Published on October 22, 2007
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: 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: Agenda Background Key Parties Project Overview Financials Case Discussion Project Valuation and Decision Update Background: 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: Key Parties AES U.S. power company International experience Equity holder – offering 12.5% stake IFC A-loans B-loans Export Credit Agencies Project Overview: 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 Project Integration: Project Integration El Faro Site Power Transmission Upgrade El Faro Project $650M investment Puebla-Panamá Plan $240M investment El Faro Site: El Faro Site Artist’s Rendition 1-Steam Turbine 3-LNG Turbines Storage Facility Terminal El Faro Financials: Financials Case Discussion: Case Discussion Should United Energy invest in this project? How should Carlos and Stan value this investment opportunity? Major Risks: Major Risks Natural Gas Spot Price: Natural Gas Spot Price Cost of Capital Calculation: 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: Project Valuation and Decision IRR Project valuation: Monte Carlo analysis Real options Sensitivity analysis United Energy recommendation IRR, Static Results: 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% Monte Carlo Results: Monte Carlo Results Abnormal Earnings Model NPV positive project LNG price modeled in 10-50-90 distribution Real Options: Real Options Best Outcome Build LNG 2 and LNG 3 on time Static Model Sensitivity Analysis: Sensitivity Analysis Terminal Growth Rate Not sensitive Recommendation: 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: Update February 19, 2002: AES announces major divestitures of Latin American interests What will happen to the El Faro Project?