With the new “greenfield developments”, which are newer power plants that generate fuel source to convert into energy–are seriously being looked at (ie private equity firms) as an alternative asset class, based on the increase in demand globally and potential for high profits comparable to lower risks for the investor. My question is how do you valuate these power plants and what type of models and multiples do you use to see if this company is profitable? ( I know this touches more on corporate finance) My thought is IS support model to get FCF, projected for 5 years, discount back based on your WACC to get NPV. Due some diligence find you hurdle rate, and the industry multiple. How does multiple support your DCF model?–I’m lost here. Any help for suggestions? Thanks
Merchant power or IPP? Which RTO?
Choosing a multiple is an art, not a science. Look around at recent (industry) acquisitions for a starting point, and then tweak accordingly.
Zforce12000 Wrote: ------------------------------------------------------- > With the new “greenfield developments”, which are > newer power plants that generate fuel source to > convert into energy–are seriously being looked at > (ie private equity firms) as an alternative asset > class, based on the increase in demand globally > and potential for high profits comparable to lower > risks for the investor. > Say what? “greenfield” is just an adjective that means unconstrained by previous design. There is no chance that a power plant constitutes an “alternative asset class”. > My question is how do you valuate these power > plants and what type of models and multiples do > you use to see if this company is profitable? > > ( I know this touches more on corporate finance) > > My thought is IS support model to get FCF, > projected for 5 years, discount back based on your > WACC to get NPV. Due some diligence find you > hurdle rate, and the industry multiple. > This is just CFA-speak which only sounds smart if you are new to these terms. Is there anything in the previous sentence that wouldn’t work for a bridge or an apartment building? What’s distinctive about a power plant? There’s not just some easy off the shelf model that you can find in your readings that will give you a value that is very meaningful. What exactly are you trying to value? Are you trying to value a technology or a particular plant or what? > How does multiple support your DCF model?–I’m > lost here. Any help for suggestions? > > Thanks
The trick to valuing power plants is to try and figure out the future free cash flows of the power plant, and then discount those to present value at a risk appropriate discount rate. But that’s just how I’d do it.
HSA is correct. That’s how you’d value any income producing property. The discount rate might be a bit of a moot point though, as that’s usually RFR + some risk premium. When you don’t have a lot of liquidity for this sort of asset, it might be hard to assess the risk premium.
I fiqured as such. A little background. I’m at the final round of interviews for a power generation company in US (electricity). For a financial analyst to help valuate their existing operations and also work with aqusitions group for growth opportunities. I would work directly with CFO. I’m meeting with VP operations, corporate controller and Dir. Market analysis. So I’m trying to get some feedback for those in a similar occupation on their valuation techniques. JoeyD–answer your question, I’m looking to see how one valuates an existing power plant in terms of it’s efficiency, cash flows, and how to project variables such as change in fuel price and costs, weather changes, etc. Thanks
Some links posted here: http://www.analystforum.com/phorums/read.php?1,619007 Oh wait. That’s you. As much as we’d like to be on the other end of your cellphone Lifeline call during your upcoming interview rounds, you’re eventually going to have to sit down and drink some of the water you’ve been led to. We can’t win this job for you, only you can. You can start by defining the terms IPP, RTO, and merchant generator. Without understanding these you won’t bring anything to the power-industry table other than generic buzzwords. BTW, it’s ‘value’, not ‘valuate’.
lola Wrote: ------------------------------------------------------- > HSA is correct. That’s how you’d value any income > producing property. The discount rate might be a > bit of a moot point though, as that’s usually RFR > + some risk premium. When you don’t have a lot of > liquidity for this sort of asset, it might be hard > to assess the risk premium. Ibbotson’s Equity build up or Duff and Phelps CAPM is the way we build up the equity discount rates for power plants. Although the Industry risk premiums arent useful here, you can substitute an estimate.
JoeyDVivre Wrote: ------------------------------------------------------- > Zforce12000 Wrote: > -------------------------------------------------- > ----- > > With the new “greenfield developments”, which > are > > newer power plants that generate fuel source to > > convert into energy–are seriously being looked > at > > (ie private equity firms) as an alternative > asset > > class, based on the increase in demand globally > > and potential for high profits comparable to > lower > > risks for the investor. > > > > Say what? “greenfield” is just an adjective that > means unconstrained by previous design. There is > no chance that a power plant constitutes an > “alternative asset class”. > > > My question is how do you valuate these power > > plants and what type of models and multiples do > > you use to see if this company is profitable? > > > > ( I know this touches more on corporate > finance) > > > > My thought is IS support model to get FCF, > > projected for 5 years, discount back based on > your > > WACC to get NPV. Due some diligence find you > > hurdle rate, and the industry multiple. > > > This is just CFA-speak which only sounds smart if > you are new to these terms. Is there anything in > the previous sentence that wouldn’t work for a > bridge or an apartment building? What’s > distinctive about a power plant? There’s not just > some easy off the shelf model that you can find in > your readings that will give you a value that is > very meaningful. > > What exactly are you trying to value? Are you > trying to value a technology or a particular plant > or what? > > > How does multiple support your DCF model?–I’m > > lost here. Any help for suggestions? > > > > Thanks i wonder how a cap and trade carbon trading system would impact the economics of different types of power pants and how those impacts could be modelled. its just a passing curiosity.
In Europe emission trading has a had big impact on the energy industry. There exists a lot of arguments between European countries regarding this matter. This is due to the fact that national caps were decided according to a base year (in the beginning of 90s, don’t remember exactly which year) and at that point countries were in different economic states, thus the level of production at that specific year was used to determine the national cap. This development of Emission Trading has made it much more expensive to use fossil derived energy and therefore the utilization rate of some power plants using fossil fuels has dropped significantly. Some of these will be booted up only in case of severy energy shortage. This is especially regard to Northern Europe where the use of energy is very high during the winter months due to need of heating in temperatures of -20-30 celcius (around -4-22 F). Regarding modeling, I would treat the emission rights similar to a commodity that is needed in industrial production. The plant can have a certain amount of this commodity that it is able to acquire by itself and the rest it has to buy from the market. The price of this commodity fluctuates according to offer and demand as do other commodities. The biggest problem with modeling relates to the price volatility of the emission rights. For example in the beginning of 2006, a right for Carbon tonn in Amstercam ECX cost 30€ and by April, the price had dropped to 15€.
DarienHacker Wrote: -------------------------------------------------------> > BTW, it’s ‘value’, not ‘valuate’. I would always use the word value too, but valuate is actually a word that means “to value” according to Generic Internet Dictionary. It seems vaguely possible to me that someone uses “valuate” in some neck of the finance world.
So Z-Force - I really don’t know much about valuing power plants (I used to ride bikes with a guy who designed power plants who used to talk about them all the time; I never listened). But I’m sure that talking like Debtnocrat in an interview is much more impressive than > IS support model to get FCF, > projected for 5 years, discount back based on your > WACC to get NPV. Due some diligence find you > hurdle rate, and the industry multiple. It actually sounds like Debtnocrat knows something about the power industry and might have something intlligent to add. DarienHacker also pointed out some good stuff for you. BTW - You’d get killed in an interview on that line - 5 years of NPV’ed FCF for valuing a power plant? Really?
Give me a model and I’ll tell you why it’s not good enough. There simply isn’t a cut out answer to this. Like any investment its value is all future cash flows discounted back to t=0 with the relevant discount rate. Thing - as always - is that you don’t know the future cash flows precisely and you don’t know what discount rate is the right one. That counts for almost every asset, though, I wouldn’t call this ‘alternative’. Although CFA does call everything non-FI or equity ‘alternative’. that’s true.
there is some good discussion in the vault guides - see the one for the Energy Industry and there are a few pages on how they would value a power plant Many of the posters have hit it spot on; a power plant is no different than any other income producting asset. The key points are a) discount rate (relative riskyness of project) and b) timing of first cash flows (operation date). Permitting and NIMBY-ism are two huge factors that can affect a) and b). I would be happy to answer other questions; post em up
engineer2finance Wrote: ------------------------------------------------------- > there is some good discussion in the vault guides > - see the one for the Energy Industry and there > are a few pages on how they would value a power > plant > > Many of the posters have hit it spot on; a power > plant is no different than any other income > producting asset. The key points are a) discount > rate (relative riskyness of project) and b) timing > of first cash flows (operation date). Permitting > and NIMBY-ism are two huge factors that can affect > a) and b). > > I would be happy to answer other questions; post > em up i figure nimbyism and regulatory risk are such huge factors in evaluating these types of projects that a standard discount rate based on wacc is probably not an accurate representation of the risk of the project. for example in a jurisdiction such as france where nuclear power is much more accepted a company should not be using the same risk analysis/wacc as it would in a jurisdiction like the pacific coast of canada where the opposition to anything mildly environmentally unfriendly is very strong. how do we select an appropriate discount rate in these types of situations, also as an offshoot of this how do we select an appropriate discount rate for countries that are much more politically unstable or corrupt? I’ve always been quite curious about these types of situations, because they aren’t easily quantifiable and require some serious subjective evaluation.
SeanC Wrote: ------------------------------------------------------- > this how do we select an appropriate discount rate > for countries that are much more politically > unstable or corrupt? I’ve always been quite > curious about these types of situations, because > they aren’t easily quantifiable and require some > serious subjective evaluation. Doesn’t cfai recommend adding a country risk premium to your cost of capital, e.g. the difference in sovereign rates for 10y bonds. Thought I saw that in L2 somewhere…
havent started studying for level 2 yet. 
also i wonder if the spread between the different sov bonds truly reflects all the risks inherent with dealing in a foreign national. you never know, there could be revolution in a previously stable country and fools decide to start nationalising everything. I guess these black swan events are just part of the game.
DarienHacker Wrote: ------------------------------------------------------- > SeanC Wrote: > -------------------------------------------------- > ----- > > this how do we select an appropriate discount > rate > > for countries that are much more politically > > unstable or corrupt? I’ve always been quite > > curious about these types of situations, > because > > they aren’t easily quantifiable and require > some > > serious subjective evaluation. > > Doesn’t cfai recommend adding a country risk > premium to your cost of capital, e.g. the > difference in sovereign rates for 10y bonds. > > Thought I saw that in L2 somewhere… true, but in some cases a government will negotiate with a power development company(in severely underdeveloped countries) and basically enter a PPA with a utility. This will make the cash flows less risky, but then you have to consider how credit worthy the government of the nation you are analyzing is