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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

ACKNOWLEDGMENT

This working paper owes its completion to the assistance, insight, guidance and cooperation of many persons who have been most kind and gracious in helping us to successfully negotiate through various features of an EPC contract process. Through the aegis of this paper, they enabled us to underpin the conceptual and rudimentary framework of an EPC contract. We express our sincere thanks and gratitude to !%E&' r. P.&. (ehdev, (r. -ccounts .fficer, Corp. )in.$, !%E&' r. !. !hambani, "eneral manager #Commercial$, r. ohammad ,halid #(r.

anager #)in. Packages * !.+.$, !%E&'

r. (atnam (ingh, Power )inance Corporation.

There are others who were e/ually generous with their contributions and ideas. %owever, in deference to their wishes we shall maintain their anonymity to preserve the integrity of confidential assistance. 0evertheless, if not in letter then in spirit, we acknowledge their support and heartily thank them for it. We are also grateful to our Professor, +r. (.,. Chaudhary for giving us an opportunity to work on such an interesting and enlightening sub1ect. The leanings derived in the process have been invaluable and we are confident that it shall hold us in good stead in the future. )urther, errors, omissions, and mistakes, if any, are our responsibility alone.

Prologue 2nfrastructure pro1ects with their enormous implications on the economic and social development of a nation, possess three inherent risks. )irst, is the risk of inaccurate estimation of demand and the

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

conse/uent underutili3ation of built up capacity. (econd, is the is of cost and time overrun, which plays havoc with the 244, 0P5 and payback period calculation and place the viability of the entire pro1ect in 1eopardy. Third is the risk of force ma1euer. -n answer to the second type of risk is the emergence of EPC contractors who are responsible for the design , engineering, manufacturing, supply, storage commissioning and handing over of the pro1ect. The caveat here is that EPC contractors have to necessarily deliver on time , and as per the prescribed specifications. -ny default on their part, empowers the pro1ect sponsor to levy a penalty from the EPC contractor. Therefore such contractors need to be disciplined , punctual, financially prudent, deeply committed, resourceful, knowledgeable and should possess sufficient financial clout. (ince an EPC contract assumes the entire responsibility of the pro1ect, commissioning ab initio and since it is organised under a single point of responsibility, it is extremely convenient for the sponsor to coordinate and oversee the operations. The very fact that responsibility can be pinned down and a penalty charge levied has enhanced the popularity and stature of EPC among pro1ect sponsors. The intention of this working paper is to ascertain the roles, responsibility and rules of an EPC contract. We attempt to investigate the strengths of successful EPC contractors and strive to derive some learning from this study. .ur working paper is built on an actual real life pro1ect that is currently under construction . This is the !20- power pro1ect 1ointly promoted by the "rasim group , 2ndia' and Power "en, 6, The EPC contractors are (iemens -" "ermany, (iemens #2ndia$, !%E& #2ndia$. This particular case has been selected not to evaluate and discuss the pro1ect per se, but to use it as an illustration in improving our understanding of an EPC contract pricing

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

EPC CONTRACTS Definition and Co era!e -n EPC Contract encompasses the design, engineering, manufacturing, supply, transport to site, storage, installation, testing and commissioning, conducting Performance Test and handing over to the power station in reliable operating order. The power (tation shall comprise all works, plant and e/uipment necessary for a complete working Power (tation including interalia, steam generators, steam turbine generators, condensers and other boiler and turbine auxiliary e/uipment, electrical e/uipment, control systems, control room, air conditioning, ventilation, fire protection and fire fighting system, air pollution system, dust extraction systems, cooling water systems, site civil works, coal unloading, storage and handling facilities, fuel delivery system, fresh water supply systems, dust and ash handling e/uipment, stack, 788 ,5 switchyard, fuel gas desulphurisation plant, and any other plant and e/uipment necessary for successful operation for a power station and a township for the .* staff. Sco"e of Wor#s and Su""$y %y t&e Contractor The materials to be provided and the works and services to be performed by the contractor pursuant to the contract include the following 9 :. Pro1ect administration ;. +esign and engineering <. Procurement and expediting 7. aterial control =. Tests and inspection >. (hipment, transportation, customs clearance and storage ?. Construction @. (ub contracting A. Control of schedule and /uality :8. Commissioning and reliability test ::. Performance guarantee test :;. (upply of initial spare parts :<. Training of the owners operating and maintenance personnel :7. -ny other item of workBsupply re/uired to fulfill the contractorCs obligations Project Administration Provide the .wners 4epresentativesC with all the information and data necessary for the works, including master plan, time schedule of the works, the contractorCs pro1ect team organi3ation chart together with the identities and curricula vita of key personnel, copies of insurance policies, and estimates or reports on the performance of the works as re/uired from time to time by the .wner. -ppraise and administer all engineering, procurement and field construction work performed by subDcontractors for /uality and schedule Coordinate and manage the progress of the works, while submitting the monthly progress reports for the entire works as correlated with the agreed time schedule. (urvey, verify or otherwise ascertain the geographical conditions, producing the site survey drawings, subsoil conditions of the site and other construction areas, and local conditions, local laws and regulations pertinent to the proper performance of the works. Establish the works procedures fro such items as called for in "C :@.= of the "eneral Conditions. 2n connection with the permits, approvals andBor licenses from local state or national government authorities or public service undertakings to be obtained by the .wner in itCs name, assist the .wner in preparation of supporting documents and application submitted to the authorities.

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

.btain and pay for the permits, approvals andBor licenses from local state or national government authorities or public service undertakings fro the performance of the works developed on or off site

Design and Engineering Plan design and schedule and prepare the following !asic design and engineering (ite survey drawings Pro1ect design basis Plot plan +esign intent memorandum Mechanical P*2 design &ine design data sheets and diagrams E/uipment schedule E/uipment data sheets

Electrical (ingle line diagrams Instrumentation +escription of instrumentation, control systems, alarm and interlocking system, control room, special provision for instrumentation in ha3ardous areas. Civil !asic design drawing for civil, building and other structures +rawings for infrastructure development such as leveling, drainage, roads including access to the site Concept drawings or single line diagrams, with appropriate explanations for all building service systems such as lighting, communications, fire prevention, and fighting, air conditioning and ventilation, plumbing systems. Waste water treatment system concept Detailed Design And Engineering +ocumentation Produce the following items of documentation through every category of the engineering design +ocument schedule and index Purchase re/uisites anufacturing drawings operation and maintain instructions and manuals Program of commuting Catalogue of e/uipment -s built drawings and record documents &ist of codes and standards used &ist of lubricants chemicals catalysts and other materials for commissioning echanical electrical instrumentation and civil specifications for fabrication, assembly, installation, and other field works !ills of material

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Mechanical Engineering Design &ayout E/uipment sketches or drawings E/uipment specifications Piping arrangement drawings Terminal point drawings for the interconnection of pipes, going in and coming out of plant site (cale model of the plant (tructural steel works 9 fabrication, assembly and installation drawings 2nsulation and painting Electrical Engineering Design Power balance +etailed power distribution diagram Electrical system layout and cable routing Electrical e/uipment specifications and list Terminal point drawings 2nstrumentation engineering design &ists of instruments, cable, instruments air tubing +ata sheets for all instruments orifice plate specifications and typical calculations Control valve specifications ad typical calculations &ist of settings of switches and relays for operation of alarms and interlocks Tele automationBtelecommunication engineering design )unctional specifications for tele automation Electrical power supply diagrams Control room design Communication layout drawings Civil Engineering Design (tructural calculations and loading diagrams for ma1or structures Typical details for anti corrosion, thermal insulation lighting protection, maintenance access etc. +etail design drawings for civil, building and other structures and all building service systems Quality Assurance Euality assurance documents and programs for implementation Completed /uality assurance dossier Procurement And Expediting Procurement Prepare re/uisites for procurement of material s 2ssue in/uiries to vendors and receive /uotations Evaluate vendors /uotations from both technical and commercial point of view and prepare bid comparisons Prepare technical bid evaluations 2ssue purchase orders to selected vendors 2nstead or in addition to any of a$ to e$ above, either entirely or partly , prepare and produce the standards and specifications for manufacturing.

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Expediting Expedite vendorCs engineering, design calculations and other data fabrication and delivery, so that the overall time schedule may be maintained. (ubmit a production schedule for ma1or e/uipment reports periodically. 2f re/uired station expediterCs shop. Expediting shall be carried out in accordance with the works procedures. Material Control Prepare material lists for bulk materials based on estimated /uantities. Check bulk material re/uirement by making takeoffs in accordance with progress of engineering aintain bulk material summary sheets up to date, showing takeoff /uantities and surplus shortages status. Prepare procedures for control of material substitution in various phases of the pro1ect development to minimi3e material substitutions Tests And Inspections Perform tests and inspections in vendorFs shops by contractorCs inspectors and Bor third party testing or inspection agency, as specified in the contract. (hop inspections shall be carried out in accordance with the works procedures -rrange or perform any additional or special tests including lab tests when re/uired %ave any statutory or specialist authority conduct the tests and inspection where re/uired by laws and regulations 2f so re/uired, produce manufacturerCs certificates concerning material , pressure tests etc. (tation field inspectors at the site and perform tests and inspections for items specified in the contract -ssure that welders are all /ualified in accordance with accepted standards Prepare inspection reports and submit them to the owner )ield specifications to be carried out in accordance with the works procedures. Shipment And Transportation Customs Clearance And Storage (hipment and transportation -rrange packing of the materials as specified and transport them to the port of loading -rrange shipment of the materials to the port of unloading by ship, aircraft or other means Transport the ownerCs supplied e/uipment and materials from the delivery points -rrange insurance in accordance with the contract Customs Clearance .btain import and reexport licenses for temporary facilities, construction e/uipment, personal effects of the contractorCs personnel, etc. -rrange and conduct customs clearance of all materials, construction e/uipment, and other supplies at the port of unloading Transport all material, e/uipment, etc. )rom the port of unloading to the site. Storage (tore all materials in a warehouse or yard, and implement proper inventory control for receipt, stocking and checking Construction Provide the following services and facilities for all of the contractors and sub contractors, personnel engaged in the Works

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

-. Transportation to and from the site !. edical care and treatment C. &iving accommodation and catering +. 4ecreational and communication facilities Provide for the ownerCs review as soon as possible after the award of the Contract, detail field construction plans including the following9 Estimated manpower re/uirements by crafts Procedures and organisation for security, safety, sanitation, gate control, loss prevention and fire fighting at the site Procedures for inventory control Plans for mobilising e/uipment, material and labour Plans for making critical and heavy lifts Provide preliminary construction items Conduct leveling, compaction of the areas and remove obstacles at the site Provide access roads (upervise labour and subDcontractors (upply utilities anage construction work

(ubDContracting Control of (chedule and Euality Commissioning and 4eliability Test Performance Test (upply of spare parts Training of the ownerCs operating and maintenance personnel T&e +id The bid prepared by the bidder shall be in two parts9 :. 6npriced TechnoDCommercial !id ;. Price !id !npriced Techno"Commercial #id shall contain no prices or price schedules for the scope of Works. The following should be attached to the !id9 :. ;. <. 7. =. >. ?. @. A. !id (ecurity Power of -ttorney !idderCs eligibility and Eualifications Eligibility of the plant, e/uipment, systems and services (ubDContractorsB(ubD5endors proposed by the bidder Technical +eviations -lternate !ids Performance "uarantee Parameters Construction E/uipment

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

:8. ::. :;. :<. :7. :=. :>.

Technical +ata (heets &ocal 4epresentation Contract Euality -ssurance Work Program Electrical Power 4e/uirement -dditional 2nformation Commercial +eviations

Price #id shall cover the bid prices for the entire scope of work, facilities and shall contain the appropriate price schedules furnished in the bidding document as per the 2T! Clause. !idder shall furnish the G!id PriceH in the (ummary (heet and the breakdown of prices as follows9 2. 22. 222. 25. 5. 52. 522. 5222. 2I. -. (chedule of Prices for .ffshore services !. (chedule of Prices for .nshore services (chedule of services for initial spare parts #!oth onshore and offshore$ 5aluation Program Chart Taxes, +uties and &evies included in the bid price .ptional itemsB(ervices Takeout Price -lternative .ffer (chedule of bid price #(ummary$ -. !. (chedule of Prices for .ffshore supplies (chedule of prices for onshore supplies

2nsurance 4e/uirements #To be effected by the Contractor$ Insurance Marine Car!o Erection A$$ Ris#s T&ird Party Lia%i$ity Auto-o%i$e Lia%i$ity Wor#-en.s Co-"ensation E-"$oyer.s Lia%i$ity Pay-ent Contract Price The Contract Price shall be a firm lumpsum not sub1ect to any alteration except in the event of a change in works and is specified in the agreement. Terms o% Payment The Contract price shall be paid as specified in the Terms of Payment as given in the table below. The owner will have to pay interest for delayed payment at the rate shown. #onds Amount to $e Insured ::8J of C2) 5alue )ull 4eplacement value of Plant )or any one occurrence )or any one occurrence 2n Compliance with statutory re/uirement s which are applicable to the employees )or any one occurrence

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

The following bonds shall be provided in favour of the owner at all times9 :. ;. <. 7. 2nitial -dvance Payment !ond Performance cum Warranty !ond 2ntermediate !ond Claim 6nder !ond

0nte$$ectua$ Pro"erty &icense' !se o% Technical In%ormation )or the operation and maintenance of the plant, the Contractor grants a nonDexclusive and nonD transferable license #without the right to subDlicense$ tot the owner under the patents, utility models, or other industrial property rights owned by the contractor or a third party from whom the contractor has received the right to grant licenses thereunder, and shall also grant to the owner a nonDexclusive and nonDtransferable right #without the right to subDlicense$ to use the knowhow and other technical information disclosed to the owner under the contract. 0othing contained shall be construed as transferring ownership of an patent, utility mode, trademark, design, knowDhow or other 2P4 form the contractor or any third party to the owner. Con%idential In%ormation The .wner and Contractor, during the continuation of the contract will keep all information confidential and shall not without prior written consent anything to the third party. The .wner shall not use any documents or other material received for any other purpose. Co--issionin! Guarantees and Lia%i$ities The Contractor guarantees9 :. .ntime Completion ;. +efect free design and engineering <. Performance sub1ect to details agreed upon 7. Contract of 2ndemnity for patent =. -vailability of the plant for the entire period till the expiry of defect liability period Security Pac(age The (ecurity package must be acceptable to power purchasers, sponsors and lenders. 2t has to take into account9 -$ The relative negotiating positions of sponsors and power purchasers based on relative experience of the parties, pressures on developers and pressures on power purchasers. !$ 4elative negotiating positions of lenders and sponsors based on comprtition for funds, limited banking capacity and expertise as well as sponsorsC sunk investment cost. Constituents of a typical security package includes (hareholders agreements and "overnment support arrangements in both phases of a pro1ect. The security is not in the technical legal sense, but the matrix of pro1ect contracts which underpin a pro1ectCs costs and revenues. )perating Phases Power purchase agreements )uel supply contracts

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

.perating and maintenance agreements 2nsurance package Permits and licences .ther special situations # CoDgeneration, tolling contracts, technical or management services, &0" facility contracts, commissioning gas, backDup fuel contracts ect. $

Construction Phase Plant construction contract .ther construction contracts # eg. )or pipelines or transmission facilities $ EngineerCs appointments 2nsurance package Permits and licences &enders rarely accept a full exposure to al l risks of a pro1ect, thus there are few, true limited recourse pro1ect financings. The building blocks of a (ecurity package include 9 To keep the risk within the pro1ect, ie. the risk impacts on the sponsorsC e/uity return andBor the debt PassDthroughs, ie. The pro1ect contract matrix effectively transfers the risk to the power purchaser External support, the pro1ect is sheltered from the risk by aa third party9 eg. "overnment support, insurance or shareholder undertaking Ris# Profi$es Even apparently very similar pro1ects may display profound differences of risk assessment and allocation on detailed examination of the security package. The risks would be P4E as well as P.(T completion. Pre"Completion *is(s Cost overrun D will the plant be completed and commissioned on budget. The issue that needs to be addressed is under what circumstances should the capital cost be passed through to the power purchaser. +elay in completion 2nterest rates D is the risk passed through to the power purchaser or is the interest rate risk held within the pro1ect and whether there is need for a hedging programme. )orce ma1eure D Problem areas include strikes, fuel contracts force ma1eure, is there a perfect match between construction contract force ma1eure and force ma1eure protection in fuel supply and power purchase contracts. %ow is loss of revenue coveredand if there is a +(6 K Performance risks D is there ade/uate protection against errors by the contractor in design, procurement or workmanship. The issues in this case would be how much risk canthe contractor be asked to accept and what liability should the sponsors have to the power purchasers for the performance defects. )oreign exchange D who bears the risk of any foreignDcurrency denominated element of the turnkey contract. Permitting risk D does the pro1ect have all necessary consents re/uired for construction and operation. 2n this case Permitting stability, ie. The role of host governments is significant. Political risk D how is the pro1ect insulated from fedral or state political risk. (cope of political risk takes into account Premitting stability, Custos dutiesBimport licences for plant and e/uipment, spares and imported fuel consents to raise local e/uityBdebt. "overnment support would be in the form of comfort letters, government agreements, state acts of parliament.

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Post"Completion *is(s + (tation defects D are there ade/uate remedies protecting the pro1ect against postDcompletion defects. )uel cycle risks D does the pro1ect have committed supplies of fuel over the life of the PP- and do the escalation provisions match. 2s the takeDor pay risk passed through and if there is any currency or fuel stoking exposure.There is big risk for the purchaser because of D +emand profiles, 4egulatory change, step change in escalated prices, Commissioning of cheaper plant. Electricity arket risk D 2s the pro1ectCs income isolated from fluctuations in demand for power in the electricity market, and against volatility in prices for power in any wholesale market. The issue that needs to be addressed is whether the capacity charge is fixed, and paid irrespective of dispatch. Plant performance #availability, net output, heat rate$ D are the risks of availability, net output and heat rate e/uitably shared between the pro1ect and the power purchaser. 2nterest rates Currency of paymentD to accommodate forex exposure on fuel purchases in energy prices. 2s the pro1ect protected against depreciation of local currencey against hard currency commitments, how is the tarif denominated, is there exchange rate protection against foreign currency debt service. Credit risk D is the power purchaser creditDworthy, what protection is available against credit dilution on subse/uent privatisation. &egislative change D are the effects of legislative change passed through to the power purchaser such as carbon tax, impact of more stringent environment regulation. )orce a1eure D Pass through of fuel cycle force ma1eure, effects of political or uninsurable force ma1eure, insurance 9 is payment of claims in foreign currency assured, how assured is business interuption cover. Political risk D to what extent is the pro1ect protected against nationalisation or expropriation, currency nonDconvertibility 9 not only for e/uity return and debt service but also offshore payments for fuel and insurance ect. There are also other risks such as discrimination in favour of stateDowned generators, Price review.

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

+ina T&er-a$ Po3er Pro4ect 15 Pro-oters The pro1ect is being promoted by Aditya #irla ,roup # through five of its companies, i.e. "rasim 2ndustries &imited, 2ndo "ulf )ertili3ers and Chemicals &td., %indalco 2ndustries &td., 2ndian 4ayon 2ndustries &td., all based in 2ndia and P.T. 2ndo !harat 4ayon , 2ndonesia$ and Po-er ,en of 6,. The -ditya !irla "roup would hold ;?J of the e/uity share capital, Power "en ;>J and balance would be by way of public issue andBor by way of private placement. The !irla "roup alongwith Power "en P&C of 6, are presently in the process of setting up two power pro1ects. .ne power pro1ect will be set up in 4osa in 6ttar Pradesh and the second Power pro1ect being set up is the aforementioned !ina pro1ect in P. -.5. !irla group has more than =8 companies worldwide. The groupCs <=8 W 4enusagar captive power plant is widely considered the best privately managed power plant with more than A:J availability and A8J P&) during last :8 years. The other promoter Power "en is one of the worldCs largest private sector power generating company . 2t has a total ;=.AJ share of total electricity market in England and Wales. Power "en has extensive expertise in generating electricity from coal, gas, oil and hydro. Power "en has a proven track record both in 6, and internationally. 25 +rief Descri"tion of t&e Pro4ect The proposed !ina Thermal Power (tation #coal based$ has a capacity of ;x;@A W #=?@ W$ in PhaseD 2 and ;x;=8 W in phase D22. The proposed power station site is about :=kms from !ina Town. The site area is uninhabited and no settlement is envisaged. Part of the land is under private holding and the rest of the land is with "o P. The EPC contractor would be responsible for pro1ect completion on a guaranteed fixed cost and time schedule basis. - limited 2C! exercise was undertaken for selection of EPC contractors. 2n view of both the sponsors having ade/uate experience in .* of coal based power plants, the pro1ect does not envisage the appointment of an outside .* contractor. The pro1ect and e/uipment design would incorporate the latest pollution control devices and is expected to adhere to all environmental norms. +C&, Calcutta has been engaged as consultant for economic feasibility study, evaluation of EPC tender, negotiations with other reputed contractors for engaging them for detailed engineering, pro1ect supervision services, etc. '5 6or3ard and +ac#3ard Lin#a!es .uel &in(ages7 Coal linkage of ;.? million TP- from ,orba Coal )ields of (EC&, a subsidiary of Coal 2ndia &td. /ater Availa$ility7 4eceived water allocation in Luly :AA= #- barrage proposed to be constructed to meet the water re/uirement in the lean season.$ &and Ac0uisition7 &and to be ac/uired, token advance paid. *ail &in(age %or coal transportation7 To be finalised with 2ndian 4ailways. .uel transport agreement7 To be signed with (outh Eastern Coal )ields &imited PPA -ith MPE# 7 (igned in )eb. MA> EPC Contractors7 Consortium of (iemens -" and !%E& Po-er Evacuation7 Proposed to be evacuated by PE! through two 77kv feeders to 788 kv system of PE! at !ina at a distance of :? kms from pro1ect site.

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

(5 Pro4ect Main P$ant and E8ui"-ent Detai$s Main P$ant E8ui"-ent !oiler Turbine "enerator Ma#e !%E& (iemens -" !%E& * (iemens Para-eters A8? tonnesBhr, :=; bar, =78deg.C ;@A W at <<degC#max$ Condenser Cooling Water <=8 5-, ;@A W at 8.@= p.f.,< phase, =8 %3. emission less than :=8 mgB 0
<

E(Ps # !%E&, 4anipet $ will control (P meter #multi flue$ for all units.

. (tack height will be ;?=

)5 En iron-enta$ Para-eters9E-ission Le e$s: E-ission Ty"e (P # gmB0 <$ (ox # icrogmB0 <$ 0.x# icrogmB0 <$ *5 0-"$e-entation Sc&edu$e The pro1ect would have total implementation period of <> months from time of 0otice to proceed which will be immediately after the financial closing. The anticipated date for completion of the first unit is Lune ;888 and second unit is (eptember ;888. ,5 6ue$ Su""$y A!ree-ent !P(C& proposes to enter into a long term fuel supply contract with (EC&, a subsidiary of C2&, for an estimated re/uirement of ;.? TP-, to be met from ,orba coal fields, ?:; km, by rail. C2& is finalising a model fuel supply agreement, which would be used by all coal based independent power pro1ects. The /uantity and /uality will be defined in the agreement. /5 Coa$ Was&ery -s per recent "o2 notification, it has been made mandatory to use washed coal for coal based power plants. The sponsor of !P(C& have been indicated that they will 1ointly put up a washery to be established at pit head at ,orba, the capital cost of which is expected to be 4s. :;= crores and construction period is anticipated to be ;: to ;7 months. Statutory Li-it ;88 @8 @8 Antici"ated Le e$ :;> <? <<

15 Tariff Esti-ation %ased on PPA 7 Coa$ Cost !asic Price of grade ) coal Washing charges

PP- validity <8 years Para-eters Considered N<<;B T 4s.:;=.>@B T

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

)reight .ther charges#excise, royalty, sales tax$ Tota$ S"ecific coa$ consu-"tion of 3as&ed coa$ S"ecific oi$ consu-"tion ;eat rate Ca$orific a$ue of 3as&ed coa$ Oi$ cost Au<i$iary consu-"tion O=M e<"enses Return on E8uity 0ncenti e Wor#in! Ca"ita$ Re8uire-ent

Tariff de"reciation S5 No5 : ; < 7 =

4s. 7=8B T 4s.<??.<;B T :;@=B T 4s. 8.=;7 kgBkwh <.= mlBkwh ;=88 kcalBkwh 7;88 kwhBkg 4s. @?=8 B T A.= J ;.= J of capital costs :> J N 8.?J for every J increase in P&) DA8 days of coal D>8 days of secondary fuel re/uirements D<8 days of .* re/uirement D>8 days of debtors N ?.=J of capital costs P$ant Load 6actor @=.88 J ;.>A :.<: 8.?= ;.8> :.@:

Tariff Ca$cu$ations Particu$ars P$ant Load 6actor >@.7A J 2st year two part tariff ;.@? -verage fixed expenses for <8 years :.<7 -verage variable expenses for <8 years 8.?= -verage Tariff for <8 years ;.8A &evellised tariff for <8 years :.@7 #:7J discounting factor$

Sc&edu$e of 0-"$e-entation The pro1ect will be implemented on a turnkey basis by the consortium of (iemens and !%E& who start construction in .ctober :AA? and complete the first unit by Lune ;888 #<< months$ and the second unit by (eptember ;888 #<> months$. The pro1ect would have total implementation period of <> months from the time of 0otice to Proceed #0TP$. The 0TP would be immediately after the financial closing. The schedule is available as !P(C& has taken advance action in implementation of the pro1ect. The company has targeted financial closing of the pro1ect at (eptember <8, :AA?. -s per the PP-, the financial closure should occur by +ecember <:, :AA?. Cost of t&e Pro4ect The cost of the pro1ect has been estimated at 4s. ;><8 crores #e/uivalent to about 6(O : P 4s. <=.=8$, broad breakDup of which is as given below9 .oreign Currency Cost 1!S2 mn3 Land and Site De e$o"-ent Non EPC Ci i$ 3or#s *upee Cost 1*s4 Crores3 7> :88 6( O?7: million at Total Cost 1*s4 Crores3 7> :88

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

EPC Contract Misce$$aneous 6i<ed Assets Pre$i-inary and Preo"erati e e<"enses Contin!encies and Esca$ations Ca"ita$ Cost of t&e Pro4ect Mar!in Money for Wor#in! Ca"ita$ Tota$ Cost of t&e Pro4ect

:?=.7

:?=.7 :?=.7

:8?> AA ==A =A :A<A >@ ;88?

:>AA AA ==A =A ;=>; >@ ;><8

&and and site development includes preliminary investigation costs of 4s. < crores, land cost of 4s. :> crores, land ac/uisition costs of 4s. :< crores, access and diversion roads costs of 4s. > crores and ash disposal area development costs of 4s. @ crores. 0on EPC civil works cost of 4s. :88 crores comprise barrage cost towards water supply system of 4s. =; crores, township cost of 4s. 7= crores and temporary construction and enabling costs of 4s. < crores. The &etter of 2ntent for the EPC contract has been awarded to the consortium led by (iemens -" at a price of 6(O :?=.7 million and 4s. :8?> crores. The EPC contract includes the steam generator, turbine generator, mechanical balance of plant, electrical balance of plant, civil works, duties and taxes, installation, engineering and erection, testing, tunkey fees, overheads,management fees and commissioning. iscellaneous fixed assets amounting to 4s. AA crores include coal transportation system of 4s. :< crores, spares of 4s. ;A crores, heavy e/uipment and tools of 4s. :7 crores and ash development plant and disposal of 4s. 7< crores. Preliminary * PreDoperative expenses of 4s. ==A crores comprise development expenses of 4s. := crores, legal * financial expenses of 4s. ;: crores, establishment and construction supervision expenses of 4s. 7: crores, operator training expensses of 4s. ; crores, start up fuel expenses of 4s. @ crores, insurance expenses of 4s. ;; crores, capital issue expenses of 4s. ;; crores, upfront fee of 4s. >: crores, %E4 E( insurance premium of 4s. <= crores, commitment fee of 4s. > crores, guarantee commission of 4s. <; crores, interest during construction of 4s. ;@? crores and other expenditure of 4s. ? crores. Contingencies and escalations amounting to 4s. =A crores has been arrived at based on a percentage of the non firm costs D :8J on land * site development, :=J on non EPC civil works, :8J on miscellaneous fixed assets and =J on preliminary and preDoperative expenses. argin money for working capital of 4s. >@ crores has been computed based on the estimated re/uirement of working capital D < months of fuel costs #advance payment of a month plus stock of two months$, ; months of secondary fuel, a month of .* expenses, ; months receivables, and one year stock of spares. Ca"ita$ cost as a""ro ed %y Centra$ E$ectricity Aut&ority 9CEA: The capital cost of the pro1ect, as approved by CE- is 6(O :?=.7:; million and 4s. :@;8>.;? crores aggregating 4s. ;7<<.<7 crores. The lower cost is attributable to the following factors9 :. The contingencies and escalations as approved by CE- are 4s. >.7= crores. -s this estimate was lower than that usually assumed by lenders in similar pro1ects, the same was increased to 4s. =?.@> crores after considering the non firm costs.

1)

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

;. The financing plan submitted to CE- assumes a rupee funding of 77.7=J of the pro1ect cost #against 78J assumed here$, EC-s of 6(O :;=.; million and balance by EC!s of 6(O =8 million. The EC!s of 6(O =8 million were assumed to be on a nonDrecourse basis in the CE- estimates. This memorandum assumes that these EC!s may also have to be guaranteed. This increases the upfront fees and guarantee commission payable during the implementation period. <. The interest rate on rupee loans has been assumed to be :?J against :@.@@J assumed in the memorandum 7. The management fee on the guarantees issued has been assumed to be :.8=J against <.:=J assumed in this memorandum for guarantees of similar maturity. =. The interest on the EC-s and EC!s would also need to be guaranteed. This has not been computed in the CE- approved cost. )or the purposes of profitability pro1ections, the sales revenue has been computed based on the tariff calculated as per the CE- approved cost and financing plan, as a measure of conservatism. Co-"arison of Pro4ect Cost 2)2s have appraised four ma1or coal based pro1ects in the private sector and two pro1ects promoted by "u1arat (tate Electricity !oard. - comparative statement of their pro1ect cost, configuration, details of their installed capacity and expected dates of completion are as below9 5ame o% Company Date o% Completion ay :AA@ Luly :AA@ Lune :AA@ -pril :AA> -pril :AA@ -pril :AAA (ept ;888 Capacity EPC Cost 1incl4 duties3 :<;> :7<: A8? D D D :>AA EPC Cost'M / <.:> ;.@> <.7A D D D ;.A7 Capital Cost ;8@8 ;=:= ::@@ <:> ><A ?<> ;=>; Cost'M / 7.A= =.8< 7.=? 7.>@ <.87 <.= 7.7<

AES 0% >a$$ey? +a$a%!ar&? @inda$ Tracte%e$A @a-s&ed"urB GSEC 9Gand&ina!ar: GSEC 9Wana#%ori: +PSCL

7;8 =88 ;>8 >?.= ;:8 ;:8 =?@

Q9 4evision of costs of these ; pro1ects, sanctioned by 2)2s in :AA7, is in progress. )inancial closure for the pro1ects are yet to be achieved. The capital costs of these pro1ects are at historical exchange rates #:AA7$ N9 Pro1ect uses dual fuels D corex gas and coal R9 Provision made in the pro1ect for expansion upto 788 substation sections W capacity in the cost handling and electric

The capital cost of "(EC units is lower primarily on account of no EPC contract being envisaged, progress already made in implementation, si3eable cost savings due to sharing of certain facilities with "u1arat Electricity !oard and low interest during construciton as e/uity contribution has been brought upfront. Means of 6inancin! Source .oreign Currency Source *upee Source 6(O : P 4s. <=.=8 Total

1*

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

#6(O million$ ECD0TE Pro-oters -ditya !irla "roup Powergen plc Ot&ers Tota$ E8uity DE+T 4upee &oans )C loans from EC-s )C!s Tota$ De%t GRAND TOTAL E0uity <8 =@ @@ :;= A? ;;; <:8

#4s. crores$ :8? <?: 7?? :8=; :8=; :=;A

#4s. crores$ ;:< ;8= <?: ?@A :8=; 77= <77 :@7: ;><8

.ut of the total e/uity of 4s. ?@A crores, the -ditya !irla group would subscribe to 4s. ;:< crores #;?J$, Powergen would subscribe to 4s. ;8= crores #;>J$ and the balance of 4s. <?: crores #7?J$ would be placed on a private placement basis andBor thru a public issue. The sponsors would underwrite the entire balance of 7?J of the e/uity share capital of !P(C&. - suitable preDcommitment condition has been stipulated to this effect.The sponsors would be re/uired to bring in =8J of the core promotersC contribution prior to seeking disbursement of the loans. - suitable preDcommitment condition has been stipulated to this effect. *upee Term &oans !P(C& has sought term loans of 4s. :8=; crores from 2)2s and 2C!s for meeting a part of the cost of the pro1ect. The applicable terms and conditions are given below9 *epayment Schedule Security Dra3do3n Sc&edu$e )verseas #orro-ings ECA Backed The EPC consortium led by (iemens -" has offered long term buyerCs credit covered by %E4 E(, the EC- of "ermany for @=J of the "erman export portion amounting to approximately 6(O :;=.; million. The loan would be offered by a syndicate of commercial banks, with political risk cover being provided by %E4 E(. The pro1ect risk would need to be covered by suitable guarantees from 2)2s and (C!s. The %E4 E( backed )C loan of 6(O :;=.; million would carry a mgt. fee of 8.=J, a %E4 E( insurance premium of @J, a commitment fee of 8.;=J and an interest rate of ?.?>J. 2nterest would be payable semiDannually, with the repayments being spread over a period of :; years commencing > months after commercial operations. 67 e0ual 0uarterly instalments $eginning 68 months a%ter %inancial closure :. ortgage of immovables and hypothecation of movables ;. -ssignment in favour of lenders of all rights, titles and interests of the pro1ect company in all pro1ect documents 8 D :; months9 @J :< D ;7 months9 =@J ;= D <> months9 <7J

1,

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

!P(C& has re/uested 2)2s and 2C!s to guarantee the aforesaid EC- credit. The applicable terms are as under9 Amount Security !S2 98:48 million 1;3 interest thereon :. ortgage of immovables and hypothecation of movables ;. -ssignment in favour of lenders of all rights, titles and interests of the pro1ect company in all pro1ect documents

The sponsors have had discussions with a few leading international banks which are active in the pro1ect finance market. 2t is envisaged that a syndicate of international banks would be underwriting the entire re/uirement of )C borrowings to the extent of 6(O ;;; million. While a few banks have evinced interest in extending commercial )C loan #non EC- backed$ on a nonDrecourse basis, given that the )(- and )T- are yet to be finalised and may not match intl. (tandards by way of guaranteed supply and penal charges, the appetite for overseas non recourse debt can be gauged only after the offers are invited from the banks. Thus this memorandum assumes that even the non EC- backed )C loans would need to be guaranteed by 2)2s and 2C!s. The guarantees sanctioned for these loans would stand reduced to the extent !P(C& is able to attract overseas non recourse loans. Salient .inancial Indicators )n Completion o% Project as on Sept <7 8777 De%t F E8uity Ratio ;.<<9: 6i<ed Assets Co era!e :.<A times Pro-oters. contri%ution as "ercenta!e of "ro4ect cost :>J The above parameters are more favourable than the ".2 guidelines in this regard for the financing of private power pro1ects #max. +BE of 79: and min. PromotersC contribution of ::J$. The above means of finance is also within the ".2 guidelines as to the extent of assistance provided by 2)2s and 2C!s not exceeding 78J of the total pro1ect outlay. Additional Sponsor Support The sponsors have agreed to provide completion support to the pro1ect. The same would be /uantified based on an assessment by the 2ndependent Engineer #2E$, prior to financial closure. - suitable preD commitment condition has been stipulated that the spsonsors agree to provide completion support to the pro1ect as determined by the lenders, based on an assessment of the 2E. This sponsor support would be without recourse to the lenders. This is over and above the contingencies of about 4s. =@ crores, which has been included in the pro1ect cost. Mar#etin! and Se$$in! Arran!e-ents The Indian Electricity Scenario The 2ndian electricity sector has grown manifold over the last =8 years and 2ndia is the third largest producer of power in -sia. The power generating capacity inceased from :<>; W in :A7? to about @<,;@@ W at present. 6ntil :AA:, this sector was confined primarily to "overnment #Central or (tate$ owned utilities except for a few licensees in the private sector operating in some of the large cities. With the growth in the economy and conse/uent growth growth in the demand for electricity, the gap between supply * demand has widened with the current energy shortage being about @J and peaking shortage of :?J.

1/

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

+0NA POWER SDPPLE COMPANE L0M0TED PROPOSED OWNERS;0P STRDCTDTRE

"rasim :.;:J Powergen plc.

2ndoD"ulf 8.;AJ

2ndian 4ayon 8.>AJ

%indalco :.<=J

PT 2ndo !harat ;>J AJ -sian 2nfra #Power$ 2nvst.

Thai Carbon !lack 7.=J

Thai 4ayon 7.=J 2ndo Thai (ynthetic 7.=J

8.A>J

Co !ased auritius

!P(C&

.ther 7?J

2nvestors

11

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

+0NA POWER SDPPLE COMPANE L0M0TED CONSOL0DATED 60NANC0AL STATEMENTS O6 S0EMENS GRODP Sie-ens 3or$d3ide conso$idated state-ent of inco-e Sear ended (ept <8 #million + $ 111* 111) Net Sa$es A7:@8 @@?>< Cost of (ales D>>?:8 D>;:;> Gross "rofit on sa$es ;?7?8 ;>><? 4esearch * +evelopment expenses D?;A> D?;?7 arketing * (elling expenses D:7:?8 D:;A@= "eneral administartion expenses D<8<A D;>8> .ther .perating 2ncome >@7 77?A .ther .perating expenses D=?@ D7A<; 4estructuring changes and exit costs D?>7 D;:?< 0et 2ncome from investment in other companies <:7 7A> 0et 2nterest 2ncome =<7 ?88 .ther financial gains :8< ;>8 0nco-e fro- continuin! oo"erations %efore inco-e ta<es <;=@ ;>8; Taxes on income from continuing operations D?>? D=:@ 0nco-e %efore e<traordinary !ains = accountin! c&an!es ;7A: ;8@7 Extraordinary gains and accounting changes #net of applicable 7A> D income taxes$ Net 0nco-e ;A@? ;8@7 Particu$ars Assets 0ntan!i%$esG fi<ed assets and in est-ents 2ntangible assets Property, plant * e/uipment at cost less9 -ccumulated +pepreciation 2nvestments Current Assets 2nventories less9 -dvances received from customers -ccounts receivable and miscellaneous assets Trade accounts receivable .ther accounts receivable and miscellaneous assets &i/uid -ssets Pre"aid e<"enses Tota$ Assets S&are&o$ders. E8uity and Lia%i$ities S&are&o$ders. E8uity Capital stock of (iemens -" Common stock #0o. .f votes ==8,>A=,A78$ ;?A>@ D:A@@7 :A=:? ::=8? <:8;7 ?>7@ :<? /,)21 111* ;?=7 7> ;>8== D:A<A; :>?@; ::;7; ;@8;7 :8:>7 :8: /11,, 111) ;?=< 7> 111* :<@; =<@;@ D<<@@8 :A;?@ 78>8@ 111) A8: 7A=:: D<:@7; :@7== <?8;=

22

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Preferred stock #0o. .f votes A,;<>,<78$ -dditional paidDinDcapital 4etained earnings 6nappropriated consolidated net income inority interest Translation ad1ustment Accrued Lia%i$ities Pension plans and similar commitments .ther accrued liabilities De%t Ot&er $ia%i$ities Trade accounts payable -dditional liabilities Deferred 0nco-e Tota$ S&are&o$ders. e8uity and $ia%i$ities

;@88 @>:? :;<:7 @78 :><@ D:8:: ;=:A@ :@>7A :A@78 <@7@A >:?A @8@8 A88A :?8@A =7> /,)21

;?AA @>:= :8<;7 ?;@ :=;> D:=8: ;;7A: :??7? ;87?: <@;:@ =:7: ?<7A @;AA: :=>78 7@? /11,,

21

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

The ". P constituted a high level committee, in Lan :AA>, under +r. 0. Tata 4ao, ExDChairman -P(E!, to arriveat guidelines on restructuring and privatisation of power sector and power tariff in the state. This committee submitted its report in Lan :AA?. The recommendations are summarised below9 The committee was of the view that the current problems being faced by PE! was due to the various social obligations which were performed by it over an extended period, including supply to rural areas and energising a large number of villages. 2n order to give relief to the (E! from the existing burden of running the huge monolithic organisation into which it had grown and is finding itself unable to provide the needed investments and the /uality of sevice a customer expects from it, the committee has recommended dividing PE! on a functional basis into < entities, vi3.9 :. ;. <. adhya Pradesh Power Corporation # PPC$ adhya Pradesh Transmission Corporation # PTC$ adhya Pradesh Tonal +istribution Companies # PT+C$

2nitially these will be susidiaries of PE!. +istribution functions of PE! will be decentralised into a number of independent 3onal companies of manageable si3e in area, turnover and employee strength. The committee was of the view that PE!, unlike other (E!s, has managed to keep its generation wing separate from the transmission and distribution wings and ahs not allowed interDtransfers of staff. This is expected to facilitate the proposed restructuring of PE! on a functional basis. ". P is understood to be intending to evolve a consensus for the restructuring of PE!. The restructuring is likely to result in improvement in the risk profile of the offtake entity. )urther, the escrow arrangements would continue even in this scenario.. Pro"osed Credit En&ance-ent Mec&anisThe pro1ect envisages < sources of security for the obligation of PE!9

:. &etter o% Credit 9 PE! shall establish for the benefit of !P(C& one or more &cs in respect of the amounts payable under the PP-. Each such &C shall remain in place for the longest period commercially available #not less than :; months$. The aggregate of each &C shall be an amount necessary to meet ; months pro1ected tariff payments. - P&) of @8J is assumed for the :st yr. of operations and for the subse/uent years, an average of the previous period P&) will form the basis. PE! shall renew or replaceeach &C at least ?8 days prior to its expiration. !P(C& shall be entitled to drawdown upon a &C if PE! does not make payment by the invoice due date. PE! shall restore the &C to the envisaged amount within = days of such drawdown. ;. Escro- Account9 PE! shall at all times following the first unit commercial operations date maintain an escrow account with PE!Cs bank in a form and substance mutually agreed to by the parties and on terms no less favourable than applicable to any other indpendent power generating company. (uch an escrow account shall be credited with an amount suficient to e/ual one and half months of the monthly tariff payments payable by PE! under the PP-. PE! shall be at liberty to withdraw amounts from the Escrow account till such time that PE! fails to renew, replenish, replace or restore any of the envisaged &Cs. 6pon an event of default, PE! bank shall withhold all further withdrawals or disbursement instructions by PE! from the escrow account and !P(C& shall be entitled to draw on the escrow account. <. ,)MP ,uarantee9 The ". P irrevocably and unconditionally guarantees to !P(C& the payment and performance obligations of PE! under the PP-. The Escrow mechanism is seen to be a ma1or security measure for payments due to PE!. )urther, the pro1ected revenues from PE! would be insufficient to meet the escrow re/uirements of all the 2PPs

22

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

envisaged in the state #@:A= W$. !roadly it has been estimated that the pro1ected revenues of PE! would support about ;888 W of private sector generating capacity #assuming a cover of :.= times at the time of commercial production$. -ll the PP-s which have been signed envisage escrow as a credit enhancement mechanism. 2t has been indicated to PE! that escrow should be awarded to only a select few pro1ects based on certain criteria, to enable at least a few pro1ects to achieve financial closure. The sponsors have indicated that PE! is presently in the process of identifying pro1ects which would be awarded the escrow and !P(C&, being one of the early pro1ects envisaged to achieve financial closure would not encounter any problem in securing the escrow. - suitable preDcommitment condition has been stipulated that the escrow arrangements be finalised to the satisfaction of lenders. Retention Reser es -s a limited recourse pro1ect, !P(C& would be re/uired to maintain reserves for meeting payments for fuel, .* and insurance expenses, tax payments, interest on working capital, interest on long term debt and principal repayments. - suitable consition has been stipulated that the company shall maintain retention amount suficient to e/ual one and half months of the monthly tariff payments payable by PE! under the PP-. PE! shall be at liberty to withdraw amounts from the Escrow account till such time that PE! fails to renew, replenish, replace or restore any of the envisaged &Cs. 6pon an event of default, PE! bank shall withhold all further withdrawals or disbursement instructions by PE! from the escrow account and !P(C& shall be entitled to draw on the escrow account. E ents of 6orce Ma4eure 0either party to the PP- will be held liable for the non or delayed compliance of its performance obligations if such breach is solely due to certain events of force ma1eure, i.e., to the extent such event is outside the reasonable control of the relevant party. )our types of force ma1eure have been defined in the PP- including natural, nonDpolitical, political and foreign political event. +uring the pendency of force ma1eure of the types including natural, nonDpolitical, political and foreign political event, !P(C& shall be entitled to receive monthly tariff payments from PE!. Consequences of Indian Political Event )or an 2ndian political event occuring prior to the pro1ectCs commercial operations date, !P(C& has a right under the PP- to terminate the agreement and #i$ sell the pro1ect to PE! for a termination purchase price or #ii$ accept payments from PE! including interest due on loans, costs associated with any suspension, cancellation of any contract entered into by the company, any additional costs incurred by the company as a result of the event of force ma1eure and ?J simple interest on the e/uity invested in the pro1ect for the period of continuation of the 2ndian political event. )or an 2ndian political event occuring during the operational period of the power plant, !P(C& shall be entitled to receive monthly tariff payments in the following manner9 #i$ in the event the plant has not operated for more than one month, the monthly P&) shall be =:.<?J for the first > months and >@.7AJ for the next > months, #ii$ if the plant has operated for less than :; months, the P&) assumed shall be the P&) achieved during the last full month of operation, #iii$ otherwise the P&) shall be assumed to be the average of the P&) over the previous :; months period. COST O6 T;E PRO@ECT Particu$ars Land = Site De e$o"-ent Preliminary investigation Cost +rea#Fu" 6C Cost Rs5 Cost ())5( <8.; Tota$ Tota$ 9Rs5 -n5: 9DSH -n5: ())5( 125/ <8.; 8.A

2'

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

&and cost Cost of land ac/uisition -ccess * +iversion 4oads -sh disposal area development Non EPC Ci i$ 3or#s !arrage D water supply system Township Temporary Const. * Enabling works EPC Contract Misce$$aneous 6i<ed Assets Coal transportation system (pares %eavy e/uipment and tools -sh disposal plant * e/uipment Pre$i-inary =Preo"erati e e<"enses +evelopment expenses &egal * )inancial expenses EstablishmentBConst. (upervision .perator training expenses (tart up fuel expenses 2nsurance Capital 2ssue expenses 6pfront fee %ermes insurance premium Commitment fee "uarantee commission 2nterest during construction .ther forex charges Contin!encies = Esca$ations Ca"ita$ Cost of t&e Pro4ect Mar!in -oney for 3or#in! ca"ita$ TOTAL COST O6 T;E PRO@ECT Our Co--ents on t&e Pro"osa$ 1,)5( 1,)5( 1,)5(

:==.@ :;@.7 >7 ?? 11,5* =;8 7=;.> ;= 12,*251 11'51 :<:.@ ;A=.< :<?.= 7;@.> ))1'52 :=8 ;8>.: 78=.A ;8 ?? ;;8 ;;;.= >8?.@ <=7.? ><.> <:A.A ;@?7.= ?: )125/ 11'1251 */2 222,251

:==.@ :;@.7 >7 ?? 11,5* =;8 7=;.> ;= 1*1// 11'51 :<:.@ ;A=.< :<?.= 7;@.> ))1'52 :=8 ;8>.: 78=.A ;8 ?? ;;8 ;;;.= >8?.@ <=7.? ><.> <:A.A ;@?7.= ?: )125/ 2)*22 */2 2*'22

7.7 <.> :.@ ;.; 2/51 :7.> :;.? 8.? (,/5) 2/ <.? @.< <.A :;.: 1),5* 7.; =.@ ::.7 8.> ;.; >.; >.< :?.: :8 :.@ A @: ; 1*5, ,215, 1152 ,(25/

The costB W installation works out to be 4s. 7.7> crores which is on the higher side. - detailed review of the cost estimate needs to be done to ascertain the reasons in this regard. The EPC consortium, headed by (iemens -" is well reputed in the turnkey construction pro1ects sector and is /uite experienced in the coal based power plants construction. The experience of their consortium members , vi3. (iemens -" and !%E& is expected to minimise the construction risk to a large extent. The boiler is to be designed and supplied and erected by !%E& who have got sufficient expertise in this area. The design of the boiler is similar to !%E&Cs most recent coal fired ;x;=8 W plant at +ahanu #!(E($.

2(

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

The turbine will be supplied by (iemens -", who has got experience on combined %PB2P &P turbine cylinder design and has been fabricating reheat condensing turbines since :A=8 and total capacity added using such turbine is about A=888 W. !P(C& would be executing a long term agreement with (EC&, the most profitable subsidiary of C2&, with annual production of coal in excess of =7 million tonnes in :AA=DA>. )urther, in the event (EC& fails to supply re/uired /uantity of coal from linked mines, (EC& shall have to pay the li/uidated damages to !P(C&. !oth the sponsor groups are having ade/uate experience in operation of coal based plants. The -ditya !irla "roup is operating :: power plants in 2ndia with an aggregate capacity of @>7 W, with another ;?; W expansion underway. Power "en is the fifth largest private sector power engineering company in the world and is predominantly a fossil fuel based generating company, with expertise in generating electricity from coal, oil and ash. The plant would be operated as base load station and PE! will purchase the entire power generated by !P(C&. )urther , two part tariff structure insulates !P(C& from any anticipatedB actual price increases. The (tate of adhya Pradesh has been experiencing deficit in both peak and energy demand. The peak power deficit and energy deficit by the end of the year :AA=DA> was estimated at ;<J and AJ respectively. -s per the := th Electric Power (urvey, the peak demand is estimated to increase from =:=: W in :AA>DA? to AA> W by ;88>D8?, while the energy demand is estimated to increase from <::<? kwh to ===@< kwh during this period. Considering addition of ?:@8 W capacity #including the !ina Pro1ect$ upto the year ;887D8=, it is estimated that energy availability situation will be satisfactory, while additional peaking capacity of about >88 W would be needed by ;88>D8?, to meet the peaking re/uirements. %owever it is unlikely that more than a few pro1ects are to achieve financing closure in :AA?DA@. Thus the actual demandDsupply gap is likely to be adverse than the scenario described above. Bs. 2C2C2, have already appraised the pro1ect as a lead institution for mobilising 4T& of 4s. :8=; crores and )C& of 4s. ;;; million 6( O and have recommended various )2s for financial support. PREL0M0NARE 60NANC0NG PLAN #an( Political *is( ,uarantee Cover 060s :8J D 0ndian +an#s :8J D ;ERMES D :@J 0nt.$ %an#s D D E8uity D D Tota$s ;8J :@J # 2nternational portion takes some McleanC pro1ect risk$ T&e Preconditions for 6inancin! They have to be a !ankable Pro1ect Contracts. .unds provided 1= project cost3 78J D D <8J <8J :88J .unds provided 1 appox4 In 23 O<88m D D O;;8m O;;8m O?.78m

2)

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

D PP- with acceptable security package D EPC contract with umbrella grantee from (iemens -" D Coal (upply -greement covering mining, washing, transport D .* contract Satisfactory Studies %y 0nternationa$ Consu$tants D Coal mine study D Coal washery study D 4ail logistics study D %ydrology study D Environmental 2mpact -ssessment D etc. Thereafter >DA months for financial Close EPC Contractor Se$ection Process for t&e +0NA Po3er Pro4ect The selection of (iemens and !%E& as the EPC contractors was the result of extensive supplier evaluation by the sponsors over a period of nine months. -nd international competitive tendering exercise was undertaken with selection based primarily on commercial and technical criteria. The pre/ualification tendering process was initiated in (eptember :AA=. +etailed pre/ualification /uestionnaires were issued to nine parties, including "E 2ndustrial and Power (ystems, 6(-' "EC -lsthom Power Plants, 6,' Parsons Power "eneration (ystems, 6,' (iemens -", "ermany' -!! Power "eneration, "ermany' ,orean %eavy 2ndustries, (. ,orea' %yundai %eavy 2ndustries, (. ,orea' !%E&, 2ndia' and itsubishi Corporation, Lapan. The /uality of response received from %yundai was found to be unsatisfactory and the EPC tender was issued to the remaining eight parties in 0ovember :AA=.

The tender was opened in )ebruary, :AA>. 2n addition to the review carried out by the sponsors, a preliminary review on technical aspects of all the bids received was carried out by +evelopment Consultants &td., Calcutta. .f the above parties, Parsons Power "eneration withdrew without submitting a bid, while the bid received from "EC -lsthom was re1ected on account of inade/uacies and high tender price. ,orea %eavy 2ndustries was not shortDlisted on account of high tender price and lack of experience in working in 2ndia. Though itsubishi Corp. submitted a bid, it subse/uently withdrew from the process. Thus the shortDlisted bidders were "E 2ndustrial and Power (ystems, -!! Power "eneration &td., and the consortium of !%E& and (iemens -". The tender assessment process was detailed and the main parameters for the award of the contract were 9 The EPC Price. .utputB %eat 4ate. )inancing. Technical and Commercial Compliance.

The price and construction schedule offered by the !%E& and (iemens consortium #hereinafter referred to only as GconsortiumH$ was found to be the most competitive, and a &etter of 2ntent was issued on Lune ;:st, :AA> to the consortium as the Gpreferred bidH. Sie-ens AG

2*

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

(iemens -" is a worldDwide leader in the engineering and electronics industry with operations around the world. 2t specialises in turnkey plant aspects in virtually every type of industry and is recognised as a leading edge player in engineering research. The various power business segments of (iemens -" group include9 the power generation group, industrial and building systems, automation products, communication and networks, defence electronics, transportation, medical engineering and semi conductors. )or the financial year ending (eptember <8, :AA>, (iemens -" reported total sales of +eutsche ark #+ $ @?.= billion #4s. :,@<,?=8 crores$, Profit !efore Tax of + <.; billion #4s >,@;= crores$, and a Profit -fter Tax of + ;.7A billion #4s. =,;;A crores$. Sie-ens Li-ited 90ndia: (iemens #2ndia$, a subsidiary of (iemens -", has interests in power generation and distribution systems, telecommunication, network and products, rail transportation, medical engineering, industrial products, systems and pro1ects, components and software. Together with its subsidiaries and associate companies (iemens #2ndia$ employees over A,888 people in the country. (ince the :A=8s, (iemens has provided knowDhow, technology, e/uipment and expertise to the power industries both in the power and the private sector. (iemens is associated with ma1or power pro1ects in the country including the combined cycle power plant of Tata Electric Co., Trombay' "as based combined cycle power plant of (E!, uran' and the >== W combined cycle power plant of "u1arat Torrent Energy Corp., "u1arat.

)or the year ending arch <:, :AA>, (iemens #2ndia$ reported a net profit of 4s. =@ crore on a total income of 4s. ::A@ crores. The netDworth of the company as on arch <:st, :AA>, was 4s ;@> crores. +&arat ;ea y E$ectrica$ Ltd5 9+;EL: !%E& is one of the premier engineering companies in 2ndia involved in the manufacture of power plant e/uipment and products like motors, captive power plants, coD generation plants encompassing gas turbines, steam turbines, heat recovery boilers, compressors, heat exchangers and pressure vessels. !%E& has :7 manufacturing divisions, and four power sector regional offices spread across the country. !%E& has been consistently expanding its manufacturing capacity, and has also been updating its technology by entering into collaboration agreements with leading manufacturers worldDwide. The power division product range of !%E& is comprehensive and includes the entire range of Power Plant E/uipment #PPE$. The products include thermal sets, gas turbines, hydro sets, e/uipment for nuclear power plants, boilers and pressure vessels, heat exchangers and boiler auxiliaries. !%E&Cs financial performance has been satisfactory, with net profits of 4s. 7>@ crores on a total income of 4s =?78 crores during :AA>DA?.

2,

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

En!ineerin! Procure-ent and Construction contract Sa$ient 6eatures The pro1ect will be implemented on a Turnkey !asis by a consortium comprising (iemens -" "ermany, (iemens 2ndia :$ .ff shore supply contract with (iemens -" ;$ .ff shore engineering services with (iemens -" <$ .n shore (upply contract with (iemens 2ndia 7$ .n shore civil contract and other services contract with (iemens 2ndia =$ .n shore supply contract with !%E& >$ .n shore civil and .ther servicesD!%E& The broad scope of work for each member of the consortium as under9 :$ Sie-ens AGFGer-any Consortium leader and overall pro1ect management will supply the turbine island and generators and ma1or C*2 e/uipment ;$ +;EL !%E& will be responsible for the boiler island, coal unloading and handling plant transformers, E(P and erection of all such e/uip. and !%E&. > separate contracts would be awarded which will collectively be e/uivalent to a single turnkey contract. <$ Sie-ens 0ndia Will be responsible for water treatment plant, C*2 e/uipmentCs and all main civil works including building and structures. The scope will comprise all works , plant and e/uipment necessary for a complete power station # inter alia$ (ubcritical reheat boilers (team Turbines Condensers and regenerating heaters Turbine auxiliary e/uipment !oiler feed pump, condensate extraction pump etc. Electrical systemsD 788kv system, >.> kv and 788 5 switchgears 2nstrument and control system Central control room -ir pollution control system ake up water systems (ite civil works 4ail infrastructure for cost unloading (torage and handling facilities for fuel, chemicals et c. )uel oil delivery system +ust and ash handling system (tation chimney -bove includes all civil work within the plant boundary limit Price9 - lumpsum fixed price contract without any escslationhas been negotiated at 6(O :?=.7:; millions and G2ndian rupees :8?>.8@@ crores. The break up is as follows9

2/

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Sie-ens AG Sie-ens 0ndia +;EL Tota$

DSH in -i$$ion :;?.7:; 7@ :?=.7:;

Rs5 in crores 7>;.=@ >:<.=8@ :8?>.8@

The above cost includes all import duties, taxes, works contract tax and spare parts during start up. (pares worth 4( ;A.=< crores will be ordered separately being strategic spares. Ter-s of "ay-ent7 CTR DSH9I: Rs9I: Guarantee The consortium leader (iemens -", "ermany has given a wrap around guarantee covering the entire EPC contract. a$ Performance guarantees and li/uidated damages b$ Warranty obligations c$ +efault and termination d$ 2ndemnities Perfor-ance Guarantee and t&e contract !uarantee 5et Electrical output "ross .utput ;@A w 0et output ;><.= W "ross heat rate A:=; ,LB,W% 0et heat rate -vailability Emissions +ust 0.I (ound :88=? ,LB,W% A8J 1 ?.<A >.:; ( 8.7= :.;= ) 8.7= :=.7@ * =A.>> <=.=A , ;7.?? <;.8: / 8.A: ;.= 12 8.=? :.=> 11 <.:@ 7.8; 12 ;.>: :.7@

:88mgBnm< >=8mgBnm< @= db at :.= meter from any e/uipment

Warranty "eriod The entire plant is covered for two years full defect liability period plus additional three year for significant defect in plant and machinery. The contractor will provide a performance bond for ;8J of the contract price which will be reduced to =J on taking over and to 8J after completion of the defect liability period.

21

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Li8uidated da-a!es .or delay+ ;8J of contract price#CP$, 8.?J of CP per week of delay .or per%ormance+ ;8J of Contract Price .or output+ :.?=J of the CP for every :J shortfall in output .or heat rate+ :.=J of CP for every :J excess in heat rate Availa$ility+ 8.=J of CP for each full :J by which availability fall shortly Maximum cap4+ <=J of contract price #CP$ Total lia$ility+ CP U maximum capacity

Co-"arison of EPC %ids Construction period in months. -ll financial figures in millions .riginal as on -!!. "E (iemens "EC ;:B;BA> * !%E& -lsthom Construction period !id price 6(O 4s + !id 5alue N 4s <7.= 4evised as on :=B<BA> Construction period !id price 6(O 4s + !id valueN 4s<7.= 4evised as on ;7B7BA> Constr. period !id price 6(O 4s + !id value N 4s <7.= <AB7; :?@.? ::<?@ :A:>A.?= <?B78 ;8@.?< ::87< :@?8@.= <?B78 ;8@.?< ::87< :@?8@.A= <AB7; <:? ?;A> :@;<;.= <>B<A <:;.= ?;A> :@=7;.8: <>B<A <8A.> >@8>.: :?A=;.8> <>B<A 7@ :7;=8.@ ;77.;; ;;8:;.<> <>B<A 7@ :<8>=.@ ;<>.@A ;8>77.8= <>B<A 7@ :<8>=.@ ;<>.@A ;8>77.:= <AB7; =?@.> :A@A;.? <AB7; ==:.@= :A8<@.A; itsubishi <AB7; =7< :@?<<.= <>B<A =<@ :@=@: ,orea heavy ind. 7;B7= =?; :A?<7 <>B<A =7; :@>AA

4evised as on <8B=BA> Constr. period !id price 6(O 4s + !id value N 4s <7.= 4evised as on :7B>BA> Constr. period

<>B<A ;:;.=: ::;A7.= :@8A8.@ <>B<A

<<B<> <;;.<7 >77A.: :?=>A.A <<B<>

<=B<@ 7@ :<8>=.@ ;<>.@A ;8>77 <=B<@

'2

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

bid price 6(O 4s + !id values N 4s <7.= )inal as on :=B>BA> Constr. period !id price 6(O 4s + !id values N 4s <7.= EPC STRDCTDRE

:A>.@< :8@:=.@ :?>>>.77 <<B<> :A>.@< :8?7=.@ :?=<>.77

<;8.< >>?8.: :?A;?.7= <<B<> <;8.< >>?8.: :??;8.7=

:?7.@= :8=@?.7 :>>:A.@> <<B<> :?=.7: :8?>.8@ :>@:;.77

The EPC contract would be executed by the (iemens -", (iemens #2ndia$, and !%E& consortium. (eparate contracts are to be entered among the three members linked with each other by crossDdefault breach stipulations. (ingle plant responsibility with (iemens -" by way of a wrap around contract. 2n terms of the contract, the contractor shall perform all work and services re/uired in connection with design, engineering, procurement, manufacture, construction, commissioning, start up, demonstration and testing of facilities. -s per the contract, all the civil works within the pro1ect plan site, would be the responsibility of the EPC contractor. 20 order to execute the pro1ect, (iemens #2ndia$ will have a coordinating office, covering local supplies, and !%E&Cs scope in 0ew +elhi, with the pro1ect office in "ermany. The site management team will be headed by (iemens #2ndia$ together with the !%E& site manager. The pro1ect company has the right to confirm the acceptability of site construction subDcontractors. The salient of the EPC Contractor are summarised below 9

CONTRACT PR0CE Contract Price >alidity

Contract Structure

The contract price is 6(+ :?=,7:;,888 and 204 :8,?>8,@@8,888 #fixed price$ Lune <8, :AA?, with an agreement to extend beyond that date at the mutual agreement of both the parties. #The sponsors have indicated that the EPC Contract validity will be extended till (ept. <8, :AA? at the same price$ The consortium proposes to structure the Contract between the number of GonDshoreH and GoffDshoreH contracts. This is conditional upon !20- being satisfied that the employer retains the same rights and remedies and a single point responsibility is maintained.

COND0T0ONS

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Termination Clauses

,round Condition Changes in &a.orce Majeuer Clause CONTRACT REMED0ES &i0uidated Damages %or delay Per%ormance ,uarantees

!20- has rights of termination in cases of 9 prolonged delay, failure to pass tests on completion, failure to remedy a defect, ContractorCs default, conse/uences of a force ma1euer event. Contractor has rights have termination in cases of 9 prolonged suspension, employers default, force ma1euer event. 4esponsibility of Contractor Covered under force ma1euer clauses in both PP- and EPC Contract. (ame as in PP;8J of Contract price N 8.?J per week 2f the works fail to achieve any o f the guaranteed figures, the following li/uidated damages will be payable sub1ect to a cumulative maximum of ;8J of the contract price. 0et output D :.?=J of the contract price per :J shortfall in output 0et heat rate D :.=J of the contract price per :J excess in net heat rate. -vailability D 8.=J of the contract price for each :J by which actual availability falls short of the availability. <=J on the contract price. :88J of the contract price plus <=J of #li/uidated damages$ -n Gon demandH bond of <8J of contract against (iemens -" ; year full default liability plus an extra extended defects period - A8J availability guarantee has been agreed to on the basis that &+s will only be levied after allowing a grace of :8J for an e/uivalent forced outage rate. Plan outages are considered separately.

Cap on li0uidated damages Cap on total lia$ility Per%ormance security De%ects &ia$ility Availa$ility ,uarantee

2t may be mentioned that the li/uidated damages and other penal charges proposed in the EPC Contract are on the higher side compared to similar Contractor and would be sufficient to cover any penalties which !ina Power would be re/uired to pay for any underDperformance or delay. OPERAT0ON AND MA0NTENANCE 2n view of both the sponsor group having ade/uate experience, in the operation of coal based power plants, the pro1ect envisages the appointment of an .* company, which would be promoted by the sponsors. -s mentioned earlier, Power "en has been operating coal based power plants in 6,, with high levels of availability and efficiency. The -ditya !irla "roup is operating :: power plants in its various companies in 2ndia, with an aggregate capacity of @>7 W, with another ;?; W of expansion under way. The largest captive at %indalco, 4enu (agar, is a coal plant with a capacity of 7;= W #expansion by additional :=8 W is underway$. This plant has been operating at P&) levels of upwards of @=J consistently. The sponsors have formulated a detailed organi3ational setup for the .* company and the total manpower re/uirements are estimated at @@@ for the two units of ;A@ W each. The manpower re/uirements for the general maintenance is estimated at >8 staff and :;8 workers. -ll the scheduled ma1or maintenance works are proposed to be carried out through Contractors. -part from a technical department, provision has also been made for personnel for services like a hospital, rural development, guest house, schools, and security. 2ndividuals with ade/uate experience working with the sponsors

'2

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

group would be deputed to man the key positions in the organi3ational set up on commencement of operations. - suitable preDcommitment condition has been stipulated that the .* satisfaction of lenders. PLANT = MAC;0NERE The power generating e/uipment has been based on the (iemens preDengineered basic concept for coal fired power plants which have been developed for 2ndian re/uirements. The plant * machinery for the pro1ect can be broadly classified into boilersB steam generator, the turbine generator, balance of plant, electrical e/uipment and control, and instrumentation. Stea- Generator The boiler or steam generator will be dwsigned, supplied, and erected by !%E&. !%E& has significant experience in the design and manufacture of boilers firing 2ndian coal for power station pro1ects of similar and larger capacities than that re/uired for !20- power. The corner fired, natural circulation, single stage reDheat, two pass steam generator, will operate at subDcritical steam conditions with moderate super heat and reDheat steam temperatures. The boiler will be designed to accommodate the uni/ue nature of 2ndian coals reflecting the design practice from other 2ndian plant designs. The design of the boiler will mirror !%E&Cs most recent coal fired ;=8 W reference plant, !(E( #;R;=8 W at +ahanu, aharashtra$, in 2ndia. Stea- Tur%ine (iemens has extensive experience in the combined %PB2P turbine cylinder design and has been fabricating reheat condensing turbines since :A=8, and total capacity added using such turbines is close to A=,888 W, involving 7:7 machines. The proposed turbine generator set will have one combined %PB2P #, type$ and : double flow &P turbine casting with a hydrogen cool generator arranged in line with the &P turbine. E$ectrica$ E8ui"-ent The two maintain generators with a generation capacity of ;?= W #;@A W maximum$ will have their output at ;: ,5 #,ilo volts$ at 8.@= power factor. This will feed electric power through <;8 5generator transformers to an ad1acent 788 ,5 double busbar switch yard, from where power will be exported to PE! Transmission (ystem. Contro$ and 0nstru-entation - comprehensive state of the art Control and 2nstrumentation #C*2$ system allowing a high level of automatic operation and diagnostic facilities envisaged to be provided as a apart of the EPC contract. The same will be based on the (iemens TE&EPE4 IP design. Coa$ Trans"ortation and Pre"aration SysteThe system has been designed to handle unit rakes upto >8 wagons and handling capacity of = rakes per day over a :> hour period. The normal rake speed is 8.@ kilometer per hour to the maximum speed of <.; kilometer per hour. The track hopper is designed to empty a complete rake with a capacity of <;,888 tones and is provided with covers to protect the system against rains. arrangements be made to the

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Ris# Ana$ysis F A$$ocation = Miti!ation - detailed risk analysis is provided below9 Ris# 6actor Pre F construction de$ay )inalisation of key contracts -pprovals and permits )orce a1eure Re$e ant 6actor !P(C& EPC ContractorB !P(C& PE! Pro"osed -iti!ation -ec&anis)(-, transport agreement and EPC contract to be finalised shortly. PP- and ". P guarantee already signed. PE! to assist !P(C& to obtain necessary approvals. Work permits within site to be obtained by the EPC contractor PP- provided for rescheduling of scheduled commercial operations date in the case of natural force ma1eure or 2ndian political force ma1eure. Plant to operate as a base load plant with obligation on EP! to lift entire power. The two part tariff structure insulates !P(C& from any actual price increase, but the .* expensed, which are linked to inflation. Credit enhancement mechanism include provisions of &BC, escrow account backed by ". P guarantee. )ixed price turn key contract on a completed cost basis. Pro1ect Co. To bear risk on non EPC cost. D +oD (tringent li/uidated damages for completion on time Experienced EPC consortium, li/uidated damages 4escheduling of scheduled commercial operation date Pro1ect to be deemed commissioned Commercial 2nsurance to be purchased 4eputed EPC contractor. (ponsor groups having ade/uate power plant operating experience

Off ta#e Ris# 5olume 4isk Price 4isk Payment 4isk Construction Ris# Cost increase 2nflation Completion Plant performance )orce a1eure

EP! EP! EP!, ". P

EPC contractor B !P(C& EPC contractor B !P(C& EPC contractor B !P(C& EPC contractor EP!B !P(C& EP! EPC contractor B !P(C&

+elay in construction of "rid +amage B +estruction

E/uipment 6nder performance EPC contractor B !P(C&

En iron-enta$ re8uire-ent (hortage of fuel

EPC contractor B !P(C&

EPC contractor stipulates emission norms prevalent in 2ndia. (ponsor groups having ade/uate power plant

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

(trikes 2nsurance risk

(EC&B!PC& 2nsurance Co. B !PC&

operating experience )(- provides for commercial supply of coal. Provision for two month coal supply in stock. !PC& will bear residual risk. inimal risk in light of few and trained personnel -de/uate insurance will be provided to the extent commercially viable. -vailability of foreign exchange is likely to be effected by economic and monetary conditions prevalent in 2ndia ".2 actively wooing foreign investments. Provision for payment of fair price in the event of expropriation. EP! to cover base return on e/uity, interest and principal payment against exchange variation. !PC& to bear risk on incentive payment and . * expenses. 2mpact to be absorbed by EP! after mutual agreement. EP! to pay fixed charges at a P&) linked to period of operations. !PC& to retain risk The two part tariff passes on all price increase #except .* expenses to EP!. !PC& exposed to risk on incentive payment and .* expenses. 2mplementation agreement with ". P expected to facilitate land transfer in an encumbrance free condition

Po$itica$ Ris# )oreign Exchange availability * convertibility Expropriation 4upee exchange rate risk

!PC& !PC&B ".2 EP!B !PC&

change in law Ot&ers )orce D a1eure D 2ndian political risk )orce D a1eure D 0on D2ndian political risk 2nflation

EP! EP! !PC& EP! B !PC&

4eal estate risk

!PC&

STATDS O6 APPRO>ALS Statutory C$earances S4 5o a: Item Techno D Economic clearance from CEAgency Central Electricity -uthority Status .btained in last week of ay :AA? *emar(s )ormal letter expected shortly.

')

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

%:

c: d: e:

0otification to be issued under section ;A#;$ of 2ndian Electricity #(upply$ -ct, :A7@ Water -vailability Pollution Clearance #Water * -ir$ from (tate pollution control board Environment and )orest Clearance from .E), (" Civil -viation Clearance for Chimney height from 0ational -irport -uthority Company 4egistration 4ehabilitation and resettlement of displaced families by land ac/uisition. %ydro pro1ects #miniD micro$ E/uipment procurement B 2mport &icense

(tate "overnment #("$ :. (" ;. Central Water Commission (tate Pollution Control !oard :. (" ;. inistry of Environment and )orests # .E)$ 0ational -irport -uthority 4.C :. .E) ;. (" inistry of water resources +"T+,CC2*E

2ssued

+ated :?B:BA?

.btained .btained .btained .btained .btained .btained .btained 0-

+ated :@B8?BA= +ated 8=B::BA> +ated :>B:8BA=* ;:B::BA> +ated ;<B87BA> +ated 87B:;BA> +ated 8>B8?BA= +ated :AB:;BA7 D

f: !: &:

i: 4:

0To be obtained

Coal based pro1ect Expected by <8B8ABA?

Non Statutory C$earance a: %: c: &and -vailability )uel &inkage Transportation of Coal (" +epartment of Coal inistry of 4ailways To be ac/uired, token advance paid .btained .btained Expected by <8B8>BA? +ated 8>B8:BA? +ated :>B8:BA?

Ot&er C$earances a: %: c: d: )2P! Clearance EC! clearance Tying up of finance )oreign exchange permission from 4!2 B for foreign e/uity B EC! D D D D .btained To be obtained To be tied up To be obtained +ated 8;B8:BA? * ;=B8<BA? Expected by <:B8?BA? Expected by :=B8@BA?

STATDS O6 MA@OR CONTRACTS J AGREEMENTS

'*

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

a:

Power Purchase agreement EPC contract )uel (upply -greement )uel Transport -greement Washery Contract

EP!

(igned on :;B 8;BA> &.2 issued. To be signed To be signed To be signed To be signed

%: c: d: e:

EPC consortium B !P(C& 2ndian 4ailway B &essor Washery Company

odification to be made. Expected by :=B8?BA? Expected by <8B8>BA? Expected by <8B8>BA? Expected by <8B8ABA? Expected by <8B8ABA?

',

Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Pros"ects for EPC Contractors 2nternationally, several factors have placed downward pressure on EPC contract pricing of combined cycle power plants over the last several years. Throughout the @8Cs, cogeneration and supplementary firing were incorporated in most industrialDsi3e pro1ects. Then when P64P- efficiency re/uirements were removed, plant capacity increased to utility si3e units and unit EPC costs started to drop. 2ncreased competition and deteriorating power sales pricing have led to reduced margins and additional reductions in unit EPC costs to a point where significant reductions in the near term are doubtful. 2nternational EPC contractors are a far more competitive lot than their 2ndian counterparts. This competitiveness stems from various factors but the primary is that they are much more experienced in the field and they bring the whole gamut of services to the pro1ect D not only engineering, procurement and construction, but also financing arrangements. They have been working with these financing bodies and they both understand each other well. 2ndian EPC contractors on the other hand have had no such linkages and are only 1ust beginning to get a feel of how business is done internationally. 2t is imperative for their well being that they get their act together and tieDup with financial institutions. -s long as they are learning the ropes, there can surely be tieDups with international players, but they cannot continue to hold their hand forever, especially if they aspire one day to ever compete on a global basis. The strength of the 2ndian EPC contractors is that they understand the domestic scenario better than the international players and thus can potentially be more efficient in implementation of the pro1ect.

APPEND0K Anne<ure7 1

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Pro4ect 6inancin! 0ssues So-e of t&e Ma4or 6actors t&at need to %e considered 3&i$e financin! 0ndian Po3er Pro4ects are7 &ack of credit worthiness of the Electricity !oardsD ost (E!Cs are technically bankrupt 2ndividual state guarantees are insufficient, since under many of the previous cases the state did not honour its obligations. The refusal of "ovt. .f 2ndia to extend guarantee, except in the case of some of the early GfastD trackH pro1ects. World !ank support is also not available to these pro1ects since the ".2 has refused to provide counter guarantee to the World !ank. -nd the World !ank re/uires complete restructuring of the Electricity sector before it will provide support without ".2 guarantee. .rissa is the first state that has been able to go in for complete restructuring.

0ndian 6undin! Sources The various sources that can be taped to finance 2ndian Power Pro1ects are9 0ndian 6inancia$ 0nstitutions 9060s: D are development agencies, providers of term loans D now limit pro1ect exposure to =8J of pro1ect cost D limit term loans to 78J of pro1ect cost Sc&edu$ed Co--ercia$ +an#s 9SC+s: D unable to find themselves longD term, mainly providers of guarantees D limited capacity to take pro1ect exposure9 :8J on !ina Ca"ita$ Mar#ets D no depth in retail market D regulations favour public sector issuers #no access to pension funds$ D significant redemption reserves re/uirement dilute 4.E Lessors D 2ndian PP- tariff structure does not accommodate lease payment. T&e ot&er #ey 6undin! A$ternati es for 0PP are77 ECD0TE7 (ponsors E/uipmentB )uel suppliers, .* Contractors 2nfrastructure )unds e.g. -2), "2P !ilateral and ultilateral agencies +omestic Public offering DE+T7 +omestic financial 2nstitutionsB !anks Export credit backed 2nternational banks ultilateral +evelopment -gencies 2nternational B +omestic Capital arkets Country (pecific fund providers #e.g. .P2C, -2 EC$

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Do-estic 6inancia$ 0nstitutions To take a closer look at the domestic financial institutions, we study them closely and assess the advantages and disadvantages that are attached to financing of these institutes. The -dvantages are9 These institutes are willing to assume state risk with Escrow &BCs They are usually more comfortable in assuming fuel risk They have one year oratorium The +isadvantages are9 The sponsor support being extended is not well defined This source of funding is usually very costly The Exposure Cap is informal The repayment has to be made in a shorter tenor Their are limited number of players in this field. T&e factors t&at in&i%it 0nternationa$ 6inancin! are7 The revenue risk that arises due to the creditworthiness of the (E!. )uel 4isk, this is significant but will reduce D due to the recent abolition of the (tate monopoly on fuel sourcing and supply PreD completion risk, this is viewed as significant factor by international lenders, especially political risk #e.g. +habol$ The state govt does not guarantee Ggood behaviourH, since this concept has not yet evolved in 2ndia +44 re/uirements T&e a$ternati e fundin! ideas for t&is "ro4ect are7 -ccessing +omestic G!ankH "rantees Packaging EC- debt with 0onD EC- funding -ccessing 2nternational !anks with a 4ombust structure D D D itigate (E! 4isk with &BCs itigate )uel risk with alternative arrangements itigate construction period risk

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Anne<ure 2 +;EL7 Cor"orate Profi$e >ision - worldDclass, innovative, competitive * profitable engineering enterprise providing total business solutions. Mission To be the leading 2ndian Engineering Enterprise providing /uality products, systems * services in the fields of energy , transportation, industry, infrastructure and other potential areas. >a$ues eeting commitments made to external * internal customers )oster learning, creativity and speed of response 4espect for dignity * potential of individuals &oyalty and pride in the company team playing Teal to excel 2ntegrity and fairness in all matters !%E& is 2ndiaCs largest engineering company and one of its kind in this part of the hemisphere. 2t manufactures a wide range of stateDofDtheDart power generation e/uipment and systemsbesides e/uipment for industry, transmission, transportation, defense, telecommunication and oil business. The company has :7 manufacturing divisions, A service centers and 7 power sector regional centers, besides pro1ect sites spread all over 2ndia and abroad to provide customers prompt and efficient service. !%E&Cs business broadly covers conversion, transmission, utili3ation and conservation of energy in core sectors of the economy that fulfill vital infrastructure needs of the country. 2ts products have established an enviable reputation for high /uality and reliability, which is largely due to the emphasis placed all along on contemporary technology. !%E& has consistently upgraded its design and manufacturing facilities to international standards by ac/uiring and assimilating some of the best technologies in the world from leading companies in 6(-, Europe and 1apan, together with technologies from its own 4*+ centers. This has helped the company to be at the cutting edge of technology. +usiness Sectors !%E&Cs operations are organi3ed around three business sectors namely 2ndustry, 2nternational .perations and Power. This enables !%E& to have a strong customer orientation, to be sensitive to their needs and respond /uickly to the changes in the market.

0ndustry Sector

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

a1or capital e/uipment and systems to important core industries like cement, fertilisers, refiners, Petro chemicals, steel, paper, mining and telecommunications are contributed by !%E&. Captive power stations of a wide range of capacities are supplied by !%E& to industrial users, based on thermal, gas turbine diesel generator sets. To promote large scale conservation of energy, coDgeneration systems and combined cycle power plants for better heat utili3ation and thermal efficiency are offered. !%E& is a ma1or producer of large si3e thryristor devices. 2t also engineers and supplies distributed digital control systems for power stations and process industries controls. !%E& has the capability to make simulators for power plants, defense, industrial process plants and other applications. - new plant has been set up in !angalore to give a thrust to the electronics systems business. Trans-ission - wide range of transmission products and systems are produced by !%E& to meet the needs of the power transmission and distribution sector. These include products like dry type transformers, ()> switch gear and 788,5 transmission e/uipment. )or economic transmission of bulk power over long distances, high voltage direct current systems have been set up. (eries and shunt systems have been introduced to minimi3e transmission losses which have proved highly successful. Oi$ !%E& has been supplying onDshore drilling rigs, IDmas tree valves and well heads to .0"C and .il 2ndia. !%E& has ac/uired technology to supply subseawell heads too. (uper deep drilling rigs, desert rigs and heli rigs have been indigenously developed by it. To prevent corrosion of offDshore pipelines ,,structures etc., cathodic protection system is also supplied by !%E&. Trans"ortation (ixty fiveJ of the trains in the 2ndian railways ware e/uipped with !%E&Cs traction and traction control e/uipment. The company manufactures broad gauge <A88 %P -C locomotives and has developed inDhouse 7?88 %P -CB+C locomotives for the 2ndian 4ailways and diesel shunting locomotives upto ;>88 %P for various industries. !attery powered road vehicles and locomotives are also manufactured by the company. 2n the future, !%E& would introduce electric trolley transport systems to meet the growing transportation needs of the urban centers sources of energy to serve remote and rural areas. These include photovoltaic cells , solar power based pumps, lighting and heating systems. !%E& has also emerged as a ma1or manufacturer of wind electric generators of rating upto ;=8 ,W. 0nternationa$ o"erations !%E& has exported its e/uipment and services to over =8 countries,. With the receipt of repeat orders, @8J of boilers installed in alaysia are of !%E& make. !esides several !%E& hydro sets are also in operation there. 4ecently !%E& rehabilitated several boilers in alaysia and converted them to gas firing. The company also supplied and commissioned four gas turbines to alaysia on a tight delivery schedule. 2t has supplied ; T" sets of >8 W rating to both alta and Cyprus. 2T has executed an order for two <8 w steam generators in Egypt. -nd in (audi -rabia, <R ;8 W )rame = gas turbine pro1ect is under execution. -mong other items !%E& also exports insulators, transformers, valves, otors, traction generators and services for renovation, maintenance and operation of power stations. Po3er Sector

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Power is the core sector of !%E& and comprises of thermal, nuclear, gas, diesel and hydro business. 2n less than three decades, !%E& has taken B2ndia from a position of total dependence on overseas sources to complete self reliance in power plant e/uipment with capabilities ranging from concept to commissioning. Today, !%E& supplied sets account for nearly >=J of the total installed capacity of around @<888 w in the country as against nil till :A>AD?8. !%E& manufactures boiler auxiliaries, T" sets and associate controls, piping and station C*2 upto =88 W rating with technology and capability to go upto :888 W range. The auxiliary products include high value capital e/uipment like air preheaters, bowl and tube mills, pumps and heaters, electrostatic precipitators, gravimetric feeders, fans valves etc. 2t has turnkey capability and can contract, system design and commission total power pro1ects to the satisfaction of the consumers. !%E& has contracted so far around ;7@ thermal sets of various ratings which include :7 power plants set up on turnkey basis. 0early @=J of world bank tenders for thermal sets floated in 2ndia have been won by the company against international competition. !%E& has adapted the technology to the needs of the country and local conditions . this has led to the development of several technologies in house. The fluidised bed boiler which uses low grade high ash abrasive 2ndian coal, is an outcome of such an effort. -nother example is the development of system fro direct ignition of pulveri3ed coal to cut down fuel consumption for boiler set up and operation. These developments have been complemented with addition of circulating fluidised bed boilers to the product range. When the demand for short gestation power plants increased, !%E& began to manufacture gas turbines and now possesses two streams of gas turbine technology. 2t has the capability to manufacture gas turbines upto ;88 mw rating and custom built combined cycle power plants. 0uclear steam generators, turbine generator sets and related e/uipment of ;<= w rating have been supplied to most of the nuclear power plants in 2ndia. !%E& has already manufactured and supplied e/uipment consisting of steam turbine and generator for =88 W 0uclear power pro1ect %ydro sets of )rancis, Pelton, ,aplan tyres for different head dischargecombinations are also designed and manufactured by !%E&. !%E& has the expertise in renovation and maintenance of power plant e/uipment besides speciali3ed know how of residual life assessment, health diagnostics and life extension of plants. Conse/uently it has been repeatedly entrusted with overhauling, renovation and speciali3ed life extension 1obs of total power plants of a wide variety of makes, by its customers both from2ndia and overseas. This expertise and experience forms the basis for the new business of Plant Performance 2mprovement which has high potential for renovating old fossil power plants at comparatively lower costs. To give a thrust to this business the company is setting up two 1oint venture companies with world leaders for Power Plant 2mprovement of old fossil fuel power plants and repair and servicing of gas turbines. The business in the power sector has grown for !%E& and orders worth 4s 787@: million , the highest ever were received during the year. Power sector contributed a turnover of 4s ;?>A= million D 7@J of the compnayCs total tgurnover. The power sector in the country has been influenced by a variety of factors which have contributed to a slow down in the installation of new power generating capacity in recent years leading to acute power shortages. The company looks with optimism to better business prospects where in addition to having a dominant market presence the company alos has a well knit regional Blocational network spread all over the country giving it the uni/ue advantage to further its business. .verall the company is expected to maintain its growth pattern next year also. R=D

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

!%E& has a corporate 4*+ center supported by 4*+ groups at each of the manufacuring divisions. !%E&Cs technology policy has adopted a 1udicious mix of indigenous effort supported by selective collaboration in essential areas. !%E& is participating in the 0ational research effort on super conductivity. - lab, prototype of super conducting high gradient magnetic seperator has been successfully deeloped and tested. (everal new products have been developed like automated storage retrieval system,automated guided vehicles for material transportation etc. !%E& has started transferring technologies develped in its 4*+ centers and has signed a memorandum of understanding with 04+C. !%E& has also set up several national level research institutions with 60+P assistance.The ma1or highlights of !%E&Cs technological achievements include a combined ; cylinder %PV2P steam turbine module for use in :;8D:=8 mw rating utility sets, a work station based Process operation * supervisory environment system which is an advanced man D machine interface for intelkleigent operational control in thermal power plants, 2ndiaCs largest fre/uency drive mototr of <>@; kw for 2+ fan application and a compact , cost effective and user friendly control system for industrial steam turbines. The companyCs inherent potential coupled with the strong performance over the years has resulted in it being chosen to be among the nine select G Na ratnasH P(Es which are to be supported by the government in their endeavour of becoming future global corporations. The company is reorienting itself to be more responsive to customer needs. 5arious in house inititatives aimed at reducing cycle times, improving productivity in operations , cost control business process reengineering, advance procurement and manufacturing action on long lead items, pre contract engineering work, TE etc are all aimed at providing customers with products, systems and services taht match their re/uirements. 2n addition high speed data linkages have been provided at := locations through %5 net. Paucity of resources with customers and the conse/uent high level of customer outstandings continues to be a matter of seoius concern. !%E& has made special effortsa to reduce the customer outstandings by technoDcommercial settlements. 2nternal controls to defer supplies to non paying customers are being strengthened. 6inancia$ Perfor-ance 2nspite of the extremely competitive business environment and the general slowdown in industrial growth !%E&Cs performance has been /uite good. 2ts turnover has been increasing steadily over the last few years.2n :AA>DA> it was 4s. =?==< million which is an increase of :A.:J over the previous year, maintaining the momentum of growth of :@J and :=J achieved in :AA=DA> and :AA7DA= respectively. Profit after tax also shows an increase of 7@.=J over :AA=DA> and iwas 4s. @>77 million for the year :AA>DA?. The same upward trend is observed in the Earnings per share which are up by <;.<J. 0et -sset 5alue per share is 4s. ?@.>. 2nternal 4esource generation was at 4s. =77< million, an increase of ;A.<J over the previous year. .verall orders inflow at 4s. ?:@@8 million was the highest ever achieved and the company started the year :AA?DA@ with a record outstanding order book of over 4s. :8>888 million. The company has adopted measures like better sourcing, value engineering and economy in material consumption which lead to an improvement in value addition over the previous years. These efforts lead to an improvement in material and subcontracting costs. %igher interest costs are the general experience in the industry, however the toatal cost of financing for !%E& shows a decline for the year :AA>DA?.

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Anne<ure '
Turnover
60000 50000 Rs. in m illion 40000 30000 20000 10000 0 92-93 93-94 94-95 Years 95-96 96-97 4150 6700 8700 11620 15600 35083 35537 Turnover New Product Turnover 48335 40942 57553

aa
Value Added
30000 25000 Rs. in m illions 20000 15000 10000 5000 0 92-93 93-94 94-95 Years 95-96 96-97 14162 15317 17606 Value Added 21695

25346

bb

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Profit
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 3090 1332 3173 1369 8644

Rs. in m illion

5823 4632 3651 1409 3502 PBT PAT

92-93

93-94

94-95 Years

95-96

96-97

cc
Capital Employed
20000 18000 16000 Rs. in m illions 14000 12000 10000 8000 6000 4000 2000 0 92-93 93-94 94-95 Years 95-96 96-97 19248 15077 14885 11544 10760 8822 8640 Borrow in ! Netw ort"

13839 10102

8716

dd
Net Asset value
78#6 80 70 Rupees 60 50 40 30 20 10 0 92-93 93-94 94-95 Years 95-96 96-97 41#3 47#2 NAV 60#8

35#2

ee

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Infrastructure Project Fina n c e Stu d y on EPC Contr a c t o r s

Earnings per Share


20 15 Rupees 10 5#4 5 0 92-93 93-94 94-95 Years 95-96 96-97 5#6 5#8 14#3 18#9

$P%

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