TIDMKSK
RNS Number : 8446G
KSK Power Ventur PLC
09 March 2015
KSK Power Ventur plc
("KSK" or the "Group" or the "Company")
Coal Auctions and Operating Update
KSK Power Ventur plc (KSK.L), the power project company listed
on the London Stock Exchange, with interests in multiple power
plants and businesses across India, is pleased to provide an update
on developments of the Company's projects over the last three
months, and the recent coal auctions.
KSK Mahanadi's 3.6GW project (of which 2 units totalling 1.2GW
are completed) and the Sai Wardha 540MW project are both
cornerstone assets for the Company's power generation operations.
Every effort is being made to address the short term challenges,
financing requirements and external issues that have constrained
asset utilisation levels, revenues and profitability over the
period. While the second half of FY2015 continues to be just as
challenging as trading was during the first half, a number of
positive developments have occurred during recent weeks which
indicate that many of these external issues may be resolved in due
course, allowing KSK's 2GW of completed portfolio to operate with
improved plant load factors (PLF). These improvements are likely to
take effect during FY2016 and, as a result, revenues for FY2015 are
likely to be flat when compared to FY2014 and therefore below
market expectations. Consequently operating profits are likely to
be materially below market expectations.
A summary of recent developments are as follows:
15.12.2014 Uttar Pradesh distribution companies had provided
their consent for commencement of 300MW of power supplies from KSK
Mahanadi starting May 2015, ahead of the scheduled delivery date
under the 1,000MW PPA executed in February 2014;
23.01.2015 Sai Wardha has achieved partial resolution of the
issues directed by Competition Commission of India ("CCI") with
respect to coal supplies by Coal India. Under an addendum to Fuel
Supply Agreements executed, Coal India has agreed to introduce
third party sampling, a relaxation of the provision necessitating
financials securities to support its mine investments, and a
limited waiver of the performance incentive clause. Coal India is
currently on appeal at Competition Appellate Tribunal challenging
the CCI order and therefore the correction to the distortion in
sale price has not been undertaken. Sai Wardha continues to pursue
this vital change as ordered by CCI and now anticipates, in all
likelihood, resolution of this issue during the first half of
FY2016
10.02.2015 Successful appeal by Sai Wardha at Appellate Tribunal
for Electricity (APTEL) with respect to the execution of Sai
Wardha's long term PPA with the Maharashtra State Electricity
Distribution Company. Upon such execution anticipated during first
quarter of FY16, the PPA would allow sustained generation from two
units at Sai Wardha, aggregating to 270MW in gross capacity
terms;
16.02.2015 The Central Electricity Regulatory Corporation's
(CERC) order to the Power Grid Corporation (PGCIL) outlining clear
guidelines for allocation of transmission corridors among various
applicants. PGCIL has been given until the 15(th) March 2015 to
determine and provide transmission access to the applicants, such
as KSK Mahanadi.
These developments form part of a series of ongoing
negotiations, the pursuit of which has been undertaken for some
considerable period of time. While it is anticipated that with
these recent developments are positive and certain solutions could
be only few weeks away, the specific timing of any complete
solution is currently hard to predict given the historic delays in
certain instances resolving these issues. An update will be
provided upon visibility of any imminent resolution.
Renewed focus on Operational Performance
While the various power generation assets of the group are
intrinsically valuable and have been configured and setup at
strategic locations with vital support infrastructure, the
financial performance of KSK Mahanadi and Sai Wardha is primarily
dependent on the levels of asset utilisation that can be achieved,
through an integration of fuel sourcing, transmission corridor and
PPA offtake. The potential generation from these two large assets,
in a full year of operation lies in a range between 7.6TWh to
12.9TWh, and assuming 7 cents/kWh of tariff, results in an
aggregate annual revenue between $491 million to $835 million as
tabulated below:
Power Plant MW 50% 60% 70% 80% 85%
Sai Wardha 540 2365 2838 3311 3784 4021
KSK Mahanadi 1200 5256 6307 7358 8410 8935
TOTAL MWh 7621 9145 10670 12194 12956
Revenue $/KWh
Sai Wardha 0.07 149 179 209 238 253
KSK Mahanadi 0.07 342 411 479 547 582
TOTAL $ million 491 589 688 786 835
Hence, operating performance of the operational units is as
vital and important to KSK as the focus on fuel tie ups and the
construction of the balance of units at KSK Mahanadi. The
Management continues to give immediate priority to these matters,
while focusing on the resolution of longer term issues of asset
creation and asset value enhancement.
Coal auctions and allotments - the new fuel landscape
The Coal Mines (Special Provisions) Second Ordinance, announced
in December 2014 by the Government of India, completely changed the
existing landscape and provided a new mechanism and additional
sources for access to coal for independent power producers (IPPs).
This was subsequent to the Honourable Supreme Court of India's
judgments in August 2014 and September 2014, which cancelled the
allocation of 204 coal blocks across India, including the Gare
Pelma III and Morga-II mines which were allotted earlier to
Government companies GIDC and GMDC respectively.
In the first round of auctions, six coal mines totalling over 18
million tons of annual coal production, specifically earmarked for
IPPs, have been under auction during recent weeks. Under the
reverse auction procedure for these blocks, in order to gain access
to the coal, IPPs were required to bid and offer their maximum
discount to the reference ceiling price of coal (reference ceiling
price of anywhere between $11 to $20 per ton of coal depending on
specifics of the mine). The discounted price offered by IPP for the
coal would become the basis of determination of the transfer price
of coal to the power plant operations for variable cost
determination (without any reference to actual cost of mining).
The net result of this first round of auctions has meant that,
in order to secure access to coal mines, IPPs have not only reduced
their variable cost recovery but have also agreed for a further
potential reduction over their long term power sales tariff as
illustrated in table below:
Reverse Auction Forward Auction
A Discount B Premium C D
Equivalent Resultant Further Aggregate
Coal fuel cost fuel cost reduction reduction
per charge in tariff
ton $Cents/Kwh -25% -50% -100% $Cents/Kwh 25% 50% 100% $cents/Kwh $cents/Kwh
$20/ton 1.50 0.38 0.75 1.50 0.00 0.38 0.75 1.50 -1.50 3.00
$15/ton 1.13 0.28 0.56 1.13 0.00 0.28 0.56 1.13 -1.13 2.25
$10/ton 0.75 0.19 0.38 0.75 0.00 0.19 0.38 0.75 -0.75 1.50
The net result being, three levels of potential power tariff
reduction as outlined below
-- A - First level of Variable cost scale down to anywhere
between 0.75 to 1.5 cents/kWh (depending the grade of coal of the
specific mine and reference ceiling price);
-- B - Second, Reverse Auction Discount - further reduction of
anywhere between 0.19 to 1.5 cents/kWh (depending on the level of
auction discount offered by the successful bidders);
-- C - Finally, in more competitive bid for coal mines, Forward
Auction Premium - switching to forward auction premium basis,
results in commitment to make additional payment to the government
of anywhere between 0.19 to 1.5 cents/kWh for such coal access.
The net result of this for the auction winners is a scale down
of variable costs to lower levels and thereafter effective
reduction of power supply tariff of anywhere between 1.5 to 3
cents/kWh in aggregate from existing PPAs, depending on the
specific case, as well as similar benefit to be passed on to
Discoms under new PPAs to be executed. While a large discounts to
the power supply tariffs by the various competing IPPs, would
enable more competitive power tariffs, it could also materially
adversely impact the financial performance of the successful IPPs
and constraining their ability to meet financing costs and
servicing requirements.
KSK Mahanadi has participated in these auctions to secure its
fuel requirements for the longer term, but given the challenges
outlined above, has maintained a cautious approach. The Company has
not been successful so far in securing any mines under the auction
but it will continue to review and participate over the coming
weeks in auctions for further sets of coal blocks that may be under
offer, where opportunities exist to secure suitable coal mines at
economically viable operating levels.
In addition to securing domestic coal supplies through a public
auction process, the new statute also has provisions for the direct
allotment to government companies. KSK Mahanadi continues to be
committed to its reciprocal power supply commitments entered into
with government companies, such as GMDC and GIDC, with whom it has
had prior fuel supply arrangements for such power supplies. In the
event any of the government companies are successful in securing an
allotment of mines under the new ordinance, KSK Mahanadi would
expect to be able to continue with construction of the balance
power plant in line with fuel availability.
In order to meet the long term coal requirements for all of its
large 3.6GW power plant, KSK Mahanadi has also sought for the
conversion of its existing tapering linkage of coal from Coal India
Limited, as well as an allotment of new linkages. The Company is
currently evaluating various options, and anticipates the
development of the four remaining 600MW units will be contingent
upon reaching a successful conclusion with regard to the key aspect
of achieving a secure and long term fuel supply.
Coal supplies for KSK Mahanadi's 2 x 600MW operating units
While the Company continues to explore alternate arrangements to
address the developments of coal blocks and alternate long term
supply arrangements, KSK Mahanadi currently enjoys a tapering fuel
supply agreement with South Eastern Coal Fields (a subsidiary of
Coal India Ltd) that supports the current operation of its first
two 600MW units. An additional 600MW also enjoys a supply linkage
which can be utilised upon commissioning. While these efforts to
secure the domestic fuel commitments over the long term will
continue, in the interim, coal imported from overseas utilising
collaborative arrangements which are already in place, are expected
to provide additional fuel for the planned power generation from
KSK Mahanadi.
Transmission Corridor access - key to enhanced asset
utilisation
KSK Mahanadi has 1,500MW of long term PPAs with Tamil Nadu and
Uttar Pradesh utilities, with an expected tariff of least 7
cents/KWh plus periodic escalators in line with cost and other
increases. However, the Company has not been able to benefit from
these PPAs due to severe constraints on the export of power to
these utilities via the interstate transmission corridor, which was
originally scheduled to be completed by Power Grid Limited (the
Government of India owned Transmission Company) in August 2014. On
the 16(th) February 2015, the CERC finally addressed the issue and
passed an order outlining the procedure to be followed for the
granting of long term access to the transmission corridor,
stipulating this must be resolved by the middle of March. This
order will determine the quantum of transmission corridor access
that will be made immediately available to KSK Mahanadi for power
supplies to Tamil Nadu, with a correspondingly significant impact
on revenue and profitability. At current tariff levels, 500MW of
supply to Tamil Nadu would potentially increase revenue by $18
million and EBITDA by $9 million per month.
Similarly, while the commencement of supplies under the PPA to
Uttar Pradesh utilities would be subject to the availability of
transmission corridor access for export to the Northern Region, the
Company has received consent to start supplying 300MW in June 2015
and has initiated dialogue to secure the required open access.
Successful resolution of these transmission constraints would
enable supplies to Tamil Nadu, Uttar Pradesh and Andhra Pradesh,
and ensure increasing utilisation of KSK Mahanadi's 1,200MW
generating capacity. The scale of increase would depend on the size
of the interstate transmission corridor access granted by Power
Grid.
KSK Mahanadi project construction and debt financing - the plan
ahead
With capital investment in the power station of approx $1million
per MW, the aggregate capital expenditure at KSK Mahanadi for full
completion is currently estimated by the project lenders to be in
the order of $3.6billion. The capital expenditure to date of
approximately $2.4billion ($500+million of equity infused and the
balance from project debt) has resulted in the completion of two
operating units of 600MW each, the substantial completion of all
the common infrastructure support at the power project location for
the 3.6GW power station itself, plus initial progress on the
construction as well as commencement of erection of the remaining
four 600MW units. In addition to current undrawn part of project
debt, the lead lender has approved entire additional overrun debt
funding of over $700+ million, with participant banks to complete
further confirmations.
Once transmission constraints have been lifted enabling the
supply of 1.2GW, it is anticipated that KSK Mahanadi operating at
an 80% PLF would produce annual gross generation in excess of 8TWh.
The resulting annual revenues of approximately $560 million and
estimated EBITDA of $260 million would provide a very significant
scale up in the Company's power generation operations and cash
flows. Approximately $150 million of annual interest cost is
estimated to be currently attributable to the operating units of
1.2GW for FY16 against estimated EBITDA of $166 million to $281
million based on level of asst utilisation achieved as tabulated
below:
KSK Mahanadi PLF 50% 60% 70% 80% 85%
EBITDA 3.5c 166 199 232 265 281
Interest (Est) 150 150 150 150 150
TOTAL $ million 1.10 1.32 1.55 1.77 1.88
With the first 1.2GW of the project and requisite common power
plant infrastructure having achieved completion, the project
becomes eligible for appropriate refinancing, with the debt
repayment schedule being aligned with the asset life. Such
refinancing would not only allow flexibility in the repayment
schedule, it is also expected to provide additional cash accruals
to be available to support the equity requirement for the
completion of the remaining units.
While work continues on a number of major initiatives in this
regard, further capital expenditure commitments on KSK Mahanadi
will be, as far as practicable, appropriately modified to match
both the visibility and availability of suitably priced coal and
access to the transmission corridors thereby allowing the Company
to deliver power to its utility consumers. The decision to proceed
with the construction of each of the additional units will be
concluded after due consultation with project lenders. When these
matters are fully addressed, the Company has every confidence that
it will secure the necessary further funding required to complete
the remaining capital expenditure programme.
KSK Mahanadi continues to be an intrinsically valuable
investment as a large green field asset, with significant common
infrastructure for the entire facility already created and long
term PPAs at competitive tariffs executed. The management team
continues to persist with efforts to explore other potential
collaboration opportunities to address the strategic requirements
of the project.
KSK Mahanadi - Ancillary Infrastructure
The additional infrastructure projects of water, rail and mining
required to support the 3.6GW power plant, which were expected to
require additional capital expenditure of $500 million, have only
been part completed to date. This infrastructure is currently for
the exclusive use of KSK Mahanadi, and the debt servicing
requirements for these projects are expected to be met by the KSK
Mahanadi project and have been secured with appropriate arrangement
in consultation with KSK Mahanadi's project lenders. As regards
incremental capital expenditure from the current levels, these will
be determined upon further visibility of access to coal supplies
from the Gare Pelma coal mine.
Sai Wardha - increased asset utilisation and potential reduction
in fuel cost
The 540MW station consists of two phases, an IPP phase of 270MW
and Captive Power Plant (CPP) phase of 270MW. As regards the CPP
phase, during the period additional PPA commitments of 40MW to 50MW
with industrial customers has been undertaken and the necessary
documentation is currently being finalised. It is anticipated upon
grant of open access for these consumers, as well as the renewal of
open access for the existing consumers, asset utilisation at this
phase is expected to increase. Further, PPAs with a number of
government owned new industrial customers with direct offtake from
the Sai Wardha power plant are under discussion. These agreements,
once concluded, could also provide support for enhanced asset
utilisation at Sai Wardha
As regards the IPP phase, the company has successfully won an
appeal at APTEL that resulted in the local state utility being
directed to afford the opportunity for the execution of the long
term PPA awarded from the competitive bid participated by Sai
Wardha in 2009. Execution of the PPA and commencement of energy
supplies would enable asset utilisation in the IPP phase and result
in Sai Wardha achieving an improved and sustained PLF.
As regards the potential reduction of fuel cost at Sai Wardha,
despite the positive landmark ruling by the Honourable Competition
Commission of India (CCI) and the Company's efforts over the last
four months, only limited progress has been achieved so far.
Amendments undertaken to the Fuel Supply Agreement restricts
changes to (1) enabling controlled third party sampling procedure,
(2) limited waiver of performance incentive clause, and (3)
relaxation on financial risk requirements for mine immoveable
assets. Western Coal Fields and Coal India Limited are on appeal at
Competition Appellate Tribunal currently against the CCI Order.
Sai Wardha will continue in its pursuit to remedy the unfairness
embedded in the pricing formulae for coal. Once the distortion in
the sale price is finally corrected Sai Wardha's financial
performance will start to improve. Until such time, Sai Wardha's
dependence on high priced coal continues and this will be reflected
in its operating results.
VS LIGNITE POWER PRIVATE LIMITED
The project has access to a dedicated lignite mine, Gurha (E)
that meets the entire fuel requirement for the 135MW power plant.
In compliance with the recent directive from the state government,
the Company is currently in the process of executing long term PPAs
with the local distribution companies for all the power supplies on
a regulated basis.
ARASMETA CAPTIVE POWER COMPANY LIMITED (ACPCL):
With KSK Mahanadi under obligation to provide 225MW to
Chhattisgarh (the host state), an arrangement has been agreed,
following consent by the state as well as project lenders at KSK
Mahanadi, whereby 75MW would be fulfilled from Arasmeta enabling
the surplus power at KSK Mahanadi to be disposed at higher tariffs
to other utilities. This project is also under transition with the
entire power supply dedicated to the local utility under the long
term PPA. While this was approved by the Regulatory Commission in
May 2014, the Company awaits compliance by the procurer for
enhanced generation and supply.
Therefore, enhanced scheduling at Arasmeta is likely to occur as
the second 600MW unit at KSK Mahanadi commences operation. As a
result, the Company, having had reduced utilisation levels during
FY2015, anticipates plant utilisation, power generation and revenue
from the Arasmeta plant to increase significantly during
FY2016.
SAI REGENCY POWER CORPORATION PRIVATE LIMITED (SRPCPL):
With the continuous supply of gas and the efficient operation,
the plant has produced an operational and financial performance,
which the Company expects to continue in the future.
SITAPURAM POWER LIMITED (SPL):
Although the fuel cost for the period under review has increased
due to an increase in coal prices from the Singareni Collieries
Company Limited, as well as from open market purchases, the energy
generated in the period has been supplied to the captive consumers
in accordance with the provisions of the PPA, with the balance of
power sold to other customers.
SAI MAITHILI SOLAR POWER PROJECT:
The 10MW PV solar power generation plant is located in the state
of Rajasthan, operating under the Jawaharlal Nehru National Solar
Mission.
RENEWABLE POWER GENERATION:
The Company continues to pursue specific wind power generation
initiatives as well as work on the hydro project portfolio for
appropriate collaboration opportunities. In response to the
continuing initiative of the Indian Government, the Company is
seeking to develop an additional 250MW of solar power generation
projects in the medium term. Necessary progress has been made and
procurement advances have been paid for equipment at competitive
prices.
Efforts are also underway to execute a PPA and begin
construction of a 50MW solar power project in the state of Tamil
Nadu. The Tamil Nadu Electricity Regulatory Commission has
stipulated the necessary tariff arrangement in this regard.
Key Strategy Moving Forward
With an operating base rising to over 2GW, the Company's
immediate objective would be to enhance the PLF across the various
projects over the next few months. This would produce a substantial
increase in the gross generation, and provide a much larger
operating base with which to absorb the related costs as well as
deliver the requisite incremental cash flows to meet Company
requirements.
OUTLOOK
With unfulfilled demand for power generation in India expected
to continue to grow through the coming decade, coupled with the
high quality of the Company's expanding asset base, a proven
execution capability, and an increasingly efficient business
structure, KSK is well positioned to address the Indian power
generation opportunities. The Company anticipates further growth
upon securing fuel supplies pursuant to the new statute. As
outstanding issues are resolved, and with the successful phased
completion of the remaining units of the 3.6GW KSK Mahanadi power
project being added to the Company's existing portfolio over the
next few years, the Board believes KSK will be one of India's
leading suppliers of power.
Commenting on the results, T. L. Sankar, Chairman of KSK
said:
"The Company's management has continued its efforts to address
the various challenges in its operating projects. Results are
expected to further improve upon clarity emerging in the regulatory
environment and the Company addressing the on-ground situations to
co-ordinate planned generation with fuel supplies for the assets
and transmission corridor access.
At the country level, power generation is also anticipated to
play a central role in supporting the revival of the overall
economic growth in the country over the next few years. With KSK's
underlying assets, associated performance and opportunities, the
Company is well positioned to be one of the more stable, valuable
and sustainable players on the Indian power generation
landscape.
KSK's performance during the period was only possible with the
valuable and appreciated support of the various investors in the
Company who have enabled us to pursue appropriate business
opportunities in these challenging times."
For further information, please contact:
KSK Power Ventur plc
Mr. S. Kishore, Executive Director
Mr. K. A. Sastry, Executive Director +91 40 2355 9922
Arden Partners plc
Steve Douglas
James Felix +44 (0)20 7614 5900
This information is provided by RNS
The company news service from the London Stock Exchange
END
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