Good Morning !

Welcome to the Presentation of

AES Tietê: Expansion

Plant in Brazil
Submitted to:
DR. M. SADIQUL ISLAM
Professor,
Department of Finance,
Faculty of Business Studies,
University of Dhaka
Prepared By:
Name ID No.
Giasuddin Bulbul 25054
Md. Amir Kashem Khan 27039
AES Tietê: Expansion Plant in Brazil
Executive Summary
In this report the Industrial Analysis and Financial
Analysis of AES Tiete is conducted for Mr. Luiz Costa.
Also, a bid price is calculated for him which is suitable
to get a Net Present Value of expected cash flow. He
has to make a rigorous analysis in three different
scenarios, Base Case for which the bid price is
assumed to be BRL 45/Mwh, Optimistic Case for
which the bid price is assumed to be BRL 50/MWh
and Pessimistic Case with a bid price of BRL 45/MWh.
He has to recommend his board if the company
should invest or not.
Executive Summary-2
After analyzing the case, we saw that the plant should
stick with the recommended financing decision. In all
three alternatives, the actual WACC is higher than the
recommended WACC. Beside we prepared cash flow
considering the production of 500 MWh and 225 MWh.
In which both has a positive NPV of $166,62,50,884.05
and $56,29,32,636.48 respectively. The realistic one was
to produce electricity in dispatched capacity. So we run
stimulation for the revenue and cost of that cash flow to
define NPV.
Executive Summary-3
The coefficient variance (CV) of the project is 10.02%
which shows the project is less risky. On the other
hand, exploration of real option along the project
made the AES Tiete more attractive. We found the
total value of the real option to be US$
216,69,80,810.96. Thus the true NPV of the projects
were $166,62,50,884.05 and $56,29,32,636.48. So to
expand the thermoelectric project In Brazil would be
a profitable business. Hence, we recommended Mr.
Luiz Costa that AES should invest in the
thermoelectric plant at Brazil.
Company Overview:
AES Tiete S.A. is an electricity generation company,
which is directly controlled by “Companhia Brasiliana
de Energia”, a holding company controlled by The
AES Corporation, which holds 50% plus one share of
Brasiliana's voting capital and 46.15% of its total
capital. The Brazilian Federal Development Bank --
BNDES owns the remaining 50% less one share of
Brasiliana's voting capital (53.85% of its total capital).
Brasiliana, in turn, controls AES Tiete by holding
71.35% of its voting capital
Company Overview:
The company joined the Brazilian market in 1997
through the acquisition of one of its utilities (AES Sul).
AES holds 24% economic interest in Tietê. It is the third
largest private generator in Brazil. It has
18 Hydro-electric Power stations
2658 MW of installed capacity
Physical guarantee of 1278 MW average.
Company Overview:
AES decided to develop plans for a 500 MW natural gas
thermo electric project. The strategy is to offset
dependence on hydroelectric generation. Planning to
start operation in 2019. A PPA between AES and
government would be for 25 years. Depreciation of the
plant would be for 25 years. Total amount of capital
expenditure would be BRL 1.2 billion.
ANALYSIS OF THE INDUSTRY : SWOT
Analysis
SWOT analysis of AES Tiete SA can provide a
competitive advantage.
Strengths:
reduced labor costs
experienced business units
high growth rate
skilled workforce
monetary assistance provided
existing distribution and sales networks
SWOT Analysis
Weaknesses
future profitability
future debt rating
tax structure
brand portfolio
Productivity
investments in research and development
SWOT Analysis
Opportunities
new acquisitions
new products and services
new markets
growth rates and profitability
growing demand
income level is at a constant increase
SWOT Analysis
Threats
price changes
government regulations
tax changes
increasing costs
increase in labor costs
increasing rates of interest
cash flow
rising cost of raw materials
financial capacity
growing competition and lower profitability
PESTEL Analysis
PESTEL Analysis
Political:
Government is proactive and stable and there is no political
instability in the country at the moment.

Economic:

Both domestic and foreign enterprises are treated equally and

labor costs are considerably low. For import duties, a system is
in position, which gradually decreases the tariff depending on
the amount of successful importing years.
PESTEL Analysis
Social:
There is economic inequality with the population as around 20%
of the population lives under the poverty line. Looking at the
class distribution, there are a considerable number of wealthy
citizens and a huge segment of people with minimal incomes.
The middle class is growing as well.

Technological:

Compared to countries like the US and Russia, Brazil

possesses a weaker technological infrastructure and
investment, but there are efforts to push the development of
technology. However, IT is a sector in which Brazil has been
constantly improving and it currently ranks 53rd in the world.
PESTEL Analysis

Environmental:
For almost all the countries, environmental
considerations are a major issue for businesses
running in the country. Brazil has not put a lot of
importance on environmental factors yet as there are
some other aspects to focus on. The rules are being
strict with the passage of time.
PESTEL Analysis

Legal:

Law of a country is a very important factor for businesses

operating in the country. Restrictions and strict monitoring
of energy prices by government sometimes affect the
business. Brazil has a moderate regulatory environment.
But for some cases, the rules are very strict.
COUNTRY RISK ASSESSMENT
International Country Risk Guide:

The International Country Risk Guide (ICRG) rating

comprises 22 variables in three subcategories of risk:
political, financial, and economic. A separate index is
created for each of the subcategories. The Political Risk
index is based on 100 points, Financial Risk on 50 points,
and Economic Risk on 50 points. The total points from the
three indices are divided by two to produce the weights
for inclusion in the composite country risk score. The
composite scores, ranging from zero to 100, are then
broken into categories from Very Low Risk (80 to 100
points) to Very High Risk (zero to 49.9 points).
Country Risk of Brazil using ICRG Methodology
The Political Risk Rating
Component
A Govt. Stability
B Socioeconomic Condition
C Investment Profile
D Internal Conflict
E External Conflict
F Corruption
G Military in politics
H Religious tension
I Law and order
J Ethnic tension
K Democratic accountably
J Bureaucracy Quality
Sub-sub component Highest Score Score
Govt. Unity 4 3
Legislative Strength 4 3
Popular Support 4 3
Sub-Total 12 9
Unemployment 4 2.5
Consumer confidence 4 2.5
Poverty 4 2
Sub-total 12 7
Contract Viability/ Ex-proportion 4 3
Profit Repatriation 4 3
Payment delays 4 3
Sub-total 12 9
Civil War/Coup threat 4 3
Terrorism/ Political Violence 4 2.5
Civil Disorder 4 3
Sub-total 12 8.5
War 4 3.5
Cross-Border conflict 4 3
Foreign Pressure 4 3
Sub-total 12 9.5
6 3.5
6 4
6 4
6 4
6 4
6 4.5
4 2.5
Total= 100 69.5
The Economic Risk Rating
The economic risk
rating

Components Highest Point Points

GDP per Head 5 4

Real GDP Growth 10 8

Annual Inflation Rate 10 6

Budget balance as a % of GDP 10 7

Current Account as a % of GDP 15 11

Total= 50 36
Financial Risk Rating
Sequence Component Points Out of

A Foreign debt as a % of GDP 8 10

Foreign debt service as a % of Exports of Goods &

B 8 10
Services

C Current account as a % of Exports of Goods & Services 10.5 15

D Net International Liquidity as months of Import cover 2 5

E Exchange rate stability 3 10

Total 31.5 50
The Composite Risk Rating
The method of calculating the Composite Political, Financial, and
Economic Risk Rating remains unchanged. The political risk rating
contributes 50% of the composite rating, while the financial and
economic risk ratings each contribute 25%.
The following formula is used to calculate the aggregate political,
financial and economic risk:
CPFER (country X) = 0.5 (PR + FR + ER)
Where,
CPFER = Composite political, financial and economic risk ratings
PR = Total political risk indicators
FR = Total financial risk indicators
ER = Total economic risk indicators
The Composite Risk Rating
The highest overall rating (theoretically 100) indicates
the lowest risk, and the lowest rating (theoretically
zero) indicates the highest risk.

CPFER (Brazil) = 0.5 (PR + FR + ER)
= 0.5 (69.5 + 36 + 31.5)
= 68.5
Categories of Composite Risk
Risk Rating Points Risk Premium

Very High Risk 00.0 to 49.9 points 0.03

High Risk 50.0 to 59.9 points 0.025

Moderate Risk 60.0 to 69.9 points 0.02

Low Risk 70.0 to 79.9 points 0.015

Very Low Risk 80.0 to 100 points 0.01

Assessed Composite Risk
(CPFER) for Brazil

Scenario Points Category of Brazil’s Risk

Very High Risk 00.0 to 49.5 Points

High Risk 50.0 to 59.5 Points

Moderate Risk 60.0 to 69.5 points 68.5

Low Risk 70.0 to 79.5 points

Very Low Risk 80.0 to 100 points

Risk Premium= Low Risk So Premium is 2% (0.02)

FINANCIAL ANALYSIS
‘AES Tiete: Expansion Plant in Brazil’ requires BRL 1.2
billion for developing the plant, constructing the processing
facilities and building the infrastructure necessary to
generate electricity. The major problem with the project is-
What is the NPV of the project in optimistic, base and
pessimistic case?
What will be the value of real option?
To analyze the case financially, we have to find the Net
Present Value of the Project in 2013 using three different
Scenarios: base case, in the optimistic scenario and in the
pessimistic case.
Evaluating the Simulation of
AES Tiete
We have analyzed the expansion project of AES Tiete
considering two scenario. In the first scenario we
considerd the total 500 MWh capacity and in the
second scenario we consider the dispatched MWh
considering the 90% production factor. To adjust with
the country risk, we added 2% risk premium with the
9.27% WACC. We converted each value in the USD,
prepared cash flow statement and stimulate it for the
both scenario.
Evaluating the Simulation of
AES Tiete
Total Capacity 500 MWh

Number of Hour per year 8,760

MMbtu gas needed/MWh 6.53

Adjusted WACC 11.27%

NPV $166,62,50,884.05

IRR 60%

MIRR 19%
We also analyzed the cash flow considering the
dispatch amount of production. For the dispatched
capacity calculation we considered the following:
Total Capacity 225 MWh

Number of Hour per year 8,760

MMbtu gas needed/MWh 6.53

Adjusted WACC 11.27%

NPV $56,29,32,636.48

IRR 29%

MIRR 16%
After running 1000 trials of revenue and variable cost to
forecast the NPV we get the following histogram:
Forecast: NPV
Statistic Forecast values
Trials 10,000
Base Case 216,69,80,810.96
Mean 217,03,45,660.43
Median 217,23,21,337.76
Mode

Standard Deviation 21,74,27,526.41

Variance 47,274,729,242,454,200.00
Skewness -0.0029
Kurtosis 2.99

Coeff. of Variation 0.1002

Minimum 133,73,00,958.25
Maximum 304,35,22,615.45

Mean Std. Error 21,74,275.26

 From the statistical chart of the revenue and variable to forecast NPV
we get the CV 10.02% which means the project is less risky and the
Standard Deviation is 21,74,27,526.41 so NPV can vary up to
21,74,27,526.41.

 MIRR: After running 1000 trials we get the following histogram of

MIRR where most of the values are around the mean.
Forecast: MIRR

Statistic Forecast values

Trials 1,000

Base Case 216,69,80,810.96

Mean 216,69,31,457.93

Median 216,69,64,930.59
Mode '---

Standard Deviation 8,75,176.23

Variance 76593,34,33,513.01
Skewness -0.1849
Kurtosis 2.8

Coeff. of Variation 4.04E-04

Minimum 216,44,05,160.88

Maximum 216,94,22,128.57

Mean Std. Error 27,675.50

On the statistical distribution table of MIRR we can
see the CV is close to zero. So the certainty of MIRR
for this project is significant. The deviation of the
project is 875,176.23.
Exploration of the real Option
To explore the real option we consider the different
possible cash flow in respect with the different
percentage of electricity production:

Probability Net Cash Flow for each year

0.1 157,232,003.00 30%

0.25 209,642,670.70 40%

0.35 235,848,004.52 Dispatch 45%

0.2 314,464,006.00 60%

0.1 504,310,914.36 Capacity 100%

The key points are
Initial investment $ 360 million
Time to exercise the option 5 year
Project life 2019 to 2043(25 years)
PV of Cash Inflows (S) $2,180,273,790.75

Cost for Real Option (K) $359,613,655.34

Time to Exercise Option (t) 5

Risk-Free Rate (r) 0.05

Standard Deviation 2.109800785

Variance 4.451259351
d1 2.793827767

d2 -1.923830206

N(d1) 0.997395589

N(d2) 0.027187935

C $ 2,166,980,810.96
Here we find that the value of the put option after exercising the thermo
electric project for 5 year is $2,166,980,810.96. We also stimulate the real
option with the present value of the cash flow with the cost of real
option to define Call option vale and we get:
Forecast: CE
Statistic Forecast values
Trials 10,000
Base Case 2,166,980,810.96
Mean 2,167,654,725.76
Median 2,169,043,116.67
Mode '---

Standard Deviation 220,133,669.15

Variance 48,458,832,294,373,800.00
Skewness -0.0041
Kurtosis 2.92

Coeff. of Variation 0.1016

Minimum 1,213,815,251.95
Maximum 2,982,092,792.78

Mean Std. Error 2,201,336.69

Here the coefficient of variance is .1016 it means the
project is less risky.
Opportunity for Real Option
From this report, we can draw some findings about Real
Option in this project. These are:
Greenfield projects
building its own regasification terminal
Solar distributed generation
RECOMMENDATION
After evaluation of the cash flow for ASE expansion plan
Tiete in Brazil, it can be said that the plant should stick
with the recommended financing decision. Because in all
three alternative the WACC is higher than the
recommended WACC. Beside we prepare cash flow
considering the production of 500MHh and 225MWh. In
which both has a positive NPV of $1,666,250,884.05 and
$562,932,636.48 respectively. The realistic one was to
produce electricity in dispatched capacity. So we run
stimulation for the revenue and cost of that cash flow to
define NPV and the coefficient variance of the project is
10.02% which shows the project is less risky.
RECOMMENDATION

On the other hand, exploration of real option along the

project made the AES Tiete more attractive. We found
the total value of the real option to be US$
2,166,980,810.96. Thus the true NPV of the projects
were $1,666,250,884.05 and $562,932,636.48. So to
expand the thermoelectric project In Brazil will be a
profitable one. So AES should invest in the
thermoelectric plant at Brazil.
Thank You All