El Faro Project: Valuing an LNG Plant in Honduras

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Presentation transcript:

El Faro Project: Valuing an LNG Plant in Honduras Stan Brunson Rachel Fefer Andrew Frankel Carlos Sanchez Emerging Markets Corporate Finance Prof. Campbell Harvey Fuqua School of Business, Duke University Term 3, 2002

Case Issue Senior investment advisors Carlos Garcia and Stan Johnson must decide… Should United Energy invest $25 million for an equity stake in a Central American power plant project?

Agenda Background Key Parties Project Overview Financials Case Discussion Project Valuation and Decision Update

Background Honduras Pro-market Stanford-educated President Central American electricity market currently fragmented Puebla-Panamá Plan for regional wholesale electricity market $240 million IDB financing support

Key Parties AES IFC Export Credit Agencies U.S. power company International experience Equity holder – offering 12.5% stake IFC A-loans B-loans Export Credit Agencies

Project Overview $650M: largest project ever in Central America Construction of LNG power plant in El Faro, Honduras Capacity to grow in stages Upgrade to existing transmission line Electricity to be sold below existing market rates to Honduras, El Salvador, Nicaragua, Guatemala, Costa Rica

Power Transmission Upgrade Project Integration Puebla-Panamá Plan $240M investment El Faro Project $650M investment El Faro Site Power Transmission Upgrade

El Faro Site 1-Steam Turbine 3-LNG Turbines Storage Facility Terminal Artist’s Rendition 1-Steam Turbine 3-LNG Turbines Storage Facility Terminal El Faro

Sources and Uses of Cash Financials $140M A-loans $150M B-loans ECA $200M Equity $621.5M CAPEX Working Capital El Faro Project Sources and Uses of Cash Sources Uses $650MM Operations Costs: LNG at NYMEX spot Revenue: $0.05 per kWh base, which fluctuates with LNG spot price

Case Discussion Should United Energy invest in this project? How should Carlos and Stan value this investment opportunity?

Major Risks Risk Mitigation Operational Completion AES experience Natural gas price volatility Some hedging in tariff structure Sovereign Currency USD denominated Expropriation IFC involvement Financial Cost of debt

Natural Gas Spot Price

Cost of Capital Calculation Use ICCRC to calculate a blended country risk to reflect exposure to multiple countries Adjust for idiosyncratic risks Composite risk 29.91% Currency risk -5.75% Operational risk -1.50% Financial risk -3.00% El Faro cost of capital 19.66%

Project Valuation and Decision IRR Project valuation: Monte Carlo analysis Real options Sensitivity analysis United Energy recommendation

IRR, Static Results IRR, Year 10: 18.6% IRR, Year 15: 25.3% Cost of Capital: 19.66%

Monte Carlo Results LNG price modeled in 10-50-90 distribution Abnormal Earnings Model NPV positive project

Real Options Static Model Best Outcome Build LNG 2 and LNG 3 on time

Sensitivity Analysis Terminal Growth Rate Not sensitive

Recommendation We recommend investment in this project NPV positive given electricity pricing fluctuates with LNG spot price. Static IRRs higher than cost of capital, except for IRR at year 10. Even with construction delays or change to capacity built, project NPV positive.

Update February 19, 2002: What will happen to the El Faro Project? AES announces major divestitures of Latin American interests What will happen to the El Faro Project?