AES Corporation (AES)

AES purchased a number of foreign utility plants in Eastern Europe that produced power with technology from the 1970s. The purchases were funded with debt in 3rd world currencies that were devalued. In some cases, AES was simply given the plant because the sellers couldn't justify the capital investment required. The company reported that the plants had large amounts of unused capacity, but an industrial decline and inadequate maintenance made actual capacity significantly lower than management's estimates. In addition, management did not recognize the different operating conditions in eastern Europe. There were widespread problems with its Kazakhstan plants, including theft, sabotage, rampant alcoholism, and an unsafe, dirty plant. AES made investments in other older power production plants in Hungary and California, in each case committing to retrofitting the power generation capabilities and draining cash. By August 2001, many of the deals had soured, yet they continued making investments into new markets. Our analysis showed anemic organic growth and no change in their acquisition strategy. We originally warned our clients in our August 2000 issue.

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