Project Appraisal of Power Project-A Case of Private Sector Utility

PROJECT REPORT ON

PROJECT APPRAISAL OF POWER PROJECT: A CASE OF PRIVATE

SECTOR UTILITY

Towards the Partial Fulfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT

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(Approved by AICTE, Govt. of India) Power Finance Corporation

Academic Session

2008-2010

Submitted By;

Vineet Kumar Sarawagi

PGDM, BM-08223

Submitted To:-

Industry Mentor:

Mr. A. K. Agarwal (Executive Director-Projects)

Power Finance Corporation Limited

College Mentor:

Dr. Simmi Agarwal

(Faculty-Finance)

IMS, Ghaziabad

INSTITUTE OF MANAGEMENT STUDIES,

C-238, BULANDSHAHR ROAD,

LAL QUAN, PB-57,

GHAZIABAD - 201 009.

TO WHOM SO EVER IT MAY CONCERN

This is to certify that Vineet Kumar Sarawagi, student of PGDBM (Full Time) 2008-

2010 batch, IMS Ghaziabad, have executed live project under my supervision and

guidance on the topic of “PROJECT APPRAISAL OF POWER PROJECT: A CASE

OF PRIVATE SECTOR UTILITY”

During the project execution he was found to be very sincere and attentive to small details,

which were discussed with him.

I wish him good luck and success in her future endeavors.

FACULTY GUIDE

Dr. Simmi Agarwal

(Faculty-Finance)

IMS,GHAZIABAD

DECLARATION

I, Vineet Kumar Sarawagi, a student of PGDM (BM-08223), hereby declare that the live project topic

entitled “PROJECT APPRAISAL OF POWER PROJECT A CASE OF PRIVATE

SECTOR UTILITY”, is submitted in partial fulfillment of the requirements for the two years full

time P.G.D.M. course from IMS Ghaziabad is my original work. All the information and data provided in

this report are from some primary & secondary sources along with some calculations made and are true to

the best of my knowledge. But to maintain the confidentiality of the work the name of the entity has been

changed. References are quoted and due credit are given to the sources. This report has not been

submitted earlier either to this University/Institution or to any other University/Institution for any

purpose.

VINEET KUMAR SARAWAGI

PGDM, BM – 08223

ACKNOWLEDGMENT

Any assignment puts to litmus test of an individual knowledge credibility or experience and thus sole

efforts of an individual are not sufficient to accomplish the desire successful completion of a project

involve interest and effort of many people and so this becomes obligatory on the part to record our thanks

to those who helped us out in the successful completion of our project.

At this level of understanding it is often difficult to comprehend and assimilate a wide spectrum of

knowledge without proper guidance and advice. Hence, I would like to take this opportunity to express

my heartfelt Gratitude to Mr. A.K. Agarwal, Executive Director (Projects, PFC), without whose support

and constant guidance this project would not have been possible. I also express our deepest thanks to Mr.

Y. Venugopal, Manager (CMD Secretariat, PFC), whose unstinted Support, Noble Guidance and

Encouragement, which made this project successful. I would like to show my great gratitude to Dr.

Simmi Agarwal (Faculty-Finance), for her great guidance without which this project was not possible. I

would like to show my great gratitude to Prof. Timira Shukla (Chairperson-PGDM), for her great

guidance without which this project was not possible. Above all I will like to thanks to the Director Sir of

my college Dr. R. K. Bhardwaj, who allowed me to have this opportunity to have such a nice

experience.

I would also like to express my thanks to all other working team members of Power Finance Corporation,

whose help has made this project successful.

Vineet Kumar Sarawagi

PGDM, BM-08223

IMS,Ghaziabad

.

Abstract: Power sector is growing at war level and needs proper nourishment through funding and

relaxation of rules and regulations. Indian government, being a welfare government has always been

promoting the Industrialization of the country. There are many organizations, where government has

shown its important role towards achieving its purpose. PFC (A Navratna PSU) has been one among

them, promoted by government, which help power projects through funding as well as through many

other clearencess. This has lead to increase in power projects in the country and has also decreased red

tappism. Before funding any project, every organization has to go through appraisal route, where different

areas are covered to analyze the feasibility of the project. CERC has given proper rules and guidelines

concerning the loan appraisal for any type of project PFC has its own OPS and other policies, being

followed by it for project appraisal. One such example of Abc Power has been considered here and the

project appraisal process by PFC is explained, trying to cover its all aspects.

Key Words: PFC, CERC, Project Appraisal, Project Financing, Xyz Power

TABLE OF CONTENTS

Chapter 1. Power Industry Structure & Development ……………….…………………….. 1-3

Chapter 2. Power Finance Corporation …………………………………………………… 4-11

Chapter 3. Objective of the Study …………………………………….……………………...12

Chapter 4: Policy Framework for loan appraisal

4.1 Policy Framework of PFC ………………………………………………. 13-25

4.2 Loan Policy Framework of CERC …………………………..………………….26-27

4.3 Project Appraisal guidelines …………………………….………………. 28-32

Chapter 5. Case of Abc Power ………………………………………...…………….. 33-53

Chapter 6: Bibliography ………………………………………………………….…………. 54

Chapter 7. Appendices

Appendix 1: Abbreviations

Appendix 2: Calculation of IDC and Project completion cost

Appendix 3: Sensitivity Analysis

Appendix 4: Tariff Calculations

Appendix 5: Projected Cash Flow Statement

Appendix 6: Projected Balance Sheet

Chapter 1: POWER INDUSTRY STRUCTURE AND DEVELOPMENT

Energy in its diverse forms is the life-blood of economic development. Economic growth, the world over,

is driven by energy whether in the form of finite resources such as coal, oil and gas or in renewable forms

such as hydroelectric, wind, solar and biomass, or its converted form, electricity. For future growth to be

both rapid and sustainable, energy needs to be technically efficient, economically viable and

environmentally sustainable. In the last few years, Indian economy has been growing at a rapid and

impressive pace averaging over 8% and is now moving in the high growth phase, with average economic

growth rate projected for the period 2007-12 being 9% p.a. The key ingredient in achieving this growth

rate & sustaining it would be the availability of adequate quantity and quality power at affordable prices.

As on 31st March, 2009 the country had an installed generation capacity of 147965 MW. The Govt. of

India, Ministry of Power in the Eleventh plan has set a target of 78700 MW capacity addition out of

which 59693 MW would be from thermal power projects, 15627 MW from hydro projects and 3380 MW

from nuclear.

The targeted capacity addition for 2008-09 was 11061 MW, however the actual addition is 3454 MW

with thermal, hydro and nuclear accounting for 2485 MW, 969 MW and nil respectively.

A generation capacity of 21180 MW was added during the X plan period. The availability of power has

increased but demand has consistently outstripped supply and the power sector is characterized by

substantial peak & energy shortage. The country faced energy shortage of about 9.6% and the peak

shortage of 13.8% at the end of X plan. Coupled with this is the urban-rural dichotomy in supply. In

accordance with Census 2001, only about 56% of households have access to electricity, with the rural

access being 44% and urban access of about 82%. In case of those, who do have electricity, reliability and

quality are matters of great concern.

To mitigate the shortages, the Govt. of India has set a goal- „Mission 2012: power for all‟. The blueprint

for Power Sector development revolves around the following:

Access to electricity to be available for all households by 2012.

Availability of power on demand to be fully met by 2012.

Energy shortage and peaking shortage to be overcome by providing adequate spinning reserves.

Reliable and quality power to be supplied in efficient manner.

Electricity Sector to achieve financial turnaround and commercial viability.

Consumers interests to be accorded top priority.

An integrated power transmission grid helps to even out supply-demand mismatches. The existing Inter-

regional transmission capacity of about 20750 MW connects northern, western, eastern and north-eastern

regions in a synchronous mode operating at the same frequency and the southern region asynchronously.

This has enabled interregional energy exchanges of about 46,000 million units (2008-09), thus

contributing to greater utilization of generation capacity and an improved power supply position.

Proposals are underway to have synchronous integration of southern region with the rest. According to XI

plan 293372 CKM of transmission lines are planned to be added during the XI plan. Distribution is the

key segment of electricity supply change. The biggest challenge of the power sector is the high Aggregate

Technical and Commercial Losses (AT&C losses). The AT&C losses are in the range of 18% to 62% in

various states. The average AT&C losses in the country are at 34%. The Ministry of Power, Govt. of

India has launched the Restructured Accelerated Power Development and Reform Program (RAPDRP) in

July 2008 with focus on establishment of base line data and fixation of accountability, and reduction of

AT&C losses through strengthening and up-gradation of subtransmission and distribution network and

adoption of information technology during XI plan.

The Central Electricity Regulatory Commission (CERC) has issued new Inter-state Trading Regulations

in February 2009 with an aim to tighten the terms and conditions for grant of trading licence keeping in

view the current price of the trading power and the liquidity requirements of the power trading business

and to encourage only the serious players. The Traders are categorized on the basis of volume of

electricity to be traded and the net worth of the trader. Further, CERC has issued guidelines for setting up

power exchange. It has also given approval to two (2) applications for setting up power exchange. The

two power exchanges, viz. the Indian Energy Exchange Ltd (IEX)., New Delhi and the Power Exchange

India Ltd (PXIL), Mumbai have already started their operations from 27th June, 2008 and 22nd October,

2008 respectively. Power trading would help in resource optimization by facilitating the disposal of

surplus power with distribution utilities and in meeting the short-term peak demand.

Even though per capita consumption of electricity in India has grown from 15 kWh/Year in 1950 to 704

kWh/Year in fiscal 2007-08 and according to data from the Ministry of Power, Govt. of India per capita

consumption of energy in India is projected to increase to about 1,000 kWh/Year by 2012, the per capita

consumption in India is extremely low in comparison to the rest of the world due to unreliable supply and

inadequate distribution networks. The power scenario in India offers a huge opportunities as well as

challenges. For the XI five year plan a total of Rs.10,59,515 crore will be required to fund all generation,

transmission, renovation and modernization and distribution projects. According to estimates,

Rs.4,24,259 crore will be available as debt and Rs.2,13,614 crore as equity from the financial industry

inclusive of PFC. The opportunity for investments exists in power equipment manufacturing, wind and

solar power, coal mining, natural gas, LNG and gas pipelines and carbon trading and CDM projects.

Chapter 2: POWER FINANCE CORPORATION

STATE AND CENTRAL SECTOR GENERATION PROJECTS

THERMAL PROJECTS

The Company is providing financial support to thermal generation projects for their timely completion.

During the year 2008-09, the Company has sanctioned loans amounting to Rs.26,430 crore and disbursed

an amount of Rs.11,306 crore. The cumulative financial support provided by the Company for thermal

generation scheme is Rs.1,20,168 crore out of which Rs.46,740 crore has been disbursed till 31st March,

2009. The major thermal generation projects sanctioned to State & Central sector are Obra TPS (2x500

MW) and Paricha TPS Units 3 & 4 (2x210 MW) of UPRUVNL in Uttar Pradesh, Mettur TPS Stage-III

(1x600 MW) of TNEB in Tamil Nadu, Chabbra TPS unit 3 & 4 (2x250 MW) of RRVUNL in Rajasthan,

Koradi Extension TPS (3x660 MW) of MSPGCL in Maharashtra, Bellary TPS (1x500 MW) of KPCL in

Karnataka and Raghunathpur TPS (2x600 MW) of DVC in West Bengal.

Projects Commissioned

The important projects of State & Central sector which were supported by PFC and commissioned during

the current financial year are Amarkantak TPS of MPPGCL in Madhya Pradesh, Valathur Combined

Cycle Power Project Phase-II (92.2 MW) of TNEB in Tamil Nadu and Sadardighi TPS Unit –II (300

MW) of WBPDCL in West Bengal.

HYDRO GENERATION PROJECTS

The Company is proactively identifying and providing financial support to hydro generation projects in

order to improve upon the declining share of hydro power in the country. During the year 2008-09, loans

amounting to Rs.7,914 crore were sanctioned and an amount of Rs.3,575 crore was disbursed. The

cumulative amount sanctioned for hydro generation projects is Rs.30,981 crore out of which Rs.17,813

crore has been disbursed till 31st March, 2009. The major projects supported during the current financial

year are Tipaimukh (1500 MW) of NEEPCO in Manipur and Mizoram, Pallivassal Extension Scheme

(2x30 MW) and Mankulam HEP (40 MW) of KSEB in Kerala, Nirgazini SHEP (7 MW) of UPJVNL in

Uttar Pradesh, Periyar Vaigai 1 & 2 and 3 &4 (13 MW) of TNEB in Tamil Nadu, Ganol HEP (3x7.5

MW) and Myntdu Leshka Stage-I Extension (1x42 MW) of MeSEB in Meghalaya and Rellichu HEP

(3x4 MW) of SPDCL in Sikkim.

Projects Commissioned

The important projects which were supported by PFC and commissioned during the current financial year

are Baglihar HEP (3x150 MW) of JKPDCL in Jammu and Kashmir, Priyadarshni Jurala HEP (6x39 MW)

of APPGCL in Andhra Pradesh and Varahi HEP (2x115 MW) of KPCL in Karnataka.

RENOVATION, MODERNISATION AND LIFE EXTENSION

THERMAL PROJECTS

During the year 2008-09, loans worth Rs.214 crore were sanctioned for R&M and life extension of

thermal power plants and an amount of Rs.510 crore was disbursed. Cumulatively, an amount of Rs.6,629

crore has been sanctioned and Rs.4,568 crore stands disbursed till 31st March, 2009.

HYDRO PROJECTS

During the year 2008-09, the Company sanctioned Rs.48 crore for R&M of hydro power projects and

Rs.51 crore was disbursed. Cumulatively, an amount of Rs.1,453 crore has been sanctioned and Rs.884

crore stands disbursed till 31st March, 2009.

CREDIT RATINGS

DOMESTIC: During the financial year 2008-09, The Company‟s long term domestic borrowing

programme (including bank loans) was awarded the highest rating of „AAA‟ and „LAAA‟ by CRISIL and

ICRA respectively. The Company‟s short term domestic borrowing programme (including bank loans)

was awarded the highest rating of „P1+‟ and „A1+‟ by CRISIL & ICRA respectively.

INTERNATIONAL: During the financial year 2008-09, the international credit rating agencies Moody‟s,

Fitch and Standard & Poor‟s have given to the company, long term foreign currency issuer ratings of „

Baa3‟, „BBB- „ & „BBB-‟ respectively, which are at par with sovereign rating for India.

BORROWINGS

BORROWINGS FROM DOMESTIC MARKET

The Company mobilized funds amounting to Rs.21,482.59 crore from the domestic market during 2008-

09 as against Rs.15,972.34 crore during 2007-08. Out of the above, Rs.12,808.90 crore was raised by

issue of unsecured taxable bonds in the nature of debentures, Rs.5,350.00 crore by way of long / medium

term loans from Banks/FIs, Rs.1,260.00 crore by way of short term loans from Banks/FIs and

Rs.2,063.69 crore by way of issue of Commercial Paper.

EXTERNAL BORROWINGS

Due to tight financial conditions in international credit markets, The company did not raise any External

Commercial Borrowing (ECB) during the financial year 2008-09. However, US$1.22 million was drawn

by the Company from ADB, Manila by way of sanctioned line of credit.

REDEMPTION AND STATUS OF UNCLAIMED AMOUNTS & BONDS

The unclaimed balance amount of bonds as on 31st March, 2009 was Rs.1.09 crore (previous year –

Rs.1.00 crore). This represents the amount remaining unclaimed/unpaid after redemption by the

bondholders, as the bondholders had not surrendered their bond certificates. The bondholders have been

individually advised to surrender bond certificates.

ULTRA MEGA POWER PROJECTS

GENERATION PROJECTS

The Company has been designated as the Nodal Agency by Ministry of Power, Govt. of India, for

development of Ultra Mega Power Projects (UMPPs), with a capacity of about 4000 MW each. So far, 14

such UMPPs have been identified to be located at Madhya Pradesh (Sasan), Gujarat (Mundra),

Chhattisgarh (Akaltara), Karnataka, Maharashtra (Munge), Andhra Pradesh (Krishnapatnam), Jharkhand

(Tilaiya), Tamil Nadu (Cheyyur), Orissa (Bedabahal), 2 Additional UMPPs in Orissa and 2nd UMPPs in

Andhra Pradesh, Tamil Nadu and Gujarat. The project in Madhya Pradesh, Chhattisgarh, Orissa and

Jharkhand are domestic coal based while the other eight (8) are based on imported coal. As on 31st

March, 2009, eleven (11) Special Purpose Vehicles (SPVs) were incorporated (9 by PFC and 2 by PFC

Consulting Ltd., a wholly owned subsidiary of PFC) for these UMPPs to undertake all preliminary site

investigation activities necessary for conducting the bidding process for these projects. Ministry of Power

is the Facilitator for the development of these UMPPs while Central Electricity Authority (CEA) is the

technical partner. These SPVs shall be transferred to successful bidder(s) selected through Tariff Based

International Competitive Bidding Process for implementation and operation. Three SPVs namely

Coastal Gujarat Power Ltd. for Mundra UMPP in Gujarat, Sasan Power Ltd. for Sasan UMPP in Madhya

Pradesh and Coastal Andhra Power Ltd. for Krishnapatnam UMPP in Andhra Pradesh have been

transferred to the successful bidder.

INDEPENDENT TRANSMISSION PROJECTS

Ministry of Power has initiated similar process i.e. Tariff Based Competitive Bidding Process for

development of Transmission system through private sector participation. The objective of this initiative

is to develop transmission capacities in India and to bring in the potential investors after developing such

projects to a stage having preliminary survey work, identification of route, preparation of survey report,

initiation of process of land acquisition, initiation of process of seeking forest clearance, if required and to

conduct bidding process etc. Towards this end, two shell companies namely East North Interconnection

Company Limited and Bokaro Kodarma Maithon Transmission Company Limited had been set up as

wholly owned subsidiaries of Power Finance Corporation Limited. East North Interconnection Company

Limited (ENICL) was incorporated on 1st February, 2008 for enabling import of NER/NR surplus power

by NR. It will be the first transmission line under Tariff Based Competitive Bidding Guidelines in the

Country. The project includes 400 kV Quad D/C line from Bongaigaon to Siliguri (approx. 260 Km) and

400 kV Quad D/C line from Purnea to Biharsharif (approx. 235 Km.). RfQ for the project has been issued

on 20th October, 2008. Responses have been received from 16 bidders on 5th

January, 2009. Evaluation

of responses is in progress. In respect of Bokaro Kodarma Maithon Transmission Company Limited,

Ministry of Power decided to entrust this project to Power Grid Corporation of India Ltd. and thus PFC is

in the process of winding up this Company.

NON-CONVENTIONAL ENERGY SOURCES

During the year 2008-09, PFC has accorded high priority to funding of Renewable Energy Generation

Projects. A new Group for Renewable Energy and CDM was created in August 2008. During the year

2008-09, loans for 15 projects were sanctioned to support a capacity of 131.25 MW for biomass and

small hydro projects in State and Private Sector. Total loan amount sanctioned was Rs.560.54 crore.

Further to increase the business in Renewable, co-generation, energy saving projects and captive power

plants, the Company empanelled thirty Business Development Associates (BDAs). PFC also entered into

an MoU with Gujarat Energy Development Agency (GEDA) for development of business in renewable

energy generation projects in the State. The Company is also facilitating SPUs to obtain CDM benefits

for R&M of old thermal & hydro projects in accordance with mandate from MoP. A Grant of USD 1

Million from ADB has been tied up in the current year. 10 projects in States of Meghalaya, Andhra

Pradesh, Punjab, Himachal Pradesh, Madhya Pradesh, Kerala and Maharashtra have been identified for

registration with United Nations Framework Convention on Climate Change (UNFCCC). The Project

Design Documents for 5 Projects have also been prepared through the consultant appointed by ADB.

FINANCIAL ASSISTANCE FOR POWER SECTOR STUDIES

The Company has been extending financial assistance in the form of grants, interest free and/or

concessional loans to utilities to take up important power sector studies in priority areas of R&M of hydro

& thermal power projects, distribution management, reform & restructuring, Institutional Development,

etc. The major studies sanctioned during the year are reform and restructuring of KSEB and reform and

restructuring of power sector in Jharkhand. Grants amounting to Rs.1.90 crore and term loan amounting

to Rs.20 crore were sanctioned during the financial year 2008-09 towards studies in the areas of reform &

restructuring and institutional development, etc. and an amount of Rs.0.36 crore as grant and term loan

amounting to Rs.1.30 crore was disbursed. Cumulatively, grant for studies amounting to Rs.52.65 crore

and term loan amounting to Rs.335.21 crore has been sanctioned and Rs.42.71 crore as grant and

Rs.271.47 crore as term loan has been disbursed till 31st March, 2009.

PRIVATE SECTOR FINANCING

The Company is actively supporting capacity addition in the private sector by providing finance and loan

syndication services to various types of thermal plants including coal, gas/naphtha, furnace oil or DG set

based; hydro plants, wind power plants and T&D network. The Company has so far cumulatively

sanctioned loans worth Rs.21,671 crore to the private sector and an amount of Rs.6,073 crore has been

disbursed till 31st March, 2009. During the year 2008-09, loans amounting to Rs.7,892 crore have been

sanctioned and Rs.620 crore has been disbursed to private sector entities. Major projects sanctioned are

1320 MW Coal Based Power Project of Adani Power Maharashtra Private Limited in Maharashtra, 8x135

MW Coal based Captive TPP of Jindal Steel and Power Limited in Orissa, 3x360 MW (Unit 2,3 &4) of

RKM Powergen in Chhattisgarh, 1320 MW Coal Based Power Plant of Sophia Power Limited in

Maharashtra, 220 MW Captive Cogeneration Power Project Phase-I & 395 MW Captive Cogeneration

Power Project Phase-II of Vadinar Power Company Private Limited in Gujarat, 3960 MW TPS of Sasan

Power Limited in Madhya Pradesh and 10 MW Biomass Project of ASN Power Projects Private Limited

in Maharashtra.

EXTERNALLY AIDED PROJECTS

The Company had USD 50 million Line of Credit (LoC) with ADB for utilization for R&M of thermal

power plants and for Transmission and Distribution schemes. For the utilization of loan, ADB had

approved schemes with ADB reimbursement component of about USD 25 million. Utilities were finding

it difficult to comply with some of social, environmental and procurement related covenants of the loan,

therefore there were not many eligible projects for utilization of the loan. Due to this, the loan amount

was reduced to USD 25 million out of which, PFC has utilized USD 21.48 million. The loan has been

closed on 30th June, 2008. The Company has a Line of Credit of Euro 100.56 million from KfW to

finance RM&U of Hydro Electric Projects. Funds from the facility would be used to finance RM&U

schemes of six HEPs of Uttrakhand Jal Vidyut Nigam Ltd. (UJVNL). The contract for detailed feasibility

studies of these projects has been awarded by UJVNL. The Company has also signed a MoU with EX-IM

Bank of United States on 14th May, 2008. EX-IM Bank will make available a special delegated line of

credit of up to USD 800 million to be used to purchase goods and services from U.S. for power projects

in India. The line of credit is available for 2 years w.e.f. 16th April, 2008.

CATEGORIZATION OF UTILITIES

The Company classifies State Power Utilities, its principal borrowers, into A+, A, B and C categories.

The categorization is based on the pre-determined parameters including operational & financial

performance of the utilities. The categorization enables PFC to determine credit exposure limits and

pricing of loans to the state power utilities. As on 31st March 2009, 88 nos. utilities were categorized, 10

as “A+”, 33 as “A”, 25 as “B” and 20 as “C”. PFC is also stipulating appropriate conditions relating to

implementation of reforms and improvement of performance while sanctioning financial assistance to its

borrowers based on their entity appraisal.

PROMOTION OF POWER TRADING THROUGH POWER EXCHANGE

During the financial year 2008-09, the Central Electricity Regulatory Commission has granted its

permission to set up power exchanges in the country. The Power Exchanges will have a nationwide

presence in the form of electronic exchange for trading in power. Apart from power trading, transmission

clearance will also be taken care of by power exchanges simultaneously. It will provide its members a

transparent, neutral and efficient electronic platform for power trading. In order to promote short term

power trading through power exchange, The Company took the initiative by promoting National Power

Exchange Ltd. jointly with NTPC, NHPC and TCS. This exchange is yet to start its operations. The

Company has also contributed upto 7% of the equity share capital of Power Exchange India Ltd. (PXI)

promoted by NSE and NCDEX, PFC is also a Professional Clearing Member to PXI for settlement of

dues of utilities who wish to avail service from PFC. In addition to equity contribution, PFC is also

providing credit facility to utilities in need of funds required for purchase of power. This exchange has

started its operation since October, 2008.

EQUITY FINANCING

Equity investment business is generally considered as a logical extension of debt business. The Company

is endeavoring to make a mark in the area of equity investment so as to capitulate on its vast domain

experience that it has attained during its over 20 years of operations in power sector debt financing. PFC

aims to leverage its financial strength, large debt providing capability and power sector expertise to invest

in equity of attractive power projects. Further, PFC also intends to enter equity syndication business so as

to expedite early financial closure of projects leading to faster capacity addition. This would help PFC to

enhance its fee-based income also. Over a period of time, The company proposes to build an equity

portfolio of power assets which could provide consistent gains in the form of dividend and/or capital

appreciation.

SUBSIDIARIES

As a nodal agency designated by Government of India for development of Ultra Mega Power projects,

PFC has so far incorporated eleven wholly owned subsidiaries out of which nine (9) were to facilitate the

development and construction of large capacity power projects based on international competitive bidding

and two (2) for the development of large transmission projects. On completion of the bidding process, so

far four (4) subsidiaries have already been transferred to the successful bidder for implementation of the

projects. In addition, the Company had also incorporated on 25th

March, 2008, PFC Consulting Limited, a

wholly owned subsidiary company to promote, organize and carry on consultancy services.

PFC CONSULTING LIMITED

Background

The Company has been providing Consultancy services to Power sector through its Consultancy Services

Group (CSG) since October 1999. With a reforming power sector, new entities being operationalised,

regulatory mechanism coming into operation and Electricity Act 2003 being implemented; leveraging the

experience of its CSG Unit, PFC incorporated PFC Consulting Limited (PFCCL) as a wholly owned

subsidiary of PFC on 25th March 2008 for providing consultancy services

to Power Sector. The company commenced its business on 25th April 2008.

Range of Services Offered:

1. Reform, Restructuring, Regulatory and related aspects in power sector.

2. Financial Management, Bid Process Management, Resource Mobilization, Accounting Systems etc.

3. Project-Structuring / Planning / Development / specific studies, implementation monitoring, efficiency

improvement projects, for both State owned Utilities and IPPs.

4. Development of sustainable Human Resources Plans.

5. Communication and information dissemination.

6. Information Management systems.

7. Legal and Contract Related Services for the Power Sector

While PFCCL continues to undertake various assignments, its focus is on assignments relating to:-

Procurement of Power Through „Case 1‟ and „Case 2‟ of Guidelines for Determination of Tariff

by Bidding Process for Procurement of Power by Distribution Licencees, issued by MoP, GoI.

Overall advisory services for development of a new Thermal Power Station.

Computerization of Accounting Systems for State Utilities.

Restructuring/ Implementation of reforms for State Utilities.

UMPPs & ITPs

PFCCL has been assigned the task of development of Ultra Mega Power Projects (UMPPs), an initiative

of Ministry of Power (MoP), Govt. of India (GoI), by PFC, which is the Nodal Agency appointed by

MoP, GoI. At the time of taking over the work for development of UMPPs, work was actively in progress

for one UMPP i.e. Jharkhand (Tilaiya). With its concerted efforts round the year, as on 31st March, 2009,

work on three (3) more UMPPs viz. Tamil Nadu (Cheyyur), Orissa (Bedabahal) and Chhattisgarh

(Akaltara), has been taken up progressively and RfQ for these UMPPs are expected to be issued in FY

09-10. PFCCL is conducting the bid process for the SPV, East North Interconnections Company Limited

(ENICL).

SUBSIDIARIES OF PFC CONSULTING LTD.

SAKHIGOPAL INTEGRATED POWER COMPANY LIMITED

Sakhigopal Integrated Power Company Limited (SIPCL) has been established by PFC Consulting

Limited(a wholly owned subsidiary of Power Finance Corporation Limited) on 21st May, 2008 to

undertake preliminary studies and to facilitate tie-ups of inputs, linkages and to obtain necessary

clearances for the projects such as water, land, environment clearance and power selling arrangement etc.

for proposed power project prior to award of the project to the successful bidder. The certificate for

Commencement of Business was obtained on 17th April, 2009.

GHOGHARPALLI INTEGRATED POWER COMPANY LIMITED

Ghogharpalli Integrated Power Company Limited (GIPCL) has been established by PFC Consulting

Limited (a wholly owned subsidiary of Power Finance Corporation Limited) on 22nd

May, 2008 to

undertake preliminary studies and to facilitate tie-ups of inputs, linkages and to obtain necessary

clearances for the projects such as water, land, environment clearance and power selling arrangement etc.

for proposed power project prior to award of the project to the successful bidder. The certificate for

Commencement of Business was obtained on 16th April, 2009.

FINANCIAL REVIEW

The company continued to accomplish a healthy growth during the Financial Year 2008-09. The total

revenues grew by 30.62% from Rs.5,040.04 crore in FY 2007-08 to Rs.6,583.54 crore in FY 2008-09.

Profit before Tax (PBT) grew by 11.34% from Rs.1,787.69 crore in F.Y.2007-08 to Rs.1,990.47 crore in

F.Y. 2008- 09. However, Profit before Tax grew by 24.07% without taking into account exchange losses

of Rs.252.53 crore booked during the current year as against Rs.20.14 crore booked during the previous

year. The increase in Exchange loss during the current year is due to significant depreciation in INR

against the foreign currencies. Profit after Tax (PAT) grew by 63.24% from Rs.1,206.76 crore in

F.Y.2007-08 to Rs.1,969.96 crore in F.Y. 2008- 09. (This includes increase in profit by Rs.483.24 crore

due to reversal of Deferred Tax Liability (DTL) pertaining to earlier year‟s on Special Reserve created

and maintained u/s 36(1)(viii) of Income Tax Act, 1961 consequent upon the receipt of a clarification

from the Institute of Chartered Accountants of India.)

Further, the net worth of the Company grew by 24.19% in 2008- 09 to Rs.10,790 crore as compared to

Rs.8,688 crore in 2007-08 and the Loan Assets (net) as at 31st March, 2009 grew by 24.94% to

Rs.64,428.99 crore from Rs.51,568.31 crore as at 31st March, 2008. Also, the Gross Non Performing

Assets (NPAs) as % of Loan Assets decreased to 0.02% in 2008-09 as against 0.03% in 2007-08.

Chapter 3: OBJECTIVES OF THE STUDY

1) To understand the Policy Framework of Loan sanctioning of PFC

2) To understand the Policy Framework for Tariff Determination by CERC

3) To study a case of Loan appraisal by PFC for Power Project in India

Chapter 4: LOAN POLICY FRAMEWORK FOR PROJECT APPRAISAL

4.1 LOAN POLICY FRAMEWORK OF PFC

PROJECT TERM LOANS

A. RUPEE TERM LOAN

1. Purpose

To provide finance to all types of projects in state & private sector viz. generation, transmission,

distribution, renovation & modernization, uprating, environment upgradation, metering, etc. The

infrastructure projects having forward and backward linkages with power projects are also covered.

2. Eligible entities

The entities engaged in generation, transmission, trading, distribution of power or any combination of

these activities including captive / co-gen power producers. The entities engaged in the infrastructure

projects with forward / backward linkages to power projects.

3. Extent of assistance (restricted to actual requirement of funds)

Central / State sector entities - Upto 70% of the project cost

Reforming State sector entities - Upto 80% of the cost of project.

Private sector entities* - Upto 50% of the project cost.

The extent of funding may vary from project to project.

* In case of thermal generation projects and hydro projects, the financial assistance is generally up to

20% and 25% of the project cost respectively. However, the enhanced limit can be considered for loan

size of Rs. 500 crs and above or where PFC is a lead institution. In case of infrastructure projects with

forward / backward linkages to power projects the financial assistance is up to 20% of the project cost.

4. Interest rates & Other charges

� Interest rates as notified by the Corporation from time to time. Special interest rates are also available

for loans exceeding Rs. 700 crs for generation projects in state sector and Rs. 500 crs in private sector.

� Interest rates prevailing on the date of disbursement(s) shall be applicable.

� Incentive / rebate available for timely payment of dues for state/ central sector utilities.

� For all type of generation projects and infrastructure projects with forward and backward linkages to

power projects, reduction in interest rate after commissioning of projects / COD as per prevailing policy.

� Penal interest payable on default-payments.

� Commitment fees / upfront fees as may be applicable for respective borrowers from time to time.

� Processing fee, Lead fee & facility Agent fee for private sector entities as applicable from time to time.

5. Interest rate reset option

� Option to avail interest rate with reset after every 3 years or with reset after 10 years.

� Interest reset condition to apply from the standard due date following the date of first disbursement

after 3/10 years, as the case may be.

6. Moratorium

Moratorium on principal is available upto 6 months from the date of project commissioning / COD. There

is no moratorium on interest payment.

7. Disbursement mechanism

Disbursement will be made, against bills, as per the „Disbursement Schedule‟ submitted by the borrower.

In case of small loans (below Rs. 20 crs.), simplified disbursement procedure is applicable. In the case of

private sector borrower, disbursement is made through Trust and Retention Account mechanism.

8. Interest payment

Interest is to be paid quarterly, on standard due dates i.e. 15/4, 15/7, 15/10 and 15/1 every year.

9. Repayment

Repayment is to be made in maximum years of:

* All such loans shall also have put and call option after the end of 12 years (thermal & other schemes)

and 15 years for hydro schemes from the date of commissioning of project.

The first repayment installment will become due on the standard due date immediately following the end

of moratorium period. Borrower may also opt for a shorter repayment period.

10. Security requirements

� State / Central government or bank guarantee or charge on assets, for state and central sector entities,

while charge on project assets for others.

� Letter of Credit or Tripartite Escrow Agreement amongst the borrower, the bank and PFC for state and

central sector entities while Trust and Retention Account mechanism for others.

� Corporate and / or personal guarantee of the promoters for private sector, if the outcome of appraisal

establishes a requirement for the same.

� Other securities, as may be necessary.

B. FOREIGN CURRENCY LOAN :

PFC sanction foreign currency loans based on the requirement of capital expenditure of the project

subject to its ability to provide foreign currency loans. These loans are provided to power sector utilities

for end use as permitted under the External Commercial Borrowing Guidelines issued by RBI as amended

from time to time. The interest rates offered are based on six months US Dollar LIBOR or LIBOR in any

other currency. The margin over LIBOR is generally reset at the end of every 5 years.

SHORT TERM LOAN

1. Purpose

To provide finance to the existing borrowers in the State / Central Sector to meet their immediate

requirement of funds. The rupee loan under the scheme shall be provided for purchase of fuel for power

plant, purchase of consumables, essential spares, emergency procurement / works for generation plant and

T&D network in the nature of repair & maintenance work, purchase of power, against receivables of

transmission entities on account of wheeling charges.


All the existing state / central sector borrowers (who have outstanding amounts under long term loans-

project finance) and who are not declared defaulter by PFC.

3. Extent of assistance

Rs.150 crores to Rs.300 crores depending upon reforming status of the borrowing entities as per policy

applicable.

4. Tenor

The loan under the scheme shall not exceed one year from the date of disbursement.

5. Interest rate & other charges

As notified by the Corporation from time to time.

6. Disbursement mechanism

� At the time of making request to PFC for release of tranche the borrower shall indicate the purpose for

which the amount is proposed to be used.

� The borrower shall furnish utilization certificate for the amount released within 60 days from the date

of disbursement.

� On the advice of the borrower, the Corporation may also make direct payment to the executing agency

under intimation to the borrower.

7. Repayment period

Option-I : Loan will be sanctioned for a tenor of 30 days to 180 days in multiples of 30 days with option

to roll over.

Option-II : Loan will be sanctioned for a tenor upto one year. Loan shall be repaid through EMI. First

EMI shall commence after two months.

Loan under each of these options may be drawn in maximum of three tranche, each tranche being at least

Rs.10 crores. A repayment schedule will be made out for each tranche.

8. Security

� Tripartite Escrow account agreement in the prescribed format where the sanctioned amount is upto

50% of sanction limit.

� Where sanctioned amount is more than 50% of sanction limit in addition to escrow account, charge on

assets / govt. guarantee will also be required.

9. Validity of loan

The entire loan amount shall be drawn within 45 days from the date of sanction.

GUARANTEE ASSISTANCE

A. DEFFERED PAYMENT GUARANTEE

PFC issue guarantees on behalf of projects to guarantee their payment obligations. Our guarantees enable

projects to secure financing from a wider spectrum of sources at more competitive rates, including

borrowings from commercial banks, foreign lenders and the debt capital markets.

B. GUARANTEE FOR PERFORMANCE OF CONTRACT / OBLIGATIONS W.R.T. FUEL SUPPLY

AGREEMENT (FSA)

1. Purpose

To provide non-fund based assistance by way of guarantees for performance of activities/contractual

obligations under agreements such as guarantee for performance under Fuel Supply Agreement for

facilitating procurement of raw material like gas, oil, coal or any other form of fuel.


All power utility companies / entities (excluding state sector and municipal bodies).

3. Extent of exposure

Sanction of guarantee to a company / entity under this policy shall be within the maximum exposure as

per policy of the Corporation.

4. Period of guarantee

Upto the scheduled date of Commercial Operation Date.

5. Guarantee fee and other charges

The borrower shall pay guarantee fee quarterly in advance on standard due dates of 15/1, 15/4, 15/7 and

15/10 every year, at the prevailing rates. In addition, the borrower shall be liable to pay any management

fee and other charges like processing fees, Lead fees etc. as applicable.

6. Securities

Combination of following securities :

(i) State / Central Government Guarantee

(ii) Charge on assets

(iii) Corporate Guarantee

(iv) Personal Guarantee of Promoters

(v) Pledge of shares

(vi) Charge on Revenue

Any other security acceptable to PFC

COMMITMENT CHARGES/UPFRONT FEE

*Commitment Charges for State/Central Sector.

The Borrower will furnish at the time of the submission of MOA to the Corporation a quarter-wise

schedule of drawl of this loan, the year being the financial year commencing April 1st and ending

March 31st, and the quarters being three months period beginning from 1st April, 1st July, 1st Oct.

and 1st Jan. of the year. The borrower will be required to draw the entire amount of committed

funds in the respective quarters. In case the borrower could not draw the committed funds in the

scheduled quarter, the Corporation will recover commitment charges on the undrawn amount of

previous quarter from the first day of following quarter till the date of actual date of drawl @ 0.25

% p.a. The commitment charges will be payable quarterly on 15th April, 15th July, 15th October

and 15th January every year after execution of loan documents till the date of drawl of loan by the

borrower.

The Commitment Charges will be payable quarterly on 15th April,15th July, 15th October and

15th January every year after execution of loan documents.

OR

*Upfront Fee

The Central/State Utilities/Municipal Bodies shall pay to PFC upfront fee of 0.1% of the loan

amount sanctioned on or before the execution of MOA.

Not applicable in the case of loans sanctioned upto Rs. 100 crores.

Upfront Fee for Infrastructure projects with backward/ forward linkage to power sector shall be 0.1% and

1.0% for State/ Central & Private Sector borrowers respectively. No option for commitment charges shall

be given

Private Power Utilities shall pay to PFC upfront fee of 1.0% of the loan amount sanctioned on or before

the execution of MOA.

Penal Interest

In the event of the interest or the principal not being paid to the Corporation by the Borrower on due date

as indicated in the foregoing clauses, the Borrower shall pay to the Corporation a penal rate of

interest of 2.0% per annum over and above the rate of interest mentioned above at which the loan

is sanctioned, which will be compounded on quarterly basis.

The penal interest charged from borrower shall be subject to the following rebate :

(a) In case the payment is received within one month of the date on which the repayments

became due, 50% of the penal interest due from the date of default till the date of receipt shall

be given as rebate.

(b) In case the payment is received within two months of the date on which the repayments


be allowed as rebate.

(c) In case the payment is received within three months of the date on which the repayments


be allowed as rebate.

(d) No rebate shall be given in penal interest in case of default of over three months.

Timely Payment of dues :-

In order to encourage timely payment of dues by the borrowers PFC may consider offering

incentive at the rate specified from time to time.

Premature payment of loans:

Premature payment of loans may be permitted on the terms agreed by the Corporation from time to time.

GUIDELINES FOR FINANCIAL MANAGEMENT OF PFC

1. Debt Equity Ratio

The capital structure of PFC would consist of mainly two components: equity including reserves

and surplus, and long- term debt. A debt to equity ratio not exceeding 6:1 will be maintained.

Keeping in view the operational and financial risks to which the PFC will be exposed and subject to

the guidelines of the Government and also from the Reserve Bank of India.

2. Debt Service Coverage Ratio :

PFC's operations would be so managed as to maintain a minimum debt service coverage ratio of

1.2.

PFC’s Know Your Customer (KYC) Policy

PFC‟s customers, for the purpose of KYC, are categorized as under:

• Lending side customers

• Borrowing side customers

Lending side customers (borrowers) would include state utilities and IPPs. Borcustomers (investors)

include banks, institutions, trusts, corporates etc.

Risk Management:

On borrower side customers, since SEBs are Govt. controlled entities; they are excluded from the

purview of PFC‟s KYC structure. However, corporates, irrespective of its status, would be included.

Accordingly, in case of IPPs, the details of the borrower company, its Directors as well as promoter

entities would be obtained. Further, the individual details of Directors of the promoting companies would

also be included in the purview of PFC‟s KYC Guidelines.

PFC‟s investors are categorized, based on perceived risk, into three categories - A, B & C. Category A

customers include low risk, Category B contain marginal risk customers while Category C are high risk

customers. PFC‟s borrowings are mainly wholesale and in the form of loans from scheduled commercial

banks, FIs and bonds, which are subscribed by trusts, corporates, banks etc. Since scheduled commercial

banks and FIs are registered with statutory bodies like RBI, they may be exempt from PFC‟s KYC

structure (Category A customers). Similarly, Government departments & Government owned companies,

regulators and statutory bodies etc. and Central Board of Trustees may be categorised as Category A

customers.

Those entities, which are primary investors in our bonds (Category B & C customers), shall be included

in PFC‟s KYC structure. Further, for the purpose of risk categorization, individuals (other than High Net

Worth) and entities whose identities and sources of wealth can be easily identified and transactions in

whose accounts by and large conform to the known profile may be categorised as Category B customers.

Further, Category B customers shall include salaried employees whose salary structures are well-defined,

public trusts like provident fund trust, pension trusts etc. Likewise, Category C customers shall include

(a) non-resident customers, (b) high net worth individuals i.e. those investors who invest more than Rs. 1

Lac (c) private trusts, charities, NGOs and organizations receiving donations, (d) firms with 'sleeping

partners'.

Broad Guidelines for Submission of Disbursement Claims to PFC (Rupee Term

Loan to State Sector)

REQUIREMENTS TO BE COMPLETED PRIOR TO DISBURSEMENT

Complete the execution of loan documents. Ensure to comply with the following :-

a) Submit the details of procurement of materials, works and services in the format (Disbursement

Schedule) to the concerned

b) Submit the names and designations of officers who are authorised to submit the claims to PFC along

with attested specimen signatures.

c) Ensure the compliance of all pre-disbursement conditions as laid down under the terms and conditions

of loan.

d) Submit the quarterly drawal schedule for the entire loan amount.

e) Ensure to clear outstanding dues , if you has been declared a defaulter by PFC.

f) Create the security and other such requirements as per loan sanction terms and conditions..

g) Establish the Escrow account/Letter of credit etc. as per the sanction terms.

h) Ensure to Comply with all general and other special conditions, if any, as per the terms of sanction.

DISBURSEMENT BY PFC

PFC makes the disbursement in the following manner:

a) Direct Payment to Supplier/contractor

b) Reimbursement Claim to borrower

c) Advance Payment to borrower

• Direct Payment to Supplier/contractor

i) When supplier /contractor / agency / consultant is a Government Company / any other Govt.

Departments / agencies.

•• Verify that equipment / materials or civil/erection work done/ services provided shown in the Bills/

Invoices are in conformity to the disbursement Schedule. PFC will not release the payment of material /

work / equipment services which is not in conformity with disbursement schedule.

•• Fill the required information in Form-I (Annexure-II) and get it signed by the authorized official along

with seal.

•• The Government supplier/contractor/agency will present the Form –I along with authenticated original

bills/invoices to PFC.

•• PFC will make the direct payment to such Company / Department / Agency on behalf of the Borrower.

ii) When supplier /contractor / agency / consultant is not a Government Company/ Departments / agencies

•• Verify that equipment / materials or civil/erection work done/ services provided shown in the Bills/

Invoices are in conformity to the disbursement Schedule. PFC will not release the payment of material /

work /equipment services which is not in conformity with disbursement schedule.

•• Fill the required information in Form-I (Annexure-II) and get it signed by the authorized official

alongwith seal.

•• Give to the supplier/contractor/agency the Bills/Invoices ( in original ) alongwith Form-I (duly filled &

signed by authorised signatory). Simultaneously, you also send an advance copy of the Form-I, without

any enclosures to PFC for information.

•• The supplier /contractor /Agency will present the duly passed bills/invoices and Form-I to the

designated bank of PFC through their bank. A list PFC‟s designated bank is enclosed at Annexure –IV.

•• The designated Bank of PFC will forward the Bills/Invoices alongwith Form-I (in original) to PFC.

•• PFC will advise the designated Bank for making the payment to Supplier/Contractor/Agency through

their bank.

• Reimbursement Claim

•• Submit the claim in Form –II ( Annexure-III).

•• Ensure to get signed the Form by Authorised officer alongwith seal.

•• Claim will be admitted in respect of the equipment/materials or the civil/erection works, which

conform to the accepted disbursement schedule.

• Disbursement of Advance

•• An advance to the extent of 15% of the sanctioned amount can be considered by PFC, as per the

prevailing policy.

•• Send a request for advance alongwith justifications.

•• PFC will examine the request and compliance and after having satisfied , may release the advance.

•• Ensure to submit the utilization of advance in line with the terms & conditions of the Sanction Letter.

•• The utilization claim will be submitted in same manner of reimbursement claim.

•• PFC may adjust the reimbursement claims of the borrower against the outstanding advance in loan .

General Points

•• Ensure to deposit all statutory deductions or make arrangement to deposit to the concerned authorities.

•• Submit separate claims for each loan.

•• Ensure not to stipulate any condition either by you or supplier which may restrain the PFC‟s designated

bank to remit the payment.

•• Ensure the compliance of relevant laws and regulations while passing the bills and authenticating the

FORM-I/II.

•• Ensure that the supplier/ agency/ contractor are not barred to receive the payment under any

statute/law.

•• Ensure that the claimed invoices were raised on or after the cut off date of expenditure as specified in

the sanction terms & conditions.

•• If any specific disbursement procedure is indicated in letter of sanction, terms and conditions of any

loan, the same will be followed in respective loan.

Rejection/return of claim

•• A claim will be rejected if it is not in conformity with the accepted disbursement schedule or the

prescribed disbursement procedure.

Common mistakes which should be avoided

•• Wrong reference of item in disbursement schedule.

•• No reference of Item Number.

•• Incomplete Form I/II or submission of claim on wrong form.

•• No matching of figures / amount in Form I / II with respect to the passed bills.

•• Claims for the items not included in the disbursement schedule without submission / acceptance of

additional / revised schedules.

•• Changes in authorized signatories without intimation to PFC.

•• Form I/II is not signed by authorized person.

•• Direct payment claims of private/ contractors/ suppliers are not routed through banks.

•• Original invoices are not submitted.

4.2 LOAN POLICY FRAMEWORK OF CERC

Return on Equity.

(1) Return on equity shall be computed in rupee terms, on the equity base determined in accordance with

regulation 12.

(2) Return on equity shall be computed on pre-tax basis at the base rate of 15.5% to be grossed up as per

clause (3) of this regulation:

Provided that in case of projects commissioned on or after 1st April, 2009, an additional return of 0.5%

shall be allowed if such projects are completed within the timeline specified in

Provided further that the additional return of 0.5% shall not be admissible if the project is not completed

within the timeline specified above for reasons whatsoever.

(3) The rate of return on equity shall be computed by grossing up the base rate with the normal tax rate

for the year 2008-09 applicable to the concerned generating company or the transmission licensee, as the

case may be:

Provided that return on equity with respect to the actual tax rate applicable to the generating company or

the transmission licensee, as the case may be, in line with the provisions of the relevant Finance Acts of

the respective year during the tariff period shall be trued up separately for each year of the tariff period

along with the tariff petition filed for the next tariff period.

(4) Rate of return on equity shall be rounded off to three decimal points and be computed as per the

formula given below:

Rate of pre-tax return on equity = Base rate / (1-t)

Where t is the applicable tax rate in accordance with clause (3) of this regulation.

Rate of return on equity = 15.50/ (1-0.1133) = 17.481%

Operation and Maintenance Expenses.

Normative operation and maintenance expenses shall be as follows, namely:

Open Cycle Gas Turbine/Combined Cycle generating stations

(Rs. in lakh/MW)

Interest on Working Capital.

(1) The working capital shall cover :

(b) Open-cycle Gas Turbine/Combined Cycle thermal generating stations

(i) Fuel cost for one month corresponding to the normative annual plant availability factor, duly taking

into account mode of operation of the generating station on gas fuel and liquid fuel;

(iii) Maintenance spares @ 30% of operation and maintenance expenses specified in regulation 19.

(iv) Receivables equivalent to two months of capacity charge and energy charge for sale of electricity

calculated on normative plant availability factor,

(v) Operation and maintenance expenses for one month.

Depreciation shall be calculated annually based on Straight Line Method and at rates specified in

Appendix-III to these regulations for the assets of the generating station and transmission system:

4.3 PROJECT APPRAISAL GUIDELINES

1. TITLE

2. INTRODUCTION

Proposal of the borrower in brief covering the project, proposed plan for its execution and financing.

3. ENTITY DETAILS

3.1 Private Sector Company

3.1.1 Applicant Company:

Brief about the applicant company (private sector/joint venture), date of incorporation, reference to

MOA of the company with reference to object clause. Status of the company in terms of Electricity

(supply ) Act,1948/Indian Electricity Act, 1910. In case applicant company is an existing company,

detailed analysis of operational & financial performance and financial position. The analysis (3-5

years) to include the ratio analysis covering profitability, debt servicing, financial health aspects,

pattern of share holding (list of share holders holding more than 5%shares, also to be given). In case

loans have been obtained from the Financial Institutions (FI) in the past, special terms and conditions,

if any, imposing by the FIs having bearing on the management, operation, raising of funds, credit

worthiness.

In case applicant company is an existing power company, details assessment on critical areas such as

consumer profile, receivable, tariff fixation mechanism, cost-tariff analysis also to be given.

3.1.2 Promoter and their background:

Details of the promoters, giving their business background and experience profile. Analysis of the

operational & financial performance and financial health of the group promoters and their group

companies, business growth, future plan. The analysis of performance (3-5 years) to include the ratio

analysis covering profitability, debt servicing, financial health aspects. Status of income tax

assessment and pending litigation, credit worthiness, giving credit references received from Bank,

position of default from FI, credit rating, if any, obtained in the past including current status of credit

rating, track record of the promoters in project implementation, pattern of share holding in promoter

company (list of share holders holding more than 5% shares, also to be given), promoter contributing

and its percentage to total project cost. Critical comments on the overall credibility, competence of the

promoters and the company.

3.1.3 Management

Composition of Board of Directors, background and experience of Directors, brief profile of key

executives.

3.2 Past performance of Borrower

Status of loan from PFC and from other sources, mentioned in two different headings.

4. PROJECT DETAILS

4.1 Project Profile and technology

4.1.1 Project Purpose & Scope: The detailed purpose, capacity, system components, justification,

and feasibility of the project.

4.1.2 Location and Site: Location, Rail, Air & Road links, distances, limitations in transportation (if

any), availability of construction power and water sources.

4.1.3 Technology: Salient Technological features of the project i.e. type & design of equipments,

characteristics of fuel, water and other inputs such as wind velocity, solar radiation etc. and

their relevance in selecting systems, equipments and plants to be used. The alternatives

considered and the basis for selections made for the project. Technical collaborations,

consultants and origin of main plant and equipment.

4.1.4 EPC Contract: EPC contract, if any, items covered, details relating to EPC contractor and its

selection.

4.1.5 Status and Preparedness: Describe preparedness, status of investigations, preliminary and

detailed engineering, procurement etc. Also describe systems and process involved etc.

alongwith the status of infrastructure already developed.

4.1.6 Projects Inputs: Sources. And quantities of required project inputs in terms of water, fuel

linkage, land availability, port handling and transportation facility etc. as required for

successful and reliable operations. The areas of concern, if any, may be elaborated.

4.1.7 Project Infrastructure Development: The proposed infrastructure facilities such as approach

rail/road. Residential colonies, construction power & water, construction machinery and other

construction facilities.

4.1.8 Environment Management: How the key environment which form the conditionality of

environmental clearances for the project by MOE&F/CPCB and the state pollution control

board has to be dealt. Local matters and global environmental issues should also be covered.

4.1.9 Operations and Maintenance: Arrangements for operations and maintenance including details

of O&M contractor, if any.

4.2 Clearances: List all the clearances/approvals required at Central/State levels as per GOI (Ministry

of Power) guideline for power along with their status and also the status of investment approvals.

4.3 Project Review

4.3.1 Need and Justification: Critical comments based on demand-supply position, system

inadequacy, project inputs and linkages available, adaptability of the technology proposed to

be used etc.

4.3.2 Existing System: Explain and establish the boundaries of the existing system on which the

proposed project is to be interconnected for smooth operation.

4.3.3 Proposed Project: Define the main boundaries of the proposed project in relation to the

existing system.

4.3.4 Techno-economic Consideration: Man observations of statutory authorities, need for special

efforts and actions required with respect to generation, transmission and sale of electricity for

ensuring techno-economic viability of the proposed project need to be brought out.

4.3.5 Linkages: Linkages for evacuation of power, fuel supply or other forward and backward

linkages.

4.4 Procurement Procedures and competitiveness:

Describe in detail the procurement philoshpy and guidelines be adopted for procurement of main-

plant, auxiliary systems, construction works, erection & commissioning and other services for the

project. Define procurement packages being adopted, fixed or variable price contracts proposed,

incentive/penal provision and how their competitiveness is being ensured.

4.5 Implementation Plan:

Review of borrowers projections and assessment of the realistic time frame for completition, taking

onto account the status of investigation, infrastructure, clearnces, procurement, financial tie-up, and

progress at site. Illustrate the implementation schedule with PERT/CPM networks etc.

If the project is already under implementation, the progress of major work areas viz-a-vis the schedule

to be indicated with likely dates of completion/commissioning.

4.6 Cost Estimate

4.6.1 Cost of he project and package-wise break up including EPC contracts, miscellaneous assets,

preoperative expenses, margin money etc. wherever applicable. Basis of cost estimates, prices

level and reasonability of cost estimate should also be dealt.

4.6.2 Contingencies provided for physical variation in estimates, price escalation in local and

foreign components and affect of foreign exchange variation should be covered.

4.6.3 Comparison of he cost of the project with similar recently appraised project, wherever

possible.

4.7 Financing Plan

Describe the financial tie-up with upto date position. Bring-out the phasing of investment proposed

for various equity, loans, lease etc. covering completed project costs including tentative

drawdown/Year-wise schedule.

In case part of financing are already tie-up, give details of agencies and arrangements for tying-up

such resources. Also mention the arrangements to mobilize balance funding including that from

internal accruals.

4.8 Marketing and selling Arrangements

Detailed arrangements with required PPA for sale of generated power and marketing strategy

proposed to be adopted for additional capacities being generated. The methodology for realization of

outstanding dues for sale of power including guarantees proposed should be spelt out.

4.9 Operational costs, Prices & Assumptions

All the relevant costs, prices, tariff, marginal costs of generation, transmission, distribution and

consumer surplus, and other related assumptions which become the inputs to the cost & benefit

analysis and projection of EIRR, FIRR should be defined and described. State investment analysis

should be the basis of such costs, prices and assumptions.

4.10 Projected Cash Flow Statements

Based on the new projects, proposed and planned for implementation on the anvil-projected cash flow

statements be made for the borrowing entity for the plan period/five years.

4.11 Cost Benefit Analysis

All tangible and intangible costs and benefits in the analysis to be included. Both EIRR and FIRR

should be estimated and viability of the project be established. In case of negative FIRR, manner of

securing payments/repayments of PFC‟s loan to be suggested and conditions similar to IPP be

considered.

4.12 Project Risk & Sensitivity Analysis

Identity key factors which are liable to cause risk in viability of he project and deal with each one of

them assessing their impact on viability. Risk factors to be discussed may include time and cost over-

run, input supply, off-take of output, receipts of sales revenue, etc.

4.13 Overall Loan Justification

Justification of the project from eligibility point of view as enunciated by PFC in the OPS i.e.

technical soundness, least cost alternative, achievement of stipulated minimum ROR and strengths of

the project etc. as well as from he policy angle in terms of GOI guidelines and policies.

4.14 Securities and Re-Payments

Elaborate on type of securities being proposed

5. RECOMMENDATIONS & SPECIAL CONDITIONS

Taking into account the overall loan appraisal, risks involved and security of PFC‟s money. Suggest

additional conditions of loan (if any) to be added to the PFC‟s standard condition of loan.

CHAPTER 5 CASE OF ABC POWER

I TITLE: Xyz Power Generation Corporation Limited (XGCL) - proposal for Term Loan of

Rs. 485.0 Crores for execution of Abc Combined Cycle Power Project (1 x 100 MW) in Xyz

expected for completion by April 2012 at an estimated cost of Rs. 692.5 Crores.

II. INTRODUCTION

PFC vide letter dated 14/09/2007 (Loan No: 62401002) had sanctioned a term loan of Rs. 297.50 Crores

(72.7 % of the project cost) to Xyz Power Generation Corporation Limited (XGCL) for Abc Gas Based

Combined Cycle Power Plant Phase-I (100 MW) in Xyz which was expected to be completed by March

2010 at a total estimated cost of Rs. 409.07 Crores (including IDC). The balance fund of Rs. 111.57

Crores (27.3% of the project cost) was to be arranged from XGCL‟s own resources. The loan documents

for the project could not be executed mainly due to the delay in obtaining MoEF clearance and non

finalization of cost pending award of EPC contract and the validity of the loan has expired. MoEF

clearance has since been obtained in December 2008 and EPC contract has been awarded to BHEL in

January 2009 and the project cost is now being projected at Rs. 692.5 Crores.

Now XGCL vide letter no. XGCL/MD/NRPP/PFCL/425 dated 21/01/2009 (copy enclosed at Annexure –

I) has requested PFC for financial assistance upto 70% of the revised project completion cost.

The proposed project will replace the existing 134 MW Abc project (which has outlived its age) and is

scheduled for completion by April 2012 at an estimated completion cost of Rs. 692.5 Crores (including

IDC of Rs. 77.2 Crores), which will be financed through equity of Rs. 207.5 Crores (30%) by

Government of Xyz/ XGCL and a debt of Rs. 485.0 Crores (70%) from PFC.

III. ENTITY DETAILS

Introduction:

Xyz State Electricity Board (XSEB), was originally established in the year 1958 in the composite state of

Xyz under the Electricity Act 1948. The Board was reconstituted in 1975 after the state was trifurcated

into Xyz, def and ghi in 1972. XSEB was a vertically integrated power utility consisting of generation,

transmission and distribution divisions. During FY 2004-05, in exercise of powers conferred by section

131 and section 133 of the Electricity Act, 2003 Government of Xyz restructured the board by transfer

and vesting of functions, properties, interests, rights, obligations and liabilities of Xyz State Electricity

Board on the State Government and re-vesting thereof by the State Government in the following five

corporate entities :

Xyz Power Generation Company Limited (XGCL)

Xyz Electricity Grid Company Limited (AEGCL)

Lower Xyz Electricity Distribution Company Limited (LADCL)

Central Xyz electricity Distribution Company Limited (CADCL)

Upper Xyz Electricity Distribution Company Limited (UADCL)

This reorganization was notified by the transfer scheme of Government of Xyz vide memo dated

10.12.2004 and given effect vide order dated August 16, 2005. As per AERCs tariff order, the GoA vide

notification no PEL.133/2003/416 dated 07/June/2007, XSEB (operating as a trading licensee in the state)

has been allowed to undertake the limited functions of bulk purchase and bulk supply. Further the

government has notified that the purchase of electricity in bulk from XGCL would be the responsibility

of XSEB and XSEB would also supply electricity in bulk to DISCOMS.

XGCL is a company incorporated with the main object of undertaking electricity generation in the state of

Xyz as a state utility. In pursuance of finalization of the First Transfer Scheme notified by the

Government of Xyz vide Notification No. PEL.151/20003Pt349 dated 16.8.05, the updated opening

balance Sheet as at 1.4.2005 has been transferred to the Company. Therefore, 2005-06 is the first year of

preparation of Annual Accounts of the Company.

Presently, XGCL has 3 (three) power plants namely Abc Thermal Power Station (119.50 MW), Lakwa

Thermal Power Station (120 MW) and Karbi Langpi HEP(100 MW). The PLF and plant availability of

these projects are as given below:-

Sl.

No.

Name of Project PLF/ Plant

Availability

2005-06 2006-07 2007-08

1 Abc TPS PLF 39% 33% 49%

Plant Availability 40% 34% 50%

2 Lakwa TPS PLF 33% 45% 49%

Plant Availability 74% 79% 79%

3 Karbi Langpi

HEP(KLHEP)*

PLF - 18% 58%

Plant Availability - - 90%

*KLHEP: Unit-1 and Unit-2 was commissioned on 31.01.2007 and 20.03.2007 respectively.

Commercial operation of KLHEP was started from April, 2007. 18% PLF achieved during the year 2006-

07 was of in-firm power and availability was not counted for stabilization period of the units.

Financial Highlights

The financial of the XGCL (in Rs. Crores) are as follows:-

2005-06 2006-07 2007-08

REVENUE FROM WHEELING OF POWER 133.73 152.91 247.65

OTHER INCOME 1.78 9.91 13.94

TOTAL REVENUE 135.51 162.82 261.59

PBDIT 15.14 36.940 99.31

DEPRECIATION 42.91 32.18 51.10

INTEREST 23.40 7.36 39.93

PROFIT BEFORE TAX -51.18 -2.74 8.28

PROFIT AFTER TAX -51.26 -2.81 8.21

EQUITY CAPITAL 455.86 455.86 455.86

RESERVES & SURPLUS 0.00 7.41 11.73

NETWORTH 455.86 463.27 467.59

TOTAL BORROWING 281.80 355.63 462.89

REPAYMENTS 12.53 19.05 30.13

NET FIXED ASSETS 160.75 600.16 565.91

RECIEVABLES 0.99 1.43 3.83

NET MARGIN (PAT/REVENUE) -37.83% -1.73% 3.14%

RoE -11.24% -0.62% 1.80%

RoNW -11.24% -0.61% 1.76%

RoCE -3.78% 0.56% 5.17%

DEBT EQUITY RATIO 0.62 0.78 1.02

DSCR 0.42 1.39 1.42

RECEIVABLES (DAYS) 3 3 6

AVERAGE COST OF SUPPLY(Rs./KWh) 2.49 2.00 1.72

AVERAGE REVENUE(Rs./KWh) 1.80 1.97 1.77

SURPLUS (Rs./KWh) -0.68 -0.03 0.06

The Company‟s revenue from main operations grew by 61.96% at Rs. 247.65 Crores in 2007-08 as

against Rs. 152.91 Crores ring 2006-07 mainly due to increase in energy generation. There is

considerable improvement in net margin, RoE, RoNW and RoCE. The DSCR has improved to 1.42

during 2007-08 as against 1.39 during previous year. The receivables are excellent which just 6 days in

2007-08.

Business History

The status of loan sanction, execution, disbursement etc. w.r.t. XGCL as on 27.04.2009 is given below:-

Rs. in Crores

1 Loans Sanctioned and Executed 445.69

2 Loans yet to be executed 315.80

3 Total Sanction (1+2) 761.49

4 Total Disbursement 355.38

5 Total Repayment (4-6) 83.36

6 Outstanding 266.61

7 Committed disbursement from executed loans (1-4) 100.31

8 Exposure attained (2+6+7) 682.72

Entity Categorization

XGCL has been assigned Category B-notified as on 10.12.2008 and valid upto 31st March, 2009.

(Categorization as on 1/4/2009 is under approval in which XGCL is categorised as Category-A)

Exposure Limit

The maximum permissible exposure for XGCL is 100% of PFC‟s networth under prudential norms and

80% of PFC‟s networth under the OPS. The networth of PFC as on 31st December, 2008 stood at Rs.

9248 Crores. The details of actual and balance exposure applicable to XGCL as on 31st December, 2008

is as under:-

(Rs. in Crores)

Under Prudential

Norms

Under OPS

Maximum Permissible Exposure 9248.00 7398.00

Actual Exposure 683.00 683.00

Balance Exposure (Sanction Limit)

available

8565.00 6715.00

Submission of Annual Accounts

As per standard terms and conditions, the Borrower shall furnish to the Corporation the unaudited annual

accounts, within three months and audited accounts within seven months of the close of the year to which

the accounts relate. XGCL has furnished the un-audited annual accounts for 2007-08.

IV. PROJECT DETAILS

1.0 PROJECT PROFILE &TECHNOLOGY

1.1 The Project

XGCL has proposed to set up the combined cycle power plant (CCPP) with an ultimate nominal capacity

of 200 MW within the premises of the existing 134MW gas units at Abc, District Dibrugarh, and Xyz. The

plant shall be constructed in two phases each of 100 MW nominal capacity. The total capacity of the existing

Abc project is 134 MW with the following configuration

S.No Head Make Commissioned

On

a) 23 MW (Gas Turbine- 1) WCL 01-04-65

b) 23 MW (Gas Turbine- 2) WCL 01-04-65

c) 23 MW (Gas Turbine- 3) WCL 01-04-65

d) 30 MW (Steam Turbine) WCL 22.07.85

e) 22 MW (Heat recovery) BHEL 01-07-76

f) 12.5 MW (Gas Turbine- 4 Open Cycle) BHEL 01-04-90

Most of these machines have outlived their age. Maintenance of the power plant has become difficult

because of the non-availability of spares as the existing units were installed 30-40 years back and out of

these six units installed in the existing plant only units 1, 3, 5 and 6 are in running condition. The plant is

currently operating at annual PLF below 50%.

The present proposal is for financial assistance for Abc Combined Cycle Power Plant Phase-I (100 MW)

in District Dibrugarh, Xyz. The existing units are proposed to be phased out once the new plant is fully

commissioned. XGCL has also informed that the second phase of the plant shall be constructed depending on

the availability of additional gas for the same.

1.1.1. Project Purpose

The following tangible and intangible benefits from the Project are envisaged:

a. 100 MW capacity to the existing Abc Combined Cycle Gas Power Project which will generate 620

MU annually at 72% PLF.

b. Improvement in Plant Load Factor thus saving fuel which is a national resource along with additional

annual generation of approximately 300 MU.

c. Improved cost of generation because of higher efficiency.

1.1.2 Project Scope

The works covered under the scope of the Abc Combined Cycle Gas Power Project are given below:

Supply and Erection of:

a) Gas turbines

b) Generators, Steam Turbines

c) HRSG (Heat Recovery Steam Generators)

d) All auxiliary equipments

The scope of services for the project for contractor would include:

a) Engineering

b) Equipment handling

c) Project management

d) Control

e) Erection and commissioning

f) Supervision and Documentation

The civil works included in the scope of work will be Generator Turbine Building, Steam turbine building

and air washer rooms along with the foundation works for these building and other such structures

required for the proper functioning of the plant.

1.2 Location & Site

XGCL proposes to install the proposed expansion project within the premises of its existing 134MW gas

based power station at Abc. The project is located near Abc village in Dibrugarh district of Xyz. The

nearest town is Naharkatia which is about 15 km from the project site.

Nearest Highway NH37, 70km

Nearest Railway Station Abc with BG connectivity, 10km

Nearest Airport Dibrugarh, 70km

1.3 TECHNOLOGY

The Combine Cycle Power Plant configuration will have 1 Gas Turbine Generator, 1 Heat Recovery

Steam Generator (HRSG) and 1 Steam Turbine Generator (STG) and associated auxiliaries.

In a Gas Turbine based Combined Cycle Power Plant (CCPP), the hot exhaust gases from the Gas

Turbine are passed through heat recovery steam generator to generate steam, utilizing the residual heat

content of the exhaust gas. The generated steam is expanded in a steam turbine to generate additional

power. The high thermal efficiency of CCPP is due to combination of the two thermodynamic cycles,

Brayton cycle and Rankine cycle. The efficiency of a thermodynamic system depends directly on the

difference between temperatures of the source and the heat sink.

In conventional steam cycle (Rankine cycle), the average temperature of heat exchange with the heat

source is limited by steam temperature at inlet to turbine, which is at present, about 5400C for techno-

economic reasons in case of steam turbines. The steam cycle is however privileged by the very principle

of condensation which allows a low heat exchange temperature with the heat sink. The industrial Gas

Turbine cycle (Brayton cycle) presents the reverse situation. A high inlet gas temperature (11000C to

12000C) to Gas Turbine results in a high average heat exchange temperature with the heat source. A

highly favourable factor, however, is the discharge of hot exhaust gas at temperature around 5000C to

6000C.

Combining the above two cycles is a most optimum method and attractive way of enhancing the overall

efficiency. They are complementary in that the heat exchange with the gas cycle heat source occurs at

high temperature and the exchange with the steam cycle heat sink occurs at low temperature. Thus two

very different cycles, each having different thermodynamic limitations, are combined into a very efficient

energy system, the Gas Turbine‟s role being the main contributor to the total output.

Further, the combined cycle power plants have the advantage of simplicity as well as quick start and load

change capability. They have a high ratio of power output to ground space occupied and a lower heat rate

compared to steam plants of comparable size. The only limitation of CCPP is the requirement of clean

fuel and relatively low efficiency when operating in open cycle.

CONSULTANTS: The Detailed Project Report (DPR) has been prepared by NTPC National

Productivity Council has completed the Environmental Impact Assessment studies.

POWER EVACUATION: The power from the plant is proposed to the evacuated through the existing grid

network of the state. XGCL has informed that the same is adequate for evacuation of power from the project.

The power generated from the plant will be stepped up to 220kV and will be evacuated through the 220kV

lines. An additional 220kV tie has been proposed to connect the switchyard with the 220kV switchyard of

AEGCL. Further, the proposed project would be setup in the premises of the existing 134 MW gas based

plant of XGCL at Abc, which is proposed to be phased out once the new plant is fully commissioned.

1.4 EPC CONTRACT

EPC contract has already been awarded to BHEL. The contract has been awarded through international

competitive bidding route and the tender process was completed in January 2009 and LOI was issued to

BHEL.

According to the LOI, the plant will be commissioned in 35 months from the zero date for the project.

Advance amounting to Rs. 18 Crores has already been released to BHEL and the final contract will be

signed soon. The contract is awarded at a cost of Rs. 564.6 Crores and is a firm price contract.

The project also requires the diversion of water intake from the existing units to the Project. The contract

for the diversion of intake will be awarded separately and may be awarded locally.

1.5 STATUS AND PREPAREDNESS

The land required for the project is already in possession of XGCL. Further XGCL has obtained MoEF

clearance for the present proposal. The evacuation facilities already exist and the fuel supply agreement is

already in place. XGCL had already entered into a MoU with XSEB for the sale of power. The turnkey

contract has already been awarded to BHEL and work is expected to start shortly.

1.6 PROJECT INPUTS

Land: It has been informed that approximately 23 acres of land shall be required for the proposed Phase-I

project. XGCL has already identified about 30 acres of land for the proposed project within the existing

area which is already under the possession of XGCL.

Water Availability: XGCL intends to meet the water supply requirement for the proposed project from

the Dilli River, at a distance of about 6km from site, as is being done for the existing project of XGCL at

Abc. XGCL has proposed to construct a new raw water intake pump house near Dilli River and install

new pump sets, while utilizing the existing clarifloculators (sedimentation process equipment) and pipe

lines for transportation of water. XGCL has informed that similar arrangements are already in place for its

existing power plant at Abc.

Construction Power: The requirement for supply of construction power is proposed to be met from the

existing power plant of XGCL at Abc.

Construction Access: The site is accessible by air, rail and road. Approach road to the site from the

nearest town and national highway already exists. XGCL has informed that the road has sufficient load

carrying capacity for transportation of machinery and equipment.

1.7 PROJECT INFRASTRUCTURE DEVELOPMENT

The existing Abc Combined Cycle Power Project is accessible by air, rail and road. Approach road to the

site from the nearest town and national highway already exists. The site has sufficient road carrying

capacity for transportation of machinery and equipment.

1.8 ENVIRONMENT MANAGEMENT

The existing Abc Combined Cycle Power project site is being used for the extension project and therefore

no forest clearance is required. Also no rehabilitation and resettlement is required. XGCL has obtained

environmental clearance from the Ministry of Environment and Forest for the proposed project. Further

since the land is already in possession there are no Rehabilitation and Resettlement (R&R) issues.

1.9 OPERATION AND MAINTENANCE

Operation and maintenance (O&M) of the facilities will be carried out by XGCL. XGCL has necessary

experience as they are already operating and maintaining the existing 134 MW Gas Based Abc Combined

Cycle Power Project..

2.0 CLEARANCES/ LINKAGES

No. CLEARANCE/

LINKAGE

CONCERNED

AGENCY

STATUS

1. Board Approval XGCL Obtained

2. Environment &

Forest Clearance State Govt. Obtained

3. Clearance for

Chimney height AAI Obtained

4. Water Availability C W C / State

Government

The water supply requirement is

proposed to be met from the water

system in place for the existing

power plant of XGCL at Abc from

river Dilli at distance of 6 km.

5. Fuel Linkage Min. of P&NG

XGCL has informed that the gas

supply arrangements for its existing

power plant shall be utilized for the

proposed project. A pre-

disbursement condition in this

regard has been stipulated.

6. Power selling

arrangement XSEB/DISCOMs

XGCL has already entered into an

MoU with Xyz State Electricity

Board (XSEB) on 22nd

Aug, 2007

for sale of power from the

proposed Phase-I (100MW)

project.

7. Power evacuation AEGCL/Concerne

d utilities

XGCL has proposed to utilize the

existing network of the state for

evacuation of power and has

informed that the same is adequate

for the proposed project.

3.0 PROJECT REVIEW

3.1 NEED & JUSTIFICATION

The energy requirement and availability for the state of Xyz for the past 6 years is given in the table

below

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

Apr20 08-Jan

2009

Energy Requirement

(MU) 3527 3787 4051 4297 4816 4354

Energy Availability

(MU) 3321 3582 3778 3984 4412 3874

Energy Deficit (MU) -206 -205 -273 -313 -404 -480

Energy Deficit % -5.8% -5.4% -6.7% -7.3% -8.4% -11.0%

The peak demand and peak deficit for the state of Xyz is given in the table below

2003-

04 2004-05

2005-

06

2006-

07

2007-

08

Apr 2008-Jan

2009

Peak Demand

(MW) 738 659 733 771 848 958

Peak Met (MW) 635 621 679 688 766 787

Peak Deficit (MW) -103 -38 -54 -83 -82 -171

Peak Deficit % -14% -5.8% -7.4% -10.8% -9.67% -17.85%

As seen in the above tables, Xyz is an energy deficient state. Hence replacing the existing Abc CCPP will

help bridge the demand supply gap.

Also the proposed Abc Combined Cycle Power Project was envisaged because of the poor performance

of the existing project and non availability of spares. Further since the efficiency of the existing machines

is low, the requirement of fuel for the generation of energy is more which meant higher cost of

generation. Thus replacing the existing Abc CCPP will help the economy by providing cheaper energy.

3.2 Linkages

Fuel Supply

XGCL is drawing 0.66 MMSCMD of gas from Xyz Gas Company Limited/Oil India Limited under the

agreement for its existing plant at Abc. As per XGCL has informed that this quantity of gas would be

sufficient for Phase-I (100MW) of the project, and that it is already under negotiation with Oil India

Limited for additional supply of gas to meet the requirement considering the ultimate capacity of 200

MW of Phase-I & Phase-II combined. A pre-disbursement condition in this regard has been stipulated

that

“if required, XGCL shall enter into/renew fuel supply and transportation agreement for the proposed

project. “

Fuel Transportation

The fuel required for the project is currently being transported through an underground pipeline of 500

MM N.B. this pipeline had been designed for a flow of 1.5 MMSCMD at 300 PSIg (Pound per Square

Inch gauge). After commissioning of the new project, the gas will be diverted through this pipeline with

minor modifications. No separate pipeline has been envisaged for this project.

4.0 PROCUREMENT PROCEDURE AND COMPETITIVENESS

The project has been awarded to BHEL. The tender was awarded through International Competitive

Bidding (ICB) route. The price offered by BHEL in the bid was Rs. 599.7 Crores. On negotiation with

BHEL the contract price was reduced to Rs. 564.6 Crores which will be a firm price contract. Letter of

Intent to BHEL has already been issued by XGCL along with an advance of Rs. 18 Crores.

5.0 IMPLEMENTATION PLAN

In the earlier proposal submitted to PFC, XGCL had estimated the completion time at 23 months for the

combined cycle but as per the new schedule the completion time has been increased to 35 months.

Considering the zero date for the project as June 2009, the project will get commissioned in April 2012.

6.0 COST ESTIMATE

The cost estimates as per LOI issued to BHEL are given below:

S. No. Head Amount

1. Preliminary works 0.50

2. Physical contingency 0.03

3. Supply ex-works 355.90

4. Freight Charges 5.80

5. Erection and commissioning 44.00

6. Civil works including tax 114.50

7. Spares including freight 44.40

8. Physical contingency 17.20

9. Evacuation cost 2.40

10. Intake Works 6.20

11. Pre commissioning Expenses 2.95

12. Environment Management plan 2.20

13. Financing charges 2.99

14. Establishment, Audit and Accounts 13.10

15. Training of O&M staff 0.50

16. Consultancy 2.62

Total Project Cost excluding IDC 615.2930

Interest During Construction 77.20

Total Project cost Including IDC 692.50

The phasing of expenditure for project in the above calculation has been considered as below:-

Year Amount in Crores

2009-10 138.5

2010-11 277.0

2011-12 277.0

TOTAL 692.5

Detail calculation of IDC is enclosed at Annexure- II

Reasonability of Cost Estimate:-

The cost per MW of the proposed project comes out to Rs. 6.93 Crores, which appears to be on higher

side. A comparison of the per-MW cost of the proposed Abc Combined Cycle Power Project & similar

projects is as follows:

S.

No

Scheme State Installed

capacity

Cost (Rs.

Cr.)

Rs. Crore

/ MW

Sanction

1 Pragati Power Delhi 1371

MW

5196 3.79 March

2009

2 Valathur Ph 2 Tamil Nadu 92.2 MW 377.47 4.09 Sept 2007

3 OTPCL

Pallatana

Tripura 726 MW 3429.3 4.71 Under

appraisal

4 Abc Xyz 100 MW 692.5 6.93 Instant

Proposal

The EPC contract for the project was awarded to BHEL based on International Competitive bidding. The

actual bid amount was 599.7 Crores by BHEL which on subsequent negotiations was reduced to 564.6

Crores. According to the environmental clearance given by MoEF, the project cost has been taken as

724.9 Crores which was based on the initial offer by BHEL. According to XGCL, the prices of the gas

turbines in the international markets have increased by a factor of 30%.

The cost of the project in plains differs with the cost of the project in hilly terrain. Also Xyz faces the law

and order problem and thus not able to find many bidders for the projects which also has a bearing on the

project cost being on the higher side. Hence the project cost arrived at is based on the actual tendered cost

and is therefore justified.

7.0 FINANCING PLAN

The proposed financing plan for the execution of project is as under:

SOURCES OF FUNDS Amount (Rs. Crore) % of Funding

PFC 485.0 70%

XGCL/ Govt. of Xyz 207.5 30%

TOTAL 692.5 100%

8.0 MARKETING AND SELLING ARRANGEMENT

XGCL has already entered into a MoU with Xyz State Electricity Board (XSEB) on 22nd

Aug, 2007 for

sale of power from the proposed Phase-I (100MW) project. The tariff shall be as determined by the Xyz

Electricity Regulatory Commission (AERC). A condition regarding the final PPA has been stipulated:

XGCL would enter into Power Purchase Agreement 3 months prior to the commissioning of the project

to the satisfaction of PFC.

9.0 OPERATIONAL COSTS, PRICES AND ASSUMPTIONS

The Financial analysis has been carried out based on the year wise expected tariffs (calculated as per

CERC norms). The project related assumptions for the purpose of financial modeling are detailed below:

-

Assumptions

Performance Parameters

Capacity 98.4 MW

Station Heat Rate (Kcal/kWH) 1705

Plant Load Factor 72%

Calorific Value of Gas 8200 Kcal/m3

Rate per SCM (Rs. /SCM) 2.436

Project Commissioning date April 2012

Gross Generation 620 MU

Net Saleable Energy 583 MU

Total Aux cons. 6.1%

Plant life 25 years

Discounting Factor 12%

Financial

Debt Rs. 485.0 Crores

Equity Rs. 207.5 Crores

Repayment 15 years

Interest Rate (post-COD) 12.00% p.a.

Interest Rate (pre -COD) 12.25% p.a.

Interest on Working capital 12.00%

Working capital months taken 2

ROE payable in MAT year 17.50%

ROE payable in Corporate Tax Year 23.25%

Depreciation Rate

Civil Works CERC 3.34%

Machinery CERC 5.28%

Civil works Taxation 10% (WDV)

Machinery Taxation 25% (WDV)

Income Tax

Rate 30%

Surcharge 10%

Education cess 3%

MAT

Rate 10%

Surcharge 10%

Education cess 3%

For calculating IDC, uniform phasing of total expenditure in a year across each quarter is assumed. The

yearly phasing for the project has been assumed at 20% for the 1st year, 40% for the 2

nd year and 40% for

the 3rd

year.

10.0 COST BENEFIT ANALYSIS

10.1 Physical Benefits

The power output will be 98.4 MW. The net energy generation would be 620 MUs annually. The net

saleable energy at the bus bar after an auxiliary consumption of 6.1% is 583 MUs.

10.2 Financial and Economic Analysis

Tariff: The tariff for the project in a year is calculated based on CERC guidelines and details are as

follows:

Rs./ kWH

Cost of Generation Tariff

1st Year 2.29 2.91

Levellised 2.27 3.03

The tariff calculation is enclosed at Annexure –III.

FIRR: The Financial Internal Rate of Return (FIRR) of the project considering the benefits of the project

as per Para 10.1 above for borrower works out to be 15.41%. The detailed calculations are given at

Annexure –IV.

DSCR Calculations: The DSCR for the instant project is given below:

DSCR Value

Average 1.33

Minimum 1.26

Maximum 1.55

The detailed calculations are given at Annexure-IV (page 2 of 2).

10.3 COMPARISON WITH EARLIER LOAN

PFC had sanctioned a term loan of Rs. 297.50 Crores to Xyz Power Generation Corporation Limited

(XGCL) for Abc Project in 2007. The comparison of the various parameters of the earlier sanction with the

instant proposal is given below

Parameter Earlier sanction Instant Proposal

Capacity 98.4 MW 98.4 MW

Expected Completion date March 2010 April 2012

Completion Cost Rs. 409.07 Crores Rs. 692.5 Crores

Loan Amount Rs. 297.5 Crores Rs. 485.0 Crores

Loan Percentage 72.7% 70%

IRR 13.3% 15.41%

First Year Tariff Rs. 1.96/kWH Rs. 2.91/kWH

Tariff (Levellised) Rs. 1.83/kWH Rs. 3.03/ kWH

Station Heat Rate 2030 Kcal/ KWH 1705 Kcal/kWH

ROE 14% 15.5%

Gross Generation 701 MU (at 80% PLF) 620 MU (at 72% PLF)

Loan Tenure 10 years 15 years

Interest Rate Post COD 11.5% 12.0%

11.0 PROJECT RISK ANALYSIS AND SENSITIVITY ANALYSIS

A brief description of risk factors associated with the project and arrangement for their mitigation are

given below:

Time overrun: The project is located in North East where progress is affected by the frequent law

and order problems. According to the LOI issued to BHEL, the completion time for the project is 35

months. The implementation schedule in the earlier sanction by PFC was 23 months which has now been

increased. Since the schedule has already been stretched by 12 months, the risk of time overrun is

expected to be minimal.

Escalation in project cost: Due to time overrun and increase in interest rates the cost of the project

gets escalated. The contracts for the project have already been awarded on a firm price. The interest rates

are likely to decrease in the coming months and since the project has been awarded lately with increased

implementation duration, risk of escalation in project cost is minimized but cannot be ruled out.

Fuel Linkage: Some of the gas based projects in the past have faced crisis because of the

unavailability of gas in spite of the gas tie-up. XGCL currently has a fuel tie-up of 0.66 MMSCMD being

used for the existing project. Hence no major problem is anticipated. However if the gas linkage needs to

be modified for the power plant, XGCL will have to get the FSA modified. A condition in this regard has

been stipulated

The sensitivity analysis for the project is given at Annexure- V.

12.0 POLICY ISSUES

Reimbursement/ adjustment of IDC

In order to ensure smooth flow, it is proposed that IDC for PFC loan amounting to about Rs. 77.2 Crores

will be reimbursed/ adjusted. With the sanction of PFC loan financial closure will be achieved and this is

allowed as per policy.

13.0 OVERALL LOAN JUSTIFICATIONS

Entity Related Criteria

As per OPS, the eligibility criteria for XGCL are as under:-

a) As per PFC policy, XGCL is eligible for financial assistance from PFC and comes under grade B

(Categorization as on 1/4/2009 is under approval in which XGCL is categorised as Category-A).

b) XGCL has not been declared as defaulter

c) The sanction limit available to XGCL as on 31st December 2008 works out to Rs. 6715 Crores in

terms of OPS.

As per OPS, financial assistance will normally be provided for the projects which meet the following

criteria:-

a) Are techno-economically sound with Financial or Economic Rate of Return of not less than 12% (as

may be applicable).

b) Are feasible and technically sound and provide optimal cost solutions for the selected alternative.

c) Are compatible with integrated power development and expansion plans of the

State/Region/Country.

d) Compliance to environmental guidelines, standards and conditions.

e) Schemes should have obtained the required clearances.

XGCL has obtained all the statutory clearances and land has already been acquired for the project. The

project is techno-economically viable with FIRR of 15.41%. Investment cost of about Rs. 6.93 Crores per

MW is high but is based on the actual tendered cost. The project will generate 620 MU of energy

annually and expected tariff at Rs. 2.91 per unit in the first year of generation is attractive. The project is

compatible with the expansion plans of the State/Region/Country.

As per policy of PFC, 80% of the project cost can be considered for sanctioning of loan. In the instant

case XGCL has only sought financing for 70% of the project cost.

In view of physical benefits as above, positive EIRR and FIRR being projected, the loan proposal is

justified.

14.0 SECURITIES AND REPAYMENTS

Security: Security for this loan is proposed as below:

(i) XGCL shall offer security towards repayment of loan in the form of charge on assets of the

project (Abc Combined Cycle Power Project Phase-I), both movable and immovable, present and future,

to the satisfaction of PFC.

(ii) XGCL shall also open/enhance escrow account as per PFC policy

Repayment: Repayment shall be made in 60 quarterly instalments after a 6 months principal moratorium

period from the date of commissioning of the project.

VI. RECOMMENDATIONS AND SPECIAL CONDITIONS

XGCL has obtained major statutory clearances and land required for the project is already in possession

of XGCL. No Rehabilitation and Resettlement issues are involved in the project. The project has already

been accorded environmental clearance by the Ministry of Environment and forest. The project is techno-

economically viable with FIRR of 15.41%. Investment cost of about Rs. 6.93 Crores per MW is high but

is based on the actual tendered cost. The project will generate 620 MU of energy annually. XGCL has

already entered into an MoU with Xyz State Electricity Board (XSEB) for sale of power from the

proposed Phase-I (100MW) project and a firm PPA will be signed before the commissioning of the

project.

As per policy, upto 80% of the project cost can be considered for sanctioning the loan. However in this

case, XGCL has sought financing for 70% of the project cost.

In view of physical benefits as above, positive FIRR being projected, the loan proposal is justified and it

is recommended that the proposal for providing Rupee Term Loan of Rs. 485.0 Crores. (Rupees Four

Hundred Eighty Five Crores only) to XGCL for Abc Combined Cycle Power Project Phase-I , on

standard terms and conditions, as applicable to thermal generation schemes in the state sector, security

package mentioned in Para 14.0 above and applicable additional conditions may be approved by the

Loans Committee.

If the proposal is agreed to, Loans Committee of Directors may consider passing the following resolution:

SPECIAL CONDITIONS

Pre-Commitment Condition

1. XGCL to furnish an undertaking that it shall obtain all statutory and non statutory clearances as

and when required during the implementation of the project.

Pre-Disbursement conditions

1. XGCL shall enter into/renew fuel supply and transportation agreement for the proposed project, if

required.

2. XGCL to provide the source of equity to the satisfaction of PFC. Alternatively, XGCL to arrange

a letter of comfort from Govt. of Xyz addressed to PFC expressing the commitment to meet any shortfall

in equity requirement for the project.

3. NOC & ceding from the existing lenders, if any, shall be obtained.

Other conditions

1. XGCL would enter into a Power Purchase Agreement 3 months prior to the commissioning of the

project to the satisfaction of PFC.

2. Reimbursement of expenses incurred from 14.06.07 shall be permissible for the project.

Chapter 6: BIBLIOGRAPHY

Agarwal, Aman, "A New Approach & Model for Weather Derivative Instrument based on Water Table

for Floods, Droughts and Rainfall" prepared for Financial Sector Development Department, The World

Bank, Washington DC, USA; Finance India XVI No 3, September 2002.INDIA

Agarwal J. D., Agarwal A. (2004), "Financing of Power Projects", International Conference on “India

Hydro 2004” Indian Institute of Finance, Delhi

CIME, “India's Energy Sector”, CIME July 1995

Economic Survey, 2002-03, Government of India

Raghuram G.; Rekha Jain; Sidharth Sinha; Prem Pangotra and Sebastian Morris, "Infrastructure

Development and Financing", MacMillian India Ltd.

http://www.cercind.gov.in/

http://www.pfcindia.com/

http://www.powermin.nic.in/

http://www.sbicaps.com/

Chapter 7: APPENDICES

Annexure 1: Abbrivations

ADB Asian Development Bank

APDRP:- Accelerated Power Development and Reforms Programme

BLOT Build-Lease-Operate-Transfer

BOOT Build-Own-Operate-Transfer

CCPP Combined Cycle Power Plant

CEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

CTU Central Transmission Utility

DISCOMS:- Distribution Companies

FCL:- foreign currency loan

IPPs Independent Power Producers/Projects

OPS Operational Policy Statement

O&M Operations and Maintenance

PFC Power Finance Corporation Ltd.

PPA Power Purchase Agreement

PSA Power Sale Agreement

RFP Request for Proposals

RM&U Renovation, Modernization and Upgrading

R&M Renovation & Modernization

RTL:- Rupee term loan

SEB State Electricity Board

Annexure 2: Calculation of IDC and Project completion cost

Project Cost (Without IDC) 615.3 Rs. Crores

IDC 77.2 Rs. Crores

Project Cost with IDC 692.5 Rs. Crores

2009-10 2010-11 2011-12

20.00% 40.00% 40.00%

Expenditure 138.5 277.0 277.0

Equity 41.5 83.1 83.1

DEBT 96.9 193.9 193.9

Cumulative Debt 96.9 290.8 484.7

IDC 5.9 23.8 47.5

total idc 77.2

Annexure 3: Sensitivity Analysis

Base Case Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7

Independent Variables

Interest on Term Loan Pre COD 12.25% 12.75% 12.25% 12.25% 12.25% 12.25% 12.25% 12.75%

Interest on Term Loan Post COD 12.00% 12.25% 12.00% 12.00% 12.00% 12.00% 12.00% 12.25%

PLF 72.00% 72.00% 60.00% 72.00% 72.00% 72.00% 72.00% 72.00%

Per Unit Price of Natural Gas 2.44 2.44 2.44 2.44 5.00 8.00 2.44 5.00

Calorific Value of Gas 8200 8200 8200 7000 8200 8200 8200 7000

Auxiliary Consumption 6.10% 6.10% 6.10% 6.10% 6.10% 6.10% 9.00% 9.00%

Dependent Variables

Project Cost 692.48 696.05 692.48 692.48 692.48 692.48 692.48 696.05

FIRR 15.41% 15.59% 15.37% 15.45% 15.66% 15.95% 15.41% 15.92%

Average DSCR 1.33 1.35 1.35 1.35 1.35 1.35 1.35 1.35

Minimum DSCR 1.26 1.28 1.29 1.29 1.29 1.29 1.29 1.28

Levellised Tariff 3.03 3.05 3.46 3.17 3.91 4.94 3.12 4.36

Levellised Cost of Generation 2.27 2.28 2.54 2.40 3.14 4.17 2.33 3.56

Annexure 4: Tariff Calculations

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Annexure 5: Projected Cash Flow Statement

Annexure 6: Projected Balance Sheet