Chapter 1

Introduction:

A fossil fuel power station is a power station which burns fossil fuel such as coal, natural gas, or
petroleum to produce electricity. Central station fossil fuel power plants are designed on a large
scale for continuous operation. In many countries, such plants provide most of the electrical
energy used. Fossil fuel power stations have machinery to convert the heat energy of combustion
into mechanical energy, which then operates an electrical generator. The prime mover may be a
steam turbine, a gas turbine or, in small plants, a reciprocating internal combustion engine. All
plants use the energy extracted from expanding gas, either steam or combustion gases.

Coal is the most abundant fossil fuel on the planet, and widely used as the source of energy in
thermal power stations. It is a relatively cheap fuel, with some of the largest deposits in regions
that are stable politically, such as China, India and the United States.

Westmoreland Energy, Inc. (WEI), based in Charlottesville, Virginia, was a subsidiary of

Westmoreland Coal Company (WCX). WCX was established in 1854 and held substantial coal
reserves and mining operations in the western United States and Montana. In recent years, WCX
had to contend with the oversupply and low price of Central Appalachian coal.

WEI was formed in 1986 to compete in the independent power and cogeneration market. Its
project portfolio consisted of eight domestic projects with a gross capacity of 850 megawatts of
electricity. Over the past few years, the scope of the power industry had expanded from a
predominantly domestic business to one dealing with diverse international projects. WEI decided
to focus on potential investments in China, Italy and Mexico. WEI approached each market
differently. In Mexico, WEI proposed innovative energy supply partnership for an industrial
complex and was exploring the acquisition of existing private cogeneration facilities. In Italy,
WEI set out to work on a greenfield development. Many of the international projects pursued by
WEI were coal-fired electric-power generating plants, which complemented the firm’s expertise
in coal in independent power generation and mining.
Basically the report objective is to solve the case for WEI. The case in about forecasting whether
to set up or not an electric power generating plant at Zhangze, China as a key potential investor
had backed away from the deal and decision-making on the part of the Chinese was agonizingly
slow. But in general, setting up a project in China means not only to move WEI into an attractive
power market, but to capitalize on WCX’s historical strength in coal mining in a potentially
high-growth coal production market.

Objective of the report:

The major objectives of the case study are mentioned below:

 Explore the problems to evaluate electric-power-generation project at China with different
economic and political characteristics.
 Summary of different types to risk.
 Evaluate the approach to capital budgeting.
 To know how to take capital investment decisions.
 Chapter 2
Analysis of the Economy:

The People’s Republic of China is situated in eastern Asia, with coastlines on the Yellow Sea
and the East and South China seas.

As contradictory political, economic, and social trends pulled China, a country of nearly 1.2
billion people, in opposite directions in 1994, it was difficult to discern a coherent pattern in the
government’s policies. At the beginning of the year, China’s leaders proclaimed a period of
comprehensive reforms, but these were nowhere in evidence at year’s end apart from the
introduction of a new tax system. Two conflicting images of China were unmistakable. The first
was that of a rapidly developing economic powerhouse, playing an increasingly important
international role and vigorously asserting its interests on the stage of Asian and world politics.
The second was that of a country with decreasing internal cohesion, beset by intractable social
and economic problems and indifferently governed by Communist Party veterans mainly
interested in clinging to power. Ample evidence supported both of these images. China seemed
to be a vessel adrift at high speed, its destination unknowable.

CPC leaders, however, had reason to believe that their political sins would be overlooked by the
outside world as long as the Chinese economy continued to grow and foreigners were given a
piece of the action. In March, Li, fearing inflation and budgetary overruns, forecast a 9% gross
domestic product (GDP) growth rate in 1994, down considerably from 1993’s torrid 13.5%. This
target proved too modest, however, because less than half of China’s GDP was being produced
by the state sector, and 9% growth was considered sluggish by booming coastal provinces such
as Guangdong (Kuang-tung). In fact, the economy continued to expand at an 11.8% clip.

The most worrisome effect of high growth was an upwardly spiraling inflation rate. The
consumer price index shot up 27.4% in the first three quarters of the year, with food responsible
for about half the increase. (The average Chinese spent 50% of personal income on food.) Grain
prices soared owing to sharp increases in the amount the state paid farmers for their grain, as
well as disastrous floods, the imposition of a 17% value-added tax on goods, loose credit
policies, the effects of price reforms in 1993, and excessive demand. Overall, increases in per
capita income outpaced inflation, but the income gap between the urban nouveaux riches and the
mass of ordinary workers and farmers continued to widen, with disturbing social consequences.

In the first half of 1994, crime soared 20% as new waves of rural migrants contributed to an
accelerating breakdown of social order in the cities. Authorities cracked down on illegal firearms
possession and struggled to control the activities of rapidly proliferating criminal gangs, many
with international connections. In September the deadly rampage of a lone gunman in downtown
Beijing (Peking) was a powerful symbol of growing lawlessness. Among the measures the
authorities used to combat crime was the profligate application of the death penalty, making
China responsible for more than 60% of the world’s state-ordered executions. Officials estimated
that there were 140 million "surplus laborers" in China--more than the entire population of
Japan--a figure that could rise substantially as the shutdown of unprofitable state enterprises
produced massive unemployment. During the first half of the year, 43% of state-run industries
lost money. Any slowdown in urban and national infrastructure construction would further
exacerbate a problem for which there appeared to be no solution other than long-term population
control. The State Planning Commission and the Ministry of Foreign Trade and Economic
Cooperation released a list of 210 major capital construction projects for the period 1993-2000.
Concentrated in the fields of energy, transportation, and agriculture, they were intended to act as
a magnet for foreign capital and facilitate the transformation of China into a modern industrial
power.

The State Council announced a pilot program to provide one-time cash payments to workers who
lost their jobs as a result of plant closings, but the absence of a comprehensive state system of
social security, including unemployment insurance, caused government leaders to shy away from
radical solutions to the problem. Yet pressure from insolvent enterprises for additional
government subsidies made it difficult, if not impossible, to maintain the tight-credit policy
needed to control inflation. The money supply grew by 37% in the first three quarters, rather than
the planned 25% increase. China’s foreign trade approached $234 billion in 1994, with exports
up 30% to $120 billion and imports up 10% to $114 billion. The projected $6 billion surplus
reversed the previous year’s deficit. China’s foreign-exchange reserves, bolstered by $22.7
billion from foreign direct investment in the first three quarters of the year, increased to $43.7
billion, more than double the level of a year earlier. Beijing’s efforts to reenter the General
Agreement on Tariffs and Trade (GATT) and become a founding member of the World Trade
Organization (which was to replace GATT on Jan. 1, 1995) were blocked by the U.S. and
European countries because of China’s reluctance to fully open its domestic market to
international competition. The U.S., irritated by China’s slow crackdown on the rampant piracy
of U.S. computer software and compact discs, temporarily suspended trade talks in December.
At the beginning of the year, China abolished its dual currency system by withdrawing Foreign
Exchange Certificates from circulation and moving toward a freely convertible Yuan.

China was the largest borrower from the World Bank in 1994, with over $3 billion in loans.
These included $925 million in soft loans from the International Development Association. In
Hubei (Hu-pei) province ground was broken on Li’s controversial pet project, the gargantuan
Three Gorges Dam, scheduled for completion in the year 2009 at an official cost of $11.2 billion.
It was designed to generate 84 billion kw/hr of electricity annually and to control flooding. China
also unveiled plans for a huge North-South Water Diversion Project, which included a shift of
water from the upper Chang Jiang (Yangtze River) to China’s arid northwestern provinces. The
World Bank and other international lenders shied away from such mammoth projects, however,
because of doubts about their feasibility, efficacy, and human costs. Despite prevailing optimism
about China’s economic future, the difficulties many foreign companies faced in collecting
hundreds of millions of dollars in loans that had been guaranteed by the government raised
significant questions in the international business community about China’s creditworthiness.

In general at the past, the PRC government had implemented policies to restrain economic
growth rates, control inflation, and otherwise regulate economic expansion. The recent market-
based reforms had made a significant positive impact, but the reforms had been carried out on an
incremental, piecemeal basis. There was no assurance that the reforms would continue or
continue to be successful. Furthermore, the reforms and economic expansion had been more
effective in some provinces than others.
Although in the past China had used heavy-handed policies to prevent sustained high-inflation
rates, but there was still a probability for depreciation of the Chinese currency, the Yuan (CNY).

The Chinese government had implemented major changes in the country’s foreign exchange
system. The new system emphasized external liberalization and a transparent system based on
rules and pro-development macroeconomic policies.

The new unified exchange arrangement is a managed float. At the start of each day, the PBC
[People’s Bank of China] announces a reference rate based on the average of the buying and
selling rates against the U.S. dollar at the close of the previous day’s trading. Movement of the
renminbi against the U.S. dollar is limited to 0.3% on either side of the reference rate, with the
PBC intervening in the interbank market through purchases and sales of foreign exchange to
keep the exchange rate within this limit. During the first six months of 1994, the exchange rate
remained stable at about Yuan 8.7 per U.S. dollar and the foreign exchange holdings of the PBC
rose.
 Chapter 3
Analysis of the Industry:

Over the past few years, the scope of the power industry had expanded from a predominantly
domestic business to one dealing with diverse international projects. Projected annual growth in
electricity demand in the United States through the year 2000 was less than 2%, with returns on
investment in the range of (8%-12%) per annum. In contrast, international markets were
conservatively expected to grow between (5%-10%) annually during the same period, with
potential returns in excess of 20%. WEI decided to focus on potential investments in China,
Italy, and Mexico. Many of the international projects pursued by WEI were coal-fired electric-
power generating plants, which complemented the firm’s expertise in coal in independent power
generation and mining. In past, China’s legal procedure was not well supported of foreign
investment, but things have changed now. Government already started to reforms its legal
procedure by targeting power sector and proposed “Electricity Law” to support foreign
investment. Government takes necessary steps to control its inflationary economy and
implemented major changes in the country’s foreign exchange system. The new system
emphasized external liberalization and a transparent system based on rules and pro-development
macroeconomic policies.
Porter’s Five Factors Analysis:

The result of industry analysis by using Porter's Five Factors Model is given below:

Threat of New Entrants:

There are some barriers to entry in the power project industry in China. Extremely large startup
costs, unstable political circumstances, risk of nationalization and high inflation rate are some of
them. Power market now in starting situation and currently there is little threat of new entrants.
But this is may be only for short period. Because, Industry case suggests that within the next few
years, there could be more private & international companies to dominate power project sector of
China for meeting increasing demand of electricity. Threat of new entrants can be more acute by
the attractiveness of mega project which will be built by non-Chinese parties and recent positive
steps taken by the government for example- new proposed electricity law, unified exchange
arrangement, certain sales of electricity etc.
Bargaining Power of Buyers:
This is the area where WEI or WCX have to think much and takes decision very carefully. From
the case we found that all the power generated by the project would be purchased by the Shanxi
Provincial Electric Power Company rather than being sold directly to other provinces or different
buyer. Hampton also assumed that price of electricity should be indexed to inflation, but Chinese
are not interested about it rather than they include escalation clause which is currently set at 4%
per annum and it is expected that it will be low for political reason. So, Hampton, WEI and
WCX has to consider the sales contract through expert analysis whether it is viable or not in the
inflationary economy like China.

Bargaining Power of the Suppliers:

Main supplier for the Zhangze project is the Shanxi authority. raw material for producing
electricity of Zhangze project is the coal, which will be supplied from the southeastern district of
Shanxi to maximize the advantage of rich coal resources on that area. So, Shanxi will be the key
supplier or only the one supplier for generating the electricity of Zhangze project which will be
established by the WEI. Availability of the coal will not be a problem for the project because
where the project will be established, the area is enough rich by the natural coal. But Hampton,
WEI and WCX has to be sure that the Shanxi province will supply that coal in a reasonable price
throughout the lifetime of the project. And to make sure of that, contract has to be made between
the parties and WEI can reduce the uncertainty and risk through the contract.

Threat from Substitute Products:

We found in the case that there is no other alternative or substitutes for electricity in China, and
they set their target to produce 300000 megawatt from 183000 within a very short time to match
with their growth. Electricity will play the main role for achieving the targeted growth set by the
government. In Zhangze project only coal will be used to generate the electricity which will be
provided by Shanxi province. Shanxi has the advantage of rich coal resources in that area and
WEI needed to maximize the advantage because the project will be established in near rich coal
resources. So, in that case alternative power will not be a much concern for WEI and they don’t
have too much think the availability of resources of coal. So, as a result they don’t have to give
great concern of that issue.
Rivalry among Existing Firms:
China government just starting the process to build new & big projects for producing electricity
For ensuring development of different provinces & meet their overall desired growth. The
Zhangze project could be a great opportunity for WEI that needed to capitalize on potentially
huge market opportunity in China. The policy taken by the government is now only in starting
phase, and currently we found in the case that no other company is not in the market, expected in
future there will be some other private or non-Chinese party will came for at least 100-200 mega
projects, in that circumstances no rivalry in current situation and in near future there will be less
rivalry among the firm because of availability of the mega project & experienced firm in this
area like WEI should be clearly ahead from the other companies.
PESTEL Analysis:

PESTEL analysis stands for

 Political factor
 Economical factor
 Social factor
 Technological factor
 Environmental factor and
 Legal factor
It describes a framework of macro-environmental factors used in the environmental scanning
component of strategic management. Here we will use PESTEL Analysis to describe macro
environmental factors of China.
Political:
These factors determine the extent to which a government may influence the economy or a
certain industry. In the political arena, there are some issues which should be considering in
analysis part. Unpredictable changes between China’s top political leadership could dramatically
change the attitude toward foreign investment. Also China’s communist ideology often left
diplomatic relations with other nations under a cloud of uncertainty. As a consequence of future
radical change in Chinese government there is a possibility that government may nationalize or
expropriate foreign-investment-backed projects. There are also some several positive aspects to
China’s political environment that balanced the apparent risks. China’s central leadership
recognized the need to reform its central planning mentality and to foster a more market-based
approach. In 1992, senior leader Deng Xiaoping called for the establishment of a “socialist
market economy.” China also recognized the need for foreign capital investment to meet its
goals. To that end, it was developing mechanisms such as open economic zones to encourage
foreign capital and technology investment. Finally, local governments had become more
autonomous and had been given more authority to act on their own behalf. Officials in the
Shanxi Province reflected this growing independence and were anxious to close deals to help the
province grow and improve the lives of its people. On a practical level, this meant developing the
province’s infrastructure, such as electricity generation capacity, to support growth.

Economical:
This factor takes into consideration all events that affect the economic environment. Economic
environment of China is one of the most critical areas to evaluate. In the past, china tried to
restrain economic growth rates, control inflation, and otherwise regulate economic expansion by
implementing several policies. Significant positive impact on macroeconomic factors show the
result of the policies taken by the government, but there was no certainty that the reforms would
continue or continue to be successful. Also reforms had been carried out on an incremental,
piecemeal basis and it had been more effective in some provinces than others. There is another
most important issue and may be the difficult one to consideration was the foreign exchange
aspect of the project. Hampton was still concerned with the potential for depreciation of the
Chinese currency the Yuan, though they take heavy hand used policies to control and sustained
the inflation rates in the economy. The Chinese government had implemented major changes in
their foreign exchange system. Basically the new system emphasized external liberalization and
a transparent system based on rules and pro-development macroeconomic policies. The new
unified exchange arrangement is a managed float. At the start of each day, the PBC [People’s
Bank of China] announces a reference rate based on the average of the buying and selling rates
against the U.S. dollar at the close of the previous day’s trading. Movement of the renminbi
against the U.S. dollar is limited to 0.3% on either side of the reference rate, with the PBC
intervening in the interbank market through purchases and sales of foreign exchange to keep the
exchange rate within this limit. During the first six months of 1994, the exchange rate remained
stable at about CNY 8.7 per U.S. dollar and the foreign exchange holdings of the PBC rose.

Social:
The project will contribute to the socio-economic development not only to Shanxi provinces also
as well as China. If the Zhangze Power project was taken then it will ensure the use of the coal of
the China, reduce the shortage of power in Chinese countryside. Also if was established near the
coal mine then it would have lessen the burden on the railroads and other transport infrastructure
by reducing the need to transport coal. The expected increase in employment and income for the
regions will help to increase gross income and lead to sustainable development in the economy.

Technological:
These factors pertain to innovations in technology that may affect the operations of the industry
and the market favorably or unfavorably. This refers to automation, research and development
and the amount of technological awareness that a market possesses. Despite the political and
economic uncertainty in China, the situation in the power industry seemed to offer great
potential. From the 1992s onward, the Chinese government actively sought to promote private
and foreign investment in the country by implementing several policies. Because of these
policies, China seems to now a better investment zone than previous to the investor. Specifically
China gave more focus to producing big project for power within a short time to match their
targeted growth. Because they know if they want to achieve their growth rate target, they need
more power. Currently they have 183,000 MW installed capacity, wants to increase their
capacity up to 300,000 within 2000 to match with their GDP target 8% to 9% through the 1990s.
Electricity demand and GDP growth occur at essentially the same rate. If they achieve their
target, growth in capacity matched GDP growth, but still only reduced the existing power
shortages from 10% to 5% of the total demand. WEI has the technical advantage in China
compared to US, reason behind this is that WCX had actively marketed the concept of mine-
mouth power projects in the United States, but with minimal success due to the abundance of
natural gas. But in China natural gas was not an alternative fuel. Coal was the fuel of choice, and
it was estimated that its production would quadruple over the next decade in China. For
achieving the target WEI already had the essential development expertise in-house or under
retainer through consulting agreements.

Environmental:
The Chinese government has support the coal based power project and they want to use rich coal
resources in Shanxi provinces using it in Zhangze project. In some countries may be coal based
power project is not very supportive, but in case of Zhangze project we find this is not the case in
China. That coal based power project was very welcomed by the government would assist the
project in gaining necessary approvals and funding. We already found through case analysis that
by producing electricity, China can achieve the growth rate by using coal resources. There is no
alternative to achieve the growth rate. So, we assume that coal based project will not be a great
problem for WEI under environmental factor analysis.

Legal:
Significantly enhancing China’s attractiveness as a location for foreign and private investment
which went into effect in 1992 by the more market based approach and central planning
mentality taken by the government of China. But definitely till now legal and regulatory
concerns were closely related to the political situation of China. And political situation depends
through the mandates from China’s leadership. China’s legal system was civil law system;
precedent decided case has little or no value. Foreign investment was affected due to lack of
well-developed law bodies, new laws and inconsistent interpretation of existing law. Although
legal system was under reform but much of the existing legal and institutional framework was
based on government-owned enterprises and a command-and-control structure which results that
power sector operated without contractual arrangements, instead relying on the mechanisms of
central planning. Context of contractual obligation was very different in China than in more-
developed countries. And now Chinese government had initiated a series of dramatic reforms
targeted at the power industry to achieve their growth target. So, definitely it’s a positive impact
not only for WEI or Zhangze project but also for other foreign investment in power sector. China
proposed “Electricity Law” and they promote contractual arrangements through the Ministry of
Electric Power definitely make a positive impact in the legal environment.
 Chapter 4
Analysis of the Company:

Westmoreland Energy, Inc., based in Charlottesville, Virginia, was a subsidiary of

Westmoreland Coal Company. WEI was formed in 1986 to compete in the independent power
and cogeneration market. The company sought to achieve long-term growth through the
development of energy projects in domestic and international markets. Its project portfolio
consisted of eight domestic projects with a gross capacity of 850 megawatts (MW) of electricity.
The company’s typical equity ownership in each of these projects was 30% to 50%.

Ratio Analysis:
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication
of a firm's financial performance in several key areas. The ratios are categorized Profitability
Ratios, Liquidity Measurement Ratios and Asset-Debt Ratios. We used the financial statements
of WEI’s power project at Zhangze for analyzing the Ratios.

Current Ratio: The current ratio is a liquidity ratio that measures a company's ability to
pay short-term and long-term obligations. To gauge this ability, the current ratio considers the
current total assets of a company (both liquid and illiquid) relative to that company’s current
total liabilities.
Current Ratio = Current Assets / Current Liabilities

Current Ratio

2015 2014

1,021,888/ 1,497,606= .68 971,532/ 1,202,058= .80

Quick Ratio: The quick (acid-test) ratio is similar to the current ratio except that it excludes
inventory, which is generally the least liquid current asset. The generally low liquidity of
inventory results from two primary factors: (1) many types of inventory cannot be easily sold
because they are partially completed items, special-purpose items, and the like; and (2) inventory
is typically sold on credit, which means that it becomes an account receivable before being
converted into cash.

Quick Ratio= = Current Assets – Inventories/ Current Liabilities

Quick Ratio

2015 2014

1,021,888-22,762/ 1,497,606= 971,532-21,320/ 1,202,058=

.66 .79

Return on Asset (ROA) Ratio: The return on assets (ROA) ratio illustrates how well
management is employing the company's total assets to make a profit. EDPR has a very low
Return on Asset.

Return on Asset ( ROA) Ratio= Net income/ Total Asset

Return on Asset ( ROA) Ratio

2015 2014

245,491/ 15,736,157= 177,887/ 14,316,319=

.016 or, 1.6% .012 or, 1.2%

Return on Equity (ROE) ratio: This ratio indicates how profitable a company is by comparing its
net income to its average shareholders' equity. Usually the higher the ratio percentage, the more
efficient management is in utilizing its equity base and the better return is to investors.
Return on Equity (ROE) ratio= Net income/ Total Equity

Return on Equity (ROE) ratio

2015 2014
 245,491/ 6,834,109= 177,887/ 6,330,759=
.034 or, 3.4% .029 or, 2.9%

Debt Ratio: The debt ratio compares a company's total debt to its total assets, which is used to
gain a general idea as to the amount of leverage being used by a company. A low percentage
means that the company is less dependent on leverage, i.e., money borrowed from and/or owed
to others. EDPR has outstanding liability of more than half of its total assets.
Debt Ratio= Total Debt/ Total Assets

Debt ratio

2015 2014

8,902,048/ 15,736,157= 7,985,560/ 14,316,319=

.57 or 57% .56 or, 56%

Fixed Asset Turn Over(FATO) Ratio: This ratio is a rough measure of the productivity of a
company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales.
For most companies, their investment in fixed assets represents the single largest component of
their total assets. This annual turnover ratio of year 2015 is only .09 which is comparatively low.

Fixed Asset Turn Over(FATO) Ratio= Revenue/ Fixed assets

Fixed Asset Turn Over(FATO) Ratio

2015 2014

1,349,605 / 14,714,269 = 1,153,126 / 13,344,787 =

.09 .09

Total Asset Turn Over(TATO) Ratio:

 Total Asset Turn Over(TATO) Ratio= Revenue/ Total assets

Total Asset Turn Over(TATO) Ratio

2015 2014

1,349,605 / 15,736,157= 1,153,126 / 14,316,319=

.09 .08

Profit Margin Ratio: The gross profit margin measures the percentage of each sales dollar
remaining after the firm has paid for its goods. The higher the gross profit margin, the better, that
is, the lower the relative cost of merchandise sold).

Profit Margin Ratio= Net Income/ Revenue

Profit Margin Ratio

2015 2014

245,491/ 1,349,605 = 177,887/ 1,153,126 =

.18 or, 18% .17 or, 17%
Duo Pont Analysis:
Risk Analysis:

Business Risk:
Business risk is the possibilities a company will have lower than anticipated profits or experience
a loss rather than taking a profit. Business risk is influenced by numerous factors, including sales
volume, per-unit price, input costs, competition, the overall economic climate and government
regulations. A company with a higher business risk should choose a capital structure that has a
lower debt ratio to ensure it can meet its financial obligations at all times.
As per the contract WEI only sales their electricity to Chinese authority and collect their main
raw materials such as coal from the same authority. So, there is a risk that WEI will not get the
standard price for their producing electricity and may be they have to pay more for raw materials
compared to market price. Chinese are conservative about the operating assumptions. They
assume only 6000 hour per annum whereas WEI’s power plant basically operated 90% or more,
7884 hours per annum in US. Though, Hampton and Kost were comfortable with a range of
operating hours per year of 5,500 to 6,500. The upper end of the range (74% utilization) was
within reach if everything went as planned. But there is a chance that input cost will rise if they
have to maintain the assumption of Chinese, because fixed will remain same whether the
production hours differ or not. Still now competition in the market is absent because WEI will be
the first company to establish this kind of project with collaboration of China, and The Zhangze
Project could be the foot in the door that WEI needed to capitalize on potentially huge market
opportunity in China. And we assume that it will also remain lower in the future because of
availability of the big project and the advantage of experienced gained by established this kind of
project in China.
Unpredictable changes in China’s top political leadership could dramatically change the attitude
toward foreign investment. Sometimes foreign investment might be threatened. Legal and
regulatory concerns were closely related to the political environment through the mandates from
China’s leadership. No well-developed body of laws governing foreign investment enterprises
existed. As a result, the administration of laws and regulations by government agencies was
subject to considerable discretion. Much of the existing legal and institutional framework was
based on government-owned enterprises and a command-and-control structure. Specifically,
many aspects of the power sector operated without contractual arrangements, instead relying on
the mechanisms of central planning. The final and perhaps most-critical area was China’s
economic environment. In the past, the PRC government had implemented policies to restrain
economic growth rates, control inflation, and otherwise regulate economic expansion. Probably
the most important economic issue and one of the most difficult for Hampton to come to terms
with, was the foreign exchange aspect of the project. Although in the past China had used heavy-
handed policies to prevent sustained high-inflation rates, Hampton was still concerned with the
potential for depreciation of the Chinese currency, the Yuan (CNY).

Financial Risk:
Financial risk is the possibility that shareholders will lose money when they invest in a company
that has debt, if the company's cash flow proves inadequate to meet its financial obligations.
When a company uses debt financing, its creditors are repaid before its shareholders if the
company becomes insolvent. Financial risk also refers to the possibility of a corporation or
government defaulting on its bonds, which would cause those bondholders to lose money.
Financial risk is the general term for many different types of risks related to the finance industry.
These include risks involving financial transactions such us company loans, and its exposure to
loan default. The term is typically used to reflect an investor's uncertainty of collecting returns
and the potential for monetary loss.
Investors can use a number of financial risk ratios to assess an investment's prospects. For
example, the debt-to-capital ratio measures the proportion of debt used, given the total capital
structure of the company. A high proportion of debt indicates a risky investment like WEI debt
equity ratio is 75:25 which express the high risky investment for the WEI. But it is possible to
mitigate the risk by using proper business model and also doing appropriate financial analysis.
Another ratio is the capital expenditure ratio, divides cash flow from operations by capital
expenditures to see how much money a company will have left to keep the business running after
it services its debt.
Parent company of WEI, WCX already reported a loss of 8.4 million dollar for first 3 months of
operation. So, in that situation WEI may be in a critical position to pay debt interest or principal
repayment. So, proper justification should be made before taking any decision about debt-equity
ratio.
WEI’s organization comprised three operating groups. One of the groups is The Finance and
Accounting Group, which obtained all necessary funding for projects and supported the overall
financial needs of the company. A key potential investor had backed away from the deal because
of slow decision making process. So, financing may create a problem for this project.
Additionally, six investment funds (public and private), with a sole focus on Asian infrastructure,
had recently raised more than $3.1 billion.
There was several financial risk comprise includes- high inflation rates, foreign exchange rates,
potential for depreciation of the Chinese currency, the Yuan (CNY). To address and solve this
problem government take some important and major steps. It includes- implemented policies to
restrain economic growth rates, control inflation, and otherwise regulate economic expansion.
Reforms had been carried out on an incremental, piecemeal basis. Use heavy-handed policies to
prevent sustained high-inflation rates and depreciation of the Chinese currency, the Yuan (CNY).
Implement major changes in the country’s foreign exchange system. The new system
emphasized external liberalization and a transparent system based on rules and pro-development
macroeconomic policies.
WEI and Hampton have to think and analyze where they can use the US debt finance or Chinese
debt finance. If they use debt finance through US bond coupon rate is 10%, and if they use CNY
debt finance coupon rate is 11%. Project can be financed through both US & CNY debts, in that
case both accumulated coupon rate should be calculated. Where ever the debt finances come
from some other information should also be considered like inflation rate, exchange rate, growth
rate etc. WEI authority also have to think that they can earn enough money to pay its debt
interest payment, principal repayment and also they can paid dividend to its owner or equity
shareholder for taking risk.
SWOT Analysis:
SWOT analysis is an organized strategy that assesses those four components of an undertaking
or business wander. It includes indicating the goal of the business wander or extend and
recognizing the inner and outside components that are positive and unfavorable to accomplish
that target. SWOT stands for Strength, Weakness, opportunities and Threats.

Strength:
Strengths describe what an organization excels at and separate it from the competition: things
like a strong brand, loyal customer base, strong balance sheet, unique technology and so on. It’s
the internal capabilities of the firm to compete in the adverse situation and sustain in the
competitive market.
WEI has the following strengths:
 It has both technology and solutions that will provide a lower Cost of raw materials.
 In-house expertise of coal based power production project.
 A unique business model (CAPM) with proactive and customer oriented approach.
 Historic strength record of coal mining power project.
 Knowledge of rich R&D division.
 Strong portfolio to manage this kind of power project in US.
 Assurance of whole production selling.
Weaknesses:
Weaknesses stop an organization from performing at its optimum level. They are areas where the
business needs to improve to remain competitive: things like higher-than-industry average
turnover, high levels of debt, an inadequate supply chain or lack of capital. It’s also internal
factors which may lead the firm toward hazard in the future. As a dynamic project manager
Hamton has to try to solve the weaknesses.
WEI has also some weaknesses like:
 Lack of experience of operating business outside US.

 Higher debt-equity ratio is a key weaknesses as per analyze for Zhangze project. Because
WCX or WEI’s equity was in between 30% to 50% in US based project. But for China
project its ratio is 75:25. So, this will be the first project for WEI where debt will be
higher that there previous project.

 Decision making process is longer for WEI, in this case after 1 year of discussion it is not
confirmed whether WEI investing in China or not. So, opportunity cost arises through
this long time process.

 Negotiation is one of the factors where we found WEI weaknesses. For example-
several transmission lines are included in the project costs but still those transmission
lines would not belong to the project.

 Incapability of use alternative fuel is a great weakness for WEI. In US WEI has minimal
success due to the abundance of natural gas. Though natural gas was not an alternative
fuel in China.

 Lack of convince the different parties into the deal like investor or lender may create a
problem for WEI, already one key investor had backed away from the deal of Zhangze
project.
Opportunities:
It refers to favorable external factors that an organization can use to give it a competitive
advantage. Opportunities are external attractive factors that can be a source of the future
performance and profitability of the company.
WEI has some opportunities where it can exploit possibilities like:
 Attractive power market in China which can be exploiting further.
 Huge shortage of power in China country side.
 Demand increasing in different provinces for development.
 Project expansion opportunity & new project requirement.
 Availability of rich coal resources, key raw materials for producing electricity.
 Mineral rich province of Shanxi helps to grow the power project very much.
 Supported by the government and local authority.
 Joint financing opportunity with the collaboration of government.
 It is expected that demand of power will be grown rapidly in next decade in China.

Threats:
It refers to factors that have the potential to harm an organization. Threats are external factors
which can cause trouble in the future which may hamper profitability of the company.
WEI faces the following external threats also.
 Future potential government policies, new laws and regulations which can be adversely
effect on power project.
 The PRC’s legal system is a civil law system based on constitution which may be
unfavorable for the future operation.
 Unpredictable change of top level political leadership can change dramatically
investment situation or opportunity for the foreign investment.
 Possible threat that project become nationalize or government can expropriate foreign-
investment-backed projects.
 High inflation rate can diminishes the positive approach or acceptability of the project.
 Labor and operating practices of the Chinese would depress production and capacity
utilization levels.
 Continuing coal consumption may create unusual situation in future.