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IssueAlert for  March 28, 2001 

AES Completes Acquisition of IPALCO

by Will McNamara 
Director, Electric Industry Analysis

The AES Corporation (NYSE: AES) announced that it has completed its 
acquisition of IPALCO Enterprises, the Indianapolis, Ind.-based utility with 
3,000 MW of generation and 433,000 customers in and around Indianapolis. 
IPALCO has now become a wholly owned subsidiary of AES through an exchange of 
shares in which each outstanding share of IPALCO common stock will be 
exchanged for 0.463 shares of AES common stock. IPALCO common stock was 
suspended from trading at the close of the market on March 27.  

Analysis: The purchase of IPALCO, an established and respected utility in the 
Midwest, will help AES to continue to secure its foothold in this region and 
further the company's aggressive expansion efforts along the generation side 
of its business. AES already owns CILCORP, an energy services company whose 
largest subsidiary, CILCO, serves portions of Illinois and Missouri. (Note 
that pursuant to an SEC order, AES will restructure and/or sell its ownership 
interests in CILCORP within two years in order to retain its status as an 
exempt holding company under PUHCA). Thus, through the purchase of IPALCO, 
AES is strengthening a presence in the Midwest that it already has 
established. In addition, from this purchase we now know that AES, along with 
being a global player, intends to remain dominant throughout the United 
States as well. Further, the acquisition represents a rather bright 
development for AES, considering that the company has recently encountered 
some ongoing challenges related to its operations in California. 

First, let's examine the value of AES' acquisition of IPALCO. Certainly, the 
3,000 MW of generation that AES gained in the deal must have been the primary 
draw, but from comments made by Dennis Bakke, AES president and CEO, the 
company apparently also wants to become a marketing presence in Indiana (and 
the Midwest as a whole). IPALCO gains in the deal by now being under the 
aggressive management of AES; the subsidiaries under IPALCO such as 
Indianapolis Power & Light will now stand a much better chance for global 
development and expansion. 

As with other generation acquisitions that AES has made, the company secures 
a decided edge over competitors that may have strong marketing presence but 
fewer hard assets. With its strong generation portfolio, to which the IPALCO 
purchase only adds, AES can further guarantee to potential customers a 
reliable power supply. AES is one of the largest generation companies in the 
world, having reached this level through a series of strategic acquisitions. 
The company's generating assets include interests in 134 facilities totaling 
over 48 gigawatts of capacity. By comparison, Calpine has approximately 
36,700 MW, Dynegy has a net ownership of 12,497 MW, and Reliant has about 
27,000 MW. In addition, AES' electricity distribution network has over 
920,000 km of conductor and associated rights of way, and sells over 126,000 
GWh per year to over 17 million end-user customers.  

AES has surpassed many of its power supply competitors by maintaining an 
aggressive growth strategy over the past year. Recent milestones for the 
company are too many to list here. However, highlights include acquiring a 
controlling interest in Electricidad de Caracas; acquiring 100-percent 
interest in Tractebel Power; purchasing 70-percent interest in the Mohave 
Generating Station in Laughlin, Nev.; and purchasing GeoUtilities, Inc., an 
Internet-based superstore for energy and telecom services. Just since the 
start of 2001, AES entered into an agreement to purchase all of the energy 
assets of Thermo Ecotec Corporation, a wholly owned subsidiary of Thermo 
Electron Corporation of Waltham, Mass., for $195 million, and announced new 
generation development projects in Texas and California. AES also has 
continued its international expansion with an acquisition of a 140-MW 
oil-fired co-generation facility in Italy, the acquisition of a 290-MW 
barge-mounted natural-gas fired generating business in Nigeria, and the 
purchase of additional ownership interest in a 1,000-MW hydro plant in 
Argentina.  

As I've said in the past, AES is a company to watch. Even when acquisitions 
that AES is making seem rather small, they must be taken within the context 
of the portfolio that AES is building. Whether it's generation, retail 
marketing, telecom, or selling electricity over the Internet, AES has a 
foothold in many different areas. AES is a major player that can offer the 
full package to a customer, which may in the end be its strongest advantage. 
The company maintains that it is engaged in three lines of businesses, which 
are all equally important to its strategy: power generation, network delivery 
services and retail energy marketing. However, it is important to recognize 
that AES continues to build a huge generation arsenal and now has the 
capability to market its commodity products through its marketing 
subsidiaries. 

However, although AES has had a fairly successful year, the company has hit 
some bumps and made some questionable decisions along the way, all of which 
were related to the California market. AES has established several tolling 
agreements with Williams Corp. for the power plants that AES owns in 
California. Under the tolling agreements, AES essentially rents its plants to 
Williams so that Williams can generate fuel to electricity, which it then can 
sell on the wholesale market. In other words, Williams had a contract to 
market all of the power generated by AES' California plants. In hindsight, 
AES may regret the questionable decision to enter into the tolling agreements 
with Williams in California. Although AES did well last year, with net income 
rising 181 percent to $641 million, the company reportedly lost $11 million 
on the lucrative California market. Meanwhile, Williams (NYSE: WMB) reported 
unaudited 2000 income from continuing operations of $873.2 million, or $1.95 
per share on a diluted basis, versus $178 million, or 40 cents per share on a 
restated basis, for 1999. AES also took a hit when it had to pay air 
pollution fines and buy power on the wholesale market to meet its obligations 
to Williams when it was forced to shut some plants down.  

Further, AES (along with other companies) continues to fall under the intense 
scrutiny of FERC for pricing that the commission has deemed "unjust and 
unreasonable" for power generated at AES-owned plants. FERC's investigation 
centers on the unavailability of certain so-called "must run" generating 
plants in the Los Angeles area that are owned by AES Southland, a subsidiary 
of AES. A "must run" plant is a generating facility that the California ISO 
can call upon to provide energy and ancillary service essential to the 
reliability of the California transmission network. Several weeks ago, FERC 
announced that a preliminary investigation raised serious questions about the 
actions of Williams Energy Marketing and Trading and AES.   

On March 14, FERC gave the two companies 20 days to explain why they should 
not refund $10.86 million to California utilities. Further, FERC said that 
"Williams had a financial incentive to prolong any outages" of two AES-owned 
plants last April and May. "Williams received more revenues as a result of 
the respective outages," the commission said. AES responded to the charges by 
saying that the plants were taken off line for repairs and that it did not 
share in market revenues from sales of power from the plants. According to a 
report in The Washington Post, AES Pacific Group vice president Stu Ryan said 
that as long as the plants are in operating condition, Williams decides when 
they will run and what it will charge for their power.  

As a result of the unavailability of the two "must run" AES plants, the 
state's ISO had to obtain power from other plants, also owned by AES, where 
the power was much more expensive and the companies made much larger 
profits.  The commission said its investigation indicated that AES and 
Williams refused to make the two "must run" plants available "for reasons 
that were not directly related to the necessary and timely maintenance" of 
the plant.  

Many power supply companies that were active in the California wholesale 
market now are retreating due to the volatility and uncertainty of the 
state's market. Although it remains unclear how AES will continue to 
participate in the California market, it may be a smart move for the company 
to focus on expanding operations in other regions of the United States (such 
as the Midwest). Yet, how AES' acquisition of IPALCO will impact the 
company's bottom line remains to be seen. Standard & Poor's (S&P) is 
reserving its assessment of the partnership for the time being, and is 
keeping AES on CreditWatch. AES' double-'B' corporate credit, single-'B'-plus 
rating on subordinated debt, and single-'B' rating on the company's trust 
preferred securities remain intact pending further review and information 
about the acquisition of IPALCO. Also, S?lowered its corporate credit ratings 
on IPALCO to triple-'B' from single-'A'-plus, and IPALCO's subsidiary, 
Indianapolis Power & Light Co. (IPL), to triple-'B' from double-'A'-minus, 
and revised the CreditWatch implications to positive from negative. S?expects 
to address the CreditWatch status in the next two weeks.  

On March 27, AES shares closed at about $47.75. As of mid-morning on March 
28, AES shares were priced at about $50.00. Over the last few days, AES 
shares have increased by about 5 percent and have closely tracked the Dow 
Jones Utility Average. 

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