AES Corporation Business Review - Capstone Project Example

of Capstone Project AES Corp. Business Review Information [Pick the AES Corp. is a global company involved in electricity generation and distribution business. It operates in 27 countries across 5 continents. As of December 2011, AES owns and operates 33,800 MW of generation capacity and serves 12 million consumers through its distribution companies. In 2011, AES Corp (AES : NYSE) had revenues of $17.8 billion. Mission As a global power company, AES is dedicated to improving lives by providing safe, reliable and sustainable energy solutions in every market it serves and continuously creating value for its shareholders. Vision Over the last two years, AES has seen a transformation in its vision. Recent change in leadership as well as efforts to counter the effects of global economic challenges are shaping the Companys vision. In the recent 10-K filing, the Company describes its vision as: "Our goal is to maximize value for our shareholders by growing cash flow and earnings per share and achieving better returns on our investments. We will expand our platforms in our core markets, specifically Brazil, Chile, Colombia and the United States, and will work to develop growth platforms in key markets including Turkey, Poland and the United Kingdom. Over time, by focusing our growth and exiting select non−strategic markets, we expect to narrow our geographic focus to achieve better results with fewer countries. Across our portfolio, we will work to optimize profitability, as well as reduce our overhead and business development costs" (AES Corp, 2012, p. 3) Primary Stakeholders Management AES has a strong and industry-respected management team. The fact is evident by a recent smooth change in leadership. The current CEO Andres Gluski took over the leadership of this global company without much difficulty when the last CEO Paul Hanrahan decided to leave after a long and celebrated tenure. Similarly, the Companys Group CFO and President of Global Services Group Victoria Harker also recently decided to move on. The Companys recent financial performance despite these changes exemplifies a strong culture and business management acumen. Shareholders, The Market and the Board of Directors The Board of Directors has 11 members with vast industry and global business experience. Mr. Philip Odeen is the current Chairman of the Board and has been serving in this position since 2003. AES Corporation (Symbol AES) trades on NYSE. As of May 25, 2012, AES closing share price was $12.55 and a market capitalization of $9.63 billion (Yahoo Finance, 2012). The Company currently does not pay dividends but has shown an intent of doing so in 3Q 2012 (AES Corp., 2012). The Company regularly holds investor road shows and shareholder meetings. Customers As of December 31, 2011 AES has a customer base of 12 million people. Majority of the customers are served through its Utility Business. For the Generation business, the customers include regional utilities and other government-owned distribution companies. Regulators Electricity generation and distribution business around the world is a highly regulated sector with a strong influence of local government agency, referred to as Regulators. The mandate of these regulators, as given by the respective governments, is to secure customers interest and provide the independent power producers (IPP) and Utility operators a conducive environment for business. Lenders and Financiers Electricity generation and distribution business, similar to other sectors within the energy industry, is highly capital intensive. This means that most energy companies require high leverage in order to finance business growth. Most of this finance comes from Lenders and Financiers, which are generally large banks and governments. These entities have a strong influence on growth and development of electricity producing companies like AES Corp. Porters Five Forces Analysis In the following section, forces that affect and shape the electricity generation & distribution are analyzed according to the Porters Five Forces Analysis model. Rivalry Among Existing Competition Within industry competition does not seem to be very strong. AES generally faces some challenge during the initial period of starting in a new region or a new power generation facility but there is not much competition in existing or established business areas (AES Corp, 2012, p. 5). One reasonable explanation could be that the Generation Business or Independent Power Producers, also referred to as IPP, generally have long term Power Purchase Agreements with the distribution companies. The duration of these agreements with Take-or-Pay nature can be 10 to 15 years. Similarly, in the Distribution Business, the utilities are mostly regional monopolies. Bargaining Power of Buyers For AES Generation business, the buyers have a strong influence in determining the rate at which they off-take power from AES. However, the Utility business has general population as customers, who are protected by the Regulators. The Regulators also have a strong influence on the business of AES. Bargaining Power of Suppliers Main suppliers for AES are the fuel supplying companies which provide coal, natural gas and other fuels for electricity generation. Generally, this side of the business is secured through long term Fuel Supply Agreements (FSA). However, companies like AES are strongly susceptible to fuel price variations. Threat of New Entrants Entry into electricity generation and distribution is highly capital intensive as well as mostly regulated. The inherent monopolistic nature of utility business also diminishes the risk of new entry. Threat of Substitutes Recently, renewable energy sources have fast grown in to energy industry as a substitute to the traditional carbon-fuel based energy sources. However, the sources still continue to be expensive in contrast to coal and natural gas. In near future, the threat from these substitutes is likely to increase. By 2030, it is predicted that almost 8-14% of electricity produced in US will be from renewable sources (Energy Information Agency, EIA). SWOT analysis Table 1 SWOT Analysis of AES Corp. Strengths Weaknesses Global presence and strong industry experience Diversified energy mix and generation portfolio Long term Power Purchase Agreements (PPA) which guarantee revenues and cash flow Ability to turnaround and manage assets High leverage or level of Indebtedness Dependence on subsidiaries for payments Opportunities Threats Expanding operations in core markets Increasing demand for electricity in its core markets Foreign currency fluctuations and foreign risk Increasing competition in core markets Environmental regulations in North America and Europe Strengths As of December 31, 2011 AES operates across 5 continents in 27 countries. It has a total electricity generation capacity of around 33, 800 MW while an additional 2,100 MW is under construction. It serves 12 million customers through its utilities in 13 countries in regions like US, South America, Europe and Asia. AES has one of the post diverse energy mix in the industry. Energy Mix refers to the different sources of energy which a company employs to produce electricity. As of 2011, AES produces 37% of electricity from Natural Gas, 30% from coal, 28% from renewable and remaining from other different sources. This helps mitigate the risk of fuel supply and prices in different regions Almost 73% units of electricity produced by AES are sold under long-term Power Purchase Agreements. These PPA contracts secure future revenues for AES. One element of AESs competitive strategy includes portfolio and asset management. The Company has consistently demonstrated its ability to identify and acquire underperforming assets, turn them around and sell at considerably high valuation. In 2011, AES created opportunities of $890 million through this strategy. Weaknesses Historically AES has had a higher leverage in comparison to other similar companies. AES has used these funds to drive strong growth. However, recently in view of the current economic crisis, AES is trying to change its leverage situation to a more reasonable position by consistently paying back its outstanding debt. Current plan show that the Company is aiming at Recourse Debt to Subsidiary Contributions of a 4.4 and Credit Worthiness of BB by 2012 (AES Corp., 2012). AES Corp.s annual revenues depend on the subsidiary contributions and revenues. AES Corp. has very little contractual control over independent contributions from these subsidiaries. Opportunities AES is quickly changing its position in its strong geographical markets of NA and SA. It is creating long term opportunities by investing and developing strong distribution companies. Acquisition of Dayton Power & Light (DPL) in Mid-West is an example of this strategy. Demand for electricity is expected to continue to increase at 1.5% CAGR between 2010-2035 (Energy Information Agency, EIA, 2011). AES strong position in LA markets is a great opportunity as these market are expected to grow at very high CAGR because emerging economy led by countries like Brazil (BP, 2011). Threats Because of its global operations and dependence on contributions from its subsidiaries, AES is susceptible to foreign currency exchange rates. AES provides its sensitivity to this factor in all its guidance and financial performance reports. Due to growing environmental awareness and stricter environmental regulations in the NA and European countries, AES and other energy companies are facing some risks. One aspect specially of concern is growing concern on CO2 emissions from coal-fired power plants. AES is aggressively changing its energy mix to gas-based generation to avert this risk. Recommendations for AES Some broad recommendations for AES in light of the above SWOT analysis are as follows: Improve Debt to Equity ratio (leverage position) to more sustainable levels by paying back outstanding debt Continue to pursue its strategy of stock buyback. The performance of this program in 2011and sustained stock price demonstrates the confidence of market in AESs strategy and operational performance Develop strong investment plans in natural gas based generation in NA market. The current spot price of natural gas ( 3-month average of $2.2 /mmBTU) and future outlook will drive strong investment in this market. Manage risk in European market: The economic condition in Europe is uncertain. Situation is still unfolding and 2012 will be critical in this regard. AES like many other global companies will like to manage their risk in this European markets. Levels and types of strategies the firms use to maximize competitiveness and profitability Choosing market which allow position of strength In context of our discussion of AES and its performance over the years, we see that it continually reviews its strategy and market position and chooses markets which allow a position of strength. In early 2000s, when US economy was strong, AES chose to follow aggressive growth in international markets. However, in view of recent challenging environment after 2008, it is optimizing its investments and rationalizing geographical footprint. Selective Portfolio Management One element of AESs competitive strategy includes portfolio and asset management. The Company has consistently demonstrated its ability to identify and acquire underperforming assets, turn them around and sell at considerably high valuation. In 2011, AES created opportunities of $890 million through this strategy. Organizational Restructuring in order to manage operational costs AES in 2011 launched an ambitious plan of organizational restructuring in order to reduce operational and management costs as well as improve decision making process. AES completed this plan and the gains were evident in its 2011 financials. The idea was to move from a regional organizational focus to a more operational focus. Prior to 2011, AES Subsidiaries reported to Corporate on geographical market. Now, Generation companies are grouped under a Generation Portfolio reporting to a COO Generation while all Distribution Companies report to COO Distribution. This organizational change is believed to have contributed $100-150 million in saving in 2011. Recent Corporate Governance Issue In 2011, AES completed a successful succession at top level. AES CEO Paul Hanrahan, who had been the CEO since 2000, chose to move on and COO SA Andres Gluski took over the top position (CityBizList, 2011). Generally, CEO transition at top level in corporations of this size effects profitability and market valuation, for example market has strong concerns about long term profitability of Apple Inc. after the death of Steve Jobs (Stammers, 2012). However, AES success as a strong performer demonstrates that mature organizations manage this critical Corporate Governance Issue successfully. References AES Corp. (2012). AES Corp 10-K Filing to SEC. AES Corp. AES Corp. (2012, May). AES Investor Road Show Presentation. BP. (2011). Energy Outlook. BP . CityBizList. (2011, September 6). Andrés Gluski Replaces Paul Hanrahan as CEO of AES. CityBizList. Energy Information Agency, EIA. (2011). 2011 Energy Outlook. EIA. Stammers, R. (2012, March 14). Can Apple Keep Climbing Without Jobs? Forbes. Yahoo Finance. (2012, May 12). Yahoo Finance. Retrieved May 27, 2012 Read More