Infrastructure & Project Finance

www.indiaratings.co.in 3 April 2013

Power

Raichur Power Corporation Limited Full Rating Report

Key Rating Drivers

Rating Action: India Ratings & Research (Ind-Ra) on 11 March 2013 assigned Raichur Power

Corporation Limited’s (RPCL) INR17.12bn project bank loans a Long-Term rating of 'IND BBB-

'. The Outlook is Stable.

Strong Sponsor Track Record: The rating reflects the main sponsor’s – Karnataka Power

Corporation Ltd (KPCL) - strong four-decade-long track record in the construction and

operation of thermal power plants. KPCL is fully owned by the government of Karnataka (GoK)

and owns 50% of RPCL. BHEL (‘IND AAA’/Stable), the largest power equipment manufacturer

in the country, holds 26% of the share capital and the balance 24% is held by IFCI. This

project, when complete, will be KPCL's second-largest thermal power project. KPCL is already

operating a 1,000MW power plant in Bellary and a 1,720MW power plant in Raichur.

Strong Industry Demand: In view of acute power supply shortages in the state – peak and

energy deficits currently at 14.1% and 12.5%, the government proposed this project. The power

deficit recorded in the southern region (December 2012) was 16.8% and the peak deficit was

18.9%.

Completion Risk: The rating is constrained by the inherent execution risks associated with a

greenfield thermal power project. There are also significant completion risks as the project is

running behind schedule and the six-month moratorium before scheduled principal amortisation

may be eroded. Completion risks are partially mitigated by RPCL’s fixed-price fixed-time

contract for the supply of boiler-turbine-generator (BTG) package with BHEL.

However, the contract does not protect RPCL from exchange rate variations for some portion of

equipment which will be imported. Management expects an additional cost of INR15bn mainly

on account of an increase in cost of balance of plant (BoP). The additional cost will be funded

through a mix of debt and equity due to the absence of a sponsor undertaking to cover

overruns - which is normally not the case with the rated peers. RPCL’s ability to source

additional debt and equity for completing and commissioning the plants by March 2015 will be

key to the preservation of the credit quality.

Fuel Supply Risk: Fuel supply risk is a key rating concern. Currently, the project does not

have any firm fuel arrangements in place and hence is exposed to risks associated with

availability and price of coal. The principal sponsor (KPCL) has applied for nine out of 17

blocks under the government of India’s (GoI) coal block auction exclusively for state-owned

generators. However, if GoI does not allot coal blocks to KPCL and/or there are delays in

operationalizing, capacity utilisation will be negatively impacted during the operation phase.

Also, management may apply for linkages from state-owned mines, availability from which is

uncertain at this juncture. Therefore, continued uncertainties on coal supply could lead to a

negative rating action.

The project could source coal from the existing mines allotted to the sponsor for different

projects, albeit only to a limited extent. Management expects to import 30% of its coal

requirement and use domestic coal for the balance, which has been factored into Ind-Ra’s base

case scenario. The sponsor’s experience in sourcing imported coal for some of its other

projects is a positive.

Rating

Senior Project Bank Loans IND BBB-

Outlook

Senior Project Bank Loans Stable

Analysts

Nikunj P. Doshi

+91 22 4000 1742

nikunj.doshi@indiaratings.co.in

Venkataraman Rajaraman

+91 44 43401702

r.venkataraman@indiaratings.co.in

Infrastructure & Project Finance

Raichur Power Corporation Limited

April 2013 2

Revenue Risk Partially Mitigated: The rating benefits from a 25-year power purchase

agreement (PPA) with Karnataka-owned distribution utilities - which is based on Central

Electricity Regulatory Commission’s (CERC) tariff workings on cost of service principles that

comprise recovery of all costs including operating, maintenance, coal (including imported coal)

and financing expenses plus a regulated return on equity. That being said, counterparty risks

including potential receivables risk arise from off-takers’ generally weak financial profile, which

have been making delayed payments (around 60 days) in the some of the sponsor’s (KPCL)

other projects.

Rating Sensitivities

Positive: Firm arrangements for coal supply and timely completion of the project could result in

positive rating action.

Negative: Lack of certainty on fuel supply and/or delays in completing the project could act as

downward rating triggers.

Overview

RPCL is implementing a 1,600MW (2 X 800MW) coal-based thermal power project in Raichur,

Karnataka. RPCL is a JV between Karnataka Power Corporation Ltd (50%), a state

government undertaking, BHEL (26%) and IFCI (24%). The JV will source the BTG package

from BHEL and will sell the power to Karnataka-owned distribution utilities at a regulated tariff

computed in accordance with CERC rates under a long-term PPA.

Out of the total land requirement of 1,153 acres needed for this project, RPCL has already

acquired 826 acres and is in advanced stages of acquiring the balance 327 acres from

Karnataka Industrial Areas Development Board (KIADB), a state-owned entity.

Annual coal requirement for this plant is likely to be around 6MTPA, based on blended fuel of

70:30 (domestic:imported). Operation and maintenance will be carried out in-house.

The initially estimated project cost of INR90.15bn is being financed with a mix of debt and

equity in the ratio of 80:20. That being said, the company expects an additional cost of around

INR15bn, which is likely to be financed through a mix of debt and equity in the same ratio. The

total debt is funded by a consortium of banks (INR17.12bn) and Power Finance Corporation

(PFC, INR55bn). The sponsors had infused over 53% of the initial equity (i.e. INR9.54bn out of

INR18.03bn) and a debt of INR17.76bn had been drawn as on 30 November 2012.

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (September 2012)

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April 2013 3

Project Profile and Analysis

Figure 1 Project Summary Table Project summary data

Financial summary data

Project type 2 X 800MW Supercritical Thermal Power Project

Rated debt terms Amount: INR17.12bn

Project location Raichur, Karnataka Amortisation profile Fully amortising, equated quarterly repayments over a period of 40 quarters for INR3bn, commencing 15 April 2015 and ending 15 January 2025

and

48 quarters for INR14.12bn, commencing 15 April 2015 and ending 15 January 2027

Status Under-construction Interest Interest rate: currently 11.96% (base rate + spread)

Revenue basis Volume

Applicable regulation Electricity Act 2003 and CERC notifications and orders

Off-taker(s) Karnataka Discoms

Contractor BTG, Coal & Ash handling and mill rejects – BHEL

Chimney – Gannon Dunkerley & Co.

Cooling Towers – yet to be awarded

Operator In-house

Equity sponsors KPCL, BHEL and IFCI

Equipment Suppliers BHEL

Source: Ind-Ra

Project Structure

RPCL is a single purpose entity formed under a JV with project finance structure, whose assets

consist solely of the project and the revenue generated from the project. Debt is at the project

company level. The company currently does not have any trust and retention account (TRA),

which is likely to be in place before the commercial operations date (COD).

Completion Risk

Project Contractors

The project benefits from a fixed-price EPC contract for the BTG package and part of the BoP,

with an experienced contractor-cum-sponsor, BHEL. This mitigates construction risk to a large

extent, given the long experience of BHEL in the construction, supply and service of power

equipment. However, prices for sourcing imported components are payable in foreign

currencies and subject to exchange rate variation, which will be borne by RPCL. The chimney

erection work has been awarded separately to Gannon Dunkerley & Co. and work on the

cooling tower is yet to be awarded. According to the management, delivery of equipment

related to BTG is on time. The agency believes that the likelihood of delay due to delivery of

equipment to the project site appears to be minimal.

Cost Structure

The project was proposed to be set up at an initial cost of INR90.15bn, with a debt-equity mix

of 80:20 (senior project debt – INR72.1bn, equity – INR18bn). However, according to the

management, the additional cost is estimated at INR15bn, which is likely to be financed in the

same debt-equity ratio. This has been factored into the agency’s base case. In other words,

Ind-Ra in its base case has assumed a project cost of INR105.15bn as against INR90.15bn,

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April 2013 4

which was initially expected. The capital cost per MW at INR 65.7m is higher than for other

rated thermal power projects in its portfolio.

As per the latest progress report obtained from the company w.r.t. to expenditure incurred and

funds infused till date, the project cost is estimated to be distributed among the following

components:

Figure 2 Project Expenditure Particulars As appraised (INRm) Investment up to 30 November 12

(INRm)

BTG & other associated works 63,000.0 24,239.4

Other Works 10,820.0 1,927.6

Sub-total 73,820.0 26,167.0

Contingencies 2,160.0 -

Total hard cost 75,980.0 26,167.0

IDC and finance charges 14,170.0 1,131.8

Cash and Bank balance - 0.5

Total 90,150.0 27,299.3

Source: Ind-Ra

Figure 3 Sources of Funds Particulars As appraised (INRm) Infused up to 30 November 12

(INRm)

Equity 18,030.0 9,536.0

Term Loan from PFC 55,000.0 14,893.3

Term Loan from Banks 17,120.0 2,870.0

Total 90,150.0 27,299.3

Source: Ind-Ra

Provision for contingencies at 3% is low, given that the project has already suffered additional

costs. The increase the overall project cost is pegged at INR15bn mainly on account of non-

availability of mega power status, an increase in cost of ash handling, coal handling and mill

rejects system.

Contract Terms

RPCL has a fixed price and fixed time contract with BHEL with adequate protection for

liquidated damages for delay and performance which is comparable to its peers. Liquidated

damages payable by BHEL for delays in completing work is a penalty of 0.5% of contract value

per week up to 10% of contract value and for performance it is 5% of contract value. This is

largely in line with the industry peers.

The BTG contract carries a defect liability clause, for a period of 24 months from COD for

BHEL manufactured products and 12 months for other equipment which are not manufactured

by BHEL. The value of BTG package includes part of components to be paid in USD and EUR

to the tune of USD159m and EUR244m with exchange rate variation being borne by RPCL.

Any adverse variation in exchange rates could further escalate project costs.

Delay Risk

The project is already facing delays on account of civil work which was scheduled to start by

March 2011 but actually commenced in March 2012. The management expects a delay of six

months in commissioning Unit-1 and four months for Unit-2 from the initially planned COD of

April 2014 and October 2014, respectively. As per the latest progress report (December 2012)

provided by the company, the delay stands at eight months.

RPCL is awaiting allocation of coal blocks from the central government for which KPCL has

applied. If and when allocated, any possible delays in operationalising the coal mine(s) could

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April 2013 5

affect cash flows in the short-term, given that the project is already facing delays and obtaining

environmental related clearances and land acquisition could further delay the commencement

of the project. Having said that, the agency believes that it is not an immediate concern as this

being a government-driven project.

Operation Risk

Operator

RPCL plans to carry out O&M in house. The sponsor, KPCL, has a four-decade-long

experience in operating power projects, including thermal power projects.

Fuel Risk

The rating is constrained by fuel supply risks facing the project at this point, since the project

does not have any firm fuel supply arrangement. With the agency’s base case assumptions,

the project requires a 6.51MTPA at 85% plant load factor (PLF). The project would blend

domestic coal and imported coal in the ratio 70:30.

KPCL has applied for nine out of 17 blocks under the recent GoI’s coal block auction

exclusively for state-owned generators. However, if GoI does not allot coal blocks to KPCL

and/or there are delays in operationalising them, capacity utilisation during operations phase

will be negatively impacted.

Even if the coal blocks are allocated, land acquisition, clearance and forest related issues need

to be tackled. The agency believes that it will take around three to five years for the allotted

mines to start production, from initial allotment date. According to the management, the

arrangement to bridge the gap in fuel requirement between the time of commissioning of the

plant (2015) and the mine (2016-2018) will be through imported coal, coal from mines allocated

to KPCL’s Bellary project and adhoc linkage to be obtained from the central government.

For imported coal, a trader will be finalised close to COD. The sponsor (KPCL) has experience

in importing coal through competitive process for their Bellary plant. KPCL’s experience in

sourcing imported coal for some of its other projects is a positive.

The base case financial model assumes an average gross calorific value (GCV) of

4,240kcal/kg (blended). A cost of INR1,600/tonne for domestic coal and INR4,950/tonne for

imported coal is assumed. The weighted average (blended) cost works out to INR2,605/tonne.

Revenue Risk

Gross Revenue/Off-take

RPCL has entered into a long-term PPA to sell the entire generated power to Karnataka-owned

distribution utilities. The state has an installed capacity of around 6,000MW and has been

growing its portfolio through capacity expansion through KPCL. The expansion has been

undertaken to address the power deficit in the state. Considering the high deficiency in power

in the region, off-take of power is not seen as a major risk.

The concentration risk is high given a single counterparty having contracted to purchase the

entire power generated by this project. Potential receivables risks arise from off-takers’

generally weak financial profile, which have been making delayed payments (around 60 days)

in the some of KPCL’s other projects.

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Raichur Power Corporation Limited

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Figure 4

Actual Power Supply Position and Peak Demand*

Region Requirement

(MU)

Availability

(MU)

Deficit

(%)

Peak Demand

(MW)

Peak Met

(MW)

Deficit

(%)

Northern 23,608 21,403 -9.3 37,830 34,743 -8.2

Western 28,346 27,155 -4.2 39,475 37,246 -5.6

Eastern 8,107 7,746 -4.5 13,806 13,056 -5.4

North-eastern 995 945 -5.0 1,948 1,853 -4.9

Southern 23,537 19,583 -16.8 35,792 29,012 -18.9

Total 84,593 76,832 -9.2 128,851 115,910 -10.0

Karnataka State 5,656 4,951 -12.5 9,267 7,959 -14.1

Source: CEA, Ind-Ra * For the month of December 2012

Price Risk

Price risk is mitigated by a 25-year PPA with Karnataka-owned distribution utilities - which is

based on CERC’s tariff workings on cost of service principles that comprise recovery of all

costs including operating, maintenance, coal (including imported coal) and financing expenses

plus a regulated return on equity.

This enables the company to pass through the entire fuel cost and the fixed cost on a

normative basis to the off-taker, providing it with a hedge against any increase in fuel costs,

including costs of imported coal. As per Ind-Ra’s base case, the average fuel cost works out to

INR1.55/kWh (FY16) and capacity charges INR1.97/kWh (FY16) and a levelised tariff of

INR3.31/kWh for 25 years. Power supply shortages in the state – peak and energy deficits

currently at 14.1% and 12.5% – make the power to be supplied by this project at an estimated

tariff of INR3.48/kWh even at assuming 50% imported coal a viable proposition for the off-taker.

The normative tariff is quite competitive to the average tariff seen in Case-1 bids in various

states across the country.

Figure 5

Having said that, the project cash flows are highly sensitive to even slight stress on collection

efficiency. Financial margin is thin in that even at a relatively high collection efficiency of 96%,

debt service coverage ratio (DSCR) drops below 1x.

Termination Event Risk (Pre Maturity)

PPA can be terminated by the either party without any financial obligation to the other party.

However, termination risk appears minimal at this time considering both counterparty and

RPCL are state government-owned entities and the acute shortage of power in the region.

As per the terms of PPA, RPCL can sell 20% of power to a third party but the decision to allow

this selling of power will be taken by GoK. It also can sell it to the third party in the event of

default by the counterparty i.e. if payments are delayed for over 90 days.

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Raichur Power Corporation Limited

April 2013 7

Debt Characteristic and Terms

The rated debt consists of a term loan of INR17.12bn. Interest rate is currently 12% per annum

(floating). Debt is fully amortising with quarterly repayments commencing April 2015 and ending

January 2027. The moratorium available with the company is six months before the first

repayment date.

As per the financing documents, the company currently does not have any TRA, but an escrow

arrangement will be in place before COD for revenue.

Balance debt of INR55bn is sanctioned by PFC. Interest rate is around 12%. Debt is fully

amortising with quarterly repayments commencing January 2015 and ending October 2029.

Additional debt will be availed to part finance the additional cost from the same set of bankers,

as they have sanctioned an amount of INR19.5bn against INR17.12bn and the balance might

be financed by PFC.

Financial Analysis

Figure 6 provides a summary of various other stresses carried out for the analysis:

Figure 6

Summary of Management Case, Base Case and Stress Scenarios

Management

Casea

Base Case

b

Stress: SHR Rating

Case BEP: PLF

BEP: Collection Efficiency

Project cost (INRbn)

90.15 105.15 105.15

Plant load factor (PLF)

85% 75%

(FY16), 85%

75% (FY16),

85% 71%

Station heat rate (SHR)

2,300

2,300

2,369 (3% inefficiency)

2,300

Return on equity 16% 15.50% 15.50%

Blended cost of coal (per Ton)

3,413

2,605

2,605

Collection efficiency

100% 100% 95% 96%

Interest rate 11.50% 12% 13%

Average DSCR 1.30 1.30 1.27 1.17 1.09 1.21

Minimum DSCR 1.23 1.06 1.04 0.96 1.00 1.00 a Assumptions based on assessment when the project was submitted for the bank's appraisal

b Assumptions reflect Ind-Ra’s and management's current assessment

Source: Ind-Ra

Figure 7

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Annex I Figure 8 Instruments Loan-Term Bank Loans Rating / Outlook Amount (INRm)

Bank of India IND BBB- /Stable 3,000.0

Oriental Bank of Commerce IND BBB- /Stable 2,000.0

Punjab & Sind Bank IND BBB- /Stable 2,000.0

Syndicate Bank IND BBB- /Stable 5,000.0

State Bank of Mysore IND BBB- /Stable 1,900.0

State Bank of Travancore IND BBB- /Stable 1,900.0

Vijaya Bank IND BBB- /Stable 1,320.0

Total 17,120.0

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