QUESTION

You’ll need to read the case and write a 2 page paper with a spider chart page and financial model included. Use the points I have listed below to write the paper. I

Case :: Argentina Power -Don’t cry for me Argentina case

Intro to the project,

Key details you’re gonna include in your 6 pillar

Use the 6 pillar for a summary, cover key points, key analysis

Need project IRR and WACC calculation

–

Key issues

Talk about how you’re going to mitigate the risks presented

Financial Evaluation

Need a Spider chart of risk work

Assumption slide for your IRR

Different partners to talk about

Ppp could be a strategy if it meets all 5 criteria

Provide recommendation

Bidding needs to be addressed

What if world back doesn’t solve the issue or IFS or MIGA?

Focus on addressing the issue, you’re speaking to??, analysis for IFS

Take a look at 3 P’S structure might work

What if world back doesn’t solve the issue or IFS or MIGA?

Provide context to EPC

There seems to be more than one SPV

Talk about hedging?

Risk is outlined clearly but dont spend to much, talk about the mitigation strategies

One of the issues is that the country has pretty high inflation? Could it impact the future value

So many ways you can look at it

Mini firms?? Financial analysis? What kind of collateral to have?

Financing?? Debt coverage?

Intake and feedstock: putting natural gas

Have a strong contract for the offtake:

Insurance: MEGA involves the world bank, and other ways to get the world bank involved. The more support you have

from the world bank the less likely of extradition

Bidding cost? To take on as epc

A lot of SPV’s: how much of a position they can take on each project

EFC cold be on the hook for more than they’re expecting.

Inflation page

Growth relevance to off take. You wanna go to growing economy

Need appendix

ANSWER

Introduction

The attitude of neglection the requirement of investment in the energy sector has led to an urgent requirement of new production capacity in the energy sector in Argentina. Despite abundance of energy resources Argentina is in desperate need of energy production. It is a net importer of power and that shows the urgency of new projects. The new government has decided to invest in the sector and has launched an auction for international and domestic companies to contribute to the projects and invest in them. The government has introduced multiple fast power capacity requirements for the companies to participate in.

The minimum requirement of installed capacity for the tender in 40 MW and a single generating unit should produce at least 10MW. The duration of the supply contracts will range from 5 to 10 years. These contracts will be with CAMMESA and the sale of all the generated power will thus be secured as part of the tender.

Entry of EFC

Due to its expertise in such projects EFC which is a subsidiary of ICC has shown interest in some of the projects. EFC has financed power plants and other power projects around the globe. ICC also has subsidiaries that are big equipment manufacturers which sell turbines and related equipment for power generation. Thus, taking part in the tender and finally winning it will also lead to probable profits for these BEM as well.

Positions of Interest

There are two tenders which the company is specifically interested in. These tenders have the potential of starting operation in as low time as 12 months. There are three pillars which Bruce Wayne finds important in selection of the tenders:

Partner project selection: done by selecting local partners which will be also to provide local expertise and help in project selection
Negotiation of favourable contracts: Done via proper use of PPA, the expertise of the company itself in the field and local partners
Effective deployment of his company’s capabilities: Done via the effective deployment of BEM, EFC and ICC

The company plans to use the expertise of the local partners about the location as well as about the tactical details of execution to their advantage. The knowledge of a local person will also help the company in dealing with the government when it comes to the execution of the power projects. They will have a much better grasp of how the people operate.

The company can also leverage its capability to form syndicates with banks to decrease its obligation towards the projects. The loans from the bank will contribute towards the debt obligation of the company. EFC and the local partners will still keep the equity portion of the investments.

The biggest leverage that the company holds is the size and history it holds in the field. ICC has a lot of subsidiaries which specialise in different domains from manufacturing power station equipment to financing power projects. Within the conglomerate itself the company will find most of the expertise and resources it needs to make the power projects a reality.

Financials

Only a high IRR and a low cost of capital of the project can be used to make the company invest even in the presence of multiple risks presented above. As there are multiple projects with different structure of each, it was possible to calculate a WACC at consolidated level of all projects whereas IRR had to be calculated at individual project level.

For WACC calculation the total debt and equity investment was used with the interest rate taken as the highest available in the market, which is 9%. In the absence of a reliable source for calculating cost of equity it has been assumed that the minimum required return will be more than at least the GDP growth rate of the country in 2010. The payback of 5 years has been considered in the best-case scenario. This leads to an IRR of 32% which is more than most of the investments that ICC has currently.

Conclusion

Due to the long-standing history of the country, Argentina does pose a risk as an investment venture. ICC decision to take part in tender will be met with many hurdles when it comes to implementation. But most of these risks will only be limited to the political environment and the people management at the government level. Their expertise in the power sector and the above average returns of the projects should b enough to compensate for the risks. This will be a good opportunity for the company to venture into the untapped natural resources of Argentina.

APPENDIX

Best Case Scenario
Transaction Structure			WACC Calculations [2]
Project Debt [1]		345.5	Interest Rates (Kd)	9%
Sponsor’s Equity		255	Ke [4]	10.10%
EFC Investment		186.5
Cost	1030		Contribution of Debt	31.095
EPT		894	Contribution to Equity	18.8365
CM		193	Total Contribution	49.9315
Payment	1087
Debt and Equity	532		WACC	9.39%

IRR Calculations [5] [3]
EFC	Investment	187	Year
	Return of Investment	187	1	-187
	Return on investment	207	2	80.2
			3	80.2
BEM	Investment Defferal	14	4	80.2
	EPT CM	199	5	80.2
	CSA CM	8	6	80.2

ICC	Net Exposure	124	IRR	32.31%
ICC	Cash Inflows – Post COD	401

1: Calculated using the difference of total exposure and equity
2: WACC Calculations at complete investment level
3: IRR Calculations at individual project level
4: Taken at GDP Growth of 2010
5: Returns realised over 5 years

Associated Risks

There are six risks that the company will have to face if they decide to take the project. The following is a brief description of the risks:

Political Risks: The country of Argentina itself has been highly unstable in terms of its political structure. Thus, a change in government, which is very probable, can turn the whole investment into a sunk cost.
Finance Risk: In case of EPC failing to get a syndication in appropriate time they will have to bear the whole amount of debt themselves.
Enforcement Risk: The company has a long history of financing projects. It should be able to manage this one.
Project Execution Risk: With all the subsidiaries of ICC and the local partners contributing to the tenders there is minimal to no execution risk.
Operational Risk: The change in the economic environment poses low operational threat to the plants once the operations are underway due to the company’s expertise.
Currency Risk: The exchange rate fluctuations of the Argentinian currency pose risk to the cash flows of the company as they would finally calculate the earnings in dollars. However, currency hedges and swaps should be able to easily mitigate them.

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