Valuing a natural gas power plant
I am an Associate and am looking at my first operational gas power plant deal. Plant has been operational since 2010. There are a total of 10 years under capacity contract remaining and I have been provided forecasts by the seller for the first five years
Looking to submit a NBO offer. Seller is not forthcoming to any DD questions.
Thinking of slapping a 7-8x entry EBITDA, do a five year DCF on the projections, apply a terminal value (based on build costs) at end of year 5, and see what price gives me a 12-14% post tax IRR? Is this too simplistic approach to valuation? I don't think it makes any sense to build a 30 year monthly forecast model
What are you solving for? Potential value of the plant or max. purchase price for a particular IRR / investment period?
Flat-line any projections beyond year 5.
Thanks. Solving for max purchase price that gives me the IRR I require
Does that change your answer?
What would you suggest i do for terminal value? Or should I not factor it in. I believe I should otherwise my offered price would be completely disconnected from market multiples
You don’t need a terminal value. For example, your goal is to determine the max purchase EV for an investment period of 10 years. Assume an exit at end of year 10 at a multiple similar to entry multiple (based on precedents) and use that to solve for max. equity contribution for a given IRR, and ultimately max purchase EV.
Note that above solves for “what you are willing to pay” vs. Intrinsic value of plant to the seller. To understand value, just project out cash flows till the end of life (no terminal value) and discount them to obtain an NPV.
The delta between your NPV and max. Purchase EV will likely drive your bid-ask spread here. Hope this helps.
generally what this guy said, terminal value should be informed by the npv of remaining cash flows post whatever your assumed exit date is. These are finite-life assets so i'd think that just assuming same exit multiple as your entry multiple doesn't usually make sense unless the asset is still pretty new (or you assume a much stronger market in 5-10 years that would drive up future cash flows, but this should be informed by your cash flow assumptions when doing the npv analysis)
A power plant is not like a normal business, it has a limited useful life. Do u think taking a terminal value would be justified?
Levered dcf to useful life
Market curves and dispatch inputs from market consultants to drive revenue post contract life
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