AES Corp. CEO Dennis Bakke last week became the latest top executive in the energy business to call it quits. The AES board elected Paul T. Hanrahan as president and CEO effective immediately, and Hanrahan went right to work, promising significant additional steps to restructure AES’ global power operations in order to restore investor confidence.

Hanrahan said the steps, which will include asset and equity sales and further cost cutting, are designed to get AES bonds trading at par and to make AES an investment grade company in four years for the first time in its history.

Bakke, who co-founded AES in 1981, will remain on the board and has been given the title of co-founder and emeritus CEO. He joins an exodus of top trading executives, including Dynegy CEO Chuck Watson and CFO Rob Doty (see related story), CMS Energy Chairman William T. McCormick Jr., NRG CEO and Chairman David H. Peterson, NRG Executive Vice President and CFO Leonard A. Bluhm, and the top two trading executives at Reliant, Joe Bob Perkins and Shahid J. Malik.

“The entire power sector has undergone a crisis of confidence, and investors are demanding change. Although AES has grown a great deal during my tenure, it became clear to me that this is a time for a new CEO,” Bakke said. “Different times require different leaders.”

Hanrahan, who has been executive vice president and COO and has held various executive positions at the company over the past 15 years, said his immediate priorities include “vigorous strengthening of the AES balance sheet, improving liquidity, reducing operating expenses, and resolving our significant issues in South America in a way that is most beneficial for AES shareholders. We will enjoy some growth in the next few years from de-levering, cost cutting, and completion of projects currently in construction.”

During a web cast last Wednesday, a day after Bakke resigned, Hanrahan said the company planned to reduce debt by another $1 billion in addition to the $1 billion already announced. “We’re going to do that through asset sales or equity sales and do it in the same time frame by 2003,” he said.

“We believe these steps are what are needed to restore credibility, but we are going to go further once we’ve gotten to that point,” he added. “We are going to continue to dedicate a substantial portion of our cash flows to delever the company. Our goal is that within three or four years, we are going to be an investment grade company. It will be a first in the history of AES to be an investment grade company but we are committed to that.”

Hanrahan said the company also intends to go beyond the $200 million in cost cuts that it already promised. In addition, it intends to fix the continuing problems with its South American utility operations. “We are going to resolve the regulatory problems, particularly in Brazil,” he said, “but we’re also going to be looking at a number of strategic alternatives that can help maximize shareholder value. That would include the possibility of selling or spinning off assets.”

He said AES plans to have a road show for investors in August to provide additional details on its restructuring plans. AES also will make an effort to add clarity to its reported financials. “We are going to do whatever it takes to regain our position as a premier global power company.”

Bakke, 55, who also participated in the web cast, admitted that the economic performance of AES “has been terrible in this past year and as its leader I take fully responsibility, and this decision to leave comes from that.” He said that while he was proud of the company’s accomplishments, he also recognizes that AES needs to have a change of leadership. “The world has changed, especially for our industry, and AES needs to adjust to a new way of life,” said Bakke, adding that he was more of a visionary leader and what AES really needs now is “more discipline, accountability, control and efficiency.”

The company, which has businesses in 32 countries, agreed in April to sell its Illinois utility, Cilcorp, to Ameren Corp. for $1.4 billion (see NGI, May 6). Earlier this month, the company sold NewEnergy to Constellation Energy for $240 million (see NGI, June 17). These transactions came after the company announced in February that it would cut expenses 41%, exit the power trading business and distance its exposure to the political and economic instability in South America (see NGI, Feb. 25).

AES is the world’s largest independent power company with operations in 33 countries. At the end of 2001, AES had $37 billion in assets, $9.3 billion in revenues, $727 million in net income and $1.35/share in earnings.

While AES’ share prices rose initially following the news, the stock quickly reversed course, continuing downward on Friday to $4.64 by midday. Its 52-week high is $44.50.

Despite the restructuring plan, Morningstar analyst Harry Milling urged investors to “avoid AES stock — no matter who is charge of the company.”

“AES is still in the midst of a complex restructuring of its balance sheet, which includes paying off some of its hemorrhaging debt,” Milling noted. “At this point, we are unable to predict the success or failure of the restructuring plan. Thus, we think assigning any fair value to AES shares would be too speculative to be meaningful.”

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