City Gas Distribution in India An emerging investment opportunity

City Gas Distribution in India

Overview of Natural Gas Market

India is the 5th largest energy market in the world - TPES ~ 433 MTOE Natural Gas consumption in 2009-10 is 166 MMSCMD constituting 9% of TPES Gas consumption has increased from 1.91 MMSCMD in 1971 to 166 MMSCMD in 2009; a CAGR of ~12% Significant investments are planned in the transmission infrastructure

Sector Wise Gas Consumption (2009)

Internal Consumption 11% Other Industries 19% CGD 3% Sponge Iron 7% Fertilizer 27% Power 33%

Plan to add 5000 km of pipeline network in the next 4-5 years

Natural Gas Demand Projections

400 350 MMSCM D 300 250 200 150 100 50 0 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 166.96 240.5 204.76 275.48 299.39 346.79

CGD sector currently consumes ~ 3-4% of the countrys natural gas consumption

Natural Gas is poised to play an important role in Indian energy market investment in distribution infrastructure will enable last mile connectivity to the population
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Overview of City Gas Distribution Market

During FY0510, CGD consumption in India has grown over 30% to reach a current level of ~ 8.5 MMSCMD Current consumption is concentrated in Gujarat, AP, Mumbai and Delhi CGD segment is getting active support from the govt. / judiciary in particular for switch over to CNG from liquid fuels

Gas Consumption Trend in CGD

5 4 4% Share in India's total gas consumption

3%

mmscmd

3 2% 2 1 0 FY05 FY06 FY07 Consumption FY08 Share FY09 1%

Additional ~250 cities identified by PNGRB for development in 5-7 years 1. Distribution market poised for growth with multiple cities being bid out by PNGRB 2. Cross country pipelines are also being bid out to provide transmission connectivity 3. Evolving bidding / regulatory framework aims to encourage more inclusive participation

0%

~18 pre-nominated cities already covered by CGD ~ 13 cities awarded by PNGRB under round 1 & 2 in 2009 Operational network in 42 GAs; Under implementation in 20 more GAs

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City Gas Distribution in India

Transmission Pipeline Connectivity

Transmission pipeline connectivity is critical for the development of CGD Projects The national gas grid is set to emerge by 2015 with a large number of pipelines being commissioned Recently announced pipelines include:

Bhatinda Jammu Srinagar Pipeline Mehsana - Bhatinda Pipeline Mallawaram - Bhilwara Pipeline Surat Paradip Pipeline
While initial roll out of CGD networks have been around existing pipelines like HBJ and EWPL, new pipelines will accelerate CGD roll out

From a current pipeline network of ~ 11,000 kms, the national gas grid aims add ~ 5,000 kms of new pipelines

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City Gas Distribution in India

Market Outlook

CGD network projected to reach 213 new cities by 2020 Natural gas demand originating from CGD is expected to increase to over 100 MMSCMD by FY 20 The share of CGD in the countrys total gas demand is projected to increase to around 20% by FY20 Expected investment of INR~400435 Bn with opportunity for players dealing in ancillary services
120 100 Demand (mmscmd) 80 60 40 20 0

Natural Gas Requirement for CGD

25% 20% 15% 10% 5% 0% FY10E FY11E FY12E FY13E FY14E FY15E FY20E CGD gas demand Share in total gas demand Share in India's total gas consumption

With benefits of offering a clean fuel, attractive economics and regulatory support, CGD sector is an attractive proposition for consumers, investors and the society at large
Page 6 City Gas Distribution in India

City Gas Distribution International Scenario

Natural Gas Market in United Kingdom

Market is regulated by OFGEM, which is also the electricity market regulator Large industrial, commercial and residential users free to select their gas suppliers The market has integrated energy players having presence across value chain

Natural Gas Consumption Mix

Others 14% Other Industry 12% Energy Industry 7% Electricity 35%

Residental 32%

1. Market has evolved from being PSU controlled to privatized unbundled units 2. Perfect competition features with multiple gas sources, multiple producers and consumers and a well integrated infrastructure network 3. Wholesale and retail prices are not regulated; transmission and distribution prices are regulated through a five year regime
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Price Composition
Meter Provision 2% VAT 5% Transmission 2% Distribution 15% Environmental 3%

Energy Supply costs & Margin 73%

City Gas Distribution in India

Natural Gas Market in Turkey

Market regulator EMRA grants new distribution licenses in cities through tenders. The tender evaluation is based on the unit service and depreciation charge (USDC) for supplying one KWh of natural gas for the first eight years. Entity has to connect all customers across the distribution region within five years.

Natural Gas Consumption Mix

Industry 22%

Electricity 55%

Residential 23%

Pricing Tariffs across the natural gas value chain are regulated by EMRA. Natural gas retail price comprises USDC, gas procurement costs and transmission and storage prices. USDC is the only variable from one region to another

1. Market evolution is similar to India private participation post unbundling of market activities 2. Distribution is done by 5-6 large entities 3. Local municipalities own 10% of the CGD Projects 4. Large reliance on imported gas
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Natural Gas Market in Pakistan

Pakistans Gas industry has witnessed high growth over the last decade The country had ~96,000 kms of distribution pipelines and ~56,000 kms of transmission pipelines SNGPL and SSGPL are primary distributors The gas transmission network reaches over 20% of its population Country has largest CNG market in Asia serving over 2 Mn vehicles

Natural Gas Consumption Mix

Industry 21% Fertilizer 16% Domestic 15% Power 43%

Transport 5%

Pricing Tariffs across the natural gas value chain are regulated by OGRA Field wise well head gas prices are fixed Maximum CNG prices for different regions are prescribed as well as Minimum charge and final sales price of gas for different category of users

1. Distribution done by 2 primary players who control ~ 75% of the network 2. The transmission network growth rate ~70% between 2001-09 3. End Prices are regulated
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Pipeline Density Comparison

India Pakistan Turkey UK

Reserves (TCF)

39.4

32.0

10.3

Consumption (BCF per day) Pipeline (Km) Pipeline Density (km/Km2)

5.0

3.7

3.1

8.4

29,000 0.01

106,533 0.13

275,000 1.13

Significant planned investments in transmission and distribution infrastructure, planned would enable an integrated gas market for India
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City Gas Market in India

Regulatory Framework

PNGRB was established by the Central Government on October 1, 2007 PNGRB is responsible for the regulating refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas
Authorization by MoPNG Entities which have laid networks prior to the establishment of PNGRB Need to submit detailed calculations which need to be verified by the board Are assured a Project IRR (14% post tax) on their investment in infrastructure

CGD

Authorization by PNGRB through bidding Entities wanting to enter the CGD space post the establishment of PNGRB These entities need to bid for authorization once PNGRB invites EOIs for particular cities IRR is not assured and is purely a function of the bids quoted in the competitive process

In the City Gas Distribution (CGD) space, two types of entities operate 1. Authorised by MoPNG to lay the CGD network before October 1, 2007 2. Authorised by PNGRB through the bidding route

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City Gas Distribution in India

Bidding Framework for New Cities

Lowness of present value* of the unit network tariff
Weightage 40% Tariff to be quoted over 6th25th year of the economic life Entity to provide a year wise network charge in Rs/MMBtu

Lowness of present value* of the CNG compression charge

Weightage 10% Tariff to be quoted over 6th25th year of the economic life Entity to provide a year wise compression charge in Rs/Kg

Highness of the present value* of the inch km of steel pipelines

Weightage 20% Pipeline proposed to be laid during the exclusivity period (5 years) Entity to provide a year wise inch km of steel pipeline proposed to be laid during the exclusivity period

Highness of the present value* of number of domestic consumers to be connected

Weightage 30% Number of customers to be connected over the exclusivity period Entity to provide a year wise number of customers proposed to be connected during the exclusivity period

* Present Value to be calculated using a discount rate of 14% Note: All calculations are made from the 6th year onwards.

As per the latest Round III Bidding Framework, the bidding variables need to be within a 20% range of the DFR parameters subject to a minimum IRR of 6%
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Indicative Timelines
Suo-motu by Board Firm-up Authorized Area
30 days

EOI
15 days

Open Advertisement

Invite Bids
15 days 60 days

Bid Evaluation
90 days 30 days

Gas Tie-up Financial Closure

120 days 5 YEARS 20 YEARS

Grant of Authorization

Exclusivity ends

End of Economic Life

Page 15 City Gas Distribution in India

Indicative Demand Build Up

A medium size city will have a long term demand of ~ 1.25 1.50 MMSCMD During the first phase of capex roll out, demand is primarily from CNG segment and a few large industrial connections Post the steel network roll out, bulk of the volume growth is from the Industrial segment 1. Industrial customers are the anchor demand large customers need to be tapped upfront 2. CNG demand -- impetus from the judiciary / state govt. 3. PNG demand switchover rate dependant upon level of current awareness about gas
CNG 38%

Demand: Year 3
Household 12%

Demand : 0.19 MMSCMD

Commercial 1%

Industrial 49%

CNG and Industrial segment as anchor demand

Demand : Year 25
Household 10%

Demand : 1.43 MMSCMD

Commercial 1%

CNG 11%

Industrial 78%

Industrial demand grows faster than other segments

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City Gas Distribution in India

Margin Drivers
Segment Wise Indicative Gas Price
$/MMBTU 35 30 30 25 20 20 15 10 10 5

Profitability Grid

Alternate Fuel Price Discount to Alternate Fuels Indicative Affordable Price

0 0 0

Industrial Industrial

Domestic Domestic

CNG CNG

Commercial Commercial

Gas Cost+ Network Charge

Marketing Margin

High margin segment might not offer good volume intensity

CGD business offer attractive margins across the four operating segments

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City Gas Distribution in India

Indicative Capital Expenditure

For a medium size city with a long term demand of 1.5 MMSCMD, the ~ investment is INR 650 675 cr Investment during the first three years is ~ 30% of the Project Cost (primarily) towards roll out of the steel network Post exclusivity period, entity invests in providing last mile connectivity and marketing of gas

Capital Expenditure
Other Costs 9% Taxes and Duties 11% Pipelines 10%

EPC Costs 18% RoU 18%

LMC 22%

Compressor s 12%

1. City Gas Distribution is a capital intensive business 2. Key to success is quick roll out of the steel network and maximizing connections

A typical medium size city would have a steel network of ~ 50 to 60 kms Last mile connectivity costs are ~ INR 5000 per household connection An online compressor would cost ~ INR 2.0 2.5 cr

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City Gas Distribution in India

Indicative Operating Expenditure

Opex for network infrastructure primarily comprises Manpower costs and O&M expenses Opex for Compression facilities primarily comprises cost of utilities and O&M costs O&M costs for distribution infrastructure are ~ 2-3% of Project Cost O&M Costs for compression are ~ 4-5% of the Project Cost on compression facilities 1. A typical city with a PNG demand of ~ 1.25 MMSCMD would have an annual opex of ~ Rs 30 35 cr 2. Opex would also vary depending up on the PNG / CNG demand mix 3. Significant proportion of the opex is in the form of fixed costs

Network Opex

O&M Expenses 54%

Manpower Costs 34%

Admin and Overhead s 12%

CNG Opex
Manpower Costs 13% Utilities 32%

Admin and Overheads 5%

O&M Expenses 50%

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City Gas Distribution in India

Thank You