tianjin case

Topics: Debt, Risk, Operational risk Pages: 4 (2721 words) Published: October 27, 2014

Construction risk
Construction risk is the risk that accompanies with setting up the power plant project from 1996 till 2000. In those four years Maple Energy is responsible for arranging a joint venture with a local partner, arranging the financing needed, and acquire and contract for all power sales when the project is operational. Considering all the factors Maple Energy is accountable for, there is a possibility things could go wrong during this four- year period. Maple Energy and Tianjin Plastics are major equity investors, with 49 percent and 46 percent at stake they are responsible for repaying debt holders in case of failure or the lack of operating income to cover the debt repayments or principal. The Chinese Ministry of Power Industry (MOPI) is according to their share of five percent in this project also accountable, but the Chinese government refuses to give any guarantees. While Tianjin, a city in Northern China, is known as an industrial city that enjoys many foreign investments, a big concern arises when we talk about coal. The intensive power plant (coal-fired steam-electric) produces 140 megawatt could be seen as a huge amount of air pollution in the Northern city that spreads to 82.300 kilometers with 9.2 million inhabitants. From a financial point of view, the use of coal is actually beneficial for Maple Energy, because of two reasons. The first reason is that the power purchasing agreement (PPA) with the Chinese Ministry of Power Industry (MOPI) states that the coal used for the power plant during its technical life of 20 years plus will be supplied free of charge. This means that costs are being substantially reduced, which indicates higher free cash flows. Consequently, It also means that Maple Energy does not have to bear the risk of fluctuations in coal prices. The second reason is that MOPI has a stake in the project of five percent and a legally binding contract (PPA), which would be in their benefit to honor. With this stated, we...
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