PROGRAMA LATINOAMERICANO DE RECLUTAMIENTO DE TALENTOS

BUSINESS CASE CEO 2

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

PROGRAMA LATINOAMERICANO DE RECLUTAMIENTO DE TALENTOS

TO SOLVE
The plant capacity can be upgraded by investing in inlet coolers to deliver an additional
50 MW. Each of UPWP and the industrial customers need an additional 50 MW. How would
you approach this issue? Who would you consult for approval before green light to invest is
given?
Here the CEO should clearly involve the shareholders, the permitting authorities, lenders,
etc Deliberately no investments costs are specified, so it is important to see how the CEO
goes ahead not having all information (without saying that this info is really required). Does
the CEO make any reflections on the tariffs.

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

Energy Charge
US $/MWh
4

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.

PROGRAMA LATINOAMERICANO DE RECLUTAMIENTO DE TALENTOS

EXHIBIT 4: OPENING BALANCE SHEET 2012

Wonderful Power

Balance Sheet
US$
Assets

1/1/2012

Plant
Cash

800,000,000
10,000,000

810,000,000

Total

Liabilities
Loan
Shareholder Equity
Rertained Earnings
Total

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

600,000,000
210,000,000
0
810,000,000