Course: Credit Management (Assignment II) NIBM, Pune

Assignment 2

Case: Angul Thermal Power Limited (ATPL)

ATPL proposes to set up a domestic coal based sub-critical thermal power project in
Angul District in Orissa. The project will have an aggregate power generation
capacity of 1800 MW comprising three units of 600 MW each. While the first two
units of 600 MW each are already implemented, the company now proposes to take
up the third unit of 600 MW for implementation.

Sale of power:

14% of the power to be generated from unit III of the project would be supplied to
Grid Corporation of Orissa Ltd (GRIDCO) on variable cost basis, upto 66% to Tata
Power Trading Company Ltd. (TPTCL) on profit sharing basis with a minimum
guaranteed tariff level of Rs.2.70 per unit & the remaining 20% will be sold on
merchant basis.

Fuel Linkages:

The proposed unit will require coal of about 2.485 MMTPA for the capacity of 600
MW based on the calorific value of 4260 kcal/kg, 85% PLF and Station Heat Rate
(SHR) of 2370 Kcal/KWh. The requirement of coal for phase-II and phase-III of the
project is proposed to be met from Mandakini coal block in Talcher Coalfields,
Orissa which has extractable reserves of 287.88 MT, allotted to the company jointly
with two other power projects under implementation by other promoter groups.
ATPL’s share of extractable coal from the coal block is 95.96 MT. The coal available
from its captive coal mines would be sufficient to meet the company’s requirement
for around 19 years for Phase-II & III. The PPA for at least 75% of the power
generated from 600 MW for Phase III would be signed before seeking disbursement
of the term loan

Project Tariff & Cost of Generation:

(Rs/KWh)
Financial Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Year ending 14 15 16 17 18 19 20 21 22 23 24
Cost of
generation 1.87 1.88 1.85 1.82 1.79 1.77 1.75 1.72 1.70 1.69 1.67
Levelised cost of generation for project life = Rs.1.81
Blended
Tariff 2.43 2.44 2.44 2.44 2.44 2.44 2.45 2.45 2.45 2.46 2.46
Levelised tariff for project life =Rs.2.45

Page 1 of 8
Course: Credit Management (Assignment II) NIBM, Pune

Repayment period: Door-to-door 141/4 years including construction period of 2 ½

years and moratorium of 6 months from date of commissioning (COD).

DPR: Prepared by Prime Power Consultants India Ltd

EPC Contract: Company proposes to award Boiler, Turbine & Generator (BTG)
Package contract to Bharat Heavy Electrical Ltd (BHEL) shortly.

Provisional DCCO: 01.01.2014. DCCO to be finalized and documented prior to

disbursement

Status of existing Project: Completed.

Lead Arranger: Appraisal & PIM by SBI Caps.

Underwriting: By three banks for Rs 2370 crores.

Cost of Project & Means of Finance:

Item Amt % Item Amt %

Land and R & R Cost 105 3.32 Equity: Promoters 400
10.98 Equity: Investors 100
Civil & Structural Works 347
14.30 Sub Debt: Investor290 25
Sub-total (Land + Civil Works) 452 790
Boiler Turbine generator (BTG) 1671 52.90 Rupee Term Debt 2370 75
Balance of Plant (BOP) 564 17.84
Sub-total (Plant & Machinery) 2235 70.74
Sub-total (Hard Costs) 2687 85.04
Pre-Operative Expenses + Misc 96 3.03
Interest During Construction (IDC) 278 8.80
Contingency (3% of Hard Cost) 81 2.56
WC Margin 18 0.57
Sub-total (Soft Costs) 473 14.96
Total Project Cost 3160 100.00 Total 3160 100

Promoters

 ABC group is among respectable business conglomerates of India. The group

is engaged in diversified business. The group has diversified into Power
Sector through its subsidiaries and is already implementing 1200 MW.

Page 2 of 8
Course: Credit Management (Assignment II) NIBM, Pune

Environmental clearance

 The company has already obtained environmental clearances for phase-I&II

of the project. All environment clearances including MoEF clearance,
clearance from State Pollution board would be obtained by the company
before seeking any disbursement from the lenders. The company would also
agree to comply with all the conditions of these clearances.

Land acquisition

 The total land required for the proposed project is estimated at about 1375
acre. Land of about 1054 acres out of critical land of 1075 acres is already in
the company’s possession and the additional land would be required for ash
dumping and green belt. Company is in the process of identifying the
required land and the land acquisition would be completed by Dec 2010.

Water allocation

 The company has been allocated of 40 cusecs of water and would need to
obtain additional allocation of 8.3 cusecs of water for Ph-III, which would be
obtained before disbursement

Equity

 Equity requirement for the phase-III is estimated at about Rs. 790 crores.
ATPL is planning to raise funds via IPO / private equity to the extent of Rs
800 crores to part fund its ventures in power sector. As per SBI CAP IM,
Company will make upfront equity infusion of 35% before seeking
disbursement of funds from the lenders.

 Further, promoters will undertake that during debt repayment period, they,
along with other group companies and individual family members, will hold
directly or indirectly at least 51% shareholding in the holding company JIPL
and also give sponsor support undertaking to fund any equity shortfall & also
to fund any cost overrun in the project.

 The internal accruals / investible surpluses of these promoting companies

coupled with the undertaking to fund any equity shortfall provides
reasonable comfort with regards to timely equity contribution for the
project.

Debt

Page 3 of 8
Course: Credit Management (Assignment II) NIBM, Pune

 ATPL is a part of ABC group having a satisfactory past track record of

completing projects on time and its borrowings has high acceptance in the
financing community.
 The company has already successfully tied up debt requirement for phase-
I&II of the project.
 ATPL would seek disbursement of funds only after securing full tie-up of
entire debt requirement for the Project.

Technology

 Boiler-Turbine-Generator (BTG) package is proposed to be supplied by

BHEL, largest engineering and manufacturing enterprise in India in Energy
Sector. BHEL has installed power generation equipment totalling more than
90,000 MW
 The company is in the process of finalizing contracts for balance of plant
packages. It is also proposed that Tata Consulting Engineers (TCE) would be
appointed as project management consultant to advise the company in
smooth integration of different packages.
 Contracts for BTG Package and other equipment will have liquidated
damages provision to take care of any shortfall in performance parameters
and delays.

Cost overrun

 ATPL will be implementing the project through multiple package contract

routes. The project would be divided into 23 major packages and each
package would be executed by capable and reputed contractor. Package
route has been decided so as to economise on the capital cost of the project.
 BTG package which comprises of approx. 50% of the project cost has already
been finalised for phase-I&II. Estimate for phase-III has been based on the
above experience with adequate provision for cost escalation.
 A contingency provision of 3% has been assumed in the Project cost to take
care of any unforeseen costs. Necessary provision for escalation in various
components of ingredient costs has been assumed in the base case.
 ATPL, ABC group would provide undertaking to meet cost over-run in cost of
Project solely from their own sources.

Time overrun

 ATPL has already acquired the critical land for the project and initial
developmental activities are already in place for the phase-I & II of the project.

Page 4 of 8
Course: Credit Management (Assignment II) NIBM, Pune

 The BTG contract with BHEL is a fixed-time contract, with applicable LDs for
delay in implementation of the Project, which would considerably mitigate the
time over-run risk.
 TCE has been appointed as the project management consultant and would be
responsible for coordinating between different packages.

Offtake

 PPA for at least 75% of installed capacity would be signed to the satisfaction of
lenders before disbursement of the term loan.
 14% of the power would be supplied to GRIDCO on variable cost basis. Out of
balance power, up to 66% would be sold to TPTCL on the lines of arrangement
for phase-I&II.
 In view of the deficit between power demand and supply in the country,
offtake is not considered to be a problem.

Payment

 The company is expected to obtain the following for payment security

against the power supplied.
 Irrevocable, revolving Letter of Credit (LC) covering 105% of one month’s
estimated billing for sale to Gridco.
 Irrevocable, revolving Letter of Credit (LC) covering of 19 days estimated
billing for sale to TPTCL.
 In case of payment default by the Procurers, ATPL will also have the option of
selling the power to third parties.

Evacuation arrangement

 ATPL will build its own transmission line for power transmission from the
project site to the nearest PGCIL sub-station at Angul, which is at a distance
of around 56 kms. The company will obtain open-access from PGCIL for
onward transmission of power to the eventual power off-takers.

 ATPL has already initiated Bulk Power Transmission Agreement (BPTA) with
PGCIL along with other 6 IPPs for evacuation of power for first two units.

 The company would construct a single circuit dedicated transmission line for
Ph-III from the project site to the Angul substation. Cost of the same has been
included in the project cost.

Page 5 of 8
Course: Credit Management (Assignment II) NIBM, Pune

Performance shortfall

 Shortfall in performance parameters, viz. rated capacity and other associated

parameters (such as station heat rate and auxiliary power consumption) will
result in a reduction in profit margins.

 BTG package is proposed to be awarded to BHEL, who would be supplying

the similar equipment for phase-I&II also. BHEL is considered to be a reliable
power equipment supplier with adequate experience with Indian weather
and coal conditions. The equipment package contracts will have necessary
and adequate liquidated damages provision for any shortfall in performance
from guaranteed parameters.

Regulatory risk

 Power Generation is one of the key thrust areas for the Govt and any adverse
regulatory change is highly unlikely.
 All the requisite approvals would be taken prior to commencement of
operations / as and when required

Operations and maintenance

 The O&M activities will be carried out in-house by the company.

 Escalation in O&M costs may impact the financials. Impact of the same has
been analysed and debt servicing has been found to be satisfactory.

Fuel availability

 The coal requirement for 600 MW of Ph-II and Ph-III each has been estimated
to be around 2.485 MMTPA each. The same is proposed to be met from the
coal to be mined from the coal block allocated to the company and being
developed in JV with Tata Power and Monnet Ispat Ltd. The company’s share
from the extractable reserves i.e. around 95.96 MMT would be sufficient to
meet the coal requirement of Ph-II and Ph-III for around 19 years, which
would ensure adequate coal during the tenor of the proposed term loans.

Coal transportation

 The captive coal mine is located at a distance of about 4 Kms from the plant
site. Transportation of the coal from the captive mines to the project site will
be through conveyor belts.

Non availability

 It may be mentioned that operating performance of the power plants in the

country has been steadily going up with plants under private management
reporting PLF of over 90%. Considering the proposed sourcing of BTG from

Page 6 of 8
Course: Credit Management (Assignment II) NIBM, Pune

BHEL, the project is not expected to face any difficulty so far as availability is
concerned.

Foreign exchange risk

 The entire revenues and expenses of ATPL during the operations period will
be in Indian Rupees. However, the company is exposed to currency
fluctuations to the extent of import component of plant & machinery cost,
which may be marginal. Hence, it can be safely assumed that the company is
not exposed to any currency fluctuations during the operations of the
company.
 In case the company opts for financing through ECA/ECB, it will be exposed
to foreign currency fluctuations as it does not have natural hedge. Hence, it
may have to obtain necessary cover against currency fluctuations.
 A contingency margin has been built in while finalising the cost of imported
plant and machinery

Interest rate risk

 Interest rates considered for project funding are in line with the market.
 Sensitivity analysis for interest rates going up by upto 1% above the base
case indicates a comfortable debt servicing capability.

Demand

 The power sector in the country is expected to be plagued in the near future
with significant energy shortages. Also, environmental impact of hydel power
projects tends to increase resistance to such projects, thus crating delays.
Further, power generated from alternate sources of fuel, viz. LNG, natural gas
and naptha, is not expected to be competitive as compared to the coal
environmental impact of hydel power projects tends to increase resistance to
such projects, thus crating delays. Hence, it is expected that sufficient
demand would exist for power from power plant based on captive coal mines
in the near and medium term.

Distribution companies

 The revised tariff policy makes it mandatory for the distribution companies
to gradually reduce the cross subsidies to a maximum of 20% of their cost of
power. Financials of the various distribution companies have started
improving under the present regulatory set up for power in the country.
Moreover, in terms of PPA, the company is permitted to sell its power to
third parties in the event of default in payment of its dues by procurers

Page 7 of 8
Course: Credit Management (Assignment II) NIBM, Pune

Force Majeure

 ATPL proposes to take adequate insurance cover for insurable Force Majeure
risks.
 Further, it is proposed to have a DSRA of 6 months to meet the debt service
requirement under such circumstances

Page 8 of 8