Globalizing the Cost of Capital and Capital Budgeting at Aes?

8708 Words Dec 30th, 2010 35 Pages
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REV: OCTOBER 23, 2006

MIHIR DESAI

Globalizing the Cost of Capital and Capital Budgeting at AES
In June 2003, Rob Venerus, director of the newly created Corporate Analysis & Planning group at The AES Corporation, thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public, AES had become a leading independent supplier of electricity in the world with more than $33 billion in assets stretched across 30 countries and 5 continents. Venerus now faced the daunting task of creating a methodology for calculating costs of capital for valuation and capital budgeting at AES businesses in diverse locations around the world. He would
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The legislation was part of the United States government’s reaction to growing concern over American dependence on foreign oil. The act sought to diminish this dependence by requiring that electric utilities source some of their new power needs through qualified cogenerators and small independent power producers, provided that the power generated by independents cost less than if the utility were to produce the power itself. Sant and Bakke recognized that in shielding small independent power producers from costly state and federal regulation, PURPA actually created a market for a new private sector power market. In practice, the act almost ensured that independent power producers could undercut a utility’s cost of production. The company initially struggled to raise financing but after the construction of its first cogeneration facility in Houston, Texas, in 1983 and the subsequent development of a profitable cogeneration facility in Pittsburgh, Pennsylvania, in 1985, AES experienced rapid growth. By the time the company went public in 1991, revenues had grown to $330 million and net income had soared to $42.6 million from $1.6 million just three years earlier. In the early 1990s, AES began to shift its focus overseas where there were more abundant opportunities for the company to apply its nonrecourse, project finance model to the development of contracted

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