Financing L&T

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L&T Infra

Infra Project Finance Financial Advisory ServicesStructured Products

Financ ing of power p rojec ts

Suneet K. Maheshwari

CEOL&T Infrastructure Finance Company Ltd.

Thursday, March 11, 2010


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Pow er generation sector

Indian economy is growing at 7-8% thus power demand will grow fast

Govts in India have been caught unawares

shortages are increasing from 12% to 25% levels

Its the Open Access regime that is providing impetus to generation projects

Private sector contribution is still ~10-12% in terms of generation, though it

shows promise for future

UMPPs will kick start private sector participation in large projects

Greater number of projects are in west & south

Increasing & volatile petroleum fuel prices puts focus back on Coal, Hydel &

Renewables

Key risk Indian bankers are more tolerant of projects risks -

EPC, Equipment, Fuel & market risk due to higher power cost Default by SEBs/DISCOMs not seen as disastrous Multi-buyer model has made

financing power projects possible despite poor health and limited escrowing capacity of

many DISCOMs

In the sho r t r un o f 3 yea r s , pow e r b row nou t s & even r i o t s a re he re t os t ay impac t in g i n du s t ri a l & ag r i cu l tu r a l g row th


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Installed capacity as on 31 Dec 2009

Source: MOP Website

78413.99

49812.63

27865.61

Sector wise Capacity(MW)

State (50.2%) Central (31.9%) Private (17.9%)

36885.4

4120

15225.35

81605.88

17055.85

1199.75

99861.48

Fuel w ise Capacity (MW)

Hydro ( 23.6%) Nuclear (2.6%) RES (MNRE)(9.8%)

Coal (52.3%) Gas (10.9%) Oil (0.8%)

Thermal


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Per capita energy consumption

Source: CEA WebsiteIndian Installed capacity: ~156,000MW

Per Capita Energy Consumption (2008)14240

11849

67566425

4818

2714 23401684

732 476 564

U

SA

Austra

lia

UK

Russia

n

Federat

ion

South

Afr

ica

Argent

ina

Brazil

Ch

ina

In

dia

Indone

sia

Pakistan


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Current trends in Power

Right to Open Access making a Multi-buyer model possible this is bringing a

market structure where lower tariffs are incentivised Return upsides from higher tariffs in the short-term and huge gap in supply is

attracting several private sector players even in Hydel

Average short-term tariff is currently 3x the regulated tariffs - Most developers eying for

equity IRRs of ~25-35% and payback period less than 3-7 years based on these

opportunities

Tariffs established through competitive bids are far lower than short-term tariffs

The renewable segment up till now has been driven largely by tax

incentives, however, high petroleum & coal costs along with the lure of carbon

credits is attracting more private sector players

The sector has witnessed high PE activity this coupled with a buoyant equity

market laid the groundwork for good valuations and helped several private

players to and was laid by a large number of PE transactions

More projects to come in the power starved regions of west and north

However, in 8-10 year time frame merchant power price advantage would go


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Inter-regional Transmission capacity

1250

1000

1650

0

1700

2700

650

1250

1700

2100

0

5000

3600

2800

7600

3600

2700

8500

8500

2200

4000

National Grid 10th Plan: 16450 MW National Grid 11th Plan: 37150 MW

Investments expected to the tune of Rs 70,000 crores by PGCIL alone; privateinvestment sought at Rs 20,000 crores


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Movement of Power and Coal

34004

7449

1840

4024

22072

10993

1100

7048

15280

3934

0227

1066

1116

0

171

23552

134251180

1766

Thermal

Hydro

Nuclear

Other

Power Transfer

Coal Transport

NR and WR are power deficit

regions ER has maximum coal reserves

Around 64% of coal movesto thermal plants

Around 36% (excludinglignite) coal consumed at pithead

Long distance transport forcoal are to the northern andsouthern regions


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Pow er sector: issues

First where is the coal coming from? Arent we impacting global coal prices whither energy security and govt planning

on this Sector needs to significantly improve- transparency & independent regulator

We are forgetting fuel & transmission related logistics Where do we have ports to unload so much coal?

Does railways have capacity to carry coal around the country for all projects?

50% of hydel projects are being planned in Arunachal Pradesh how to evacuate ?

BHEL didnt see serious shortage of power equipment most plants are coming up on imported equipment this yet to prove itself in

Indian situations

Balance-of-plant capability limitations

We seem to forgetting the need for distribution reform T&D losses & power theft still haunting SEBs, control measures not very effective

Transmission investments need to be planned

Not enough happening on R&M which has a potential to give a quick result

Ultimately, the cost of power to the customer has to be the most importantparameter of development of sector

So w h i le t h e re i s huge demand - Banke r s & P r iv a t e equ i ty p l a y er s n eed t obe cau t i ous


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Current power project financing scene

Funding sources for a project at inception: Developer Equity, Private Equity, Primary equity market, Quasi-Equity, Convertible

instruments, Sub-debt, Senior term debt, ECB, ECA, FCNRB funding with roll-over

Funding sources for a project during operations: Internal accruals

Refinancing of debt

Take-out financing (not functional; though some fillip recently through IIFCL scheme)

Secondary Debt Markets (non-existent)

Financiers: Domestic Banks & Institutions, Foreign Banks , NBFCs, Investment Banks, Private Equity Funds

Products: Plain Vanilla Senior Debt, Private Equity Fund, Project Finance, Structured Finance, Mezzanine

Fund, Asset based funding, Leasing, Securitization of future receipts

Project finance practices: Institutions underwrite the total project debt and subsequently sell down/syndicate

Interest reset at the end of construction phase & subsequently every 3 years to help banks tackle

Asset-liability mismatch / re-pricing risks of long term financing


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Equity funding trends

Increasing interest by strategic and PE by overseas groups/ funds

Appetite to diversify to power projects in the emerging markets Assured ~14% p.a. post-tax return in mature brown-field projects by utilities in

developed markets

Higher returns possible with power deficit market conditions

Issues/ apprehensions:

Quality of governance, multiple authorities in India, lack of predictability Quality of contracting

Enforceability of contracts & dispute resolution practices

Inability to manage political system

Large execution/construction risks some of which are peculiar to India

Policy difficulties in planning & executing Exit strategies for the investments Lack of viable good deal flow in the $100-300 million big-ticket equity

category, which would attract big funds that are simply not interested in smaller deals

U n rea l i s t i c va lu a t ion ex pecta t ion s o f I nd ian deve loper s fu e l led byu n su st ain ab ly h ig h m e rch an t p ow e r t ar i f fs & u n de rp la ye d e xe cu t io n r is ks


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Debt funding trends

Longer term financing (> 10 years) and longer moratoriums needed for

minimizing front-ending of tariff & be competitive

Absence of a fixed-rate long-term corporate bond market

Trend of innovative structures like built-in refinancing at the end of the debt

tenor used for some of the large sized projects

A structure with banks taking 10 year exposures from ALM perspective andspecialized institutions like IIFCL/ Insurance companies accepting back-

ended /ballooning repayments

Explicit exemptions would be needed in respect of stamp duty to encourage

take out financing

Prudential exposure limits for power sector for the banking system Need to allow & encourage ECB to be used for refinancing operational power

projects to free up the capacity in the domestic banking system


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THANK YOU

Suneet K. Maheshwari - Chief Executive

L&T Infrastructure Finance Co. Ltd.

3-B, Laxmi Towers, 2nd Floor

Bandra Kurla Complex, Bandra (E),

Mumbai 400 051, India

Tel: +91-22-4005300

Fax: +91-22-4005353

[email protected]

www.ltinfra.com
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Financing L&T