DStreet Finance Case Study

7/30/2019 DStreet Finance Case Study

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2012..A Corporate Cross Road

Presents

SM


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PROJECT DETAILS

ABC has been promoted to develop, construct, own and operate a 1050 MW (3

x 350 MW) thermal power plant based on domestic coal to be sourced from the

linked mines of CIL and the captive coal blocks of Sitapur coal blocks.

Deal Diagram

Figure1: Deal Diagram

Location and site

The proposed power plant would be located at the identified site near

Jharsugadu village in Jharkhand state. The site area is 1154 acres housing the

main plant, power house, transformer yard, switchyard, water system, coal and

ash handling system, ash disposal area and green belt and the staff colony.

The site is easily accessible by road and rail and is about 3 Kms from National

high way. The nearest railway station is Bhogpara, which is about 2 km from thesite. All the heavy equipment for the power plant is expected to be received by

road trucks / trailers. The nearest airport is at Ranchi which is about 150 km

from the plant site.

As per the MoU of ABC with Government of Jharkhand (GoJ), GoJ is to provide

the land for the power project, free from all encumbrances. The State Industrial

Infrastructure Development Corporation (SIDCO) is the agency nominated by

GoJ, which will acquire the land for the proposed project. The cost of the land

shall be paid to SIDCO for all new acquisitions of land.


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Update on the Land Acquisition Process

Land Break up Area (Acre)

Government Land 136.0Private Land 940.0

Forest Land 78.5

Total 1154.5

Engineering Procurement and Construction (EPC) Contract

ABC proposes to execute the project through a lump sum, fixed time and fixed

price EPC contract.The bidders who submitted their technical bids for theProject are as

Shandong Electrical Power Construction Corporation (SEPCO), China The company has set up 160 power projects with a cumulative capacity of

22,000 MW. The company has undertaken 25 projects of more than 300

MW capacity in the past 5 years either as main contractors or EPC

contractors.

Dongfang Electric Corporation (DEC), China - The company has set uppower projects of a cumulative capacity of 110,000 MW till 2005. DEChas an annual production capacity of more than 20,000 MW of thermal

power plants and 3,500 MW of hydro power plants. DEC product range

spans from 0.75 MW to 300 MW, 600 MW and 1000 MW unit capacity

for thermal and upto 700 MW capacity for hydro. As an active worldwide

power project contractor, DEC has undertaken more than 70 projects

worldwide in thermal and hydro power.

Cethar Vessels (P) Limited (CVL)- CVL is a prominent equipmentsupplier / EPC contractor in the small and medium range of power plants.

It is an ISO 9001-certified company and has commissioned over 950boilers and 10 power plants on an EPC basis till November, 2007. CVL

achieved a turnover of Rs. 731.5 crore and a PAT of Rs.67.1 crore for the

9 month period ending December, 2007. It has signed an MOU with

Harbin Power to supply turbines and generators for its EPC projects.

Harbin power is one of the top three equipment manufacturers in China

capturing about one-third of the market and has an annual production

capacity of 20,000 MW and manufactures coal fired boiler, turbines and

hydro power equipment.


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The scope of the EPC contractor shall include design, engineering,

manufacturing, procurement, packing & forwarding, supply,

transportation, receipt, unloading, construction, installation, erection, testing,

commissioning and performance guarantee tests for the 3x350 MW thermalpower project.

Scope Turnkey EPC for the entire Power Plant

Price Basis Lump sum fixed price

Scheduled COD Unit 1 28 months, Unit 2 30 months, Unit 3 32

months from NTP.

NTP Financial close and pre disbursement conditions

have been met/waived and ABC receiving all permits

as may be required.

Performance BG 15% of the contract price, valid till final acceptanceof thepower plant

PBG amount will be increased by Rs. 20 million/

week ondelay in COD

Defects Liability Period 24 months from takeover of the power plant

Contractor to provide a bond for 10% of the Contract

Price for the term of the defects liability period

Latent Defects 5 years from Take Over of the Power Plant

LDs for Delays Milestone based (Unit wise PG tests and takeover of

the Plant)Maximum liability for LDs for delay 10% of contract

price

Penalties for PerformanceShortfall Penalties applicable for

Shortfall in Gross Power Output Auxiliary power consumption higher than

guaranteed value

Heat rate higher than the guaranteed heat rateMaximum liability for LDs for performance shortfall

20% of contract price

Power Evacuation

Power generated from the project would be evacuated at 400 kV with Double

Circuit transmission lines to the nearby substations of state discom and Power Grid

Corporation of India Limited (PGCIL). As per the evacuation studies conducted by

consultants 2 options namely Tamana (30 km from the plant) and Rampur (75 km

from the plant) have been suggested for power evacuation to PTC.

The cost of erecting transmission lines to the PGCIL sub-station has been

considered as a part of the project cost. Estimated cost of Rs. 95 crore has been

considered as a part of the project cost to erect the transmission line and associated


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infrastructure. The Project shall supply about 323 MW (including transmission

losses) to Punjab. The sale to Punjab is the outcome of the competitive power

procurement bid invited by Punjab Power Generation Corporation Limited wherein

the bid submitted for the power supplied from the project was short listed as a

successful bid. In line with the PPA between ABC and PTC, PTC is expected toapply to PGCIL for providing open access. With the supply to Punjab, the Project

has tied up about 59% of the capacity. The balance is expected to be tied up shortly

and open access for evacuation shall be applied for the same.

(in MW)

Source: PGCIL DRH

Schedule of implementation

Particulars Start Completion

Award of major contracts Day 0 Day 60

Civil Works Day 120 2 years

Delivery of BTG Day 240 2.5 yearsMechanical works Day 300 2.5 years

Electrical works 1.5 years 2.5 years

Unit I Trial Runs 28th month 30th month

Unit II Trial Runs 30th month 32nd month

Unit III Trial Runs 32nd month 34th month

Project COD 36th month

Total Implementation Period 36 months

FUEL ARRANGEMENT

Background

The project envisages usage of domestic coal as primary fuel for the project. The

aggregate coal required to operate the Project at a Plant Load Factor (PLF) of 80%

works out to about 5 million tonnes3

per annum.

Allocation of Captive Coal Block

Ministry of Coal, Govt of India has made a joint allotment of Sitapur non-

coking coal blocks to ABC along with 5 other allottees. The following

table shows the allottees and capacity allotted to them.

Networks East-West East-North

Existing 1850 3700

Proposed additions 4650 7750

Total by FY 2012 6500 11450


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Against the total coal requirements of about 790 million tonnes of the allottees, the

geological reserves in the allotted blocks are only about 645 million tonnes.

Consequently, the share of the quantum allotted for the project is about 112 million

tonnes, against the requirements of about 125 million tonnes (5 tonnes p.a. for 25

years)

The captive coal block is situated at a distance of about 250 km from the power

plant

However considering the availability of the linked coal and the captive

block, it is estimated that the Project shall have sufficient coal for power

generation at 80% PLF during the tenure of the loan and even for beyond

Coal Linkage

Since development of the captive coal blocks is expected to take more than 36

months (scheduled completion time for the power plant), ABC has obtained coal

linkage for the plant.

Ministry of Coal has issued a Letter of Assurance (LoA) to Coal to ABC.

Company proposes to apply for additional tapering coal linkage for the balance

500 MW for the interim period of development of captive coal block. The coal

linkage (including additional coal linkage for 500 MW) shall be adequate for the

plant to operate at 100% PLF. However, coal linkage will be gradually reduced to

the extent of coal extracted from the captive coal blocks. ABC shall enter into a

coal supply agreement (CSA) with Coal India Ltd. As per the standard agreements,

the proposed agreement shall remain in force for a period of 10 years with effectfrom first delivery date and extendable by 5 more years after expiry of initial term.


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PROJECT COST AND MEANS OF FINANCE

Project Cost

Based on the Detailed Project Report, the cost of the Project has been estimated at

Rs. 4,211crore. The details of the project cost are as under:

Particulars Amount (Rs. Cr)

Land and Site Development 46

Civil Works 534

Steam Generator 1,062

TG Island 708

Balance of Plant (Mechanical, Electrical, C&I) 948Non-EPC Costs (including transmission line) 153

Contingencies 126

Total Hard Costs 3,578

Preliminary and Pre-operative Expenses 284

Interest during Construction 319

Margin Money for Working Capital 31

Total Project Cost 4,211

Land and site development

Total land area identified is 1154 acres and is adequate for the power plant

including coal stockyard and green belt. The cost of Rs 46.5 core for acquisition of

land has been estimated based on inputs from Detailed Project Report.

Civil Works

Civil and structural works include site improvement works, power plant building,

foundations for steam generator, turbine generator pedestal, civil works for coal

handling system , ash handling system, raw water intake and water systems related

civil and structural works, miscellaneous buildings like workshop, warehouse,

canteen, fire station and colony for the employees.

EPC Costs

EPC Costs consist of the civil and structural works, mechanical works and

electrical works. The major components of the EPC costs are shown as below:


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Mega-power status has been considered for the project for the power project has agross capacity of 1000 MW and is supplying power to more than one state. Thus

no taxes and duties have been considered as a part of the project cost.

Non-EPC Costs

Non-EPC costs consist of a 400 kV transmission line to PGCIL sub-station from

where power shall be evacuated by PTC India. Enabling works like construction

water, compound wall and approach road. The cost of railway wagons for

transportation of coal (Merry-go-round technique) is also a part of the Non-EPC

Costs.

Contingency A 3% contingency on the hard-costs and 10% contingency on the pre-operative

expenses have been built in the Project cost as per the DPR

Pre-Operative and Preliminary Expenses

The preliminary and pre-operative expenses include

Development expenses

Legal Fees

Administrative expenses like salaries, wages and travelling expenses

Start-up power and fuel

Financing charges

Margin Money

Working Capital Margin requirement of the Project has been estimated for all units

during the first year of operation. The Margin Money requirement represents 25%

of the total Working Capital requirement for the Project

Major Components of EPC Rs. Crore

Steam Generator Island 1062

Steam Turbine Generator Island 708

External Coal transportation system 130

Coal Handling System 105Ash Handling System 55

Generator transformers 52

Freight and Insurance 47

Power and control cables 40

Switchyard equipment + SCADA 37

River water pumps 35

LT switch gear and MCC 30

Total 2301


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Means of Finance

Means of Finance Rs. Cr

Debt (70%) 2,948

EquityPromoter Group 1,011

Equity- Equity investors 253

Total 4,211

Project Cost Comparison

The project cost can undergo a change after the completion of the bidding process

and conclusion of negotiations with the preferred EPC contractor. However,

comparison of the project cost as mentioned in the DPR has been done with a few

power projects appraised by Lender in the recent past

Particulars Wari Belgaum Jain Power ABC

power

Capacity (MW) 1800 1005 1000 1050

Project Cost Rs. Crore Rs. Crore Rs. Crore Rs. Crore

Land & Site Development 98.4 60.0 70.4 46.5

Civil & Mechanical costs 5273.0 3103.7 3485.4 3405.1

Railway Siding 60.0 0.0 0.0 0.0

Preliminary & Preoperative247.9 190.3 376.3 284.4

Expenses

Contingencies 217.3 263.8 0.0 125.9

Interest During Construction 867.4 487.3 346.2 318.5

Margin Money for WC 74.2 41.9 61.1 30.6

Total 6838.1 4147.0 4338.0 4210.9

ComparisonRs. Cr/ Rs. Cr/ Rs. Cr/ Rs. Cr/

MW MW MW MW

Land & Site Development 0.1 0.1 0.1 0.0

Civil & Mechanical costs 2.9 3.1 3.5 3.2

Railway Siding 0.0 0.0 0.0 0.0

Preliminary & Preoperative 0.1 0.2 0.4 0.3

Expenses

Contingencies 0.1 0.3 0.0 0.1

Interest During Construction 0.5 0.5 0.3 0.3

Margin Money for WC 0.0 0.0 0.1 0.0

Total 3.8 4.1 4.3 4.0

FINANCIAL PROJECTIONS

State Discomtariff computed based on the provisions of the ElectricityRegulatory Commission regulations which are similar to Central Electricity

Regulatory Commission (CERC) The regulations allow for the recovery of


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various costs at the specified normative parameters with provisions for

incentives/ disincentives

PTC India Ltd. - tariff computed based on the provisions of the CentralElectricity Regulatory Commission (CERC) Order on Terms & Conditions of

Tariff subject to an overall limit equal to the cumulative of the levelised tariff

over the term of the Agreement (25 years from COD) which is capped at the

levelised rate of Rs. 2.3 per kWh

Punjab Generation Corporation LimitedAt the tariff submitted for the biddingby PTC India for supply of net capacity of 300 MW to Punjab. The tariff has

been agreed upon between PTC and ABC as per the agreement for sale

The cost of generation for the Project has been worked out based on parametersprovided in the CERC Order

Operational performance:

For the year ended Mar-12 * Mar-13 * Mar-14 Mar-16 Mar-18 Mar-20 Mar-22 Mar-24

Gross capacity (MW) 350 1050 1050 1050 1050 1050 1050 1050

PLF (%) 80% 80% 80% 80% 80% 80% 80% 80%

Heat rate (Kcal/KWH) 2450 2450 2450 2450 2450 2450 2450 2450

Net energy sales (MU) 360 6324 6676 6694 6676 6694 6676 6694

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

3 operates for 10 months

Tariff calculation

The table below summarises the expected tariff for the project

Tariff to Jharkhand Mar-12 Mar-13 Mar-14 Mar-16 Mar-18 Mar-20 Mar-22 Mar-24

Variable Charge per unit 0.80 0.83 0.89 0.95 1.02 1.09 1.16 1.23

Fixed Charge per unit 1.20 1.29 1.33 1.35 1.29 1.24 1.18 1.12

Electricity duty on auxpower 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02

Total Tariff 2.02 2.14 2.24 2.32 2.33 2.34 2.36 2.37

Levelised Tariff toJharkhand 2.28

The above tariff has been calculated assuming coal supply from the coal linkage from CIL. However, the levelised

tariff assuming coal supply from captive coal block at Rs. 650/ MT comes out to Rs. 2.07 per unit

Tariff to PTC Mar-12 Mar-13 Mar-14 Mar-16 Mar-18 Mar-20 Mar-22 Mar-24



Environment Cess 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06

Total Tariff 2.06 2.18 2.28 2.36 2.37 2.38 2.40 2.41Levelised Tariff to PTC 2.32


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The above tariff has been calculated assuming coal supply from the coal linkage from CIL. However, the levelised

tariff assuming coal supply from captive coal block at Rs. 650/ MT comes out to Rs. 2.11 per unit

The tariff to Punjab has been calculated on the basis of energy charges and variablecharges quoted by PTC at the time of bidding. PTC quoted a levelised tariff of Rs.

2.94 per unit for the bidding, which includes the transmission losses and wheeling

charges. The above mentioned tariff has a 3% commission payable to PTC built in.

Hence ABC shall get the above mentioned tariff from PTC net of 3% commission,

for sale of 323 MW capacity at the PGCIL interconnection point in Jharkhand

After FY 2013, fixed charge starts decreasing as debt servicing amount decreases

due to commencement of repayment and lower interest charges (repayments being in

equal quarterly instalments). It may be mentioned that the fixed charge may change

depending upon the change in Project cost post finalisation of the EPC contract

Questions:

1) Bring out the salient features of the case2) Comment on the financial Position of the company3) Comment on project cost comparison of similar projects?4) Comment on Viability of the project5) Bring out the assumption on which you have analysed the case.

Make suitable assumptions wherever required and indicate the same.

Tariff to Punjab Mar-12 Mar-13 Mar-14 Mar-16 Mar-18 Mar-20 Mar-22 Mar-24



Total Tariff 2.14 2.14 2.50 2.53 2.58 2.64 2.68 2.73

Levelised Tariff to Punjab

(without transmission

charges)2.6


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Annex Financial projections of ABC

Income Statement (Rs crore)Income Statement for year ending Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25All figures in Rs. CrUnits sold to Jharkhand (Mn Units) 90 1586 1674 1674 1674 1679 1674 1674 1674 1679 1674 1674 1674 1679Sale price per unit 1.8 2.0 2.0 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1Revenue from Jharkhand 18 339 362 375 389 390 390 390 391 393 393 394 396 398Units sold to PTC (Mn Units) 148 2594 2738 2738 2738 2746 2738 2738 2738 2746 2738 2738 2738 2746

Sale price per unit1.9

2.0

2.0

2.1

2.2

2.2

2.2

2.2

2.2

2.2

2.2

2.2

2.2

2.2

Revenue from PTC 30 565 603 624 648 649 648 649 651 655 654 656 658 663Units sold to Punjab(Mn Units) 122 2144 2264 2264 2264 2270 2264 2264 2264 2270 2264 2264 2264 2270Sale price per unit 2.1 2.1 2.5 2.5 2.5 2.5 2.6 2.6 2.6 2.6 2.7 2.7 2.7 2.7Revenue from Punjab 26 460 561 565 569 575 579 584 590 598 600 606 612 619Rev from Jharkhand + PTC+Punjab 75 1363 1526 1563 1606 1614 1617 1624 1633 1647 1648 1656 1666 1680Less rebate 0 0 0 0 0 0 0 0 0 0 0 0 0 0Net Revenue 75 1363 1526 1563 1606 1614 1617 1624 1633 1647 1648 1656 1666 1680Add Other Income 0 0 0 0 0 0 0 0 0 0 0 0 0 0Total Revenue 75 1363 1526 1563 1606 1614 1617 1624 1633 1647 1648 1656 1666 1680Less Fuel cost 29 527 575 594 615 638 658 681 705 731 749 769 789 813Less O&M exps 8 142 155 162 168 175 182 189 197 205 213 221 230 240Environment Cess 2 28 30 30 30 30 30 30 30 30 30 30 30 30Less electricity duty @ actual 1 13 13 13 13 13 13 13 13 13 13 13 13 13Less: Commission to PTC 1 13 16 16 17 17 17 17 17 17 17 18 18 18EBITDA 35 641 737 747 763 741 717 694 671 650 626 605 585 566

EBITDA Margin 47% 47% 48% 48% 48% 46% 44% 43% 41% 39% 38% 37% 35% 34%Int on long term loan 15 317 325 297 268 241 212 184 155 127 99 71 42 14Int on working capital

2

30

33

35

36

36

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40

41

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43

PBDT 18 294 378 416 459 464 468 472 477 482 487 494 501 509Less book dep 11 196 208 208 208 208 208 208 208 208 208 208 208 208PBT 7 98 170 208 251 256 260 264 269 275 279 286 293 301PBT Margin 9% 7% 11% 13% 16% 16% 16% 16% 16% 17% 17% 17% 18% 18%Less Tax 1 11 19 24 28 29 29 30 30 31 32 32 33 34PAT 6 87 151 185 222 227 230 234 239 243 247 253 260 267PAT Margin 8% 6% 10% 12% 14% 14% 14% 14% 15% 15% 15% 15% 16% 16%


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Disclaimer

The views expressed here are of individual capacity and to be used strictly for academic discussions

only. The facts, figures and financials are illustrative and not factual or observed on any company.

Neither the author nor the company is responsible for any commercial decision based on this case

material. The contents of this document cannot be reproduced without prior permission of the author.

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