Lakshya 2012

..A Corporate Cross Road

SM

Presents

PROJECT DETAILS
ABC has been promoted to develop, construct, own and operate a 1050 MW (3 x 350 MW) thermal power plant based on domestic coal to be sourced from the linked mines of CIL and the captive coal blocks of Sitapur coal blocks. Deal Diagram Figure1: Deal Diagram

Location and site The proposed power plant would be located at the identified site near Jharsugadu village in Jharkhand state. The site area is 1154 acres housing the main plant, power house, transformer yard, switchyard, water system, coal and ash handling system, ash disposal area and green belt and the staff colony. The site is easily accessible by road and rail and is about 3 Kms from National high way. The nearest railway station is Bhogpara, which is about 2 km from the site. All the heavy equipment for the power plant is expected to be received by road trucks / trailers. The nearest airport is at Ranchi which is about 150 km from the plant site. As per the MoU of ABC with Government of Jharkhand (GoJ), GoJ is to provide the land for the power project, free from all encumbrances. The State Industrial Infrastructure Development Corporation (SIDCO) is the agency nominated by GoJ, which will acquire the land for the proposed project. The cost of the land shall be paid to SIDCO for all new acquisitions of land.

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Update on the Land Acquisition Process

Land Break up Government Land Private Land Forest Land Total Area (Acre) 136.0 940.0 78.5 1154.5

Engineering Procurement and Construction (EPC) Contract ABC proposes to execute the project through a lump sum, fixed time and fixed price EPC contract. The bidders who submitted their technical bids for the Project are as Shandong Electrical Power Construction Corporation (SEPCO), China The company has set up 160 power projects with a cumulative capacity of 22,000 MW. The company has undertaken 25 projects of more than 300 MW capacity in the past 5 years either as main contractors or EPC contractors. Dongfang Electric Corporation (DEC), China - The company has set up power projects of a cumulative capacity of 110,000 MW till 2005. DEC has an annual production capacity of more than 20,000 MW of thermal power plants and 3,500 MW of hydro power plants. DEC product range spans from 0.75 MW to 300 MW, 600 MW and 1000 MW unit capacity for thermal and upto 700 MW capacity for hydro. As an active worldwide power project contractor, DEC has undertaken more than 70 projects worldwide in thermal and hydro power. Cethar Vessels (P) Limited (CVL)- CVL is a prominent equipment supplier / EPC contractor in the small and medium range of power plants. It is an ISO 9001-certified company and has commissioned over 950 boilers and 10 power plants on an EPC basis till November, 2007. CVL achieved a turnover of Rs. 731.5 crore and a PAT of Rs.67.1 crore for the 9 month period ending December, 2007. It has signed an MOU with Harbin Power to supply turbines and generators for its EPC projects. Harbin power is one of the top three equipment manufacturers in China capturing about one-third of the market and has an annual production capacity of 20,000 MW and manufactures coal fired boiler, turbines and hydro power equipment.

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The scope of the EPC contractor shall include design, engineering, manufacturing, procurement, packing & forwarding, supply, transportation, receipt, unloading, construction, installation, erection, testing, commissioning and performance guarantee tests for the 3x350 MW thermal power project. Scope Price Basis Scheduled COD Turnkey EPC for the entire Power Plant Lump sum fixed price Unit 1 28 months, Unit 2 30 months, Unit 3 32 months from NTP. NTP Financial close and pre disbursement conditions have been met/waived and ABC receiving all permits as may be required. 15% of the contract price, valid till final acceptance of the power plant PBG amount will be increased by Rs. 20 million/ week on delay in COD 24 months from takeover of the power plant Contractor to provide a bond for 10% of the Contract Price for the term of the defects liability period 5 years from Take Over of the Power Plant Milestone based (Unit wise PG tests and takeover of the Plant) Maximum liability for LDs for delay 10% of contract price Penalties applicable for Shortfall in Gross Power Output Auxiliary power consumption higher than guaranteed value Heat rate higher than the guaranteed heat rate Maximum liability for LDs for performance shortfall 20% of contract price

Performance BG

Defects Liability Period

Latent Defects LDs for Delays

Penalties for Performance Shortfall

Power Evacuation Power generated from the project would be evacuated at 400 kV with Double Circuit transmission lines to the nearby substations of state discom and Power Grid Corporation of India Limited (PGCIL). As per the evacuation studies conducted by consultants 2 options namely Tamana (30 km from the plant) and Rampur (75 km from the plant) have been suggested for power evacuation to PTC. The cost of erecting transmission lines to the PGCIL sub-station has been considered as a part of the project cost. Estimated cost of Rs. 95 crore has been considered as a part of the project cost to erect the transmission line and associated

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infrastructure. The Project shall supply about 323 MW (including transmission losses) to Punjab. The sale to Punjab is the outcome of the competitive power procurement bid invited by Punjab Power Generation Corporation Limited wherein the bid submitted for the power supplied from the project was short listed as a successful bid. In line with the PPA between ABC and PTC, PTC is expected to apply to PGCIL for providing open access. With the supply to Punjab, the Project has tied up about 59% of the capacity. The balance is expected to be tied up shortly and open access for evacuation shall be applied for the same.
(in MW) Networks Existing Proposed additions Total by FY 2012
Source: PGCIL DRH

East-West 1850 4650 6500

East-North 3700 7750 11450

Schedule of implementation Particulars Award of major contracts Civil Works Delivery of BTG Mechanical works Electrical works Unit I Trial Runs Unit II Trial Runs Unit III Trial Runs Project COD Total Implementation Period Start Day 0 Day 120 Day 240 Day 300 1.5 years 28th month 30th month 32nd month 36 months Completion Day 60 2 years 2.5 years 2.5 years 2.5 years 30th month 32nd month 34th month 36th month

FUEL ARRANGEMENT
Background The project envisages usage of domestic coal as primary fuel for the project. The aggregate coal required to operate the Project at a Plant Load Factor (PLF) of 80% works out to about 5 million tonnes3 per annum. Allocation of Captive Coal Block Ministry of Coal, Govt of India has made a joint allotment of Sitapur noncoking coal blocks to ABC along with 5 other allottees. The following table shows the allottees and capacity allotted to them.

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Against the total coal requirements of about 790 million tonnes of the allottees, the geological reserves in the allotted blocks are only about 645 million tonnes. Consequently, the share of the quantum allotted for the project is about 112 million tonnes, against the requirements of about 125 million tonnes (5 tonnes p.a. for 25 years) The captive coal block is situated at a distance of about 250 km from the power plant However considering the availability of the linked coal and the captive block, it is estimated that the Project shall have sufficient coal for power generation at 80% PLF during the tenure of the loan and even for beyond

Coal Linkage Since development of the captive coal blocks is expected to take more than 36 months (scheduled completion time for the power plant), ABC has obtained coal linkage for the plant. Ministry of Coal has issued a Letter of Assurance (LoA) to Coal to ABC. Company proposes to apply for additional tapering coal linkage for the balance 500 MW for the interim period of development of captive coal block. The coal linkage (including additional coal linkage for 500 MW) shall be adequate for the plant to operate at 100% PLF. However, coal linkage will be gradually reduced to the extent of coal extracted from the captive coal blocks. ABC shall enter into a coal supply agreement (CSA) with Coal India Ltd. As per the standard agreements, the proposed agreement shall remain in force for a period of 10 years with effect from first delivery date and extendable by 5 more years after expiry of initial term.

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PROJECT COST AND MEANS OF FINANCE

Project Cost Based on the Detailed Project Report, the cost of the Project has been estimated at Rs. 4,211crore. The details of the project cost are as under: Particulars Land and Site Development Civil Works Steam Generator TG Island Balance of Plant (Mechanical, Electrical, C&I) Non-EPC Costs (including transmission line) Contingencies Total Hard Costs Preliminary and Pre-operative Expenses Interest during Construction Margin Money for Working Capital Total Project Cost Land and site development Total land area identified is 1154 acres and is adequate for the power plant including coal stockyard and green belt. The cost of Rs 46.5 core for acquisition of land has been estimated based on inputs from Detailed Project Report. Civil Works Civil and structural works include site improvement works, power plant building, foundations for steam generator, turbine generator pedestal, civil works for coal handling system , ash handling system, raw water intake and water systems related civil and structural works, miscellaneous buildings like workshop, warehouse, canteen, fire station and colony for the employees. EPC Costs EPC Costs consist of the civil and structural works, mechanical works and electrical works. The major components of the EPC costs are shown as below: Amount (Rs. Cr) 46 534 1,062 708 948 153 126 3,578 284 319 31 4,211

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Major Components of EPC Steam Generator Island Steam Turbine Generator Island External Coal transportation system Coal Handling System Ash Handling System Generator transformers Freight and Insurance Power and control cables Switchyard equipment + SCADA River water pumps LT switch gear and MCC Total

Rs. Crore 1062 708 130 105 55 52 47 40 37 35 30 2301

Mega-power status has been considered for the project for the power project has a gross capacity of 1000 MW and is supplying power to more than one state. Thus no taxes and duties have been considered as a part of the project cost. Non-EPC Costs Non-EPC costs consist of a 400 kV transmission line to PGCIL sub-station from where power shall be evacuated by PTC India. Enabling works like construction water, compound wall and approach road. The cost of railway wagons for transportation of coal (Merry-go-round technique) is also a part of the Non-EPC Costs. Contingency A 3% contingency on the hard-costs and 10% contingency on the pre-operative expenses have been built in the Project cost as per the DPR Pre-Operative and Preliminary Expenses The preliminary and pre-operative expenses include Development expenses Legal Fees Administrative expenses like salaries, wages and travelling expenses Start-up power and fuel Financing charges Margin Money Working Capital Margin requirement of the Project has been estimated for all units during the first year of operation. The Margin Money requirement represents 25% of the total Working Capital requirement for the Project

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Means of Finance Means of Finance Debt (70%) Equity Promoter Group Equity- Equity investors Total Rs. Cr 2,948 1,011 253 4,211

Project Cost Comparison The project cost can undergo a change after the completion of the bidding process and conclusion of negotiations with the preferred EPC contractor. However, comparison of the project cost as mentioned in the DPR has been done with a few power projects appraised by Lender in the recent past
Particulars Capacity (MW) Project Cost Land & Site Development Civil & Mechanical costs Railway Siding Preliminary & Preoperative Expenses Contingencies Interest During Construction Margin Money for WC Total Comparison Land & Site Development Civil & Mechanical costs Railway Siding Preliminary & Preoperative Expenses Contingencies Interest During Construction Margin Money for WC Total Wari power 1800 Rs. Crore 98.4 5273.0 60.0 247.9 217.3 867.4 74.2 6838.1 Rs. Cr/ MW 0.1 2.9 0.0 0.1 0.1 0.5 0.0 3.8 Belgaum 1005 Rs. Crore 60.0 3103.7 0.0 190.3 263.8 487.3 41.9 4147.0 Rs. Cr/ MW 0.1 3.1 0.0 0.2 0.3 0.5 0.0 4.1 Jain Power 1000 Rs. Crore 70.4 3485.4 0.0 376.3 0.0 346.2 61.1 4338.0 Rs. Cr/ MW 0.1 3.5 0.0 0.4 0.0 0.3 0.1 4.3 ABC 1050 Rs. Crore 46.5 3405.1 0.0 284.4 125.9 318.5 30.6 4210.9 Rs. Cr/ MW 0.0 3.2 0.0 0.3 0.1 0.3 0.0 4.0

FINANCIAL PROJECTIONS
State Discom tariff computed based on the provisions of the Electricity Regulatory Commission regulations which are similar to Central Electricity Regulatory Commission (CERC) The regulations allow for the recovery of

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various costs at the specified normative parameters with provisions for incentives/ disincentives PTC India Ltd. - tariff computed based on the provisions of the Central Electricity Regulatory Commission (CERC) Order on Terms & Conditions of Tariff subject to an overall limit equal to the cumulative of the levelised tariff over the term of the Agreement (25 years from COD) which is capped at the levelised rate of Rs. 2.3 per kWh Punjab Generation Corporation Limited At the tariff submitted for the bidding by PTC India for supply of net capacity of 300 MW to Punjab. The tariff has been agreed upon between PTC and ABC as per the agreement for sale The cost of generation for the Project has been worked out based on parameters provided in the CERC Order

Operational performance: For the year ended Gross capacity (MW) PLF (%) Heat rate (Kcal/KWH) Net energy sales (MU) Mar-12 * 350 80% 2450 360 Mar-13 * 1050 80% 2450 6324 Mar-14 1050 80% 2450 6676 Mar-16 1050 80% 2450 6694 Mar-18 1050 80% 2450 6676 Mar-20 1050 80% 2450 6694 Mar-22 1050 80% 2450 6676 Mar-24 1050 80% 2450 6694

In FY 2012, Unit1 operates for only 2 months, while in FY 2013, Unit 1 and Unit 2 operate for 12 months while Unit 3 operates for 10 months

Tariff calculation The table below summarises the expected tariff for the project
Tariff to Jharkhand Variable Charge per unit Fixed Charge per unit Electricity duty on aux power Total Tariff Levelised Tariff to Jharkhand Mar-12 0.80 1.20 0.02 2.02 2.28 Mar-13 0.83 1.29 0.02 2.14 Mar-14 0.89 1.33 0.02 2.24 Mar-16 0.95 1.35 0.02 2.32 Mar-18 1.02 1.29 0.02 2.33 Mar-20 1.09 1.24 0.02 2.34 Mar-22 1.16 1.18 0.02 2.36 Mar-24 1.23 1.12 0.02 2.37

The above tariff has been calculated assuming coal supply from the coal linkage from CIL. However, the levelised tariff assuming coal supply from captive coal block at Rs. 650/ MT comes out to Rs. 2.07 per unit

Tariff to PTC Variable Charge per unit Fixed Charge per unit Environment Cess Total Tariff Levelised Tariff to PTC

Mar-12 0.80 1.20 0.06 2.06 2.32

Mar-13 0.83 1.29 0.06 2.18

Mar-14 0.89 1.33 0.06 2.28

Mar-16 0.95 1.35 0.06 2.36

Mar-18 1.02 1.29 0.06 2.37

Mar-20 1.09 1.24 0.06 2.38

Mar-22 1.16 1.18 0.06 2.40

Mar-24 1.23 1.12 0.06 2.41

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The above tariff has been calculated assuming coal supply from the coal linkage from CIL. However, the levelised tariff assuming coal supply from captive coal block at Rs. 650/ MT comes out to Rs. 2.11 per unit

Tariff to Punjab Variable Charge per unit Fixed Charge per unit Total Tariff Levelised Tariff to Punjab (without transmission charges)

Mar-12 Mar-13 0.95 1.19 2.14 0.95 1.19 2.14

Mar-14 Mar-16 1.02 1.48 2.50 1.10 1.43 2.53

Mar-18 Mar-20 1.18 1.40 2.58 1.27 1.36 2.64

Mar-22 Mar-24 1.34 1.33 2.68 1.43 1.30 2.73

2.6

The tariff to Punjab has been calculated on the basis of energy charges and variable charges quoted by PTC at the time of bidding. PTC quoted a levelised tariff of Rs. 2.94 per unit for the bidding, which includes the transmission losses and wheeling charges. The above mentioned tariff has a 3% commission payable to PTC built in. Hence ABC shall get the above mentioned tariff from PTC net of 3% commission, for sale of 323 MW capacity at the PGCIL interconnection point in Jharkhand After FY 2013, fixed charge starts decreasing as debt servicing amount decreases due to commencement of repayment and lower interest charges (repayments being in equal quarterly instalments). It may be mentioned that the fixed charge may change depending upon the change in Project cost post finalisation of the EPC contract

Questions: 1) 2) 3) 4) 5) Bring out the salient features of the case Comment on the financial Position of the company Comment on project cost comparison of similar projects? Comment on Viability of the project Bring out the assumption on which you have analysed the case.

Make suitable assumptions wherever required and indicate the same.

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Annex Financial projections of ABC

Income Statement (Rs crore)
Income Statement for year ending All figures in Rs. Cr Units sold to Jharkhand (Mn Units) Sale price per unit Revenue from Jharkhand Units sold to PTC (Mn Units) Sale price per unit Revenue from PTC Units sold to Punjab(Mn Units) Sale price per unit Revenue from Punjab Rev from Jharkhand + PTC+Punjab Less rebate Net Revenue Add Other Income Total Revenue Less Fuel cost Less O&M exps Environment Cess Less electricity duty @ actual Less: Commission to PTC EBITDA EBITDA Margin Int on long term loan Int on working capital PBDT Less book dep PBT PBT Margin Less Tax PAT PAT Margin Mar-12 90 1.8 18 148 1.9 30 122 2.1 26 75 0 75 0 75 29 8 2 1 1 35 47% 15 2 18 11 7 9% 1 6 8% Mar-13 1586 2.0 339 2594 2.0 565 2144 2.1 460 1363 0 1363 0 1363 527 142 28 13 13 641 47% 317 30 294 196 98 7% 11 87 6% Mar-14 1674 2.0 362 2738 2.0 603 2264 2.5 561 1526 0 1526 0 1526 575 155 30 13 16 737 48% 325 33 378 208 170 11% 19 151 10% Mar-15 1674 2.0 375 2738 2.1 624 2264 2.5 565 1563 0 1563 0 1563 594 162 30 13 16 747 48% 297 35 416 208 208 13% 24 185 12% Mar-16 1674 2.1 389 2738 2.2 648 2264 2.5 569 1606 0 1606 0 1606 615 168 30 13 17 763 48% 268 36 459 208 251 16% 28 222 14% Mar-17 1679 2.1 390 2746 2.2 649 2270 2.5 575 1614 0 1614 0 1614 638 175 30 13 17 741 46% 241 36 464 208 256 16% 29 227 14% Mar-18 1674 2.1 390 2738 2.2 648 2264 2.6 579 1617 0 1617 0 1617 658 182 30 13 17 717 44% 212 37 468 208 260 16% 29 230 14% Mar-19 1674 2.1 390 2738 2.2 649 2264 2.6 584 1624 0 1624 0 1624 681 189 30 13 17 694 43% 184 38 472 208 264 16% 30 234 14% Mar-20 1674 2.1 391 2738 2.2 651 2264 2.6 590 1633 0 1633 0 1633 705 197 30 13 17 671 41% 155 39 477 208 269 16% 30 239 15% Mar-21 1679 2.1 393 2746 2.2 655 2270 2.6 598 1647 0 1647 0 1647 731 205 30 13 17 650 39% 127 40 482 208 275 17% 31 243 15% Mar-22 1674 2.1 393 2738 2.2 654 2264 2.7 600 1648 0 1648 0 1648 749 213 30 13 17 626 38% 99 40 487 208 279 17% 32 247 15% Mar-23 1674 2.1 394 2738 2.2 656 2264 2.7 606 1656 0 1656 0 1656 769 221 30 13 18 605 37% 71 41 494 208 286 17% 32 253 15% Mar-24 1674 2.1 396 2738 2.2 658 2264 2.7 612 1666 0 1666 0 1666 789 230 30 13 18 585 35% 42 42 501 208 293 18% 33 260 16% Mar-25 1679 2.1 398 2746 2.2 663 2270 2.7 619 1680 0 1680 0 1680 813 240 30 13 18 566 34% 14 43 509 208 301 18% 34 267 16%

Disclaimer

The views expressed here are of individual capacity and to be used strictly for academic discussions only. The facts, figures and financials are illustrative and not factual or observed on any company. Neither the author nor the company is responsible for any commercial decision based on this case material. The contents of this document cannot be reproduced without prior permission of the author.

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Lakshya 2012