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El Faro Project: Valuing an LNG Plant in Honduras

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.

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El Faro Project: Valuing an LNG Plant in Honduras

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

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

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

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

  11. Major Risks

  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 29.91% • Currency risk -5.75% • Operational risk -1.50% • Financial risk -3.00% • 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% IRR, Year 20: 26.7% IRR, Year 25: 27.1% 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: • AES announces major divestitures of Latin American interests • What will happen to the El Faro Project?

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