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Using the approach developed by Venerus calculate the cost of capital for Kelvin project in South Africa. (You can find all the necessary information in exhibits 7a, 7b, 8. 9a, 9b, 10 and 11, assume that EBIT coverage ratio is 2.6X. You should also include WACC adjustments for Unsystematic risk) AES case study
Line of Business EBIT Tax Rate Debt to Cap. Coverage Default Spread Sovereign Spread Constructie Operation/ Technical Regulatory Currency Counterpa Contract er Legal Commodit Business/Project Country Project Description Andres Dominican Republic CG 300 MW gas fired combined cycle plant currently under construction 30 km east of Santo Domingo 25.0% 35.1% 3.0x 3.57% w 8.93% Caracoles Argentina CS 123 MW hydroelectric power plant located on the San Juan river in western Argentina 35.0% 40.8% 3.Ox 3.57% 16.25% 3 2 2 2 - 2 1 Drax United Kingdom CS 0.0% 29.5% 3.0x 3.57% 0.00% . 2 2 . 2 2 3 Largest coal-fired power station in western Europe. It can produce enough electricity - about 4000 MW- to meet the needs of approximately four million people Eletropaulo Brazil LU Distribution company that serves a population of 14 million in Sao Paulo 34.0% 30.0% 3.5x 2.89% 8.93% Gener Chile 17.0% 277 MW fossil fuel plant located in Tocopilla, 1500 km north of Santiago 35.2% 2.5x 4.34% Haripur Bangladesh CG 0.0% 360 MW gas turbine facility located 25 kilometers southeast of Dhaka, capital of Bangladesh 33,3% 2.5x 4.34% 5.23% Kelvin South Africa CG 600 MW coal fired power plant 25% 32.9% 2.5x 4.34% 3.14% 1 - - 1 1 2 2 2 2 1 1 2 . 1 Lal Pir Pakistan CG 337 MW coal fired power plant 23% 35.1% 3. Ox 3.57% 9.90% Los Mina CG 210 MW Oil-fired facility supplying the capital city of Santo Domingo Dominican Republic 25.0% 28.7% 4.0x 1.85% 8.93% OPGC India 7.9% 30.4% Joint Venture with the Government of Orissa. Two 210 MW P.C. coal-fired units 3.0x 3.57% 3.60% Ottana Italy CS 35.0% 42.5% 2.5x 4.34% 0.14% Oil fired 140 MW cogeneration facility - under contracts of up to 10 years, electricity, steam, compressed air, dematerialized water and nitrogen to three chemical facilities adjacent to the plant Red Oak USA 37.5% 39.5% 3.0x 3.57% 0.00% 1 2 . 3 . 2 Rivnoblenergo 30.0% 36.5% 2.5x 3.57% 9.98% CG GD GD CG 832 MW natural gas-fired plant Distribution Company serving 380,000 customers Distribution Company serving Tbilisi, the capital of Georgia 600 MW gas-fired combined cycle power plant Telasi 9.98% Georgia Brazil - . 2 . 3 3 3 3 3 2 3 3 3 2 Uruguaiana 34.0% 322% 4.0x 1.85% 8,93% Source: Company document. Project descriptions taken from http://www.aes.com/businesses/default.asp. Exhibit 9a ERIT Coverage Ratics and Default Spreads - - Corsoge Ratio -Default Spread S ydec. 21-100 Cloballing the Color Caprand Cap AS Exhibit 9b ERT Coverage Ratics and Default Spreads Credit Rating FRIT Cove Ratio Default Speed 21.1x 15. 1x 02% 0.3% Aat 055 0.7% 09% 52 125 42 3.9 1599z22111a11saa 113 15% 1.9% 23% 29% 2169 43% 32 1 Ox OB 5.2% 745 Caat Otx 100% Caa 114 S Comme A 3 p pe 000 angunan ad asb pou SPEE MAC DO ay for proceny - roots D compra y re Tverster od PRIROMA UMNO SOMAL engan de PC Garde d Drag D ap DO Exhibita AES Project Data Yan pandemos Ana OVOC Globaling the Cost of Capital and Capitaluring at AES Exhibit AES Selected Financial Data Select Financial Information 45% 7.00% 10-Year U.S. Troury Bond US Risk Premium Unluste Equity Bites by Line of Business Contract Generation Large Unity Growth Distribution Competitive Supply 0.25 SC Exhibit 8 Summary of WACC Calculations for AES Step Required Information Approche . 1. Calcuinto unlovered equily beta Batas at comparable US companies Unlover and overage equity bates for comparables in each Als line of business 2. Auluver quity batas at targul capital structure . Taigat capitalization to Estimated by projecting cash flow calculate desired EBIT Goverage . Risk-froe rate 2. Calculato cost of equity for each AES business 10-Year U.S. Transury Note Longterm avg difference between S&P 500 and US TOUTES Equity risk prerrium Releverd equity beta Risk-free rate Detauit spread 4 Calculate the cost of 10-Year US Treasury Note Observed relationship between EBIT coverage ratios for comparable companies and their costs of debt . LOS version orgad 5. Add country specific rok to the cost of debt and cost of equy The ditorence between local govement denominated bond yields and the corresponding US Treasury Nato Sour Country Gualting the C Caplualul Capital Marting at AES 201-10 Exhibit %a EXIT Coverage Ratics and Default Spreads Exhibit 9a ERIT Coverage Ratics and Default Spreads - - Corsoge Ratio -Default Spread S ydec. 21-100 Cloballing the Color Caprand Cap AS Exhibit 9b ERT Coverage Ratics and Default Spreads Credit Rating FRIT Cove Ratio Default Speed 21.1x 15. 1x 02% 0.3% Aat 055 0.7% 09% 52 125 42 3.9 1599z22111a11saa 113 15% 1.9% 23% 29% 2169 43% 32 1 Ox OB 5.2% 745 Caat Otx 100% Caa 114 S Comme Exhibit 10 Credit Ratings and Sovereign Spreads Used by AES 15 (AAA) AAA) A (AAA) UK (AAA) Italy (AAA) Spain (AAA) Nu (AAA) Howy (4) Chile ) QUIA) Cech Republic (A) Such A ( 5 ES (18) ( ( V OC) Argan (D) New 0% 2% 1 0 % 10% 124 12% In Sour Company docum , Sandard and and t Gibraltarting the Comte Capital Capitaluring AES Exhibit 11 Project Specific Risk Categories and Weightings Kent Risk Category Operational Weight 354 Example An AES plant may tail to pers o nal produce cent electroty to meet contractul obligations 2 705 Counterparty Crody Performance AES as of agreements that resando darivative Instruments required the counterparty may ether tal to post ditonal costeral as required or til to pay 3 10.5% Rugulatory Contact s unt process in a foreign country may change or AES has made investments in a generation facility. Regulatory agencies may choose not to adjust rates for a sily after inflation goes up or other market dynamic change 14.5% Construction Construction of a specific plant is complete but the plant may not perform the way is supposed to the entrate is too high, the output too low, the availability too low, 18.0% Commodity Prions of conloll, or other fuels may sple Currency 21.5% AES may be unable to hodge the devaluation of foreign currencies to the Argentine peso 25.0% Contract Enforcement Legal A local AES partner is in breach al contract and local government authortes y fail to anforce it Allamatively a foreign goverment may decide to nationali sats Sour Company document. Line of Business EBIT Tax Rate Debt to Cap. Coverage Default Spread Sovereign Spread Constructie Operation/ Technical Regulatory Currency Counterpa Contract er Legal Commodit Business/Project Country Project Description Andres Dominican Republic CG 300 MW gas fired combined cycle plant currently under construction 30 km east of Santo Domingo 25.0% 35.1% 3.0x 3.57% w 8.93% Caracoles Argentina CS 123 MW hydroelectric power plant located on the San Juan river in western Argentina 35.0% 40.8% 3.Ox 3.57% 16.25% 3 2 2 2 - 2 1 Drax United Kingdom CS 0.0% 29.5% 3.0x 3.57% 0.00% . 2 2 . 2 2 3 Largest coal-fired power station in western Europe. It can produce enough electricity - about 4000 MW- to meet the needs of approximately four million people Eletropaulo Brazil LU Distribution company that serves a population of 14 million in Sao Paulo 34.0% 30.0% 3.5x 2.89% 8.93% Gener Chile 17.0% 277 MW fossil fuel plant located in Tocopilla, 1500 km north of Santiago 35.2% 2.5x 4.34% Haripur Bangladesh CG 0.0% 360 MW gas turbine facility located 25 kilometers southeast of Dhaka, capital of Bangladesh 33,3% 2.5x 4.34% 5.23% Kelvin South Africa CG 600 MW coal fired power plant 25% 32.9% 2.5x 4.34% 3.14% 1 - - 1 1 2 2 2 2 1 1 2 . 1 Lal Pir Pakistan CG 337 MW coal fired power plant 23% 35.1% 3. Ox 3.57% 9.90% Los Mina CG 210 MW Oil-fired facility supplying the capital city of Santo Domingo Dominican Republic 25.0% 28.7% 4.0x 1.85% 8.93% OPGC India 7.9% 30.4% Joint Venture with the Government of Orissa. Two 210 MW P.C. coal-fired units 3.0x 3.57% 3.60% Ottana Italy CS 35.0% 42.5% 2.5x 4.34% 0.14% Oil fired 140 MW cogeneration facility - under contracts of up to 10 years, electricity, steam, compressed air, dematerialized water and nitrogen to three chemical facilities adjacent to the plant Red Oak USA 37.5% 39.5% 3.0x 3.57% 0.00% 1 2 . 3 . 2 Rivnoblenergo 30.0% 36.5% 2.5x 3.57% 9.98% CG GD GD CG 832 MW natural gas-fired plant Distribution Company serving 380,000 customers Distribution Company serving Tbilisi, the capital of Georgia 600 MW gas-fired combined cycle power plant Telasi 9.98% Georgia Brazil - . 2 . 3 3 3 3 3 2 3 3 3 2 Uruguaiana 34.0% 322% 4.0x 1.85% 8,93% Source: Company document. Project descriptions taken from http://www.aes.com/businesses/default.asp. Exhibit 9a ERIT Coverage Ratics and Default Spreads - - Corsoge Ratio -Default Spread S ydec. 21-100 Cloballing the Color Caprand Cap AS Exhibit 9b ERT Coverage Ratics and Default Spreads Credit Rating FRIT Cove Ratio Default Speed 21.1x 15. 1x 02% 0.3% Aat 055 0.7% 09% 52 125 42 3.9 1599z22111a11saa 113 15% 1.9% 23% 29% 2169 43% 32 1 Ox OB 5.2% 745 Caat Otx 100% Caa 114 S Comme A 3 p pe 000 angunan ad asb pou SPEE MAC DO ay for proceny - roots D compra y re Tverster od PRIROMA UMNO SOMAL engan de PC Garde d Drag D ap DO Exhibita AES Project Data Yan pandemos Ana OVOC Globaling the Cost of Capital and Capitaluring at AES Exhibit AES Selected Financial Data Select Financial Information 45% 7.00% 10-Year U.S. Troury Bond US Risk Premium Unluste Equity Bites by Line of Business Contract Generation Large Unity Growth Distribution Competitive Supply 0.25 SC Exhibit 8 Summary of WACC Calculations for AES Step Required Information Approche . 1. Calcuinto unlovered equily beta Batas at comparable US companies Unlover and overage equity bates for comparables in each Als line of business 2. Auluver quity batas at targul capital structure . Taigat capitalization to Estimated by projecting cash flow calculate desired EBIT Goverage . Risk-froe rate 2. Calculato cost of equity for each AES business 10-Year U.S. Transury Note Longterm avg difference between S&P 500 and US TOUTES Equity risk prerrium Releverd equity beta Risk-free rate Detauit spread 4 Calculate the cost of 10-Year US Treasury Note Observed relationship between EBIT coverage ratios for comparable companies and their costs of debt . LOS version orgad 5. Add country specific rok to the cost of debt and cost of equy The ditorence between local govement denominated bond yields and the corresponding US Treasury Nato Sour Country Gualting the C Caplualul Capital Marting at AES 201-10 Exhibit %a EXIT Coverage Ratics and Default Spreads Exhibit 9a ERIT Coverage Ratics and Default Spreads - - Corsoge Ratio -Default Spread S ydec. 21-100 Cloballing the Color Caprand Cap AS Exhibit 9b ERT Coverage Ratics and Default Spreads Credit Rating FRIT Cove Ratio Default Speed 21.1x 15. 1x 02% 0.3% Aat 055 0.7% 09% 52 125 42 3.9 1599z22111a11saa 113 15% 1.9% 23% 29% 2169 43% 32 1 Ox OB 5.2% 745 Caat Otx 100% Caa 114 S Comme Exhibit 10 Credit Ratings and Sovereign Spreads Used by AES 15 (AAA) AAA) A (AAA) UK (AAA) Italy (AAA) Spain (AAA) Nu (AAA) Howy (4) Chile ) QUIA) Cech Republic (A) Such A ( 5 ES (18) ( ( V OC) Argan (D) New 0% 2% 1 0 % 10% 124 12% In Sour Company docum , Sandard and and t Gibraltarting the Comte Capital Capitaluring AES Exhibit 11 Project Specific Risk Categories and Weightings Kent Risk Category Operational Weight 354 Example An AES plant may tail to pers o nal produce cent electroty to meet contractul obligations 2 705 Counterparty Crody Performance AES as of agreements that resando darivative Instruments required the counterparty may ether tal to post ditonal costeral as required or til to pay 3 10.5% Rugulatory Contact s unt process in a foreign country may change or AES has made investments in a generation facility. Regulatory agencies may choose not to adjust rates for a sily after inflation goes up or other market dynamic change 14.5% Construction Construction of a specific plant is complete but the plant may not perform the way is supposed to the entrate is too high, the output too low, the availability too low, 18.0% Commodity Prions of conloll, or other fuels may sple Currency 21.5% AES may be unable to hodge the devaluation of foreign currencies to the Argentine peso 25.0% Contract Enforcement Legal A local AES partner is in breach al contract and local government authortes y fail to anforce it Allamatively a foreign goverment may decide to nationali sats Sour Company document
