and more losses. As of last September, a total of $1.4 billion in project debt at AES operations in Brazil, Argentina and Colombia was in default.
In August 1999, AES agreed to buy the Drax Power Station in northern England, Britain's largest, for $3 billion.
The company had paid top dollar, said Ellinghaus, and the deal was mortally wounded when power prices fell in Britain last year. Now, AES may have to write off all or part of the Drax investment, the company said.
"Clearly, the investment in Drax was a poor decision at the time," Ellinghaus said. "They were even predicting a decline in power prices. They just didn't predict the magnitude and timing very well.
"They put too many eggs in the South American basket. That was a poor diversification," he said.
The South American and British debts do not yet threaten the parent company, Hanrahan told analysts on Oct. 24. But under certain conditions, including a drop in the value of the company's assets, defaults on projects debt in Latin America or Britain could trigger demands for accelerated repayment of the parent company's debt, AES warned.
Still, AES has long-term contracts to back 85 percent of its worldwide electricity production, company vice president Kenneth R. Woodcock said. It expects to raise $800 million next year through asset sales.
"Even if you assume Brazil, Argentina and Venezuela [profits] disappear and Drax, too, you'd still conclude their ability to cover their interest is more than enough to keep the company going," Ellinghaus said.
At best, AES will be living on the edge for years, analysts said. But after 2003, debt repayment deadlines look less foreboding -- if it can get that far.
"The crux is to establish confidence with the bondholders and the banks that this management offers the best opportunity to pay back the debt in the long run," said Merribel S. Ayres, president of Lighthouse Energy Group LLC, a District consulting firm.