Globalizing the Cost of Capital and Capital Budgeting at Aes?

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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 need more than his considerable daily dose of caffeine to point himself in the right direction. Much of AES’s expansion had taken place in developing markets where the unmet demand for energy far exceeded that of more developed countries. By 2000, the majority of AES revenues came from overseas operations; approximately one-third came from South America alone. Once a critical element in its recipe for success, the company’s international exposure hurt AES during the global economic downturn that began in late 2000. A confluence of factors including the devaluation of key South American currencies, adverse changes in energy regulatory environments, and declines in energy commodity prices conspired to weaken cash flow at AES subsidiaries and hinder the company’s ability to service subsidiary and parent-level debt. As earnings and cash distributions to the parent started to deteriorate, AES stock collapsed and its market capitalization fell nearly 95% from $28 billion in December 2000 to $1.6 billion just two years later. As one part of its response to the financial crisis, AES leadership created the Corporate Analysis & Planning group in order to address current and future strategic and financial challenges. To begin the process, the CEO and board of directors asked Venerus, as director of the new group, to revalue the company’s existing assets, which required creating a new method of calculating the cost of capital for AES businesses. Central to the questions facing Venerus was the international scope of AES, as he explained: “As a global company with operations in countries that are hugely different from the U.S., we need a more sophisticated way to think about risk and our cost of capital around the world. And, frankly, the finance textbooks aren’t that helpful on this subject.” The mandate from the board of AES to create a new methodology presented an interesting but overwhelming challenge. As he prepared his materials for the board, Venerus wondered if his new approach would balance the complexities of the unique business situations around the world with ____________________________________________________________

Professor Mihir Desai and Research Associate Doug Schillinger prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


Globalizing the Cost of Capital and Capital Budgeting at AES

the need for a simple, straightforward process that could be implemented accurately and consistently throughout the organization.

AES Corporation1
Roger Sant (MBA ’60, HBS) and...
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