Globalizing the Cost of Capital and Capital Budgeting at AES (Case Analysis)
AES was founded by Roger Stan and Dennis Bakke in 1981 after the Public Utility Regulation Policy Act (PURPA), which created a market for independent power producer. In 1980s, the company experienced rapid growth in United States and went into public in 1991. From early 1990s, AES began to explore offshore markets and made remarkable success. In the 12 years since it went public, AES has hold more than $33 billion assets across 30 countries and 5 continents. Heavily affected by the global economic turndown in 2000, AES created the Corporate Analysis & Planning group to revalue assets with new method of the cost of capital. Globalization of AES and Business Lines
After founded in 1981, AES constructed its first cogeneration facility in Houston, Texas, in 1983, followed by constructions in Pittsburgh, Pennsylvania in 1985. During the 1980s, AES expanded rapidly with major growth within the US. AES initiated its international expansion in 1991-1992, in which time it purchased two plants in Northern Ireland. Subsequently, subsidiaries were also created in Latin America and China. By 1998, estimated 80% to 85% of its capital were invested in foreign countries including Australia, Canada, India, Mexico, etc. By 2002, AES has successfully globalized and became the industry leader which owned four separate lines of business. Among these business lines, Contract Generation (CG) business enables the company to stabilize its output and input prices through locking in long-term contracts. Competitive Supply (CS) business, on the other hand, allowed the company to sell electricity directly to customers through short-term contracts and volatile daily spot prices. Conversely, Large Utilities (LU) business was located in three countries and exposed to local government regulations. Growth Distribution (GD) business line mainly focused on developing markets with...
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