1. 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

2. 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?

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

4. 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

5. 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

6. 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

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

8. 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

9. 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

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

11. 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

12. Natural Gas Spot Price

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

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

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

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

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

18. Sensitivity Analysis
Terminal Growth Rate
Not sensitive

19. 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.

20. 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?