PROGRAMA LATINOAMERICANO DE RECLUTAMIENTO DE TALENTOS

BUSINESS CASE CEO 1

A company called Wonderful Power (WP) just started its new activities as power producer. The company is located in Utopia, a country ruled by Thomas More. The founders of the company are International Flower (IF), holding 60% of the shares, and Thomas More Investments (TMI), holding the remaining 40%. The power capacity (net output) is 1000 MW. At the commissioning of the Plant, there were some issues on the quality and correctness of the gas metering unit, where the custody transfer with the gas supplier occurs. These issues still need to be evaluated and attended. Although commercial operation has been reached on 31st December 2011, the plant faces plenty of problems. Many technical defects still need to be attended by the EPC contractor who is on one hand willing to solve the easy and obvious flaws, but on the other hand reluctant to tackle major issues, which inevitably will jeopardize the future operation of the plant. Both parties, EPC contractor and WP are still negotiating these issues. The Board approved a max expenditure of 5M$, borne by WP, to correct these technical issues. The plant starts its commercial operation (COD) on 1st Jan 2012 with all its customers. Wonderful Power sells 50% of its power capacity to a governmental owned body, Utopia Power and Water Procurement (UPWP), under a 15 year Power Purchase Agreement (PPA), and 50% of its power output to a cluster of industrial companies. Industrial customers signed up for a 3 years contract. Water (except for auxiliary needs) is not produced at this plant. UPWP is renowned as a reliable partner in terms of respecting contracts. There are other power producers who can provide energy to your industrial customers. The plants fuel efficiency is a risk/upside of Wonderful Power. UPWP and the industrial customers are respectively dispatched at 50% and 60% of the contracted capacity. The total investment cost of the plant (TIC) is 800 million US$. The budget assumptions for the first year of operation are reflected in Exhibit 1 Data on the plant is reflected in Exhibit 2 A loan of 600 million dollar has been secured with the Holy Sweet Bank Company (HSBC). Detailed information on the loan is given in Exhibit 3 The opening Balance Sheet is reflected in Exhibit 4 The opening Cash Flow is given in Exhibit 5

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TO SOLVE 1. You are Charles-Emile Obreno, the CEO of Wonderful Power, and you have to present the budget 2012 to the Board. How will this budget look like? What dividend forecast can the CEO offer the shareholders given the circumstances within which the plant operates? Develop first the P&L, Cash Flow and Balance Sheet before you elaborate your answer. (If you do not manage to develop these financial statements, assume a reasonable level of potential dividends, and continue your reasoning on the dividend payments onwards) Does the CEO look ahead, and take some contingency on potential issues that could arise as the plant is not up to standard yet but is he not too conservative either? Can the CEO quickly build some financial statements?

EXHIBIT 1: BUDGET DATA WONDERFUL POWER 2012

1. Contracted Sales Volumes a. UPWP i. Capacity= 500 MW ii.Dispatch (average)= 50% b. Cluster of Industrial Companies i. Capacity= 500 MW ii.Dispatch (average)= 60% 2. Sales Prices- Tariffs

UPWP Industrial Customers

Capacity Charge US$/MW/h 12 9

Energy Charge US $/MWh 4 5

3. Operational Costs The operational cost for either type of customer is reflected in the table below:

Fixed US$/year 5,000,000

Variable US $/MWh 2

4. Key Performance Parameters of the plant: a. Scheduled outage: 15% b. Forced outage: 2 % (no penalties to be paid) c. Outages are defined as a percentage of the number of hours per year 5. Cost of fuel

US$/MWh sold 1

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EXHIBIT 2: DATA WONDERFUL POWER PLANT

1. Power Capacity 1000 MW 2. Fuel Gas Fired 3. Configuration Combined Cycle Plant` 4. Total Investment cost (TIC) 800 M US $ 5. Depreciation of the asset 30 years 6. Corrective Works- due to non compliance by the EPC contractor Over the first 2 years of operation, at total aggregated amount of 20 M$ is required to correct technical defects and other shortcomings on the plant.

EXHIBIT 3: LOAN CONDITIONS

1. Issuing Bank Holy Sweet Bank Company (HSBC). 2. Total Amount 600 million 3. Currency United States Dollar 4. Term 20 year, starting at the first day of commercial operation 5. Interest Rate a. Year 1 to 5 (5 included): 4% fixed b. Year 6 to 20: volatile Libor+ 70 bp 6. Capital Repayment 5 % p.a.

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EXHIBIT 4: OPENING BALANCE SHEET 2012

Wonderful Power

Balance Sheet US$ Assets Plant Cash

1/1/2012

800,000,000 10,000,000

Total

810,000,000

Liabilities Loan Shareholder Equity Rertained Earnings Total 600,000,000 210,000,000 0 810,000,000

EXHIBIT 5: CASH FLOW STATEMENT

Cash Flow Statement

Us $ Opening Cash Revenues Fuel Cost Operational Costs Interest Laon Repayment Tax Ending Cash

1/1/2012 10,000,000