- Westmoreland Energy Inc. (WEI) is considering a Build Operate Transfer power plant project in Zhangze, China that would operate for 20 years. - The total funding required is 3,664 million CNY, with 75% as debt and 25% as equity. WEI's portion of equity would be 14.87% to obtain a 49% interest in future cash flows. - The internal rate of return for the project appears to exceed the target rate after accounting for country and company risk premiums. However, the project developer has some concerns about risks that could affect the appropriateness of the target rate.

1. 8/24/2017
WESTMORELAND ENERGY INC.:
POWER PROJECT AT ZHANGZE, CHINA
Dhruv Manair- M1603
Vivek Kumar – M1617
SAPM 1

2. Summary:
• Westmoreland Energy Inc. (WEI) a subsidiary
of Westmoreland Coal was considering
whether to proceed for the power plant
project or not.
• Build Operate Transfer (BOT) project for 20yrs.
• IRR appeared to exceed the target.
• Project Developer (Dorothy Hampton), was
concerned about a variety of risks, and
appropriateness of the target and hurdle rate.
8/24/2017 SAPM 2

3. Financing of project:
• Total fund required : 3664 million CNY.
• Debt. : 2748 million CNY (75%)
• Equity : 916 million CNY (25%)
8/24/2017 SAPM 3
Chinese Portion
Local Debt. 54.2%
Local Equity 45.8%
WEI Portion
USD Debt. 85.13%
USD Equity 14.87%

4. Q.1 a) What is Westmoreland`s
investment opportunity here?
Shortage of power, Ministry of Electric power
support.
Transportation of raw material is negligible, set up
of plant near coal mines.
Arrangement of attractive debt financing and credit
enhancement, available to the project.
Leverage of debt to avoid dilution of the existing
equity.
8/24/2017 SAPM 4

5. b) Why is it proposed that Westmoreland
put up 40% of the equity for a 49% interest
in the future cash flows?
• Government of china would own about 60%
equity through Shanxi Provisional Electric
Power Company which increase the risk of
interruption in operation hence they offer
49% of interest in the future cash flow.
• This may consider as the consequences of an
interruption in the operations of the plant.
8/24/2017 SAPM 5

6. Q.2 What should be Westmoreland`s
ROR for the project?
• ROR = Rf + π + (βcountry * βfirm) (EMRP)= 12.11 %
Where,
Π= political risk premium
EMRP= Equity market risk premium
Rf = 8.22 % ( Exhibit 12)
Π = 1.55 (Exhibit 14)
Βfirm = 0.45 (Exhibit 13)
Βcountry = 1.08 (Exhibit 14)
EMRP= 5.5%
8/24/2017 SAPM 6

7. • Since the cash flow in exhibit 11 are given in
Chinese yuan, the U.S. dollar ROR must be
translated to a yuan ROR.
Local K = ((1+Home K) * (1+Local inflation rate)
/(1+Home inflation rate))-1
K= 20.89 %
8/24/2017 SAPM 7

8. Q.3 Should Dorothy Hampton consider
recommending a target ROR of 20%
for this project? Why, or why not?
IRR Sensitivity:
8/24/2017 SAPM 8
Opp. Hours IRR
7884 (90%) 34%
6500 (74%) 26%
6000 (68%) 23%
5500 20%
10 15 18 20
10 23% 27% 28% 29%
15 24% 28% 30% 31%
18 25% 29% 30% 31%
20 25% 29% 31% 32%
Term of USD Debt.
TermofCNYDebt.

9. Q.4 Will this project create value for
WEI? What are the key value driver
assumptions for this project?
• Yes definitely this project create value for WEI,
as china is one of the most growing country of
world.
• Key value driver:
– Demand risk (Take or pay contract)
– Mine mouth power plant
– High ownership interest of 49% by investing only
37-45%.
8/24/2017 SAPM 9

10. Q.5 Are there any qualitative concern
or risk that are not captured in the
valuation analysis?
• Higher inflation in china may lead to high rate
of coal but the charges of electricity can be
controlled by Govt. and cannot be increase by
more than 4%.
• The entire context of contractual obligation
was vastly different in China than developed
countries. (Page-5).
8/24/2017 SAPM 10

11. What should Hampton recommended
to WEI`s board of directors regarding
this project?
• Hampton should recommended to WEI`s
board to go for this project as the IRR in all
different scenario is higher than ROR.
• Also she suggest to start investment after the
Shanxi Provisional Electric Power Company.
• She can also suggest for the long period debt,
which further increase the IRR. And reduce
the risk.
8/24/2017 SAPM 11