LNG Project Valuation with Financial Leasing Contracts *

Transcription

1 LNG Proje Valuaion wih Finanial Leasing Conras * By Magne Emhjellen**, Kjell Løvås*** and Peer Osmundsen Absra Finanial leasing is prevalen in LNG projes. Aually, in many LNG infrasruure projes, leasing is he only opion for oil ompanies. A ommon approah in suh seings is o rea finanial leasing oss as operaing os and disoun wih he firm s weighed average os of apial (WACC. his mehod, whih is applied on huge invesmens in LNG infrasruure, oversaes proje profiabiliy and may lead o overinvesmen. Sine finanial leasing paymens are onraual and deerminisi, a separae ash flow valuaion is alled for, wih a lower disoun rae for finanial leasing oss. We presen a orre mehod for alulaing he ne presen value of projes when here are no invesmen alernaives, i.e., when leasing is he only opion. Finally, we demonsrae hrough a real LNG proje example, he magniude in he proje ne presen value error wih he urren valuaion mehod. Keywords: Proje Valuaion, Capial Budgeing, Finanial leasing, Finanial os. Jel.lass.no.: G31, G32 Magne Emhjellen is urrenly a Senior Commerial Advisor in he Norwegian oil ompany Peoro AS. He ame from he posiion as Assoiae Professor, Deparmen of Eonomis and Business Adminisraion a he Universiy of Savanger ( In he period and he held various ommerial and managemen posiions in Saoil AS (Norwegian oil ompany. In he period he was a finanial analys in Orkla Finane AS. He holds a PhD degree in eonomis from he Universiy of New Souh Wales, Sydney Ausralia,1999. Kjell Løvås holds a Maser in business adminisraion from he Norwegian Shool of Eonomis and Business Adminisraion (NHH in Bergen, joined Saoil in He is now working as an Advisor in Corporae Planning and Analysis. His area of responsibiliies is eonomi analysis and profiabiliy mehodology on he Group level. Before he joined he Corporae saff in 1995 he had a broad experiene from he E&P business boh on he NCS and on inernaional projes. Peer Osmundsen is Professor of Peroleum Eonomis a Universiy of Savanger, where he is head of he Seion of Peroleum Eonomis in he Deparmen of Indusrial Eonomis and Risk Managemen. He has a Ph.D. from he Norwegian Shool of Eonomis and Business Adminisraion (NHH in Bergen. In 1992/93 he was a Researh Fellow a he Massahuses Insiue of ehnology. He has previously held posiions as Assoiae Professor a NHH and Researh Manager a he NHH affiliaed Insiue for Researh in Eonomis and Business Adminisraion (SNF. * We would like o express our appreiaion o Chris Alaouze for helpful ommens. Address of orrespondene: Peer Osmundsen, Universiy of Savanger, Deparmen for Indusrial Eonomis, 4068 Savanger, Norway. el: ( , [email protected], Inerne: hp://www5.uis.no/kompeansekaalog/cv.aspx?id=08643&sprak=bokmal ** Magne Emhjellen, Senior Advisor, Peoro AS, PO Box 300 Senrum, 4002 Savanger, Norway. el: ( , Fax: ( , [email protected] *** Kjell Løvås, Saoil ASA, 4033 Forus, Norway, el:( , [email protected] 1

2 1. Inroduion he exbook mehod for he lease or buy deision is o esimae he expeed os ash flow afer ax for he wo os alernaives and alulae he presen value of hese using he aferax borrowing rae in disouning. he lowes os opion is he preferred hoie. However, in some ases here is no invesmen alernaive for he finanial asse o be leased. hese are siuaions where here are only offers for leasing an asse, here is no available developmen ime for invesing in he asse, or managemen does no onsider owning his ype of asse. In suh ases he exbook mehod may no be used sine here is no invesmen opion. Consequenly he alulaion of he ne presen value of he proje for a deision (and omparison o oher projes mus inlude he leasing onra. his inlusion of he finanial leasing os mus be underaken orrely in order o esimae a orre proje ne presen value. o alloae invesmen funds opimal wihin peroleum ompanies, i is neessary o apply onsisen valuaion mehods. We find he ommon praie of reaing leasing paymens as operaing oss and applying he WACC does no refle he aual risk sruure, as leasing paymens ofen are fixed by onras for up o weny years. he urren praie, whih applies o huge invesmens in LNG infrasruure, overraes profiabiliy. I may hus lead o overinvesmen. Also, here is a poenial problem of sub-opimisaion in he ompanies inernal apial alloaion proess. Proje managers ha would like o ahieve suppor for heir proje, may have an inenive o op for leasing, as his would give an undue inrease in NPV wih he urren evaluaion mehods. hus, here may be disorions in he deision o buy or lease, in he overall invesmen deision, and in he inernal alloaion of invesmen funds. Mos riial his would be in a riial bidding siuaion where wrongful valuaion ould indue oo aggressive bidding. A real world example of suh disorions is provided in Seion 8. 2

3 2. Inroduion o Liquefied Naural Gas projes and leasing he liquefied naural gas (LNG ehnology is able o uilise marine ransporaion, and LNG is like oil slowly beoming an inernaionally raded ommodiy. he LNG proje hain onsiss of four links (oasionally five; 1 field developmen, in some ases 2 a pipeline o he oas, 3 he liquefaion failiy, 4 anker ransporaion, and 5 he reeip/regasifiaion erminal. 1 Eah elemen is highly apial inensive and fron-end loaded. Field developmen will in many ases only represen a quarer of he overall apial expendiure. Finanial leasing is prevalen in links 2 o 5. here are several reasons why he inernaional oil ompanies hoose leasing. here has been a rend owards a narrowing of he sraegi ore. Oil ompanies engage in exploraion, developmen and disribuion of peroleum, and make aive use of ousouring in siuaions where here exis a funioning marked for servies. Leasing may also be benefiial if he infrasruure lass longer han he esimaed produion ime of he reservoir. Anoher moive for finanial leasing is o redue he apial employed, o improve reurn on average apial employed (RoACE. Invesmen banks benhmark inernaional oil ompanies aording o heir RoACE, and use his indiaor for valuaion. For a given year, UBS Warburg idenifies a lear relaionship beween RoACE and he EV/DACF muliple, and onlude: 3

4 Figure 1: RoACE and EV/DACF for Major Inernaional Oil Companies 2003 Exxon Pero-Canada oal Chevronexao Royal Duh Saoil Oidenal BP Eni ConooPhillips Marahon Oil Repsol YPF Hydro Amerada Hess RoACE EV/DACF Daa soure: Deushe Bank: Major Oils Eah of he soks whih we rae a Buy is rading below he average level relaive o is reurns. EV/DACF versus RoACE provides he key objeive inpu ino he proess of seing our arge pries. 2 Similar saemens abou valuaion, muliples and reurn on apial are made in Deushe Bank s publiaion Major Oils. For more deails on valuaion of oil projes and ompanies, see Osmundsen e. al (2006, 2007 and Emhjellen and Alaouze (2002a, 2002b. If finanial leasing were adequaely adjused for in finanial valuaion analyses, leasing deisions would no have any impa. I is unlear, however, if exernal analyss who are raking many ompanies - have he neessary informaion and resoures o do suh adjusmens in a onsisen manner. In he numbers behind Figure 1, suh adjusmens have no been made. If mos ompanies follow a sraegy of leasing, hus reduing apial employed and boosing RoACE, a deviaion from his sraegy by one ompany would harm is performane on he RoACE benhmarking. LNG leasing arrangemens ofen involve long erm onras wih fixed paymens from ompanies ha are finanially robus. hus, one ould from a separae ash flow perspeive argue ha he oil ompanies hemselves ould own he infrasruure, whih would be he opimal soluion if appropriae risk adjusmens were made o his parial ash 1 See Jensen (

5 flow. Bu if invesors expe high RoACE - and impliily a higher risk profile from oil ompanies (lienele effe - i migh be opimal o leave his job o speialised ompanies having differen owners and a differen reurn profile (lower reurn, lower risk. he LNG invesmen analyses of he oil ompanies should in hese ases refle he fa ha he leasing paymens on dediaed infrasruure represen fixed paymens for some 20 years. 3. Exising lieraure In reviewing he exising lieraure on leasing and proje valuaion we have found no work on proje valuaion where an invesmen alernaive o he finanial lease onra does no exis. Early work by Lewellen e al (1976, Brealey and Young (1980 and Ang and Peerson (1984 fous on inenives for leasing and wheher deb and leasing is omplemens or subsiues. Reen work in his area has been provided by Sharpe and Nguyen (1995, Kang and Long (2001 and Ezzell and Vora (2001. Sharpe and Nguyen (1995 argue ha firms faing high oss of exernal funds an eonomize on he os of funding by leasing. Kang and Long (2001 find ha leasing and deb finaning is subsiues and ha ax posiion, ageny os, bankrupy os and asymmeri informaion are signifian faors in prediing leasing levels. hey also find resuls onsisen wih Sharpe and Nguyen (1995 ha higher levels of leasing is more likely in less profiable, risky firms wih lower levels of fixed asses. Ezzell and Vora, 2001 find suppor for inrease in lessee equiy value for he ax savings hypohesis and he savings in bankrupy oss hypohesis of sale and leasebaks bu less so for dire leases. Oher researh fous on he yield/reurn of lease onras (Grenadier, 1996 and Shallheim e al, 1987 and he valuaion of he lease onra iself (rigeorgis, 1996 and MConnell and Shallheim, Grenadier (1996 presens a model for he esimaion of equilibrium redi spread on leases subje o defaul risk. Shallheim e al (1987 examine a represenaive sample of 2 Global Inegraed Oil Analyzer. 5

6 finanial leases and find some evidene of a relaionship beween lease yields and he defaul risk of he lessee. In addiion, hey find he yield o be relaed o reasury bond yields, heir proxy for he sysemai risk of he leased asses residual value and he ransaion and informaion os assoiaed wih he lease. rigeorgis (1996 and MConnell and Shallheim (1983 work on he valuaion of leasing onras when differen opion values are presen. Wih opion values presen in he onra here are added benefis o he lessee or leaser. he lease onra is no longer a sri finanial lease sine here are oher benefis o he onra han finaning only. We omplemen he exising lieraure in he presen paper by fousing on he hallenges in applied valuaion in siuaions where leasing is he only opion. 4. Invesmen deisions wih finanial leasing In his paper we presen a mehod for alulaing he ne presen value of a proje wih a finanial lease onra when here is no invesmen alernaive o leasing and he lease is a sri finanial lease. here are no opions in he lease onra and leasing is assumed o be a perfe subsiue for deb. reaing he finanial lease as an operaing os will provide an erroneous esimae of he ne presen value (NPV of he proje. An alernaive mehod for esimaing a proje ne presen value is suggesed: alulaing an invesmen equivalen from he finanial lease onra and replaing he invesmen equivalen for he finanial lease paymens in he proje ash flow. he res of he paper is organized as follows. In seion 5 we demonsrae he exbook mehod of he lease and buy deision. In seion 6 we presen he differene beween oal apial and equiy apial and he misake of reaing he finanial lease as an operaing os. 6

7 Seion 7 presens he mehod for alulaing proje ne presen values wih finanial leasing onras and seion 8 provides a praial LNG proje example. We onlude in seion he exbook Approah he exbook mehod for he lease or buy deision involves esimaing he expeed differene ash flow afer-ax beween leasing and buying, and disouning i using he afer-ax borrowing rae of he firm (Brealey and Myers, 2003 pp hus, he presen value of he os of he leasing alernaive and he inves alernaive is ompared using he afer-ax deb finaning os of he firm. he lowes os opion is hen he preferred alernaive. he mehod assumes ha he lease or buy deision is a sri finane deision. Mos firms rea leasing using he exbook mehod (Mukherjee, When deiding o lease an asse raher han owning i one looses he righ o he depreiaion amouns and gains he righ o dedu he down paymens from he loan. he ne presen value of leasing for he lessee is (Copeland and Weson, 1992, 623 NPV I L (1 D 1 1 (1 rd, (1 where I is he invesmen, L is he lease paymens, D is he depreiaion amouns, is he orporae ax rae and r d is he orporae borrowing rae. For illusraion, a simple numeri example is presened. An oil firm is evaluaing a new oil lease developmen and are faed wih he opion of leasing a produion vessel for 6 years a a os of 120 million USD per year or invesing in he produion vessel a a os of 600 million USD. he orporae ax is 28%, and invesmens in he vessel may be ax depreiaed linearly over 6 years. he orporae borrowing rae is 7%, whih implies an afer- 7

8 ax borrowing rae of 5,04% [7% x (1-0,28]. he ne presen value of he finanial lease for he lessee - he NPV of he differenial ash flow - is hen 6 120( (0.28 NPV (2 1 ( ,07 1 Sine he NPV is posiive he presen value of he afer-ax finanial lease os is lower han he afer-ax invesmen os and he deision is o lease he produion vessel. However, before his deision an be made he value of he proje when invesing mus be esimaed. he value of he proje when invesing is NPV I ( R 1 1 O (1 WACC D, (3 where R is revenue, O is operaing os and WACC is he weighed average os of apial. Assuming a WACC of 10% and proje revenues and operaing oss of 200 million and 50 million per year, respeively, he value of he proje is 6 (200 50( (0.28 NPV (4 1,1 1 Based on invesing wih he normal os of finaning refleed in he WACC he proje should be rejeed. However, wih he heaper han normal finaning provided by he finanial leasing offer he proje NPV is posiive and he proje should be aeped ( = he exemple presumes no alernaive use of he lease onra. 8

9 he appliaion of he exbook approah requires ha here exis an invesmen alernaive for he finanial lease obje in quesion and ha he invesmen os is known. In many praial siuaions his is no he ase. here are siuaions where here are only offers for leasing he asse or here is no developmen ime for an invesmen alernaive in order for he proje o be realised. In oher ases managemen does no onsider owning his ype of asse and he rue os of invesing is no known. In suh ases he alulaion of he ne presen value of he proje mus inorporae he os of he finanial lease before an aepane or rejeion of he proje. 6. oal apial, equiy apial and deb apial WACC onsiss of he os of equiy obained from he apial asse priing model (CAPM (Sharpe, 1964 and he os of deb, and is a weighed average of he wo based on he firm s apial sruure. WACC is herefore appliable only in disouning he oal apial ash flow. In able I he oal apial ash flow, deb apial ash flow and equiy apial ash flow is presened. able I: oal Capial-, Deb Capial- and Equiy Capial ash flow oal apial ash flow Deb apial ash flow Equiy apial ash flow +Revenues +Revenues -Invesmen -Invesmen -Operaing os -Operaing os -ax paymens -ax paymens -Loan +Loan +Ineres -Ineres +Down paymens -Down paymens 9

10 Finanial lease paymens are for all praial purposes equivalen wih a deb ash flow. From he able is lear ha inroduing leasing in he oal apial ash flow will hange i o an equiy apial ash flow. he wo ash flows have differen sysemai risk beause he inlusion of deb in he equiy ash flow amplifies he equiy ash flow risk (Copeland and Weson, 1992, pp he WACC may herefore no be used in alulaing proje value when he finanial lease os is inluded in he ash flow sream as an operaing os (i.e. in effe inreasing leverage. In addiion, inluding he finanial lease in he proje ash flow will ause he deb level o hange during he life of he proje. he use of he WACC in disouning proje ash flow requires a onsan deb raio (Miles and Ezzell, Differen deb levels during he life of he proje are no onsisen wih a onsan WACC. Consequenly, a proje NPV esimae using WACC is inorre. Our example will exemplify he proje valuaion error of reaing he finanial lease as an operaing os. In equaion (5 he finanial lease paymens are inluded as operaing os in he proje ash flow sream. NPV ( R O L (1 1 1 (1 rd. (5 Using equaion (5, he ne presen value of he example in Seion 5 is alulaed o 94.1 million USD. 6 ( ( NPV (6 1,1 1 10

11 he finanial leasing os paymens (120 per year are inluded in he ash flow as an operaing os. Ineres and down paymens ener he ash flow and are dedued as operaing os. he ne presen value of 94.1 million USD is a subsanial inrease from he 12.4 million alulaed from equaion (2 and (4. he alulaion is erroneous sine he ash flow is no longer a oal apial ash flow where he WACC may be used in disouning. 7. he Mehod - Calulaing proje NPV wih a finanial lease he mehod requires alulaing an invesmen equivalen from he lease paymens. his invesmen equivalen is an esimae of he presen value of he finanial ommimen he lease represens. he invesmen equivalen (E is alulaed by esimaing he presen value of he lease paymens using he orporae borrowing rae. Sine his is a sri finanial lease where borrowing and leasing are perfe subsiues, he orporae borrowing rae before ax is used in disouning. In equaion 7 E is alulaed E L 1 (1 rd, (7 where L is he lease paymens and r d is he orporae borrowing rae before ax. he lease paymen is an annuiy wih presen value E and ineres and down paymens of i and d, respeively. he ax shield resuling from i is aouned for in he WACC. he down paymens, d, are he esimaes of he depreiaion amouns of he invesmen equivalen E. he value equaion is hen NPV E ( R 1 1 O (1 WACC d, (8 11

12 where E has replaed I and d has replaed D in equaion (3. he example ase value of he proje is hen 6 (200 50( d NPV (9 1,1 1 Wih leasing paymens of 120 million and a borrowing rae of 7%, E is alulaed o 572, and he down paymens (d as esimae of he depreiaion amouns assoiaed wih E are alulaed o [80.0, 85.6, 91.5, 98.0, 104.8, 112.1] from years 1 hrough 6 respeively (annuiy from lease. he esimaed NPV of he proje using he invesmen equivalen mehod is 12.5 million USD. his proje NPV esimae is a beer esimae of he proje ne presen value han he erroneous proje NPV of 94.1 million USD alulaed in equaion (6. In Appendix 1 we provide a es of our proposed inves equivalen mehod, indiaing ha i is an aurae mehod. 8. Case: Liquefied Naural Gas example o illusrae he magniude in he ne presen value alulaion error an example from an offshore Liquefied Naural Gas (LNG field developmen is presened. Deailed proje daa are available in Appendix 2. he building of he neessary LNG rains and field apial expendiure (wells and modifiaion amoun o 7.6 billion 2006 USD. he proje has an upfron ommied onraual agreemen wih he ship owner and he regasifiaion erminal (a he eas os of he USA owner for he whole produion period ( he onraual agreemen is a ake or pay agreemen ha ommis he oil ompany o pay he ariff wheher hey use he failiies or no. We do no have aess o reliable informaion on invesmen os for LNG ransporaion ships or a regasifiaion erminal. 12

13 he shipping and regasifiaion oss (paid in erms of ariffs are 1 USD per mill Bu. Ordinary operaing oss are 5,5 billion USD over he lifespan of he proje. Invesmen sar is se o 2010 and produion is in he period from 2014 o oal produion amouns o 100 billion sandard ubi meer of Gas and 14 million sandard ubi meer of ondensae. Prie assumpions are an easern USA Gas prie of 6,25 USD (2006 per million Bu and an oil prie of 38 USD (2006 per barrel. he required rae of reurn is 10% afer ax (real, inflaion is 2.5%, and he referene year for disouning is he Norwegian offshore ax regime wih a 78% marginal ax rae is assumed and he invesmen in shipping and regasifiaion is assumed o be in a ax regime wih a 28% marginal ax rae (ordinary ax rae in onshore Norway. he shipping and regasifiaion os, however, is assumed o be deduible agains he 78% ax rae regime by he oil ompanies. he shipping and regasifiaion os of 1 USD per mill Bu will amoun o 3,8 billion USD over he lifespan of he proje. In a sandard ne presen value alulaion where he shipping and regasifiaion os erroneously lassified as operaing os, he proje ne presen value is 359 million USD. If we alulaed he ne presen value of he proje in aordane wih he invesmen equivalen mehod presened in his arile, however, he ne presen value is negaive; minus 73 million USD. able II. NPV, LNG example Mill 2006USD NPV before ax NPV afer ax Lease reaed as operaing os Lease reaed as invesmen his demonsraes he magniude of he error in ne presen value alulaion and he possibiliy of a wrong proje aepane deision. Managemen mus be aware of his 13

14 possible ne presen value alulaion error and rea leasing arrangemens orrely in he valuaion of he proje. If apial leasing is no reaed orrely in he proje ne presen value alulaion, oher invesmen os (7.6 billion USD in his example ould make proje managers eager o lease addiional asses, hereby reduing he invesmen amoun and inreasing he exen of leasing. his ould give rise o even larger errors. 9. Conlusion An imporan objeive for apial invesmen valuaion proedures in a ompany is o esablish a level playing field for he apial alloaion proess, o failiae an opimal alloaion of invesmen funds. A ommon way o ahieve his end is o ake finaning deisions ou of he projes NPV alulaions. his is someimes hallenged by inseparable proje finaning, e.g., finanial leasing of LNG infrasruure. Finanial leasing represens fixed paymens, analogously o deb finaning. hus, proje leasing inreases he ompany s gearing and hereby inreases he funding os of all he ompany s projes. his negaive exernal effe is no aouned for in he radiional way of reaing finanial leasing. Aordingly, he profiabiliy of suh projes is overraed, and here are oo srong inenives o ake on proje finaning. In he paper we have presened a mehod ha aouns for he disorions ha may be imposed by leasing in invesmen projes. he exbook mehod for he lease or buy deision is o ompare he afer ax invesmen os wih he afer ax os of leasing using he afer ax borrowing rae. In many LNG-projes, however, leasing is he only opion. A ommon approah in suh seings is o rea finanial leasing oss as operaing os and disoun wih he firm s weighed average os of apial (WACC. his mehod, whih is applied on huge invesmens in LNG infrasruure, oversaes proje profiabiliy and may ause overinvesmen. Sine finanial 14

15 leasing paymens are onraual and deerminisi, a separae ash flow valuaion is alled for, wih a lower disoun rae for finanial leasing oss. We demonsrae ha by inluding leasing paymens in he oal apial ash flow, i hanges o an equiy apial ash flow. WACC is hus no appliable. We presen a mehod for alulaing proje values wih finanial lease onras when here are no invesmen alernaives o leasing. he mehod uses he ash flow from he finanial lease onra offer in obaining an esimae for an invesmen equivalen o replae he finanial lease os in he proje ash flow. he firm weighed average os of apial is hen appliable in disouning he proje ash flow. he mehod developed provides beer esimaes of proje values sine he alernaive approah makes he error of reaing he finanial lease oss as operaing oss. he example of an LNG proje alulaion demonsraes ha he error in he proje ne presen value alulaion may be subsanial, and ha erroneous invesmen deisions may be made. Referenes Ang, J., and P. Peerson, 1984, he Leasing Puzzle, Journal of Finane 39, Brealey, R.A., and S.C. Myers, Priniples of orporae finane: Sevenh Ediion (MGraw-Hill, New York. Brealey, R.A., and C.M. Young, 1980, Deb, axes and Leasing-A Noe, Journal of Finane 35, Copeland,.E., and J.F. Weson, Finanial heory and Corporae Poliy: hird Ediion (Addison - Wesley, Menlo Park, California,. Emhjellen, M. and Alaouze, C. M Proje Valuaion when here are wo Cashflow Sreams, Energy Eonomis, Vol. 24, Sepember, pp Emhjellen, M. and Alaouze, C. M he Disouned Ne Cashflow Mehod and A Modern Asse Priing Mehod Impliaions for Proje Seleion and Poliy, Energy Poliy, Vol. 31, Deember, pp

16 Ezzell, J.R., and P.P. Vora, 2001, Leasing versus purhasing: Dire evidene on a orporaion's moivaions for leasing and onsequenes of leasing, he Quarerly Review of Eonomis and Finane 41, Grenadier, S. R., 1996, Leasing and redi risk, Journal of Finanial Eonomis 42, Jensen, J.., 2004, he developmen of a global LNG marke, Oxford Insiue for Energy Sudies. Kang, S., and M.S. Long, 2001, he fixed paymen finaning deision: o borrow or lease, Review of Finanial Eonomis 10, Lewellen, W.G., M.S. Long, and J.J. MConnell, 1976, Asse leasing in ompeiive apial markes, Journal of Finane 31, MConnell, J.J., and J.S. Shallheim, 1983, Valuaion of asse leasing onras, Journal of Finanial Eonomis 12, Miles, J.A., and J.R. Ezzell, 1980, he weighed average os of apial, perfe apial markes, and proje life: a larifiaion, Journal of Finanial and Quaniaive Analysis, 15, Mukherjee,. K., 1991, A survey of orporae leasing analysis, Finanial Managemen 20, Osmundsen, P., Ashe, F., and K. Mohn (2006, Valuaion of Oil Companies Maers, Energy Journal, 27, 3, Size Osmundsen, P., Mohn, K., Ashe, F., and B. Misund (2007, Is he Oil Supply Choked by Finanial Markes?, Energy Poliy 35, 1, Shallheim, J. S., R.E. Johnson, R.C. Lease, and J.J. MConnell, 1987, he deerminans of yields on finanial leasing onras, Journal of Finanial Eonomis 19, Sharpe, S. A., and H.H. Nguyen, 1995, Capial marke imperfeions and he inenive o lease, Journal of Finanial Eonomis 31, Sharpe, W., 1964, Capial asse pries: A heory of apial marke equilibrium under ondiions of risk, Journal of Finane 19, rigeorgis, L., 1996, Evaluaing leases wih omplex operaing opions, European Journal of Operaional Researh 91, UBS Warburg, 2003, Global Inegraed Oil Analyzer, quarerly assessmen of he sraegies and valuaion of he world s larges inegraed oil ompanies. 16

17 Appendix 1: es of he auray of he proposed invesmen equivalen mehod In Seion 7, we demonsraed a onsiderable deviaion in proje value beween he ommon mehod of reaing leasing oss as OPEX, and our proposed invesmen equivalen mehod. We now es he auray of our mehod by omparing wih he exbook mehod. As poined ou, he exbook mehod is no appliable when he invesmen amoun is no known o he lessee. For esing our mehod, however, we hek he auray of our mehod in a ase where he invesmen os is known o he lessee. From equaion (1, (3, (7 and (8 he proje value differene, whih we denoe PV D, beween he exbook mehod and he invesmen equivalen mehod, is given by PV D I 1 ( R O (1 1 WACC D I 1 L (1 1 (1 r D d (10 L 1 (1 rd 1 ( R O (1 (1 WACC d. Simplifying he expression, we ge PV D L ( D d L (1 D 1 ( 1 rd 1 (1 WACC 1 1 (1 rd (11 For our example wih equal o 6 periods, (100 d ( (0.28 PV D 0.1. (12 (1.07 (1.1 (

18 he differene he exbook mehod less invesmen equivalen mehod - is merely given by -0.1, i.e., indiaing auray of he proposed invesmen equivalen mehod. When deiding o lease an asse raher han owning i one looses he righ o he depreiaion amouns and gains he righ o dedu he down paymens from he loan. he differene in equaion (11 is aused by he fa ha he ax gain from his differene is disouned differenly wih he wo mehods. In he exbook mehod he differene is disouned using he afer ax borrowing rae while in he suggesed invesmen equivalen mehod he differene is disouned using he WACC. Equaion (13, as equaion (11, herefore expresses he ne presen value differene beween he wo mehods PV D ( D d ( D d 1 (1 rd (1 1 (1 WACC. (13 Using (13 for our example he presen value differene is -0.1 million USD whih is equal o he differene shown in (12. Seing (11 equal o (13, we ge L L (1 D ( D d 1 ( 1 rd 1 1 (1 rd 1 (1 (1 rd. (14 Sine he lease paymen (L is equal o he down paymen (d plus he ineres paymen (i, (14 is equal o L i (1 1 ( 1 rd 1 1 (1 rd d. (15 18

19 Equaion (15 demonsraes ha he presen value of a loan is equal o he presen value of he ineres paymens afer-ax plus he presen value of he down paymens, boh disouned using he afer-ax ineres rae. For any given sine i Lr d ( 1 rd and d L Lr d ( 1 rd (1 L r d L /(1 r r (1 d d 1 (1 r L d L /(1 r r d d (16 and L L(1 rd rd L ( 1 rd (1 rd rd (1 rd (1 rd. (17 In he ase where here is no invesmen alernaive, here exis no alernaive bu o use he orporae WACC in disouning he depreiaion ax shields. Differenes in ash flows beween alernaive developmen oneps are in praial analysis evaluaed by using he WACC. he suggesed invesmen equivalen mehod is, as a resul of using he WACC when disouning he depreiaion ax shields, onsisen wih urren praie. An alernaive mehod o he invesmen equivalen mehod is o esimae a orre required rae of reurn for he proje ash flow inluding he finanial lease (i.e. an equiy ash flow. Suh a proje valuaion mehod would be diffiul and no very praial sine he finanial lease will ause he deb level o hange during he lifeime of he proje, requiring a new esimae for he required rae of reurn for eah individual period. 19

20 Appendix 2: Daa from he LNG example able 1: Lease reaed as operaing os Inome Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Inome Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Inome Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Mill USD able 2: Lease reaed as invesmen Mill Norwegian offshore axaion ase as able 1 USD Inome Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Inome

21 Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Inome Capial expendiure Operaing os Lease ax Cash flow before ax Cash flow afer ax Vessel and Regasifiaion Owner ompany Inome Capial expendiure ax Cash flow before ax Cash flow afer ax Inome Capial expendiure ax Cash flow before ax Cash flow afer ax Inome Capial expendiure ax Cash flow before ax Cash flow afer ax Combined Cash flows Cash flow before ax Cash flow afer ax Cash flow before ax Cash flow afer ax Cash flow before ax Cash flow afer ax

22 22