Accounting/ Latin American Hydroelectricity Research term paper 18089

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Financial Analysis of Latin America Opportunity

The following is an illustration of the financial feasibility of a joint venture hydro electricity power plant project in Central America. Estimating the estimated costs of our proposed project, our group chose to use Commonwealth Edison as a comparison. Commonwealth Edison, a subsidiary of Unicom Corp, is used as an assessment of our hypothetical costs of providing electricity for Central America. Using Commonwealth Edison we feel provides a good measure of the validity of estimated costs our corporation would incur. Generally Accepted Accounting Principals (GAAP), used by all U.S. corporations, is the highest standard in the world in determining the validity of a corporation's financial statements. In the subsequent paragraphs, we will demonstrate costs of the joint venture project. Future growth rates in Central America market share for electricity will be projected as well.

One of the benefits that our corporation will have in expansion to Central America is a lower cost of capital. A substantially larger pool of investors would provide a larger supply of loanable funds. Having a greater selection of borrowers in the international market will reduce the cost of starting our firm in Central America. Portfolio diversification is another advantage that our firm will attain, in regards to foreign investment in the financing of our project. The projections of the percentage of debt our firm will incur will be discussed in the following paragraphs.

In looking at the average debt to equity ratio (D/E) of hydroelectric firms in the U.S., we feel that a 67% debt / 33% equity structure would be feasible to initially launch our firm in Central America. To use a comparison, Commonwealth Edison's plant and equipment assets total $28.245 billion. Com Ed provides electricity for over 6.5 million residents in Chicago, and other segments of Illinois. The total population of Central America - (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Panama, and Nicaragua) total to 35.5 million. Taking account these statistics, plant and equipments costs for our firm providing the Central American region would cost $154.22 billion. Using this cost estimate, we would finance $103.33 billion though new market issuance in the U.S. 30 -year Treasury market. At a $100,000/ per U.S. Treasury bond face amount, we would need to have access to 1.03 million 30 yr bond contracts, at the prevailing market interest rate of 6.36%. This financing of 67% of our operations would suffer an annual interest payment of $6.55 billion per year. Our choice of financing through the 30 year treasury bond market is that long-term bond prices are more sensitive to interest rate movements in the U.S. economy. We feel that an efficient estimation of the bond market by investment analysts at our firm can reduce our lending costs in the long-term. The annual interest payment of $6.55 billion/ year can be significantly reduced by 15-20%/ year on forecasts of our analysts at our company.

The cost of labor is another important element is determining the production costs of our firm in Central America. The total population of Central America is estimated at 35.77 million residents. The average unemployment rate in the 7 Central American countries is 8.99%. The adult population, ages 17 and older, represent about 62% of this population; approximately there are 2 million unemployed workers in Central America. We feel that our firm can take significant advantage of the available labor force in Central America. The average hourly wage for an unskilled worker for the Central American region is the equivalent of $2.12 U.S. dollars. Based on the financial data from Com Ed, we would utilize 210,000 from the unskilled labor force, and 55,000 from the skilled labor force (from areas of engineering, environmentalists, and architecture) for operations at our firm.

The high underemployment in Central America is an advantage to the financial costs of labor for our firm. Because there is such a large supply of potential additions to the labor force, our firm does not intend to pay a premium for both skilled, and unskilled worker. We plan to undercut the average unskilled labor wage of $2.12/ hour in Central America by 15%, at $1.80 / hour. The choice here is twofold- lower labor costs/ unit, and overall, more attractive employee benefits package than the current labor market can offer in Central America. Because of the lack of pension benefits programs in Central America, our firm plans to structure an appealing pension benefit program for employees, who will be 100%, vested in the program after 9 years of employment.

Market share and future economic growth portrays the ultimate goals of our joint venture into providing hydroelectric power to Central American residents. Our proposed joint venture is with a multinational commercial bank, the Central American bank for Economic Integration, or CABEI. CABEI's core competency is providing the financial means for integration and development of Central American countries. Energy, infrastructure and social development are the three main categories CABEI looks to improve the economic quality of Central America.

We propose selling CABEI a 43% interest in our corporation. This would reduce our bond financing from $103.33 billion to $58.91 billion. The projected initial costs for our 57% stake in our firm would be $109.79 billion. To finance this substantial level of initial capital, we would stage an initial public offering (IPO) in the U.S. primary market of 24% of our 57% stake in our firm. Percentage wise, our firm would still be the majority shareholder of the firm, at 43.32% stake in the company (slightly above CABEI stake of 43%). $83.44 billion would need to be generated for our stake in the initial investment of our joint venture in Central America.

Due to the considerable cash level of $83.44 billion needed to start our firm, through congressional lobbying efforts, we hope to obtain $750 million in subsidies per year for 5 years from the U.S. government. We feel that in establishing our firm as a dominant energy provider in Central America would generate "first mover" advantages for our firm. Future U.S. investment in the long run is estimated to increase because of our long-term establishment as the most efficient, and largest provider for energy in Central America. We also look to achieve a $250 million/ year subsidy from the 7 Central American countries for our firm's costs for the first 5 years. It is in Central America's best interest to foster the growth of our corporation due to the considerable economic benefit our firm will provide to the region.

Market share is the second main mission for our corporation in Central America. Over the first two years of inception in the Central American markets, we hope to achieve an 11% share on the energy market. In the five-year term, we will target a 28% market share in providing electricity to Central American residents. In a ten-year time span, we estimate that our firm can achieve a 45% market share in the Central American market for hydroelectricity. Residents in Central America on average consume 19.6 billion kWh (kilowatts/ hour). Using the average Com Ed cost of $.0877 per kWh, this is $1.72 billion in total energy revenue. If our firm achieves a 45% market share in that time interval, taking in account inflation, we could achieve $1.04 billion in annual revenues in the tenth year.

The financial analysis discussed above is an estimate of a hypothetical joint venture that Commonwealth Edison would incur in Central America. Data was obtained from Com Ed's financial statements on the database, which provides financial statement information for registered corporations. One of the attractive features we hope to capitalize in providing energy costs for Central America is the hydroelectricity concept. Hydroelectricity is an environmental sound way to provide energy to residents, when compared to the burning of fossil fuels in our world economy. Taking advantage of the mountainous terrain of Central America, we feel that our startup costs of a hydroelectric plant might be lower than originally estimated.

Word Count: 1325


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