MBB - Cutting Carbs - Divestiture in the Electrical Power Market

You may provide the following clarifications when they are asked for:

• MwH stands for Megawatt hour, a unit of measurement for energy produced
• 1 GwH stands for Megawatt hour
• 1 Gwh = 1,000 MwH
• Total Annual production can be calculated by leveraging # hours per year

The candidate needs to recognize that we need to evaluate our existing assets. They should ask for information regarding our current asset performance (operating costs, revenues, etc.) with the hypothesis that we will need to scale down or improve certain non-performing assets.

A good candidate will note the following:

• Coal and gas make up the majority of our business
• Carbon taxes play a notable role in the ultimate cost of coal and gas assets

The candidate should proceed to calculate the MwH Operating cost per energy type when incorporating carbon. They should note that they are as follows:

While the candidate should clearly indicate now that coal is the most expensive, an excellent candidate will also note that wind, while 2nd, should continue to decline in price over time due to current market trends.

The candidate may opt to calculate the total annual free cash flow from Exhibit 1. They may proceed with this calculation at this time, or later in the case. The calculations are as follows:

At this stage, the candidate should be locked into coal as the ideal candidate for divestiture. They should ask if we have any information on sale value, carve-out logistics, etc., essentially looking to compare savings to value.

Upon receiving the exhibit, the candidate needs to realize that total cost savings need to be compared to our market offering and cost of divestiture execution.

A good candidate will quickly realize the following:

• Coal will free up the most cash flow (Exhibit 1) and result in the highest cash pile (tied for 1st, Exhibit 2)
• CoalCo has declined in value in the market’s view
• Calculating the total annual free cash flow from Exhibit 1 is important to determine total benefit (they may realize this now or earlier)

If the candidate opts to calculate the total operating costs for the various energy sources now, they may do so (see end of Section I. for answers)

It should now be clear the CoalCo is the best target for sale and the candidate needs to clearly state this. The candidate needs to be clear about the objective of the case, namely “to increase free cash flow and cash reserves”.

A good candidate will look to calculate the NPV of the divestiture of CoalCo. This can be done as follows:

Recommendation:

A strong candidate will lead with the recommendation that we divest from CoalCo, noting that this will bring us $33.95B in NPV in the form of $2.695 of free cash flow AND $7B cash reserves.

Notable risks to consider include the following:

1. Loss of potential profits from continued operation of CoalCo
2. Loss of the largest part of our business (one third)
3. Difficulties in executing divestitures (IT, Staff, Legal, etc.)
4. Selling CoalCo at a markdown

A strong candidate would counter these risks by proposing the correlated next steps:

1. Further investigation into the Revenues earned by CoalCo to understand loss
2. Identification of exactly how the additional cash/cash flows will be used, with ultimate evidence of higher returns than would have been achieved by keeping CoalCo
   1. Investment into gas, wind, nuclear, etc.
   2. Investment into additional projects/initiatives
   3. Share buybacks/dividends
3. Due diligence into carve-out logistics to confirm $1.5B cost
4. Look for higher bidders