The case solution of AES Tiete: Expansion plant in Brazil

7/25/2019 The case solution of AES Tiete: Expansion plant in Brazil

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Serial ID NO' Name

% !(!) Mobassira *abi"a +a,ue

!(%!! Md' Ati-ur Ra"man

. !(%&/ Al(*aysal Bin Amin

) !(! M'0'M' Siddi,ui 1ros"un

2 !(% 1arbon A3"ar4ee

Ta"le of ContentsExe'uti)e Su%%ar*!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!3

Situation Anal*sis8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!9

Co%pan* ;)er)ie48!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!6

;ur Tas+8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Co%petiti)e ?i)alr*8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!>

Threat of Su"stitutes8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!>

Threat of Entr*8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!>

Politi'al!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

E'ono%i'!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

So'ial!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

Te'hnolo-i'al!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

En)iron%ental!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

@e-al!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!10

&inan'ial Anal*sis8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!11

?e)enue Per ear8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

Capa'it* ?e)enue8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

?e)enues Pass:throu-h8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

aria"le ?e)enue Pass:throu-h8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

ross ?e)enue8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

?e)enue tax8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12

7et ?e)enue8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

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aria"le Costs8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

aria"le as Costs8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

&ixed Cost8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

Personnel, aterials, Ser)i'es, and others8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

$epre'iation!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

Total &ixed Cost Per ear8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!13

7et Profit8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 13

7et 4or+in- Capital8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

7et Capital Expenditure8!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

B/$ Pri'e Cal'ulation!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!16

&indin-s!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1>


5/19

T"e 3om8any "olds t9o lines of business:

1! Ener-* eneration

2! Ener-* $istri"ution

In total$ AES Brasil "as:

1! Thirteen -eneration fa'ilities

2! Capa'it* is 32>= ross e-a4atts

3! Hh! This 'ontra't 4ould

expire in $e' 2019! Tiet isplannin- to 'ontra't and sell in spot %ar+et! AES de'ided to

de)elop plans for a 900 natural -as ther%o ele'tri' proe't! The strate-* is to offset

dependen'e on h*droele'tri' -eneration! Plannin- to start operation in 201>! A PPA "et4een

AES and -o)ern%ent 4ould "e for 29 *ears! $epre'iation of the plant 4ould "e for 29 *ears!

Total a%ount of 'apital expenditure 4ould "e BRL %' billion'

Our Tas-:

E)aluate the situation in Brazil for AES Tiet and re'o%%end @uiz Costa if the* should -ofor this proe't and 4hat 'ould "e the pro"a"le "id pri'e!

Also, @uiz Costa has to "uild three different )aluations8

%' A base Case' An O8timisti3 S3enario

.' A 1essimisti3 S3enario

All the )aluations ha)e to "e at the end of 2013!

/n order to "e 'o%petiti)e, AES 'ould not "id %ore than BRL 2!M;"in the au'tion!

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6/19

Industry Analysis:

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e used 1orter


8/19

'apital to set up and operate hundreds of po4er plants! E)en thou-h utilit* 'o%panies lar-el*

dra4 'usto%ers on pri'e, the 'o%petiti)e lands'ape in 4hi'h these 'o%panies operate is

diffi'ult to penetrate!

;e also 3arried out a 1ESTELanalysis to di= dee8er:

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9/19

1oliti3al o)ern%ent is proa'ti)e and sta"le and there is no politi'al insta"ilit* in

the 'ountr* at the %o%ent!

E3onomi3 Both do%esti' and forei-n enterprises are treated eDuall* and la"or 'osts

are 'onsidera"l* lo4! &or i%port duties, a s*ste% is in position, 4hi'h

-raduall* de'reases the tariff dependin- on the a%ount of su''essful

i%portin- *ears!

So3ial There is e'ono%i' ineDualit* 4ith the population as around 20G of the

population li)es under the po)ert* line! @oo+in- at the 'lass distri"ution,

there are a 'onsidera"le nu%"er of 4ealth* 'itizens and a hu-e se-%ent

of people 4ith %ini%al in'o%es! The %iddle 'lass is -ro4in- as 4ell!

Te3"nolo=i3al Co%pared to 'ountries li+e the (S and ?ussia, Brazil possesses a

4ea+er te'hnolo-i'al infrastru'ture and in)est%ent, "ut there are efforts

to push the de)elop%ent of te'hnolo-*! #o4e)er, /T is a se'tor in 4hi'h

Brazil has "een 'onstantl* i%pro)in- and it 'urrentl* ran+s 93rd in the

4orld!

En6ironmenta

l

&or al%ost all the 'ountries, en)iron%ental 'onsiderations are a %aor

issue for "usinesses runnin- in the 'ountr*! Brazil has not put a lot of

i%portan'e on en)iron%ental fa'tors *et as there are so%e other aspe'ts

to fo'us on! The rules are "ein- stri't 4ith the passa-e of ti%e!

Le=al @a4 of a 'ountr* is a )er* i%portant fa'tor for "usinesses operatin- in

the 'ountr*! ?estri'tions and stri't %onitorin- of ener-* pri'es "*

-o)ern%ent so%eti%es affe't the "usiness! Brazil has a %oderate

re-ulator* en)iron%ent! But for so%e 'ases, the rules are )er* stri't!

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10/19

*inan3ial Analysis:

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11/19

To anal*ze the 'ase finan'iall*, 4e ha)e to find the 7et Present alue of the Proe't in 2013

usin- three different S'enarios!

Bid 1ri3e:

(sin- the infor%ation pro)ided, 4e ha)e to 'al'ulate the 7P of the proe't in three different

'onditions! As the %axi%u% Bid pri'e of the proe't is B?@ 90H h, hen'e that is the

opti%isti' s'enario! As a result, eMre assu%in- the Base 'ase to "e B?@ 9Hh and the

Pessi%isti' 'ase to "e B?@ 0Hh!

To 3al3ulate t"e total ener=y:

Biddin= 1ri3e 9Installed Ca8a3ity 900

No' of +ours =0G

Dis8at3" 90G

Total Ener=y

%>?%!!

!

Re6enue 1er @ear:

/n the Brazilian @a4, the ?e)enue Tax ?ate is >!29G

Total Biddin= 1ri3e:

KBiddin- pri'e per unit x Total unit of ener-* x K1NCP/LLH1000000

Ca8a3ity Re6enue:

KBiddin- pri'e per unit x /nstalled Capa'it* x 7o! of #oursLH1000000

Re6enues 1ass(t"rou=":

OTotal aria"le as Cost per *earN KTotal aria"le as Cost x 19GLH K1:>!29GL

ariable Re6enue 1ass(t"rou=":

OTotal aria"le ;5 per *earN KTotal aria"le ;5 per *ear x 19GLH K1:>!29GL

ross Re6enue:

Biddin- Pri'eN Capa'it* ?e)enueN ?e)enues Pass:throu-hN aria"le ?e)enue Pass:throu-h

Re6enue ta5:

ross ?e)enue x ?e)enue Tax

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Net Re6enue:

ross ?e)enue: ?e)enue Tax

ariable Costs:

ariable O8erations Maintenan3e Costs:

Per (nit Cost8

BRL .'>M;" 5 %C1IF

Annual Cost8

Installed Ca8a3ity 5 Number of +ours 5 1er Unit ariable CostF %!!!!!!

ariable as Costs:

Annual Cost:

K/nstalled Capa'it* x 7u%"er of #ours x ?ate of as Consu%ption x Per (nit Cost x the

ex'han-e rateLH1000000

Total ariable Cost 1er @ear:

aria"le ;5 Cost N aria"le as Cost

*i5ed Cost:

1ersonnel$ Materials$ Ser6i3es$ and ot"ers:

There 4ould "e a &ixed Cost of B?@ 6 illion per *ear es'alated "* the /nflation! #en'e,

)& 5 %C1IF

There is a ?e-ulator* Cost of B?@ 20 illion Per ear, this 4ill re%ain 'onstant throu-hout

K7ot adusted to inflationL

#en'e, it 9ill remain BRL ! Million t"rou="out'

De8re3iation9ould be 3al3ulated in a strai="t line met"od'

#en'e, 1200H 29Q =

Total *i5ed Cost 1er @ear:

PS; 'ostN ?e-ulator* 'ostN $epre'iation

T"e Earnin= Before Ta5 is:

ross Profit: Total &ixed Cost

The Corporate Tax is 3G$ hen'e, the annual tax is:

Earnin=s Before Ta5 5 .)G

Net 1rofit:Earnin-s "efore Tax: Corporate Tax

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Some Ot"er Information 9e used in our *inan3ial Analysis:

Details G

;ACCBRLF %%'2?G

;ACCUSDF >'?G

Net 9or-in= Ca8ital:

The or+in- Capital 7eeds for ea'h ear is ;ne:T4elfth of the 7et /n'o%e of that *ear!

Net Ca8ital E58enditure:The alue of the /n)est%ent is B?@ 1!2 Billion! Capital Expenditure Per'enta-e for ea'h *ear

is8

@ear Ca8ital E58enditure

!%2 .!G

!%& .!G

!%? !G

!%/ !G

T"e Cas" Outflo9s in3urred in t"e %st) years 9"ere Ca8ital E58enditure too- 8la3e in

=i6en 8er3enta=es 8er year'

Net Cas" *lo9:

7et /n'o%eN $epre'iation:7et Capital Expenditure:7et or+in- Capital

Then, 4e need to find the 1resent alue of t"e Cas" *lo9s ea3" yearin the Brazilian

Curren'*' /t is found "*8

Net Cas" *lo9 %;ACC of BraHilFn

7ext, 4e ha)e to 'on)ert it in (S$ "* di6idin= t"e 1resent alue of Cas" flo9s in BRL by

t"e E53"an=e Rate'

&inall*, 4e ha)e to 'al'ulate Net 1resent alueof the Proe't at 2013, "*8

Total Cas" *lo9s %;ACC of USAF n

Item !%>Biddin= 8ri3e >3!30


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Ca8a3ity Re6enue 1>

Re6enues(1ass T"rou=" AS COSTF >3!=1

Re6enues(1ass T"rou=" 31!==

ross Re6enue =16!0>

Re6enue Ta5 Net Re6enue ?)!'&!

ariable 3osts

as Cost 3=>!6=

ariable OM 29!16

Total ariable 3osts 1!=3

ross 8rofit .2'??

*i5ed Costs 1ersonnel$ Materials$ Ser6i3es$ and ot"ers 6!00

Re=ulatory 3osts 20

De8re3iation =

Total *i5ed 3ost 11!00

EBT 20>!3=

Cor8orate Ta5

Net 1rofit 13=!1>

Usin= t"e abo6e ste8s ;e 3an 3al3ulate t"e Net 1resent alue of Ea3" of t"e S3enarios'

Cal3ulation for !%>$ Base Case:

Item !%>

Net In3ome 13=!1=>De8re3iation =

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Ca8ital E58enditure 0

Net ;or-in= Ca8ital 11!919=

Net Cas" *lo9 1

De8re3iation =

Ca8ital E58enditure 0

Net ;or-in= Ca8ital 11!919=

Net Cas" *lo9 129

N1 at !%. :61!26>

BID 1ri3e Cal3ulationTO find a Bid 1ri3e for 9"i3" t"e N1 is Hero:

;ACCBraHilK %%'2?G

Let$ N1 K !

! K !'&&R1I*A2 @ears$ %%'2?G (&&'>

2'..2RK&&'>

RK%2).&%?'%2

1ri3eK %2).&%?'%2%%>?%!!

Bid 1ri3eK BRL &)M;"

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*indin=s

Base O8timisti3 1essimisti3

Bid 1ri3eM;" )2 2! )!

N1 (&%'2 (!'2! (%!)'.)

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After anal*zin- the 'ase &inan'iall*, 4e found out that8

Re3ommendation:&ro% the a"o)e ta"le, 4e 'an see that in all the three situations, the 7Ps of the proe't

re%ains 7e-ati)e! Considerin- the &inan'ial aspe'ts, it 4ouldnMt "e 4ise for AES to "uild a

ne4 po4er plant in Brazil! The Co%pan* needs to %a+e a "id pri'e of at least B?@ 6Hh

in the ;pti%isti' Case S'enario to -et a 7P of Iero!

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Inde5

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Documents

The case solution of AES Tiete: Expansion plant in Brazil