Case Study

Case study: Project modelling and valuation

A gas and power company in Papua New Guinea seeks solutions

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The challenge

Wood Mackenzie was engaged by a local independent power producer (“IPP”) to determine the developer premium which can be applied into existing capital expenditure spent for a gas-fired power project in Papua New Guinea (PNG). The Client was uncertain about how to quantify the development risks, construction risks, and other relevant risks for a potential equity sale upon project commissioning.

The solution

Wood Mackenzie applied discounted cash flow method to determine the net present value of project cash flows at different discount rates based on project stages: (1) Pre-PPA signing stage, (2) construction stage, and (3) operational stage.

In order to capture the key project development and construction risks, Wood Mackenzie adopted a four-dimensional evaluation approach: (1) activity,  (2) time / effort, (3) determinant factor, and (4) country level. Nine countries with similar business environment are selected as benchmarks. The risk premium from each country is compared on a levelised basis.

Key milestones are identified for the development of a typical gas-fired power plant and weightage of the key milestones for the selected countries are being defined individually based on Wood Mackenzie’s understanding and experience of the power industry. The key determinant factor in the project’s feasibility is identified to allow the derivation and allocation of the project risk premium.

To complete the analysis, Wood Mackenzie also recommended a base discount rate applied at operational stage to reflect the investment condition in PNG.

The results

Wood Mackenzie’s detailed analysis on the developer premium helped the Client and potential equity partners to better understand the strategic value in a complex and less transparent market.