case study AES in Nigeria.seam

CASE NUMBER: IB-29VERSION: (A) 02/15/02

Ade Dosunmu, MBA 2001, prepared this case under the supervision of Professor John McMillan as the basis for class discussionrather than to illustrate either effective or ineffective handling of an administrative situation. The case was edited by MaryPetrusewicz.

Copyright © 2002 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies orrequest permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case WritingOffice, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part ofthis publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford GraduateSchool of Business.

AES IN NIGERIA

We haven’t had the problems opening plants internationally that people predicted. For somereason, people thought that our principles and our way of doing things couldn’t work overseas.But we haven’t really experienced anything like that.

—Roger Sant, Co-Founder and Chairman, AES.

It was November 2001. With a steady tropical rain falling outside, Norman Bell, businessmanager for the AES Barge independent power producer (IPP) facility in Lagos, Nigeria, sat inhis office and considered the options in designing an organization to fulfill AES stated values inthe new environment of Nigeria. There were several pending issues critical to moving forwardon the development of the nominal 270-megawatt (MW) gas-fired “emergency” power plantbeing built by U.S.-based AES, on which it expected its capital investments to total $225million.

The Barge IPP facility was AES’s first operating asset in Africa. AES had bought a 95 percentinterest in the facility from U.S.-based Enron Corp. in December 2000. Enron had divested as aresult of a corporate-wide shift in strategy from asset-based production to market making. YinkaFolawiyo Power (YFP), a Nigerian company that had been instrumental in bringing Enron intoNigeria, owned the remaining 5 percent. The plant had commenced generation with 90 MW inJune 2001, and had billed the customer, National Electric Power Authority (NEPA), for firstcommercial month in July 2001.

Now that the construction phase—which had been contractor led—was ending, and theoperational phase—which would be AES led—was commencing, Norman thought it was a goodtime to review the lessons that had been learnt during the past eleven months as well as to puttogether the right conditions to further propagate AES values in the new organization. Thisactivity was made more important by new IPP opportunities in Nigeria, as well as bygovernment-proposed privatization and the split up of NEPA, in which foreign power producers

AES in Nigeria IB-29 p. 2

like AES would be interested. Norman knew that possible future AES expansion in these areasand in other parts of Africa would depend on the quality of the organization that had been built atthe Barge IPP facility.

THE AES CORPORATION

AES Corporation was one of the largest power companies in the world, with ownership orinterest in 180 plants totaling over 60,000 MW in twenty-eight countries, and another 10,000MW in the advanced development stage in twelve countries. It also distributed electricity in tencountries. Its total assets were $35 billion, and it employed over sixty thousand people (Exhibit1). AES had been founded in 1981 by Dennis Bakke and Roger Sant—two former energyconservationists who emphasized a socially responsible and employee empowered organization.

AES Corporate Values

When founding AES, Bakke and Sant had stressed social values in the organization over profits.They believed their purpose was to build a company that was honest, treated people fairly, andprovided safe, clean, inexpensive energy. If these needs of society were met, they believed,profits would be made. The values of the founders were stated in the prospectus when thecompany went public in 1991:

These values are goals and aspirations to guide the efforts of the people of AES as they carry outthe business and purposes of the company:

• Integrity. AES has attempted to act with integrity or “wholeness.” The company seeksto honor its commitments. The goal has been that things that AES people do in all partsof the company should fit together with truth and consistency.

• Fairness. The desire of AES has been to treat fairly its people, its customers, itssuppliers, its stockholders, governments, and the communities in which it operates.Defining what is fair is often difficult, but the company believes it is helpful to routinelyquestion the relative fairness of alternative courses of action. AES has tried to practice itsbelief that it is not right to “get the most out of” each negotiation or transaction to thedetriment of others.

• Fun. AES desires that people employed by the company and those people with whomthe company interacts have fun in their work. AES’s goal has been to create andmaintain an environment where each person can flourish in the use of his or her gifts andskills and thereby enjoy the time spent at AES.

• Social Responsibility. The company has acted on its belief that AES has a responsibilityto be involved in projects that provide social benefits, such as lower costs to customers, ahigh degree of safety and reliability, increased employment, and a cleaner environment.

As a result of this stance, the U.S. Securities and Exchange Commission required that thefollowing statement be inserted in the section on investment risks:

An important element of AES is its commitment to four major “shared” values: toact with integrity, to be fair, to have fun, and to be socially responsible. AESbelieves that earning a fair profit is an important result of providing a quality


product to its customers. However, if the company perceives a conflict betweenthese values and profits, the company will try to adhere to its values—eventhough doing so might result in diminished profits or foregone opportunities.Moreover, the company seeks to adhere to these values not as a means to achieveeconomic success, but because adherence is a worthwhile goal in and of itself.

Over the years, AES had continued its unique way of doing business and came to be known asone of the premier “empowered organizations” where employees were able to make decisionsand act according to their own judgment. Reflecting on the reasons for the success of theorganization in a 1998 interview, Bakke said:

It has to do with our structure and our practices—hiring, compensation,information flow, and so on. They’re like an ecosystem. Everything about howwe organize gives people power and the responsibility to make importantdecisions, to engage with their work as businesspeople, not as cogs in themachine.

AES in Africa

By 2001, AES was pursuing an aggressive expansion strategy in Africa, as it had done in otherinternational operations. It had invested resources in both generation and distribution entities inseveral countries across the continent (Exhibit 2). Initially, AES activities in Africa werecontrolled from AES Sirocco, based in London, with responsibilities for Africa, Europe, and theMiddle East. But in a reorganization in February 2001, AES Africa activities were transferred toa new entity—AES Frontier, based in London, with responsibilities for the U.S. states of Texasand Oklahoma, and the Africa region. In reorganizing, the head of AES Sirocco, MarkFitzpatrick, moved to head the new AES Frontier division. Fitzpatrick had an excellentreputation at AES and had been instrumental in the rapid growth of the company’s European andAfrican activities since heading them in 1990. He was also an executive vice president and oneof the five officers of the corporation.

AES saw Africa as a region where it could significantly grow its generation capacity andrevenues due to low per capita use of electricity and the commencement of privatization of manyutilities across the continent. The privatization situation in some countries was similar to thatlaunched in the early 1990s with the deregulation of the British power industry by the Thatchergovernment. This movement had led to tremendous international growth for AES and otherindependent power producers during the nineties. The difference was that African countrieswere less developed and presented greater risks on several dimensions.

AES project finance strategy was consistent and generally done in a way that minimized risks tothe corporation. Each project was typically set up as a separate legal entity, and AES securednon-recourse project financing—debt and equity instruments—to aid in execution. In Africa andother developing countries, AES made extensive use of debt from multilateral agencies (MLAs)and development finance institutions (DFIs), either made available directly to the projects, or on-lent through the relevant government. AES investments would typically be in the form of equityparticipation or other participating securities paid in cash, usually for majority shareholding. Thecompany was almost always the operator—it was responsible for building and operating theplants. The company always sought to maximize the use of debt, but rarely secured political risk


insurance (PRI). For example, the company considered securing PRI from the MultilateralInvestment Guarantee Agency (MIGA) for the Songas Project in Tanzania, but did not submit aformal application (Exhibit 3). Generally, AES considered that if PRI were really required in acountry, then AES should not be in that country. The main exception was when lenders requiredPRI for a project. By 2001, this position was being questioned by certain managers within AES,but remained the predominant approach, at least with regards to AES’ equity investments.

To mitigate political risk in Africa and elsewhere, AES turned to structured financing tools. Forexample, for the Songas Project, Songas signed a twenty-year power purchase agreement (PPA)with the Tanzanian electricity operator, TANESCO. Payments to Songas were based oncalculations to cover all costs and an expected rate of return of 22 percent on Songas equity. A“credit enhancement package” consisting of an escrow account ($50 million) and a liquidityfacility ($20 million) were negotiated to mitigate risks that the payments would not materialize.Both facilities were to be funded by the Tanzanian government and maintained in bank accountswith a triple A-rated U.S. bank. AES had rights that were senior to other project participants,including debt holders, to access these accounts to make itself whole in the event of a default byTANESCO on the contractual terms.

Entry into Nigeria

AES’s $225 million commitment bought out 95 percent of Enron’s 100 percent ownership of theBarge IPP project in two stages, first buying a 30 percent stake from Enron in October, and laterbuying a further 65 percent in December 2000 (at which point YFP exercised an option toacquire the remaining 5 percent of the project). This was done because AES needed to assureitself that it would be accepted by the Nigerian governments and NEPA as a majorityshareholder and operator prior to full commitment. Any outstanding costs to complete theproject in readiness for production would be borne out of the $225 million investment. AESplanned to issue debt to finance part of its investment, which was under negotiation by 2001. Inaddition to the Barge facility, AES obtained an option to buy Enron’s 70 percent stake in aproposed 548 MW IPP at another Lagos location—Agbara—as part of the purchase deal. Theremaining 30 percent was held by YFP. The Agbara project, if fully developed, was to be anintegrated gas to electricity project, with gas coming from nearby offshore fields in which YFPhad interests. Negotiations were still underway between Enron and NEPA for the critical PPAfor the Agbara project by 2001.

Subsequent to the purchase of Enron’s interests in Nigeria, AES is separately developing amajority interest with a new partner in rehabilitating and operating a 1,000 MW gas turbine plantat Sapele in mid-western Nigeria. In contrast to the Enron buy out, this deal came through anadvertisement for expression of interest by the Nigerian central government. In October 2001,AES was named the preferred bidder on the Sapele plant and went into further negotiations withthe government. Regarding AES entry into Nigeria, Norman Bell said:

The Enron Barge project was already under construction. It was attractivebecause it would give us early megawatts in Africa. One of the reasons wewanted this was because we had not yet secured an operating entity in Africa.This would be a big boost to our efforts.


AES’s Nigeria partner, YFP, did not have any particular expertise in power generation, but actedas a business partner with knowledge of the local environment. YFP was part of a familycontrolled, diversified conglomerate with interests in trading, cement, and consumer productsmanufacturing. In addition, YFP provided logistics and operational support to Enron via asubsidiary company. Regarding YFP’s role, Norman Bell said:

They have been useful in creating a buffer for our organization in the localenvironment. For example, we lease all our vehicles through YFP. This allowsus to avoid potential liabilities in a country we don’t know very well, whereforeign companies may be seen as wealthy entities. But over time, we have beenable to develop our own knowledge of the local environment principally throughour employees and have used this knowledge to obtain many services atcompetitive rates, and to develop the “ownership” of the project by our people.

Building the AES Nigeria Barge Organization

On transfer of the Barge IPP project to AES, AES inherited several of Enron’s sub-contractors.A number of new Nigerian employees, including an accountant and thirty technicians/engineers,were directly employed during the first six months of AES ownership. The Americanconstruction manager and sixteen Philippine technicians/engineers, who had brought in thelargely Philippine origin project equipment for installation, also transferred to AES on temporarycontracts. The foreign technical personnel were required to help install and operate the plant andto transfer skills to the Nigerians.

A top priority for AES was for local employees to understand and practice AES values and itsunique way of doing business. AES brought in people from other operations and charged themwith absorbing and then transferring to new employees both AES values and technicalknowledge. There were four such AES personnel in Nigeria by November 2001: businessmanager Norman Bell and three team leaders (Exhibit 4). AES planned to have the projectmanned at least 95 percent by local employees at the end of Bell’s stay in Nigeria, which wasscheduled for 2003. In addition to social responsibility factors, the company found thatexpatriate employees cost more not only in monetary terms and benefits, but also in time taken toadjust to the local environment and in continuity during leaves and transfers.

In designing a local people strategy and compensation levels, Norman Bell was mindful of theneed to focus on AES values and on the fact that AES was setting the terms for what wouldessentially be a new industry in Nigeria—private power generation. Norman found that theNigerian environment was very different from his past experience in differences in compensationwithin the economy. There were much wider expectations at different experience levels fromentry to team leader. He also found that there could be large differences between the salariespaid for similar jobs at different firms within one industry. He faced the difficulty of setting anappropriate compensation level for the new Nigerian employees given the wide spread of datathat he had. Early on, he had decided not to use the salaries paid at NEPA, an inefficientgovernment run monopoly in his benchmarking surveys.

To solve this problem, Norman sought more information from some new employees and YFP.He hired a consulting firm to do a salary survey of the oil and gas sector as a benchmark forAES. The oil and gas sector was very important in Nigeria and was part of the larger energy


industry of which AES was a downstream operator, hence it was felt that data from this industrywould be a good approximation of appropriate compensation at AES. In the resulting survey,Norman picked a salary range between the high “offshore” salaries and the low “servicecompany” salaries to set a compensation for AES local engineers (Exhibit 5). All the AESengineers were started on the same level since they were all undergoing training in operating thefacility. In addition, Norman introduced a compensation structure that was similar to that usedby AES in other locations as well as other items that were relevant to the local environment only.Items included:

• Promotions, payments, and bonuses tied directly to evaluation of employees’understanding and practice of AES values.

• Plant, safety, and environmental performance bonuses.• Award of options in AES Corporation.• Workmen’s compensation, health insurance, and pension scheme.

One unusual item that AES provided the local engineers was cell phones. Telephone penetrationin Nigeria was less than 2 percent, and most employees could otherwise not be reached in abusiness or personal emergency. The average cost for cell phone and subscription was $200 andthe billing rate was $0.4/min. AES provided the handset, the subscription payment, and a 60-minute card each month. The employee was free to use the phone beyond this number ofminutes at personal expense.

Despite the progress on setting up the organization, Norman felt that there was still considerablework to be done to bring AES values to the Nigerian environment:

There are a number of significant issues we face here. One is the large distancebetween people of different strata in the society. This can lead to breakdown ofcommunications with subordinates being unable to express their ideas.Fortunately, we see much less of this among the young people who work for us.A second issue is that often, people are seemingly out to get the maximumbenefits for themselves, which can be detrimental to the organization and iscontrary to AES values. For example, there was a situation where some of ouremployees wrote me a memo asking for an AES vehicle, and financialsponsorship of accommodations to attend an out-of-town marriage of anotheremployee. I sat down and wrote a memo showing the implications of such anidea for the four AES values. In the end, I took the responsibility of refusing therequest. I did not yet feel our organization was mature enough for the decision tobe theirs.

NIGERIA

Located at the eastern boundary of West Africa, Nigeria was the most populous country in Africawith an estimated 120 million people in 2001 (Exhibit 6). The three main ethnic groups, Hausa-Fulani, Yoruba, and Igbo, constituted about 65 percent of the population and dominated thepolitical landscape of the country. The country was also religiously diverse; Muslims constituted50 percent of the population, Christians 40 percent, and indigenous religions 10 percent.


The first recorded European contact with a Nigerian ethnic group was by Portuguese sailors whoencountered the kingdom of Benin and other coastal peoples in the fifteenth century. Increasedcontacts led to trade in agriculture, crafts, and manufactured goods between the Europeans(British, Spanish, Portuguese, French) and the independent African kingdoms. The transactionslater came to include the trans-Atlantic slave trade, in which a total of 12 million West Africanswere sold into bondage in the Americas and Europe. Because a large numbers of slaves camefrom some of the independent kingdoms now part of Nigeria, much of western Nigeria cultureand religion survives in South America and the Caribbean into the twenty-first century.Coincident with the end of the slave trade came increased domination by the European countries,and by the end of the nineteenth century most of the Nigerian kingdoms had lost theirindependence to Britain. In 1914, the British established Nigeria by amalgamating the southernand northern Nigeria protectorates, although these entities continued to be ruled separately.

Nigeria gained independence in 1960. By 1967, competition amongst the various ethnic groupshad resulted in a civil war, which lasted until 1970. The end of the civil war saw a succession ofmilitary régimes (with one brief period of civil democratic rule from 1979 to 1983) in Nigeriauntil 1999, when elections were conducted. By 2001, the resulting presidential system ofgovernment was half way through its term and elections were due in 2003.

Economic Environment

Nigeria was predominantly an agricultural and trading economy at independence. Farm productssuch as cocoa, groundnuts, and oil palm accounted for the bulk of exports and employment in theyears preceding the oil boom. In the 1970s, crude oil rose to a dominant position in theeconomy, particularly in the export sector. By 2001, the World Bank estimated that crude oilaccounted for 85 percent of exports and almost 30 percent of GDP at factor costs. The 1970sand 1980s had seen steep declines in other exports as the oil boom and government policy drovereal exchange rates up (Exhibit 7).

Successive Nigerian governments pursued import substitution and central planning models ofeconomic development in the 1970s and 1980s. With the end of the oil boom in 1983, thesemodels were discredited as local industries failed to achieve world competitiveness and centralplanning led to corruption and rampant mismanagement. Nigeria’s per capita GDP plunged from$370 in 1985 to $310 in 2000. At the same time foreign indebtedness rose sharply, reaching $29billion or 67 percent of measured GDP in 2000.

Starting in 1985, under pressure from international lending institutions, the successivegovernments attempted to change course in economic policy with a series of structuraladjustment programs designed to move to a market based economy. These attempts met withvery limited success due to entrenched local interests, corruption, and mismanagement, and aprotracted political crisis that went on from 1993 to 1999 involving disputes over democraticelections that were annulled by the ruling army.

Corruption

Corruption was an acute problem in Nigeria. The centralization of power by the military, thelack of transparency in government, and plunging standards of living had bred a multi-layeredproblem that extended into all strata of society. The German based NGO, Transparency


International (TI), routinely ranked Nigeria among the worst offenders in corruption in its annualsurveys (Exhibit 8). Nigerian President Olusegun Obasanjo, who was elected in 1999, promisedto make the fight against corruption a key part of his administration. According to the 2001 TIcorruption report:

President Obasanjo has not had an easy ride since he made anti-corruption thecenterpiece of his reform program on coming to power. While he has pushed hisreform program forward, the pace of change has been slow, which was perhapsinevitable in a country where corruption is so deeply embedded. It took over ayear for the legislature to pass Nigeria’s Anti-Corruption Act, and the Anti-Corruption Commission it was intended to establish was only sworn in at the endof September 2000. Observers suspect that the delay was linked to a series ofcorruption scandals that broke out in the legislature. The most prominent ofwhich was the impeachment in August 2000 of Senate President ChubaOkadigbo, who was alleged to have misused public funds.

Later in November 2000, the presidency was alleged to be involved in a plot to bribe members ofthe lower house of parliament in a bid to influence votes. Parliamentarians led by Obasanjo’sfellow party members who had been at loggerheads with him displayed large bundles of currencyallegedly received from the presidential liaison to the assembly and alleged they were inpossession of video evidence implicating the president and vice president. This dispute diedafter closed consultations within the ruling party.

The Power Industry in Nigeria

Electric generation in Nigeria began in 1896. By 1929, the first hydroelectric station wasconstructed by the Nigeria Electric Supply Company (NESCO), the country’s first utility.Government domination of the sector started in 1951 with establishment of the ElectricCorporation of Nigeria (ECN), which constructed the first interstate trunk line by 1962. By 1962the electric generation, distribution, and retail industry was nationalized and federalized withestablishment of the National Electric Power Authority (NEPA), which was given a statutorymonopoly of commercial electricity production and sales. Over the years as NEPA’sperformance deteriorated, it came to be called various nicknames such as Never Expect PowerAlways (NEPA) by the populace.

In 1998, NEPA’s statutory monopoly was repealed. As a result, a number of private firmscommenced negotiations with NEPA and regional governments to generate electricity in Nigeria.It continued as a de facto transmission and distribution monopoly into 2001, pending enactmentof legislation to restructure the industry. By 2000, the installed nominal capacity of NEPA’ssystem was 5906 MW. There were 11,000 km of transmission and 43,000 km of distributionlines. However, due to lack of maintenance and under investment, peak generation was only1,500 MW, and overall transmission and distribution losses were estimated at between 30 and 40percent. Consumer electricity demand on NEPA’s system was estimated at 4,500 MW, ofwhich 2,400 MW were supplied by self-generation in the form of small diesel and petrol sets thatwere used as back up to NEPA’s erratic supply. Only 36 percent of the population had access tothis system. It was estimated that to fulfill projected national power demand by 2005, anadditional 12,700 MW of generation capacity would be required.


Since the 1998 repeal of NEPA’s monopoly, a number of IPPs had commenced. Initially, thesewere promoted by local entrepreneurs who secured political backing in their local area or state,and then invited technical expertise from foreign companies. This was the situation with YFP,the Nigerian company that held 5 percent of the AES Barge IPP project. In 1999, YFPconvinced the newly elected governor of Lagos State that an IPP project would significantlyimprove power supply to Lagos, and secured commitment of the government to back the project,with Enron as the majority partner. After difficult negotiations, an original PPA signed in 1999was thrown out, technical aspects of the project such as capacity (from 90W to 270MW) and fuel(diesel to gas) were changed, and other federal government and World Bank fiscal andenvironmental concerns were cleared. A new PPA was signed in June 2000 and constructioncommenced. The key terms for the revised PPA were as follows:

• Monthly payments to AES from the customer, NEPA, based on available capacity fromAES. The negotiated capacity price was based on a set amount per kilowatt-month ofavailable capacity. There was to be a penalty for each megawatt-hour of shortfall ifactual supplied available capacity was less than a certain percentage of maximumavailable plant capacity in any one business year.

• Irrevocable Letter of Credit (LOC) placed with guarantor banks by NEPA for theirpayment obligations.

• A thirteen and one-quarter year project life commencing from the floating finalcompletion date (AES target date was January 1, 2002).

• Gas utilized is “pass through” for AES; i.e. NEPA purchases fuel gas for operationsdirect from Nigeria Gas Company (NGC).

• The project was to remain owned by the operator at expiration of the contract withnegotiations on possible further supplies or disposition.

While these projects were ongoing, NEPA’s electricity supply remained comatose. As a result,the central government began to take a more direct interest in electricity improvement effortsincluding negotiating new IPPs, and refurbishment of NEPA’s facilities through directinvestments and public/private contractual partnerships such as Rehabilitate, Operate, andTransfer (ROT) projects. The government set a short-term target date of December 2001 toachieve “stable” power supply in the country; as a result, during 2001 a large number of suchprojects were underway.

In addition, a new “national electricity policy” was promulgated. This policy sought to promote“the total liberalization, competition, and private sector led growth of the electricity sector.” Thepolicy laid a framework for moving from the monopoly industry through interim structures to aliberalized sector by 2008. Specifically, the policy proposed the unbundling of NEPA intomultiple privatized generating companies, privatized distribution and retail companies, and onecompany responsible for transmission and dispatch. In addition, it sought to encourage newentrant companies initially in generation and later in electricity wholesale and retail. Apart fromAES, a number of other organizations had taken advantage of the IPP opportunities and were inthe process of building new power plants (Exhibit 9). These included consortia led by oil andgas companies that had been active in Nigeria for many decades and had large gas resources,which they had found hard to put to good use. Despite a recent upsurge in building large gas-liquefaction-for-export projects, about 65 percent (or 2.7 billion cubic feet per day) of gasproduced in Nigerian oilfields—enough gas to power between 9,000 MW and 18,000 MW of


electric production1—was still flared, with a monetary penalty of 15 cents per thousand cubicfeet of flared gas imposed on companies by the government.

This national electricity policy was also tied to the government’s overall privatization effort,which included selling just under two hundred state-owned enterprises. As a result, powerindustry investors closely watched developments in the privatization effort as a gauge of thegovernment’s determination in moving to a private sector led economy. By 2001, thegovernment had privatized several banks and manufacturing entities, had sold licenses in anauction for mobile telephony, and was in negotiations with competitively chosen preferredbidders for the national telephone carrier, NITEL, and the largest shipping yard in the country.

Conclusion

Norman had enjoyed the challenges of his job in Nigeria, and felt that AES was on track tocreate an organization that conformed to the values of the company. He felt that his twenty yearsin the British Royal Navy prior to joining AES in September 1994 had prepared him forchallenging work. He was determined to reduce the numbers of foreign personnel and bring inmore Nigerians into positions of higher responsibility in the next two years. He wondered whathe and the organization should be doing to accelerate this process and ensure that it would besuccessful.

1 Based on 1,000 Btu/ft3 energy content of gas, and 27% and 55% cycle efficiencies for simple or combined cycle power plants,respectively.


Exhibit 1AAES Summary Data, 1997–2000

Income Statement ItemsAll dollar amounts in $ million

For the Years Ended December 31 2000 1999 1998 1997Net Sales 6,691.0 3,253.0 2,398.0 1,411.0Net Income 665.0 337.0 311.0 188.0Earnings per Share $1.46 $0.96 6 $0.84 $0.56

Balance Sheet ItemsAll dollar amounts in $ millionFor the Years Ended December 31

2000 1999

1998

1997Total Assets 31,033.0 20,880.0 10,781.0 8,909.0Total Current Liabilities 4,882.0 2,570.0 1,976.0 1,204.0Total Non-Current Liabilities 21,340.0 15,673.0 7,011.0 6,224.0Total Shareholder Equity 4,811.0

2,637.0

1,794.0

1,481.0

Exhibit 1BNet Generation Capacity 1990–2001

0

10000

20000

30000

40000

50000

60000

1988 1990 1992 1994 1996 1998 2000 2002

meg

awat

ts

Source: AES Corporation


Exhibit 2AES Projects in Africa, 2001

# Description Country Status1 Development SONGAS—gas wells, processing, pipelines, and 113

MW gas turbine (GT) plant, Songo Island/ Dar es Salaam (firstintegrated gas to electricity project for AES worldwide).

Tanzania Approved.Closedfinancing.

2 Purchase 600 MW coal fired plant, Johannesburg. South Africa All contractssigned. Start-up imminent.

3 Development 250 MW hydroelectric facility, Bujagali. Uganda Pendingfinancingapproval.

4 Repair, Operate, and Transfer 1020 MW GT plant, Sapele. Nigeria Won bidding.NegotiatingPPA.

5 Development Barge 270 MW GT plant, Lagos. Nigeria Complete.6 Privatization 450,000 customer 900 MW electric utility Senegal Bidding.7 Development 300 MW GT plant , Tema Ghana Negotiation.8 Development 600 MW Kafue Lower and 120 MW Itezhi-tezhi

hydroplants.Zambia Pre-qualified

for bidding.9 Development 150 MW GT, Edea. Cameroon Negotiating

PPA.10 Privatization 452,000 customer 800 MW electric utility. Cameroon Complete.

Source: AES Frontier Internal Documents


Exhibit 3AES in Tanzania

SONGAS Project Financial Structure

Sources: AES and Songas Project Web site http://www.songas.com/financial.htm

Key to Abbreviations:CDC Commonwealth Development Corporation LtdTPDC Tanzania Petroleum Development CorporationTDFL Tanzania Development Finance Company LtdIDA International Development AssociationGOT Government of TanzaniaEIB European Investment Bank

Equity Holders

AES$50 millionPref A*

CDC$18 millionPref B*

TPDC$3 millionCommon

TDFL$4 millionCommon

TANESCO$1 millionCommon

Assumed Debt

World Bank$32 million

IDA$18 million

GOT

Lenders

World Bank$150 million

EIB$37 million

GOT

$ 78 million $30 million $210 million

SONGAS LIMITED

PPA withTANESCO

Gas Sale toCement Plant

Pref A & Bshareholders also holdsome common

ConcessionaryTerms

Commercial Terms


Exhibit 4ASummary Background of AES Barge

Expat Personnel

Norman Bell – Business Manager for AES Nigeria Barge Limited

Retired from the Royal Navy in the rank of engineering lieutenant and recruited into the Medway PowerPlant, under construction in the U.K., as a plant engineer in September 1994. Mainly employed as acontrol room engineer, gaining experience in all aspect of operations of a 660MW CCGT Power Plant,until selection for the position of plant leader in October 1996. As a plant leader, gained furtherexperience in the commercial and operations aspects of a power plant, with a focus on closing out theEPC contract and special projects. Left Medway to take up current position in January 2001.

Rodney Daigle

Joined the Nigeria project in March 2001 from AES Southland, which had been a fairly recent acquisitionby AES. His background is mainly in operations and he was a control room supervisor at Southland. Hasa great deal of varied employment experience both in and out of the power plant, even as a light aircraftpilot in Africa. Hired into AES Nigeria Barge Ltd. as a team leader in March 2001.

Bret Pardew

After serving six years in the U.S. Navy, was recruited into AES in 1991 at the Hawaii plant where hewas employed on mechanical maintenance. Having spent six years in Hawaii and qualifying in all areasof plant maintenance, was hired into AES Lal Pir in Pakistan as part of the team to introduce the AESvalues and culture. Selected for a position as a plant leader, he worked as a commissioning and start-upengineer, eventually taking over the balance of plant area responsibilities. He also gained invaluableexperience in the business and commercial aspects of plant operations before moving to AESLeninogorsk in Kazakstan in 2000. His primary role here was as a plant leader, mentoring the localemployees in the AES culture and values while changing the recent acquisition into an AES business.Hired into AES Nigeria Barge Ltd. as a team leader in July 2001.

Foster Mouton

Employed in the power industry since 1991, Foster progressively gained experience and additionalqualifications. He was recruited into AES in 2000 at AES Ironwood, a 700MW CCGT plant underconstruction in Pennsylvania. Activities included construction, commissioning, and start-up. Fosteradvanced into the position of control room engineer with responsibility for the EPC and PPA agreements.He was hired into AES Nigeria Barge Ltd. in November 2001 to implement the AES values and cultureand to undertake specific projects while taking on the role of a team leader.

Source: AES Nigeria Barge Limited Internal Documents


Exhibit 4BAES Barge LimitedOrganization Chart

Project ManagerMcIaren

Business ManagerNorman Bell

Receptionist Admin. AssistantRuth Imaji Dupe Awosika

Team LeaderExPat 1

Rod Daigle

Team LeaderExPat 2

Bret Pardew

Team LeaderExPat 3

Foster Mouton

Team LeaderNG 1

Obi Ezeoke

Team LeaderNG2 & 3

TBA

Team LeaderNG

Tunji Ajayi

Yolando Labitad Aurelio Samultinog Mania Garcia + 8Shift Tech Adv’s x 5 Expat Maintainers

Group ANG Engineers

Group BNG Engineers

Group CNG Engineers

Group DNG Engineers

Group ENG Engineers

Accounts AssistantSecretarial

Warehousemen

Plant Responsibilities Plant Responsibilities Plant Responsibilities Plant Responsibilities Plant Responsibilities Plant Responsibilities

EPC Contract EPC Contract EPC Contract EPC Contract EPC Contract EPC ContractTraining/Qual books Training/Qual books Fire Protection System Turbine Units Shore Fuel Gas System PPA

Safety NEPA Protocol NEPA Protocol NEPA Protocol LV distribution system Machinery/plant IinsNEPA Protocol Barge Structure Generators HV Transmission NEPA Protocol DTD Contract

PPA FED-EX/Shipping Agent Emergency Plan MMS Drawings & Tech Library StoresWaste Disposal Control Room Procedures Fire Brigade Lifting Gear Site/Building Services Finance/FinancingEnvironmental Boats & Misc Equipment Compressed Gases C&I Annual & Long term PlansControl Room

ProceduresWater Treatment Fuels/Oils

Contract/SuppliesSecurity Contract

MMS Condition Monitoring Workshops Misc. InsuranceIT MMS Station Filing System

Plant Communications

Area Responsibilities Area Responsibilities Area Responsibilities Area Responsibilities Area Responsibilities Area Responsibilities

PB202 Balance of Plant PB203 PB204 PB205 Admin BuildingPB207 Jetty PB208 PB209 PB210 Grounds

Control Room PB211 Workshop Stores

Source: AES Barge Limited Internal Documents

Operations Operational Maintenance Finance


Exhibit 4CAES Nigeria Barge Limited Values Surveys

Questions and Employee Responses

How well has AES made its presence in Lagos and Nigeria as a whole?• The project is still considered by many as ENRON Nigeria Barge Ltd. The need for

more publicity is there.• The presence of AES in Lagos and Nigeria has been felt, but people, including NEPA

and news media, still refer to the project as ENRON.• Now that AES is generating an average of 150 MW, many homes in Lagos have been

enjoying steady power supply.• AES has adequately made its presence felt in:

Employment opportunities for the NigeriansImprove electricity supply for the nationEncouraging other foreign investors into the Nigerian economy.

Do you feel you are adequately compensated for your work?• No. Salary is very low as compared to the energy sector of Nigeria• No. The welfare package including salary is insignificant compared to the cost/profit of the

project. What % profit is for staff welfare?• The medical plan is very limited in coverage.• Loan scheme at 0000% interest would help.• To a large extent…yes.• For now it is ok but still room for improvement.

How would you rate the leaders of the project?• Excellent: 12% Good: 67% Fair: 21% Poor: 0000%• The leaders should interact with the engineers more; spend more time on the barges.• The leaders are very supportive, caring, and open.• Good for now, always room for improvement.

Do you feel your talents are being completely utilized?• No, there should be more than just taking hourly readings.• We are all degreed engineers; we need to work in our disciplines more.• We need to establish a separate maintenance group, now we have no idea how to do the repair

work.• Construction is still in progress; hopefully we will be doing more after project completion.• The training program supplied by ENRON was very poor and now we only have OJT.

What would you do to make AES Nigeria Barge a better business and improve the “FUN” aspect ofwork?

• When individual’s ideas are considered prior to making decisions.• Take AES as my personal company and carrying out my duties/responsibilities with a happy

mind.• Be involved in more business decisions.• By working hard and putting in my best so as to achieve the AES Nigeria Barge goal to supply

electricity to the people of Nigeria.

Is AES Nigeria Barge fulfilling its commitments to the Shared Values?• The issue of Fairness should be taken into consideration seriously.


• Social Responsibility is being attended to by various projects, including employmentopportunities. Fairness in salary is not being fulfilled.

• Too early to say.• Yes, always room for improvement.

How would you describe the working environment at AES Nigeria Barge?• Excellent: 0000%• Very Good: 40%• Below average: 36%• Poor: 3%• Don’t know/no answer: 21%

How well do you think that your contributions to AES are appreciated?• Excellent: 6%• Very Good: 61%• Below average 15%• Poor: 0000%• Don’t know/no answer: 18%

Fun means creating an environment where people can use their gifts and skills to make positivecontributions without being squelched; a place where people’s experiences are stimulating, exciting, andfulfilling. Overall, how accurately does this description describe what is occurring at AES NigeriaBarge?

• Excellent: 6%• Very Good: 46%• Below average 33%• Poor: 0000%• Don’t know/no answer: 15%

Please place a checkmark in the corresponding columns below to indicate how you would rate thefollowing items at AES Nigeria Barge.

• Communication:Excellent: 6% Good: 61% Fair: 18% Poor: 12% NA 3%

• Support among Team MembersExcellent: 40% Good: 45% Fair: 15% Poor: 0000% NA 0000%

• Access to information:Excellent: 30% Good: 30% Fair: 37% Poor: 0000% NA 3%

AES Notes:*NA – No answerThe overall rate of submittals was: 92%Survey Conducted November 2001Some questions in survey did not provide for checking answers, only comments, hence no percentage responses areavailable for those questions.


Exhibit 5Excerpts from AES Nigeria Barge Limited Compensation Survey

Per year compensation ranges for oil and gas industry in NigeriaProbable entry points for college graduates in engineering

Figures are in Nigerian Naira (N), $1 = N120 (November 2001).

“Low Entry” midpointCompany 1 2 3 4

Job Group C G-J 3 8 12

Total cash 839,000 918,267 1,591,735 1,365,193

Benefits in Kind 492,174 962,172 833,944 299,650

Gross Incl. Bonuses 1,331,174 1,880,439 2,425,679 1,664,843

“High Entry” midpointCompany 1 2 3 4

Job Group E G-J6 6 15

Total cash 1,547,000 1,317,909 1,887,554 1,897,518

Benefits in Kind 916,666 429,672 1,000,951 476,981

Gross Incl. Bonuses 2,463,666 1,747,581 2,888,505 2,374,499

AES Entry midpoint

Total Cash 930,000

Benefits in Kind 471,706

1,401,706

Notes:Probable entry points are the casewriter’s judgment based on work experience in the Nigerian oil industry.AES entry salaries are benchmarked against the “low entry” point, and are the casewriter’s estimation as opposedto company data.

Sources: AES Nigeria Barge Limited compensation survey of oil and gas industry.Yahoo! Currency Converter, http://rd.yahoo.com/search/iy/stocks/currency+converter/*http://finance.yahoo.com/m3?u.


Exhibit 6Maps of Nigeria and Africa

1. Map of Africa with position of Nigeria shown by shading.2. Map of Nigeria showing states and large cities.

MADAGASCAR

SOUTH AFRICA

NAMIBIA

ANGOLA

SUDAN

ETHIOPIA

ALGERIA

MOROCCO

LIBYAEGYPT

CHADNIGER

NIGERIA

BURKINAFASO

MALI

MAURITANIA

TUNISIA

KENYA

SOMALIACENTRAL

AFRICAN REPUBLIC

CAMEROON

CONGO

BOTSWANIA

TANZANIA

UGANDA

MOZAMBIQUE

ZIMBAWEE

ZAMBIA

SENEGAL

DEMOCRATICREPUBLICOF CONGO

NIGERIA

Nigeria


Exhibit 7Comparative Macro Economic Indicators

(2000 unless otherwise indicated)

Nigeria Cote d’Ivoire Ghana South Africa USAGross domestic product ($ billion) 41.2 9.3 5.4 125.9 9882.8GNI per capita ($ Atlas Method) 260 660 350 3,020 34,260GDP growth (annual %) 2.8 -2 4 3.1 5.2Gross capital formation (% of GDP)Inflation, GPD deflator (annual %)

2226 -2

3135

157

-2

Foreign direct investment, net ($ billion)a 1 0.35 0.017 1.38 275.5Aid flows per capita ($)a 1.2 28.8 32.3 12.8 -Electric power per capita (KwH 1998) 85 - 289 3,832 11.832Paved roads (% of total) 30.9c 9.7d 24.1d 11.8b 58.8c

Adult illiteracy (%)Female 44.2 37.1 61.2 15.4 -Male 27.6 45.1 19.7 14.0

Life expectancy (years) a 47.5 46.1 57.9 48.5 76.9Population (millions) 126.9 16 19.2 42.8 281.6Urban population (% of total) 44 46 38 50 77Population growth (%) 2.4 2.3 2.2 1.6 1.2

a 1999b 1998c 1997d 1996

Source: Compiled from World Bank World Development Indicators Data Query,http://www.worldbank.org/data/dataquery.html.


Exhibit 8Corruption Indices

2001—Top and Bottom 10 CountriesCountry

RankCountry TI Score Country

RankCountry TI Score

1 Finland 9.9 82 Tanzania 2.22 Denmark 9.5 83 Ukraine 2.13 New Zealand 9.4 84 Azerbaijan 2.04 Iceland 9.2 84 Bolivia 2.04 Singapore 9.2 84 Cameroon 2.06 Sweden 9.0 84 Kenya 2.07 Canada 8.9 88 Indonesia 1.98 Netherlands 8.8 88 Uganda 1.99 Luxembourg 8.7 90 Nigeria 1.010 Norway 8.6 91 Bangladesh 0.4

AES Countries of Operation and TI Country RankCountry Average TI

Score,1997–2001

Year AESStarted

Operation

Country AverageTI Score,

1997–2001

Year AESStarted

Operation

Argentina 3.2 1993 India, 2.8 1994Australia 8.6 1999 Italy 4.9 2001Bangladesh 0.4 2001 Kazakhstan 2.7 1997Brazil 3.9 1996 Nigeria 1.5 2001Cameroon 1.7 2001 Netherlands 8.9 1998Canada 9.1 1997 Mexico 3.3Chile 6.9 2000 OmanChina 3.3 1996 Pakistan 2.4 1997Czech Republic 4.6 2001 Panama 1999Colombia 2.9 2000 United Kingdom 8.5 1990DominicanRepublic

3.1 1996 United States 7.62.3 1981

Germany 7.8 2001 Venezuela 2.68 2000Hungary 5.2 1996

KeyTI index: 10 = totally clean, 0 = totally corrupt.

Sources: Transparency International http://www.transparency.org/, AES Corporation


Exhibit 9Ongoing Power Generating Developments/Projects in Nigeria, 2001

Project Sponsor Description Status1 ENI/Agip Oil (Italy ) 20% , Phillips

(U.S.) 20%, Nigerian NationalPetroleum Corporation (NNPC) 60%Operator – ENI/Agip

450MW, $425 million IPP, inKwale, mid-western Nigeria. Willeliminate flares in new oilfields.

Scheduled completionDecember 2003.

2 Shell (Anglo/Dutch) 30%, Elf(France) 10%, Agip 5%,NNPC 55%.Operator – Shell

276 MW IPP, in Afam, easternNigeriaWill utilize part of current excessgas.

Scheduled completionDecember 2001.

3 Exxon Mobil (U.S.) 40%, NNPC(60%)Operator – Exxon Mobil

388 MW IPP, in Eket, southernNigeriaWill utilize part of current excessflare.

Scheduled completionunknown. PPAnegotiations ongoing.

4 NEPA/ Contractor: Asea BrownBoveri (ABB) Sweden

450 MW – 3 phase combinedcycle facility in Abuja, centralNigeria. Undisclosed terms.

Unknown completion

5 Eskom (South Africa) 2,000 MW IPP in Enugu, easternNigeriaWill utilize local coal production.Undisclosed terms.

Unknown completion

Sources:U.S. Department of Energy, http://www.eia.doe.gov/cabs/nigeria_ipp.html.Shell Nigeria, http://www.shellnigeria.com/frame.asp?Page=2001GasFla.

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