Sterilite power Jharsuguda thermal power project

Group 5:

Himank Khulbe (022) Mainak Guha(028) Megha Jain (031) Rohit Kumar (042) Marwan O.

Power sector analysis: importance of thermal

58% power in India is generated by thermal power stations that use coal Thermal power stations contribute 75% to the total electricity generated in the country Total installed capacity of coal based power plants in India is 87093MW There are nearly 100 thermal power stations in India

Major power projects carried out so far

Project name Rosa thermal power project Mundra Ultra Mega Power Project Lanco Amarkantak Power Project Dadaji Thermal power project Bakreswar Thermal Power Project Sasan UMPP Location Uttar Pradesh Gujarat (SPV-CGPL) Chhattisgarh Madhya Pradesh West Bengal Madhya Pradesh Capacity 1200 MW 4000 MW 1920 MW 1600 MW 1050 MW 3960 MW Player Reliance power Tata Power Lanco MPPGC WBPDCL Reliance power

Rosa thermal power project

Uttar Pradesh

1200 MW

Rs 3000 crore

70:30

Reliance power

Project Finance

Who are the major private players in this sector

Adani Power:
Mundra thermal power project, Mundra, Gujarat Tirora thermal power project, Gondia, Maharashtra

Reliance energy Limited

Rosa thermal power project Dahanu thermal power project Samarlakota combined cycle power project

Tata Power

Mundra UMPP, Gujarat

Jindal Mega power plant, Chhattisgarh Lanco Amarkantak power project Udupi thermal power project Lanco-Kondapalli power project Aban combined cycle power project

KSK
Wardha Warora power project, Maharashtra VS lignite power project, Rajasthan

Jindal group

Lanco group

INDIABULLS
Amravati thermal power project, Maharashtra

Private Players Projects financing methods

Domestic financing
Debt, equity, through issuing debentures by private companies Project financing in India is mainly limited to lending institutions like PFC, IDBI, GIC, UTI, ICICI, SIDBI, IFCI, SCICI and LIC

International financing
External commercial borrowings, GDRs, syndicated loans and funding by multilateral institutions like world bank, ADB

Power Projects in the pipeline

NTPC power plant, Adra:

2X660 MW thermal power plant in Purulia district The estimated cost of project is Rs 7,700 crore and will be a joint venture between NTPC and Bharatiya Rail Bijlee Company Ltd (BRBCL) The equity sharing among indian railways and NTPC will be 26:74 2000 MW thermal power plant in Amreli, Gujarat Torrent Power and Gujarat Power Corporation Ltd. (GPCL) are developing this plant In the first phase, An investment of about Rs 4500 crore for setting up 1,000 Mw plant 4000 MW thermal power plant in andhraapradesh 100% funding by NTPC, no other partners State govt. facilitate land, water clearance and coal availability

Torrent power plant, Amreli:

NTPC ltd, Anakapalle

What is the governments policy regarding foreign/ private investment in this sector?
Since Dec 12, up to 100% foreign investment is permitted in power sector, under the automatic route, for:
Generation and transmission of electric energy produced in hydroelectric, coal/lignite based thermal, oil based thermal and gas based thermal power plants Non-Conventional Energy Generation and Distribution Distribution of elective energy to households, industrial, commercial and other users Power Trading

Accordingly, any foreign investor can enter power sector through FDI route Electricity Act creates a conducive environment for investments in all segments of the industry, both for public sector and private sector, by removing barrier to entry in different segments Section 63 of the Act provides for determination of tariff by competitive bidding process

What is the governments policy regarding foreign/ private investment in this sector?
Megapower policy by GOI in Nov,1995
Exemption from customs duty on imports of power equipment Income-tax holiday regime with tax holiday period of 10 years State governments to exempt supplies made to mega power plants from sales tax and local levies

UMPP scheme by GOI in 2005

Governments responsibility: land & water availability, coal blocks, environmental clearances and tie-up for power sale Private players responsibility: arrange funding, power equipment buyout, technological tie-ups, execute and operate the project BOO: Developed on a build, own and operate basis ApproxRs.16,000 to 20,000 Crores in each UMPP assigned through competitive bidding

Sterilite Jharsuguda Thermal Power Project About Sterilite:

A Vedanta group company and subsidiary of Sterilite Industries limited Owns 2734 MW of captive power capacities and 600 MW of commercial power capacity
Jharsuguda thermal power project: Capacity
4 plants * 600 MW to be built in Jharsuguda, Orissa Total cost = Rs 8200 crore Power generation capacity = 57 million units/day

Land Acquisition
Total land acquired = 296 acres; required = 839.5 acres

Fuel linkages
Rampia coal blocks have been allocated to the company Share of coals = 112.22 MT (5.2 MTPA for 20 years, sufficient for 1000 MW); coal required = 12.59 MTPA

Sterilite Jharsuguda Thermal Power Project

Offtake agreement
GRIDCO to purchase 718 MW from the project at OERC norms Remaining to be sold on merchant basis or through long-term PPA

Transmission
For sale to GRIDCO: will be evacuated by GRIDCO at bus bar of company
For merchant sale: will be evacuated by company via 400 KV LiLo being developed

Environmental clearances
Environmental, air pollution, and water pollution approval received

Water supply
Approval received from 40 mn gallon/day of water from Hirakund Has constructed pipileline from Hirakund dam to plant site

Significance of the project

Company has signed an agreement with GRIDCO to give approx 30% of the capacity Rest 70% to be sold on a merchant basis and on long-term PPAs depending on market condition CRISIL estimate- price of merchant power to fall from Rs 5.9 per unit in FY10 to Rs 3.5-3.8 per unit in 2015 If the smelter at Jharsuguda increases its capacity, power will be supplied to the aluminum plant through this power plant Provides employment for construction to around 3000 workers Permanent employment at plant to nearly 500 people

Advantages that Jharsuguda has

The demand for power will increase at a CAGR of 9.4%, driven by GDP growth, nothing has been done to tackle this, but Price of merchant power will fall from an average of Rs 5.9 per unit in FY 10 to Rs 3.5-3.8 per unit in FY15 Project has achieved financial closure and engineering, procurement and construction order has been placed with SEPCO III Environmental clearances have been granted Agreement with GRIDCO to buy power Low capital and proximity to fuel source is an advantage Capital cost per MW = Rs 34 mn, which is quite low compared to industry average of Rs 45-50 mn per MW Sale of power on merchant basis from Jharsuguda is beneficial

Capital Structure
Project financed, with Sterilite power as sponsor Debt: Equity = 70:30 SBI leads the syndicate of banks, total loan amount = Rs 55,690 mn Foreign loan from IFCL = $140 mn Interest rate on loan = 11.5% for a period of 12 years
Valuation

Price of electricity = Rs. 3.9 per unit

Capacity divided between GRIDCO, Smelter, and CSEB Cost for mining taken into account; Equivalent to 1000 MW coal will be mined from captive coal mines For 1400 MW, coal prices taken as Rs 1000/ton

Risk Analysis
An investment in Equity Shares involves a high degree of risk. Hence, one should be careful in considering all the information in this Draft Red Herring Prospectus, including the risks and uncertainties described before making an investment in Equity Shares. The risks and uncertainties are not the only risks that we currently face. Additional risks and uncertainties not presently known or that is currently believed to be immaterial may also have an adverse effect on business, results of operations and financial condition. If any of the risks, or other risks that are not currently known or are now deemed immaterial, actually occur, business, results of operations and financial condition could suffer, the price of Equity Shares could decline, and you may lose all or part of your investment

Types of Risks

Political Risks

Interest Rate Risks

Construction Risk

Foreign Exchange Risk

Fuel Risk

Transmission Risk

Demand Risk

Payment Risk

The power risk in India is getting bigger day by day with no concrete plans in place for transmission & distribution. Given the critical role these projects might play in the future of this country, it is important to understand the risk factors associated with these projects in depth and mitigate them through changes in the underlying contracts and the process adopted for power generation

Political Risks
Clearance & land acquisition related work that is mostly carried out by the state Government delays adversely affecting the projects (e.g. Tilaiyya project delayed by 10 months) Environmental differences with the state leading to stalling of the work that may result in the withdrawal of interest of the investors from project during bidding

Interest Rate Risks

The standard debt to equity ratio for such a project is normally 70:30 & the debt can either be in the local currency or foreign currency Foreign currency loans bring with them the risk of foreign exchange rates & the power plants may end up paying much more. Sasan & Krishnapatnam UMPPs faced similar problems. Mostly floating rate is converted into fixed rates with derivatives

Construction Risks
Delays in construction may cause projects to lose their bankability due to increase in IDC and insufficient cashflows or feasibility, due to increase in the debt quantum Since these projects are awarded through a competitive bidding route, they inherently have lower internal rate of returns (IRR) and any delays may cause projects to become infeasible for the equity-holders

Foreign Exchange Risk

The projects differ significantly in their dollar denominated debt & almost all the risk is borne by the developer However, compared to the other risks borne by the developer, the foreign exchange rate risk has perhaps the minimal impact

Fuel Risk
The low calorific value, high silica content and ash content of Indian coals significantly increase the capital expenditure This risk may be mitigated by washing or using ultra supercritical technology which inherently increases the capital expenditure

Transmission Risk
Lack of sophisticated transmission & distribution network in India & unavailability of sophisticated state of the art nationwide transmission grids lead to significant losses in transmission & distribution networks The risk can be mitigated by working on the feasibility of high voltage lines for transmission & distribution

Payment Risks
Payment and default risks are major risks for the lenders with off-take agreements signed primarily with the state electricity boards For mitigating the same, provisions for Letter of Credit backed by a credible escrow deposit mechanism have normally been included in the PPA There can be situation where existing buyer does not pay & there is no new buyer

Demand Risk
Projects need to cover its costs irrespective of whether the power purchaser actually uses the electricity In the event that he does not avail of power up to the contacted available capacity, the seller has the right to sell the power not procured. This gives rise to two part tariff mechanism

Risks at the Sterlite energy project

Alleged fraudulent and unfair trading practices in proceedings of Sterlite Industries (India) Limited (Sterlite Industries) Directors & Promoters involved in criminal proceedings tarnishing the image of the company No prior operating history leading to difficulty to the investors in understanding the business & future performances Business, prospects, financial condition and results of operations will be materially and adversely affected if there are delays in commencing operations Lack of additional financing to fund the construction & development projects impacting the overall financial benefits Lack of quality coals at competitive pricing which may lead to disruptions in the operations of the project Failure to enter into off-take arrangements in a timely manner and on terms that are commercially acceptable The indebtedness incurred and the conditions and restrictions imposed by financing arrangements could adversely impact our ability to conduct our business operations

Risks at the Sterlite energy projectContd.

Increasing interest rates & exchange rates affecting business operations If power evacuation facilities are not made available by the time the power project is ready to commence operations, it may result in significant transmission costs or they may not be unable to transmit any or all the power generated Unavailability of stable & reliable transportation infrastructure impacting the business operations, transmission & distributions Dependencies on contractors or specialist agencies to construct and develop power projects and exposure to risks relating to the timing or quality of their services, equipment and supplies Approvals, licensing, registrations & permits in the power industries Relationship with joint venture partners to conduct mining operations at the site of the power project Significant costs of compliance with the local environmental rules & regulations Estimates of coal reserves are subject to assumptions, and if the actual amounts of such reserves are less than estimated, or if the quality of the coal reserves is lower than estimated, our results of operations and financial condition may be adversely affected

Type of Risk

Controllability

Impact

Result

Political Risk

Moderate

High

Increase in expenses & delays in payment/revenue Increase in interest payment

Increase in expenses Increase in interest payment Increase in expenses Decrease in sales/revenue Decrease in sales/revenue Decrease in sales/revenue

Interest Rate Risk

Construction Risk Foreign Exchange Risk Fuel Risk Transmission Risk Demand Risk Payment Risk

Low
Low Low Moderate High Low Low

High
High Moderate Moderate Moderate High Moderate

Risk Mitigation measures

For supply of coal, Jharsuguda project has got letter of assurance from Mahanadi coal fields limited for 9.51 MTPA 296 acres of land has already been acquired (against requirement of 839 acres), which is sufficient for main plant area Fuel risk due to shortage of Coal from coal india, is an industry-wide concern
Production of coal will increase at a CAGR of 7.3% and demand will increase at CAGR of 11.3% over FY 09-14

Since this is an industry wide concern, if the overall price for coal goes up, tariffs are also expected to move up in line

A significant part of the energy offtake of Sterilite is likely to be from SEBs, some of which have weak credit history. As a risk mitigating factor, sterilite energy has the option, under the PPA with SEBs, to sell the electricity to a third party in case procurers default

Add following more points

Cost of equity UMPP -: what defines UMPP FCFF/FCFE Cost of equity for thermal power plant ERR Calculating social benefits

Thank You