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Microsoft Word - Lecture 11-The All American Pipeline Case.doc

C MM 31L c r 1 O 7, et e 1 u

Lecture 11: The All American Pipeline Case (use APV valuation)

T osusht wl o d cs ifr edtl w i e taI in t i usn ut r e i s l s h a:

1. The economic rationale for building a pipeline: is the AAP a good idea? T e p otn y o xlt po c d up s frd OLn afriP D h o p r i t ep i rj t srl o c e I iC l n A D5 ut o a ee u u i a o Eh i so shtx t g en g aai cn o poes l rd iP D xit h w taeii r in cpcy an t rcs a c en A D b4 sn f i t lu 5T u, e A wlr soth c d t teenrsn ea (A D3 . h st A P it np rte r eo h r i i iT xsP D - . h la u f ee ) T e up s an t e xot wto tp rvlf o ges h srl cn o b ep r d i u apo ao C n r u e h s Rss i k Po c d up sn A D5 icm f m rj t srl iP D -wl o er : ee u l o Aak l a s C l riO t C ni naS e (C )acu tfr o srl ) af n ue o t et hl O S ( o nso ½ fup s i a o r n l f c u Po ut n xet t i r s s n i nl rd co epc d on e e i i at i e ca g f c y B t o e m n apo asl ed g u g vr etp rvlt pn i n i l n O S is ev ad iyn tu e f mC l rir i rsn t C o ihay n d t,o sid r af n en i ,o l r t o i a f ee o cm ln wt C ev o m nar u t n o pat i A n i n et e li i h r l g ao S c o r u e hafrr sot i ,n te A wl o h uh ie is eto t np r t nad h A P id ti lq r a ao l s a e pial a t np rn O S rd o id r r m m i y tr sot g C c e i a i u l Ohr afriof oe n o soe rd c g r s teC l n f h rad nh rpo ui a a i a s o n e

T e cn mc o r in iT xsa eta C l ri h eo o i fen gn ea r hrhn af n s fi t i a o C m ei ,u te a ip r n rk. l k le o o pl gb thr r m ot ti sI o si m l n e e a s to k ad oe e id rj t n,n seao nl e a n m rdtl po co sad cnr aa ss r ae ei i y e m k g dc i ai a eio n sn

T e A apa pi - m et e i t kree w h A P p er re o pti wt a e vn s cc i v h n s ev o m nas ’ p oi n o akr n i n etiso p si t t e r lt t o n s

C nt co cs :s “reo m g i d tp et a o s ut n ot ue odr f an u ey e sm r i s t i Olre i is pc Od a f c ao s feeus ri r l t t n o r n e nyuui v

creO S rd im ri lu p ( uv: C c es a n sp l m u ga y Spl up y S i re do , wl eh fsw oe rd c of i s rpi ib teit h s po u pc t l r

A P A

cree et n afridm n uv:f co C l n e ad f i a o Dmn e ad Ic d pi sa,o sm t n fn po ut fr e re fl nu pi o ed rd c u c lc o s m y i aa , u r ui te m u to e a re gi t se c g h a o n t b t s nh d n C m et n pialt kr o pti (r r a e ) i o m i n s y

Wht ihp e wt te C c d i h A Ps o b i? awl apn i h O S r ef e A in t ud l h u t l Iwl t of oeite ru d t is y f h r n h go n la s , B t i te e h h i re, ai te in h go n icsy u wt h vr i o pi sl v g h o ite ru ds ot h y g l c e n l l Iwl eendn A D5 t ib r i iP D l fe Cet ev o m nacne d eo i oui iC . r e n i n et o cr u t a p lt nn A as r l n r lo Iwl eakr t te u cato r in t ib t e d o h G l osfren g l n e f fi Iwl eakr e e hr t ib t e d l w e l n e s e T e A mt a s n i n et po l ,eas i l i t h A P i t ev o m na rb m bcuet i n e i e g r l e em a s tei o si asc t wt t kr h rk fpl soie i a e . s l s ad h n s

Ohr te

C ag iC l rir in cpcy m j r r hn en af n en g aai (a re i a fi o t o t

C ag ir u tr a i dsr u tra b hn en e loy tt e ( g lo cn l ga tu e a o cnt co ) o s ut n. r i

R g lo wl eA P af(ne a t ao t eu tr ist A t i u cr i y b u h a l rf tn C ag it rl (o dbti18) hn en a u sh t ea n 94 x e e

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2. Applying APV to value the AAP A Vcl fr spr e a ao o te rj tn i f ac g rga .it P aso a ea tvl t n fh po cadt i ni po r F s l a ui e sn n m r, ea a a bs cs” su i tate rj t ib f acd nilwt vl t “ae ae asmn hth po cwl ei ne ete i ue g e l n ry h eu yScn ,vl tte s e f c ” soie wt te rj t ata q i .eo dea a h “i e et asc t i h po c s c l t ue d f s ad h e’ u f ac g rga . h dad h bs cs ad i e etvl s i ni po r T i ,d te ae ae n s e f c a e. n n m r d f s u T e A cs icne e m sy i teit a ,vl t g h po c h A P aes o cr d ot wt h fspr ea an te rj t n l h r t ui e f acd i a eu yT e oked e m d et cs wlou o te i ne wt l q i . h L che A r o C ne ae ifcs n h n h l t o r l vl t n fh s e f c . a ao o te i e et ui d f s The all-equity financed project A sm t n iEh i , h h eotet a d ah l s su pi sn xit w i r r sm t cs f w o b8 c p s i e o N po c d ailxed ue a e18 o rj t cp aepn i r f r96 ee t t s t N ad i so ok g ail o d i n t w rn cp a t o i t A Ps o sla d i G o yafra p roe A icnodt wt o d ero t up ss i e h x G o yacn s teT i18 ad 96 n te A ’nt pr i o d era ueh IC n 95 n 18 ad h A Ps eo e t g an l ssn 97 1 o e i18s 9

Iw hd h eu y e o G o ya h wcn o ueto s f e a te q i bt f o d er o a y u s i e t a , t bt e? a
E

β = U

1− D ( TC

)E +

f t rd s uh u β ( r eaj t E

Iw hd h cso eu y ail G o ya(e asrmC f e a te ot fq i cp at o d erpr p f t t o h o teee d q i bto G o ya ,o cn e sm tte h l r eu y e f o d er h w a w et a h u ve t a ) i e cp afr A ? ail A P t o
D ( − 1 TC R S =R U + E

) ( R
U

−R D

)o eo R sl fr v

Wht aesnb vl fr ai r o al a eo β s a e u

U

, A ’u l e d ot A Ps n vr cs e e

C u btb ngt ecu t cccl o l e e eav ( ne yla? d a i o r i)

Iaeu t uiy oe r s rk ta te cn m s r le tt m ro l si y hn h eo o y g ad l i e s

R clhth ast e frh USeu y a ei0 ea tate sebt o te . q i m r t . l a . t k s7 aC s f w :rv e ieh i . o m c d csi o C et ao ,u ) ah l spo i dn xit N t uh i us n f F sm t nb t o d b8 s o i i tiic c ln w e y u ised ot f o rien elf h s r i ad hr o wl pn m so y u t ir l . s ua e l m ai e Wht aesnb g esn h r g 0 . ai r o al us itea e -7 s a e n 0? Whtatra etsebt ip ens af os f cast e sn i le? c f a pi b Dso n r eet a te n vr cso cp aui te A M ) i u ta :sm t h u l e d ot fails g h C P c t i e e e t n R = F + U [ M - F] R β R R U R = 2 % ( -er -o df meh i ) 3 3 yaTB n , o xit 0 r b9 F 1. R = 0% 2. 3 M β :sebt(n vr bt o te A . aii Wh d w ne i a e e a h A PWht t s ? y o e edt ? U ast e u l e d e ) f

O e t gee g m g i s yt aci . h sastbt pr i l r e an i ss m t rkT u,se e an v a f e e i s s a T e se s oi nn h i ut : h ast p si iten s y ’ t o d r A Psaoalp si e aa st kr A if r y oi nd gi ta e v b t o n n s

B ti i ta p ens eas o i ri c o m r u rk rhn i le bcue f sea e n a se pi t ln g Rs o r u tr at n ea i t is i fe loy co r r n af k ga i g d g rf

Ohr pr i p li ,uh s A ’aiy o r n teo e t g oc ssc a A Ps bi t a ag an ie l t r cnr twt sp lr o t c i u pe as h is

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Fc ast e so a a p o p bc t dd i le o pn sn 94 at sebt fr sm l f u ll r e p en cm ai i18 : a e iy a pi e r gd rm0 t 0 . sh A Ps rbb ate i ed fh r g a ef n o . o . A te A ipo al th h h n o ti a e 3 5 y g s n bcue f seac o m ri liw wl s 0 . eas o i ri e n a n o, e iue . t ln ga l l 5 T u, U = 6 % ( iso lb l shn o d er u l e d ot fq i , h sR 1. t s h u ee ta G o ya s n vr cso eu y 3 h d s ’ e e t a p ens rl si y hn is s i le a e rk ta te) pi es s r S ,s g 6 % a te ot f n vr eu yw cn o p tte Vo te oui 1. sh cso u l e d q i , e a cm ueh P fh n 3 e e t 18- 9 C , h h i s$2.ml n 95 95 Fw i g e - 5 io 1 c v 6 5 l i E e to g w o lhv C fr atu t19,oehth po cwl vn h u h e n ae F oe s ni 95n ttate rj t i y c s l e l et d f r95T u, e ed o o p tte t mnla e. x n a e19. h sw ne t cm ueh “ ri vl ” e t e a u

Brief discussion of possible financing side effects

Question: h wm c db so lA P ae o hth P o i o uh eth u A hv s tate V f d n m ksh tt P o te rj t oi e Itaaesnb a ae teoa V fh po cp si ?sht r o al l e t v a e A P In rf ac lir s otad tecs fr o . A ?g oei ni d t s cs n ohrot o n w n a se s s

L o adb cpcyn t d s t asm tadb ihlf o k t etaai is ay t e su eht et e t e a, s d taa o n o db D htm u t f et A sm t r e 5 su ea a 2% xt P (xh l ) t D Vt sid = x a es $2 ml n 0 5 D ,o i y l D = $500 million 15 io = . x sln id l i 2 v g es

As p et a o tee i la e i l sm t fh t mn vl m e i e r a u B 19 A P ib o e t g taai ,o hrin go t iu i o m y 92 A wl e pr i acpcys te s o rwhn n v l e l an t e t u S p oeht e cp aepn i r euler ii u p s tanw ailxed ue q adpe ao t t s c tn S p oeaf go 5 pr erra d onli ) u p s t is rw % eya( le t i ao rf et ft n T u, ee i la e a b apoia d s pre i go i a5 h st t mn vl cn e p rx t a a e t t rwn t%. h r a u m e p uy g T V = F 19 /130) $, 4 ml n C 92 (6-5= 1 7. io . . 6 4 l i
19 93

A cri t eh i , e i le se wl ae bg n g cod g o xit t p en ast ihv a ei i n b 8h pi s l nn ao t2 2 ml n cp aepn i r i8- ) h stiw b u $, 4 io ( ilxed ue n 5 6 T u, s 2 l i at t s 8. h db t astr io a u d 3 eto se ao fr n 2%% s t o

I 19, hn pr i wl e tt d s t E I iepc d n 92w e o e t n ib as ay t e BT s xet ao l e a, e $3 ml n eh i ) 33 io ( it . l i xb 8

Idb cn ea e ate a r e f4 6 ( h i ) hn n f eta b rsd th B aa o 1. % e it , e a i t 2 xb 9 t db wl e 7.ml n et ib $1 io l 3 l i T ene scvr eao E I/ t etwl e .t e. h i r to e g r i(BTi e s ib 4 i s te a t n r ) l 7m

19 93

Wehn i o n te V te d cu th T s

bc t 18 (pr d)o ba $0.ml n ako 948 eo st o tn 50 io i i 3 l i

I 19, e a evl o te i le ib $, 4 . h sA n 92t m r t a e fh p en wl e 1 7. T u, h k u pi l 6 4 l e g w u b 3% e r e ol e 0 va d

P tn tgte te r et a e fh a- u y i ne A i ut g o e r h pe n vl o te l q i f ac A Ps i h, s u l t n e VU = VC s+ VT ri l a e= $2.+ 50 = P (F) P (e n V l ) - 5 $0. -$125.2 million m a u 6 5 3

S tir i se r snb : l k le A ’db cpcy o h ao em e o al io si A Ps etaai s ts a et o k t a o n o db r u e t m k N V 0 m u t f ete id o ae P > qr

N ttai A if acd i 5% db (vrh b o vl oeht A Psi ne wt 0 eto ete o k a f n h u i etet te te vrl P w u b $5.ml n n s n) hn h o e l V o l e 12 io v m , aN d 8 l i

S tei ni po r so lhv a r et a e ft at15 ml nf o h f ac g rga h u ae pe n vl o al s$2. io i n n m d s u e 2 l i te A it b a o dda h A Pso e g o i e

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Other financing side effects (neglected here)

T x h l (r d d cse) a sid ae y i usd e s la s P f ac lir s ot V i ni d t s cs n a se s P o f ac g u s i V fi ni sbie n n ds P o f ac gbsd i ii o i et e o o e t n V fi ni -ae d c le r cni s n pr i s n n s pn n v ao

Alfhs ti s eg oe a po allg! l teeh g w i r r rbb a e o n n d e y r

Epilogue E e ti w n wo g a po l s e peiala o 18! h A P a vr h g et rn + l rb m w r r c b s f94T e A w s y n l e e dt e a ims k! b iae g t C nt co cs w ree h hrhn sm t b te o slns o s ut n ot e vn i eta et a d y h cnu at r i s e g i e t T xu s hn e a rl cagd e Olre do pdT rb :re flf r uh fh m ny a be set i i s rp e. e iepi se a em c o te o e hd en pn, pc rl c l t b t e ro e t n hd o m ne. h ste e O S rd d n t u bf e pr i s a cm ecdT u, nw C c e i o o ao h u d m t ii ,o d P D -srl eebcm vr lg. a rlen r i A D5 up s vr eo e e a e eaz d u y r G o yafl t m k m n a agm nso hrrk o d erae o ae ay r n e ett sa i id r es

I te n , o d er pr e te A free leriaet o e n fr n h edG o yao e t h A P o svr ya n t m d ad o ad a s s t np rn s a v l e o lh c d o. r sot g m l o m s fg tr e i a i l u i u l

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