Globalizing the Cost of Capital and Capital Budgeting at AES

Harvard Business School Case 9-204-109

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Table A Risk Score Calculation for Lal Pir Project

Categories of Risk
Operational / Technical
Counterparty Credit / Performance
Regulatory
Construction
Commodity
Currency
Contractual Enforcement / Legal
Sum of individual scores = business specific risk score
Source: Company document (actual assessments disguised).

Weight
3.50%
7.00%
10.50%
14.50%
18.00%
21.50%
25.00%

Grade for
Lal Pir
1
1
2
0
1
2
2

Risk Scores
(grade x weight)
0.035
0.070
0.210
0.000
0.180
0.430
0.500
1.425

Exhibit 1 AES Consolidated Income Statement

Amounts in millions except per share figures
Revenues
Regulated
Non-regulated
Total revenues
Cost of sales
Regulated
Non-regulated
Total cost of sales
SG&A expenses
Severance and transaction costs
Interest expense
Interest income
Other income
Other expense
(Loss) gain on sale of investments and asset impairment
expense
Goodwill impairment expense
Foreign currency transaction loss
Equity in pre-tax (loss) earnings of affiliates
(Loss) income before income taxes and minority interest
Income tax (benefit) expense
Minority interest (income expense)
(Loss) income from continuing operations
Loss from operations of dicontinued businesses (net of
income tax benefit of $90, $10 and $5, respectively)
(loss) income before cumulative effect of accounting change
Cumulative effect of change in accounting principle
(net of income tax benefit of $72)
Net (loss) income

2002
$

2001

2000

4,317 $
4,315
8,632

3,255 $
4,390
7,645

2,661
3,545
6,206

-3,627
-3,086
-6,713
-112
-2,031
312
219
-87

-2,416
-3,052
-5,468
-120
-131
-1,575
189
116
-65

-2,093
-2,210
-4,303
-82
-79
-1,262
201
51
-52

-1,600
-612
-456
-203
-2,651
-27
-34
-2,590

18
-30
176
755
206
103
446

143
-4
475
1,294
368
120
806

-573
-3,163

-173
273

-11
795

-346
($3,509)

$273

$795

($4.81)
($1.05)
($0.65)
($6.51)

$0.84
($0.32)
$$0.52

$1.67
($0.01)
$$1.66

BASIC (LOSS) EARNINGS PER SHARE:

(Loss) income from continuing operations
Discontinued operations
Cumulative effect of accounting change
Basic (loss) earnings per share
Source: AES Corporation, 2002 Annual Report (Arlington: AES Corporation, 2003).

Exhibit 2 AES Consolidated Balance Sheet

Amounts in millions; as of December 31,
ASSETS
Cash & Equivalents
Other Short-Term Investments
Accounts Receivable
Inventory
Prepayments & Advances
Other Current Assets
Total Current Assets
Long-Term Investments
Property Plant & Equipment
Accum Depr. & Amort.
Property Plant & Equipment, Net
Goodwill/Intangibles
Other Long-Term Assets
Total Assets
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts Payable
Short-Term Debt
Curr. LT Debt and CLOs
Other Current Liabilities
Total Current Liabilities

Long-Term Debt
Total Long-Term Debt
Deferred Taxes
Other Long-Term Liabilities
Total Liabilities
Stockholders Equity
Common Stock
Additional Paid in Capital
Retained Earnings
Treasury Stock
Other Equity
Total Shareholders' Equity
Total Liabilities + Shareholders' Equity
Shares Outstanding

2002

2001

2000

1999

1998

780
211
1264
384
218
1492
4349

802
215
1137
468
215
1855
4692

950
1297
1566
569
1193
209
5784

669
164
936
307
327
184
2587

491
35
383
119
155
71
1254

194
23050
-4204
18846
1403
8984
33776

3031
21127
-3015
18112
2433
8544
36812

3122
21874
-2632
19242
2248
2642
33038

1575
14210
-763
13447
1904
1367
20880

1933
6029
-525
5504
1490
600
10781

1139

727

743

381

215

3341
2031
6511

2449
1752
4928

17684
17684
981
8941
34117

17406
17406
627
8312
31273

6
5312
-700

5
5225
2809

-4959
-341
33776
558

-2500
5539
36812
533

2462
1834
5039

17382
17382
1863
3212
27496

5
5172
2551
-507 -1679
5542
33038
509

1216
973
2570

1413
348
1976

12136
12136
1787
1750
18243

5791
5791
268
952
8987

4
2615
1120

2
1243
892

-1102
2637
20880
414

-343
1794
10781
361

Source: AES Annual Balance Sheet, December 2003, available from OneSource Information Services, <http://www.onesource.com>

Exhibit 7a AES Project Data

Business / Project

Country

Line of
Business

Andres

Dominican
Republic

CG

Caracoles

Argentina

CS

Drax
Eletropaulo
Gener

United
Kingdom
Brazil
Chile

CS
LU
CG

Haripur
Kelvin
Lal Pir

CG
CG
CG

Los Mina

Bangladesh
South Africa
Pakistan
Dominican
Republic

OPGC

India

CG

Ottana
Red Oak
Rivnoblenergo
Telasi
Uruguaiana

Italy
USA
Ukraine
Georgia
Brazil

CS
CG
GD
GD
CG

CG

Source:Company document. Project descriptions taken from http://www.aes.com/businesses/default.asp.

Project Description

Tax Rate

Debt to
Cap.

300 MW gas fired combined cycle plant currently under construction 30 km east of
Santo Domingo

25.0%

35.1%

123 MW hydroelectric power plant located on the San Juan river in western Argentina

35.0%

40.8%

0.0%
34.0%
17.0%

29.5%
30.0%
35.2%

0.0%
25.0%
23.0%

33.3%
32.9%
35.1%

25.0%

28.7%

7.9%

30.4%

35.0%
37.5%
30.0%
20.0%
34.0%

42.5%
39.5%
36.5%
26.1%
32.2%

Largest coal-fired power station in western Europe. It can produce enough electricity about 4000 MW- to meet the needs of approximately four million people
Distribution company that serves a population of 14 million in Sao Paulo
277 MW fossil fuel plant located in Tocopilla, 1500 km north of Santiago
360 MW gas turbine facility located 25 kilometers southeast of Dhaka, capital of
Bangladesh
600 MW coal fired power plant
337 MW coal fired power plant
210 MW Oil-fired facility supplying the capital city of Santo Domingo
Joint Venture with the Government of Orissa. Two 210 MW P.C. coal-fired units
Oil fired 140 MW cogeneration facility - under contracts of up to 10 years, electricity,
steam, compressed air, dematerialized water and nitrogen to three chemical facilities
adjacent to the plant
832 MW natural gas-fired plant
Distribution Company serving 380,000 customers
Distribution Company serving Tbilisi, the capital of Georgia.
600 MW gas-fired combined cycle power plant

n from http://www.aes.com/businesses/default.asp.

Commodity

Contract enf./Legal

Counterparty

Currency

Sovereign
Spread

Regulatory

Default
Spread

Operational/
Technical

EBIT
Coverage

Construction

Risk Scores

3.0x

3.57%

8.93%

3.0x

3.57%

16.25%

3.0x
3.5x
2.5x

3.57%
2.89%
4.34%

0.00%
8.93%
1.73%

2
1
-

2
3
1

3
1

2
1
1

2
3
-

3
2
2

2.5x
2.5x
3.0x

4.34%
4.34%
3.57%

5.23%
3.14%
9.90%

2
1
-

1
2

2
2

1
2
1

1
1
2

1
1

4.0x

1.85%

8.93%

3.0x

3.57%

3.60%

2.5x
3.0x
2.5x
4.0x
4.0x

4.34%
3.57%
3.57%
1.85%
1.85%

0.14%
0.00%
9.98%
9.98%
8.93%

2
2
-

1
3
3

1
2
3
3

3
3
1
3
2

3
3

2
3
2

Exhibit 7b AES Selected Financial Data

Select Financial Information
10 Year US Treasury Bond
US Risk Premium
Un-levered Equity Betas by Line of Business
Contract Generation
Large Utility
Growth Distribution
Competitive Supply
Source: Company document.

4.50%
7.00%
0.25
0.25
0.25
0.50

Exhibit 9b EBIT Coverage Ratios and Default Spreads

Credit
Rating
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3

EBIT
Coverage
Ratio
21.1x
15.1x
10.9x
8.1x
6.3x
5.2x
4.6x
4.2x
3.9x
3.6x
3.2x
2.6x
1.9x
1.0x
0.8x
0.6x
0.4x
0.1x
0.1x

Default
Spread
0.20%
0.30%
0.40%
0.60%
0.70%
0.90%
1.20%
1.50%
1.90%
2.30%
2.90%
3.60%
4.30%
5.20%
6.20%
7.40%
8.60%
10.00%
11.40%

Source: Company documents.

Exhibit 12 Project Cash Flows (in US$ millions)

Lal Pir (Pakistan) Contract Generation

Income
Revenue
EBITDA
Depreciation
Operating Profit
Interest
Taxes
Net Profit

2004
312.5
100.0
(30.6)
69.4
(44.1)
(8.8)
16.4

2005
313.6
100.4
(31.3)
69.1
(42.7)
(9.2)
17.2

2006
314.7
100.7
(31.9)
68.8
(41.1)
(9.7)
18.0

2007
315.8
101.1
(32.5)
68.5
(39.4)
(10.2)
19.0

2008
316.9
101.4
(33.1)
68.3
(37.5)
(10.8)
20.0

2009
318.0
101.8
(33.8)
68.0
(35.4)
(11.4)
21.2

Cash Flow
Operating Profit
Addback Depreciation
Maintenance CapEx
Pre-Tax, Pre-Finance Cash Flow
Interest
Principal
New Debt
Taxes
Levered Equity Cash Flow
Lev Equity Cash Flow with TV
Unlevered Cash Flow
Unlevered Cash Flow with TV

69.4
30.6
(12.5)
87.5
(44.1)
(14.2)
0.0
(8.8)
20.3
20.3
63.2
63.2

69.1
31.3
(12.5)
87.8
(42.7)
(15.5)
0.0
(9.2)
20.4
20.4
63.6
63.6

68.8
31.9
(12.6)
88.1
(41.1)
(16.9)
0.0
(9.7)
20.4
20.4
64.0
64.0

68.5
32.5
(12.6)
88.4
(39.4)
(18.4)
0.0
(10.2)
20.4
20.4
64.4
64.4

68.3
33.1
(12.7)
88.7
(37.5)
(20.1)
0.0
(10.8)
20.3
20.3
64.8
64.8

68.0
33.8
(12.7)
89.0
(35.4)
(22.0)
0.0
(11.4)
20.2
20.2
65.2
65.2

Capitalization
Initial PP&E
Goodwill
Accum Depreciation
Total Assets
Debt
Equity
Total Capital

612.5
22.4
(30.6)
604.3
416.5
187.8
604.3

625.0
22.4
(61.9)
585.6
401.0
184.6
585.6

637.6
22.4
(93.8)
566.3
384.1
182.1
566.3

650.3
22.4
(126.3)
546.4
365.7
180.7
546.4

662.9
22.4
(159.4)
525.9
345.6
180.3
525.9

675.7
22.4
(193.2)
504.9
323.6
181.3
504.9

note: values disguised

Source: Company document.

2010
319.1
102.1
(34.4)
67.7
(33.2)
(12.1)
22.4

2011
320.2
102.5
(35.1)
67.4
(30.7)
(12.9)
23.9

2012
321.4
102.8
(35.7)
67.1
(28.0)
(13.7)
25.4

2013
322.5
103.2
(36.3)
66.8
(25.0)
(14.6)
27.2

2014
323.6
103.6
(37.0)
66.6
(21.8)
(15.7)
29.1

2015
324.7
103.9
(37.6)
66.3
(18.2)
(16.8)
31.3

2016
325.9
104.3
(38.3)
66.0
(14.3)
(18.1)
33.6

2017
327.0
104.6
(39.0)
65.7
(9.9)
(19.5)
36.2

2018
328.2
105.0
(39.6)
65.4
(5.2)
(21.1)
39.1

2019
329.3
105.4
(40.3)
65.1
0.0
(22.8)
42.3

67.7
34.4
(12.8)
89.4
(33.2)
(24.1)
0.0
(12.1)
20.0
20.0
65.7
65.7

67.4
35.1
(12.8)
89.7
(30.7)
(26.4)
0.0
(12.9)
19.7
19.7
66.1
66.1

67.1
35.7
(12.9)
90.0
(28.0)
(29.0)
0.0
(13.7)
19.3
19.3
66.5
66.5

66.8
36.3
(12.9)
90.3
(25.0)
(31.8)
0.0
(14.6)
18.9
18.9
66.9
66.9

66.6
37.0
(12.9)
90.6
(21.8)
(34.9)
0.0
(15.7)
18.3
18.3
67.3
67.3

66.3
37.6
(13.0)
90.9
(18.2)
(38.3)
0.0
(16.8)
17.6
17.6
67.7
67.7

66.0
38.3
(13.0)
91.2
(14.3)
(42.1)
0.0
(18.1)
16.8
16.8
68.2
68.2

65.7
39.0
(13.1)
91.6
(9.9)
(46.2)
0.0
(19.5)
15.9
15.9
68.6
68.6

65.4
39.6
(13.1)
91.9
(5.2)
(50.8)
0.0
(21.1)
14.8
14.8
69.0
69.0

65.1
40.3
(13.2)
92.2
0.0
(0.0)
0.0
(22.8)
69.4
69.4
69.4
69.4

688.4
22.4
(227.6)
483.2
299.4
183.8
483.2

701.2
22.4
(262.7)
461.0
273.0
187.9
461.0

714.1
22.4
(298.4)
438.1
244.1
194.1
438.1

727.0
22.4
(334.7)
414.7
212.3
202.4
414.7

739.9
22.4
(371.7)
390.6
177.4
213.2
390.6

752.9
22.4
(409.4)
365.9
139.1
226.8
365.9

766.0
22.4
(447.7)
340.7
97.0
243.6
340.7

779.0
22.4
(486.6)
314.8
50.8
264.0
314.8

792.2
22.4
(526.2)
288.3
(0.0)
288.3
288.3

805.3
22.4
(566.5)
261.2
(0.0)
261.2
261.2

2020
330.5
105.7
(40.9)
64.8
0.0
(22.7)
42.1

2021
331.6
106.1
(41.6)
64.5
0.0
(22.6)
41.9

2022
332.8
106.5
(42.3)
64.2
0.0
(22.5)
41.8

2023
333.9
106.9
(42.9)
63.9
0.0
(22.4)
41.6

64.8
40.9
(13.2)
92.5
0.0
(0.0)
0.0
(22.7)
69.8
69.8
69.8
69.8

64.5
41.6
(13.3)
92.9
0.0
(0.0)
0.0
(22.6)
70.3
70.3
70.3
70.3

64.2
42.3
(13.3)
93.2
0.0
(0.0)
0.0
(22.5)
70.7
70.7
70.7
70.7

63.9
42.9
(13.4)
93.5
0.0
(0.0)
0.0
(22.4)
71.1
71.1
71.1
71.1

818.6
22.4
(607.4)
233.5
(0.0)
233.5
233.5

831.8
22.4
(649.0)
205.2
(0.0)
205.2
205.2

845.1
22.4
(691.3)
176.3
(0.0)
176.3
176.3

858.5
22.4
(734.2)
146.7
(0.0)
146.7
146.7