Aes Tietê: Expansion Plant in Brazil

Abstract

This case allows students to learn the principles of capital budgeting in a global context. It features a power company in Brazil that is a subsidiary of AES Corporation. A new-to-the-firm manager is assigned his first big project: to evaluate and defend the case for investing in a 500 MW thermal power plant. He must present his findings to the Global Valuation Review team, including a recommendation for the project and a bid price for the upcoming government auction. The manager must build three different valuations: a base case, an optimistic scenario, and a pessimistic scenario.

Excerpt

UVA-F-1732

Rev. Feb. 26, 2016

AES Tietê: Expansion Plant in Brazil

In late December 2013, Luiz Costa was promoted to his first leadership position as a manager in the Investment Analysis Group of AES Brasil, a subsidiary of AES Corporation. Following college, Costa joined the company's leadership development program, and in only four years he had risen quickly and was considered a high-potential executive. His first big project was to evaluate and defend the case for investing in a 500-megawatt (MW) thermal power plant to be built in the state of S©o Paulo in southeast Brazil. He would have to present his findings to the Global Valuation Review team, including a recommendation for the project and a bid price for the upcoming government auction. Because this was his first task in his new position, Costa was determined to present accurate calculations.

Electricity in Brazil

The market for energy in Brazil was huge—the country was the eighth-largest total energy consumer in the world. The Brazilian government played a substantial role in keeping the lights on in the country, controlling nearly the entire sector. When the state created the National Electric Energy Agency (ANEEL) in 1996 to help privatize electricity, some thought government regulation would lessen. Instead, the effort did little to change things, and most companies remained under government control. It wasn't until 2004 that a new model was created, dividing the sector into regulated and unregulated markets.

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Keywords: energy, capital investment, capital budgeting, utilities, bidding, risk, return, free cash flows, exchange rates, Capex, WACC, DCF