The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th October, 2014 USAID Informational Meeting Washington,

The Hub Power Company Limited

Discussion at the USAID Diamer Bhasha Dam

Informational Meeting

08th October, 2014

USAID Informational Meeting

Washington, D.C.

By:

Khalid Mansoor

CEO, The Hub Power Co. Ltd.


Table of Contents1. Hubco’s Introduction

2. Hubco’s Experience with Laraib Hydro Project

3. Pakistan, an attractive IPP Market

4. GOP as a partner and Off-taker

5. Ups and Downs of the IPP sector

6. Profitability of Major IPPs

7. Key to success of IPPs

8. Importance of local partners to offshore investors

9. Pakistan’s Energy Crisis – Offering huge business opportunity

10. Current Energy Crisis & Proposed Management

11. Conclusion & Recommendations


About HUBCO

3

Capacity 1292MWFuel RFOBoilers IHISt. Turbine AnsaldoGenerator AnsaldoAvailability 80%

Capacity 225MWFuel RFOEngines MAN DieselSt. TurbineDresser RandGenerator ABBAvailability 88%

Capacity 84MWType Run-of-the- RiverTurbines Andritz HydroGenerator Andritz Hydro

NAROWAL

FY-2013 Highlights

Turnover : PKR 166 Billion (USD 1.7 Billion)

Debt / Equity : 44 / 56

Gross Profit Margin : 10%

Return on Equity : 30%

HUB LARAIB ENERGY

Generating approx. 10% of Pakistan’s electricity with reliability & sustainability


2. Laraib - Pakistan’s 1st Hydel IPP (1/2)

Laraib (75% Hubco ownership):

• Type : Run-of-the-River (ROR) plant

• Power Policy : 1995

• Units : 4 x 21 MW units

• EPC : SAMBU (Korea)

• Main OEM : Andritz Hydro (Austria/China)

• O&M : TNB REMACO (Malaysia)


Experience of Laraib2. Laraib - Pakistan’s 1st Hydel IPP (2/2)

Long Gestation time of 14 years

No policy framework for hydroelectric power projects existed in 1995

Several governmental changes from 1995 to 2009 mostly having different priorities, only few having hydropower bias New Bong Escape (NBE) being located in Azad Jammu Kashmir (AJK) i.e an autonomous territory, where all the laws and rules of Pakistan does not apply in AJK. Hence, AJK is not the domain of traditional or star lenders

Inventing the wheel

Pakistan’s private sector hydropower policy evolved around this projectDevelopment of first hydel specific Power Purchase Agreement in Pakistan

Amendment in various AJK laws (Electricity Act, Income Tax Ordinance, Stamp Duty Act, Insurance Ordinance etc.)Resolution of legal and constitutional anomalies related to AJK hydropower resulting in back to back Implementation Agreements for a project based in an autonomous region to manage project risks for financing

Challenges for New Hydro Electric Power Projects

Need for a clear cut willingness from the Multilaterals to finance projects located in

Gilgit Baltistan and AJKLarge scale investment in transmission lines by GoP/Private Sector to ensure evacuationNEPRA Tariff Rules must provide a clear road map for dealing direct tariff applications for projects located in AJK and GB. Presently being done through state owned National Transmission Co. (NTDC) as purchaser of electricity in Pakistan. Hence, making the process inefficient and slow


Security Package

The Implementation Agreement (IA) and Power Purchase Agreement (PPA) provide protection to the IPPs against the followings :

1. Payment obligations of Off-taker2. Changes in taxes and law of land3. Remittance of foreign exchange4. Protection against Discriminatory action5. Events of Political Force Majeure6. Water usage and Land Acquisition

Fiscal Incentives

Exemption from Corporate Income Tax, Sales tax, levies of Workers Profit Participation Fund & Workers Welfare Fund. Concession on Withholding Tax of Dividends of 2.5% and concessionary custom duties on import of all IPP related equipmentFront loaded capacity tariff to cover the debt service obligations which ensures consistent returns on equity Attractive USD indexed 17% IRR for coal and hydel IPPs and 20% IRR in case of use of indigenous coal

Facilitation Measures

One window operation by the set up of Private Power Infrastructure Board (PPIB)Unrestricted Import of Plant & Machinery, no minimum local content requirementOperation and maintenance of Foreign currency accounts in Pakistan100% foreign/private ownership permitted for IPPs

Established Norms

Standardized processes and guidelines laid out by the Govt. for the IPP developersAttractive Feed in Tariff regimes announced for thermal, wind and solar projects

3. Pakistan, an attractive IPP Market


4. GOP as a Partner and an Off-taker

Pakistan is amongst the pioneer countries in developing Asia to introduce contractual

IPP market• The first power policy for

the private sector dates back to 1994 and modified in 2002

• Since then the policy framework, institutional capacity and approval processes have matured to a great extent

GoP is an overall reliable partner & off-

taker for IPPs especially those based on Hydro

• Hydro sources are expected to have least political risk due to their low Tariff and overall positive attitude by all stakeholders

• Major contributor towards the correction of the current improper energy fuel mix

Positives of GoP

• Supportive policy regime endorsed at the highest level in GoP

• Personal oversight of all energy projects by the Prime Minister of Pakistan with a resolve to remove all unnecessary hurdles & bottlenecks

Negatives of GoP

• Circular Debt continues to be the major impediment towards timely payments (although history does speak in favor of hydro projects)

• Lack of institutional capacity / resolve to take tough decisions to rationalize tariff in the wake of recent judicial activism

• Long and tedious approval processes as witnessed in the first hydro project


5. Ups and Downs of IPPs

IPPs in Pakistan have seen a smooth profitability despite of changing political regimes other than a few incidents that were particularly targeted to reduce electricity tariff

NEPRA is an independent regulatory authority which balances the interest of the investors along side the consumers which minimizes project risk with various insulation measures

Delayed Payment problems have caused some concern for all IPPs but incumbent government is focusing on the issue of inappropriate energy fuel mix, being major root cause of circular debt, through policy measures

Effective governance measures are being taken for improving collections and rationalization of tariff in line with the current high cost of power generation to curb the growth of circular debt

Renowned international developers like AES (US) and International Power (UK) have had successful investments with alpha returns and seamless exits


6. Profitability of Major IPPs

Hubco(1601 MW)

KAPCO(1340 MW)

2010 2011 2012 2013 20140

102030405060708090

- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Kapco Earnings

Earnings (USDm) EPS (Cents/Share)

2010 2011 2012 2013 20140

10

20

30

40

50

60

70

80

- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00

Kapco Dividends

Dividends (USDm) DPS (Cents/Share)

2010 2011 2012 2013 20140

20

40

60

80

100

120

- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00

Hubco Earnings

Earnings (USDm) EPS (Cents/Share)

2010 2011 2012 2013 20140

102030405060708090

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Hubco Dividends

Dividends (USDm) DPS (Cents/Share)


Low Cost Power

Generation

Strong Technical Resume

Water Tight security package

Transparency

7. Key to success of IPPs


8. Importance of Local Partner to Offshore Investors

1. Technical know-how2. Access to Foreign Financing

3. O&M experience 4. International Vendors

relationship

1. Political Risk Management of the host and investing country

1. Difficulty in reaching financial close under prevailing circular

debt situation

1. Regulatory Know-how2. Ability to attract quality HR in

Pakistan 3. Experience in bidding, tariff

and security structure negotiations with the Govt.

Synergic Partners

hip

Local Partner

Fore

ign

Investo

r

Weakn

ess

Str

en

gth

Weakness Strength


9. Pakistan’s Energy Crisis – Offering huge business opportunity (1/2)

Power load shedding (up to 20 hours) is currently the biggest socio-economic issue for Pakistan

Quick resolution of the energy crisis will be a huge economic boost for Pakistan and political win for the current government

2009 2010 2011 2012 2013

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

Computed Peak DemandCorresponding SupplySurplus/Shortfall

Source: NEPRA State of Industry Report 2013


Current DependableCapacity

100

,000+

M

W

expan

sion

Assumptions:• Annual GDP Growth Rate : 4.8% (Low), 5.9% (Normal), 6.5% (High)• Annual Population Growth Rate : 1.7%• Per capita power consumption : Expected to increase from 800 kWh/y (presently to

2,538 kWh/y by 2035. Malaysia is now at 3,724 kWh/y)

Source: National Transmission & Distribution Co. (NTDC), Pakistan

9. Pakistan’s Energy Crisis – Offering huge business opportunity (2/2)


• Inappropriate energy mix• Lack of governance• Irrational tariff due to lack of political will to recover higher cost of electricity

The root causes of circular debt include :

Despite payment of around USD 5 B circular debt in Jun /13, it has again reached USD 3 B within a year!

To address the energy mix issue, low cost power projects will need to be constructed immediately. Coal fired and high capacity hydro projects should be the prime focus

• The menace of circular debt is controlled• Transmission bottlenecks are removed • An integrated energy planning framework is established

Financial Close of upcoming Power Projects would be a challenge unless :

• Enhancing the power subsidy in the short term• Increasing Consumer Tariff• Improvement on Governance Issues

There is no other solution to resolve current circular debt issue other than :

10. Current Energy Crisis & Proposed Management (1/2)


Low Cost Generation

Fast Commissionin

gBase Load

Cornerstones of Crisis Management Strategy

Low Cost

Base Load

Coal

Fast Comm.

10. Current Energy Crisis & Proposed Management (2/2)


11. Conclusions & RecommendationsCountry’s Energy Mix has to be corrected in order to save the precious foreign exchange (~USD 15 B per annum) spent on oil import

• Hydel projects though requires long gestation period, are essential for long term sustainability given the huge potential in the Country

Pakistan should continue to strive resolving water and land disputes with neighboring India and seek active diplomatic mediation from friends like Us for expeditious development of hydel power projects

Transmission networks should be extended to autonomous territories to alleviate evacuation and financing bottlenecks for large hydro projects. Investment in transmission lines can also be justified due to the lower tariff offered by size and high load factor of hydel assets. Environmental and Social concerns should be addressed by GoP in a proactive manner

In order to ensure financing of the new IPPs, the Government must address issues related to circular debt and power sector governance. Privatization of non performing Govt. entities will provide a quick fix for improved efficiencies

• Pakistan’s energy mix contains around 1/3rd Hydro power and is one of the lowest carbon footprint countries in the world. Even with the addition of coal based power projects, in order to address power crisis in short term, the overall energy mix will still remain quite environmental friendly

Energy planning needs to incorporate short term, medium term and long term measures to fix crippling power outages on a sustainable basis


Q & A


Annexure


Pakistan’s Energy Crisis

• Pakistan’s Energy fuel mix is not sustainable

• Coal needs to replace Oil to bring down the overall cost of power generation

Sources: Overseas Investors Chamber of Commerce & Investments (OICCI) Pakistan, Energy Sub Committee,NEPRA’s State of Industry Report 2013

Inappropriate Energy Fuel Mix

Documents

The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th October, 2014 USAID Informational Meeting Washington,