When Bad Things Happen to Good Companies

AES was the anti-Enron of the energy business—socially responsible, moral, earnest. That hasn’t stopped its decline.

Enron’s collapse provoked—at least in those who didn’t own stock—a delightful case of schadenfreude. It was pleasant to watch the humiliation of Enron’s mean, bullying executives—see CEO Jeffrey Skilling—as its arrogant corporate culture imploded.

But how to interpret the humbling of once-mighty utility AES Corp., which was in many ways the anti-Enron? Founded in 1981 by Dennis Bakke and Roger Sant, the massive utility had an anti-capitalist corporate culture—its core values included “fun.” When it went public in 1991, AES explicitly stated that service and social responsibility were more important than profits. And despite its hippy-dippy worldview, AES grew to be one of the largest global utilities in the ‘90s. The soaring stock turned its founders into billionaires.

But AES has crashed and burned just as surely as the utilities, such as Enron and Dynegy, run by craven, greedy executives. In the end, the company’s I’m-OK-you’re-OK management philosophy and blasé attitude toward planning left it overextended, over-indebted, and overexposed to some of the world’s most notoriously volatile markets.

In the beginning, AES’s founders created a company that would oppose the basic model of modern capitalism. “All of us who had been in government together saw business repeatedly fight any socially responsible thing every step of the way,” said Sant, who headed the Office of Conservation and the Environment in the Federal Energy Administration in the ‘70s. “We knew we wanted to be different.”

Sant had met Bakke at the Federal Energy Administration. In 1981, intent on stimulating both conservation and energy production, they raised $1.2 million and formed AES. At AES, values and social responsibility were intended to trump profits. When AES built a coal-fired plant in Hawaii, for example, it gave $2 million to help conserve 225 square miles of forest in Paraguay. When AES went public, its prospectus stated: “If the Company perceives a conflict between [its] values and profits, the Company will try to adhere to its values—even though doing so might result in diminished profits or foregone opportunities.” SEC lawyers suggested that the language be included in the “Risk Factors” section.

This social responsibility wasn’t simply a pose. Each year, AES surveyed employees to measure how well the company was sticking to its core values and based compensation for top executives in part on the results. In 1992, when the company was fined $125,000 after workers at the company’s Shady Point, Okla., plant falsified emissions reports, Sant and Bakke cut their own annual bonuses by more than half.

AES’s reputation came in handy when entering markets that were traditionally suspicious of large U.S. companies. In the early ‘90s, AES expanded into Latin America. Later in the decade it pressed into China, Pakistan, Kazakhstan, Hungary, and a score of other Second- and Third-World countries. At a press conference in Brazil, Bakke, who became the sole CEO when Sant stepped down at the end of 1993, brought a picture of Mother Teresa “to illustrate what I meant by serving.” Profits, he told Business Week, “are in fact not the goal of the company, but they are the just and fair reward that needs to be paid to investors who invest in your enterprise.”

As late as 1999, AES claimed to have no central business strategy, yet it continued to enjoy tremendous growth. That year it started or bought plants in New York, Panama, Brazil, Venezuela, and Mexico. In 2000, AES purchased Indiana utility IPALCO in a deal worth more than $2 billion.

AES’s revenues soared from $635 million in 1996 to $3.252 billion in 1999 and doubled to $6.7 billion in 2000. When the stock peaked at $70 in October 2000, the stakes of those reluctant capitalists, Sant and Bakke, were worth $2 billion and $1.7 billion, respectively. AES was poised to become the largest private generator of electricity on the planet.

But things started to go badly in the new millennium. AES was overly reliant on the dominant positions it had built in Latin America. In 2001, Latin America provided 51 percent of the company’s pretax earnings. And so the devaluations in Argentina and Brazil, the strife in Venezuela, and the general deterioration of the region’s economy took a heavy toll on the parent company. AES found that its good citizenship couldn’t spare it from emerging-market politics or the obligation to meet debts. Its Brazilian unit has, for example, missed debt payments to Brazil’s national development bank.

Nor did domestic markets provide a buffer. Even though AES was not involved in the energy-trading scandals or the California energy crisis, its U.S. operations were still damaged by the problems of confidence, surplus supply, and botched deregulation that have ravaged the industry. The debt that AES took out to finance its expansion was sapping more and more of the company’s revenues. In 2002, interest payments of $1.7 billion would eat up virtually all operating income. AES’s fuzzy, warmhearted overexpansion proved just as foolhardy as Enron’s mendacious, aggressive strategy.

The post-Enron meltdown cost Bakke much of his fortune as the stock slid from $70 to the single digits. And last June it cost him his job.

Bakke’s successor, a company veteran named Paul Hanrahan, is now engaged in a triage operation. The company has been restructured into two broad units, instead of the decentralized regional organization that Bakke had championed. And AES is furiously writing off or selling assets. The cause of management has suddenly morphed from instilling values to instilling financial discipline. Enron’s casualties may be doing their own gloating now: In this energy industry collapse, it doesn’t matter if you’re a saint or a scumbag.