Escondido Power Plant
Enron is evaluating whether to build the Escondido Power Plant, a 500 MW combined cycle natural gas plant in Douglas, Arizona, at a cost of $250 million. The plant would sell energy under a 20-year power purchase agreement (PPA). Construction of the plant, expected to be completed in 18 months, would be financed with a loan from Credit Suisse First Boston (CF First Boston). During construction, interest would be capitalized. Upon completion of construction, the plant would be financed with 60% debt and 40% equity. Enron and General Electric Capital (GE) would each provide 50% of the equity. At the end of the 20-year period, the plant would be sold for its book value.
The case asks participants to (a) develop projected financial statements (balance sheet, income statement, and statement of cash flows), and (b) evaluate the capital budgeting proposal using discounted cash flows analysis and a 12% cost of capital. The case has been used in executive programs, although in this setting the instructor should provide participants with the projections and focus the discussion on the sensitivity of the projected numbers to the assumptions imbedded in the case. The case can be used in masters-level programs where participants would be expected to develop their own detailed projections.